Read a great article in Fortune on real estate speculating that sooner than later – the whole damned thing is going to collapse and cause a lot of financial misery for a lot of people.
In hot markets like Miami, real estate is a world gone mad: Giant condo complexes with hundreds of units are selling out in days—and the juice is coming from speculators. “I estimate that between 40% and 70% of the units are selling to investors who will never live there,” says Lew Goodkin, a leading real estate consultant, who adds that in a normal market the figure is about 10%. “This is the highest level of speculation we’ve ever seen in the Florida market. It scares the hell out of me.”
Many of my clients are investors who buy in new developments with no interest in living there,” says Rene Bianchi, an agent with Century 21 in West Palm Beach, Fla. “They often don’t even come to see the houses they’re buying. I just send them digital pictures.”
Prices are also way out of line when stacked against another important yardstick: personal income. From 1975 to 2000, home prices always stayed in the range of 2.7 to 2.9 times median annual income; in fact, 2.9 was once considered a huge number. It’s where the ratio stood before housing prices sank in the early 1990s. But starting in 2000, this crucial figure entered uncharted territory. Today the ratio stands at 3.4, 17% higher than just five years ago. And get this: The ratio is now 6.4 in California and five in Massachusetts. Just to return to the once-lofty level of 2.9 would require roughly five years of flat prices—about the same kind of market correction that would be necessary to bring prices back in line with rents.
I hope it stays on long enough that when the plunge comes I can take advantage of the low prices.