Mixed Signals - Home Prices & Inventory

Posted by urbandigs

Fri Oct 27th, 2006 11:00 AM

A: New Home Prices plunged today by the biggest percentage in 35 years, wow, as prices posted nearly a 10% decline from a year earlier and more than 15% from peak levels in mid 2005. Meanwhile, Housing Inventory Stabilizes for 3rd Month in a row. Hmmm. Sounds like one of the few characteristics I noted in the post titled, "Realizing When To Re-Enter The Market". Although I don't think its quite time yet, savvy buyers are beginning to carefully anaylze all the data for any signals of a bottom in the housing market BEFORE the rest of the world sees it! "It's all about getting in EARLY", says Rick Santelli reporting from the bond market pits. He's right!

housing-mixed-signals-real-estate.gif

According to CNN Money:

New home prices took their biggest hit in more than 35 years in September, the government said Thursday, the latest sign that builders are struggling to unload a glut of unsold homes as the nation's real estate market cools.

But the median price of a new home tumbled 9.7 percent from a year earlier to $217,100. It was the sharpest drop since December 1970, when prices posted an 11.2 percent decline, and was the fourth largest year-over-year decline on record.
But WAIT! Before you get crazy with this horrible housing data, look at what former fed chair Alan Greenspan was quoted as saying at a recent conference sponsered by the Commercial Finance Association:
"Most of the negatives in housing are probably behind us...The fourth quarter should be reasonably good, certainly better than the third quarter."


Moving on to the suprise dropoff in inventory. According to a news release issued by the National Association of Realtors (NAR):
Total housing inventory levels fell 2.4 percent at the end of September to 3.75 million existing homes available for sale, which represents a 7.3-month supply at the current sales pace.

NAR President Thomas M. Stevens from Vienna, Va., said the industry is encouraged that the number of homes on the market is starting to decline. "It appears we have passed a cyclical peak in terms of the number of homes on the market," said Stevens, senior vice president of NRT Inc. "The good news is that fewer new listings are coming online. A stable sales pace is expected to draw down the number of listings to a supply balance that will support positive price growth within a few months. Taking the long view is always the best way to approach housing decisions, and right now, buyers are in a very favorable market."
There is a very KEY PHRASE in this statement that is often overlooked. So, I'll pump up the font a bit for more of an effect on readers.

"Taking the long view is always the best way to approach housing decisions, and right now, buyers are in a very favorable market."

In my previous post titled, "Realizing When To Re-Enter The Market", I pointed out 4 things that should be observed and anaylzed to best predict getting back into the housing market BEFORE the rest of the pack does.

Note: Of course, with this type of contrarian investing there is always a bit more risk as the downside has not yet revealed itself!

  • Interest Rate Policy

  • Inventory Levels

  • Time on Market

  • Rental Costs


  • The topic for this post is INVENTORY LEVELS! And the latest data shows some positive signs of reaching a top in the number of unsold inventory. If you recall my advice in that post was to LOOK TO BUY when:
    When inventory levels have topped out, reversed course, and are into a correction to more normal levels. If the average # of listings in your local market is 5,000 at any given time, yet that has ran up to 8,000 recently, than you would want to get back in when this reverses course and is closer to 7,000 or so (a hypothetical example). You want to buy when supply outweighs demand, OH activity is lethargic, and good bids for sellers are hard to come by.
    All that is reported now is a pause in the 'increase' of unsold inventory signaling a possible top; however, it could be a bear trap (a tricky pause in a longer term bear market that fools investors into buying too early) so watch out!

    In addition, we still do not have transparent data on the other points I raise. With interest rates staying where they are for the forseeable future, time on market data still rising, and rental costs not showing concrete signs of reversing (although there is talk that more rental inventory is expected and costs are beginning to top out), it seems the time to re-enter the market might be in our near future; just not yet. So, right now you got at most 2/4 of the items covered.

    I would like to see a more concrete sign on time on market data, as well as a clear sign that the fed is in the midst of a rate-easing campaign (think of all the new demand that will enter the housing market if mortgage rates fall back to 5% or lower). Combine that with decreasing inventory levels and I think that will be a very good time to get back into the market! I'm thinking early 2008 right now although that is a looooong ways off and anything can happen between now and then.


    Sponsor Sales in Your Neighborhood?

    Posted by urbandigs

    Wed Oct 25th, 2006 08:45 AM

    A: Looking for no board approval but can't afford the premium that condo's get in NYC? Then you need a sponsor sale! In short, a sponsor unit is a leftover unit from the developer that was held for whatever reason, and is now being sold. Since you are buying from the developer there is no board approval process.

    According to Wallfly.com's Glossary: Sponsor Unit: Apartments that are held as an investment by the sponsor - the original developer who built the building or converted the the building to a co-op. Sponsor apartments are usually exempt from board approval.

    In a co-op, sponsor units are called "unsold shares" and they can be marketed by the sponsor until they are all sold. This process can take many years in a co-op or condo when a converted building has rent-regulated tenants who are not required to vacate.

    Typically, in a Sponsor sale there is:

  • less paperwork required and a no board approval process

  • minimum down payment needed to finance the deal, even if non-sponsor sales require more

  • fees passed down to the buyer that are normally paid by the seller; such as transfer taxes, filing fees and legal fees


  • Needless to say, you should discuss any sponsor sale purchase with your hired attorney to make sure you fully understand all aspects of the transaction, especially the fees that might be passed down to you!

    Here are a few sponsor sales that might be in your neighborhood:

    101 West 23rd Street

    Price: $789,000
    Size: 1,400 sft
    Maint: $2,128
    PPSF: $564
    # Beds: 3
    # Baths: 2

    310 East 46th Street

    Price: $695,000
    Size: 800 sft
    Maint: $1,835
    PPSF: $869
    # Beds: 1
    # Baths: 1

    319 East 50th Street

    Price: $699,000
    Size: 762 sft
    Maint: $836
    PPSF: $917
    # Beds: 1
    # Baths: 1

    215 East 80th Street

    Price: $2,100,000
    Size: 1,628 sft
    Maint: $966
    RE Taxes: $747
    PPSF: $1,289
    # Beds: Conv 2
    # Baths: 1

    315 Riverside Drive

    Price: $1,175,000
    Size: N/A
    Maint: N/A
    RE Taxes: $747
    PPSF: $1,121
    # Beds: 2
    # Baths: 2


    Fed Update: A 2-Day Meeting?

