By Mike Colpitts
Real estate is proving to be a brutal investment for many speculators, who have purchased land as prices come tumbling down as much as two-thirds from the markets peak. A major U.S. land crisis has resulted from the nearly frozen market, which has the potential to cost billions of dollars in losses for investors and banks.
Federal lending guidelines strictly prohibit lending on property less than one year before its last sale, which is federally insured. The majority of mortgages are federally insured. The practice of selling land before the one-year period became common during the real estate boom. A frenzy of mammoth proportions resulted. Flipping property as quickly as possible to the next buyer under the one year limit triggered the end of a nearly run away market.
At least one of the causes of the crisis appears to be a hole in the lending system. Many lenders made loans on property without checking to see when the property was last sold, mortgage originators told Housing Predictor.
A sampling of real estate land recordings in 5 sunbelt states shows closings were up in 2004 and 2005 an average of more than 200% with recorded prices increasing at more than an estimated 40% to 60% on average per closed transaction.
The epidemic of foreclosures coupled with many builders and speculators attempts to sell their properties has led to an over supply of inventory.
Dan Hayworth has been a land speculator for 40 years in California. “I’ve never seen anything like this,” he said. “The prices people are paying have come down so much they’re way below what I bought any land for in the past ten years.” Hayworth, who mainly buys property in Southern California, has lost more than $800,000 since the beginning of 2007. “I had to sell two large parcels just to get out from under the loans.”
The National Association of Realtors use to say that only 3% of all land buyers made a profit on purchases. Reliable statistics aren’t yet available on how much that percentage has changed.
Typically regulators of federally insured mortgages only investigate loans in the case of a foreclosure, but with the crash of land in many markets around the nation lenders are wondering whether investigations will occur sooner.
If history is any sort of guide post, land prices increased to staggering levels during the U.S. Savings and Loan Fraud Crisis, and it took years for prices to come down to a level where investors would buy it up in mass.
Many investors made fortunes investing in land. Some say it’s because of the capitalistic market place running its natural course, a sort of disturbing view with a perception of how greed eventually destroys all business markets one at a time. At least one thing about the current crisis is certain. Speculators will purchase more land as the price declines. As Mark Twain said, “They’ve stopped making it.”