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NAR: Speculation Accounts for 40% of 2005 Home Sales


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2006 Apr 5, 8:24am   15,228 views  153 comments

by HARM   ➕follow (0)   💰tip   ignore  

bidding war!

Second homes 40% of market
Updated 4/5/2006 3:10 AM
By Noelle Knox, USA TODAY

Americans snapping up second homes — as investments or vacation properties — accounted for four out of every 10 sales of existing homes last year, a record that helped drive the real estate market to new highs, according to a report being released today by the National Association of Realtors.

Nearly 28% of homes bought last year were for investment purposes, and an additional 12% were vacation homes, the figures show. Most of the buyers were baby boomers in their top earning years, looking toward retirement and hoping to build wealth or find a more desirable place to live.

This is up from 2004's already record-breaking 36% figure. This is a NATIONAL statistic, mind you, so we can safely assume that it is even higher along the Bubble coasts --probably much higher. On top of that juicy little tidbit, we get the following information from Ben Jones as to how exactly those Sub-prime issuers of IO/neg-am mortgages still manage to book all those "record profits" we keep hearing about:

Majority Of S&L Profits Neg-AM, ‘Non-Cash’

“A survey of top option-ARM lenders’ 10-K filings by American Banker shows that much more data is now available, including figures on topics to which regulators and investors are paying close attention: deferred interest and related negative amortization.”

“All the leading lenders in this niche provided evidence that principal-balance growth on such loans surged last year as many borrowers made only minimum payments. In their 10-K filings released last month, Downey along with Washington Mutual Inc. led the pack in giving details about option ARMs.”

“Salient figures in the Downey 10-K: Ninety-seven percent of the $133 million of deferred interest outstanding came from loans with balances above the original principal amounts, and the company generated 62% of its profits from noncash income from deferred interest.”

Let me see if I get this straight: The big neg-am (aka "option-ARM") lenders are deriving close to TWO-THIRDS of their reported "profits" by booking "deferred interest" on negatively amortizing loans WITHOUT ACTUALLY RECEIVING A PENNY. They're just assuming they'll be receiving all that "deferred interest" (the extra interest that gets tacked on to the loan principal when homedebtors make the minimum payment), whenever Mr. & Mrs. Specuvestor decide to sell. And of course they'll definitely be able to sell for much more than they paid, so why wait til then? Why not just go ahead and book all that guaranteed "profit" right now?

Wow. And I thought the Feds were good at "creative accounting". 8O

(begin sarcasm) Pardon me, but where was all that evidence about housing prices & lender profits actually reflecting demand? I seem to have misplaced it. Maybe Juku/MP/JohnJacob/etc. has the data. Oh, sorry... I forgot --they don't actually USE data. (/end sarcasm)

Discuss, enjoy...
HARM

#housing

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27   HARM   2006 Apr 5, 11:02am  

@To BA Or Not To BA,

I sent Jim Jubak a critical email last summer in response to a puff piece he wrote, which basically denied the possibility of a housing bubble. He actually took the time to write me back, naturally defending his position. Fast forward to today and now he's singing a completely different tune.

What a difference nine months makes!

28   Peter P   2006 Apr 5, 11:03am  

I’d second that and introduce my own bill - the cube buillion prohibition act.

If they can have cube buillion without MSG or other additives, I have no problem with that. :)

Real broth is not that difficult to make anyway. Clam broth can be prepared very quickly.

29   Peter P   2006 Apr 5, 11:05am  

I wonder how many “investors” were sharing the same mindset.

Someone taught me this:

Never chase money. Position yourself to have money come to you.

Not investment advice

30   Peter P   2006 Apr 5, 11:14am  

Once in a while I get stuck eating at a chain restaurant (freeway, children). I think that shredded ‘cheese’ and tortilla strips shouldn’t be allowed near salads.

Well, chain restaurant...

Chopped green onion isn’t ‘chives’, and shouldn’t be called that, and I want full fat sour cream on my potato! And keep more of that shredded ‘cheddar cheese’ off my potato!

I had cream tea in SF once and they used sweetened cream instead of the all important Devonshire cream. What a crime!