    Posted by urbandigs

    Tue Oct 24th, 2006 07:28 AM

    A: Its been a while since I delved back into the true me, and focused on trading and the equity markets, and why stocks have been rallying since early August and what that all means in terms of the fed's next move, (not next meeting). And whats up with the fed extending its usual 1 day meeting to a 2 day one; as I just saw reported on CNBC? Here are some thoughts.

    The fed's 2-day meeting ends Wed Oct. 25th at which time we will most likely get a NO CHANGE - RATES REMAIN UNCHANGED decision from the FOMC. What we do NOT know is the accompanying statement that will be issued and whether or not more hawkish words are included as the war against inflation continues.

    Fact is, inflation is being very stubborn right now while energy price declines sparked a recent stock rally; at least this is my opinion. Since the price of one gallon of gas starting plunging close to 35%, stocks began going higher. Now energy prices are at year lows and equity markets are at 5+ year highs. The equity markets are PRICING IN economic data that is expected to come from corporate America. That means GOOD NEWS in the coming months regarding the economy...

    ...And THAT MEANS, more inflation worry's and rate hikes to think about to slow things down by the fed! For all of you getting caught up in the recent business headlines that promise rate cuts by mid 2007, I say...DON'T HOLD YOUR BREATH!

    I would expect rates to stay where they are, if not rise a little more, in the near future. We must remember that fighting inflation now and risking a recession later is better for our long term economic health than if inflation goes unfended. Rates are STILL at very low levels, historically speaking, and it would be narrow-minded to think the next move could ONLY be a cut.

    Factors that should be watched to see why the fed would raise rates again:

    STOCK MARKETS CONTINUE TO RALLY

    Equity markets are a leading indicator of publicly traded corporations. Investors have the opportunity to invest in the near-term prospects (6-18 months generally) of any public company in the hopes that future revenue growth will meet or exceed anaylst expectations (preferably exceed obviously); like Google, NASD: GOOG, has been doing lately!

    Right now, with equity markets charging full speed ahead, I'm thinking its the cost savings in energy that is going to be one of the main reasons for higher reported income by corporate America in the coming 3-6 months; hence the rally. If all else stays as predicted, but sky high energy costs suddenly plunge in a very short period of time, than corporate profits rise as costs shrink.

    Or is it some other fundamental? Probably. But who cares. Stocks have been going higher and thats all that matters right now. Money is betting on a good economy, not a slowing one, and the fed knows this. Check out this 6 month chart of the DOW JONES Industrial Average, courtesy of Yahoo Finance:

    dow-jones-nyc-stocks.jpg

    If stocks continue to gain, expect the fed's chances of raising rates (as estimated by the fed funds futures) to RISE!

    ENERGY COSTS BOUNCE BACK

    Energy prices have corrected beautifully over the past 3 months giving relief to millions of Americans, corporations, and at the same time giving headaches to hedge funds and traders still long the commodity. Check out this nosedive of a chart for crude oil:

    crude-oil-chart.jpg

    Its a double edge sword with the price of oil. If oil prices rise then the added costs may trigger iinflation down the road by making products more expensive too (companies have to add on those extra costs somewhere). On the other hand, if energy prices fall then both the consumer and the company show more money at the end of the day that could eventually be used to SPEND, helping to fuel the economy. Either way, it seems inflationary.

    I would think that the former is more on the fed's radar though and that as energy prices rise, so do the chances of another fed rate hike!



    HOUSING #'s COME IN STRONGER THAN EXPECTED

    What the heck am I talking about here? Housing #'s coming strong? Why not! Take a look at the latest Housing Starts numbers that came in last week:

    According to CNN Money:

    Home building may be ready to shake off its 2006 slump, as housing starts posted the biggest jump since January, according to a government report Wednesday. The report also showed that building permits, seen as a sign of builder confidence, fell more than expected.

    The number of new projects that home builders started rose to an annual pace of 1.77 million in September, according to the Census Bureau, from the 1.67 million pace in August. The 6 percent increase in September contrasts with a decline in starts in six of the previous seven months.
    Give us some more data like this and all of a sudden the fed will STOP using the fast cooling housing market as an excuse to raising rates and fighting inflation!

    If housing news is good, than the fed will have the clear 'go ahead' to fight inflation by raising rates.


    BOND YIELDS CONTINUE TO RISE


    Hard to argue the bond market. When you start to see short term yields on the rise it means that bond traders are betting on either a firm hold for longer than thought with current rates or another rate hike. Take a quick look at short term bond yields since yesterday, last week, and last month:

    bond-yields.jpg

    Bond yields will rise with the anticipation of firmer monetary policy ahead!

    WHAT I THINK THE FED SHOULD DO: No Change; Change of wording indicating inflation is STILL a hazard and that the 'further firming might be needed' phrase be re-inserted or similar.

    WHAT WILL FED PROBABLY DO: No Change; No notable change in wording. Inflation still a concern but no new phrases added.


    TrueGotham Adds Wisdom

    Posted by urbandigs

    Mon Oct 23rd, 2006 10:09 AM

    truegotham.jpg

    A: TrueGotham is an excellent real estate blog run by Douglas Elliman superstar Douglas Heddings. He recently picked up my post on 'Timing A Low-Ball Offer' that adds wisdom to some of the points that I wrote about. While I was writing directly from my experience, which is what most of the articles are about here on UrbanDigs, he offers his advice from what amounts to be a much more successfull and respected career in NYC real estate than mine.

