Comments on: High End Homes Won’t Evade Crash

By: Chris T.

Chris T. — Wed, 13 May 2009 14:35:31 +0000

to zippythepinhead:

Sounds good, but if we believe the that dollar will decline rel. more than other currencies (I do too), then I would feel at least as comfortable in buyin some real estate in good ole Europe. Despite all, that is certainly a more stable place than most of Latin America, with an infrastructure much more like the US.
Caracas has beautiful parts, yet I would much rather live a secondary European city if need be.
Real estate in many European countries avoided the bubble mania. That does not include the UK, Spain, and Ireland. Those countries were more bubbly than the US, and the fall is yet to come.

But France, Germany, Austria, to name some, didn’t froth that way. Outside of Paris, Munich, Vienna you can get 6 bdr, 2500+sqf apartments for a song compared to major American cities (in places such as Lyon, Nancy, Leipzig, Berlin, Graz, etc) with a much smaller likelyhood of decline, because it didn’t rise meteoric in the first place. Especially in East Germany, much of this is brand new, renovated prewar upscale stuff (thanks to still generous tax writeoffs).
And, no worry about insurgent bombings, Morales/Chavez style confiscation, and much lower crime than Latin America’s (just look at Sao Paulo for that).

By: zippythepinhead

zippythepinhead — Tue, 12 May 2009 19:34:09 +0000

I think US markets are going to be bad for at least another 4-5yrs and foreign markets are the place to be as I’m seeing stronger home prices in Latin America. I just purchased in Jan a 2200 sq ft, 4 bdrm, 2.5 bath in a zone 4 neighborhood in Colombia for 78k. Thanks to the spike in the USD the same home would have cost me over 100k less than a yr ago. Since I’m convinced the dollar is going to flatline I’m hoping I made a good move. We’ll see.

By: Steve

Steve — Tue, 12 May 2009 19:16:43 +0000

I think it depends more on the supply of the homes. During the bubble a lot of “upscale” homes were built in large tracts in the ‘hot’ areas. I agree that those will colapse in value. What I noticed that was interesting was that the really expensive homes, even in California and Florida, didn’t rise in value nearly as much. They tended to be avoided by ‘investors’ (lol) for the same reasons you mention in the column. Since they didn’t build very many during the boom and they never really went up that much in value I think the really high-end mansions with the 250,000 kitchens and the acres of land will be decline far less than the brand-news never been lived-in cookie cutter homes that were built all over place.

By: Chris T.

Chris T. — Tue, 12 May 2009 15:37:57 +0000

Rick,

While, like above posters, I am not so sure of this, I hope you are right.

Since I, like others also believe that gold can do rather well in deflation, how about this scenario:

Gold goes to 5000, and we can then buy a CPW co-op for 50 oz!
Sounds fantastic, but then again, you could buy half a block of prime Berlin townhouses in 1923 for an ounce or two, so this has happened before.

As to the poster about the right timing: It isn’t just timimg, but also location, location, location, in other words, rather specific circumstances, that make it really NOT likely long term for everybody, ie the average person.

Long term, as shown by Case-Shiller and other long term studies, housing has only increased at the rate of inflation. This means, you don’t MAKE money in housing, you merely preserve it. THAT is what applies to Joe Everybody, and the timing/location is for the specialists long term.
With the median US home having just declined to 189,000, that is still +/- 6x median income, thus STILL way to high vs. the long term average of 2-3x median income.

Which is more likely, an increas in median income to bring this back to 2-3x, or a decrease in median house prices to achieve that same 2-3x factor?

Even 6x is not sustainable long-term, esp. with tightened credit standards. Only credit bubbles sustained all this, and any future credit bubbles will end up being used to fund the baby-boom retirement financing, if it ever materializes.
Despite the hype over the first boom-retirees, the avalanche has not yet begun, for the first true boom retirees don’t start till next year (so far only early retirees).

By: Rich

Rich — Tue, 12 May 2009 14:06:41 +0000

Aloha All
Rick, et al, astute observations. Proverbs 22:7 says The Borrower is servant to the lender and Romans 13:8 says Owe no man anything but to love one another, for he that loveth another hath fulfilled the law. Maybe that is why Sir John Templeton, who saved 50% and prospered through the Depression, said all assets correct the amount they are financed. Considering GM Ditech used to make 125% loans to asset values, we may have a ways to go. Sure, not all homes are mortgaged, but many, particularly those of the wealthy, were bought from margin accounts on corporate stock, and serviced by dividends, including one proud former client friend, who rather than compromise, died. (Like The Grasshopper, few listened on the way up.) There is a reason the Bible, Talmud and Koran proscribe usury. Interest compounds faster than nature and man thus cannot keep up, particularly at end stages like now. Thus we see the foolishness of bailing out debt derivative defaults with more debt and derivatives. Since Ronald Reagan’s 8% GDP, the American economy was driven more by debt funny money than growth. That’s why balance sheets, dollars, employment and real wages peaked back then. We created and exported debt including mortgages, why Europe got burned and China’s exports were down 22.6% in April. Automobiles, budgets, commercial and residential real estate, credit cards, medicare, pensions and social security are being unraveled by IOUs, and this may only be the first inning, leave alone Act I. Until all debt and derivatives are foreclosed and liquidated, and actual savings compound again, we may not have enough fuel to rekindle real lasting economic growth. That may take a very long time. O may be a one-term President after Greenspan/Bernanke Paulson/Geithner rostrums fail. That’s why our parents and grandparents warned us to save for a rainy day and stay out of debt. Oh the times, they are a changin’…
Regards*Rich

