News you can use
Here's a very interesting article from the Wall St. Journal:
Housing Bubble? The MarketWon't Pop, Expert Predicts
By Christopher C. Williams From Barron's
From his perch as president of Purchase, N.Y.- based Alpine Woods Capital Investors, Samuel Lieber sees slivers of sunshine stealing through the gloom enveloping the U.S. housing market.
Speculative buying has driven housing prices to nosebleed levels -- giving rise to fears that there's a bubble and that rising interest rates will be the pin that makes it explode.
But housing's fundamentals remain strong, argues Lieber, who directly manages or helps oversee some $3 billion of assets through nine mutual funds, including chart-topping Alpine U.S. Real Estate Equity, Alpine International Real Estate and Alpine Realty Income & Growth. The portfolio manager says that he won't retract his horns unless the job market tanks, and he sees little chance of that happening soon.
Based on his record, his opinion is worth heeding.
Eschewing pricey real-estate investment trusts for the most part, Lieber has guided the U.S. fund to an annualized 29% return in the past five years, through April 4, beating 99% of his rivals, according to Morningstar. His International offering was up 26% over five years, while Realty Income, managed by Robert Gadsden, is up 23% for that span.
Late last month, Lieber visited Barron's offices in New York, where condo prices are flattening. Drawing on 25 years of real-estate experience, including stints as a broker and urban planner, he discussed many topics, including the U.S. property market, what he views as blossoming investment opportunities in Hong Kong, Germany and Sweden, and some stocks to avoid.
Barron's: Thirty-year mortgages are still pretty low, interest rates aren't spiking; the economy is still relatively robust, and the job market remains solid. Yet we have this doom and gloom over housing. Is it that folks are just tired of a good thing after years of crazy growth?
Lieber: We've seen a number of [housing] cycles globally, and this one is not that different. We've just gone through a 14-year up cycle for housing, and prices were up because of supply-demand considerations. But, fundamentally, we'll get to a point where, all of a sudden, the market will say: "The Fed is basically done. They will go from a tightening mode to neutral." When that happens, the bond market will do well, and housing will start to take off again. That is going to happen, in all likelihood, within the next nine months.
How many more rate hikes will the Fed do?
At most, we're going to get two more moves. So rates get up to the 6 3/4% to 7% range on mortgages and, as a result, we think the market stabilizes. We do not expect to see a robust recovery, as we saw in 1995. But home-building stocks are trading at just 6 1/4; times earnings multiples, in spite of having had 35% annualized compounded earnings growth over the past seven years. We're going to go through a transition in which the market will look forward to sustainable earnings growth in the mid-teens over the next three to five years. The stocks will be revalued higher by 50% to 100%, in terms of their multiples, in 18 to 20 months.
So there's no housing bubble bursting?
We don't see a bubble. Historically, home prices just don't go down nationwide unless we are in a significant recession. The last time home prices fell nationwide was in 1990. It's employment that really counts. The underlying fundamentals of real estate are still very positive. Job creation and household formation drive housing.
How high can rates go before you'd consider them dangerous for housing?
An 8% mortgage rate would be a problem. My guess is that the Fed will stop short of crippling the housing market. They simply want to slow it down.
Housing Bubble? The MarketWon't Pop, Expert Predicts
By Christopher C. Williams From Barron's
From his perch as president of Purchase, N.Y.- based Alpine Woods Capital Investors, Samuel Lieber sees slivers of sunshine stealing through the gloom enveloping the U.S. housing market.
Speculative buying has driven housing prices to nosebleed levels -- giving rise to fears that there's a bubble and that rising interest rates will be the pin that makes it explode.
But housing's fundamentals remain strong, argues Lieber, who directly manages or helps oversee some $3 billion of assets through nine mutual funds, including chart-topping Alpine U.S. Real Estate Equity, Alpine International Real Estate and Alpine Realty Income & Growth. The portfolio manager says that he won't retract his horns unless the job market tanks, and he sees little chance of that happening soon.
Based on his record, his opinion is worth heeding.
Eschewing pricey real-estate investment trusts for the most part, Lieber has guided the U.S. fund to an annualized 29% return in the past five years, through April 4, beating 99% of his rivals, according to Morningstar. His International offering was up 26% over five years, while Realty Income, managed by Robert Gadsden, is up 23% for that span.