    The Downside of the Low Ball


    Points he brings out include:

  • A 'one time' low ball offer, as recommened by Urban Digs, is almost never taken seriously by a seller in my experience. It gives the appearance that the buyer is in the marketplace 'fishing' for a steal and no seller wants to feel like they have been taken advantage of. I would recommend making a lower initial offer and leaving room for negotiation so that the seller has the sense (perhaps falsely) that they aren't being screwed.


  • When the seller purchased the apartment is not as relevant as their current situation and current market conditions. How much money they are making on the sale need not be a concern for buyers, and sellers often resent the buyer who presents an offer based on 'what the seller paid X number of years ago.' Why and when they are moving is much more relevant.


  • Open house traffic is not always a good measure of interest. I have taken buyers to open houses in which 50 people attended and no offers were submitted (by the way, often very difficult to get the honest feedback from the seller's broker regarding "interest.") I have also seen open houses where the one person who attended paid the asking price


  • Valuable feedback from this top producer and his experience in the field! While my experience has been slightly different, it still pays to listen to both sides and decide for yourself which method or strategy you ultimately take when submitting a bid.

    Thanks Doug!


    Timing a Low-Ball Offer

    Posted by urbandigs

    Thu Oct 19th, 2006 07:54 AM

    A: Great topic for the times we are in right now in NYC. Is there a bad time to submit a low-ball offer? The answer is 'YES' which brings us to this topic for today. When would a good situation arise for a qualified buyer to low-ball and submit what I like to call a '1-TIME OFFER'?

    Low-Ball Offer: A low-ball offer is a term used to describe an offer on a house that is substantially less than the asking price. While any offer can be presented, a low-ball offer can sour a prospective sale and discourage the seller from negotiating at all. Unless the house is very overpriced, the offer will probably be rejected. In a buyer's market a motivated seller will either accept or make a counter-offer.

    First lets clarify two things: YOU LIKE THE PROPERTY & YOU ARE QUALIFIED TO PURCHASE IT

    low-ball-offer-nyc-real-estate.jpg

    By the latter I mean that you earn at least what the board is looking for and are under the pre-determined debt/income ratio and that you have sufficient liquid assets leftover after closing to meet another set of pre-determined levels (generally you will need to show around 12 months of maint + mortgage in liquid).

    Now that we know you can get the property, you need to shove the seller up against the wall and make a play.

    For buyers, the BEST situation to submit a low-ball offer is when:

    1. Seller has reduced the price for 3rd time
    2. Seller reduced price two times within 4 weeks
    3. Property has been on the market for at least 4 months
    4. You show up to OH and apartment is empty with no names on sign in sheet
    5. You find out that seller bought 5+ years ago
    6. Imperfections are cosmetic NOT permanent

    Some examples would include:

    131 W 28th Street - Reduced from $995K to $800K; Reduced twice in last 4 weeks. On market since 6/1/2006.

    100 W 72nd Street - Reduced from $925K to $799K; Reduced twice in last 3 weeks. On market since 4/19/2006.

    444 East 84th Street - Reduced from $750K to $659K; Reduced twice in last 3 weeks. On market since 8/17/2006

    100 West 39th Street - Reduced from $749K to $699K; Reduced three times since on market in first 4 1/2 weeks.

    The WORST time to submit a low-ball offer is when:

    1. Seller has not reduced asking price yet
    2. Apartment is less than 4 weeks on market
    3. OH and/or showings are crowded

    THE KEY

    The KEY is to accept imperfections! Its VERY hard to find everything you are looking for anyway, so don't miss out on a great deal if there are a few imperfections in the property; especially ones that can easily be updated!

    If you are a stingy buyer than the perfect property you are seeking will never make it into the BEST scenario for making a low ball offer OR the low ball offer itself will just insult the seller making future negotiations with you difficult.

    All of this seems pretty logical and straightforward but in this business I see low-ball offers being submitted at the WORST times! There is NO WAY a seller will respond to a 1-Time Low-Ball offer if the property is only 3 weeks on the market and there were 10 people at the OH on Sunday! It's a waste of a good strategy to try and get a great deal from a desperate seller.

    To go on a slight tangent here, if the property is new on the market and you know there is activity on it, and you absolutely love it, then bid accordingly! Don't risk insulting the seller and giving them leverage with the other interested buyers in that they can now honestly say, 'we have an offer submitted, there was no response yet'. You will be amazed at what some buyers do when they find out an offer was submitted on a property they love!

    Anyway, back to finding the best situation for a low-ball. You must find signs of DESPERATION!! Does this person HAVE TO unload this property right now! Did they buy over 5 years ago making the deal a very profitable one for them even if its much lower than they originally hoped! Were there more than 1 price cut within a month? These are the things that make low-ball offers work! They are reduced to $750,000 from $850,000 over the course of 5 months, with 2 price cuts of $25K within the past month alone.

    I know, its hard to find all of those criteria for any one property let alone one you want to buy. But, I list the BEST situation with those 5 characteristics. You don't need all of them for a 1-time low-ball offer to be effective.

    SUBMITTING A 1-TIME LOW-BALL OFFER

  • Submit an offer letter, pre-approval letter, and financial anaysis

  • Clearly state your financial strength; job position, salary, and liquid assets

  • Clearly state it is a 1-time, take it or leave it, offer

  • Explain how you got to your offer, including comps, and ppsf valuations

  • State you are 'ready to close'; preferably ASAP

  • BE REALISTIC w/ the low-ball. Don't bid 30% below ask and expect it to work. Think about why 10% or 15% below ask may be accepted. Remember you are removing any future negotiating from the equation so this is the only bid your willing to make!


  • Typically, low-ball offers are made by unmotivated buyers seeking a deal. Sellers usually shrug them away refusing to play the game. This is why you MUST prove your seriousness as a buyer and submit the offer as I describe above! It's your best chance to make it work.

    By removing the option of a response (taking out negotiations) you hit the desperate seller where they hurt the most, and put the ball in their court to make a deal happen right now. While it is a bit of a risky strategy if you really love the apartment and are haggling over $25-50K or so, it usually works when the timing is right. You just need to be in the right place, at the right time, and like what you see and who knows, maybe you'll get it for much less!

