Re: Barron Thomas's Are We in a Real Estate Bubble?:
As a full time, licensed realtor in Michigan, Oakland County in particular, I meet many people each month that are going to "flip" houses. I say "that's great." I see these same people get killed by "flipping" because they paid "retail" prices for their project properties. The successful "flipper," always buys from someone who has NO IDEA what their property is worth. Remember they're INVESTORS. If the home or property is listed by a realtor, then that seller has a pretty good idea what things in the area are worth. If the flipper cons the little old lady who's been in her home for 60 years into selling for a "fair" price. Then the flipper has margin for profit. Oakland and the surrounding counties of SE Michigan are currently in a "Buyers' Market." Sellers are willing to make deals, buyers are expecting incentives from sellers, and there are few, if any, multiple offer situations.
I don't make predictions for my clients. Since I may have to one day sell that home my clients are buying. I usually ask, "How long will you be in the area?" Real estate is typically a long term investment strategy, if you paid a retail price for the property.
With no interest loans, buying rather than renting is very attractive for the short term Michigan resident. The same people that decry these "interest only," "reverse amortization," and otherwise "easy money" loans as predatory didn't see the interview on Fox News Sunday that I saw with Donald Trump. When asked by Chris Wallace if filing for bankruptcy was going to hurt the Trump name? Trump simply said: "Just shedding some debt" (he failed to add: while hiding most of my financial collateral from collection of debts owed). At whose expense I ask?
People that get themselves into financial trouble with supposedly "easy money" are as much of the problem as the rich punks like Trump. Both classes abuse the system, easily file for bankruptcy, (which can expunge their financial failings) leaving the taxpayer and retail buyers to pay the inflationary costs for your next loan or product/service.
-- P. Aaron Jones
Huntington Woods, Michigan
Very interesting article. I am trying to decide what to do with my condo in Miami Beach. However, I am more interested in knowing whether the author is the same Barron Thomas from Barron Thomas Aviation in Dallas, Texas? If so, then I want to talk to him because that Barron Thomas owes me $1500 plus interest from 1987.
-- Capt. Peter B Hauser
I think part of the problem affecting this overblown behavior towards real estate investing is that for the past five years no other investment vehicles (stocks, bonds, etc.) have been able to provide much of any return to investors who have some cash readily available to invest, hence the lemming like stampede into real estate. I think some of them are also trying to recoup on losses from the last so called investment "boom," i.e., dot.com stocks. I have been in commercial real estate for 26 years and have experienced at least three downturns in the market cycle, one particularly severe. At the time I was a portfolio manager for a large real estate syndicate and I recall meeting with an elderly couple who had invested in a limited partnership that contained several commercial properties. The value of their investment had been reduced significantly due primarily to market pressures. However, I remember clearly the one comment that the wife made: "We've owned homes for several years and they've always appreciated in value; how can this happen to higher quality real estate assets?" After explaining to her the basic economics of supply and demand and their impact on rental rates, and how operating expenses only rise over time, it wasn't hard to understand how a positive cash flow could turn negative, especially with an overload of what appeared to be a normal amount of debt on the given investment.
Although in my mind there is more emotional attachment to a primary residence as an investment, when people begin speculating on it like any other commodity, combined with easy credit, all bets are off. I thought people had learned enough from the dot.com implosion that these types of skyrocketing values on most investments make little or no sense unless you have the discipline to get out early, and then it's only a Ponzi scheme. I suspect their thinking is further muddled by the fact that some residual value remains in real estate assets. However, depending on the amount of leverage used, at what point in the cycle, and the future supply and demand economics in their given market, they may very well wished they'd left their money in paltry CD's. Nothing like selling for a loss, and worst case, if their minimal equity is gone, that nauseating feeling of realizing the net difference is still owed to the bank.