Late last month, Lieber visited Barron's offices in New York, where condo prices are flattening. Drawing on 25 years of real-estate experience, including stints as a broker and urban planner, he discussed many topics, including the U.S. property market, what he views as blossoming investment opportunities in Hong Kong, Germany and Sweden, and some stocks to avoid.
Barron's: Thirty-year mortgages are still pretty low, interest rates aren't spiking; the economy is still relatively robust, and the job market remains solid. Yet we have this doom and gloom over housing. Is it that folks are just tired of a good thing after years of crazy growth?
Lieber: We've seen a number of [housing] cycles globally, and this one is not that different. We've just gone through a 14-year up cycle for housing, and prices were up because of supply-demand considerations. But, fundamentally, we'll get to a point where, all of a sudden, the market will say: "The Fed is basically done. They will go from a tightening mode to neutral." When that happens, the bond market will do well, and housing will start to take off again. That is going to happen, in all likelihood, within the next nine months.
How many more rate hikes will the Fed do?
At most, we're going to get two more moves. So rates get up to the 6 3/4% to 7% range on mortgages and, as a result, we think the market stabilizes. We do not expect to see a robust recovery, as we saw in 1995. But home-building stocks are trading at just 6 1/4; times earnings multiples, in spite of having had 35% annualized compounded earnings growth over the past seven years. We're going to go through a transition in which the market will look forward to sustainable earnings growth in the mid-teens over the next three to five years. The stocks will be revalued higher by 50% to 100%, in terms of their multiples, in 18 to 20 months.
So there's no housing bubble bursting?
We don't see a bubble. Historically, home prices just don't go down nationwide unless we are in a significant recession. The last time home prices fell nationwide was in 1990. It's employment that really counts. The underlying fundamentals of real estate are still very positive. Job creation and household formation drive housing.
How high can rates go before you'd consider them dangerous for housing?
An 8% mortgage rate would be a problem. My guess is that the Fed will stop short of crippling the housing market. They simply want to slow it down.
posted by Real Estate Girl @ 7:59 AM
1 Comments:
At 1:49 PM,
Anonymous said…
Naples Fl, is affordable but for whom? Very insightful speech.
Aubrey Ferrao
President and CEO, Gulf Bay Group of Companies
Speech to: Economic Development Council of Collier County
January 30, 2006
Good afternoon. Let me first thank the members of the EDC Board as well as Tammie Nemecek (Nem’ a check) for inviting me here to share some of my thoughts regarding the Collier County real estate market and its effect on the economic development of Collier County.
The real story of Collier County is, of course, our astonishing growth rate. You are familiar, I'm sure, with the numbers but, for context, let me put the rest of my comments in perspective by referencing the singular fact that our current population of approximately 250,000 is up from only 20,000 in 1960 -- and will almost certainly double within the next twenty years to reach a population of 500,000.
From a bucolic seaside hamlet to a half million people…well over a thousand percent growth, in one generation. Perhaps the most amazing thing about this metamorphosis is that, living here, it is actually possible to become accustomed to the continual change around us and forget how exceptional this community really is. We are, however, occasionally reminded, on the front pages of national publications like The New York Times and USA Today that this is an extraordinary place.
The media, as you know, has concentrated its collective attention on the housing prices in Collier County, a subject that I also wrote about recently in a Guest Commentary for the Naples Daily News.
We shouldn't, I suppose, be surprised that so many people are confused by our local housing market. In historical terms, after all, the growth of high-end resort communities like Naples is a new and relatively unexamined economic phenomenon.
In my editorial, I pointed out that purported experts have taken diametrically opposing views regarding our housing market. Two studies, one by National City Corp. and the other by Global Insight, listed Naples among the most overpriced markets in the country and predicted a serious downward correction. Two other studies, one by the National Association of Realtors and one by Hank Fishkind's firm, the most respected authority on the Florida economy, contradicted that conclusion and predicted continued though less dramatic increases in home prices.
These conflicting conclusions raise a particularly important question: How can experts differ so thoroughly about the nature of our market? The answer is actually surprisingly simple.