    Happy Bidding!


    Trouble SELLING The Cielo...!

    Posted by urbandigs

    Tue Oct 17th, 2006 11:45 AM

    cielo-kitchen-nyc-real-estate.jpg

    A: The Cielo needs HELP! The Cielo is a new development on 83rd & York Avenue that recently began occupancy which means a lot of new units being flipped by pre-construction buyers. Lets see how these investors are faring and why they need some serious help!

    Its not the only new development whose pre-construction purchasers seeking to flip on occupancy are feeling the pain! Other buildings with new exclusives hitting the open market include One Carnegie Hill & The Arcadia, and thats in the UES alone.

    The problem here is a math one. Buying a condo in NYC means high transaction costs. Add in the transfer fees that many developers PASSED ON to the buyer PLUS the transaction fees associated with selling (usually 6-8%), and pre-construction buyers looking to flip are in a world of hurt; i.e. expected to take a loss on the deal. If they do break-even or make a few bucks on the deal I give them props for a job very well done! Here is the skinny on The Cielo:

    For sake of ease, I created an XLS file that includes 2 sections (SOLD & ON MARKET). Each section shows the apartment, size, price sold or asking price, and price per square foot calculation. The apartments that are ON MARKET have a url linking out to the exclusive brokerage agency instead of a contract signed date. Link to download file is below. Snapshot of file is beneath link.

    Download file

    cielo-snapshot-nyc.jpg

    APT 4E w/ Citi-Habitats

    APT 4F w/ Citi-Habitats
    APT 4J w/ Elliman
    APT 4JK w/ Elliman
    APT 7BCD w/ Elliman
    APT 9C w/ Elliman
    APT 12A w/ Elliman

    LETS DO THE MATH

    Lets take unit's 5J (SOLD) & 4J (ON MARKET) and see if we can do an anaylsis; size is 1 sft off so for sake of this discussion, the numbers should tell us something.

    On the BUY SIDE, the purchaser of 5J paid $730,000 for the unit PLUS aproximately $35,000 in closing costs, give or take a few thousand.

    5J COST - $730,000
    Closing Costs - $35,000
    TOTAL COST TO DO DEAL - $765,000

    On the SELL SIDE, the seller of 4J (again we don't know the price paid but assume it is slightly less than what 5J sold for) is asking $749,000. Transaction costs for the seller will include 6% to brokerage firm, transfer fees, attorney fees, and other smaller fees. Lets say total fees equal 8% of the sale price. So, it will look something like this if we assume a very generous full ask deal:

    4J SELLS FULL ASK - $749,000
    Closing Costs - $60,000
    TOTAL BACK TO SELLER - $689,000

    Hmm. It doesn't take a math whiz to figure this out. After ALL costs and a full ask offer, the flipper of a low floor J line property at The Cielo will take on a loss of aproximately $76,000! Now I don't know what 4J paid for their property nor do I know how they structured the purchase or the sale, and if any money was being earned on the deal itself. But this anaylsis is if an average investor decided to experiment with flipping a new development and bought at The Cielo. I used the data I was able to gather to do this post. More data is sure to come but I expect more of the same.

    CONCLUSIONS: Anyone looking to flip a pre-construction unit at The Cielo is looking at a loss when adding in total transactions fees on both the buy and sell side of the deal. It still remains to be seen what price the unit ultimately sells for and I'm very curious to see if any flippers out there will be forced to sell because they mismanaged their finances when they first bought in pre-construction and cannot afford to maintain the property.

    I would also expect many flippers to consider renting out their units rather than selling to take advantage of the hot rental market in NYC. Good apartments are hard to find and many tenants are forced to pay top dollar for apartments that are not their first choice nor their preffered location. Perhaps new dev units will flood the rental market causing an inventory correction? Only time will tell, but I'll sure be on the lookout and will report to you what trends I see.

    Am I being overly pessimistic in my anaylsis? Did I miss something? Your thoughts?


    UrbanDigs in Daily News

    Posted by urbandigs

    Tue Oct 17th, 2006 10:01 AM

    A: Sorry for the lack of posts recently as commuting to NYC takes all my free time away (should be taking a Nov 1st lease, but won't be able to move in until Nov 10th or so). I'll try to get a few up there today, as I have some things I would like to discuss and hear your feedback on. In meantime, check out the article in yesterday's Daily News featuring my client, Vincent Ngai, who I met through the LIVE CHAT on UrbanDigs!

    WHO IS VINCENT NGAI: One of my clients that I met through the LIVE CHAT feature on UrbanDigs

    WHAT MADE HIM DIFFERENT: His dedication to finding a great deal on the east side helped him learn product knowledge and jump on a deal when one presented itself

    HOW HE HANDLED THE REAL ESTATE BUYING PROCESS: Perfectly. He used every resource at his disposal, including my assistance with data that was hard to find online, to make sure he was bidding the right price for the right property. In the end, we devised a bidding strategy that allowed us to get the apartment he wanted for the price he hoped for!

    dn-client.jpg

    And the little tidbit promoting UrbanDigs...

    daily-news-urbandigs.jpg

    The moral of this story is that buyers are presented with a great deal of information on the web that can assist in the real estate buying process. However, I wouldn't discount the value of using a qualified real estate agent in addition to your own work to evaluate, negotiate, and guide you through the purchase; remember that if you buy on your own the seller broker will be in charge of all the above mentioned items and that the seller broker WORKS FOR the SELLER and NOT YOU! You can read more on Buyer Brokers in a past post I wrote.


    Plane Owned by NY Yankee Cory Lidle

    Posted by urbandigs

    Wed Oct 11th, 2006 04:46 PM

    A: Reports now pouring in that the pilot of the small plane that crashed into the Belair Condo is NY Yankee Pitcher Cory Lidle. I'm sure you'll read more on the other blogs and news sites.

    cory-lidle-nyc-belaire-condo.jpg


    The Belaire Condo Accident

    Posted by urbandigs

    Wed Oct 11th, 2006 03:57 PM

    A: Just an awful day in the York Avenue neighborhood of East 72nd street where a small plane crashed into The Belaire Condominiums this afternoon, causing at least 1 fatality. While this appears to be just a horrible accident, the thoughts of terrorism immediately came to my mind in this post-9/11 world we live in. Here are some details on the building and what real estate prices were asking before today's incident.