I further wonder how many of these speculators understand that most residential mortgage loans are recourse to the borrower; i.e., short of bankruptcy (although those rules have changed some, too), they're still on the hook in the event of a shortfall at sale time. Every time this sort of thing happens, I blow the dust off of my copy of Extraordinary Popular Delusions And The Madness Of Crowds, by Charles Mackay, written in 1841, and conclude speculation occurs from time to time, and is a faulty condition of the human psyche, i.e., greed. Nothing much changes, does it?
-- David P. Bennett
My wife and I bought a house in Howard County, Maryland (a higher median family income than oft-sited Montgomery Co., Maryland) in December 1999 for $171,000. It was the neighborhood eyesore, a real fixer-upper. After mucho work and money the house now looks great. We bought this house at the very beginning of the HoCo real estate boom. Even back then, my wife would see a property listed online, we'd go look at it, come home and find five to ten over-asking-price bids. We managed to get our house before it hit the market. It's in a decent, but not the best, school district, but those change every year in the county. The school system is a big draw to Howard County.
It was recently appraised for over $450,000 and other comparable houses in the neighborhood have sold for more. We have an affordable mortgage (one) and the house will be paid off in less 20 years. Of course we can't think about moving because we couldn't afford anything else and our investment money is in safe, conservative funds. Oh, and the Ravens have an offense this year. Think we're in better shape than the flippers?
-- Rick Hiteshew
I think your observations depend on where the property sits (the ol' location, location, location gambit). But real estate markets are not the same throughout the country. Where I live in Texas, we are dead last in home appreciation nationally, but the market is strong and demand remains constant. Some of the markets you allude to have rent control or restrictive land use policies and that effects the market in those areas as well.
The one item that really concerns me was your #8. We see financial instruments similar to your observations, primarily interest only loans or in combination with ARMS. Many for the primary residence. The cascading effect that can take hold on a family when the balloon comes due will be devastating if there is either high interest rates or a bottomed out real estate market. Many of my neighbors are going for them in a big way to purchase a larger home than they might otherwise afford. They are gambling that they will garner a larger appreciation share on an interest only loan by holding a larger asset base. They intend to refinance at the end of the ARM using appreciation to go conventional. The logic of course only holds if the market remains neutral to positive on housing.
But just to be devil's advocate, places like Los Angeles, San Francisco and New York City are havens for liberal Blue Staters. Considering their track record for macroeconomic policy it seems odd to consider their economic decisions commendable at the microeconomic level. That's like asking Keynes if we should go short on November wheat.
-- John McGinnis
I found Barron Thomas's article, "Are We in a Real Estate Bubble?" to be incredible and predictions such as he makes long overdue. The one thing I can't understand in all of this is why some governmental power has not stepped in to safeguard our financial system. I have been somewhat unaware of the degree to which the prices have risen and the speculation underwritten by out-of-control loan companies. With what he explained, I wouldn't be surprised to see a fallout somewhere in the category of the great depression.
I'm not in real estate, but I witnessed a bad crisis in real estate here in Texas back in the '80s. Once property started losing significant value, people started dumping any and all property they could afford to get rid of, followed by selling property they could not afford to keep, followed by people walking away from loans rather than be buried so deep that they would spend who knows what part of their lifetime trying to pay their loans down to the incredibly deflated price.
Some of the first to walk away from their loans were those who, without creative financing, would never have qualified for a loan in the first place. The tried-and-true methods of assessing credit worthiness had been abandoned and the law of averages worked themselves out. As values plummeted, even good solid people whose credit worthiness was flawless walked away. I knew a great number of very good and ethical people who went against their consciences when faced with a decision between seven years of bad credit verses paying perhaps ten or more years for evaporated value. (Not all of them ended up with seven years of bad credit, because bad credit back then became a relative term.)
As loan companies started foreclosing, and the number of properties they were trying to liquidate grew, prices for what was sometimes termed "distressed" properties fell to as low as twenty-five cents on the dollar of their original value (depending upon where it was located). Some loan companies even started allowing more slack on credit worthiness when the only way they could get a property off their books or try to get a decent price was to offer a loan to people with noticeably bad credit or suspicious backgrounds. Neighborhoods became run-down in no time. Good neighborhoods became not-so-good neighborhoods. Prices continued to fall.
