Is this a sign of a resurgent economy or the last desperate attempt to make a buck before it all goes bust?
Back in 2007 or so, I got a phone call. My neighbor was in the military and owned the house next door to us - identical to our home. She paid a paltry $189,000 for it - the same price we paid nearly a decade earlier, oddly enough, and arguably a bargain as it was easily worth $250,000 to $300,000 at that point. She went overseas and had a tenant in the place who moved out. She asked if I could put out a "for rent" sign and answer some phone calls, and being a nice guy, I did.
A few days later, the phone rang and the conversation went like this:
CALLER: I see you got a house for rent there.
ME: Yes, I am renting it out for a friend who is stationed overseas.
CALLER: I'd like to buy it. I'll give you $700,000 for it!
ME: (gulp!) I'll send the owner an e-mail with your offer, she might consider it. I'm just the neighbor.
CALLER: You live next door? I'll give you $700,000 for your house, too!
ME: Sold!
My neighbor sold, too, and in fact, the guy bought over a dozen houses in the neighborhood and knocked them all down. Since they were on two deeded lots he could put two mini-mansions in place of the 2-bedroom decaying shitboxes that were there before (foundation problems are not funny!).
When we went to closing, I said to him that, when we bought 18 years prior, the real estate agent always told us the land was worth more than the house - because each house was built on two lots. I also told him, "You'd better build fast! This bubble market is set to burst!"
He failed to heed my warning. He rented out some of the houses for over a year while he dithered about building. The crash of 2008 happened and he went bankrupt. Someone bought the properties at bankruptcy auction and then tore down all the houses and put up $1.3M homes on each lot and made good money at it.
Timing the market is hard to do. The developer who bought our house was under the mistaken impression that the run-up in housing prices in the early 2000's wasn't a bubble - and that housing prices would only go up, up, up from there, when in fact, he was buying near the peak of the market.
Recently, there was an article that new home permits jumped by 21% in May - The highest in three decades! Is this a sign of a healthy economy or the last gasp of a shrinking market? Paradoxically, prior to previous recessions, we often saw staggering growth and labor shortages. Things are going so well, and than, BAM! It all falls apart. That is the nature of bubbles - everything seems to be going fine at the time.
Predicting when it will fall apart is impossible to do. I thought the thing would go bust in 2005 - three years early. The developer who bought our property thought the boom would go on forever - or at least for a few more years. We were both wrong.
We also owned two condominiums in Pompano Beach, Florida and sold those shortly thereafter. The buyers both lost them to foreclosure. It was a heady time in South Florida and everyone got into real estate which has been a perennial sport in the Sunshine State. People started making money in real estate, and this, in turn, drew others in - others who had no business investing in real estate. You could put a few thousand down on a condo in a new high-rise and by the time the building was complete - or even before - you could sell the contract and nearly double your money or at least make a few tens of thousands of dollars. People heard about this and a land-rush started.
Developers bought up older buildings and demolished them and put up high-rises and made money - a lot of it. Old motels and trailer parks on the water were bulldozed to make way for yet another high-rise condominium. It was a madhouse. And around 2008 or so, a huge number of buildings were "topped off" at the same time, with no buyers. They were "see-though" buildings, just frames with no contents. The bubble had burst and there were no more "investors" with cash credit who wanted to pay the exorbitant prices that people were asking. No one actually wanted these condos, they were just a talisman of investment - tulip bulbs. Someone else would surely buy them, right?
I saw this going down when we went to see a new high-rise in Pompano Beach - one of three buildings planned - that had, as its "most affordable" unit, a one-bedroom, "designer ready" (bare concrete, no plumbing) unit on the second floor facing the dumpster, for $850,000 with a $3000 per month condo fee. Bear in mind that you could buy a house on a canal with a boat hoist and a pool for less money (and lower carrying costs, even with Florida's insane property taxes!) and it was clear that no one would actually live in these condos. It was just a shell game.
The development went bust, of course. The other two buildings were never started and I think half the condos in the building that was completed were never sold. The ground-level retail space is largely vacant. It was a scam, of sorts, although maybe even the developer was caught up in it - believing that prices could just go up, even if no one could afford to live there.
Housing prices in America have gone insane - in case you haven't noticed. But in the last year or so, they have started to drop in many markets across the country - dramatically in some markets such as Oakland, California. But at the same time, we see permits for new single-family homes jumping up.
What's going on? Well, one plausible explanation is that these builders are seeing these crazy prices for houses and thinking, "I can make money at this!" which is how capitalism is supposed to work, to provide goods and services in response to a profit motive. They also see the writing on the wall, and don't want to be the last guy standing up when the music stops. They hope - like the condo developers in Ft. Lauderdale in 2006 - to be the guy who sells out before it all goes bust. The other guy will be the one who gets his tits caught in the wringer.
So, capitalism to the rescue, too little, too late. Where were these guys three years ago? Right. Building rental properties. Why jumping into single-family homes now? Well, in the last recession, the builders of single-family homes managed to survive pretty well. You build a high-rise condominium, well, you have to sell half to three-quarters of the units just to cover your costs (or some percentage - it probably would scare you). But with single-family homes, your exposure is limited to the number of unsold homes you have in inventory, and if you are smart, you keep that number low. Build, sell, build again.
When the recession hit in 2008, the large home builders simply stopped building. Since they used "contractors" for construction, there was no need to lay anyone off, you just finished the last few houses in the pipeline (sometimes not even that) and tell everyone to go home. You then wait out the recession and when things turn up, start building again.
NOTE: I had a friend who had a house in "Rotunda" Florida - a development where all the streets are in concentric circles. It was never really finished, although today it is getting closer. It took decades to complete and for years, there were only scattered houses surrounded by empty lots. One house down the street from him was left half-finished after the recession of 2008. As you might imagine, it turned into a mold and mildew nightmare and when things picked up, someone tried to complete it, with predictable results - the new owners got sick and everyone got sued. Better to tear down and start over!
So, this sudden rise in building permits for single-family homes might be a sign that things are going swell, or a sign that everyone is trying to get one last round at the bar before closing time.
The people buying homes today, paying top dollar, might be in trouble a year from now. A year from now, when these homes are finished, they may end up being sold in a down market - which could be good news for home buyers - a year from now.
We'll see. Like I said, timing markets is impossible to do, other than in retrospect!
