palmbeachpost.com
Speculators cash in
One-third of Palm Beach County's housing market is fueled by investors and second-home buyers — a trend some say can't last.
By Jeff Ostrowski
Palm Beach Post Staff Writer
Sunday, July 31, 2005
If Elijah Thomas Jr. had known real estate riches were this easy to earn, he would have started long ago.
Less than a year after testing the waters as an investor, Thomas already plans to quit his full-time gig as a music teacher. In the first half of 2005, he says his property profits matched his $46,000-a-year teacher's salary.
The investor: John Freeland The property: This historic house at 619 51st St. in Northwood The deal: Freeland paid $46,777 for the house in 2003. He spent $50,000 on repairs, including a new roof, new AC and new kitchen. He now is listing the home at $209,000.
The investor: Elijah Thomas Jr. The property: Historic house at 933 37th St. in Northwood Hills The deal: He and a partner, David Dweck, paid $199,000 for the house in June. After some minor work, they've listed it for $259,000.
"I don't think I'm going to be teaching next year," the affable Thomas said recently while attending a meeting of the Boca Real Estate Investors Club.
A Boynton Beach High School band director with two sons and a baby on the way, Thomas decided last year to take the plunge into Palm Beach County's sizzling housing market because he wanted to earn a more comfortable living than he could as a teacher.
The Greenacres resident joined the real estate investment club, sold his stocks and slapped "Elijah Buys Houses" signs on his green pickup. After half a dozen purchases — including a foreclosure in Royal Palm Beach, a historic home in West Palm Beach's Northwood Hills and rental properties in Belle Glade and Riviera Beach — Thomas is hooked.
As home prices and sales volumes continue to break records and defy logic, an unprecedented number of Americans are seeking real estate profits, leading Federal Reserve Chairman Alan Greenspan and others to warn that the spasm of home-buying speculation could end badly.
Dire warnings or not, real estate investing as a career offers a certain appeal: No boss, no office hours, plenty of profits.
It's not all easy money, though. Thomas, for instance, has little interest in paying full price for homes Realtors list. In his search for motivated sellers, he mails 50 letters a day to homeowners on the brink of foreclosure. Sometimes he even knocks on doors of financially strapped homeowners. They're rarely happy to see him.
Being a landlord isn't easy, either. Thomas recently had to evict tenants at his Riviera Beach duplex, and he fields calls from tenants at all hours.
Still, Thomas said, "There's work to it, but compared to your regular job, it's easy."
Millions of Americans seem to agree. Nationwide, 23 percent of homes sold last year were bought by investors, and an additional 13 percent were bought as vacation homes, according to a study by the National Association of Realtors.
A more detailed survey by LoanPerformance of San Francisco says the numbers of investors are lower, but it ranks Palm Beach County and the Treasure Coast among the nation's most active real estate markets for investors and second-home buyers. A third of homes that change hands here are bought by speculators or vacation-home buyers, nearly twice the national rate.
Pessimists warn that areas with high numbers of investors and second-home buyers are particularly vulnerable to a crash. Optimists point to this region's microscopic unemployment rate and desirability to argue that a crash won't happen.
Even before the recent housing boom, Palm Beach County and the Treasure Coast were a haven for real estate flippers, rehabbers and foreclosure bargain-hunters. Now, with the area's homes appreciating by 35 percent a year, new investors are flocking to the property market, both from other careers and other parts of the country.
Realtors say they are flooded with calls from out-of-state investors who have read about soaring home values here. Indeed, real estate has replaced the stock market and the Miami Dolphins as the most popular topic of cocktail party chatter in South Florida. "Sometimes I wish people would just stop talking about home prices for 10 minutes," said Randy Bianchi, a real estate broker and investor who is co-owner of Paradise Properties in West Palm Beach.
Bianchi isn't complaining too much. After all, the white-hot market is good for business — maybe too good, some warn.
As rising home prices spur speculation, economists and contrarian investors increasingly wonder whether late comers to the real estate party are setting themselves up for a fall similar to the wrenching bear market in stocks in 2000 and 2001.
The wave of buyers offers a lesson from Economics 101: Home prices rise when demand outpaces supply, and the flood of new investors means more bids on every house that becomes available.
Should prices stop soaring, investors could pose a new threat to the housing market. No one sells a primary residence because it's not appreciating, but the market could be flooded with investment properties no longer attractive to owners who were banking on double-digit price gains.
