So, you think you’ll buy a coastal condo. Like seemingly everyone else, you’ll make a killing on your investment in a short time. There seems to be an unending supply of buyers willing to pay a premium for property, you reason.
But the big-time savvy investors always recognize the top of the market (like they did with the stock market) and begin to liquidate their holdings. Maybe returns have slipped to 50 or 25 percent annually, and now’s the time to take profits and reinvest elsewhere, possibly in real estate again.
By the time their actions start to affect prices, you find yourself selling into a buyer’s market.
So much for that killing. Hope you can cover your “margin call,” that is, if you took out an interest-only loan or one that’s adjusting higher.
– Learn from history. Attention young people: This doesn’t apply just to you. The middle aged are just as enthusiastic that real estate is a market that will never fall.
But, like everything else, real estate runs in cycles.
Some think that we have reinvented the rules and that demographics and a booming economy will keep the engine running endlessly. A few others think we are on the threshold of a conflagration that will make Floridians look back on 2004’s hurricane season with nostalgia. (Ah, remember when we were cleaning up and condos were selling for $1 million?)
Prosperity may last only as long as terrorists hold off attacking America or until the thriving economy gets its own margin call, in the form of the Chinese and Japanese buying our debt demanding more for their money — in the form of higher interest rates. (Remember when a soaring national debt, huge and growing government deficits, unending trade imbalances and a weak dollar were considered bad?)
– I’ll just rent it out. If thousands of new condos are going up, with many of them bought by investors who intend to rent them out, won’t there be an oversupply of rental units?
The surge in condo investment “is affecting the rental market in some markets positively, because it’s taking apartments out of the stock” via conversions, said Doug Bibby, president of the National Multi-Housing Council, an apartment industry group. He was responding to April’s spike in home sales and prices reported by the National Association of Realtors last week.
But he did cite a few markets with the potential to hurt rentals — San Diego, and potentially Las Vegas and South Florida.
Phoenix real estate agent Carol Dennis of Coldwell Banker Success Realty says that though the for-sale housing market there is hot, the rental market is pretty tepid. In fact, she spoke of typical subdivisions of 60 single-family homes where as many as 15 have for rent signs out front.
“There is some concern [of speculation in Phoenix] from people who had previously been in California and Las Vegas,” said Bob Curran, senior director at Fitch Ratings, in an interview about hot housing sales and the possibility of a bursting bubble.
It’s gotten to the point in some locations that builders have been trying to limit the number of speculators in their developments, some even resorting to putting provisions in their contracts that profits are forfeited if the property is resold within a certain period of time, Curran said.
– Who cares? It may not matter that new jobs are low paying, that jobs are being outsourced to Asia or that the median cost of a home far exceeds what the median income can buy. One sales agent attending a convention of the National Association of Realtors a couple of years ago told me that there are enough people making more than the median income to buy everything that’s for sale.
That should be a comfort to real estate investors — sort of.
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Wayne Faulkner is editor of Real Estate. You may contact him at wfaulkner@tribune.com, or write to him at Chicago Tribune, 435 N. Michigan Ave., Chicago, IL 60611.
