The 64 Million Dollar Question
Several readers have a question about home values. “There are many would-be homeowners on this blog, like me, licking their chops as housing prices dip. They are eager to buy when the market bottoms out. ‘But here’s my 64 million dollar question; how does one make a good buying decision in a down market? What characteristics of stable neighborhoods should we be looking for as we seek our dream home (or dream investment) in this rather unstable time?”
One responded, “Maybe I’m overly optimistic, but I think it may be a less frightening undertaking than it first seems. Let’s suppose that things totally crash and burn; you’ll be able to see that things are still going down when it’s happening, and afterward people will be really reluctant to buy back in. So, there would be a prolonged period when everything had bottomed out and you could then take your time sorting through your options to find the right situation.”
“Or let’s suppose that..we see a relatively soft landing. In that case, the period when things have bottomed out will be shorter, and it also won’t sink to the same depths, so your chances of a nice neighborhood totally going to pot are slimmer too. I’d say that if you’re a generally prudent individual then you’ll probably be in a generally good position to find yourself a nice, stable (and affordable) home with not too much to worry about.”
Another reader added, “How will the less established areas fair. Especially those with high vacancy. We all know the consequence of sprawl. We must now ask, what is the consequence of super sprawl?”
One had an answer, “Here’s a simplistic answer (in that it probably will not find you the absolute bottom, but you can know that you are getting a good deal): buy when you could rent the home and withdraw 10% (or 10 year treas +3%) of the home’s value per year after all your costs are covered as if you had financed the home using 100% fixed rate mortgage (to account for your opportunity cost of downpayment money).”
This reader sees a time horizon, “Every housing run up and run down (SOcal in 1990s…Japan, etc) has happened VERY gradually. The San Diego market was at a bottom for about 3 years. Interest rates and the stock market also play into the equation. The best advice is to buy a house as a home with a loan you can stomach for 10 years…Maybe 5 years if you think we are near a bottom!!”
Another had this advice, “Pay attention to all the details the bubble pushers ignored. As soon as the cost of ownership obtains parity with renting you will be pretty safe. You may not catch the bottom, but you will be no worse off and the much touted bennefits of ownership are real. If you are disciplined enough to save enough to pay cash, go to the courthouse auctions observe and learn.” “In the mid 90’s auctioned property went for between 1/2 and 2/3 of retail value (ie. 60k homes sold for 30-40k). You must be very careful and assure that the auctioning party has the sole interest in said RE. Contact the auctioning party to determine the terms.”
“Don’t bid on anything till you have done your homework and talked with anyone at several auctions that will give you some time. Look at as many housed as you can and make YOURSELF the best judge of VALUE. A good agent is vital at the bottom of the market. If you become the best judge of value out of all your peers you will not hesitate on the real great buys, and believe me there will be no hurry, there will be more really great buys than you could possible purchase. You must keep your powder dry for the optimal purchases.”
“Nothing sucks more than to be making a GOOD purchase (that precludes you from anothet) when a FANTASTIC purchase surfaces. Like I said above, there will be more FANTASTIC buys than you could possible entertain.”
When you see a picture of a house next to a bear or falling off a cliff on the cover of Time Magazine, that will be a pretty good indication that we’ve hit bottom.
An excellent observation - I used to use the cover of Newsweek and Time Magazine as reverse indicators. I will not forget the 1975 Time and Newsweek covers that both said “The Death of Equities”. The stock market never got lower.
“” the 1975 Time and Newsweek covers that both said “The Death of Equities””"
Wasn’t thee year was 1982 or was that a Biz Week article?
I have a question for the bears:
If people can barely make their PITI payments at 3 times what rent would be, that tells me there is room for rents to go up *alot*.
Isn’t it likely that rents will go up before housing prices deflate? In which case, sitting on the sidelines with cash doesn’t actually solve a housing bear’s problem.
What then?
there’s way to much supply for this to happen. all of the new construction and condo-conversion is going rental in 6 months-1 year. I think rents will drop, if anything
Supply and demand silly! all the “investors” have flooded the rental market so that there is a HUGE selection of rentals to choose from. We can almost name our price. Rents are not going up any time soon IMHO.
