A boom in real estate investment (clubs)

Wednesday, May 25, 2005

Not only home sales are booming, but so is the real estate investment club scene. USA Today has this report, saying the number of these clubs went elevenfold, from just 44 in 2002 to approximately 500 by now. In comparison data from BetterInvesting shows a 46 percent drop in the number of stock market clubs from a 1999 peak of 36,151 to 19,646 at the end of 2004. A poll (actual sample 4500) on the same page shows that 8 percent are worried as they've "got a lot of money in real estate." Another 22 percent fear that the housing bubble could bring the economy down. 20 percent are ready to jump in the market. Their answer: No worries, if the bubble pops I can buy a house. 18 percent think house prices won't drop. 32 percent don't care as they live in their house. If you believe this time it will be different from the crash of '25 stop reading here. Or else...
USA Today quotes Robert Shiller, author of "Irrational Exuberance", "the explosion of real estate groups is symptomatic of the shift of our exuberance from the stock market to the housing market."
While the jump in wannabe real estate investors smacks of a "bubble-icious" market, it "is not a portent of imminent demise," says Bob Barbera, chief economist at ITG/Hoenig. "What you need to temper things is a full percentage point rise in mortgage rates." That is all it needs?
The clubbers are learning such things as:
  • "Rehabbing," or fixing up properties and selling for a profit.
  • "Landlording," or buying properties for rental purposes.
  • "Wholesaling," or buying inventory at steep discounts and flipping it quickly at a profit.

The Prudent Investor wonders when such issues as
  • "Flipping," or changing your ARM for a fixed rate version,
  • "Flatting," or waiting for buyers to show up, and
  • "Flopping," or how to handle a foreclosure
will creep up the list of topics.
Florida crash of '25
To add a historical comparison: The crash of '29 was preceded by a real estate boom in Florida in 1925 when prices quadrupled within a year. From Stock Market Crash:
Starting in 1920, many Americans became enamored by the materialistic and prosperous lifestyle of the time. During this time, the stock market was moving forward at an extremely fast pace. Many investors were becoming quite wealthy. Florida became a hot spot for these newly rich people. Many whole families took vacations to Florida, tourism started booming and land prices skyrocketed. Many astute investors took notice and started buying Florida real estate. The population in Florida was growing exponentially and housing couldn't meet the demand. Florida became the "playground of the rich and famous."
Credit was easy and plentiful - then and now
At this point, almost anybody could invest in Florida, even without much money. Credit was plentiful and soon everybody in Florida was either a real estate investor or a real estate agent. In 1922, the Miami Herald became the heaviest newspaper in the world as a result of its humongous real estate advertisements. People in the North heard about the real estate prices "doubling and tripling", causing a snowball effect. Capital was rapidly pumped into the real estate market. Whole golf communities were developed, such as Temple Terrace. Resorts and retirement communities were developed almost overnight. Mansions were sprawling in every area, as were swimming pools. As always, waterfront property was the most desirable. Florida was seen as a veritable Utopia.
Real estate prices quadrupled in less than one year. An elderly man invested $1,700 in property and by 1925 the property was worth over $300,000! It seemed you could do no wrong by just buying any property in Florida and become a millionaire. By 1925, real estate prices had become so exorbitant that buying land wasn't affordable any longer. New investors failed to arrive and old investors started to sell. Panic arrived, as it always does, and the real estate market crashed. Prices kept moving downwards as heavily indebted investors tried to sell to avoid bankruptcy. In most cases, no buyers arrived, and the investors were bankrupt from the enormous mortgages. Florida was barely affected in the stock market crash of 1929 and the Great Depression, because of its poor financial state from the start.
Let's jump to the list of counties that enjoyed the steepest annual rises in the first quarter of 2005: 8 of the top 10 counties are in - you guessed right - Florida. Bradenton plus 45 percent, Sarasota, West Palm Beach and Boca Raton plus 36 percent. Fed chairman Alan Greenspan must have seen this list to conclude, "it's hard not to see that there are a lot of local bubbles." I am confident they have a sprawling local real investment club scene in Florida as well.
NOTE: New home sales data is due today at 10:00 ET.
UPDATE: General Glut has anecdotal proof that the real estate market is hot. Anybody got some more tips for the estate market from his/her taxi driver or postman recently?
UPDATE 2: Sales of new U.S. houses were essentially unchanged in April, rising 0.2 percent to a seasonally adjusted annual rate of 1.316 million, the Commerce Department reported. This a new record after March's sales pace was revised sharply lower to 1.313 million annualized from 1.431 million.

1 comment

Sharon Bush said...

Nice article and thank your valuable information and I wish you luck..

20 September, 2013 11:41

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