REAL ESTATE

DON'T INVEST IN REAL ESTATE !

The definition of the world 'real estate' in the dictionary turns up as 'land'. The etymology of the world derives from the british common law landlord system, and means 'real' as in 'tangible' part of the estate. Non-real or unreal estate might be cash or stocks.

The idea of real estate as an investment proliferated into the mainstream during the real estate boom of the 80's. Why was real estate booming in the 80's - did people suddenly have a need to buy houses? Or did the US dollar begin floating against a basket of currencies in 1980, which allowed banks to leverage international finance schemes giving people loans to buy houses and developers loans to do developments?

The fed rules the market, NOT demographics.

Brokers and real estate honchos spread a popular misconception - that supply and demand drive the real estate market. There is always a demand for houses, and that demand is always growing, because people want a larger house, and Americans are insatiable when it comes to homes and land. But to say that in an economy where jobs are lost, money has been lost in business and in the markets, people are suddenly willing to pay 50% more for a house, just doesn't add up financially. Think about it? Everyone is losing money, but properties are skyrocketing. Why?

The fed can manipulate the market in several ways, NOT just raising interest rates. Raising rates is the factor that affects the real estate market THE LEAST.

PRINTING MONEY (increasing M3 Money Supply) - The fed has this wonderful system whereby it can 'increase' M3, which is a keystroke in a computer. Today we are 10trillion, tomorrow maybe 20. Why and how the fed does this is a topic for another time, but connected to the real estate market it works like this. When the fed prints money, that money is distributed into the economy in the form of loans through investment and commercial banks. One place that banks know is always liquid is the housing market. Not only for people buying new homes, but refinancing.

CREDIT POLICY - This determines who gets approved for loans. The more people who get approved, the more people buy houses, which drives up prices. Also money can be pumped by raising the principle amount of loans. Say normally you would be approved for $100,000 now you are approved for $120,000 with the same credit rating, same bank, same person, same everything - but the fed wants to pump the market.

MORTGAGE - CHECK YOUR OWNERSHIP - Bush claims that home ownership in the US is at an all time high. Check your paperwork, that encyclopedia of papers you took away from your closing. If you have a mortgage, you do not own your house. The bank owns your house and is leasing it to you. The bank can seize the house at any time for any reason.

A mortgage is the same as a loan. Take a loan from a bank, a loan shark, the mafia, or American Express, it's still a loan. So when you buy a house with a mortgage, not only do you not legally own the house, your monthly payments are going to the bank, NOT the equity of the house. Buying a house on mortgage is worse than investing on margin, overdrawing your bank account, and swiping your credit card over the limit.

If you really want to invest in real estate, or buy a house, use cash! If you can't afford the house you want, move to an area where you can, or devise another strategy. Unless of course you have an ungodly amount of money and feel a humanitarian need to give it away.

HYPE - For $1,000,000 you can live in an apartment in an exclusive south florida beachfront apartment called TOSCANA (named after a trendy wine region of Italy - Tuscany). For the same money you can have an olive grove of over 1,000 acres in Tuscany; Castle, 10 room guesthouse, with a secured income from the olives (or wine) for life, including farm hands to run the business. Compared to in the Toscana, where you have to pay monthly maintenance fees, it's hard to understand how anyone could make that choice. But they do, and it drives the prices up artificially. It's marketing and hype, an apartment is not worth a million dollars.

TAXES - Every year you own the house, depending on where you buy it, you are liable for property taxes. If you do not live in the house, you may have to pay additional taxes. If you sell it, you are liable to pay a capital gains tax. Property is the most taxed asset of any kind.

MAINTENANCE FEES - Most high-profile sections have association fees, townhouse / condominium fees. If it is a house and not an apartment with fees, there will be high maintenance costs - things breaking, lawn care, cleaning, etc.

RISK TO DISASTER - When investing in tangible assets you are risking the physical breakdown of that asset.

Cases where you SHOULD invest in Real Estate:

If you are a developer

If you are a bank

If you are Donald Trump or equivalent

If you are a government, or work for an intelligence agency and have foreknowledge of information that will greatly affect the real estate market in the area you are buying (or in other areas which will affect the price of the real estate in yours)

Making a personal investment in a property and making it a home is an entirely different issue. It's understandable to care for your house in such a manner to be re-sold if you decide to move.