Once the bottom feeders start buying units @ 20-50 cents on the dollar they won’t need as much rental income to make a decent return on their investment. During the last bust in Denver in the early 1990’s, units actually sold for 10 cents on the dollar from their high.
You are correct that sitting on the sidelines is in itself a substantial bet that the bears’ view of the world is correct. In my own case it is the only thing to do as my rent would have to more than double before buying started to make sense.
mad tiger
On the other hand for people whose jobs/career requires mobility at the 5-10 year interval bubble sitting is the smartest thing to do.
I think that there is a tremendous amount of Inadvertent bubble sitting due to larger life circumstances like career and the need to be mobile.
Yes–not only a tremendous amount of inadvertent bubble sitting but also a tremendous amount of buying and selling of real estate due to larger life circumstances like career and the need to be mobile. The bottom line for any buy/sell/rent decision should be the quality of life that will follow, not whether you are selling at the absolute top or buying at the absolute bottom.
The problem with buying now is that prices are so outrageous it can have a persistent negative impact on quality of life. This was not always the case, even at the top of the market. My parents bought a house over 40 years ago for $40k. It is a great house in a great neighborhood and they enjoyed a great life. Their mortgage balance was only about 2x my Dad’s income. In retrospect, whether they had paid $20k or $60k for the house would not have made a whit of difference in the quality of their lives. But prices are so outrageous and buyers are so stretched that same cannot be said of today’s market.
But your comment shows that you, too, are a bear. If you believed the current slowdown is a blip and that prices would go up by 20% each year for the next decade after 2006, then home equity gains would pay back more than another rental payment.
Rents go up based on salaries. People can barely make their PITI because they have used exotic financing. You cannot get exotic financing for your rents.
Furthermore rents are even “stickier” than home prices, as people can easily double up or open up a spare room as I’ve said many times before.
Both prices and rents are ultimately based on supply and demand. There is too much supply, and ultiamtely both have room to drop or be lose value to inflation.
As a home owner, you don’t want rents to go up. Rents are a big part of core CPI that the Fed has to respond to. If Rents have gone up as much as home prices do, we would have had 15% or more hyperinflation in the past 5 years, and the Fed would have raised the rates to a level that home prices will be down to 1985 level.
Besides, rental vacancy rates are at 40-year high. Landlords are killing each other to get tenants, so average rents have actually gone down in the past 5 years.
Come on, it’s a market economy, if landlords can raise the rents without losing tenants, they would have done so.
If rents go way up, they will take it out of the CPI calculation.
“Relax, inflation is under control’
When alot of people have been foreclosed out of their homes, the demand for rentals will increase significantly.
Let me try to explain how this works in SIMPLE language.
A million people foreclosed out of their homes = a million AVAILABLE rentals. Oh yes…. you’re probably going to argue…. “No they’re NOT available because the people who just bought them are moving in. OK…. and did THESE people just come out of living in a cave …. or do you think there might just be the slightest possibility that they are creating another void to fill ‘elsewhere’ ? I think one of us needs to take ‘logic 101.’ Can you (using logic now) figure out who that would be?
You must be really insecure. The only way you can make your point is by attempting to belittle someone else. Baseless ad hominem attacks do nothing to build your case.
As I stated in a later post, a million foreclosed homes does not equate to a million available rentals. Why? Because the banks own the homes after foreclosure. When credit dries up, landlords will be in no hurry to buy these if they can’t turn them cashflow positive.
All those foreclosed homeowners are vying for extant rentals. The result is a scarcity of rentals and increased rent.
Your PITIful argument is fundamentally flawed, in that it only considers the demand side of the market. The elephant in the room which you (and the media) ignore is burgeoning supply.
As I said:
When alot of people have been foreclosed out of their homes, the demand for rentals will increase significantly.
Yes, the foreclosed will need to rent, but I don’t think their house will stand empty. It will either be rented or sold in fairly short order.
Rental prices are set by how much renters are willing to pay, not by how much they can afford to pay. If a landlord tries to set his rent above the market value, the renter will simply leave and rent from a competing landlord.
In order for your scenario to pan out, all landlords would have to get together and agree to fix their prices far above market value. That degree of cooperation is highly unlikely.
No, demand might rise because the number of homes actually owned by landlords drops (due to a large number of homes being foreclosed and owned by banks) or because the number of renters rises drastically (since they can’t make the payments on their homes and are foreclosed on) or both.
