BOCA HOUSING IS FULLY INFLATED

I drive to work through a middle class neighborhood in eastern Boca Raton, Florida. The street I drive down is a 4 lane roadway with small ranch style homes on each side. There is a tree lined median dividing the 2-way traffic and the speed limit is 35 mph. I have been going to work along this road for 6 years, and during that time I have periodically seen "For Sale" signs on the front lawns of the homes along the road. I have from time to time called to find out how much the houses are listed for, hoping that one day I would find a desperate homeowner who would sell their house quickly at a bargain price. In the 6 years I have done this, I have never been able to find a "good" deal.

Today I called on a house that I thought would be in the $200,000 area. The home is a ranch style home built in 1963. It is 1,600 square feet under air, with 2 bedrooms, 2 baths, and a small pool on about 1/4 acre of land. The kitchen is new and the floors have been replaced with wood. The homeowner, who is an investor and does not occupy the home, told me that the asking price was $400,000 and he was not negotiable. That's about $250/sq. ft. not in a gated community and not in a cul de sac. The driveway is on a busy street!

Curious about the stellar price tag, I wanted to know from where this new valuation came from. The house was sold in 1999, for the first time in 12 years, at a price of $125,000. In October of 2004, the investor who currently owns the property paid $325,000. He told me he made improvements costing about $30,000. Now, a mere 6 months later, this gem of a home is worth $400,000 firm. I am clearly in the wrong business and I am investing my clients' money in the wrong asset class.

This home has appreciated, (inflated, blown up) in value by a whopping 220% in the last 5 years. I do not know who the potential buyer is, but I picture the next homeowner as either a young couple with 1 or 2 children, both working at mid-level jobs, earning in the $100,000 combined. Not sure they will be peers of their neighbors who are probably in a lower socio-economic level, but over time, I am sure that will change as the values remain high.

Another real life story and I will revisit the topic in a few months or years to laugh. I know a doctor that bought a house to use as her office. Its in a town just to the north of Boca Raton called Delray Beach. She bought a small ranch style home on a pretty busy street in 2001 for $175,000, at that time the real estate taxes were $1,300 a year. She fixed the place up with about $30,000 and has been handsomely rewarded for her efforts. Today that same house is worth somewhere near $600,000, at least according to recent sales on the block. She is pretty happy about that, and bragged a bit about how she knew the house was a 'good buy' when she bought it. She also complained about the R/E taxes going up to $6,000/year, but was OK with it due to the appreciation of the property.

She and her husband have used the equity in this first property to buy 3 other houses in the neighborhood, all in "special" locations, and they too have appreciated nicely in the past 2 years. She rents the houses to Section 8 (low income) folks and gets rent from the government regularly. The properties are 1,700 sq ft homes 2 bedrooms 2 baths in a pretty run down area. These properties have doubled in value over the past 2 years from the mid $100,000 area to near $300,000 area...R/E taxes have also gone up alot, but the good doctor, turned real estate maven, is happy as could be about her investments. In fact she now has plans to further expand her property holdings in the area. She has bids in on 2 more homes and is thinking about doing a multi-family project on one of the properties after she knocks down the existing building and puts up a 6-8 unit apartment building...yes for Section 8 housing.

I asked her if she planned to sell any of the houses or her office anytime soon, as values seemed terrific and probably can't continue to appreciate at the recent pace. She told me, with a straight face, that she knows the values won't continue to rise at the same pace, but she thinks that her office property will be worth $1,000,000 in the next 4-5 years.

As for the real estate bubble not being a national bubble, maybe not, but in Boca Raton and the surrounding towns it is fully inflated...and so are alot of the very lucky real estate owners/investors in the area. My only comment to the good doctor was "just don't be the last one to sell".