Tuesday, August 15, 2006

Its all about alligators

Investments that bite back

How many people do you know whom own investment property? If you take a little time to ask, its amazing! You cannot turn around at any event without bumping into a real estate “investor.” Ok, I’ve always known quite a few prosperous families who had their vacation home; but in the past it was people whom could afford vacation homes. Now I’m going to tell you why the housing market will crash and crash hard.

You see, its all about the Alligators. Many have heard that an investment property is often called an “Alligator.” Why? As soon as you cannot afford to make the payments, it eats you. ;) How many people own “Alligators” that will soon be chomping away?

Drive around North Redondo Beach in the South Bay area of Los Angeles. Look and see how many nice new town homes have been built. Notice how many are for sale and are empty “never lived in?”

Then take a bit of time to tour homes in South Redondo Beach (say “Hollywood Riviera”) on a Sunday during open house hours. Notice something? None of them are occupied!

I’ve been through too many open houses with my fiancĂ© where the realtors were afraid we wouldn’t be interested in the house (we weren’t).

Other real estate blogs have noted that if there is appreciation greater than nominal interest rates, home “owners” can extract equity every year. In fact, in a fast appreciating market at absurdly low interest rates they can do so “pain free.” At some point they just sell their California (or other bubble market) home and move on to a lower cost area.

Well the musical chairs have stopped. The economist Thornberg has finally put out a shingle so that he can speak about housing as the bear he currently is.

“A hard landing could come if housing prices begin to fall, Thornberg said, in large part because that would scare consumers accustomed to watching their net worth rise on paper. Their spending pullback and a corresponding drop in construction could push the economy into recession.”



Folks, real estate investment is the most margined investment of our lifetimes. Gee… Almost like Florida 1926.

Those Alligators are hungry and they’ll drive the market for the next few years. I once read (sorry, I forgot where) that a real estate investor is a real estate speculator who has lost money. How long can flippers feed the alligators?


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