Out at the peak

Saturday, July 08, 2006

The argument against "New Villages"

CNNMoney is covering the latest RE trend: New Villages. These guys have 20+ dwellings per acre, do not have their own yards, and they are within walking distance to mass transit. They boast a local market and free WiFi.

This might sound like an interesting setup, but are they worth the 20%-25% premium over suburbs? A speculator might think that premium will be even more as traffic increases.

The problem is that one must sacrifice a good chunk of personal space, and I don't see the lure if there is a large premium. You are paying for the community and the close transit. Maybe the premium is that this idea is currently fashionable and it allows for its residents to be more smug about their lifestyle. I'm half joking here.

My hard argument against any RE investment now is think hard about the greater fool that you wish to flip your cracker box to. What mortgage payment can they afford? Think about what the interest rate will be in the year that you will sell. Now think about all of the other people who purchased dwellings for 'investments' and the competition they will impose on you.
What about all the suicide loans that will cause foreclosures in your area and drop the comparable sales?

Wake up, RE investments are currently passé. The smartest and richest RE investors are out of the market for good reason. They see a correction ahead.

What people really need are pricing cuts across the board. The speculator premium where all markets have been overbought by flippers, will have to be removed.

So even if people believe their New Village is worth 25% more than a nice suburbian house, both need the basis price reduced 30-50% over the next five years.

Disclaimer to bashers: I have not been calling for a market peak for years. I was very bullish on RE until Q3 2005. The current RE bull cycle is over.


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