I also once had a "lobster bisque" which was essentially canned tomato soup with two bay shrimps.

31   OO   2006 Apr 5, 11:16am  

FormerApt,

if you are lurking, do you care to share your perspective on what the watershed % of investors is in a total housing stock to make the general housing vulnerable to a fall?

I don't have a number here. Back in Hong Kong, we typically used 20/80 as a safety line. If 80% of a development are taken by owner-occupiers, then it's fine. If you have more than 20% investors speculating on a development, then it could get bubblish. 40/60 is the line considered too risky to breach, or you will have potential running-for-life situation. So an experienced investor or speculator will check out how many people like himself are buying into the same development.

Is it any different here?

32   StuckInBA   2006 Apr 5, 11:20am  

HARM,

I remember that article - claiming that there is no housing bubble.
http://moneycentral.msn.com/content/P116257.asp

This Jan, he did write that "Housing Bubble Is Deflating - but slowly". I wanted to write him an email reminding his article just a few months ago ;-)

He was also very wrong after the dot-com crash about the recovery. He maintained that since Fed is dropping rates, everything will be fine in 1-2 years.

But I give him credit. He is far more open, honest than most of the commentators. He has been critical of Fed for some time, although mildly.

In general, MSN Investor has decent commentators. (I do not work for Microsoft, nor do I own shares of MS.)

33   Peter P   2006 Apr 5, 12:22pm  

1. In a expanding credit is it not MOST prudent action to make GREATEST use of that credit — is that correct?

It depends. The trend is your friend... until it ends.

2. “FDIC Insured” is a FUCKING JOKE — is that correct?

It is not better or worse than fiat currency.

3. Why worldwide index is mostly GREEN

_Shrug_

34   revengeofaone   2006 Apr 5, 12:48pm  

Where is the best place to park Cash Money for the next 4-5 years?
I want CASH in my pocket each month, and extra CASH for some tasty snacks.

35   Randy H   2006 Apr 5, 12:54pm  

Owneroccupier,

Apart from energy (oil, ng, uranium, etc.), and gold, silver, what other real assets are good for hoarding? How does one hoard agricultural products, esp soy and sugar? Any suggestions?

I'm trying to solicit comments on this topic on my blog. Please feel free to post any comments there and I'll cross-link everything back here. My ambition is to use an efficient frontier optimizer I have to take the portfolios people recommend and then keep track of the different picks. So far no one's been bold enough to hazard any picks yet though.

36   Randy H   2006 Apr 5, 12:59pm  

Fewlesh,

Currently, everything is honky dory, except when we mention things like the Icelandic Kroner Hiting 11% (”How can a country have a high intrest rate?”, was the lunch time discussion).

Remind them that Iceland, New Zealand and the others in this boat fall in the IS-LM "Small Open Economy" model in a macro sense. Countries such as this have little or no effective control over their nominal rates (at least not for long), and thus their rates can rise dramatically, and very quickly. This is because they don't manipulate their currency (at least not much or effectively), they have open capital markets and therefore are real-rate takers, and they do not have economic scale or locally generated GDP sufficient to have divergent nominal rates (as the US, Japan and the EU do -- especially the US by a huge margin).

37   Randy H   2006 Apr 5, 1:02pm  

...oh, and these countries in the news all have one fatal problem in this context: they are all carry-trade currencies vis-a-vis the USD. They are all "American-Anglican" economies and are tied very closely to the USD making them great for carry-trades. The amount of capital the likes of BGI and the big Hedges were pumping through their currency was massive on a scale few comprehend. Since that pump is grinding to a halt, it's interest rate hiking time.

38   FormerAptBroker   2006 Apr 5, 1:57pm  

astrid Says:

“I find this RE boom actually brings in a lot of inexperienced investors while more experienced and more successful investors stay put.”