I bet migration to NO will really rise, as homes down there will be more affordable to newly bankrupt Californians.
Rents will drop also. When the bubble pops = recession and many people might have to rent mobile homes. There will be a big jump in mobile home manufacturing when the bubble pops. Trailer parks are endless in the U.S.
Look at recent history. There have been a couple of good postings on this blog and others with headlines from the previous housing boom/bust cycle of fifteen years ago. As must be obvious to all but the most obtuse homeowners we left the boom phase in mid-2005 and have entered the bust. No one knows what the duration or magnitude will be.
Markets don’t move in straight lines. There will be some “dead cat bounces” –or as I prefer to characterize it, the cat will manage to grab hold of the fire escape stairs a time or two on the way down. Don’t obsess with timing the bottom because no one will know we’ve hit bottom until the upturn begins. You will have some opportunities this year and even more next year and even more the year after that and even more the year after that. I think you’ve got five years to find your house, so take your time.
For example, with credit to socketsite.com:
“Learning From Past Mistakes”
A couple of excerpts from a New York Times story published in 1984:
http://www.socketsite.com/archives/2006/02/history_repeati.html#more
I am betting there won’t be a soft landing in today’s scenario. Too many I/O loans, ARM loans and speculators out there with multiple properties…which will all crash and burn. I am betting foreclosures will kill this market in the end and bring down prices within a year or two.
We have had market runups in the past, but from what everyone is saying, the amount of speculation, risky loans and rise in prices has not been seen since the great depression. I think the market may crash hard.
My dad bought a home in the early 80’s for 80K+/-. When he sold it 15 years later (1996) he only got 80K+/-. What brought the home price back down to his original purchase price was a spat of recent foreclosures in the small farming town he is from. A few people in his neighborhood had walked away from their homes and basically gave the keys to the bank a year before he sold his. He had to sell it because he was having another home built on a construction loan.
I have witnessed first hand what foreclosures can do to a neighborhoods appraisal value. I also have a feeling alot of the “no money down”, I/O, ARM’s and speculators will be handing their keys to the bank in the coming months.
Someone posted the foreclosure rate in Cali in a previous post. Just as I said over a year ago, the monthly foreclosure increase will be rising just as fast as home prices did during the boom when it’s all said and done. Too bad I can’t talk my wife into waiting any longer.
Nayrab,
I agree with you wholehartedly. In fact, as I read your every sentence, I kept saying to my self this is my sentiments exactly. But I was dismayed to read your last sentce. Why can’t you talk your wife into waiting? What is the rush for you guys to buy at the top (or close to the top) of the market? Is there a pressing NEED or is it just a want?
Get some balls and tell your wife that you are renting to protect your financial future together.
She’ll understand much better when you show her how much prices plummeted and how glad she should be not to have lost all that money by foolishly buying in now.
I at least convinced my wife (AKA She who must be obeyed) that we should sell our house, she decided that we should buy a condo. Alas at least it reduced my exposure by $250,000 with no mortgage.
Nayrab,
Agree with the others. You need to take a strong stand. There is NO reason for your wife to force you into becoming a debt slave for many decades. You will be STUCK in a declining asset for many, many years. The bottom will not be reached for a long time (years, not months, IMHO), and she will set you up for many unhappy years. This will cause strain in your marriage which can lead to divorce which leads to selling your house at a loss. DON’T DO IT!!!!
p.s.: I am a wife, so I can say this!
Be careful about purchasing at foreclosure auctions. I have bought at least 20 over the years including my current home. There are some serious risks for the inexperienced. Even the most experienced and knowledgable occassionally get burned.
Hey vain…can you elaborate on exactly what those risks are and the mitigating factors one can take. Thanks.
Observer
Please don’t call me “vain”, it reminds me of the Carly Simon song in the early 70’s when I used to point at my older sister (the cheerleader). I hope everyone knows that it merely means Virginia Investor.
I can only speak to the risks in Virginia - other states have different procedures. First of all, there are alot of people who buy foreclosures for a living. They know what they are doing. In Virginia, you can not see the interior of the house prior to the auction. Look at the outside condition and make your best guess on how well the interior has been maintained. Definitely check the comps. IF the house is vacant; be assured that the pro’s have broken-in and know the exact condition of the property. You will be at an extreme disadvantage if you don’t have the same knowledge.
