Friday, February 17, 2006

Condo Cashouts - The Dotcoms of Real Estate.

In 2004 and 2005, condos in every major market from Boston to DC to Miami were printing money for their owners. Well, that has begun to change. As speculators realize that demand is slipping, interest rates are rising and they might be stuck with a large unattractive mortgage on a condo, these fringe investors (real estate traders might be a better term) are starting to dump these properties at a meaningful rate.

Well, you might say, that's their loss, not mine and you'd be partially right. When speculators start dumping properties it can lead to entire revaluations of markets.

In Miami, at the Jade Residences at Brickell Bay, more than 20 percent of the building's 352 units are on the market. In San Diego, about a third of the 96 units in the Alicante, a condominium that opened last fall, are listed for sale and sellers are already starting to cut asking prices. - NY Times 2/17/06

The unfortunate result is that innocent bystanders, homeowners in neighboring buildings, etc are likely to be severely affected by these market shifts.

How does this impact a homeowner in Jefferson or Lewis County? An increasing percentage of property bought in the last 2 years has been financed by Interest Only (I/O) mortgages or Adjustable Rate Mortgages. Many, many factors are contributing to future increases in the 10-yr bond rate and the weakening US housing market is one of these factors. A rising interest rate environment is going to pinch many homeowners that did not account for the interest rate risk in their mortgage.

Consider the other recent data points which may be the early warning signs of our own Economic Tsunami.......

An index measuring home loan activity drops to its lowest level in two years the third consecutive weekly decline. Mortgage applications fell for a third consecutive week as demand for loans to purchase homes dropped to its lowest level in more than two years, an industry trade group said Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended Feb. 10 decreased to 574.1, down 7.3 percent from the previous week's 619.3.

Going back to 1929, Kasriel found just a dozen years in which households spent more than they earned by his calculation. Two were during the Great Depression. Three were in the decade following World War II, when consumers unleashed pent-up savings accumulated during the war (when there was little available to consume). The other seven years of negative savings have occurred since 1999. - Yahoo Finance - 2/17/06

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