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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: patron_anejo_por_favor who wrote (27942)	3/9/2005 7:10:31 PM
From: orkrious	Read Replies (1) \| Respond to of 306849

He started RE Mania Chronicles last night. Here's the first installment: Real-Time Folly in Real Estate Back to housing, as regular readers know, I have been passing along examples of the insanity on "Ask Fleck." Until now, I have resisted the effort to start a "Real-Estate Mania Chronicles" section in the Rap itself. However, given the handful of vignettes I received last night, I feel compelled to pass them on here today, and will feature more of them prospectively. For those who don't know what this is all about, let me explain: In the first quarter of 2000, it was becoming progressively more difficult to describe the market action. So, in an effort to capture the mood of the day, I decided to start passing along stories of insane behavior that were being emailed to me by regular readers. I dubbed this series "The Mania Chronicles," and you'll find excerpts from it in the Archives section of the site, Chapter Three. The Ties That Bind an Unwind In any case, the kind of maniacal behavior that we saw then in stocks is what we are seeing now in real estate tends to come at the end of a speculative mania, and is almost always coincident with supply rising to help satiate the wild demand. As I have pointed out, the true danger in the real-estate bubble is that folks are often speculating with more than 100% leverage. When it all ends (though we don't have a timeline for exactly when that will be), the banking system and other financial entities will be left with these bad assets, which will severely impact the economy. So, even though I offer up the following three vignettes in a somewhat lighthearted way, everyone should be aware that the current insanity they demonstrate is very dangerous. Each is based on its own preposterous assumptions, but what all three vignettes share is: (a) the belief that one can't lose, (b) incredible greed, and (c) the absence of any common sense. An Instant-Riches Pitch "Perhaps you are getting bored with the real-estate mania tales, but here goes: An old chum I used to work with calls me the other day on a non-business matter. He used to work a 'real' economy job (as a manufacturing engineer in the semiconductor plant, as I still do), but having made a bundle on 'investments' now works with a relatively new private investment group. Says they have about $75 [$75 what, I'm not sure] in their fund so far, are soliciting qualified investors to plunk down $500k (min), looking to return 20% to 30% per year (as they indeed have for the past couple years). The business: making bridge loans to real-estate developers. "So I ask how anyone can expect to return 20% to 30% to investors when money is so cheap? Well, their clients either are (1) 'in a hurry to close a deal and can't wait for a regular bank's process,' or (2) 'don't meet most banks' criteria.' These clients don't mind paying the 5%-per-month interest rate that this private fund charges, as this is 'just a cost of doing business.' I asked if they had ever gotten burned. 'Just once. They are in the process of foreclosing on 12 acres on the Las Vegas strip . . . expect to make money re-selling, but this isn't their business model.' Condominiumania "In Chicago this weekend, there was an apartment conversion to condos where 200 people slept out overnight for a chance to be one of the first people to have a chance at buying a condo. I personally knew five people who stayed out all night, and these people were only buying on spec, with the thought of flipping the property in the next year or so. They believe it is impossible to lose money on this deal. An interesting reminder of when everybody would line up at stock-quote machines to check all their winning stocks." The Good Ship Leverage "Just want to let you know that your article has been forwarded to my colleagues and printed for my files. And, I have highlighted the part where you say 'anyone with a pulse can get 100% financing.' My personal quote is: 'Anyone who breathes can get a mortgage.' I work for one of the larger recreational lenders for marine and RV financing. Our parent company is XYZ Corp [not the real name]. You have no idea how many people 'think' they are qualified to buy a boat and have leveraged themselves into situations that are unimaginable. Just this morning I got an email from someone wanting to start a boat business ( in essence, buying a boat in an LLC) by tapping into his IRA and retirement funds as though he was buying a first-time home. It is insane out there and only going to get worse."