Indeed, many of the new investors are taking on big debt and using volatile adjustable-rate and interest-only mortgages to buy houses and condominiums. Although rock-bottom interest rates have made those loans attractive, that will change, said Doug Kass, manager of a Palm Beach hedge fund and a prominent commentator on the stock market.
"It's eerily reminiscent of the stock market back in 1999," Kass said. "You combine the speculation with the egregious use of leverage and more creative financing tools. It ends in a ramping up in interest rates. It ends by speculators, as they always do, getting caught."
Even some investors expect a day of reckoning. David Dweck, head of the Boca Real Estate Investment Club and Thomas' mentor, said the condo market in particular is overheated.
"People think, 'I can buy a condo in downtown West Palm Beach for $450,000, and I can flip it for over $500,000,' " Dweck said. "But fast-forward to 2006 when the unit is done. What are you going to do if you can't flip it? You won't be able to rent it."
He predicts a glut of condos for rent in two years and price drops similar to those suffered by Miami condos in the 1980s, the last real estate bust in South Florida.
Although condo prices might tank, single-family homes are less likely to drop in value, most observers say. Florida home prices have never fallen significantly in the past 25 years, according to a study by the Federal Deposit Insurance Corp., although California, New England and Texas have seen busts in that time.
Michael Pappas, head of The Keyes Co. Realtors, pointed to the state's continued influx of new residents as a sign that home prices will keep rising. "Over the long term, prices will stop going up when it snows in Florida and people stop coming," he said.
Still, even Florida builders worry about speculators. In fact, most home builders have taken steps to block investors from buying new houses, according to a recent study by the National Association of Home Builders.
The measures include selling only to buyers who promise to live in the homes, prohibiting resales for a year or even charging a $50,000 fee to owners who flip their properties.
The Related Group, a major condo developer in South Florida, limits purchases by speculators, as does Mercedes Homes of Melbourne. Mercedes lets investors buy only one in five homes in subdivisions such as Lake Tuscany in Stuart, and to discourage flippers, it collects a 20 percent nonrefundable deposit from buyers.
Like many builders, Mercedes worries that speculators will simply abandon contracts if the housing market takes a dive.
"They may walk on the deal, and we'll end up with a large percentage of our backlog being built on spec," said Mark Neubauer, Mercedes' sales and marketing president.
For the ambitious investor, there are other challenges aside from builders unwilling to sell to speculators. Soaring prices also are squeezing investors.
Faith Batt, a Boca Raton mother of three who has been buying and selling homes for about two years, said it's hard to find a good deal these days. Rents haven't kept pace with price increases, so landlords are hard-pressed to cover their mortgages.
"You get frustrated," Batt said. "With the stock market the way it is, everybody's out there looking for deals."
But prolific investor John Freeland of West Palm Beach still finds plenty of profitable properties to buy and sell. In January, the former investment banker paid $125,000 for a duplex in suburban Lake Worth. After spending $20,000 on renovations, he sold the property last month for $260,000.
Forget about dreams of making a mint in real estate while keeping your day job, though. Freeland works full time, employing a maintenance man and a construction crew and constantly seeking out motivated sellers in rough-but-promising neighborhoods such as West Palm Beach's Northwood section. Even with builders and soaring prices reining in speculators, housing market skeptics such as Dean Baker, an economist at the Center for Economic Policy Research in Washington, D.C., said speculators are inflating prices falsely and squeezing middle-income buyers out of the market. During the past 100 years, Baker said, home prices on average have risen only at the rate of inflation, which has averaged 3.3 percent during the past 75 years.
"It's clearly a speculative bubble," Baker said of the real estate boom in Florida, California and the Northeast. "When you get home prices vastly outpacing inflation, there has to be a reversal."
And Baker just shakes his head at tales such as Elijah Thomas' pending career change.
"It's a huge distortion of the economy," Baker said. "We need teachers. We don't need more people flipping properties."
Thomas, for his part, sees a socially redeeming role in his real estate investing. By bailing out homeowners before foreclosure, Thomas said he saves their credit rating from a wrenching hit and gives them some cash to start over.
The profits don't hurt, either. Thomas' biggest payday came on the foreclosure in Royal Palm Beach. He bought the home from the cash-strapped owner, then quickly resold it for a profit of nearly $20,000.
Thomas hopes for another healthy profit on a Spanish-style home in Northwood Hills. He and Dweck, head of the Boca investors club, paid $199,000 for the 1,074-square-foot house in June. After some minor work, they have re-listed it for $259,000.
And by focusing on foreclosure bargains and up-and-coming neighborhoods, Thomas said, "you can make money whether the market goes up or down." |