You need 10% cash or cashier check at the auction. This is not refundable. If the property turns out to be a disaster or you simply got caught-up in the bidding and overpaid - you will lose this money. If you default (fail to close) the property will be resold and you could lose even more.
You must close within 15 to 30 days (read the Trustee’s Notice). In other words - no loan contingency, no appraisal, no inspection of any kind. You must have your financing lined-up. I always paid cash; usually using credit lines on other properties.
There are other issues involving Title (judgements, IRS liens, etc.) that are not as scary as they seem. Despite all of the foregoing; someone who wants a home to live in can get a terrific deal. Investors have to factor in closing costs in & out, carry costs, profit etc.
I bought my sister (the cheerleader) her 1st, 2nd, and current home at auction. And people, I am not talking about HUD, VA and Bank REO property. Those properties only went back to those agencies because they did not sell at the Courthouse. In other words, the lender was owed more than the “investors” were willing to pay. Hope this helps.
Thank you very much, vainvestor. You’ve done me (and hopefully others) a tremendous amount of service. It is obvious I have a steep learning curve before I start investing in foreclosures. Again, thank you.
vainvestor said: “Please don’t call me “vain”, it reminds me of the Carly Simon song…I hope everyone knows that it merely means Virginia Investor.”
I too thought “vainvestor” meant “vain investor.” You might consider changing your screen name to “va_investor.” At least that would be better than “virginvestor.”
Mad - why the arrows from you? Not the first time. Have I insulted you in some way?
arrows? I think he’s just being honest - that’s what I thought too. It’s a big leap to guess that vain vester means VA investor.
I suggest using VA_investor too. Keep up the good posts.
I am now known as va_investor. Thanks for input.
I have a question for the bears:
If people can barely make their PITI payments at 3 times what rent would be, that tells me there is room for rents to go up *alot*.
IMO, that is wishful thinking. The market is now glutted with vacant investor-owned properties. Many are desperate to get renters into those properties to snanch some (read 1/2 of the mortgage pmt) of their red ink. It will take a *long* time for the market to burn off this glut, so rental prices will remain depressed.
The smart money is renting these days.
Regarding the topic, when the cost of owning drops *below* the cost of renting, the market has overcorrected and it’s time for the ol’ bottomfisherman to start afishin.
Also, I would assume there’s more of a natural limit to rental prices in relation to local incomes since all the exotic loan and leveraging mechanisms that are inflating home prices don’t apply.
freeloading roommate–This is an excellent point.
Great point!
I make fun of the top all the time (Oct 6th shortly after breakfast). Hopefully people understand that is a jab at market timers. You cannot exactly call either a top or bottom or turn. Don’t fight the trend. Don’t try to catch a falling knife. Leave the first 10% and last 10% to the speculators, be content with the middle 80% of the market. Don’t go eBay (auctions, etc) unless you are experienced, meaning just because a property is distressed and sold at auction or foreclosure does not mean it is a good deal. Fully expect the first few courthouse steps sales to go for over asking prices. It’ll be two years before houses in the bubble areas clear out the confusion of the crash and an orderly market is restored. If you cannot negotiate a disorderly market wait for the banks and courts to get set up to handle the process. What will the indicators be? Just guesses this far out but I expect commercial real estate vaccancies to turn before residential, sales of consumer durables should lead, stuff like that. It’s really far too early to call the emergence from the bottom when we don’t know how far we are falling.
Robert,
Good point. To elaborate on this, the National Bureau of Economic Research is the organization which dates recessions. However, they only establish these dates (months / quarters in which recessions begin and end) retrospectively, as nobody knows contemporaneously whether the economy is in a recession, or a depression for that matter. Even more amazing is a quick review of the editorial stance of the WSJ after the onset of the Great Depression. While it seems clear in retrospect that it began in October, 1929, the WSJ editorial board and many of the experts whose opinions they relied on remained in denial for months if not years thereafter.
when everyone looks at you like you’re an idiot
dec 07 maybe ?
Comment by Pata Nahin
I have a question for the bears:
If people can barely make their PITI payments at 3 times what rent would be, that tells me there is room for rents to go up *alot*.