Both of the studies that paint a dismal picture of our housing market rely on data in a form published by the U.S. Census Bureau. Specifically, they used statistics gathered within Metropolitan Statistical Areas, or MSAs, which were established as a unit of locational measurement in 1940. The problem with MSAs is that they were intended originally and specifically to comprise relatively homogeneous and stable populations.
Most MSAs, in fact, started out that way but, over time, some have changed dramatically. As a result, MSAs that experience significant though uneven growth rates, such as the Naples MSA which includes all Collier County, mistakenly combine extremely diverse communities and housing markets.
These hybrid, variegated MSAs were never intended to be used as the basis for the type of affordability studies that paint Naples as "overpriced," yet that is exactly what has happened. Affordability studies, by the way, are a relatively simple attempt to gauge the ability of a local population to buy local homes based on a comparison of historical housing prices to average incomes.
Such studies are therefore meaningless when applied to an MSA that is no longer homogeneous and stable. This is exemplified by the fact that the other MSA that shows up consistently at the top of the list of supposedly overpriced markets is Santa Barbara, California -- an area with extremely rapid growth that has much in common with the Naples MSA.
South Santa Barbara is a location where homes are sold almost exclusively to high income individuals from around the world. These exclusive neighborhoods include Montecito, Hope Ranch and the Santa Barbara Riviera. Home prices in these areas are roughly on par with Naples.
On the other hand, Northern Santa Barbara County includes neighborhoods like Lompoc and Guadalupe where home prices and average incomes are far more modest. This is closely analogous, of course, to the range of Collier County neighborhoods. As a result, affordability studies that compare average incomes to home prices in the Naples and Santa Barbara MSAs yield an apparent but misleading imbalance.
Does that statistical imbalance actually mean that those who are buying homes in Hope Ranch or Pelican Bay cannot afford their homes? Of course not. In fact, a surprising number of buyers in both communities pay cash.
As a counter-example, it is useful to examine a few other high-end exurbs that do not appear in lists of overpriced markets. Two that spring to mind are Telluride, Colorado and Sun Valley, Idaho. Like Naples and Santa Barbara, both of these communities are magnets for wealthy individuals, with a large percent of homeowners spending only part of the year in their second or third homes. Home prices in Sun Valley and Telluride are similar to prices in Santa Barbara and Naples, but they do not show up on lists of overpriced markets. Why not?
The answer is simple. In both cases, the people who work in those high-end resort locations tend to commute in from nearby bedroom communities where housing prices and incomes are much lower. If the Telluride and Sun Valley MSAs encompassed their peripheral communities, they too would be categorized as "overpriced."
Outdated MSA boundaries are not the only flaw in these widely publicized affordability studies. Even if the various communities within Collier County were separated into their own MSAs, average incomes and historical housing prices in areas like Naples proper and Pelican Bay would tend toward the meaningless.
Some 25 years ago, Pelican Bay was an undeveloped area known as Clam Bay. Fiddler's Creek was a tomato farm. The notion that historical income levels and housing prices have any bearing on today's housing market is simply foolish. The engine at the heart of Collier County growth rates has been, obviously, the purchase of high end homes by people from outside the area.
This is, by the way, why Gulf Bay advertises in national and international publications like the Wall Street Journal, Town and Country and Architectural Digest. Even local ads are aimed primarily at tourists, visitors and homeowners from outside the area who have decided to buy a second or third home here.
Local income statistics are misleading for other reasons as well. While the use of average income statistics is relatively useful in a homogeneous middle-class community, they do not accurately reflect wealth in communities with populations whose wealth comes from investments and other so-called unearned sources.
The example I use is that of someone who earns $100,000 annually from low-risk investments, which would require two million dollars in savings assuming a five percent return on investment. This person, however, is treated the same in affordability studies as the salaried earner, making the same amount on paper, even if he or she is deeply in debt. In fact, some investors choose growth rather than income stocks, liquidating holdings only when they need income. Their wealth, if it shows up at all, is categorized as a modest capital gain rather than income.
Despite these, and other, obvious methodological errors in the studies that impugn the Naples housing market, the national media has reported these studies as if they were gospel. I do not, by the way, bring this up merely to defend the reputation of the Naples area market.
Nor do I dwell on these analytical flaws simply to complain about shoddy economics and the journalists who report it as if it were respectable science -- though that's always fun.
