Sunday, October 23, 2005
Barrack Selling Out Of US Real Estate
"There's too much money chasing too few good deals, with too much debt and too few brains." The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them.Barrack feels that the increase in construction costs will be the final nail in the coffin of US real estate. See also yesterday's post on the Fed's proposal to alter capital requirements for banks. There are too many trend lines pointing in the "down" direction for me not to believe that that is where the market is going. It may not be felt that much in the areas that haven't had a big rise in real estate, but the hot markets are going to cool considerably.
Right now, Barrack's view of the U.S. market couldn't be clearer: It's a great time to sell, and a terrible time to buy.
In fact, he sees signs of the tech bubble mentality in real estate. Too much capital is chasing real estate, he explains, with hedge funds, private equity groups, and rich investors all bidding on the same properties. "They've driven prices to the point where the yields on high-quality properties are like the returns on bonds, around 5 percent or 6 percent," says Barrack. "That's too low."
If you are exposed you need to take action now, whether it is selling out, clearing debt or saving money.
It not so simple.
A deduction for a $600,000 home tends to be inflationary, especially when people are buying those homes with non-amortizing mortgages. At that point, it's all funny money, because they are buying with speculative money and really holding property hoping to cash out from larg equity increases over two-three years. That puts fluff into a market.
SC&A, if it's the home you live in, sit on it and enjoy the lovely feeling of no mortgage. In the long term, real estate is always a good investment.
If it's 1-4 family detached held for investment, it depends on the area and the price range and when you had planned to sell out anyway.
Hot areas in which most people are getting the non-amortizing mortgages are the ones that I think are in trouble. Those areas have gotten most of the rise and are now getting risky. Even there, if the home was held for retirement and that was at least 5-7 years away, it might be better to sit, especially for tax reasons. But if the idea was to hold for a few years, it probably would be better to sell now.
Homes on the lower end of the price range will always find a buyer. In addition, income from rental homes should start to rise in these areas as fewer people can afford to buy, so the holding cost should start dropping.
If is 1-4 family in an area that hasn't seen large inflation in housing prices, I would not be as concerned. Property in some southern markets is likely to keep rising as people retire and move, especially with these fuel prices. When you are 65 and staring at a $1000 a month fuel cost in the North, that idea of a small house in a southern state, perhaps near a lake or a golf course, starts to look really charming.
Commercial properties depend on the specific area. In general, buying into commercial property at this time seems risky to me. The smart money is selling and the dumb money is buying.
Condos and townhouses in areas with mixed housing always take the worse hit when RE starts to drop.
As for second home investment property (resort, golf-course, vacation condos), unless there are extremely exceptional positive local indicators, sell out.
If a pandemic flu happens, and I believe that is increasingly likely, the vacation, cruise and resort industries are going to be very hard hit. Having ready money then might get you some excellent deals on golf-course or resort housing.
Whenever and wherever things go south, some developers are likely to be having trouble unloading and good investment opportunities will start popping up, so cash in hand now might find a really good spot a year or two from now.
Of course, tax considerations may override all these other factors for any individual.
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