Isn’t it likely that rents will go up before housing prices deflate? In which case, sitting on the sidelines with cash doesn’t actually solve a housing bear’s problem.
What then?
In every market (rental or home sale), supply and demand dictates the price. Right now, house prices are extremely high compared to income levels and rent prices. Housing demand should depend a lot on income levels and rent prices, so there must be another explanation for the high demand in housing, and thus high prices, we saw the past few years.
It looks like we’re in the middle of housing a bubble, which means an irrational, unsustainable increase in prices. An assest price bubble develops often when there is easy credit (fancy new mortgage products, like interest only loans) and a wave of inexperienced buyers (today we have lots of new investors hoping to make it big).
If we are in a bubble, then at some point buyers will realize that housing is overpriced, and demand will plummet. We may be experiencing that now. All those new investors will pull out quickly, and many with exotic mortgages will face foreclosure unless they sell. A fall in house prices is therefore more likely than a rise in rents. This is because rents will depend very much on current income, and it doesn’t seem like the economy is strong enough to support higher rents.
I guess one important question is whether housing prices will fall or remain flat for a very long time (maybe ten years?). I think that there will be some significant price falls. But even if housing prices remain flat, inflation continues, so the real price of homes falls.
I can only go by past history. In the D.C. area it took almost ten years after the last peak (1989) to get back to those price levels. As one who bought 8 properties at the “peak”, it was not pleasant. We just buckled the seat belt and hung-on. Rents did not drop appreciably (no pun intended). As long as you can afford your monthly payment - don’t allow price drops to make you crazy. Life is too short.
RE: how to know when to buy?
One thing I’ve noticed from the OFHEO data is that a market tends to bottom when the deviation of the 20-quarter moving average of the housing price index bottoms. For example, look at the bottom plot of California. Using this criteria, you would have bought in 1985 and 1995 (or soon thereafter). I think this works best for the boom-bust markets (CA, MA, …).
I realize that moving averages are lagging indicators, but the idea is not to catch a falling knife, so this is a way to get close.
How do you know when the deviation is at a minimum?
We’re at a very interesting time in our history. There are a lot of people who think housing prices will just “bottom out” and they’ll just jump in and ride back up, happy as a clam. Problem is…. there are many other factors to consider, like the government debt and deficits, declining wages due to outsourcing of jobs and importing cheaper immigrant labor, the coming wreck with SS, Medicare and pensions, civil unrest, terror, and energy. Buying a spiffy new home is going to be the last thing on my mind when the s*!t really hits the fan.
“There are a lot of people who think housing prices will just “bottom out” and they’ll just jump in and ride back up”
**I’m not one of those people. I think the bursting of this bubble will eliminate the idea that housing is an investment (excluding income producing rental property). Long term demographics are very unfavorable for real estate. After the froth is wiped away, we will be lucky to see housing track inflation over the next 10+ years. Don’t buy unless you’re comfortable paying off the mortgage
To refine your point a bit, l-t demographics are very unfavorable for the mix of new real estate we see under construction. Empty-nest baby boomers will not be interested in paying the upkeep on McMansions with many unused rooms.
Aren’t we getting a little ahead of ourselves here? I’d like to pick up a bargain as much as the next guy, but so far, no crash here (in So. Cal.). And there are a whole lot of other people just like me waiting to buy, so whether prices will really fall, remains questionable.
and there are a whole lot of other people just like me waiting to buy, so whether prices will really fall, remains questionable.
If “homeownership” rates are at all-time highs, this statement doesn’t make sense. I think people waiting to buy (us bubble sitters) are in the minority.
IMO, when the flippers from CA have to start covering their losses in places like LV and PHX, it will impact the CA markets greatly. Many have mortgaged their primary CA homes 100% to buy properties to flip elsewhere. When things really begin to slide, they’ll not only loose the flipin’ properties, but they’ll loose their primary CA home as well.
and to make things more interesting, this also applies on an international scale. There are many levels of leverage.
You are looking for an overnight correction, which will not happen. However, the crash is already underway, if you view the situation on the right time scale.
I hope you are right, I really do.
Take a look at the Toll Brothers stock chart on the 2-year basis, then click on “All data” — you will see in the “all data” view what I mean by needing the correct time scale to see the crash underway.
