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The initial intentions of a real estate price speculator are not based on real estate investment fundamentals. Speculation is day-trader conduct that requires an acquisition to have a high degree of convertibility to cash for nearly instant disintermediation, called liquidity. Real estate is not a candidate for hot money in the hands of a speculator since, by definition, a speculator is impatient to get rich quick. If a quick flip does not occur, he grabs whatever cash can be had and returns to commodities, currencies, stocks, bonds, or other quick-cash investments. Property taxes, association fees, brokers, and lenders remain behind unpaid.

Speculation temporarily withdraws property from the real estate market, only to dump it back into the “for-sale” inventory when sales volumes tank. Property acquisition by speculators significantly reduces the supply available to all users, be they owner-occupants or tenants. Speculators do not manage the property they take title to, and they do not want tenants since tenants interfere with a retail sale to an owner who will occupy. Unchecked speculation creates a frenzy, and this in turn causes even more speculators to arrive, ballooning prices beyond any level supported by real estate fundamentals. Soon speculators are selling properties to each other, and syndicators enter the picture as speculators. Those who would actually use the properties then wisely step away or are forced out of the market, causing sales volume to peak. A peak in prices follows within 12 months.

Speculation artificially extends an upward swing in sales volume and prices until they peak. As that bubble bursts and the shot at scoring a hit on a resale passes, the downward swing in sales volume and prices are as dramatic as the rise.

Speculators do not understand that real estate is all about possession, and that property has no value to households, businesses, or investors but for the economics of its use. Most importantly, real estate is a collectible called an appreciable asset, which speculators do not recognize.

The purchase of a single family residence (SFR) for immediate resale within six to 12 months or for use as a second home is the antithesis of the basic management and care required for the use of real estate.

The primary force driving speculation is the leverage of both purchase-assist mortgages and equity financing. Availability of excessive amounts of mortgage money to finance the acquisition of real estate for profit on an immediate resale is the magnet that draws short-term owners into the fray, be they flippers or second home buyers.

Also, it seems an unspoken conspiracy exists between speculators and the traditional gatekeepers to real estate ownership – builders, lenders and brokers. In this collaboration, a Ponsi-scheme forms a giant pyramid of temporary players, commingled with necessitous homeowners, in which the first in win. The last in on the scheme lose everything and are left holding a bag of unwanted property, waiting out the market until the price is right to recover the downpayment, sometime around 2015.

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Copyright © 2011 by first tuesday Realty Publications, Inc. Readers are encouraged to reprint or distribute this information with credit given to the first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516.

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