Wednesday, June 01, 2005


As is typical, markets and market commentators run in packs--like wolves. The practice that is catching all kinds of grief is that of buying homes for resale. What is the big deal?

I don't believe in short-term trading but I think it is wonderful that millions of Americans are wealthy enough to buy a home to flip for profit. The profits can be substantial.

Much of the flipping is done because lending rules established in the late 1988 prohibit the massive speculation that went on in the 80's real estate market. Investors got way in over their heads and the formation of the Resolution Trust of America was necessary to absorb the excess real estate.

After 1988, it has been necessary for condominium tower builders to have 60 or 70% of the condominiums sold before they can get construction loans on the buildings. The speculators solve the problem for the builder by buying the units "pre-construction". After the building is complete, some of the speculators hold for one year to achieve long-term capital gain status and others flip immediately. What is the difference in buying a block of Google stock and reselling it when you think the price is right?

The speculators see that there is demand for resort homes so they become condo traders. I know a couple of fellows who have each traded 20 or more condos in the past 3 years. They have to have good credit or a lot of cash. I know of a couple of condos that they sold last year that have since appreciated 40% over their sale price. I sold a four bedroom ocean front condo eight months ago for $385,000 and it is now worth more than $600,000.

This says more about demand than about speculation. Most speculators hold relatively short-term. Certainly there are a growing number of speculators who are currently holding more than one condo but these guys are like car dealers that have extra cars on the lot. You have to carry inventory if you want to be in the trading business.

The market will eventually hiccup. However, the demographics are positive for continued good sales.

In full disclosure, I bought real estate for 19 years and started selling two years ago. I plan to sell at least 10 more properties in the next 6 to 18 months. I believe stocks are cheaper than real estate--but it takes two to make a market.