(http://tinyurl.com/cyhbl
BTW, I am no technical analyst, but nonetheless I would describe the appearance of the two-year TOL stock chart as a “head-and-shoulders” pattern, with the stock price currently sliding down past the elbow towards the nether extremeties of the body.)
Similar comments apply to the inventory buildup currently underway — 50 or so net new homes on the market each day in greater SD does not seem like much of a big deal, but if you multiply by 730 days (= 2 years) then you are talking about 36,500 new listings, which is a big deal. We will never get there, because by the time listings get much above 20,000, the inventory correction will morph into a price correction, which will limit future new supply (and make homes more affordable).
I couldn’t agree more, LAinvestorgirl.
I know the Canadian real estate market is not necessarily representative of the us market but our real estate market also collapsed in the beginning of the 90s. We bought our first house at the trough in 1995. All the houses we’d visit were owned by couple a decade older than us who had bought in the peak and were now splitting up.
They called it a buyers’ market but you couldn’t get a nice house. All the desirables were not on the market.
People in a good financial postition as a rule will not sell their house at a loss.
Maybe this times was different because there has been a lot of construction but when the market slows and it becomes a buyers’ market again, I have trouble believing that the houses that will be coming onto the market will be the gems.
Great:
1. Buy a fixer at a fire sale price.
2. Turn it into a gem using work-hungry contractors.
3. Rent it out at break even cashflow.
4. Sell it five to ten years later.
5. Profit!
Keep your balance sheets clean, people. The hard part will be getting cash/loans.
I have heard some stories from people who purchased during the 40% price drop in the Netherlands around 1980. I think you can get very nice homes at a big discount if there is such a serious crash, but not if you buy at the bottom - by that time most of the good homes are already sold.
If there is a steep price drop, owners of expensive homes will get into trouble just like owners of cheaper homes; if there is a slow drop, people with a good salary usually have enough options to keep their home and it’s probably more difficult to get a nice home at a bargain. Also, a slow drop usually means that cash on the sidelines does not work as well, because the cash is erased by inflation.
You don’t realize how many gems are owned by buyers who purchased with suicide loans. In five years, many gems will come back on the market as part of the bankruptcy workout process.
I’ve always believed it was very simple… buy when the total PITI runs close to the cost of renting.
I believe PITI may actualy overcorrect below rental cost, but why bother trying to catch that? If you are paying 10-15% more than a renter, but owning, how can you complain?
But I agree we are getting ahead of ourselves… we’ve got another couple years of dropping at least and then a few years of stagnation I believe. At LEAST. Look at Japan.
“If you are paying 10-15% more than a renter, but owning, how can you complain?”
Ask the recent Japanese buyer whose home lost an additional 15% of its purchase price, even after the big initial post-90 drop.
Thank you very much Ben for posting this, and thanks to all those who offer insights! Lots of good info about foreclosure (thank you va…investor) and investment properties. Here is another facet I’d like to address…how would you approach investigating a neighborhood where your own personal residence will be located? How do you make sure, in down-market times, the nabe will be a safe investment over the long haul — what are the signs of a sour neighborhood and what are the signs of a stable one? Thank you all again!
PS Ben pls put alert when you have your donation function secure - I’d love to contribute - you really helped me get out at the right time!
housegeek,
Thanks, it should be done by Monday.
Only if you don’t care about the price drop a few years from now.
Most homes in SoCal will drop between 50 to 80%, so it’s a lot of money you could have made.
Currently PITI in SB is 3.5 to 5 times of rent. Also, don’t forget commissions and other costs like changing carpet and repainting the house when you need to sell the house. It’ll cost you 10% and make owning the home much more costly than it seems.
The 50 to 80% reductions in price are crazy. Don’t bet your furure on it. If it costs less to rent than to own it will be a first in history.
This was not my post. Someone moron is posted under my handle.
As I said in my original comment, average PITI is 4 times of rent in SB now. That means homes have to fall 75% to be cheaper to own than rent. Also it doesn’t even count the 10% loss owners have to bear when they sell the home.
It was cheaper to own than rent before 1997. I was a landlord myself.
And I was a homeowner for the same reason.