Rather, we need to recognize that there are real world consequences for our entire community when the mainstream media encourages the public to believe that housing prices in Collier County are destined to fall by 50 percent or more. These stories do not dissuade the high income individuals who are willing to risk a falling market in order to buy a winter vacation home in beautiful Naples, Florida. It may, however, scare off the professional who is considering a job opportunity in the Collier County school system.
So what should we know about the Naples market? First, as I've already implied, it is not the feeding frenzy of condo-flippers that some believe it to be. Rather, the Naples success story is, in large part, the American success story. The last decade has seen an enormous explosion of personal wealth in the U.S., as well as other countries with relatively free market systems.
According to an analysis by the New York Times, based on Treasury Department data, the number of Americans with assets worth more than $10 million, adjusted for inflation in current terms, increased by fourfold between 1980 and the year 2000 when they numbered approximately 1,350,000 people. Estimates by National Review's Dinesh D'Souza are that more than 5 million American families have a net worth in excess of a million dollars. Conservative estimates are that their numbers will at least double in the next ten years and some have it quadrupling.
This is an amazing story, the American story, and one that doesn't get enough attention. Some, in fact, don't seem to want to hear it.
Regardless, the increase in the number of wealthy U.S. families has had an enormous impact on certain sectors of the housing market -- especially the vacation home market. To give you an idea of how rapidly vacation home ownership is growing, the National Association of Realtors found that in 2004, vacation homes accounted for 13 percent of all homes purchases, rising almost 20 percent over the previous year and totaling more than a million of the 6.6 million total homes sold. The 2005 numbers are expected to be up significantly over the million mark.
Let me emphasize that vacation homes are, by definition, not investment homes. They are used at least part of the year by their owners. The vast majority are not rented even in the off season by their owners -- who do not plan on selling them in the near future. Because these people are not buying their homes as investments for resale, they are not susceptible financially to fluctuations in home prices or interest rates. They're in it for the long run.
This huge growth in the vacation home market represents, in fact, a new and mostly misunderstood reality in the American economy. For many people, many millions of people in fact, the American dream is no longer the proverbial home with a white picket fence in a safe neighborhood with good schools. Rather, dramatically increasing levels of personal wealth have led to a new American Dream, which is a second home in a perfect resort environment.
As is the case in other products, there are a range of vacation home options. For some, it is simply a cabin near a fishing stream in the mountains, often within a few hours drive of the owner's primary residence. Wealthier families, however, have gravitated to a relatively few premier resort boom towns that have emerged in the last decades.
While there have always been American Monacos, their growing prominence is a new and relatively unexamined factor in the American economy. This trend has been enabled and encouraged, of course, by computer and Internet technologies that allow individuals to manage their businesses and portfolios from virtually anywhere.
For the first time in history, millions of people have the option of doing business from an office in a city like Chicago or from a house in Naples on the beach or on a golf course.
Which would you choose?
Aspen, Vail, Telluride, Nantucket, Catalina Island, Martha's Vineyard, Jackson Hole, Lake Tahoe, Sun Valley, Montecito, Carmel, Palm Beach, Pebble Beach and, of course, Naples are among the top choices for those who can afford to live anywhere they choose. All these enclaves, in fact, share certain critical characteristics that have made them magnets for the most affluent.
All have spectacular scenic and environmental qualities as well as outdoor recreational opportunities such as boating and skiing. All have highly desirable winter or summer climates, which is why many homeowners in these exurbs have both oceanside and mountain addresses. Additionally, and perhaps most importantly, the concentration of wealth in these areas has attracted a quality of services that are normally found only in large metropolitan areas -- including high-quality health care, a range of airports, up-scale cuisine, shopping and cultural attractions that are not found in other similarly sized communities.
These enclaves also have become the driving economic force for much larger surrounding populations. The nature of the resort economy provides, in fact, a number of positive benefits to their larger communities.
Obviously, these affluent areas have no smokestack industries as they are the recipients primarily of invested wealth earned elsewhere. This environmental consciousness is encouraged by the fact that wealthier populations typically prefer and can afford comprehensive conservation programs.
Additionally, strong tax bases yield high quality schools, libraries, police forces, medical and other services that are available to the entire region. The economies of these areas are also particularly immune to business cycles as they are driven by investments rather than industries that are vulnerable to national or regional recessions.