    BELAIRE CONDO PICTURE FROM TODAY & FROM BROKER SYSTEM

    belaire-condominiums.jpg

    belaire-condos-nyc.jpg

    BELAIRE BUILDING DETAILS

  • Hi-Rise w/ 50 Floors; 183 Apartments

  • Post-war Built in 1988

  • 3 Elevators

  • Garage; Fitness Room; Pool; Sauna; Steam Room; Laundry Room; Valet; Lounge; Common Storage Room For A Fee.


  • REAL ESTATE PRICES BEFORE 10/11/2006

    belaire-listings-before.jpg

    MY THOUGHTS & PRAYERS FOR ANYONE STILL WAITING TO BE RESCUED FROM THE BELAIRE CONDO'S AND THEIR FAMILIES.


    Speculative Thinking Makes Them Flee

    Posted by urbandigs

    Tue Oct 10th, 2006 07:03 AM

    A: Interesting topic I feel for a post. Now that the market is in the midst of a correction, probably 15 months or so in and past stage 1 where psychology quickly turns as media networks report the changing housing market that affects so many, it seems that speculative investors are no where to be found. What is it about their thinking that makes them run for cover? Thats what I want to know.

    speculative-investing-flippers.jpg

    Speculative investors, a.k.a. 'flippers', are NOT developers who years in advance plan a lot acquisition and new building with city filings and co-investors. They are also NOT first time homebuyers who have a short term strategy for buying and selling. So who are they?

    For the most part, speculative housing investors are those who are VERY familiar with real estate investments, tax code, and the art of marketing a property with the intention of buying and selling a home usually within 6-12 months of closing. Lets go over these characteristics real quick as speculative investors usually never live in their new home.

  • REAL ESTATE INVESTING


  • Buy LOW in a rising market! The mantra of successful speculative investing. When it comes to housing, that means buying a wreck or buying into very heavy demand! Not so easy to find because once a good one pops up chances are a speculative investor, or very savvy buyer, will scoop it up immediately. If a wreck is not moving, obviously its overpricing the potential.

    Speculative investors will close, quickly renovate (usually through close contacts in the contracting world saving them thousands of dollars for high end products), and re-list for sale at a fully renovated price.

  • TAX CODE


  • Understanding the tax code in housing means more dollars in your pocket from any capital gains, come the close of a deal. There are 2 popular ways to benefit from a gain on the sale of your home, that I will not go into detail here but you can click on for a previous post where I discussed them. They include:

    1. Primary Residence Tax Benefits
    2. 1031 Exchange (Starker Exchange)

    The 1031 Exchange is by far the most popular tax benefit used by speculators because it allows an investor to BUY A PROPERTY, do their thing, and SELL THE PROPERTY whenever they want (with no minimum ownership restrictions) in order to DEFER THE TAXES DUE AS LONG AS THEY USE THE GAINS TOWARDS THE PURCHASE OF A LIKE OR GREATER PROPERTY WITHIN A PRE-DETERMINED PERIOD OF TIME AFTER CLOSING.

    In other words, if you bought for $400K, renovated, and flipped for $500K, you can DEFER the taxes owed on the gain of $100K as long as you show intent to purchase another property that is $500K or more within 180 days of closing. More info on this at realtor.org.

    So, understanding the tax code allows savvy investors a vehicle to maximize the dollars that goes toward their own investments rather than to Uncle Sam! A good way to build wealth, especially when the housing market is booming.

  • MARKETING A PROPERTY


  • Ahh, the key! Flippers usually have connections when it comes to marketing a property and know that they will be saving money on commissions, in some form or another, or will be making the commission themselves on the sale.

    For example, I knew a contractor who teamed up with a friend of his who was a real estate agent and basically formed a partnership whereby they would buy, renovate, and sell as a team and make money on every aspect of the deal. The contractor would take pay for the renovation work, albeit at a reduced cost, and the real estate agent would take the commission, again probably at a reduced cost.

    All in all, a plan was put in place beforehand that benefitted all in the transaction. Savvy thinking if you can trust your partner on all sides.

    WHATS MAKING THEM FLEE

    All of the above is how speculators 'think' about their business model of flipping real estate; and I probably missed a few too. However, in a market like today's it is easy to see why this 'way of thinking' is exactly the same reason that is making these types of buyer's flee the market.

    In a recent article in the Examiner.com, Kelly Carson investigates the spillover of speculative real estate investing's withdrawal from the local market:
    There numbers aren't pretty - 20.7 percent of housing speculators in the Baltimore region reportedly lost money in the second quarter of 2006. "Speculators are taking a bath," said David Martz, a Realtor with Long & Foster in Baltimore. "Rehabbed [houses] and new construction are hitting the market, and there is a glut of that inventory."

    John McClain, an economist and senior fellow at the Center for Regional Analysis at George Mason University in Fairfax, Va., said speculative investors who bought property are sending chills through the market because they are being realistic about profits and are pricing their units to sell quickly."

  • REAL ESTATE INVESTING


  • In a market trending downwards with negative psychology, rising inventory, and dampening demand, savvy investors are staying on the sidelines and holding off selling any properties with the intention of using the gains to FLIP AGAIN! In addition, those who have flipped already are paying up on the taxes they owe and holding all gains after that in cash or other investments for now until a brighter short-term housing outlook is seen.

    Combined together, speculative investors just aren't buying right now. If anything, speculators are unloading properties at an aggressive pace to secure any gains or minimize any losses in an uncertain industry.

  • TAX CODE


  • If there is NO CAPITAL GAIN, then there is no tax benefit; unless you consider a loss canceling out other income a benefit. Right now, transaction fees are cancelling out any profits from short term house appreciation making the tax friendly investment useless for speculators.

