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Think Twice Before Buying That Vacation Home
If you’re thinking about buying a vacation home any time soon, I’d think again. In my annual review of the residential real estate market in the High Sierra mountain hamlet of Incline Village, Nevada, and I am sad to report that antidepressant addiction among realtors there is still at epidemic proportions. Conditions here are as bleak as in any vacation destination across the country, from Cape Cod to San Diego’s Coronado Island.
This is the town on the shores of sparkling Lake Tahoe that is the home to the Godfather III, former junk bond king Mike Milliken, the mythic arms dealer Adnan Khashoggi, and a high school with one of the worst drug problems in the state. Devoid by edict of the down market fast food chains that afflict most of America, Incline boasts two municipal golf courses, where at 6,300 feet, the air is so thin that your drive travels an extra 50 yards. If you want a Big Mac, you have to drive down the road to California, if the road isn’t blocked by snow.
Incline is also a Mecca for libertarian millionaires drawn by the absence of a state income tax. Unfortunately, they also possessed the financial sophistication to buy trophy waterfront homes, extract cash-out refi’s all the way up, invest the proceeds in the stock market, and lose it all in the subsequent crash.
The result has been a meltdown of Biblical proportions in the housing market. Of the 8,000 homes in the village, 400 are for sale at distressed prices and another 400 or more discouraged sellers hang over the market. Brokers report a brisk business in short sales, foreclosures, and sales on the Washoe County Court House steps at prices down 60%-70% from the 2006 peak.
Jumbo financing is now an extinct species, unless you’re happy to pay a 250 basis pint premium over conventional loans. So the high end market has ceased to exist. One fabulous property on tony Lakeshore Drive, with every imaginable upgrade (a heated driveway, beveled glass windows, an elevator, and a fireplace in the bathroom?), originally listed at $14 million and sold for $4 million. Only cold, hard cash talks here. But high net worth individuals hate tying up capital in an illiquid asset when more attractive options about. Gold and silver coins are especially popular in the Silver State.
Some properties have been on the market so long that snow drifts have collapsed balconies, the local wildlife have moved in, and prospective buyers are scared away by offensive odors. Break-ins by black bears have become a serious problem. Abandoned homes see their pipes freeze and burst, causing irreparable damage.
In Las Vegas foreclosed homes can be easily spotted from the air by their dead lawns and green swimming pools. In Incline the “tells” are the ten foot high mountains of frozen snow dumped there by snow plows. I guess all real estate markets really are local.
Owners used to be able to cover half their annual carrying costs by renting out their properties during Christmas and New Year’s, and for a few weeks in the summer. Unfortunately, that market has collapsed also. There are not a lot of high rollers willing to fork out $10,000 a week for a vacation rental in a recession. An earlier start to the school year has wiped out a good part of the prime summer months.
The only consolation is that conditions are much worse in Las Vegas. The optimists concede that prices could stay down for another decade. The pessimists can already be found at the bottom of the lake with the Godfather’s Fredo Corleone.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out of consensus analysis, please visit me at www.madhedgefundtrader.com . There you will find the conventional wisdom mercilessly flailed and tortured daily. You can also listen to me on Hedge Fund Radio at http://www.madhedgefundtrader.biz/
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Friend of mine bought a place near Sun Valley for about 30 cents on the dollar. RE agents up there were flabbergasted - most of the Bank Owned RE up there they still won't let go of for anything less than 80% of 2007 prices. I doubt I need to explain this to anyone here, but it's still interesting. . . . . .
Bubbles tend to unwind in a symmetrical fashion, taking as long to drop as they do to peak. If you look as some basic charts of the run up in real estate you can eye out this symmetry. We should bottom out in 2015-16.
People like to think of the RE situation as a one off, a crazy miscalculation no one could ever see coming in a million years. It's a classic asset bubble and it will continue to behave like an asset bubble.
Agreed. We're in for the second wave of CRE, alt-prime and ARM reset between now and the end of 2012, with at least one more likely large term systemic collapse in the process before we even approach bottom. I don't think it'll be quite 2015, but mid-to-late 2013 looks very likely before the market even begins to recover.
Great insight!
Got a friend who rented a place in Incline, house was on the market for 1.5M, he is renting it for 2500 a month, including all utilities, go figure the cash flow on that one.
A rents versus value horror tale for sure.
Not an isolated situation, either.
Thanks for that colorful and informative post...
RE is headed down - for 20 more years - just like Japan.
Once we're back to pre-1980 levels, and people can afford to put down 20% cash and service their mortgage debt and property taxes with 30% of their income, then things can go back to a growth posture. but not before then.
Larry Kudlow and marc lindon beg to differ. Fail.
Damn mad cow. 1980 prices and 20 years! I can't wait that long.
just have Ben helicopter everyone a million $$$ and the numbers work again
The powers that be have to choose to make this happen. They have to choose to be happy with 1-7% annual growth rates and embrace an austere existence, honesty in accounting and ethics in business.
In other words never.
Now why would you ever want to buy land (vacation or not) you will never actually own? It's a little known fact that hardly anyone in the world actually owns the land that they think they do.
http://en.wikipedia.org/wiki/Allodial_title
That wikipedia page says you actually can get allodial title in Nevada.
