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Archive for 2010
Spain is a very beautiful country and it had one of the biggest real estate booms ever seen. I get asked about it all the time by investors who like the idea of purchasing a great value property there.
I tell them all the exact same thing - if you want a pure holiday home there are some acceptable deals, but if you want to make any money continue waiting because prices have not fallen enough and rental yields are still way too low and unpredictable.
Nobody in Spain (including the Central Bank) trusts official goverment estimates of an 11% decline in property prices over the past two years. The ministry of housing also refuses to release data on actual sales prices rather than the asking prices, which, as you can imagine, would be quite useful to people considering an investment there.
In contrast to the deluded government numbers, privately held property portals like idealista.com publish much more reliable estimates of a peak to trough decline in the real estate market of 24%.
My problem with Spain is that it should be a 60% decline considering the rampant speculation and house building that went on, not 24% and certainly not 11%.
Most importantly, the Spanish banks are still not telling us how many bad loans they have. The Bank of Spain estimates that there are potentially €181 billion in “problematic” real estate loans. In other words, loans worth 10% of GDP could be bad but this isn´t reflected in their accounts and they´d rather not talk about it.
Regards
Unlike a 3 year old, when an investor thinks about bubbles, the first thing that comes to mind is probably the real estate bubbles that have been bursting over the past 2-3 years. As a description of something which can grab everyone’s attention, and yet is unstable, fragile and difficult to control, a bubble is quite a nice metaphor to use when discussing real estate markets from 2003-2006.
Funnily enough, even though we´ve had the most dramatic and painful changes to the global real estate market in living memory, my gut feeling is that there are still way too many real estate bubbles that should have burst a couple of years ago and others that are actually getting bigger. These are by definition much more risky places to invest, as something other than the natural order of things is keeping prices artificially high. In economic jargon (if that´s your thing), the prices in too many markets are still considerably at variance with intrinsic values.
Regards
Colin
On the otherhand, if I was selling or buying real estate in Brazil, Mexico, Canada or Australia, I´d be quite worried about how sudden currency movements could severely disrupt carefully laid out investment plans.
Levity aside, we do seem to be in the middle of a period where a burst bubble, record house price lows, high rental yields and a falling US dollar are all combining to make a terrific buying opportunity for the right kind of real estate in fundamentally sound locations like Florida.
Regards
Colin
A revealing global survey was published by The Economist on Oct 21st, 2010.
The report stated “America’s housing market, almost alone among those which experienced a big bubble, is more or less fairly valued at this point, at least according to price-to-rent ratios”.
The full table is below, with further commentary available here.
In the late 1990s, enormous wealth was being transferred from venerable pension funds to Silicon Valley kids in their early twenties setting up overvalued dotcoms. I was a 20 something in San Francisco at the time and even at that tender age I couldn´t believe what was happening in front of my eyes.
Similarly in the late 2000s, an ever bigger amount of wealth is being transferred from those who overpaid massively for real estate to those who are willing to underpay massively for real estate. Funnily enough, a lot of the money lost was from the same venerable pension funds repeating their mistakes from a decade earlier!
The last two years have been great for Torcana as we´ve been sourcing a lot of high quality distressed property. Our job was to put it in front of cash buyers who are keen to take it off the hands of those who paid top dollar for them when prices were irrationally high.
We target areas that are going to recover fast when the tide turns. They are places within a 15 minute commute to the city centre, where professionals buy and rent, where they send their kids to great nearby schools and in neighbourhoods that are safe and clean with lots of parks and shopping areas. Makes sense to buy these kinds of properties right?
Despite having a local office, an enviable network of contacts and Torcana directors living in Florida fulltime, it´s getting very hard to find these deals. There are practically no new condos being built in Orlando at the moment and inventory of existing units is falling fast - the year on year sales figures are up 22%.
Residences at Sabal Point meets all of our investment criteria and with prices at $54 per sq ft (you couldn´t build them for twice that) we´re probably not going to have much trouble selling the 31 units we´ve exclusively secured for investors. As with all of our products, this is a turnkey investment with full services provided to buyers.
Regards
Colin
If you take a step back and look at what´s been happening to the property market over the past 10 years, you might figure that lots of people would take advantage of these booms and panics by selling when prices were high and demand frothy and buying when prices were low and demand flat.
Some people do exactly that, but not enough. The force of the herd mentality which encourages euphoria during price rises and panic during falls can be overwhelming. Warren Buffett has plenty of folksy quotes to illustrate how he made his fortune by doing what he felt was rational, which was usually the opposite of what most people were actually doing at the time.
Property shouldn´t really be treated differently to other products though. We should buy property when prices are low. If people want to buy it from us when prices are higher, then we should sell it to them. Then you repeat the cycle and buy more when the prices fall again.
Ironically enough, it´s the people who can treat property the same way they would treat an ipod who stand the best chance of making money out of it.
Regards
Colin
Last week a friend of mine showed me his new ipad. It was an impressive gadget and after checking out their eyewatering sales estimates I couldn´t help but take my hat off to Steve Jobs for anticipating demand ahead of the curve for yet another blockbuster device.