The wealthy experienced investors “all” know this is a bubble and many have been profit talking and selling property to inexperienced investors who are too naïve to know that they are buying at the top of a cycle. Most of the borrower sponsors of loans I have originated for investment property purchases over the past couple years have been so inexperienced investors buying the property from experienced investors…

39   FormerAptBroker   2006 Apr 5, 2:21pm  

Owneroccupier Says:

“FormerApt, if you are lurking, do you care to share your perspective on what the watershed % of investors is in a total housing stock to make the general housing vulnerable to a fall?”

It depends on how you define “investor”. I define an investor is someone who makes an investment and gets an actual “return” on that investment. A “speculator” or “gambler” is someone who makes an investment and hopes or prays that they will get a return on their investment. There is a big difference between real estate investors like my parents and their friends who own million dollar single family homes with little or no debt and the real estate speculators that buy million dollar homes with no money down and rent them for $50,000 to $75,000 less than it costs to own and maintain them hoping and praying that they will continue to appreciate by at least $100,000 a year…

“I don’t have a number here. Back in Hong Kong, we typically used 20/80 as a safety line. If 80% of a development are taken by owner-occupiers, then it’s fine. If you have more than 20% investors speculating on a development, then it could get bubblish.”

There are many reasons why people get nervous when the percentage of renters gets above 20% (in a condo complex, neighborhood or PUD). Owners tend to be committed to the area while renters come and go. As I mentioned in a previous post If I’m an investor and own a condo I can get more rent from eight hard working immigrant guys than I can get from an old lady and her cat or a nice young couple …

40   Michael Holliday   2006 Apr 5, 3:36pm  

Algorithm for Real Estate Success with Haiku Thrown in for Aesthetics:

Stated Income + No Doc ARM + Min. Wage Job x 10 houses = Big Pimpin'

No mon' big fun with
Monopoly housing bucks:
Back up the truck...fools...

41   OO   2006 Apr 5, 4:42pm  

FormerApt,

thanks for the clarification.

astrid,

go for it, I think it is a huge opportunity, if I could deal with the air, I would have done it myself. You will be surprised, even Carrefour carries knock offs, they have been publicly caught at least a couple of times when I was there, selling knock-off imported wines that were actually manufactured locally, or watered-down whiskies.

Here are some feedback from my expat friends, and some opinions I've heard constantly from my HK/Taiwan friends working in China.

1) Highly prefer all flown-in products from countries with high agricultural standards like US, Australia, New Zealand, France esp veggies. China has organic farms, but in a country with rampant fraud, how do you know that it is REALLY organic? So fly them in, people will pay up. California is a huge brand there, so any food made in California is considered of good quality.

2) Start with babyfood. When I was there in China, all the expat wives have their babyfood directly flown in from US, Canada or whatever country they came from. They don't trust local manufacturing facilities of foreign brands. Nestlee, KFC, McDonald's were all caught in food pollution scandals in China. Even the locals want flown-in babyfood entirely manufactured and packaged outside of China.

3) You have to be extremely strict in your QC. If someone finds out you substitute local food for flown-in stuff, your shop will close down overnight. The problem is not you, it's your buyer. Carrefour and Walmart buyers in China's retail operation all take in kickbacks. Typically the local food vendors offer a kick-back of 10-15% of the total invoice value to the buyers, that can add up to several times of the buyer's salary. So you need to control your buyers and employees well. The work ethics is not the greatest over there, employees often find ways to benefits themselves at the expense of the company, so you need to put in lots of check and balance, and a well-devised incentive system so you don't get screwed.

4) Copycat. Copycats spring up overnight on virtually anything. Think hard about how to raise the barrier of entry. Perhaps strike some exclusive contract with select brands.

42   OO   2006 Apr 5, 4:49pm  

astrid,

the general attitude of nouveau riches in China is, they want everything foreign. Foreign = good quality, so everything foreign goes for a hefty premium. Hagaan Daaz is marketed at a premium and sold at a price higher than here, Starbucks can get away with charging the same amount they do here.

For groceries, you want to follow the model of an extremely successful supermarket in Hong Kong called the Great Supermarket, very high margin business with primarily stuff flown in from developed countries. the price point is even higher than Wholefoods. All the rich and famous shop there, it also enjoys a very solid support from the middle to middle upper class.