This post by MHFT just screams opportunity to me...
Isn't it possible these days to buy a rental property with your IRA?
Yes but not in the true sense of the legal term "ALLODIAL TITLE". It is still subject to upfront taxes, otherwise know as rent, can be forfeited and has limited duration. None of which applies to real "property" all the way from you're car to your underwear.
13% said they plan a vacation...thats up from 9%. Thers hope
hope for more vacations ?
Real estate has already bottomed. They won't go higher for many years, but they have indeed bottomed.
and your how old.. and living in which purple bubble ..
we have seen the bottom lol
RE is on its second leg down as we speak. Without the glubbermint giving away money, it would already be another 20% lower. This bubble will completely deflate and then some before its bottomed. It amazes me that people keep buying. Buy AFTER the depression bottoms, when people will literally be giving homes away.
IMO we are on a ledge before another leg down, in residential, in the autumn.
Don't bet on it, scooter.
IMFresets.jpg
It's actually worse than that. RE won't bottom until 2016 or so, that is, unless it approaches zero before then.
I'm in your camp. It's a long, slow wrecking scene with 2016 or somewhere out there being more realistic.
What strikes me about the article is the laughable extravagance of the homes. This is not "just another" crash, these flamboyant freaks were so far out there its comical.
I live in a high end real estate area, Carmel by the Sea, CA, as distinguished from the other local "Carmel's" around here, but the type of house here is subdued compared to that hilarious show in Incline Village.
That's quite a broad generalization. Lotta peeps think you're wrong. What do you know that we don't?
curious of your thoughts, can you share?
Who want's to catch a falling knife? Real estate has a long way to go before we see a bottom and the sad thing is, only those with cash will be able to buy. Those fools in NV are right about gold and silver coins...but not to trade or speculate. This will become the real money once the public wakes up to the fact that their FRN's have less value than a roll of Charmin.
Excellent piece. How about a Jackson Hole update? I know prices have been dropping, but haven't seen a real analysis.
Still sucks down in JH. I have a good friend in RE there and while she has some listings and has had some showings, everyone appears to be in "hover" mode -hovering, not buying. Some but very little building going on. And a crappy snow winter to boot, what with the east coast hogging all the snow from the west...
I lived in Incline Village for 1 year. This article is completely true. A mirage of people's dreams, hopes, and beliefs in the real estate market. $2 million pieces of garbage homes that just had to be worth 30% more - well just because. Beautiful place, but one of the strangest dynamics I have ever witnessed. Abject working class conditions balanced off with some of the wealthiest people ever - an untenable situation.
My family left in large part because of the insanity known as the Incline Village realty market - it was so divorced from reality as to render a long term investment in a home that clearly had at least 50% more downside a prospect we not possibly could stomach.
I have never been happier with a trade I did not make in my life.
tha't awesome, good for you, knowledge, decision, action. And this time it worked. I love Incline Village seek opportunities to go back and visit all the time.
Agreed. I live in Truckee to the north, and lots of expensive things were built there, too. However, there are also a lot of new starts in Martis Camp now, on north edge of Northstar with their ski lift connecting. That market appears to be fine. Prices must be down, but they seem not ever to have gone so high as Incline.
As for Incline, the lakeside locations are simply mezmerising at key points in the year. Kayaking by there at 7am on a cool summer morning with sun hinting over the mountains, a thermos of Peets coffee, and the azure blue water like glass underneath, it's an experience. And also the winter wonderland experience, all around the fireplace in the great room, with surreal beauty out the windows. That might explain how people could bid beautiful scarce things up like that, as far as the lakeside properties go.
Now it seems that only Larry Ellison can afford it, as he builds on a huge lot on the south end of Lakeshore. And yet he is expected to sell the streetside homes as part of the project, and keep the waterfront compound. Savvy guy.
Friend just closed on a Forida second home. 40% off the banks' mortgage balance.
I didn't say much because he's in the RE field but my gut is telling me that in the same area within 2 years it will be worth 33-40% less.
I'm in the market but I would rather miss than buy into an ever-deteriorating situation in south Florida.
Aspen, Co. is a ghost town--"waiting for things to get back to normal."
I wonder how long people held out hoping for a better price on their homes after any given gold rush was over?
Always a pleasure to read, thanks.
By the way, short term financing of higher end homes is one of the hottest businesses in the LA. The usual requirement is 40% or more equity and 15% interest rate for no longer than 5 years. And number of people that overextended and now need cash for their businesses (so much for TARP/TRAP and improvements in the small business lending environment) are going for it.
Hard money has been having a blow out party since fall 2008. But they own quite a bit of real eastate now too.
Another hot loan program in LA metro, is Cash secured by vehicle Pink Slips.
Loans are made short term on cars, trucks, boats, RVs with a lien free title up to 50% wholesale. Outrageous interest rates....as much as 29%. You can continue to drive your vehicle, which is equipped with a shut-down GPS by the lender. Miss a payment and the vehicle shuts off. The lender sends a truck to haul it off to auction and makes a mint.
Many in SoCal had bought vehicles for cash out of a HELOC on their now repossessed homes and have full title. Now they are locked out of the traditional lending markets.
It's all part of the lending vulture's food chain, I guess.