Don’t bet your future on RE investments.
regarding the percentage prices could drop:
in the Netherlands there was a minor housing bubble in the seventies with about 100% price gains in 5 years. These gains were complete erased by a 1.5 year housing crash where prices dropped 40% (and the rest was erased by inflation). After that, the market went nowhere for 10 years so there was no need to nail the bottom. There was no obvious cause for this 40% price drop, just general causes like rising interest rates and unemployment.
On the other side of the spectrum, the current housing boom in the Netherlands lasts for 15 years already and has 500-1000% gains without any serious correction. Taking inflation into account, a 75-85% drop would be needed now to get home prices back to the trendline.
“After that, the market went nowhere for 10 years so there was no need to nail the bottom.”
If the return on alternative investments was greater than 0, there was a need to nail the bottom — the opportunity cost of capital which could have been used in alternative investments with a positive return, plus the loan interest paid on a nonproductive asset. But I guess if you are not an investor, these financial considerations don’t matter…
yes, I agree with that; it would have been better to wait ten years and keep the money on a savings account (high interest rates, the stock market didn’t no much either during those years). but that’s in hindsight of course … and if you are after a some very special property, waiting does not help either.
If you are licking your chops already, you will be far, far too early. Here’s the sentiment/psychological cycle to gauge this.
http://www.idorfman.com/Charts/sentiment_cycles.jpg
great graph, thanks!
I love the graph!
This isn’t really a hard question, if you’re buying your primary residence! If you like the house, if it’s in the correct location (i.e., no 90 minute commute!), if you can afford it, if the price seems right compared to renting in the area (if renting is cheaper, I’d stay away), and you’d be happy spending the rest of your life there, then go for it.
If you’re trying to make a quick buck, are counting on selling it in a few years, if it’s hours away from work but all you can afford, then STAY AWAY FROM IT!
You can’t predict where you are in a “cycle”. All you can tell is if it’s right for you…
When I see the first 50% price reduction next winter…vainvestor owes me a beer.
I’ve already seen a house in Huntington Beach, listed in September for $1.5 million- go down to $1.1 million. And we’re still at the top of the market, and just getting started.
Hey, that was not me posting that 50-80% remark. I suppose I should be flattered that someone would impersonate me. In any event, I will buy you a beer (or 2or3) if prices drop 50%. Iron City O.K.?
I’m mainly a lurker on these blogs but I just can’t contain myself any longer after reading about folks trying to buy the bottom of this bubble. I don’t understand why ownership is such a sought after position anyway? Is it the ability to remodel or decorate? The tax break? Anyway,there are literally going to be thousands of very nice homes in foreclosure in the next few years. Yes, even really nice homes are going into forclosure this time folks. I know of several mortgage agents that bought 7 figure homes this past year figuring that the good times will never end. Guess where they will be this time next year? This bubble will take years to work itself out. The first leg down should be quite spectacular but nothing goes straight down and I would expect to see plateau’s here and there before hitting bottom. Why tie yourself to a piece of property that you will be unable to sell easily while this bubble unwinds? I expect a minimum of 60% declines and possibly 80%+ in some areas. Clearly the house you buy will not be appreciating so why do it? Renting will be cheaper and leave you more flexible. There are so many serious issues facing the U.S. that my advice is to stay flexible for the next few years while some of these are sorted out.
I want to throw out a quick side note about where I’ve positioned myself and why. I hope this doesn’t sound arrogant or get misinterpreted. I merely would like to put out an alternative scenario to those who are having a hard time just sitting and watching.
Two years ago I had several investment properties scattered around the country as well as 48 condominium units under construction. It took me every minute of those two years to get all of those sold to include my primary home (I now travel around the U.S. in a motor home). I was petrified that I wouldn’t make it out the door in time, whew!