43   Garth Farkley   2006 Apr 5, 10:43pm  

If you were going to hoard alcohol, why not whiskey? Or better yet, everclear (200 proof). It's more valuable per unit of weight and volume than wine. It will always be saleable because people love to drink. And, you can use it for fuel if you don't.

44   Garth Farkley   2006 Apr 5, 10:53pm  

Interesting thread. More light than heat.

The weeping and wailing and gnashing of teeth gets old quick.

I don't understand this exchange between Ha Ha and Peter P:

1. In a expanding credit is it not MOST prudent action to make GREATEST use of that credit — is that correct?

It depends. The trend is your friend… until it ends.

45   Garth Farkley   2006 Apr 5, 11:30pm  

Ha Ha,

I fear the market. But then I have Hobbesian leanings: "Fear and I were born twins."

I owned/renovated my home in Pacific Grove for seven years and sold last Fall. I wasn't trying to catch the wave, but I was mindful of the run up.

I still and always believe that long term homeownership is the answer for working class professionals like me. But I did push the ball up the court on the sale. I’m not stupid.

I also bet that PG/Carmel/Monterey will fare comparatively well in any downturn. They really aren't making any more here. And the value/demand is inherent because it's a wonderful home if you don't mind some fog and have a good job. I’m just planning to move soon, and I don’t mind renting a while.

Bottom line, after working my ass off in the army, college and law school, I finally have two nickels to rub together. But I do fear the market. And inflation. Scylla and Charibdis.

I’m going to wait and watch and shop for value. I know my next home could drop a bit after I buy, but I’ll own it a long, long time. The mortgage deduction and Prop 13 push strong wage earners to own their own homes. And I believe that stocks are for experts and insiders. Or suckers. I’m none of those.

BTW, I don’t hoard anything, but if you are really desperate, hoard guns. As for me, I’m all in on our government and our economy. For America, “we pledge our lives, our fortunes, and our sacred honor.”

46   Garth Farkley   2006 Apr 5, 11:45pm  

More on topic, I am wondering what fundamental economic forces have pushed up residential RE the last few years.

The most obvious reasons I see are

1) relaxed lending standards
2) low mortgage rates
3) fear of the stock market
4) fear of inflation

Ingredients for a perfect storm?

I've always heard that RE is counter-cyclical. Especially at the start of the recent run-up the stock market looked bleak to an outsider.

And bottom line for you hoarders, run down to Billy Joe Bob's "Guns & Booze." Don't forget to stock up on ammo. Better invest in some shooting lessons for your wife and kids, too.

47   Garth Farkley   2006 Apr 5, 11:57pm  

Bap33,

Yes. The end is near.

Eat the rich.

48   DinOR   2006 Apr 6, 12:02am  

Ha-Ha,

I read the "Phoenix Management Survey" and what was really shocking was that 38% of the lenders said they were most concerned with the fed. budget deficit and rated the RE bubble dead last at only 9% of those surveyed. Hello? I checked out their website and these guys are some hard ball players. Did you see their list of services? Loss Mitigation, Turnarounds, Default Management etc. etc. I don't want to tout their position but it strikes me that these folks are well qualified to render an opinion on when things don't work.

49   Garth Farkley   2006 Apr 6, 12:02am  

I agree that fear and greed have accellerated the run up. But you'd have to ask Harm or Randy H. I'm no economist.

50   Garth Farkley   2006 Apr 6, 12:04am  

SF Woman,

I agree that fear and greed have accellerated the run up. But you’d have to ask Harm or Randy H. I’m no economist.

I hope it's obvious that I'm being sarcastic when I agree with Bap33. My end sarcasm markup didn't work.

51   Garth Farkley   2006 Apr 6, 12:06am  

I see DinOr is here. He'd know too.

52   DinOR   2006 Apr 6, 12:08am  

Garth,

I love ya like a brother but PLEASE don't make me say this again.

NUMBER 1 cause for bubble?

1997 Legislation that allowed up to 500K in cap gain FREE money! (250K) for singles. All of the other issues are important but if rank and file Americans had to pay 15, 28 or 35% capital gains when they sold their homes (or extracted equity) would we have this problem?