Of course, back then there were many different dynamics that figured into the equation. There was an oil bust that crippled the economy. Interest rates were sky-high. Many of the "Savings and Loans" were poorly run. However, the human dynamic remains the same. It's the same dynamic that fuels the corrections in the stock market. Once prices start plummeting, people start bailing out at whatever price they can get. The unfortunate aspect about a price drop in real estate value is that the value of real estate has no foundation other than the value the realtor can successfully market to a potential buyer. If the realtor can't sell the property, its worth is only a thought in someone's mind.
Perhaps Mr. Thomas could write a follow-up article explaining the other half of the problem of how prices got so out of hand. I wonder if Mr. Thomas has the fortitude to be as critical of his own vocation and peers as he was of the crazy buyers who pay too much and the loan companies who accommodate them.
Realtors are just as much to blame for the bubble having gotten to the point of bursting. Realtors are more responsible for fixing the value of a particular property than stupid buyers. They often point to appraisers and lending institutions as the ones who fix the value of a property. However, appraisers who are bearish on property values won't stay in business very long, and lending institutions have a vested interest in accommodating higher prices so as to protect the value of their existing collateral. The realtor ends up being the one who is accommodated by the companies (appraisers and lenders) who make money by supporting realtors (lenders support the buyer only after the realtor has finished his or her work). Realtors get more listings (and potential commissions) if they can flatter the seller with a higher price. They have incentives to sell a house for a higher price, no matter whether they are on the supply or demand side of the transaction. Realtors don't' get extra commissions for saving the buyer money.
Almost all the dynamics in real estate sales favor increased prices. The real estate companies make more money if prices increase (especially if the price increases faster than the rate of inflation). The lenders protect their collateral if prices increase at least at the rate of inflation (their overall risk is lowered when prices increase faster than the inflation rate). The appraisal companies, for the most part, sell their services to real estate companies and lenders and meet their need for higher prices. And the driving force of all this is where the rubber meets the road: the realtor. And what realtor is going to turn away a buyer who has more dollars than sense.
If and when the bubble bursts, there could be absolute chaos. There are no SEC-type rules to stop the downward spiral. People will always value their real financial future over their credit rating which is only ancillary. Loan companies won't stay in business long if their collateral is only worth about 25% of the money they have loaned out on it, and they start to lose money when they become owners and maintainers of property. If a loan company goes out of business, those who liquidate their holdings will sell property for whatever they can get for it, with the losses going on a ledger somewhere. Who knows where it will end. But the realtors will make money on every transaction, no matter how much the seller looses. Even if a lender is selling a million dollar house for $75,000, the realtor makes his money. Maybe after the bubble bursts and our economy loses more value than ever before, we can apply some of the lessons learned and redo how real estate is sold.
Although I'm hard on realtors, I am really thankful for Barron Thomas's article. I've always thought that realtors and real estate companies would bring about just what his article describes.
Re: Jackie Mason & Raoul Felder's Inside Up:
I really enjoyed the article about the meaning of words. I would suggest if Jackie Mason and Raoul Felder want a real laugh they should check out Ohio's current conceal carry law for handguns. It allows you to carry a handgun concealed but then proceeds to make itself almost useless and self-contradictory.
-- Jeff Cook
I like the remark that goes something like this: He finished this book/song/play before he died. Well did not think it was after. I hear this on newscasts often.
-- Elaine Kyle
Cut & Shoot, Texas
If the news outlets of the world carried Jackie Mason and Raoul Felder's common sense daily, would Noam Chomsky's disciples of spin leave the world stage in shame, vanish into hot air, return to their quagmires?
MORE "Inside Up" from masters Mason and Felder, please! The air is so blessedly clear here!