ELITE E SERVICES RECOMMENDS THE FOLLOWING BROKERS / COMPANIES FOR INTERNATIONAL REAL ESTATE:

San Diego Coastal Homes specializes in distinctive houses for sale located along north coastal San Diego County including Carlsbad, La Costa, Luanda, Encinitas, Cardiff By the Sea, Rancho Santa Fe, Solana Beach, Del Mar, Carmel Valley, La Jolla, and San Diego. Se habla espanol. NOSOTROS HABLAMOS ESPANOL- SERA MI PLACER AYUDAR A MIS CLIENTES LATINOS! Nuestra especialidad es todos los vecindarios de San Diego. http://www.san-diego-coastal-homes.com/

For properties in the Orange County area see www.homesuluv.com

Here are some important articles about the 'finances' behind the real-estate market:

Here is an important article By Eric Janszen
Housing Bubbles Are Not Like Stock Bubbles

If you're looking for the housing bubble to end like the stock market bubble, you'll be surprised. Housing bubbles may run on the same fuel as stock market bubbles, excess money from the Fed, but they grow and collapse according to a different set of functions and dynamics.

Here I respond to my the cheerful voice of my favorite Always-On blogger, Jamis, writing on one of my favorite topics, asset bubbles.

Before Perkins' "The Internet Bubble" book was the site iTulip.com that explained in 1998 that the stock market had turned into a bubble around 1995 and predicted in March 2000 that it was about to burst. The reasons why were explained in a bankrate.com article in Nov 1999.

The last update to Itulip.com was on the topic of the Housing Bubble, in August 2002. I deemed the housing market was indeed in a bubble. The main thesis was that rational housing prices are determined by cash flow, and cash flow is determined by incomes and interest rates. Incomes have been falling real terms (9.3% since 2000) while key real estate markets (read: where most people live), experienced housing prices rising between 100% and 400% faster than incomes. The explanation for rising housing prices was too low interest rates, which also caused the the stock market bubble of the 1990s.

The Fed wrote a recent piece on how housing isn't a bubble, reminiscent of Greenspan's now famous New Era rationalizations in 1999 for the stock market bubble. The Fed explains that housing prices are high because interest rates are keeping monthly payment costs low. In my view, that's not an explanation of rational pricing, only for the underlying cause of the bubble.

How does it end? On the way up, housing bubbles grow differently than stock bubbles. They're regional, because folks buy homes near where they get their income, usually withing a 40 minute drive. Now I realize that in N. CA that could be two miles away on the 101, but bear with me. That means prices fueled by too low interest rates will manifest where people and the jobs they drive, take a bus or train or walk to are concentrated. Also, they happen in areas where land is scarce, such as waterfront property; speculation is encouraged by the reality of land limitations. A comment above says prices won't decline much in the future because land is limited relative to the number of people who want on it. Tell that the the Japanese who have seen real estate prices decline for more than 12 years. Too much land and not enough people in Japan? No. Even though interest rates have been near zero for years, the problem is that their incomes have been declining.

Low rates are the input of a housing bubble, areas of concentration of population or scarce land are where they happen, but low interest rates will not sustain the bubble forever. Just as housing bubbles are unlike stock bubbles on the way up, they're different on the way down, too.

Unlike stock market bubbles, real estate bubbles don't pop. Collapsing stock market bubbles are characterized by a sudden collapse in prices because stock markets are highly liquid. You see huge volumes of transactions at ever lower prices during a stock market collapse. Collapsing housing bubbles, on the other hand, are characterized by illiquidity, a sudden collapse in transactions. Buyers and sellers seem to disappear. The reason is a reversal in the psychology of buyers that developed at the top of a speculative housing market. Buyers had been buying at prices they knew were too high but on the assumption that they'd be able to sell if they need to. The thought was: "Ok, maybe it's overpriced, but at least I'll be able to sell it later for at least what I paid for it, but likely more." What happens on the way down is that houses go on the market and just about NO ONE shows up to look. That's because buyers weren't buying earlier primarily because they needed a place to live, but because they thought the price would likely rise and that, in any case, they'd be able to get out when they wanted with all of their money or more. On the way down, neither condition is true. So buyers stay home, so to speak. But can't buyers be enticed by declining prices, by bargain hunting, you ask? No. Once housing sale transactions suddenly fall from, say, several hundred a month in a large community to, say, one or two a month, this creates fear and loathing about prices. Long periods of time pass when there are no transactions at all. Think of it this way. What's the comparable on your 3000 square foot home in San Mateo when the last sale was, say, seven months ago? Is it 10% less than the last sale of a similar home on the area? 30% less? This happened in Japan, and prices nationally are still more than 60% below peak prices in 1992, where real estate prices continued to climb for several years after their stock market bubble popped. Sound familiar?