By: Ross

Ross — Tue, 12 May 2009 13:24:36 +0000

If things get bad enough, and I mean far worse than they are at present, there probably will be substantial falls in price in what constitutes high end. Having said that, much of what is passed off for high end, isn’t. The thesis seems to be that all it takes is one high end dwelling to go for a deep discount and then the rest will fall like dominoes. I don’t think that theory has a lot of merit, but we will see. As for vacation homes falling suffering deep discounts, I think that is reasonable to conjecture, but I’d like to offer that awe inspiring vacation homes don’t tend to be located in “neighborhoods.”

By: Doug

Doug — Tue, 12 May 2009 11:33:43 +0000

I totally agree. and thats what ive been saying for two years, they don’t have to sell right now. everyone is in a holding pattern. the beach houses in Ocean city NJ are still like $4million.
I was just in the hamptons w/ a realestate agent friend and she sold her first house in like 9 months. it listed for $2.5million, she sold it for $1.5 mil. thats -40%.
I sold my ski-in ski-out condo in whistler BC for a profit back in 06′ now the real estate there is down almost 40% too.
my buddy is a contractor building a $20 million dollar house in the premier south jersey town of Stone harbor. hes the best builder of custom homes in the area and he has no jobs in the pipe after that.
we got spec homes sitting for years over here in philadelphia. and 1 out of 4 home for sale are empty.
pressure for real estate prices to rise must come from the bottom. you can’t hold prices up from the top..for long.
so basically you can take 40% off the asking price on high end cribs.

&&&&&

Unbelievable! Thanks for the rundown, Doug. I grew up in Margate, and we always thought of Ocean City, which was just a couple of miles to the south, as deads-ville. I knew that real estate prices there had gone bonkers, but I would not have imagined that beach homes got to anything like $4 million — or that a $20 million home could be built in Stone Harbor, which was nearly as bleak as OC. After the first Atlantic City casino referendum went down in flames in the early 1970s, you could have bought beach houses in Longport — Ocean City, but much quieter, and only three blocks separating ocean and bay — for $50k. Having grown up there, I never saw those homes as anything special, and so I did not buy one. It took vacationing Philadelphians — shoobies — to make me aware of how precious a small lot sitting behind the bulkhead could be. RA

By: Clark

Clark — Tue, 12 May 2009 07:36:47 +0000

all of these so called investors that are buying foreclosuers now, many may wish they had waited or not bought at all before this is all over. The only deals out there IMHO are sold for back taxes and even they may not be such a deal as of yet. The lenders are going to have to start letting more high priced homes go for back taxes as they being to foreclosue on the Alt- A’s.

By: TKO

TKO — Tue, 12 May 2009 03:53:13 +0000

Anything can happen. In the late 50’s or early 60’s, dear old dad took me for a tour around Park Slope, Brooklyn, where he and I grew up. It is an area of various sized brownstones built 1880-1910 almost all of them nicely appointed, and many exquisite. He pointed out various structures, which famous and infamous people had inhabited, and others that were “speakeasies” during prohibition. He mentioned how much these houses were sold for during the Roaring Twenties and I was surprised that most of them were still 30 percent off the high point thirty years later. In general, the Great Depression and early war years dropped prices 80% off peak with the rebound only starting in the immediate post war years. By 1975 a typical brownstone was 50 to 60k. At the last peak two years ago 2 million was common. Real Estate is a market subject to various factors and it goes up and down as my father taught me half a century ago. Not too many folks left to remember these declines, but they certainly can happen again. That said, it is hard to envision the circumstances engendering 90-95% crash in the high flying sectors.

By: mario cavolo

mario cavolo — Tue, 12 May 2009 03:03:25 +0000

As Malcolm Gladwell points out in his latest book Outliers, and as we know in trading, part of the success is timing. I bought my first home at age 25, newly married, in a new development in Scottsdale in 1985 and sold in 1995. TEN years and the market had barely moved, sold for a measly 10% profit and missed that wealth building opportunity that owning a home can bring, making the next 15 years alot tougher. In the next three years, boom boom, the market finally started moving with some guts, the house was up to $160,000 and then finally over $200,000 until the recent bust. Simple timing. My father has bought and sold 4- homes over the years, always good timing, making plenty of profits on the sale. Now he’s got plenty of cash in the bank which wasn’t from working for a living. Homeowners who bought recently, bad timing, with a devastating impact on the economy for many more years without profits in sight, let alone being upside down in the mortgage. Indeed, how can there be a recovery and repeat of prosperous times under these circumstances…Cheers, Mario