Wednesday, June 14, 2006

How to Profit From a Cooling Real Estate Market

How to Profit From a Cooling Real Estate Market
by Robert Kiyosaki

Tuesday, June 13, 2006

All over the U.S. there are stories of a rise in real estate foreclosures. Many people who took those exotic mortgages -- borrowing 125% of home value or choosing adjustable-rate mortgages -- are struggling to make their payments, and some aren't making it.
Also, a glut of new property supply, especially condominiums, is coming on line. A friend of mine, a very seasoned real estate investor, says in San Diego County, once one of the hottest real estate markets in the country, thousands of new condominiums are getting ready to come to market -- just as the market softens. He estimates that over 12,000 new units are coming on line, and the market, at the best of times, can only absorb about 1,000 condominiums a year. If he's correct, that means 12 years of supply will be ready for market in the next year.
As interest rates rise and the number of eager new buyers begins to diminish, adding supply to an already bad real estate market for sellers may mean a very good market for buyers and for property investors.
Hungry Alligators
The people who are in the most trouble are flippers -- people who aim to buy low and sell high within a short space of time. Many were buying condominiums off the plans, which means the projects were yet to be built, in the hopes that when the homes were completed, they would sell for a tidy profit. The trouble is many of these flippers, lured into the market by stories of people making a huge killing earlier with a similar strategy, are now the ones to be slaughtered. Now, they either lose their deposit or have to cough up the money for the purchase in the hopes there's a greater fool than they were somewhere out there real estate.
If you recall, the same thing happened around the year 2000 as amateurs jumped into the stock market, buying up tech stocks or any IPO with a dot-com after the company name.
In the coming months, I predict we'll see an increase in people dumping real estate they can't afford. They'll be forced to sell because they'll be eaten alive by a phenomenon known as negative cash flow. Investment properties that you have to feed money to every month are fondly known as alligators -- if you can't afford to feed the property every month, it eats you.
I know of one so-called real estate investor (and I prefer to call people like him speculators rather than investors) who has three homes he thought he could flip for a profit -- but he priced them too high. Now, $7,500 comes out of his pocket every month to feed the negative-cash-flow alligators. The problem is, he and his wife don't earn that much a month. Their three alligators are literally eating them out of house and home, consuming the profits they made from other flips -- and their savings.
To add more pain to the misery, they still have to pay the capital-gain taxes they made from their previous successful flips. They're toast. The alligators are eating them alive. They can't afford to feed them, and they can't afford to sell them because the prices they paid for these alligators are more than they're worth today. And this is only one story -- out of who knows how many. Over the next couple of years, keep your eyes open for some great bargains.
It's Time for the Pros
Some people say we're now entering a bad real estate market. I disagree. I think we're entering a great market. A bad one is when amateur investors become real estate experts and they bid up prices. They make housing expensive for homeowners, often adding little to no value to the property. They simply muddy the waters and make a valuable investment, a home, expensive.
Now, I must admit, I sometimes do buy to flip, so I can't be too critical. Yet it's the amateurs who come late to the party -- and who eventually donate their money back to the professionals. What I'm saying is: Now is the time to turn pro. Now is not the time to be an amateur. It's the amateurs who jump in when the market is hot. It's the professional who comes in when it's cooling down. Get the message?
When the red-hot bull market of real estate was beginning to overheat, you didn't have time to make considered decisions. Sellers were receiving multiple, over-asking-price offers. In a bull market, you had to be quick, have money, and be a little foolish. Now that the market is cooling down, sellers are a little bit more humble. You have more time and can do your due diligence carefully. You can negotiate better terms and make a better deal, especially if the seller has his leg inside an alligator's jaws.
Bad News That's Good
But don't be in too much of a hurry. I think we still have some bad news yet to come -- and I believe it may come from the bond market. I suspect that many of our foreign investors who have been buying our debt may be becoming more cautious about investing in American assets, especially U.S. bonds. Many foreign bankers may be having doubts about the U.S. government paying the interest on our debt. In other words, many investors will be moving increasingly out of their cash into tangible assets such as gold, silver, and other metals. Again, this is only a suspicion. We should know more by September of this year.
If investors stop buying U.S. government debt, who knows what might happen? The U.S. may need to raise interest rates even higher, which will drive home values down even further. So be patient, keep looking at real estate, but keep your hand on your wallet (unless of course you find a seller with a really mean alligator eating him alive).
A year ago, I sent out a warning to investors, especially flippers, to cash out quickly. I received a lot of irate e-mails from people who thought I was turning on them. They thought I was spreading bad news. Little did they know that by forecasting a real estate downturn, I was spreading good news -- good news for real investors and bad news for amateur alligator wrestlers.

