Glut. That's a funny word.

Article on washingtonpost.com today about the near-exponential growth in condo construction/conversion in the DC metro area which has resulted in a "glut of condos." The article references two studies, both of which "found that condo activity was red-hot here but now is cooling." Wow, so somebody actually paid these guys to figure that out?

While the conclusion is obvious to anyone with an eye on For Sale signs, the actual numbers are interesting, even to the well informed. From the article:

Arlington and Fairfax have 14,156 units under construction and almost 28,000 planned or proposed, Wenhold said. "But in the same area, last year we only sold 4,001 condos." In 14 counties in Maryland, including those around the District and Baltimore, Wenhold said, 3,901 condo units are under construction.

Neither of the articles, however, indicated that result will be a housing market crash and that we should all run for our lives. In fact, one of the studies called for a softer landing in DC than in many other areas such as Las Vegas and Miami, owing in part to continued job growth. That's a lot of jobs.

Bob Bruss' Top 10 Real Estate Books for 2005

I find Bob Bruss to be one of the better dealers in real estate advice. He's a syndicated columnist for the Washington Post where he answers questions from people of all walks of real estate life. I must admit, I have written to him myself. I've added a link to his web site under the Links section.

Apparently, Mr. Bruss is quite the reader, reading one real estate book per week during the year and selecting his 10 favorite come year end. Recently, Bob unveiled his top 10 books for 2005. I've already ordered two from Amazon.

Bubble Bubble

From longorshortcapital.com, an amusing post ridiculing all the housing bubble doomsayers that have invaded the blogosphere. The title of the post, "Is There a Bubble in Housing Bubble Blogs?" can be answered with a resounding 'Yes!'. While I give equal time to the pessimistic view when surveying the market, I am of the firm belief that many people are getting worked up over nothing. At least I'm not the only one.

Maybe someone will start a blog dedicated to the subject. The Housing Bubble Blog Bubble Blog can detail the current limitless demand for information about the Housing Bubble, document the increasing supply in blogs seeking to capitalize on that demand, and lament the coming of the bubble blog bubble burst in which many blog owners, jumping into the housing bubble blog market, will find themselves too late to profit from their own doom and gloom forecasts.

I was directed to the post on longorshortcapital.com by this article on cbsnews.com.

Non-Traditional Financing Devices So Yesterday

Rob left a comment on my previous post with some insightful remarks. Referring to this article on washingtonpost.com, Rob warns about the problems that may soon result from the exotic financing devices that have become all the rage among borrowers and lenders during the real estate boom.

The article points out that during the first half of 2005 in DC, 54.3% of all homes purchases used interest-only loans. The plus side of an interest-only loan is that the monthly payments are lower because you are only paying interest, no principal. But as Rob points out, the problem with these types of loans is that the borrower is not building any equity in the property through paying down of the principal. During a boom period when housing prices are increasing, this is not such a bad proposition because the borrower is building equity in the property as a result of its increasing value. But if prices are flat for 4 or 5 years, the borrower is not building equity in the property at all, neither through monthly payments of principal, nor through increasing value. You could say you are basically renting from your lender except with all the headaches of a homeowner.

A second article in the Post describes the increase in no money down loans, another non-traditional financing device. That article cites a study by the National Association of Realtors finding that 40% of recent first time home buyers financed their purchase using no money down loans. There has been a greater than 50% increase in borrowers going this route over the last two years. As opposed to a borrower looking for the low monthly payments of an interest-only loan, nothing down loans are attractive to borrowers with little or no savings. The problem is that many (of course, not all) borrowers who have not been able to build up some kind of nest egg, will also not be able to make their payments consistently for 30 years. The probability of this occurring is increased by the fact that the monthly payments will be significantly higher if you finance 100% of the purchase price as opposed to putting down 20%. But lately, the pull of the real estate market has been just too great and even the savings-challenged have wanted in. Lenders have obliged.

Does this make sense from a lender's perspective? During a boom, yes, because the lender is in a win-win situation. If the borrower can make his payments, great, more money financed means more interest collected. If the borrower isn't able to make the payments down the road, that's OK too because the borrower either sells the presumably well-appreciated house and easily pays off the loan or goes into default and the lender forecloses. But what happens, as Rob pointed out, when inventory increases to the point that sellers have to slash prices and houses sit on the market for extended periods of time. The nothing-down party kind of comes to an end for borrowers and it'll probably be no picnic for lenders either.

Both of these types of loans, relatively unheard of for home buyers 10 years ago, appear extremely attractive to the borrower at negotiation time when viewed in light of their current personal situation and that of the market. But a downturn in the future, either in the market or the borrower's personal situation, can make a once attractive loan turn in to an unmanageable nightmare. The result could be a flood of foreclosures driving inventory even higher. On the bright side, savvy investors, start scouring the classified for sales on your local court house steps.

