Tuesday, October 2, 2007

House Hunters That Flip this Property Ladder

First off, the post today over at the Market Ticker Blog is absolutely top notch, and I STRONGLY recommend reading it. Right now even:
http://market-ticker.denninger.net/2007/10/twisting-tuesday.html
Excellent stuff!

Now on to my post.
I am sure most people have seen one or many of the real estate shows that populate channels like TLC and the like. Some titles are "House Hunters", "Flip This House", and "Property Ladder". The flipping shows are the best at showcasing the Economic Disconnect I am trying to bring to a larger audience. A example "Flip" that I have seen chrystalizes the mania that was home buying during the last few years, and equally starts to shed light on how much trouble there is to be seen yet. Lets dive in!
Example
3 bedroom, 1 and one half bath, 2600 square foot home in Phoenix Arizona
Preflip purchase price: $260,000
Costs of improvements/ holding costs: $75,000
Time of renovation until resale: 3 months (thats 90 days)
Postflip purchase price: $575,000
Profit: $240,000 (92% return on initial purchase; 320% return on renovation costs)

Lets look at some particulars:
Location
Phoenix Arizona? Im sure the dessert is nice, but seriously? Phoenix has no real job base to support such home prices. I have read its is due to richy Californians moving East to find affordable housing, and I would say a big thanks to those brilliant Californians that have made Phoenix ground zero for the thermonuclear winter that will follow the housing bubble.

Renovation
My favorite part of the real estate mania is the absurd premiums people threw around for "move in condition" homes. Some of the fine, awe inspiring, value adding additions this flipper made were;
  • fresh paint on the walls
  • fake hardwood snap together floors
  • Plastic sheets with a stainless steel facade over the appliances
  • travertine tiles in the kitchen and bathroom, bought on sale due to "manufacturing defects"
  • GRANITE COUNTERTOPS
  • CROWN MOULDING
  • plants outside
  • fresh paint on outside trim

Quite an impressive list. I have always wondered about granite countertops and crown mouldings. If adding them adds 150k to a homes value, then I have 2 thoughts:

1. The granite companies are not charging enough and 2. someone should make a house out of pure granite with crown mouldings as the house should be worth well north of 1 Billion dollars.

Back to the flip. All the work was done by the flipper himself, who's real job until he quit was in web design. Given that snippet of info, I am sure all the renovations were done to code and will stand the test of time.

Now try to imagine yourself in the shoes of the following people after they view the show

The Flipper: WOW! I am a genius!

The New "HomeOwner": I spent 240k on crap I could have done for 75k? Good thing homes appreciate so much or I might be upset!

The Mortgage Broker: Glad I sold that loan to Countrywide, HAHAHAHAHAHA!

Countrywide Financial: Good thing our mark to model takes such lunacy into account! What? Its doesn't? Good thing we sold those to Hedge Funds and Pension Plans ! HAHAHAHAHAHAHA!

Ultimate Holders of the crap paper: We need a federal bailout for all this worthless crud!

Federal reserve office of Ben Bernanke: WTF was that?!

So even people that have drank the real estate Kool Aid can see from this example that recent home price appreciation has nothing to do with employment, population, or any other rational reason. The run-up has been pure speculation and greater fool theory. It was fueled by ridiculously cheap money due to low interest rates and loan requirements that only required that you apply for the loan. If you were the buyer of the flipped home, you are a buffoon of truly epic proportions and I hope you see this episode on TV. When your 14 year old asks you why you paid so much for nothing, I would love to see your answer. If you are one of the talking heads saying that the bottom is in for housing and things will pick up, you have no idea how out of whack things became.

Bottom line is until most if not all of the false appreciation disappears from the last few years, we are never going to be at the bottom of anything. I would offer the TV channels a new show to try and gain viewership:

"Americas Funniest Home Purchases"

Have a good night.

3 comments:

brokenotbroken said...

Just wanted to offer you encouragement on your new blog. Good job.

I sure would like to be able to track those houses/flippers now but alas that is the "reality" that they don't want us to see. I also find it funny that no one ever seems to lose money on those "investment." Everyone is making 50k - 200k on a single flip. Not one case of j6p losing his shirt, getting foreclosed on, filing for divorce--since financial problems are the leading cause of divorce--overall royally screwing himself. Nope, not in TV land where everyone makes a killing and has a dazzling white smile to boot.

getyourselfconnected said...

Welcome broken,
Thanks for checking this blog out. As a follow up to your observation, all the 2007 shows I have seen so far the property has not sold. Most of the time the show ends with the flipper either living in the house or renting it out. Not that rent can cover the holding costs, but hey, a turnaround is right around the corner we are told. Thanks again for stopping by.

Anonymous said...

Houses made of granite are built fairly often, but don't appreciate in value much because they are called "mausoleums".