WSJ Article Titled “Speculators Helped Fuel Florida’s Housing Boom” – Brilliant

January 9, 2007 – An otherwise good article in yesterday’s Wall Street Journal was headed “Speculators Helped Fuel Florida’s Housing Boom.” Well golly gee. I’ll bet there were still a few dozen people out there who didn’t know that. Unfortunately they still don’t know because they don’t read the WSJ. In fact, they probably can’t read. Of course there were many factors contributing to the boom – low interest rates, a strong economy, creative financing alternatives, a swelling boomer population with lots of wealth transferred from aging parents, and the media itself. But the presence of speculators best defined the boom.

 

Who are the speculators? The real estate market consists of the following categories of buyer:

 

Non-discretionary Buyers – These folks need to buy because of a required move, brought on by an event such as a job change, a health issue, or a sudden financial change. In any market there will be non-discretionary buyers.

 

Discretionary Buyers – They are the people purchasing second homes, retirement homes, or are up-sizing or down-sizing because of changing financial or family situations. They can sit on the sideline if the market is uncertain.

 

Investors – Investors buy property for its underlying value. They do their homework. They want to know if the rent will cover the carrying cost. What is the historical trend in the local market? What is the expected return on investment? They have a plan for the use and disposition of their purchase. They can be found in all cycles of the market.

 

Speculators – Here are otherwise rational people who somehow morph into someone who will buy a property for $100,000 more than the seller paid a few months ago on the assumption that the person in line behind them will do the same. Speculators must dress, walk, or smell differently because they always seem to find each other at cocktail parties. Here, fortified with media hype, they brag and feed each other anecdotal evidence of their shared theory of a perpetually rising market. Once bulked up and re-energized, they’re off to proselytize to others. (We must have more buyers. We must have more buyers.)

 

Currently the market is in a “correction period." Yesterday’s speculative buyers are today’s sellers. The discretionary buyer is on the sidelines. The media trumpets the bursting bubble. “Homes for sale” has been replaced by the “record high inventory of unsold homes.” Ironically, interest rates are still low, the economy is still strong, and the transfer of wealth to Boomers from their parents continues. What’s missing? Well the media hype has become media gloom. And the speculator is gone. But we already knew that before yesterday’s WSJ article.