53   Garth Farkley   2006 Apr 6, 12:09am  

Mmmm, rich people.

54   Garth Farkley   2006 Apr 6, 12:14am  

DinOr

I believe you. But it's funny, as a licensed atturney I didn't know the old rollover rules had changed when I sold.

My Realtor team, one is a CPA, had to explain it to me. I talked to several other lawyers and judges I know. None of them knew about the new exclusion rules.

So for the masses of poor slobs like me I wonder about the impact on decision making. Also I note that the speculators will have STCG, so they wouldn't get the exclusion, no?

55   DinOR   2006 Apr 6, 12:15am  

SF Woman, Garth,

We can make this real simple. Randy H always hammers me/us on "reversion to the mean". We can take say 5 year increments and look at the appreciation in the median home price in America/CA (your preference) and any deviation above that is fluff and hot air.

56   DinOR   2006 Apr 6, 12:19am  

Garth,

The fact that you weren't aware of it is my witness. If you had been surrounded by grumbling malcontents that begin their conversations with the "those damn cap gains" you may have thought long and hard before selling.

57   DinOR   2006 Apr 6, 12:23am  

Garth,

I have to believe that alot of specuvestors had quit their dayjobs to flip homes. Unlike folks like ourselves in professional services where we struggle to come up with legitimate deductions the STCG is specuvestors only real tax. B/c they have a paper trail for the $'s spent on the renovations they may have been able to offset alot of the gains anyway. My guess though is that alot of these folks didn't bother with the quarterlies and many may not have bothered with a return!

58   edvard   2006 Apr 6, 12:26am  

This is amazing to me that an institution can count unearned wealth as profit so soon after the Enron Scandel that was based on similiar practices. As far as 40% of homes being investments, I'd believe it. The fact is that the 2 or 3 homes that have sold on my street in the last year have nobody living in them, and ever so often, a truck comes by with a crew to spruce up the yard is proof that they are all indeed investments. I am willing to put money on it that at least 50% of the homes sold in California, and maybe higher in the Bay Area were investments. They will all likely be put up for sale this spring. Can you imagine the inventory? Of course I would think that RE agents and investors wouldn't be stupid enough to place their homes up all at once. That would be far too obvious of a mistake, but then again, I imagine these people are going to panick if they aren't already.
A sad story- One of my neighbors lives in a large, run down, crummy victorian that his father bought. He inherited it and now he himself is in his 60's. He had a beat up old truck and lots of carvings out in the yard. Pretty unique local guy. Anyway, within 3 weeks, the old truck gets sold, he buys a new truck, and starts making trips back and forth, throwing his stuff into the back of the truck. The place was cleaned out in a week and now there it sits for sale, for 720k. Sad really. I can't help but feel that what character many of these places had, where average people once lived will be replaced with office cubicle monkeys and upper executives.

59   Garth Farkley   2006 Apr 6, 12:34am  

DinOr,

Point taken.

60   Garth Farkley   2006 Apr 6, 12:35am  

When I found out about the $500 exclusion I wanted to start all over. Then I found Patrick.

61   DinOR   2006 Apr 6, 12:37am  

SF Woman,

Many in New England as well as the Capitol were able to take "full advantage" of the exclusion. While many in the mid-west and more affordable markets may not have flirted w/500K free ride, they may have gotten it in "bites". Let's not kid ourselves. When we have 50K or 500K in tax free money dangled in front us we can fabricate alot of reasons as to why our current house just isn't right for us!

62   Garth Farkley   2006 Apr 6, 12:38am  

SF Woman,

I'm not sure but I think the rollover rules are still there in the background for the very rich who want to stay in real estate. Or maybe take a short breather. Unfortunately, that wasn't an issue for me.

You should check with a qualified CPA. Or even a qualified Realtor you trust.

