Teardown Post

Firstly, I think it’s important to recap how we got here.  It all started quite innocently as a Wall Street product called mortgage securitization.  The creation of this market was lead by Lewis Ranieri and his crew at Solomon Brothers in the late 70’s. Over the next 30 years it grew into a gargantuan secondary market for mortgage loans that would ultimately increase the obtainability of homeownership.  Government and its policies supported this “factory” with an “everyone should own a home” initiative - and the party began.

The rest has been well documented.  Both consumers and institutions fueled the leveraging fire and everyone; banks, consumers, government agencies Freddie Mac and FNMA seemed to want to ride the exciting wave of cash flow and home appreciation.

Then, like all things that seem too good to be true; the air got thin at the top, and with the development of just one chink in the pricing armor, the bubble burst and everyone stampeded for the door.  Party over!

 So, what happens now?   

As a life-long practitioner of the markets, I’ve always looked at the business of homes as an asset class play.  Like commodities, equities or bonds, real estate trades and clears the market based on supply and demand – simple fact.  When homes become unaffordable the market corrects and prices go down.  No government program is going to overcome that eventual reality.  At some point, buyers and sellers need to agree on price – without that agreement, there is no transaction.

So, where should the government jump in and help out?  The government needs to free up capital and get out of the transaction.  Support private sources of capital and innovation - get the flow of capital back into the market. 

Government policies need to focus on wealth creation and increased investment velocity not additional constraints and wealth redistribution.  The market will correct on its own, the more the government meddles the longer that correction will take and cost.  Banks want to lend to qualified buyers and investors want to buy properly priced risk. 

Further government involvement will only reduce the ability of investors to invest and blur the line where investors’ risk begins and ends. Maybe President Obama should give Mr. Ranieri and other proven wealth creators a call and ask them what to do – chances are they’ll have some great answers.

 Brian Hickey is founder and President of teardowns.com, an online stand-alone marketplace for infill redevelopment property, and former mortgage-backed securities salesman, Kidder Peabody & Co.  1989-1996

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NAR released news today that higher end home sales have picked up dramatically from last year.  Sales volume for homes priced between $700,000 and one million are up 29 percent from last years levels.  The reason seems to be lower rates on jumbo loans and a more confident lender for big ticket homes.  Hopefully part of the bottoming process……….

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Finally, an online marketplace that really works like an exchange.  All market participants are welcome to post and list property for a reasonable fee and target the buyers most likely to buy.  Any buyer, seller and/or their real estate agent can participate.

The teardowns.com marketplace does not favor fsbo’s or MLS postings - the marketplace simply offers connection services for buyers and sellers.  Sellers can post their own property or ask their agent to do it for them.  Buyers on the other hand, sign up to see redevelopment property opportunities in the community where they have interest.  The sellers are then connected to those buyers directly.

The NASDAQ for real estate?

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I caught this article about distressed foreclosures on CNN today. I agree with the observations noted in the story; many of the bank-owned properties that I have been showing to teardown buyers these days are complete wrecks in need of a skilled builder.

Too Damaged To Sell?

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The housing market in Naples, Florida which had been pleading for signs as well has indeed received another sign that things are definitely getting better. Lot sales. In Naples not only lot sales are a sign and the purchase of “Teardowns” are way up, which in this upscale market is the same as a lot sale. A teardown in Naples is a home built primarily in the 1970s, with limited square footage, approximately 1,500, with outdated features and amenities. The home will be torn down, and a new home built. These sales which do not appear as lot sales are sold for lot value. The typical Naples homebuyer looks for a home with the newest features, granite countertops, marble flooring, much more square footage, media rooms, island kitchens with top of the line appliances and much more natural light. Thus on the same lot where there once stood a 1978, two bedroom, two bath home, you will find a year later a two story 4,000 square foot, 4 or 5 bedroom, 4 bath, plus den, plus media room, gorgeous new home.

Another very positive sign is not just that the number of lot sales and teardowns has increased it is important to note who is purchasing. Not only private parties, that are purchasing to build their dream home, but many builders, who held off buying for two years have now jumped back into the market to build spec homes. Specifically, the very attractive area, a corridor known as West of U.S. 41, within a stones throw of the Gulf of Mexico, has displayed a huge upswing in lot and teardown sales.

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