Starting in 2003 I became aware of what I will term “the silent bull market”. That is the precious metals market. I know that most of you will not become believers in this market but I can not just sit by and at least not mention it to you. I have quadrupled my money since 03 and most professionals that follow this market will tell you it is going to run for AT LEAST 7 more years. Now, if you want to understand why this is not really covered by the mainstream media and is going to make fortunes for investors then you will have to do your own homework. I would recommend going to http://www.financialsense.com and start reading the “stormwatch” series. There are dozens of links to articles written by different authors that will help you understand why this market is going to skyrocket. Please read (cut and paste this)http://www.financialsense.com/series4/part1.html this article. If you take the time to get all the way through it I believe you will have your eyes opened to what is happening in the market place. Also the energy market (oil sands, uranium, nat gas) has just started a bull market. I guess what I want to convey to everyone is that there are some incredible opportunities RIGHT NOW for you to participate in. These will take your mind off of real estate. Both of these markets right now are correcting after having run up for several months. After this breather I expect to see another 30-50% gain before another breather. Take the next couple of weeks and get educated. By the time real estate has totally crapped out you will be sitting on huge gains. It just seems that this would be a whole lot more productive course of action. You don’t have to be a trader. As a matter of fact, I would recommend against that course of action. Get a good mutual fund in either sector (or both) and hold on for the ride! Sorry to get off topic, I just couldn’t contain myself.
Sounds familiar– I sold out of SF last summer and invested some of my gains in precious metals and energy funds. Very nice ROI thus far and I think much more is to come. Think “Peak Oil.”
Think “Bernanke ends the conundrum, and all the associated bubbles.”
Think “Bernanke looks much more like Volcker than Greenspan.”
Good luck!
You seem to have discovered the next bubble, all right. Did you happen to notice any other blogs Mr. Jones runs besides this one?
“I’m mainly a lurker on these blogs but I just can’t contain myself any longer after reading about folks trying to buy the bottom of this bubble. I don’t understand why ownership is such a sought after position anyway? Is it the ability to remodel or decorate? The tax break?”
This angle is one I honestly have overlooked, but this “homeowner envy” that many express here (and which I even admit to feeling from time-to-time) is just another manifestation of the irrational psychology which fueled the bubble. There is a good chace that the stigma currently associated with being a priced-out renter could morph into a status symbol of membership in this elite club of visionaries who first understood all the reasons not to own at unsustainable record-high price levels. Two years out, even after the bubble-burst is common knowledge, it may be far cheaper to rent McMansions than to own them during a protracted correction.
How can rents increase if incomes don’t? Only by higher density, I think.
Robert - your posting describes what I just got in ABQ. Got 50K under FMV, pymt less than rent (before tax deduction), reasonable commute to anywhere in ABQ, wife’s dream house and already fixed up. Told her I don’t ever plan on moving again. But will be looking to make money with investments (no debt sure helps), as well as some money saved.
Ben - thank you so much for the education on this blog. I have been reading yours for about 8 months, and have really learned a lot from here. You, Patrick, and SoCalMort sites are all awesome and compliment each other so well. Also, many of us bubbleheads read all of them.
A good time to buy after the bubble bursts will be when home values closer reflect the true cost of land + construction + a reasonable profit margin for the builder. It should be possible to calculate this value for a home in an “average” location - such as Bakersfield, or Sacramento, CA.
Compare this value vs. the current market valuation. Homes near the beach, good schools, etc. will demand premiums. The location has a more subjective influence on price. Strip the location out of the equation by choosing a boring location with plenty of land for new development.
This should give an idea of the thickness of the bubble froth.
Example, cost of land: $50K
cost to build: $150K
profit margin: $100K
total: $300K
current selling price $700K
bubble froth = $400K
This is simple enough, I have a feeling these calculations already exist somewhere. Raw costs in less desireable areas vs. current market values.
It’s a good start, buit I think it is not that simple; when the bubble bursts, both construction cost and land valuations will drop - everywhere.
In my country, land values in most areas have increased more than 500% (even in some boring locations) and construction cost is probably 200% higher than 15 years ago (with CPI during those years at 1.5-2.5%).
Construction costs could plummet if there is a recession and demand drops, especially the labour part (which is about 75% of total cost here and has been pushed up by all kinds or legislation that protects wages and margins in the building sector).
As for land values, according to the latest figures population growth in the Netherlands will turn negative within 1-2 years and a recession will further stimulate the downturn in population numbers. I don’t think this is supportive for the current ridiculous land/home price levels.
As for the US, if there is a recession I think at least immigration levels will drop significantly which will cause a further drop in (expected) demand for housing.
rents a tied to local wages and amount of homes for rent. like in kingman az low wages and lots of new vacent homes equal low rents. in ca, orange county high wages and low inventory high rents. new 3/2 in kingman $800.00 to $900.00 mo. new 3/2 orange county $1800.00 to $2500.00 per month