In law "issue" is defined as the disputed point or question to which the parties in an action have narrowed their respective allegations, and upon which they are desirous of obtaining the decision of the court. Merriam-Webster Online says it is a condition or occurrence traceable to a cause, as "one of the issues of the Civil War was the resolution to the question of states' rights." No authority suggests that "issue" is a synonym for "problem" and yet its use in that way is epidemic -- in business letters, newspaper headlines, in television sitcoms and dramas,... everywhere by people wishing to appear educated. (One good result is that it has ousted the use of "hopefully" -- without a verb to be modified -- formerly used by the same imperfectly educated persons seeking to pose as educated.) My plea is that some real authority -- perhaps Bob Tyrrell or Wlady -- issue a bull henceforth banning the use of issue to mean "problem."
-- J.R. Wheatley
Harper Woods, Michigan
Re: Jay D. Homnick's Old Agents:
The playful article on Hoover, Gray, and Felt by Jay D. Homnick (not J.D.) reminds me of the time Sandy Koufax and Don Drysdale were holding out together for 100 grand each. Whatever the name of their agent, general manager Buzzie Bavasi blasted him by saying that one should never trust a man who has an initial for a first name (as I normally do not).
-- R.L.A. Schaefer
Re: John Tabin's O'Connor's Ups and Downs:
I don't think anyone doubted where O'Connor would come down on property rights. She loved the family ranch in Arizona they probably swiped from the Indians, but she is now gone with her Ouija board and I say good riddance.
I would like to suggest Ted Olson for the replacement. I think he would stand a good chance of being confirmed without much fuss and would bloody up the democrats in the process. At 65 he has a good 15 years ahead of him. What's the matter with that?
-- Annette Cwik
The Villages, Florida
Don't underestimate President Bush. By leaking the name Gonzales, the President is making one of his subtle misdirection plays. Politically, Gonzales is DOA not only to conservatives, but also liberals. The President knows that if he nominates Gonzales, his lame duck status is in effect immediately after the announcement. There is just too much at stake for him.
I suspect the President will nominate someone who is of the Bork mold intellectually, but who is relatively unknown. He may even select a non-sitting judge into the slot. The Senate Democrats in any event are in a much weaker position to filibuster a nominee. They know the mid-term elections are only 18 months away, and there are at least three vulnerable Democrats. If the President plays this one correctly, not only will he get what he wants, but also force a split in the armor of his foes.
Re: James Rosen's Security Clearance:
My how times change. In my Grandpappy's day, if some one had a lanyard around their neck it meant something else. But then they called it something else as well: the cattleman's necktie, or more generally the hangman's noose. And serious security involved a key at the end of a silver watch fob and the strong box that it locked.
And I suspect they were more successful at it as well. I never heard Jessie James making off with 30 million credit card numbers.
-- John McGinnis
The Federal Maritime Commission. That's too good. It almost seems to contain a dash of Trollope. Not Joanna.
-- Robin Boult
Re: R. Emmett Tyrrell's Death to Rader:
Read with interest your article on the death penalty. Here's a few thoughts that might change your mind completely. Years ago in Great Britain a husband and wife were convicted of murdering children. They kept detailed records of their sexual abuse, torture and death. The notes were read aloud in court for all to hear, including the victims' parents. Great Britain outlawed the death penalty many years ago. The couple went to prison for the rest of their lives. That means the families of the dead children were forced via taxes to support the two fiends. Is that justice? Jack Abbott was in prison for murder when he wrote his book (Belly of the Beast). The book was a well received and he was released from prison. As I recall, he was out several weeks, when he murdered a waiter in downtown New York City. Here in New Jersey, another "star" committed murder at 17 years old (bashed his girlfriend's head in). He was eventually released from prison. Within months, he grabbed a woman off the street and attempted to rape her. Only through God's grace, did she escape. How about the two animals in Kansas who murdered a concert violinist. Not satisfied, they went on to murder three other young people who gathered to celebrate an engagement. Four lives snuffed out for no reason at all. Should they be given life in prison? In my view, no. Rader is depraved and should be put to death as soon as possible.
-- Bob Montrose
Fort Lee, New Jersey