Empty homes might be undoing of speculators

April 24, 2005|By Jay Hancock

OK, NOW WE HAVE a housing bubble. How do we know? Real estate professionals, who aren't even allowed to think that homes might be, uh, overpriced, are publicly worried.

Speculators snapping up homes they won't live in and may not be able to rent have given the market a new tier of foam and raised chances it will all end badly, pros say.

There is "a growing presence of investors or speculators or whatever you want to call them, especially in hot housing markets," says David Seiders, chief economist for the National Association of Home Builders. "I don't think we've ever had to deal with something of this magnitude before," he adds, or if they did, it was long ago and unmeasured.

The Home Builders are so concerned they just ordered a survey to try to track "investor activity." The figures aren't yet published, but builders see speculation spikes in places such as Florida, Las Vegas, the Northeast - and Maryland, Seiders said.

The Home Builders Association of Maryland polled 20 contractors for its part of the project. Executive Vice President John Kortecamp saw several surveys before they got sent to the national association, and each one reported investor buyers. One builder said investors made up 20 percent of his sales.

"Everybody's somewhat surprised by it," Kortecamp said. "This very strong market has lasted longer than most strong markets, frankly. There is a great deal of sensitivity as to how long it will last and how long it can last."

Although metropolitan Baltimore home prices have risen 50 percent on average since 2002, Kortecamp thinks Maryland's growing economy and government employment base will keep its housing market "in decent shape for a sustained period" compared with other places.

Not everybody is so sure.

"I have people calling me [saying], `I want to get into real estate. I have 15 grand,' " said Dan Carpenter, an insurance professional who lives in Ellicott City and owns a handful of townhouses and condos in metro Baltimore. "Everybody is buying, and I don't think they're knowing what they're getting into. And they're buying with minimum money down. It could just explode."

Carpenter is careful to invest in less-crazy areas such as Catonsville or nearby Pennsylvania. He requires prospective rent to cover his mortgage plus 12 percent, and he works hard to keep properties occupied.

But many investor homebuyers appear unconcerned about tenants, cash flow or basic economics. They seem to expect prices to keep rising and the heck with supply, demand or the notion of assets producing income.

Long & Foster home agent Debbie Latona-Adams recalls when professional listing services showed only a few dozen condos, houses and townhouses for rent in Howard County, southwest of Baltimore. Last week she counted more than 200.

"Everybody is buying them for investment," she said. "They're all for rent. You can't hold onto these things [without tenants]. The idea is for the renter to pay for them. But that's not happening. There's too many of them."

Vacancy statistics for rental houses and townhouses are hard to come by, but an increase in Howard County rental houses would suggest that investor exuberance has hit Maryland.

At least the Howard County landlords realize they need occupants. That's apparently an advanced concept for investors in some markets who simply hold onto vacant houses and wait for capital gains, Seiders said.

Sometimes homes aren't even built before they change hands. "It's rampant speculation," said Seiders, who added that in some markets builders are trying to quash speculation by requiring buyers to remit $50,000 of their profits back to the builder if they sell within a year.

Buying homes as investments rather than owner-residences has become big enough that the National Association of Realtors has also started tracking it, reporting that such sales accounted for 23 percent of all homes purchased last year. Vacation homes, another category, were 13 percent.

The association doesn't think there's a speculative bubble, however.

"Speculative activity - the data doesn't support the premise that there's very much of that at all going on," said spokesman Walter Molony, saying the survey showed only 3 percent of homes being resold in less than a year.

But that was last year. This is now, and "we feel more exposed now than ever," says the Home Builders' Seiders.

Speculators can destabilize any market by bidding prices to unsustainable levels. Fed Chairman Alan Greenspan has said a housing bubble is less likely than the 1990s stock bubble because homes are harder to buy and sell than, say, Amazon.com stock, and most people acquire houses to live in, not make quick money.

But if the housing day-traders truly have arrived, look out. With big mortgages, scarce tenants and an eye on net worth, they'll be even more eager to sell on the way down than they were to buy on the way up.

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