Tuesday, August 01, 2006
Imagine this: in four years your child is going to leave for college. Due to a runup in real estate prices, you realize that you can sell your home, buy a smaller one with a smaller mortgage, and use the remaining equity to pay for her tuition & board. This sounds great, but how do you know that you are not caught in a housing bubble, the popping of which could seriously jeopardize all your plans? With a housing futures contract, you can protect the price of your home. Here's how it works:
Your home is currently valued at $200,000. You fear that you will not be able to sell your house in one or two years for that much, and you want to find a way to ensure that you can get this price.
The idea behind this future is that you can basically lock in an option to get a certain price at a certain point in time. You are protected, but at the same time you are giving up some possible upside.
According to the press, housing futures were lightly used their first quarter in trading. Most of the contracts written were in Miami, where so many condos are going up. It looks like a good number of them may be sitting on the market, so developers have tried this approach.
Selling a futures contract on a house requires someone else who's willing to gamble that housing futures will go up and the buyer will be sitting on instant profit at the end of the future contract. After all, no one wants to lose money.
Only 10 contracts were written in New York City in the first three months. This isn't surprising, as publicly traded housing derivatives are pretty new. But derivatives have existed for a long time on the down low. People can sign options on individual properties, allowing them time to shop around the contract to someone who is willing to pay $10,000 - $50,000 more. Though some states have tried to restrict this, it is still possible to be done, anywhere, following the appropriate procedures.
So will housing futures take off?? Well, I think that hedge funds and developers will be the first in. As with most futures markets, a mix of professional traders and end users (ie, developers and property investors) will be the first people to actually buy and sell futures contracts. But I do see money to be made there, and as soon as someone figures out a "system", this will become a pretty big market.
So this two-week illness necessitated my taking it easy for all of July. I did manage to close a sale and find some very lovely ladies apartments, but it was more luck than anything else - I lacked the energy to keep up the marketing, but I'm back on it now.
Of course, the first thing I came back to was the tightest market since 1999, which was the height of the dot-bomb bubble. I (blissfully shielded from the mania by living in a three-way share in a gorgeous Brooklyn Heights apartment building that I still covet today) remember those few of my friends who could afford to live in Manhattan (we were after all in our early 20s) scrambling to find guarantors. How I ever managed to live for only $540/month in rent is beyond me, but even today I find plenty of people who manage to find such situations. So, if you are planning to move to New York, go roommate first - it will save you a bundle and a headache. Besides craigslist, I recommend Roomster.net.
In other news, home sales have basically been flat for the summer. What does this mean? It means that prices are not going up right now. Sellers hoping to make the big bucks are going to be disappointed. Picking the right asking price is crucial to a quick sale. Picking the wrong asking price can mean months of sitting on the market and stalled plans for the future.
Buyers have more leverage than they have the past two years. This means that they have more to choose from and more ability to negotiate price. However, waiting for "the bottom to drop out" is unadvisable for the following reasons.
- Interest rates are going up. Rates are tied to the 10-year bond issue, not the overnight funds rate that we hear so much about. On a $100,000 mortagage, you will pay $600 with a 6% interest rate but $665 with a 7% interest rate. Rates are already above 7% for a 30 year fixed mortgage for all but the highest credit scores. Keeping in mind that the average mortgage on a New York City home is far more than $100,000, and you would do well to get moving if you are serious.
- Time is the greatest appreciator. In otherwords, even the worst investment can make money in the long run (although, considering that time is money, not a good idea to deliberately make a bad investment!). If you have a long time horizon - at least five to seven years - and you want to buy a home, chances are good that you will experience appreciation. If you find a property that you are willing to fix up and plan to live in for several years, then you can get even more appreciation.
- Don't put the cart before the horse. If buying a home is important to you, then do it.
On the investment side, I have been learning quite a lot. It's no secret that the best investments never actually go on the market. Those sellers of investment properties who choose to go through a broker seem to have very inflated ideas of their property values, or they are looking for a very specific type of buyer. Most listings that I see are priced to need a minimum of 50% down to cover the necessary debt service, operating costs and allow for even minimal cashflow. On the other hand, many people are out there looking for land that they can develop into other types of property, most often condominiums. The enormous amount of money that they can achieve from the individual unit sales pushes up the property value (ie, the current owners know that developers will make more money so they try to get a larger piece of the pie).
According to The Real Deal , at least one high profile condo project has been cancelled due to increases in construction costs (the SUndari Lofts, unfortunately; they truly looked beautiful). Such developments lead me to urge caustion: investment purchases are best made with more than the minimum down payment, with adequate reserves and for cashflow purposes only - it is dangerous for all but the most experienced developers to be in the game for the next months.
The next few months find me and my partner in search of our next investment - likely to be another house in Philadelphia. We are not totally out of the woods on it yet, but light is at the end of the tunnel. Our tenant is happy and hopefully paying on time. Our second tenant has just chosen to renew his lease. It's not easy to practice what I preach. being a landlord is a harrowing experience. Even if you have many units (I know someone who has 63 units and still is worried about his building making cashflow), it is truly a business, and you have to run it thus.
As such, my goal for this month is to complete my tax return and implement my accounting system.This may take some doing but it's the right way to do things. A reorganization of my living room may help my organization problems, so that is possible as well. My partner is off on vacation for a week - that is always when most changes occur. We'll see if he recognizes his home upon his return :)
This computer is so slow, it's driving me crazy. I have more to say but it will just have to wait for tomorrow.