I live about an hour from the coast in a state that has experienced nutty increases in real estate values. Predictably, real estate values are now crashing.
In nutty real estate markets, the primary driver of speculation are condos. Condos are often used as second homes or, more likely, as places to rent. Thus, when the animal juices get flowing, condos are the speculator's vehicle of choice, especially in highly desirable areas like the coast. And when the speculative fervor comes to a grinding halt, condos are hit the hardest and fall the fastest. So I wanted to see how hard condos have fallen in the resort community closest to my city of residence.
What makes this city especially interesting is that 10 years ago, even five years ago, it looked dramatically different than it does today. It used to be a sleepy, kitschy place. Today, you see building after building, mile after mile you drive. There are secular reasons why real estate should be substantially higher here than a decade ago. But as one who has studied financial history would expect, when a frenzy occurs, they build too many, too fast, prices get out of whack, and an inevitable and painful shakeout occurs.
I believe we are in the 2nd or 3rd inning of the shakeout. My trip did nothing to dissuade me from my opinion.
My first sign was one of poetic foreboding, as the first billboard I saw as I turned off the Interstate onto the state highway that took me to my destination was an advertisement for a condominium building. I couldn't remember seeing it when I was last here a year ago. I mustn't have been looking for it then.
Then, straight out of cheesy B-movie, I turned on the radio and the first station I heard was a program about - you guessed it - real estate. It was a local real estate show hosted by a nice female real estate agent.
It must be in the genes of real estate agents to be perennially optimistic, or at least in successful ones. The host of the show was as happy and chipper as could be, telling us not to worry about the Gloomy Gusses who were talking about the crash in real estate. She reminded us that negative talk just lead to more negative talk, and that was, well, bad for real estate. Instead, we should be happy and positive, and real estate prices will start rising again! I envisioned this woman saying how everything was going to be okay as one marched towards the guillotine. "Think happy thoughts, Marie, and you'll live a long happy life." Chop!
I started at one end of the beach and drove to the other. I stopped at several buildings and spoke with three real estate agents. The picture painted by the happy woman on the radio (who, in fairness, was talking about properties off the beach) was not anything like the carnage occurring in the beach front condo market.
The market had come to a thudding halt about a year ago. It just stopped, dead in its tracks, as speculation appeared to have dried up about the time conditions began deteriorating in the submergingprime market.
Many of the buildings had been started in 2004 or later. Several were still being built. Almost all the condos were owned by people who were not local residents - I had read last year that 98% of those buying real estate on the coast in the community had not applied for homestead exemption.
ARMs were the primary choice of financing. The people to whom I spoke estimated that the volume of ARMs ranged from "much" to "a lot," though the consensus was that the majority of condo purchases were financed by adjustable rate mortgages. Some were submergingprime, though nobody could get a handle on how much. One real estate agent said it "always made sense to finance with an ARM." He has six years of experience. He also had the most experience of the agents to whom I spoke. He may change his opinion over the next few years.
Every single condo I looked at was a speculative investment. Every single one. One of the agents even had the courtesy to show me the prices paid and who had purchased them - they were often corporations that owned several other units in the area.
Also, the agents were convinced the market was bottoming "right now." One nice woman, offering up evidence of such, told me that they even had a few sales last week.
Perhaps of most interest was that there were very few foreclosure sales. People had been sitting on empty units for a year or more, and prices were coming down, but there were few forced sales. That makes me think there is much more to come as credit - which, I have heard from a very reliable source - has become much, much tighter in hot coastal properties in the state.
It makes no sense to own investment properties here. Prices will be the same a decade from now. You cannot hold it for rental income. One of the brokers told me a unit can generate $20,000 - $30,000 in rental income per year. Split the difference and assume $25,000. Now, pay the strata fee of ~$5,000. Taxes are around $10,000. And insurance? Start at $10,000 and go from there. Poof! No more rental income. You earn 0% on your investment while the price of it falls.
I'm not looking for an investment. I can generate good returns in stocks, which is my forté. I want a place where I can hang out 10-12 weekends a year, and I'd rent it out the rest of the time. But it appears that many, many, many people who have invested on the coast have different goals than I.
They are caught and cannot escape. They are trapped. Those who will hang on, will. But many have over-leveraged themselves and the units they own will be dumped onto the market as foreclosures skyrocket.
It is not uncommon for the price of condos to fall 50% peak to bottom in the formerly hottest areas. I expect that to happen here. I will watch the market and perhaps look seriously at buying at the point of maximum pain in 2-3 years.