As happened with the ipod and the iphone, other companies are now rushing to launch rival devices, which will soon drive down prices and widen their appeal way beyond gadget enthusiasts like my friend above.
In theory that´s how a market works - price goes down and demand goes up. If Zara put an advert in the newspaper saying they´ll have 50% discounts on all stock the following weekend, there´ll be hoardes of people queuing outside the door on Saturday morning. If my favourite restaurant suddenly doubles the price of everything on its menu, I´ll start looking for somewhere else to unwind on a Friday evening.
Property isn´t at all like that though. It and many other financial assets move to a different rhythm. If property prices are increasing, more people will want to buy them, not less. There are few things that can cause people to rush to their check books as much as seeing a friend getting rich and wanting a piece of the action for themselves.
Over the past 3 years we´ve seen how the flipside is equally true. Unlike a department store, most people will not rush to buy a technology stock that just fell 30% overnight, and most people don´t rush to buy a property when the market is falling either.
Regards
Colin
In my previous blog, I listed some examples of how respected organisations like the BBC, Irish Times and Business Week can give US housing a big thumbs up in one month and a big thumbs down just a few short weeks later.
The reason, as I mentioned, was because the looked at housing trends over a period of weeks rather than months or years. In addition to that, those particular weeks (between June-July 2010) were particuraly volitile because homebuyers were rushing to meet a government imposed deadline.
The well publicised first time homebuyers credit expired on June 30 and so a property sale must be completed by that date if the new owner wanted to get his or her tax credit. As any economist would easily have predicted, the average for June and July was normal, but sales that would have naturally closed in July were pushed forward to June.
And so, June sales were higher than they should have been “Sharp jump!” and July sales were lower than they should have been “Record low!“
Let´s take Tampa Florida as an example (which is near our stunning Waterside at Coquina Key development).
If you look at the June (2155) and July (1486) sales for 2010, they average 1820 sales per month. Sales in June and July 2009 were 1876 and 1885 each. Sales in June and July 2008 were 1481 and 1431 each.
Nothing too exciting there - this year was same as last year and much better than 2008. The expiry of the tax credit simply meant that June and July this year are particularly bad months to examine housing trends.
The six monthly figures for Tampa are a little more useful
Feb-July 2008: 9,497 sales
Feb-July 2009: 9,651 sales
Feb-July 2010: 10,731 sales
Doesn´t exactly lend itself to dramatic headlines does it?
The national figures are even more illustrative. There were 4.58 million properties available for sale in July 2008. In July 2010 there was 3.98 million. In other words, even with record foreclosures in the past two years, there were so many people buying properties that housing inventory levels had fallen by 600,000.
Let´s look at an even longer timeframe (and I´ll stop boring you with stats after this!). Even allowing for a poor July, Annual housing sales in the USA should be approx 5 million in 2010. To place in perspective, annual sales averaged 4.9 million in the past 20 years, and 4.4 million over the past 30 years.
The point I´m trying to make is that comparisons always need to be put into perspective and useful ones are always over a longer time frame.
You don´t have to be Warren Buffett to realise that reacting to monthly movements in activity and price levels makes for exciting headlines but it is unlikely to make you rich. You´d be better off researching a few things very well, making a medium to long term plan, and then sticking with it.
That´s what Torcana do in Florida, and investors have very kindly started to thank us for it online.
Kind Regards
Colin
August is usually a quiet time of the year for newspapers and magazines and so the latest housing figures in the USA received wider attention than they usually do. Judging by the way the headlines were complied however, it would seem summer silliness isn´t quite over yet.
Consider the headlines from last week:- “US Home Sales Dropped to a 10 year low” (BBC)
- “US Homes drop to their lowest pace in 15 years” (Irish Times)
- “Sales of US Homes drop to record low” (Businessweek)
Hmmm, well no, it´s never that simple with these numbers unfortunately. If you looked for similar stories within these same reputable news organizations 4 weeks ago, you would have noticed an interesting contrast…
- “Sharp jump in US housing sales” (BBC)
- “Positive US Housing data lifts investor confidence” (Irish Times)
- “Sales of foreclosed homes are up nationwide” (Businessweek)
The above headlines might seem nonsensical when put beside each other, but the reason these respected organizations are giving US housing a big thumbs up in one month and a big thumbs down just a few short weeks later is easy to explain. They are looking at housing trends over a period of weeks rather than months or years. In addition to that, the last few weeks have been particuraly volitile because homebuyers were rushing to meet a government imposed deadline.
View our next blog if you´d like to read more on this subject.
Regards
Colin
I hope everybody had an enjoyable summer break. I was fortunate enough to spend a few weeks in the north western coast of Spain, in a lovely Galician fishing village called Sanxenxo.
Winding down somewhere scenic and reading a few interesting books* is a great way to relax and recharge the batteries, but thank heavens for Blackberries and wireless internet connections.
Oh they have their faults, I´ll grant you that, but I´d never be able to bring the family to the coast for a few weeks without them.
Like it or not, I can see this type of “working” vacation becoming ever more popular as the years go by.
* My holiday reading
1. The Big Short, Michael Lewis
2. Race of a Lifetime, Heilemann & Halperin
3. False Economy, Alan Beattie
Kind Regards
Colin