63   DinOR   2006 Apr 6, 12:50am  

Garth, SFWoman,

The fact that you were both long time residents makes you "dead money" to a realtor. They need "money in motion" so they tend to focus on the "players". Believe me, mortgage brokers look at their book of clients and they know EXACTLY where all the loans are at. Their FICO's etc. They know they can go back to those clients they put into ill-fitting loans (and some do so intentionally) so they can go back and harvest fees again. Realtors did/will try to do the same thing! They will start bugging everybody they sold to 18 months ago so they can go back and "flip" the client into another property knowing full well that taxes are not an issue.

Again, this above all other "bubble factors". It's commission driven.

64   DinOR   2006 Apr 6, 1:01am  

SF Woman,

Now I'M confused. Prior to 1997 you HAD to roll your profits from the sale of the previous home into a residence of equal or greater value to be excluded from cap gains. After 1997, ORGY! Married couples could take up to 500K in tax free money out and do as they please. Thus the explosion in second homes. If it worked good once, why not take advantage of the multiplier effect? (Mind you in 1997 the median price of a home was substantially lower than today). Linda in La La Land had to pay ONLY on the excess amount OVER 500K. Even at that, she was able to offset to a degree b/c of some improvements they had done. The discussion now is that the cap gains exclusion should be moved out to 3 or even 5 or 10 years. About time. Also there is talk that the deductibility of mort. int should begin to evaporate above the median price in your area. About time. Also a word to the wise; a little birdie at the IRS told me that they are going to begin looking long and hard at 1031 Exchanges.

65   DinOR   2006 Apr 6, 1:23am  

John M,

The guy I spoke was in the Chicago Office and was about to retire. A "short timer" has nothing to fear, I mean c'mon what are they going to do? Take away his birthday? Anyway, he explained that 1031's had become so perverted that the IRS has been forced to take a dim view. Before the 1997 legislation this was very necessary. Now? He explained that the "service" is now aware that developers actively seek out property owners that have developable land and are using the 1031 as a means to circumvent the law. But you're not selling your land (or sub-divideable land) to a developer? Why me? Thank all of those that abused the honor right out of the honor system.

66   Different Sean   2006 Apr 6, 1:24am  

i'm intrigued to juxtapose these two different observations - no criticism of either. one is talking about the individual psychology of 'keeping up with the joneses', or what david levine calls 'meeting esteem needs', and the other blaming greenspan for the fact that households are up to the wahoozy in debt...when greenspan didn't force them to go into debt, it's a decision they made. (note from my blog, a few articles down, that australian households are in exactly the same position vis-a-vis debt...)

i think these are two sides to the same coin - personal psychology and the 'me too' factor creates the market conditions; on the other hand, a lot of younger people are forced to take on more and more debt just to try to get into housing... however, my point is that owneroccupier's guy did not have to start flipping to make a buck, he could've had a comfortable life without it - so it's invidious comparison, not quite 'competition'...

Owneroccupier Says: April 5th, 2006 at 5:58 pm
how did we end up with so many amateur “investors”?

I believe that they are not compelled by greed. Instead, they are compelled by fear and competitiveness. A friend of mine who took on more than 1.2M mortgage, flipping 3 homes. He has a kid and another one was on the way, till his wife had a miscarriage, due to pressure, I guess, because they absolutely need dual salary to make it through every month.

Last year, when he was contemplating buying his last “investment property”, I asked him why he wanted to be so aggressive. He was a bit insecure so I never dared to tell him that he was totally setting himself up for failure. He noted that he was “lagging” in building his wealth as compared to his friends, and he felt pressured to catch up. Flipping homes seemed to be the only route to quick bucks. He missed out on the dotcom lottery (a close friend of his who has almost the identical background and skill sets lucked out and bought a home in Los Altos all-cash), so he didn’t want to miss out on the next get-rich-fast scheme.

I wonder how many “investors” were sharing the same mindset.

Ha Ha Says: April 5th, 2006 at 6:59 pm
For me, Greenspan is the savings saboteur, par excellence. There are two sorry tales of savings. On his watch, first we have seen the steady erosion of personal saving as a percentage of disposable income; and second, the eventual devastation of net national saving after the bursting of the equity-market bubble in technology, media and telecommunications shares in 2000.

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