Farewell to the flippers

Farewell to the flippers: Home prices are falling
Buyers in some cooling markets know they’re in the driver’s seat

NEW YORK - Low-ball bidders, persnickety buyers and cancellations are now the rule in once-hot housing markets.
Rising interest rates and sky-high home prices have cooled real-estate investment, “particularly in high-end markets in some juiced-up parts of the country where speculation was most rampant,” said Mark Zandi, chief economist at Moody’s
The record low interest rates and speculators that once drove prices higher are gone. Observers expect housing prices to stagnate or decline slightly, though a steep crash for housing prices is unlikely. As the market slows, both builders and buyers are getting used to the changes.

On a recent conference call, Ara K. Hovnanian, the president and chief executive officer of homebuilder Hovnanian Enterprises Inc. said that real estate investors “have largely pulled out.”
“Investors were a bigger part of the market than many thought, including ourselves,” said Hovnanian, whose company builds primarily in the Northeast. Would-be flippers are not only not buying new properties, they’re selling what they already own, adding to the record number of homes already on the market.
Stocks in the sector have fallen dramatically. Hovnanian, for instance, is trading near $30 a share, down from its 52-week high of $73.40. Rival Toll Brothers Inc. trades around $27 a share, down from a 52-week high of $58.67.
Wachovia last week cut its rating on builders including Pulte Homes Inc., KB Home and DR Horton Inc., citing a sharper more rapid downturn in the market than expected.
Developers have started canceling projects. Plans were scrapped last week for a 4,400-unit Las Vegas condo resort complex that had been backed by actor George Clooney and nightclub owner Rande Gerber. The development company for the project said rising construction costs and slow sales forced it to rethink the plan.
With land prices falling in some areas, Hovnanian has walked away from about $5.6 million of deposits on land parcels it had options to buy, lopping 5 cents a share off the company’s second-quarter earnings.
Buyers in some cooling markets know they’re in the driver’s seat.
Click for related story
Home sellers seeking new ways to woo buyers
Rachel Moehl, a real estate agent with Weichert Realtors in Jersey City, N.J., said she almost saw a deal for a three-bedroom condo fall apart over what proved to be a $400 problem — moisture between window panes.
The buyers “were saying the week before the closing, ‘We don’t really love the apartment. We’re ready to cancel the deal over the windows,”’ she said. The seller gave them a $400 credit.
Other agents say clients are putting in bids well below the sellers’ asking prices, or simply waiting.
“Home prices have risen to where buyers can’t afford to buy,” said Keith Gumbinger vice president at HSH Associates, which publishes consumer loan information.
The national median existing home price was $223,000 in April, according to the National Association of Realtors. While that was a 4.2 percent increase from April 2005, the organization predicts that prices this year will rise only 0.8 percent.
Others aren’t so sure they’ll rise at all.
There was a 4-month supply of unsold homes on the market in April 2004; it rose to 5.8 months in April 2006, according to the Department of Commerce.
In suburban Philadelphia, where the inventory of unsold homes has soared, Zandi asked an agent months ago how anyone could get a mortgage for a home listed at $3.2 million.
“They were almost snooty,” he said. “The girl said, ‘People who buy these homes buy with cash.”’ The house is still on the market, now listed at $2.8 million.
Part of the backlog is 128,000 unsold new homes, the highest level in history, said Mario Ricchio, housing analyst at Zacks Investment Research Inc.
“(H)omebuilders may not be able to push all this supply through the market,” he said.
Contract signings for new homes are down sharply and cancellations are up.
“It’s a more difficult market and our salespeople are no longer just taking orders; they have to sell,” Hovnanian said on the call.