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Jun. 04, 2005
If real-estate bubble bursts 0605
NATION'S HOUSING
If real-estate bubble
bursts, some will snap up bargains
Price slowdowns would create many
distressed property opportunities
KENNETH HARNEY
WASHINGTON
- Growing expectations of
price slowdowns -- or even significant drops in values -- in hot real
estate markets are stimulating a new sub-industry: Entrepreneurs preparing
investment funds and businesses to snap up bargains after the bubbles
burst.
Yale economist Robert Shiller, who
forecast the stock market decline and the dot-com implosion in his book
"Irrational Exuberance" (Princeton University Press, $27.95)
says that significant corrections in housing prices in some of the
fastest-appreciating markets are now virtually inevitable.
Double-digit, multi-year run-ups
in prices in dozens of markets in
California
,
Florida
,
Nevada
and along the
Atlantic
Coast
are "much the same phenomena" as the tech stock market bubble of
the late 1990s. Schiller isn't making specific predictions about when or
how severe the corrections will be in these areas, but he is convinced the
speculative excesses in at least some of them will trigger downturns in
real property valuations.
In
Deerfield Beach
,
Fla.
, Jack McCabe of McCabe Research & Consulting, a project feasibility
adviser to large residential developers and apartment owners, shares
Shiller's bearish views. But he's getting ready to pick up the pieces
after the storm. He is putting together a series of what he calls
"opportunity funds" -- pools of investor capital -- to acquire
new and converted condominium units purchased by speculators.
Some condo projects in the
Miami-Dade County area have sold "70 to 80 percent" of their
units to speculators, "who think they're getting into a gold rush and
expect to flip" the units within the year. In reality, McCabe
believes, many of these investors will lose their shirts trying to resell
at ever-inflating prices.
It's the 2005 real estate version
of the "greater fool" theory, he argues. "At some point
there just aren't enough people who will buy" your overpriced condo
unit, "and you can't afford to carry it anymore."
McCabe says a lot of
sophisticated, experienced investors apparently agree with the scenario he
sees ahead. He says he now has commitments for more than $10 million in
capital from investors -- large and small -- who expect to acquire
individual units and entire projects at deflated prices during 2006 and
2007.
McCabe is putting together limited
liability companies (LLCs) for small groups of up to 25 investors to buy
new units, some of which are at the pre-construction stage today. The LLCs
have varying minimum share requirements -- anywhere from $30,000 to
$50,000 at the low end to $1 million at the top. Their acquisition
strategies and financing will depend upon the specific opportunities
available, but will include holding and managing properties for extended
periods, or shorter-term ownership followed by profitable resales when the
market begins to recover. The LLCs expect to buy for all-cash in some
cases, or use financing to increase leverage.
"We think there will be very
attractive opportunities" beginning in the first quarter of 2006, he
says.
Even now there are signs that the
speculative bubble may be in its final phase. Developers in the
Miami
area are beginning to limit the number of investors they will sell to in
certain projects. Lenders are cutting back on higher-risk loans for
speculators, especially low-down-payment, interest-only and
"payment-option" plans that allow substantial negative
amortization (rising principal balances).
McCabe believes that
speculation-driven price excesses -- Federal Reserve Chairman Alan
Greenspan called it "froth" in a recent speech -- can be found
in dozens of other markets besides
Miami
.
"The dynamics are
similar" in California, the Washington, D.C., metropolitan area, the
west coast of Florida and other high-fizz areas where speculators are
active.
In
Denver
, Tom DiMercurio, a veteran specialist in REO (real estate owned) or
defaulted properties taken back by banks, also sees a rising tide of
distressed property opportunities ahead. He has just launched a new,
multi-city firm, The Mercury Alliance, to work with lenders "in the
15 hottest markets" around the country to dispose of homes, condos
and other properties that go sour.
DiMercurio thinks that any
significant increase in interest rates will cut short the boom psychology
puffing up many markets. That, in turn, "will trigger a substantial
increase in REO" available for resale to distressed property buyers
or for management on behalf of lenders. Even in cities such as
Denver
, where recent price gains have been modest, DiMercurio says an oversupply
of loft and condominium projects is likely to trigger property
devaluations and a decrease in willing purchasers.
DiMercurio attributes a major part
of the problem to mortgage lenders themselves. Too many of them have come
up with what he calls "hairball programs" that allow
unsophisticated borrowers to take out loans larger than even the inflated
appraisals on the properties they are financing.
"People think they can only
make money and there's no risk" when they invest in real estate.
"That is ridiculous," says DiMercurio.
Kenneth
Harney
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