That's not to say there is no time or place for an interest-only or no money down loan. So-called "real estate investment guru" Robert G. Allen, author of Nothing Down for 2000: Dynamic New Wealth Strategies in Real Estate, is a staunch advocate of finding ways to finance real estate investments using anyone's money but your own. It is important, however, to know what you're getting in to. Because of the long-term uncertainty associated with these types of loans, they are better suited for short term investments, not for a house you plan to occupy for 15 or 20 years.

The key, as always, is knowledge and an eye towards the future. You must examine both the pros and cons of what you propose to undertake, not only under present circumstances, but under all possible future situations, good, bad, and ugly.

While Rob makes several great points about the state of the market, I stand behind my original statement that if, say, you're looking to buy your first home or have a portion of real estate investment among your well-balanced portfolio, there's no need to hit the panic button for fear of a bubble burst.

For more reading, see Who Should Get an Interest-Only Loan? by Holden Lewis and Interest-Only Mortgages Stage a Comeback by Jay MacDonald, both at bankrate.com. Keep in mind, however, that these articles are from October 2004 closer to the beginning of the boom and the advice given in them does not necessarily apply under the market conditions at present.
Remember, I talk like I'm an expert, but I'm not one.

No Housing Bubble Burst?

Amidst all the warnings of a housing bubble, at least we have one person telling us not to panic. Mark Vitner, senior economist with Wachovia Corp., spoke soothing words to a gathering in the Hampton Roads area of Virginia.

Mr. Vitner says the recent slowdown in home sales is due only to supply and demand levels returning to equilibrium, rather than the doomsday scenario of a bubble burst forecasted by some.

In fact, Mr. Vitner's forecast is in line with most expert predictions. I think when people hear the term "bubble", it is a forgone conclusion in their minds that a bubble must be followed by a burst. What goes up must come down and when there is a bubble, it must be followed by a burst. But really, bubble just means an anomalous inflation of demand caused by speculation-fueled speculation. The 'my brother-in-law is making a killing buying up properties so I will too' mentality.

Yes, that type of demand can come to a sudden and screeching halt, a burst. But it can also slowly deflate until demand and supply are again living in perfect harmony. So if by burst you mean the days of double and triple digit rates of return in a short period of time are over, then yes, you could say there will be a burst. But if by burst you mean the bottom falling out of the market with prices returning overnight to levels of 3 and 4 years ago the way it did with the tech stocks bubble then, no, most experts disagree.

Evidence abound if you do a search on Google News for "real estate bubble."You won't find many articles from experts who come right out and say there will be a real estate bubble burst. Most use terms like slowdown, decline, or cooling. Definitely not the time to tie all your cash up in one market but, then again, is there ever a good time to do that? No. But if you're worried about buying your first home or holding on to that one investment property in your portfolio, you're worrying needlessly.

I don't have to remind you that I'm no expert, I'm sure that's clear from my ramblings.

Book Review: Rental Houses for the Successful Small Investor

I recently read a book called Rental Houses for the Successful Small Investor by Suzanne P. Thomas. According to the back cover, Ms. Thomas began investing in real estate at age 23 and was "semi-retired" by age 32, whatever that means. Clearly, I am behind schedule.

The book is a great resource full of very practical information. It is aimed mainly at small-scale investors looking to buy properties to rent out. It cannot be considered a one-stop resource for all your investing needs, but it is a great primer on many areas. Say you're interested in doing 1031 tax deferred exchange. You won't be able to complete the transaction based on the information in this book alone, but it will definitely get you headed in the right direction.

Some of the sections may be too basic for an investor with a little experience. The first chapter, for example, is about setting financial goals and deciding "how much is enough"? I think all but the complete novice at investing will skip this chapter.

Most of the other chapters dealing with finding properties, financing, and tenants provide very practical advice for the small-time investor. I like books that give practical advice of the type you can easily apply to your own dealings, as opposed to theoretical advice as to how to invest in general.

Overall, this book is an easy read with great advice in simple and understandable terms. I highly recommend it for anyone who is relatively new to real estate investing and is considering maintaining a small number of rental properties.

DC New Home Trekker Blog

Added a link in the Blogs section to the New Home Trekker Blog. This is a great blog that tracks new home constructions, pre-construction homes, condos and townhomes in the metropolitan Washington DC area.

DC Lofts

Added a link to DCLofts.com in the links section. This is a great directory of new loft and condominum projects in the DC area, including the Maryland and Virginia suburbs. Tim Liu, the owner of the site does an excellent job of compiling all the latest information on "loft and loft-style condos" in the DC Metropolitan area. An excellent resource.

DC Condo Market Cooling

From washingpost.com, an article about the slow down in the DC Condo market caused by increased supply. From the article:

While the inventory of all housing for sale in the Washington area has risen over the past few months, the change in the formerly hot condo sector has been the most marked.

Looks like the condo market has definitely peaked. Good for first time home buyers looking for a condo as a starter home. Bad for investors who've made a killing flipping units by buying pre-construction and selling pre-delivery.