If you'd like to read more on this topic, Blanch Evans, the editor of real estate professionals' site RealtyTimes.com has written a good series titled "The Perfect Real Estate Storm" that can be read at:

http://realtytimes.com/rtapages/20040624_perfectstorm.htm

The iTulip.com housing bubble piece is available at:

http://www.itulip.com/#Today

Here is an important article By JR Ball
Our real estate riddle

I don't get it. I just don't get it. This sprawling metropolis is filled with many head scratchers--the I-10/College Drive intersection, The Shaw Group getting billed for a traffic signal that shopping centers get for free, and the appeal of Scott Rogers, to name three--but the latest brainteaser is this: How is it possible that more and more new homes are under construction when more and more people are moving away from Baton Rouge?

Who's going to buy all these French Country knockoffs?

Forget for a second about Zachary and the neighboring parishes of Livingston and Ascension, places where the population is actually growing, and just look at what's going on in South Baton Rouge, where anyone with a pickup truck or an SUV fancies himself a developer. Count the hardy plank piled up at seven large developments between Nicholson Drive and Corporate Boulevard, and you're talking about 3,700 new homes coming online in the near future. Toss in the scores of smaller developments and the condo and townhome frenzy and the number could swell to more than 20,000 units over the next five years, depending on pace of filings and absorption.

As it now stands we're on a record-setting pace for 2,100 new homes this year in East Baton Rouge.

Maybe this would make sense if existing home sales were fading faster than LSU basketball in March, but the average sales price in the metro area has increased 10% over the past two years.

This is all happening at a time when people are fleeing Baton Rouge like Castro was mayor. Last year alone over 1,300 more people left here than moved here, a number that would have been much worse were it not for a net gain of 843 foreigners.

So how do you explain it? Those in the business can't, though this notoriously optimistic bunch is quick to say there's no cause for alarm.

Low interest rates, they say, are prompting folks to buy new and keep their old house as rental property. No question, money is cheap and the 2000 stock market crash did make real estate a hot investment, but let me ask you this: Who's renting these houses? Apartment rentals are at 95%. Every LSU student apparently lives in Mommy and Daddy's freshly built condo, and why rent when it's so easy to buy? There can't be that many people with bad credit.

Others suggest kids moving from home and a rising divorce rate is gobbling up the inventory. Are you telling me that failing marriages, prompting the need for two homes instead of one, is the fuel that's driving what's become Baton Rouge's economic engine?

So what gives? Maybe we should ask Parade columnist Marilyn vos Savant, she of the world-record 228 IQ.

Before we do, let's toss this into our little mystery-encased enigma: Where's the money coming from to purchase all these $250,000-plus condos and townhomes, not to mention the $350,000-and-up McMansions? Last time I checked, job and wage growth were hardly on the rise, despite the fact Jim Bernhard is minting so many new millionaires.

Seems to me the only new jobs are coming from Wal-Marts, Cabela's and Bass Pro. There's also the gig as iHOP's dancing pancake on College Drive. But do those jobs pay enough to afford a four-bedroom on the ninth fairway at University Club?

I'm guessing the answer to our real estate riddle rests with area bankers desperate to boost revenues. And in today's climate, the fastest way to serious cash is commercial and residential loans, explaining why anyone with a set of blueprints pretty much gets approved.

The danger, of course, is that it could all come crashing down if interest rates jump and today's cheap money is no longer quite so cheap. Consequently, controlling our local economy is 1) the whims of Alan Greenspan and 2) where the Chinese and Middle Eastern nations invest the riches generated by America's massive trade deficit.

If those countries start picking the relatively stable euro over the currently weak dollar, then interest rate will jump, meaning all that Chinese-made stuff we're buying from Wal-Mart could produce a lot of unhappy faces.