In November, I closed on a piece of land. The property is beautiful and quiet,
albeit a bit small. It is in a
small subdivision with 10 other properties. Four properties have been built. I have no deadline to build. There is a swimming pool in the common area and the small
subdivision road is made of cobblestone.
It is two blocks from a very trendy area where everyone wants to be.
And it is a minute’s walk to a beautiful beach. There is no main thoroughfare
obstructing beach access. It is
wonderful. I could not be happier.
For the last four years, I have been making a trip to a
resort area in hopes of finding a dirt-cheap bargain after the inevitable real
estate bubble crash. I was
originally hoping to find a condo but last summer, I changed my mind and started
looking at land instead. Land
prices had completely collapsed. Condo
prices, on the other hand, had merely imploded.
Ten years ago, this was a relatively unknown but naturally
gorgeous part of the world, if perhaps a little kitschy. At the beginning of the decade, I think
there were seven or nine condo complexes built along the beach in entire the
county.
Then, things got crazy.
Nearly 30 condo complexes were built in a few years. Literally thousands of condo units
flooded a market that had a small local population. There was construction everywhere. Upscale replaced
kitsch.
Prices exploded.
In 2005, my wife and I stopped into a two-story house built in the 1980s
on the beach but on the wrong side of the highway. The owners were selling the second floor. Asking price? $2 million. The
house probably went for $100,000 a generation ago.
Virtually none of the units in the newly-built condos were
owned by locals. Less than 2% had
applied for the tax emption eligible for primary residences. There was no rise in the number of
children registered for school. Everything
was owned by non-residents. Many bought several units financed with subprime, Alt-A and assorted “liar”
loans. This place was the poster
child for excesses during the Housing Bubble.
For those with an understanding of history and value, what
was about to happen was clear as day.
And it did. The market crashed. Foreclosures skyrocketed.
I would guess that the entire beachfront is now worth much less than
the debt that underwrote it. Most
properties are upside down. Banks
are the largest property owners and are ridding their inventories at firesale
prices. It is a great time to be a scavenger.
When I discovered the subdivision, there were two identical properties for sale. Both properties were owned by banks. One bank had owned its property for
over two years, the other bank owned its property for less than two months.
Believing that the bank which held its property for two
years would be a more motivated seller, I made an offer. I was shocked at the response – “No
deal.” They weren’t willing to budge. They thought prices had fallen far
enough. A property had changed
hands at the same asking price a month earlier but that property was a third
larger in size and was arguably better situated.
I thought the bank was being unreasonable. I told the bank that on a per square
foot basis, they were overpricing the property. “Sorry” came the response. They weren’t selling.
So I made the same bid on the property owned by the other
bank. This bank was far more motivated to sell and we quickly reached a deal. It is actually a better property than
the one I originally bid on since it is closer to the beach.
The subdivision was originally purchased by very clever real
estate developers. They bought the
land when it was covered in brush, cleared it away, paved it, built a swimming
pool, and carved out 10 properties.
In 2005, they started selling, listing each property for $679,000. Eight sold quickly. A year later, one of the properties was
flipped for $885,000.
But then, the market froze.
People mark 2008 as the beginning of the credit crisis, but
that is wrong. In one resort area
near where I live, transactions literally stopped dead in the fall of 2006. A few months earlier, titles were being
flipped before closing. The
suddenly, bids completely evaporated.
The bubble had peaked.
The real estate developers – being clever – understood what
was happening, and in 2007, dumped their last two properties for $100,000
each.
The bank that wouldn’t budge originally listed the property
for $500,000. They lowered it to
$330,000. Then to $250,000. Then to $125,000. Finally, they lowered it to
$90,000, which was the listing price when I found it.
I bought my property for $70,000. Three years earlier, a similar property in the subdivision
changed hands for $885,000. My
purchase represented a 92% decline from the peak.
I ask the reader this – where in the world can you find
assets down 90% that will benefit from the massive inflation the world’s
central banks are creating?
Stocks have soared, bonds have soared, commodities have
soared but real estate just sits.
Yes, there are structural problems in real estate. There is way too much of it. There is too much real estate
debt. And that is why real estate
has lagged.
But the Fed’s actions to Save the World are highly
inflationary, not necessarily inflationary in terms of consumer and producer
prices paid, but in terms of asset prices. We live in an asset-driven economy, where asset prices are
the primary benefactor of easy money.
The dogma of modern central bankers has been to focus on the
general level of prices paid in the economy for goods and services, not the
level of asset prices (unless asset prices fall too low and imperil the
system). As long as consumer
prices are not rising (or falling) much, the amount of money created is a minor
focus, if any at all.
The opening of China and the commercialization of the
Internet were both powerful deflationary forces. Prices should have fallen over the past 15 years, or at
least not risen as much. In a
quest for price stability, excessive liquidity was created in the system, which
found its way first mainly into stocks, then into residential real estate, but
also elsewhere – bonds, commodities, real estate, art, wines, sports teams, you
name it.
This cycle has not changed. To offset deflation, the Fed’s balance sheet has exploded,
and liquidity from the largest fiscal and monetary stimulus ever is flooding
primarily into asset markets.
Most asset prices have soared. Stocks have exploded.
Bonds are way up.
Commodities have more than doubled and gold hit an all-time high. Yet real estate just sits there.
It won’t for long.
When I closed, I had to wire funds for purchase at a local bank. I asked
the banker how the real estate market was doing. She told me that at the lower end, houses that were listed on
Monday were under contract by Friday.
Prices had fallen far enough and now people were buying again.
I may buy more land.
When I went out to my new property a few weeks ago, I had planned to
look at a few more listings my broker had sent me. But they have since been sold. I was hoping that the first property on which I bid would
still be available so I could convince the bank of the error of their ways and they
would sell to me at my purchase price.
But that is not going to happen.
Last month, the bank sold the property for $74,900.
I am long US land.