There is another characteristic of these elite enclaves that also sets them apart from other locations. They're all running out of space. While demand for homes in this handful of premier locations is increasing, the amount of prime developable space in most, including Naples, is limited severely by both geography and land use regulations.
The increases in Naples real estate prices have to be seen in light of this market imbalance, which can only intensify as Boomers, the richest and most active generation in history, search for up-scale vacation and retirement homes. What happened here and in similar locations, like Pebble Beach and Carmel, has to be seen therefore as an upward market correction as an increasing number of the wealthiest people in America and the world realized that the best locations in the safest and most stable country in the free world were disappearing quickly.
This is not to say that some U.S. housing markets are not overpriced. There are definitely real estate bubbles in certain areas. Alan Greenspan uses the term froth. In Florida, there is froth in the Miami/Fort Lauderdale area, where currently there are some 55,000 to 65,000 units in and about to go under construction. People have been "flipping" contracts and making high returns -- a sure sign of a bubble.
In the 25 years I have been involved in real estate development, I have never seen a market, where speculators are driving prices, that has not experienced a severe correction.
I see the same for the East Coast of Florida where the problem is amplified by foreign banks, based in Miami, lending without previous knowledge of the market. These banks are buoyed by an inflow of funds, from Latin American economies exporting oil and other commodities at record prices, before finding its way into the overheated Miami real estate market.
Where speculators are buying homes on credit, especially with exotic new instruments like short-term interest-only mortgages, there is a real danger that those intending to "flip" properties will be seriously hurt. These areas should not be confused with areas like Naples that draw super-affluent customers like the more than half of home buyers in Naples' Pelican Bay community, for example, who pay cash. Naples, Florida, like Vail and Aspen, Colorado, has a very limited amount of land for development.
Historically, small exclusive communities, limited in size by geographic factors and already populated by the wealthiest segment of the population, have not suffered during national downturns. Naples, Florida is one such place.
Miami's condo boom, however is almost certainly artificial, and the attempt to create an ultra luxury residential resort atmosphere in Las Vegas, which is in no way environmentally unique, also seems to have failed. In such areas, where prices have been driven by speculators rather than buyers who actually want to enjoy their properties, sharp reduction in prices could take place and, at least temporarily, affect the entire housing market in that locale.
In the long run the fundamentals driving prices in Naples and other similar communities will not only hold but strengthen -- for the same reason that great art continues to appreciate in value. //
The Merrill Lynch/Capgemini World Wealth Report has, in fact, pointed out that the dramatic modern increase in the numbers of wealthy individuals has led to price inflation in luxury consumption goods that is running four times that of mass-produced consumer items -- a rate that not coincidentally mirrors price increases in high-end real estate. You cannot buy Naples real estate or Gulfstream jets at Wal Mart…..at least not yet!
Those who produce luxury items such as heirloom quality furniture, private jets and luxury yachts have been unable to expand production capacity to keep up with rapidly growing demand, leading to increased prices. The selling prices of new Gulfstreams are at an all time high.
In terms of luxury housing, the shortages have not only been due to difficulties in ramping up production, caused by the scarcities of skilled labor and materials, but by the unassailable fact that there is simply no more prime undeveloped space on the Gulf Coast near high-end services.
This is a truth that is clearly understood among those with the wealth to afford their place in paradise. A survey by The PNC Financial Services Group found that confidence in the value of supposedly overvalued high-end Florida real estate increases with the level of personal wealth. It is in all our interests that others understand this as well.
We have, unfortunately, seen the term snowbird turn into a slur among some, though Collier County's success has depended from the beginning on the willingness of wealthier individuals to spend here what they earned elsewhere.
When policy makers, politicians and civil administrators make decisions on the kind of information contained in defective economic studies and publicized by prominent national media outlets, their policies are necessarily flawed as well.
Collier is not immune, after all, to the kinds of policy challenges facing other similar, rapidly growing resort locations -- and much can be learned by studying what has and has not worked for them. Important policy decisions involving transportation, affordable housing and other smart growth issues will be made whether or not those making the decisions have access to reliable information.
But, we who are part of the Collier County Economic Development Council have an important role in furthering an accurate or real-world understanding of the Naples area economy. Thank you.
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