The Wall Street Journal

By Dan S. Barnabic, June 09, 2016

The prices of real estate in major selected urban centers are still going up. But job growth and wages cannot keep up the pace, in fact, they lag behind very badly. The minimum salary needed to afford the rent in many major cities is way too low, even for the rapidly eroding middle class.

Housing hotspots and rampant speculation could lead to another crush

By Dan S. Barnabic

Housing hotspots

Rental prices usually commensurate with the value of the real estate property, be it an apartment, condo unit or house. The rentals are getting more expensive as wealthy off shore buyers, local speculators and some very naïve buyers, are driving the real estate housing prices through the roof.

But what if China’s economy crashes, or tightens up loopholes which allow wealthy Chinese parking moneys in the US real estate?

Will the average American middle-class buyer be able to consider buying into already overvalued real estate in those hot-spot cities such as San Francisco, Portland, Seattle, L.A., San Diego, Denver, Miami, Atlanta, not to mention New York City? The simple answer is no. Recent report from ADP Research Institute showed the U.S. economy added 173,000 jobs in May. That is a noticeable downshift from the kinds of readings we saw in late 2015- early 2016, and a big decline from 200,000 to 300,000 readings, we consistently saw in 2014.

Such noticeable downshift certainly cannot support indefinite price increases even in the hottest of the hot-sports, not to mention the rest of the country which is stagnant or, in some cases, declining. One has to be blind not to see what is really coming. We are already in serious bubble, the fact that stakeholders such as real estate brokers and speculators, even existing owners of overvalued real estate deny in fear of losing their commissions and equities. And fear they should. We are now living in the market which is almost solely driven by speculators hoping to flip the properties for even higher prices to Chinese and other off shore buyers and some domestic naïve buyers, who just about forgot or don’t bother to remember the last devastating real estate crash of 2007.

The latest gimmick involving condo developers’ promises for guaranteed first and second year rental income has turned even ordinary folks into speculating investors. They are buying condo units and other types of real estate hoping to ride the wave of success by selling them later at a higher prices. They take calculated risk by renting out their newly acquired rental units, often for less than the total monthly carrying cost of unit.

We are living at times where the game of condo speculation becomes dangerous to the whole real estate industry. History shows that an oversupply of units may be created when over 30% of the units are bought by profit-hungry small-time investors, rushing to buy products they don’t need for themselves but for the sole purpose of renting them out.

Due to sheer number of such investors-turned-speculators, the market has now entered into in artificial state of (high) demand. At the first sign of an economic slowdown, the speculators will retrieve, bringing the buying frenzy to a hold.

Suddenly, everybody will realize there is no actual demand. In a resulting panic, many investors will dump their units onto the market, causing prices to plummet and wreak havoc in the process. The glut of available units for rent will become a clear signal to buyers that there is an oversupply of units on the market. When this realization sinks in, a downtrend in condo unit market will begin. The ensuing panic will cause loss of confidence in the overall real estate market, and with many other owners eventually putting their units or other types of properties for sale, the possibility of market crash looms large.

I elaborated on this scenario quite extensively in my book, “The Condo Bible.”