All of us live in real estate and other than that we mostly watch it from the sidelines, so when the nightly news talks about a bubble, well who really cares. Since home building is big business, builders care, mortgage lenders and title companies care, land developers care, industries that supply all the materials that go into a new home, those people care. The guys and girls who actually build the homes, and landscape them, they all care, but real estate always cycles through ups and downs, it has throughout history and those people and industries know this. They expect it.
So I am back to who really cares? There is one other group.
Maybe it started with one of those “How to buy real estate and get rich programs” or maybe it was the guy down the street telling you how he sold a house the same day he bought it and made a pile of cash on it.
You have all heard of the day traders, back in the dot com hay day, it could be likened to Russian roulette, some get killed, and some survive! Many got caught in the stock market frenzy. There is ALWAYS a relationship between risk and reward. Today the new breed of day traders are called real estate speculators or house flippers. It works like this, you sign a contract to buy, usually from a builder, and then before you ever own the home, you raise the price from 30% to 100% and put it back on the market. Like shooting fish in a barrel! Easy money, very little cash needed, and almost no effort. The very loose monetary policies of late have made this even more tempting to jump in.
Many unsuspecting, normally not high risk taking individuals are now in the real estate business as speculators, including plenty of licensed real estate people. Look at the for sale ads, you will see things like “put your money to work’ or “great investment potential”. Right now, “for sale” there are 67 properties listed in Mesquite, all built since 2005.
I picked out three new subdivisions in Mesquite all built in the last year or so. Twenty six properties for sale, average asking price is $217 per square foot. I went back to the public records to see what they paid for them. Here are the numbers; average original purchase price $299,723, average new asking price today $396,923 that means they expect a 26% return on their investment. Actually if they put 10% down payment ($30,000), they expect a 325% return, (that’s fair isn’t it?). Keep in mind that relationship between risk and reward. Since the interest clock keeps ticking and time is literally money, a slower market creates some issues for these investors. Carrying costs typically run about 1% per month; remember taxes, insurance, utilities, HOA dues, time value of money, etc. Many have financed with adjustable rate mortgages, interest only or even balloons, none of these options are favorable for holding property long term. As rental units, virtually all these properties will have substantial negative cash flow, not to mention wear and tear, property management, etc.
Now for the real news, the average single family home sold in Mesquite in April 2006 went for $321,900 or $173 per square foot. Imagine that a 7 % increase from the average price paid by the speculators, yet they want 26% return or was that a 325% return on investment? Remember the line from the 1987 movie Wall Street, “Greed is Good”.
Given the fact that today’s buyers have at least 300 properties to choose from in Mesquite, interest rates are on the rise, and consumer sentiment is at a ten year low, it won’t be long before some start saying “please stop the bleeding”.
The market is about to serve up a lesson in the basic principle of supply and demand, and it may be time for a serious reality check for many of these new real estate guru’s.
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