Then in 2003, I heard from friends about listing houses for sale and getting multiple offers of $10,000 to $20,000 above asking. I kept thinking this can't last much longer, but it did. In 2004, people were telling me about getting five to ten offers of $50,000 to $100,000 over asking price. I read articles in the newspaper about a couple that bought a two bedroom, one bath fixer in Silicon Valley for $1.2 million. I kept thinking this can't last much longer, but it did.
Finally in 2005, I got cold called about a rental property that I owned, asking if I wanted to sell. I asked how much they thought I should list it for and they said it was worth $440,000. I said that I wanted to list it for $639,000 and they thought I was crazy. I then received a call from my former secretary who said she just got her real estate license. I told her I would give her the listing if she would list it at the price I wanted, and of course she jumped at the chance. That summer, I got two offers over the asking price. If that wasn't the top of the market, then I didn't know what was and nor did I care. As it turned out, it was the top.
Now I see examples such as a house in my neighborhood that was put on the market last year for $1.1 million, later reduced to $939,000, later reduced to $829,000, the listing expired and picked up by another broker who listed it for $799,999, yet it is listed on zillow.com as being worth only $685,000. I'm sure you've seen and heard other stories in your area.
The froth in real estate lasted for several years before the turn; now I think we have to see blood in the street for several years before this is over. Readers of my previous article about shorting the sub-prime lenders, and the followup article about the 26% return in four days, created an interest from readers about other possible shorts, or put purchases. The short party for sub-prime may be almost over but there are other areas of real estate where this drop could reverberate, such as residential construction.
Here are three worth investigating as possible shorts:
Ryland Group Inc. (RYL) is a California based homebuilder and mortgage lender. Quarter revenues dropped by over 11% year over year, and their quarterly earnings sank by 40.4%. The stock is currently at 43.10, way above book value of 35.46. They owe almost a billion dollars in total debt.
Meritage Homes Corp. (MTH) is a single family homebuilder based in Arizona which concentrates primarily in the southwest, with developments in Arizona, California, Nevada, Texas, Colorado, and Florida. [My personal opinion is that Nevada will get hurt the worst in terms of the real estate markets.] Meritagehad a 21% reduction in quarterly revenues and over a 90% drop in revenues. Operating cash flow is a negative $21.9 million.
Brookfield Homes Corp. (BHS) is a luxury and move-up homebuilder that operates in California and the Virginia area. Quarterly revenues dropped 29.8%, quarterly earnings dropped 49.8% and the stock sells for 2.3 times book value.
These stocks can be tracked at stockpickr.com.
Full Disclosure: Author has no position in above-mentioned companies.