| Real Estate: Time for Speculators to Go Cherry Picking? |
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| Monday, 01 February 2010 05:45 | |
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There was a time when making money in real estate was thought to be a no-brainer. You know that old meme: "Invest in real estate because they aren't making any more of it. Therefore, property will always increase in value." Or so it seemed. But in our book, The Big Gamble, Are You Investing or Speculating? we gave you plenty of examples of how those sure-fire real estate deals turned out to be nothing more than speculation and tanked right along with a huge percentage of the nation's Wall Street holdings. And we wrote it before the real mortgage crisis had kicked in. A mere decade ago, we couldn't have written a book with a title like that and expected anyone to accept our premise that there is no such thing as an investment because it's all speculation—especially when applied to real estate. That's all changed now as the economy struggles toward recovery amidst the 1.9 million home foreclosure filings reported on U.S. properties in the first half of 2009 alone. Nearly 11 million U.S. homeowners (that's one in four!) are underwater on their mortgages – meaning the value of their homes has sunk below the amount they still owe the bank. In some parts of the country – California, Nevada, Florida, Arizona and Michigan – the underwater percentage is over 40 percent! Ask some of those unfortunate buyers if they still feel like they made a good "investment." What can they do now? What should they do? Some say that it's logical for people to want to walk away if they're too far underwater. They could find comparable rental housing for less than what they pay in mortgage payments and learn to live with a bad mark on their credit for the next seven years. But if the idea of walking away from their debt becomes too widespread, it will leave even more havoc in the wake. Banks will have to carry an increasing number of bad loans on their books, which means they'll be less likely to make new loans, and that tends to push home prices even lower if no new buyers can get financing. In spite of this grim picture, some economists and business groups are preaching that the worst is over and that it's time to start cherry picking again. What they are really saying is, if you have enough capital to play with, it's time to go speculating again. A few financial experts think New York may be the first real estate market in the U.S. to recover. But many take a different view and predict that after the home mortgage meltdown, commercial real estate will be the next shoe to drop. And even if New York had nothing else, it's got plenty of commercial real estate. We say that shoe has already dropped. New York's Urban Land Institute predicts that in 2010, vacancy rates in the city are going to skyrocket into the mid teens, while office rents dip by as much as 40%. Check out these latest statistics: First, try to picture the square footage of about 920 football fields. Got it? OK, now you have a rough estimate of the available office space in Manhattan. That's equivalent to about 180 major buildings with a total value of somewhere in the neighborhood of $12.5 billion. That's a quick snapshot of how much property in New York City is in trouble—either facing foreclosure or bankruptcy, or having problems making the monthly mortgage payments. While rents for commercial office space declined further and faster over the past two years than in any similar period in the last half-century, some say it presents a buying opportunity for those with the ready capital to pick up the foreclosed properties. For better or worse, depending on which side of the equation you find yourself, there are always those looking for opportunities to take advantage of distressed situations. The danger is that is also presents an opportunity for foreign investors to swoop in and cherry pick some of the city’s most prime properties, leaving less desirable pickings for everybody else. This has all the makings of a perfect financial storm. Many commercial real estate experts in New York City believe that despite signs of economic recovery here and there across the country, and the chance of foreign investments, the market for big commercial buildings and mega-apartment complexes has further to slide. New York could see the biggest value losses in the country—the market is already down 40 percent and it's been suggested that by this time next year, Manhattan commercial property values could decline by up to 58 percent. What's the message here? It’s this: If you've got big bucks to spend and you're tempted to rush in and do a little Manhattan cherry picking, just remember a few basic rules. No matter how great your net worth, the same rules apply today that applied back during the disastrous Herd Mentality episode of the 1630s called Tulip Mania. (Our book has a whole section on Herd Mentality, i.e. if it looks like everybody else is doing it, it's gotta be good.) When those with even bigger bucks begin to descend, it sets up the perception that the train is about to leave the station and that you’d better hurry up before you miss it. If you need a refresher course on Herd Mentality and how even the best and brightest can get caught up in the euphoria, we invite you to pick up a copy of our bookThe Big Gamble, Are You Investing or Speculating?. As if anyone needed reminding, we'll say it again. There are no guaranteed investments. It's all speculation, or in the worst-case, it's simply gambling. |