    In other words, there is no tax benefit to speculative investing in a downward moving housing market.

  • MARKETING A PROPERTY


  • In a market such as today's, marketing a property means pricing it aggressively or else it sits on the open market for months until a price cut is deemed necessary. Not the bext way for speculative investors to profit on their deal, especially if they just bought the property 3 months ago. Even renovations do NOT pay off as well in a downward market making 'flipping' even less lucrative a business model.

    In other words, savvy marketing and a reduced commission still may not be enough to convince speculative investors of potential gains. The risk/reward is just not making much sense to them.

    FINAL THOUGHTS: Today's housing market is one of price cuts, longer time on market, dampening buyer demand, and negotiations! All of this combined equals a less # of transactions overall. The absence of speculative buyers, a.k.a. 'flippers' is definitely affecting the housing market and the general train of thought that powers this type of investing is directly resulting in making them flee! This will not change until the short-term prospects of the housing market change considerably, convincing flippers that it is time to re-enter the market and get back to work!


    Properties on the decline...

    Posted by urbandigs

    Fri Oct 6th, 2006 11:39 AM

    A: Lets delve into the world of price cuts in New York City and go over some properties that have been reduced twice or more since its been on the open market. Now this doesn't necessarily mean the unit is cheap, rather, that the seller is willing and eager to lower the price to move the property; a very favorable attribute for savvy buyer's to look for!

    323 West 11th Street; Apt. 4W

    323-west-11th-street-new-york-city.jpg

    Size: 720 SFT
    # Beds: 1
    # Baths: 1
    maintenance: $827
    Asking: $649,000
    Price Per Sq. Ft.: $762
    Price Reduced From: $729K --> $699K --> $649K
    Marketed By: Kari Kaplan of Douglas Elliman

    EXPECTED MONTHLY COSTS w/ MIN DOWN PAYMENT = $4,109

    *Pre-Tax costs assume Full Ask, 20% down and 30YR fixed at 6.5%

    42 East 12th Street; 2nd Floor

    42-east-12-street-nyc.jpg

    Size: 2,000 SFT
    # Beds: 2
    # Baths: 2
    maintenance: $2,215
    RE Taxes: $708
    Asking: $1,999,000
    Price Per Sq. Ft.: $1,000
    Price Reduced From: $2.5M --> $2.1M --> $1.99M
    Marketed By: Paula Allen of Sotheby's Int'l Realty

    EXPECTED MONTHLY COSTS w/ MIN DOWN PAYMENT = $13,031

    *Pre-Tax costs assume Full Ask, 20% down and 30YR fixed at 6.5%

    135 East 71st Street; Apt. 16A(15% Down Limits Marketability)

    135-east-71-nyc.jpg

    Size: 1,280 SFT
    # Beds: 1, Conv. 2
    # Baths: 1.5
    maintenance: $1,860
    Asking: $999,000
    Price Per Sq. Ft.: $780
    Price Reduced From: $1.25M --> $1.149M --> $999K
    Marketed By: Nicki Buck of Corcoran

    EXPECTED MONTHLY COSTS w/ MIN DOWN PAYMENT = $5,017

    *Pre-Tax costs assume Full Ask, 50% down and 30YR fixed at 6.5%

    9 Barrow Street; Apt. 6H

    9-barrow-street-new-york-city-real-estate.jpg

    Size: 440 SFT
    # Beds: 0
    # Baths: 1
    maintenance: $740
    Asking: $439,000
    Price Per Sq. Ft.: $998
    Price Reduced From: $499K --> $475K --> $450K --> $439K
    Marketed By: Joanna Pashby of Corcoran

    EXPECTED MONTHLY COSTS w/ MIN DOWN PAYMENT = $2,960

    *Pre-Tax costs assume Full Ask, 20% down and 30YR fixed at 6.5%

    REMEMBER: Do more research in any unit's building to see what the last comparable sale was. PropertyShark.com is a great resource for this type of data. Don't forget to give a premium for apartments on higher floors with better natural sunlight and views, and apartments that have been fully renovated. Bid accordingly and consider devising a bid strategy that gauges the seller's level of desperation first to see if they really need to move the property fast; who knows, you may get lucky!


    Condo Mania: Worthy Deals

    Posted by urbandigs

    Thu Oct 5th, 2006 10:28 AM

    A: For anyone looking to avoid the painstaking process of a Co-op board approval, buying a condo or condop (co-op w/ condo rules & by-laws) means spending a bit more money for a bit less property. Here are some worthwhile listings from across Manhattan that allows you to put only 10% down (except for one that requires the typical 20% down), skip the tedious board approval process associated with co-ops, sublet your property, and eventually market your home to a larger buyer pool when you decide to sell.

    301 West 110th Street; Apt. 18C

    301w110.jpg

    Size: 589 SFT
    # Beds: 1
    # Baths: 1
    maintenance: $321
    RE Taxes: $382
    Asking: $449,000
    Price Per Sq. Ft.: $762
    Marketed By: Alan Aciman of Bellmarc Realty

    EXPECTED MONTHLY COSTS w/ MIN DOWN PAYMENT = $3,257

    *Pre-Tax costs assume 10% down and 30YR fixed at 6.5%

    420 East 64th Street; Apt. W8A

    420e64.jpg

    Size: 800 SFT
    # Beds: 1
    # Baths: 1
    maintenance: $941
    Asking: $599,000
    Price Per Sq. Ft.: $749
    Marketed By: Mindy Diane Feldman of Halstead

    EXPECTED MONTHLY COSTS w/ MIN DOWN PAYMENT = $3,970

    *Pre-Tax costs assume 20% down and 30YR fixed at 6.5%

    250 West 88th Street; Apt. 706

    *Brand new listing doesn't have unit photos up yet

    Size: 956 SFT
    # Beds: 1
    # Baths: 1
    maintenance: $441
    RE Taxes: $68
    Asking: $825,000
    Price Per Sq. Ft.: $863
    Marketed By: Chris Herrera & Maura Jarach of Douglas Elliman

    EXPECTED MONTHLY COSTS w/ MIN DOWN PAYMENT = $5,202

    *Pre-Tax costs assume 10% down and 30YR fixed at 6.5%

    Thats really the best of the best I see when looking at location, unit features, monthly expenses, price per square foot, and the fact that it is a condo or condop with no board approval process. Two out of the three I list here allow up to 90% financing with one condop only allowing up to 80% financing; still not bad. I could have put some more up but the combination of price, location, monthly's, and unit features wouldn't compare to the above mentioned ones.

