If you read the mainstream media enough, many seem to believe that the housing market is close to hitting bottom. The National Association of Realtors (NAR) has said that in the past (and each time been wrong.) Various “analysts” have said it. Some economists have said it. Perhaps friends or relatives have said it.

They are all wrong.

How do I know?

I watch Property Ladder, a house flipping show on TLC on Saturday nights. About the show:

Property Ladder is hosted by veteran real estate investor and flipper Kirsten Kemp. Kirsten brings her years of experience in flipping properties to the series. She’ll provide insight on the flipping process, recommendations on our flippers projects and guidance for at-home viewers looking to take on their own fix and flip projects.

It was off the air for many months but has returned with new episodes. You wouldn’t think there would be people still buying properties and hoping to flip them for profit in only a few weeks (given the state of the housing market.) But you would be wrong.

There have been two shows on now. One with a house in Atlanta and one with a house in Pomona, California. What makes the show entertaining is that the flippers never know what they’re doing. They underestimate the cost of renovation and the time it will take to do it. In both cases, the flippers went over their budgets.

But in both cases, they sold the house fairly quickly and made siginificant money (over $50,000 each.)

The Pomona, California episode was especially disturbing given how shoddy the construction was. They put in the cheapest kitchen cabinets you have ever seen and blue countertops (yes, blue.) The tiling in the kitchen was poorly done, and the carpet didn’t fit properly so there was a “patch” near the door that was very visible.

They bought the house for $270,000. Listed it for $390,000. People coming through in the open house actually said, “this is pretty affordable.”

Since when is $400,000 “affordable”? Only in California.

It was still a dump- even after they renovated. But they sold it in like two weeks for $370,000 without using a realtor.

This housing bust has a long way to go, I’m afraid. Flippers still believe they can make quick bucks (and if you believe Property Ladder- they are successful at getting it.) Yes, it’s only a tv show. And yes the producers are picking flippers who can make money and are interesting to watch on tv.

Nevertheless, the “dream” of flipping and making $50,000 in one or two months is alive and well (and the Pomona California flippers were something like 26 years old.)

But the daytraders in tech stocks “believed” well into 2001 and 2002 before they finally capitulated and stopped that game.

The same will happen in housing. Just not yet. You don’t reach a bottom without capitulation.

During the last few years of the housing boom, the mantra of the real estate industry has been: real estate never declines.

Right now, with prices falling in many parts of the country, the latest mantra is: if you buy and hold you will always make money.

But isn’t that true of any asset class?

If you bought gold in 1981 at $803 an ounce, EVENTUALLY you’ll make money (buyers are still waiting 26 years later.)

If you bought the Nasdaq in 2000, EVENTUALLY it will again top its all time high over 5000.

But I ask you: is that any type of sound investment strategy? It doesn’t seem like it to me.

History has shown that it does matter when you buy an asset. Buying at the peak of prices has never been good (for any asset class.) But if you had bought the Nasdaq in 2002, you’d be sitting on a nice little sum right now.

To me, real estate as an investment is over. Maybe in five years it will be attractive again. But there are still investors who are buying what they think are cheaply priced condos. Many become landlords (even without covering their mortgage.) To them, they’d rather lose money every month in anticipation of making big gains sometime in the near future.

Again, I ask, is that any way to invest? Whoever heard of such a thing?

Booms lead to strange behavior. We saw this in 2001 and 2002 as stock market investors piled into the Nasdaq tech stocks thinking that they were a value and would again recover. They did not and have not (with a few exceptions.) In 2003, a work colleague in Chicago said one of his friends worked at Brocade and it was “going to explode”. It was trading at $20 at the time. Instead, it dropped down to around $4 a share and has stayed there ever since. So much for that stock. Even in 2003, my work colleague still “believed” even though it was nearly 3 years after the initial collapse of the dot-coms and the Nasdaq.

When I see people buying investment condos (Money Magazine has a section on where the best “deals” are in condoland right now) I think, “Brocade.”

Ask me again in five years.

Will investors buying now make money off the Miami condo?

Eventually.

I prefer to make money now, instead of eventually.

According to the local media in Sacramento, nearly 20% of homeowners now have homes worth less than their mortgages.

And the housing bust has only just begun.

That means there are thousands of homeowners who, for the most part, cannot move and cannot divorce (and have to sell.) From News 10:

Nearly 20 percent of Sacramento homes are worth less than the value of their mortgage. Some 3,400 Sacramento County property owners faced foreclosure in the first quarter of 2007, up nearly 200 percent from 2006. Sacramento County ranks in the top ten nationally in the number of foreclosures.

Prices continue to decline in California’s capital. They haven’t yet reached “Bear Market” levels however. From the Sacramento Business Journal:

The area’s median-home price — meaning half the homes sold for more, the other for less — dropped 10.5 percent to $409,990, from $457,950 a year ago. California’s median-home price fell 6.2 percent to $431,450, from $459,950.

If you bought at the peak in Sacto, it will be years before you even breakeven (if the experience of LA in the early 1990s is any indication- where it took 7 years before prices recovered.)

Sacramento is not a small city. Multiply Sacramento by many of the major cities in California (and Nevada and Arizona.) You can see the extent of the problem.

Too many investors got into the game in Sacto. I knew of people buying homes there because it seemed “cheap” compared to San Francisco. Well, there’s a reason for that!

Just because housing is cheaper than in your hometown doesn’t mean it’s a bargain.

How low will prices go in Sacto? In my opinion they have at least another $100,000 to fall. At the minimum. Salaries still do not support even the current housing levels.

Stay tuned. The housing story is only just playing out in California.

How many million dollar homes are for sale in your neighborhood?

Drive around. I bet it’s more than you think.

In Chicago, from what I can tell from public real estate listings (not being a realtor myself), there are over 550 single family homes priced at $1 million or more within the Chicago city limits.

That doesn’t sound too bad (in a city of over 2 million.)

But add on the condos and there are another 650 of those (and that number doesn’t include new construction inventory that does not show up in the listings.)

Over 1200 properties- all awaiting very rich people to buy them.

That’s just in the city.

DuPage County- which is west of the city and considered one of the five richest counties in America- has over 800 single family homes over $1 million. Chicago Magazine’s blog Deal Estate has some sales figures for Hinsdale, an extremely upscale suburb west of Chicago:

In tony Hinsdale, the playing field is dense with multimillion-dollar homes. This week there were 24 homes listed for sale for $2 million or more, according to data from the Multiple Listing Service of Northern Illinois; over the past year, the suburb had 18 sales in that price range.

Lake County- home to the Barrington horse country- has over 850 homes.

In Cook County (minus Chicago) which includes the exclusive North Shore suburbs and towns like Oak Park and Park Ridge- there are another 1300 for sale.

If you are in the market for something around $5 million- you have your pick of dozens of homes.

Who is buying them all?

Apparently, no one.

Take 1431 N. Astor in Chicago’s Gold Coast. It is a beautiful single family home on one of Chicago’s most prestigious streets. It was first listed for $6 million in July of 2005 (just about two years ago.) It has been pulled from the market twice and re-listed. Its current market time is 307 days. Current list price is $4.95 million. It’s been at the new price for 5 months.

Still, no one is biting.

Stay tuned for either more price reductions or ask me again in two or three years if it has sold.

Picture below:

The rich can wait longer to sell. But a glut at the upper end is never a good sign either. Usually normal economic conditions (interest rates etc.) don’t affect the rich.

It’s something to watch.