Good news on the interest rate front

[SHELLY]

Zero-profit condition

From Wikipedia, the free encyclopedia

Take, for example, the real estate industry. In the mid 2000's there has been a huge real-estate boom, but real estate agents are not making any more money then previously. Why? Because it is very easy to become a real-estate agent, so when profits start to rise, more people become agents, and each agent already in the industry starts to sell less houses.

Wikipedia's definition is far too simplistic for such a complex situation, but in keeping with Wikipedia's lead, I offer up this:

What happens if..., say...., there are 100 agents and 100 condos sold in a year at $100,000 each @ 6% commission= Each agent sells one condo and makes $6000 per year.

Now, there is a condo boom, so another 100 agents pass the test and enter the profession--making 200 agents. The number of condos sold increases to 200 condos AND the price goes up 20%. So the condos are now selling at $120,000 @ 6% commission = Each agent sells a single condo and makes $7200 per year (the original 100 are making $1200 more than the previous year as a result of the increase in sales price). Even with the additional agents in the market, and even though they sold only one condo, they still made more profit than the previous year--albeit not as much had the barriers to entry into the profession been higher.

The boom continues, and the builders keep clearing and building, the developers keep the pre-sale condo market well stocked, and the investulators scour the market snapping up anything they can find hoping for a killing on a quick turnaround; prices continue to show double-digit increases year-after-year. More agents can enter the field and this will work fine and dandy as long as prices keep going up and the demand exceeds the supply (multiple offers).

But then, the market tops out (which in this area was about this time last year) and buyers stand on the sidelines--the investulators start dumping their properties. Now there are multiple offerings for each buyer and multiple agents chasing down that buyer. Prices are still high, but not much is selling...there is a real estate stand-off. There presently is a glut of inventory--more than ever before--with very few buyers interested to buy at these asking prices and sellers refusing to lower their prices. The RE profession is still staffed as though the market is firing on all cylinders (although the mortgage companies and banks have been slicing and dicing their staffs and development plans are being scrapped). With less sales and increasing inventory (and if the glut of agents aren't culled) it will turn into a worse than Zero-Profit condition.

A zero-profit condition during a real estate price/supply boom is assuming the original 100 agents sold the same number of units at the $100,000 (no price appreciation) and just the number of units for sale increased exponentially with the number of agents passing the test. I assume a large number of the newbie RE agents were used by the BIG GUN real estate companies to generate profits by throwing them less profitable properties that the "star players" felt weren't worth their time (which benefits the old-timers at the expense of the newcomers). With more boots on the ground, it certainly wasn't a Zero-Profit situation for the "star players" and the Big Gun Companies.

During the boom, there was PLENTY of money being made and there weren't many RE agents in line at social services drawing unemployment checks and food stamps. Older agents (meaning those who know what it's like to change a typewriter ribbon) who were smart enough to know the run-up was a fluke, probably are well-prepared for the market that is ahead (i.e., they leased, not bought, that Lexus). The others who thought RE was a quick and easy road to riches, where the toughest part of the job was to decide which dress to wear to the Condo Kick-0ff Party on Saturday or which of the multiple offers to accept for their client, will find comfort in that fact that Florida's unemployment is among the lowest in the nation and there are many opportunities for jobs in the service sector.

 

[redfisher]

More ordinary citizens participated in the 2001 stock market recession than in the R/E mkt...The previous stmt is incorrect...

 

[surfer]

Does it not concern anyone here that a large chunk of the economic expansion of late has been due to the explosion of debt levels? With increasing construction costs, increasing intrest rates and stagnant or nonexistant sales prices the market and economy are in for a rough ride. It might not even matter if the fed holds the rate, most of the equity based economic expansion is past tense and with construction costs out of control new starts are destined to come to a halt.

Why the discussion about intrest rates anyway? I thought all the houses in Sowal were paid for with cash :rofl:

There are so many negative signs I don't understand how anyone can look past them ALL. I look at RE every time I come there and it is still way too high for investment.

You hit the nail on the head. We are a way from the trough. I will buy once I see the trough in big bold letters.

 

[Mango]

Originally posted by Pirate:
It might not even matter if the fed holds the rate, most of the equity based economic expansion is past tense and with construction costs out of control new starts are destined to come to a halt.

The Bank Lending Rate also affects corporations and manufacturers who wish to borrow money for expansion. Expansion means more jobs, more spending, and home buying.
Many people are under the impression that the Fed Funds Rate directly affects bond rates. It has some impact, but there is no direct relationship.
There are many other economic indicators, factors nationally and globally that can impact bond rates.
I would also like to add that quite a large majority of the mortgages I procured for people in the past 5 years during the "run up" were low Combined loan to values 55-65% average, had low debt, and excellent debt to income housing ratios. They also had savings.

 

[Kurt]

You hit the nail on the head. We are a way from the trough. I will buy once I see the trough in big bold letters.

That sounds great!!!! Let me know when that is and then after we buy we'll let everyone else know that the only direction is up.

 

[SHELLY]

More ordinary citizens participated in the 2001 stock market recession than in the R/E mkt...The previous stmt is incorrect...

Please give your rational for this statement.

 

[30A Skunkape]

The funny thing about this this thread is that in taking two required economics courses in college, all I remember was 'guns and butter' and being really bored. Your blood and guts economics makes great theater-please, continue! :clap_1:

 

[Mango]

Yeah, it's been a hoot!

 

[SHELLY]

I would also like to add that quite a large majority of the mortgages I procured for people in the past 5 years during the "run up" were low Combined loan to values 55-65% average, had low debt, and excellent debt to income housing ratios. They also had savings.

Looking at your industry--nationwide--would you say your experience was "the exception" or "the rule" over the past 5 years.

 

[Mango]

Looking at your industry--nationwide--would you say your experience was "the exception" or "the rule" over the past 5 years.

I only am licensed in N.Y. and CT., and I run my shop differently than some brokers and Bankers. I won't do a loan if I do not think that someone can not afford it regardless of the fact that I can place it with a Lender that will do the deal or not. I also wouldn't put people with fixed incomes in ARM loans simply because the rate was lower, and it could get them a bigger house.

I did receive calls like that. From what I have seen is there was no middle ground. You either had the Borrower who was maxed out on everything based on their income which was average, or the conservative higher income Borrowers.

I suppose you could say that that was the rule, because the Banks that offered the HELOC's originally did not have any draw requirements. Then they added a minumum draw requirements and pre-payment penalties because people were refinancing or purchasing, adding equity lines just to have access to the funds if they wanted them, but not using them. The people I refinanced and added lines of credit simply did it because they could borrow money at about 4% at that time and they were savvy financially and they always had the ability to pay the line off somehow either with investment money or bonuses.

There has been a slight increase in the foreclosure rate in areas of fast and high appreciation, but not what I was expecting yet.