    I'll keep my eyes open and put up some more deals as I see them!


    Realizing When To Re-Enter The Market

    Posted by urbandigs

    Tue Oct 3rd, 2006 11:27 AM

    A: Forgive me for writing about general topics for the next few weeks while I commute back and forth to NYC for work and time is limited with the loss associated with travelling. I'll go back to real data posts once I move back to NYC, which hopefully should be next week. For today, I felt like discussing what "Dave" brought up in yesterday's comment thread about finding the market's trough; how do you do this? Well, I'm no fortune teller or Wharton graduate, but here are a few things I would look for should you be an active investor in housing who buys and sells more than the norm hoping to take advantage of market trends.

    In yesterday's post titled, "Housing Slowing; More Interested Buyers", Dave provided this comment:

    How do you decide when the market is at it's trough? What you set out above is to see if something is priced below what was sold in the building previous. However, what if you buy now and prices are lower in 12 months time? We know property is inflated on a global scale, but by how much, we have no idea. How does the contrarian property purchaser decide when is the "optimum" time to enter the market they are looking at? (i.e. when it's at it's lowest ebb, before things pick up again).
    Great question. The quick answer I gave included a combination of the following factors:

  • Interest Rate Policy

  • Inventory Levels

  • Time on Market

  • Rental Costs


  • Lets go over what I thought was the best answer I could come up with to Dave's original comment.

    Interest Rate Policy

    Monetary Policy is set by the federal reserve board of governors and headed by Ben Bernanke. The main purpose of monetary policy is to defend against inflation and control pricing stability; however, policy is usually changed to reflect current events that are affecting the nation and the economy (i.e., a long rate cutting campaign after the dot com bubble burst to help stimulate the economy).

    Right now, policy is at a pause after 2 1/2 years of 1/4 point interest rate hikes. You probably have felt the pain of higher interest rates on your mortgage, credit card, and auto financing bills! Thats the point! The purpose of raising rates is to defend against inflation, cool the economy, and restrict investments by making money more expensive to borrow. This is already done! The question that remains is what the full affects of all rate hikes will ultimately have on the economy as there is a lag of about 10-12 months between a rate move and its affect on the economy. We have like 7-8 more months to go.

    I recently wrote a post comparing housing to monetary policy, titled "Timing The Market & Monetary Policy", and is worth a look for sake of this discussion. In a nutshell:

    Look To Sell - When the fed nears the end of a rate hiking campaign when the full effects of monetary policy are still yet to be felt.

    Look To Buy - When the fed nears the end of a rate easing campaign and interest rates are nearing their bottom. When the fed reverse's course and starts to raise rates again, consumers will rush to lock in the low rates while they are still there PLUS the effects of lower rates to stimulate the economy are yet to be fully felt, and that can only be good for housing if the economy picks up 1-2 years later.

    INVENTORY LEVELS

    It is no surprise that inventory levels right now are at recent highs. Now that the psychology of the market has turned negative, with the media outlets assuring this dynamic remains, more people are choosing to sell their homes than there are looking to buy a home. The result is a rise in inventory levels to the highest level in 7 years, I believe is the last stat (correct me if Im wrong).

    Inventory levels is something that you have to use some investment savvy with in predicting. If you wait for the data to prove that inventory is at its highest point, than its too late. You need to have a sense of where levels are heading in the future to really nail it down.

    To answer Dave's question, in a nutshell:

    Look To Sell - When inventory levels are below normal levels and supply is just very limited. Tough, I know. But if you realize 10 people at an OH with you, a filled up sign-in sheet, and bidding wars, then you know that inventory is tight and now is a good time to sell!

    Look To Buy - When inventory levels have topped out, reversed course, and are into a correction to more normal levels. If the average # of listings in your local market is 5,000 at any given time, yet that has ran up to 8,000 recently, than you would want to get back in when this reverses course and is closer to 7,000 or so (a hypothetical example). You want to buy when supply outweighs demand, OH activity is lethargic, and good bids for sellers are hard to come by.

    TIME ON MARKET

    A big indicator when trying to determine if it is a buyer's market or a seller's market. If time on market is on the rise and nearing a long term peak, than you know its a buyer's market and seller's will have to adjust their prices to move a property. After all, the reason why the property isn't moving in the first place is because the price is most likely too high! Hence, a correction is in the works.

    In a nutshell:

    Look To Sell - When time on market is lower than the norm for your local market. Right now time on market for most of the country is at a 10 year high or so. Not the best time to be selling as you may get desperate. You want to sell when property's are moving very quickly due to the huge demand and bidding wars that result.

    Look To Buy - When time on market tops out, starts to reverse course and head back to the norm. Again, once this trend gets started it takes an awful lot to reverse course. Try to buy when time on market is still relatively high and sellers are forced to adjust pricing to maove a property.

    RENTAL COSTS

    The final piece to my puzzle. Rental costs are on the rise as rental buildings have converted to condos to take advantage of market trends and would be buyers get priced out of the housing market and look to wait it out by renting. The result is very low vacancy rates in most major cities, giving pricing control to landlords and managment companies. Not good for renters.

    However, as housing continues to cool and rents continue to rise, there will be an inflection point. Nothing goes on forever and this is no exception.

    In a nutshell:

    Look To Buy - When rents are high and on the rise. This way, at some point there weill be a level where rental costs are so high that BUYING makes the most sense. This may be happening right now and there very well may be a rent induced buying surge in the near future in NYC.

