Why location, location, location in real estate is ‘BS’

Photo by Cultura RM/Luc Beziat via Getty Images.

Photo by Cultura RM/Luc Beziat via Getty Images.

Editor’s Note: In 2010, Paul Solman joined a busload of snow-bird wannabes and investors on a tour through Cape Coral, “the ground zero” of Florida’s real estate bust. Led by real estate agent Marc Joseph, the “Foreclosure Tours-R-Us” bus stopped at recently vacated homes selling for cheap.The median sales price was just $85,000. “It is definitely the right time to buy,” Joseph said back then.

Returning to Florida last month, Solman heard a similar refrain on Joseph’s weekly bus tour: “The time to buy is now.” But with the median sales price just under $200,000, those homes are not nearly as cheap. In fact, prices are rising. But they’re still selling, Joseph tells Making Sen$e on the NewsHour Thursday — increasingly to all-cash buyers. “Foreclosures have dried up, inventory has gotten tight, and the demand to be here is still here,” Joseph says.

Yes, with warm temperatures in abundance, the Sunshine State still has the “location” market cornered, especially after New England’s brutal winter. But as Joseph discovered himself during the 2005 bubble, when he paid $1 million cash for a house that soon plunged in value to $400,000, location should no longer be a sufficient motivator to buy. Price and timing are equally important. And both of those factors are starting to give Joseph pause. With prices creeping back toward their 2005 highs, he fears that Florida’s housing market may be heading for a déjà vu.

Find out why in the edited transcript of Paul Solman’s interview with Joseph below.

Simone Pathe, Making Sen$e Editor

Will History Repeat Itself?

MJ: We may very likely hit $317,000 as a median sales price in the year 2020. That was the high in 2005, when it dropped. So, I guess I could ask, will history repeat itself? A part of me says maybe not because it’s not built on a fake house of cards. This is real money: 54 percent of our market is cash.

PS: What was it back in 2004-2005?

MJ: Lucky if it was 20 or 30 percent because they were giving zero-down, no-income-verification loans. Those were, as we all know now, toxic loans. Now the fear I have is that they’re not toxic loans anymore. Now, we have large hedge funds in our area buying up mass amounts of houses, renting them out, and then they take ’em in big pools and they sell ’em up to the New York Stock Exchange, to the Real Estate Investment Trusts.

“But the biggest thing that we have is the sun. As long as that thing is out there shining, people will come here, they’ll go through their bankruptcies, they’ll go through their foreclosures; this is paradise.”

My question to you is, in the year 2020, or before, when these large hedge funds pull out, what happens to these thousands of homes that they purchased all through Florida? Are we going to have history repeating itself, not on toxic mortgages, but on homes that are rented to people that really can’t afford to rent the homes? It takes one hiccup in our economy — and you’ve gotta remember, they’re paying rent. They’re not paying mortgages.

[And] In this market, anything could depress us. Any small little hiccup. But the biggest thing that we have is the sun. As long as that thing is out there shining, people will come here, they’ll go through their bankruptcies, they’ll go through their foreclosures; this is paradise. You’ll pay a premium for that sun. That premium is built in to the median sales price, it’s built into the lack of inventory, and it’s built into the pent up demand that people have to want to be here. I just don’t know if we can support all of that five years from now, unless something changes. Because if we get back up to $315,000 or $317,000 as a median sales price, how does your average working class person afford that home? If the schoolteacher and a fireman can’t get a house, we’re missing something big.

Cash Is King

Editor’s Note: Those workers could buy a similarly priced house in 2005, but as Joseph explains, “that was part of the problem.” With no income verification or down payment needed, first-time homebuyers were moving into houses they couldn’t afford.

PS: You were selling people property with no-income-verification loans?

MJ: Yes.

PS: You knew they were putting nothing down, and that the appraisals were higher than the value of the home at the time?

MJ: Yes, that was our market.

PS: Did you see the crash coming?

MJ: No. Absolutely not. I would have been the first one to pull out. I lost $600,000 on one house because I believed in location, location, location.

PS: And that’s not true?

MJ: That’s B.S.! My eyes are so open right now: it’s location, timing and price. Time is now, not in 2005. In 2005, I lost half my money.

PS: Wait, wait wait. So, the three rules of real estate are not location, location, location, but location, timing and price?

MJ: Dead on. If you can get those three to line up together, you have a home run. If you can’t figure that out, you’re gonna get slapped like I got slapped, and I will never get slapped again. I watch these numbers every month. When I see $317,000 dollars come back up again as the median sales price? I’m pretty sure I’m selling.

PS: And the no-income-verification loans, they’re gone?

MJ: They are totally gone. If you cannot qualify for the mortgage right now, you are not getting it. Again, that’s why I’m seeing so much cash come to our market. … The banks are making people move their money. Because 1 percent is lower than inflation, you can’t leave it in the bank. If you got a couple of hundred grand in the bank, move it.

PS: Well, the chair of the Federal Reserve has signaled she’s going to raise interest rates.

MJ: I didn’t even need to read that, I see it right here. If there are this many people wanting to buy, and there’s a premium, and cash is coming in like it’s coming in, it’s time to tighten up a little bit — just not too much.

I have found that if you just take your time, and you approach investment properties with your eyes open, not with the blinders on, it’s a good deal. Don’t put your head in the sand. You got to slowly go into the investment. You gotta micro-analyze everything about it.

And the key about buying lots and buying houses [is], if you lose your job tomorrow, can you afford to hold everything that you have? And if you say no, then you should be selling some of that off, because that means you’re over-leveraged, you’re going to be one of those people who in five years is going to say, “I wish somebody woulda told me.”

Is Home Ownership Overrated?

PS: Are a lot of people living in this area now just better off because they’re renting, instead of owning?

MJ: Absolutely. Homeownership is overrated.

PS: You’re a real estate broker saying that!

MJ: I’m being real. It’s overrated. If you can afford to own a home, buy a home. If you can’t afford to own a home, the next best thing is renting it. Nobody knows if you’re renting or owning your home. You’re out there cutting the grass, just like the guy that bought the house.

PS: But the argument made by Democrats, and even more by Republicans, in my experience, is that if you own something, you’ll take better care of it.

MJ: Sure, it feels better to have five dollars in my pocket than to ask for five dollars out of your pocket. But, the reality is, if they can’t buy that house, they should hold their head high, they should rent that house.

PS: Right. Well, look, I grew up in an apartment. I rented, my parents rented, my whole life, I never thought twice about the fact that we didn’t own the apartment.

MJ: And you probably kept your apartment as if it was your home, and it didn’t make any difference that you didn’t own it.

PS: That’s true.

Watch Paul’s full story about another potential housing bust, featuring Marc Joseph, below.

Watch Paul’s first report on Florida’s ongoing foreclosure crisis.

And his conversation with one homeowner-turned-homeless victim of that crisis: