Divesting in Real Estate

It is all over the news. House prices are dropping. It is due to sub prime lending. It is only temporary. Remind yourself. What were people/realtors/pundits telling you 3 months ago? Is it now much worse than they said it would be? Why, because they were lying to you!

First, let me say I sold everything I had in real estate in 2006. I still had to buy one home and overpaid, but I needed to land somewhere. Why did I sell? First, I was one of those speculators that were paying kids to sleep out overnight to get new homes in Las Vegas. But the books made me worried so my finger was on the trigger. My realtor, kept telling me not to worry, the economy is strong, look at all the people moving in, etc. Well, thank god I read those books. Two things happened. First, my realtor said let’s go look at a new development. When I asked why? he said they were offering double commissions! Hmm I thought. Then, a week later a home I had in escrow with a major builder had a price cut. They adjusted people in the queue so they wouldn’t quit, that is they lowered the prices of deals already cut. I told my realtor sell everything, including my second home in another state!

I am not gloating; the effects are all around me. In Las Vegas, monthly closings are down 75%, but the economy is still strong. I suspect that speculators were much bigger than anyone expected. I know an exotic dancer who now has a bunch of condos in Miami and you can guess the result. Insert your own perverted joke here. How did she even qualify for those loans in the first place?

So the pundits/realtors are now saying it is the time to buy. Heck they are even paying for advertising. Nothing lasts forever, and real estate “always” recovers. Well my take on the 27,000 homes in inventory in Vegas, and the monthly closing rate of 1100 says we are in for along wait. Check your area. Ask a realtor the following questions.

a. How many homes are listed in inventory??

b. How many homes closed escrow last month?

This time however, may be much different than in the past…

Under normal circumstances, I would expect the national market to recover in a year or so. This is not normal. We are not yet done with the sub prime problem and another one is looming just ahead. Retiring baby boomers.

In yet another book called The Great Bust Ahead, the author points out that the demographics of boomer retirement indicate a tremendous shift in real estate values. Most people have more wealth in their homes than in their retirement or stock accounts. Already, they have seen their nest egg decline in the current market and are worried. It would appear, just as we resolve the current mess, they will be lining up to sell. Be very careful, do your homework. Better to live in a retirement destination starting in 2011. Basically, this would be south of the Mason Dixon line plus Seattle.

Let me give you some additional insight as to how bad the real estate market really is. For those investment groups that have large amounts of capital it is easy to buy large packages of repos at 40% or more off list from banks. These buyers then break up the packages piecemeal and sell them to parties at 20-25% off. They get back to market at repo auctions at 15-20 off. I am trying to tell you the real value is 40% off, I think the trend is still down as a result.

So what? You missed your chance to sell. Oh well shit happens. Don’t just be passive. Learn your local area. Do you have aspirations to move? Be sure you understand the local economies of both areas as the pricing will not move lock step. In fact, it may be better to sell now and move to the target area in some cases. Or clean up your financial condition to be able to buy in 18 months even without making a sale. Bottom line it is more important than ever to pay attention.

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