    Making a decision to SELL on rental costs is not really related. At least I dont think so. On the other hand making the decision to BUY because renting is just way too expensive, does make sense. So, I'll leave out 'look to sell' for this one.

    CONCLUSIONS - To answer Dave's question:
    How does the contrarian property purchaser decide when is the "optimum" time to enter the market they are looking at?
    I would answer:
    A Delicate combination of when the fed nears the end of a interest rate easing campaign, when inventory levels have topped out and reversed course to more normal levels, when time on market has topped out and starts to reverse course toward the norm, and when rental prices stop rising and vacancy rates start to creep up again.
    If you can convince yourself of these 4 fundamentals, than I would say to the contrarian that is a financially healthy time to re-enter the housing market. Now all 4 may not happen at the same time so you need to decide for yourself whether 2 or 3 of these fundamentals happening at the same time warrants a buy signal for your local market.


    Housing Slowing; More Interested Buyers

    Posted by urbandigs

    Mon Oct 2nd, 2006 08:45 AM

    A: Its the focus of most contrarian thinking; that is buy when a sector is out of favor and down with a medium term forecast for appreciation. No one can pick the exact bottom, but you can look for deals if you understand how to spot them. So what makes a good deal and something to jump on in this market? Lets discuss.

    buyers-market-nyc.jpg

    I wrote about Contrarian strategy a ways back to point out the main aspects of this investment school of thought. When it comes to housing though, an illiquid investment because of the time it takes to sell a home and the transaction fees associated with the deal, you must make sure that you are buying a new property for the right reasons and NOT just because a deal pops up. To start out, the right reasons to buy would include:

    1. A stable job (without the possibilitiy of relocation) with rising income that you see yourself at for the next 3-5 years

    2. Thinking ahead to a home that you can grow into for the longer term

    3. Saved up financially to be able to afford the initial costs of home ownership (i.e. closing costs, moving costs, mortgage + taxes + maintenance costs)

    4. You are happy with the town/city that the home is in

    These are some powerful reasons to buy a new home rather than rent. But how do you spot a deal? In order to spot a deal you must first gain PRODUCT KNOWLEDGE.

    PRODUCT KNOWLEDGE

    Your buyer broker should already know this, but if you are working on your own product knowledge of your price point is extremely important. Not only do you have to be able to know what you can get for your budget, but you will need to know how to spot a deal when one pops up that can be moved on very quickly!

    In real estate training with Citi-Habitats, they talk about placing buyer clients into categories:

    'A' Buyers - Buyers whom are educated on their price point and have been looking for a while. These buyers are the most ready to go and will jump on a good deal when it is found. 'A' Buyers should gain a broker's highest priority especially after months of working with these clients.

    'B' Buyers - Buyers who are 1-2 months into looking for a new apartment but aren't quite ready to go. These buyers are still in the education process of buying a new home and are about halfway between 'C' buyers and 'A' buyers. 'B' buyers quickly move up the scale to 'A' buyers after a month or so of solid showings and will be loyal to their hard working agent that spends the time with them.

    'C' Buyers - Buyers who are just starting to look around, have some time before they need to buy, and are really uneducated about what they can afford, what is out there, and spotting a good deal. These buyers require patience on the part of the real estate agent who makes their annual salary on commission alone. 'C' Buyers are considered in the industry the worst type of buyer to work with, although I do not agree. To me, 'C' buyers are the easiest buyers to work with and become the most loyal over time. Start out through emails by sending these buyers listings with excerpts to educate them on why one listing might be better than another.

    Which buyer would you classify yourself as? If you do not classify yourself as an 'A' buyer (again this is an industry set category for agents), than how will you know when a good deal presents itself?

    Bottom Line: Get product knowledge by researching all properties in your price point and visiting open houses on your Sunday's! Try to see at least 10-12 properties in the first few months of looking which should give you the experience needed to spot a good deal in the future!

    SPOTTING A DEAL

    Look at the main 3 aspects of housing that I talk about all the time here on UrbanDigs and then compare the PPSF (price per square foot) with recently sold's in the building to evaluate the desperation of a seller.

    The 3 main aspects of housing that take priority remain:

    1. Location
    2. Light/Views
    3. Raw Space

    This should be your focus, with all other apartment/building characteristics following suit (i.e. renovations, a roofdeck, gym in building, etc.). When you spot a property that meets your needs and wants, you normally move on to price evaluation next to see if the apartment is priced right and worth a bid. Thats exactly what you should do now except you need to find out RECENT SALES for this particular building as well.

    Ask your broker or look at PropertyShark.com to try and find the last sales in the building and then compare to what this property is asking. Lets do an example:

    245 East 93rd Street (a luxury full service building in the UES) has a large 1,494 sft 2BR/2.5BTH apartment on the 11th floor listed for sale at $1.195M. Details:

    245 East 93rd Street; Apt 11H
    Size: 1,494 sft
    maintenance: $842
    RE Taxes: $820
    Views/Light: City & River Views with N/E exposures
    Asking: $1,195,000
    PPSF: $800

    Now lets look at the last comparable unit sold in the building to evaluate current pricing. The last units sold were:

    Apt. 8D
    Closed: 7/26/2006
    Size: 1,400 sft
    Closing Price: $1,125,000
    Closing PPSF: $804

    Apt. 19E
    Closed: 6/06/2006
    Size: 1,300 sft
    Closing Price: $1,125,000
    Closing PPSF: $865

    CONCLUSIONS: The current ACTIVE 2BR/2.5BTH apartment at 245 East 93rd street has been on the market only 2 weeks but is priced right and below the last 2 comparable sold in this building! Obviously the eventual purchase price will be even lower with a negotiation making this listing a good deal for a new family seeking space to grow into at this price point!

    Do the same work for your price point and for any listing that looks like a good deal to you and you should be just fine! And remember:

    AS HOUSING SLOWS SAVVY BUYERS GET MORE INTERESTED TO SCOOP UP THE BEST DEALS