Residential Investment

In the comments of a prior post, a reader (Sailorman) asks: if housing is having heartburn while the general economy is still relatively strong, what will happen to housing if the general economy has a hard landing?

That’s a fair question worth further exploring:

Housing activity is a function of several factors: Rates, the overall economy, supply, population growth, rental prices. These are the primary drivers of sales and pricing. Like all asset classes, other elements will impact end demand: sentiment, speculation, liquidity (easy financing terms, I/O loans, no doc mortages), etc. 

Over the past 5 years, rates dropped, supply expanded, population expanded, prices rose. That’s fairly normal. Then something a bit unusual happened: rates plummeted even further, prices rose more quickly as former stock market investors discovered Real Estate Speculation.

This group is notorious for being late to the party. Just as they bought right into the top in 2000, I suspect many did the same in the Summer of 2005.

Fast forward a year or so: Equity price shave dropped — and not just the 2% you may have heard in the official data.

Most of the time, Real Estate is a function of the overall economy: Job creation, GDP, Rates. As we discussed extensively, this go round has seen the roles reversed: its the prime mover of the economy. 

Which leads us to this chart:   

Historical chart of Residential Investment Cycles, 60 Years



Does this look like the downturn in Residential Investment is over? Except for 1995, most private RE investment contractions are much longer lived . . .


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RE Speculation on Long Island

On New Year’s Eve Day, I was visiting my kid brother’s family. They live in the fictional town of Suburbia, Long Island.

The next development over is a section of Woodbury called "The Gates" (don’t ask). This has long been a very nice upper-middle to upper class part of town, known for rambling ranches and big splits on one and two acre plots. I hadn’t been thru there in years. My bro said he had something to show me (he is, amongst other things, a successful Real Estate speculator). 

So while the wives played with the kids and chatted, we took the convertible out (it was 56 degrees on 12/31/06) and tooled thru the neighborhoods.

I couldn’t believe the sheer number of knockdowns. It seemed that every 3rd house was either brand new, under construction, or had already been leveled.

The RAZR has a decent camera on it, so I took quite a few snaps:

This is the original sort of Houses that were all over this nicer part upper middle class suburbia. This Ranch is bigger than the photo shows, with a garage off to the right:

These are what are replacing the ranches and splits:


How the prices developed was an interesting aspect of this: According to public records, most of these knockdowns were purchased over the past 24 months. Specs paid between $1.0-1.3M — essentially for the land, as they razed whatever buildings were on the property. The new homes had been first listed for $2.4m or so, but that was optimistic. Prices slipped to then $2.2m, and they are now holding at $1.99m — with few takers. But  its a nice neighborhood (location location location), and as prices drop further there will be plenty of buyers — the only question is at what price point?

What I found so fascinating were the number of empty lots (knock downs) and half-finished homes — and according to the neighbors we met, quite a few have been that way for a while.

If any builders/developers here can provide insight, I’m curious as to what it costs to put up one of these bigger homes — not the land, just the construction costs. A few of these 5,000 sq. were actually very handsome (not the boring red brick McMansions, but others). I am curious as to how much profit there is in these jumbo homes. 

One thing to note in light of the earlier Lennar news:  As Beezer’s CEO observed, about 75% of the home building business is still in private hands. (See WCW)

I’ll toss the rest of the snaps I took after the jump  . . .

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