Economy, Falling Dollar, Interest Rates and How it Affects Home Prices!

Hey Guys,

So, im really perplexed by whats going on at this point… There are tons of houses on the market, but alot of the REOS / foreclosures are getting 3-4 offers above list price, so in essesnce there is a bidding war going on with regard to the middle family homes (200-220K range), but i still forsee prices dropping more and here is why…

The dollar is taking a beating (and has been for the last several years), and with all the worries in the US economy i believe we HAVE to see higher interest rates (30 yr fixed is 6.33% today) to stop investors from fleeing the dollar… Once interest rates rise, less people will be able to afford houses at these prices (am i mistaken here?) House prices go down with less buyers…

I mean the same houses selling for 200K now at 6% interest are going to be a tough sell at 10-18%… At higher rates barely any houses will be movable…

everyone is seeing bargains but i see trouble ahead and have a hard timing buying unless rent would cover the mortgage, even for a house that i would like to move in for myself and live in… But, these houses are getting bid up like it was 1999 all over again…

Thoughts? Alot of you guys are pretty deep into the market and i would like to hear some of your guys opinons…

If you disagree please say so and give your reasons, im interested in getting some sort of debate going as the rates are beginning to rise and peoples income is either decreasing or staying the same while inflation is going up…

I see debate as a way to clarify misconceptions whether in my own head or others perceptions as well…

I would love to hear from folks who lived through the 80s & 90s with the S&L crisis as well (by lived, i mean folks who were actually old enough to do business/remember repercussions such as house prices as interest rose and dollar weakend)

Thanks,
Karim0028

karim…

cash is king…point blank…

Karim, Since RE is very local, you’ll get different opinions depending your location. But I do believe there will be more REO’s than the banks can handle. There may be some good deals out there for owner occupied SFH’s, but these same SFH’s may not cashflow to make a good INVESTMENT. When people get nervous about the economy, they hold back on their purchases ( even houses). They don’t want to lose their jobs AND a house. When it comes to interest rates, what’s stopping investors from offering to buy/sell using owner financing at a rate better than the banks? Even if the rates do increase, they’re not going to raise them to double digits quickly. That would take a while I think.

yeah, but what would happen to the house values and the overall economic system? Right now 90% of sales are pretty much REOs. The banks aren’t going to sell to anybody and take a note… They will have to drop prices to levels people can afford at higher rates, correct? The way i see it, a rising tide raises all ships and a sinking tide brings them down…

Here is how i think about it… The bottom line value of any RE is its income potential at the financiable interest rate… For instance (example, i dont have a calculator with me), If at 6% i can buy a house at 180K and get cashflow then that homes value is around the 180K range, at 10% interest i cant make it cashflow unless the price goes down to 130-40K range, so at those rates that would be its value. And yes, if your selling privately you can always take a note for less than prime, (but then your losing money) and for REOs selling next to your property the comps will be lower… At least thats what i see, please correct if im wrong…

And as for raising rates quickly or not… The point is what happens if/when rates go to around 10%+? At this point with the devaluation of the dollar that is not inconceivable… Greenspan himself (in a book he wrote AFTER leaving the Fed) mentions that rates will have to go into the double digits to combat inflation as well as strengthen the dollar…

Karim, When the banks have REO’s, the REO’s are a liability. If someone doesn’t buy them, they cost the bank money in holding costs AND the loss of income (interest). They would gladly take a huge loss on a purchase price in order to get that property back into their asset column. If they finance the REO to someone at $50k less the original loan, that new loan will make them money over the course of the loan. Just look at the total amount paid on a $100k mortgage over 30 yrs. Instead of the total pmts being $240k (or whatever), it would be $120k. I’m oversimplifying it, but the point is basically that I think the bank would like to finance this property to a qualified buyer in order to get that mortgage (income).
When it comes to home prices falling, they’re not losing value. The values are just coming back to realistic levels. People run into trouble when they think their house value will always increase. So they think refinancing for this or that is a smart move. Then they have a drop in income for whatever reason and realize they can’t make the pmts. They try to sell and also realize their home isn’t worth what it was when they took on the added debt. They have no reserves to get them through the tough times. When push comes to shove, they’ll let the bank foreclose. Interest rates are still decent for qualified buyers. It will take a while for them to reach double digit levels. That’s why people are able to afford the REO’s right now. But savvy INVESTORS won’t buy them because the the price is too high for them to cashflow. The economy is getting worse and unemployment is going to rise along with prices for the products we NEED. People don’t NEED houses. The ned a place to live. People will start deciding what they actually need instead of what want.
Selling your home with owner financing to a QUALIFIED buyer for 7% interest rate instead of the 10% they would have to pay att a bank is a smart move. Think about it. this business is about CASHFLOW. If I can get $1100/mo. for 30yrs. on a $165k property without the responsibiities of a landlord, that property would generate $395k over the loan term. Compare that to the $165k one time pmt if they had their own financing. In my book, you’re not losing money on owner financing, you’re MAKING money. If its good for the bank, its good for you. Damn! I just realized how long this reply was… Sorry! :cool :biggrin

The big key to owner financing is a quailified buyer, going through similar requirements the bank does for DTI, just not the strict credit worthiness as much. I never penalize someone because of unpaid medical bills (we live in a society where not everyone has health insurance even with a good paying job). I like to get a 3-5% downpayment , but market at 10% DP at beginnings and look for a 8% interest rate with a 3-5yr balloon, however I try to sell my notes after closing them as well.

Ex. 200K home price. I owe $100K. I get a 5% downpayment of $10K (now I owe 90K). Loan is for 190K. I then sell note at 65LTV for 124K. Net profit is 10K+24K=34K plus the 8% interest is $1267 a month into the profit. say it takes 6 months to sell the note.
34K = 7,600 = $41,600 Profit.
I owed only 100K on the home. I made a 41% ROI on investment in less than 1 yr and the investor who buys the note has 35% equity and a performing note hopefully. Plus plenty of interest.

yrush2000 - I am having a hard time seeing how you came out ahead in the above example… So you started off with a property where you had $100k in equity ($200k home price - $100k mortgage). And ended up getting only $41.6k “profit”, which you did not calculate correctly because you forgot you still had to pay your $100k mortgage during the 6 months it took you to sell the note. So your “profit” for each of those months is not $1,267, it is the difference between $1,267 and the mortgage you had to pay.

Wouldn’t it be better to sell the house at a discount ($180k or even $170k) and get the equity out?

I am probably missing something in your strategy, but I don’t see it as a good one… :O)

Have a nice Sunday!

Yeah Yrush, somthing doesnt seem to add up in your example… But, again; we are talking cashflow. But, what about price? The price of the home seems like it would go down… Are you guys saying that at 10% lending environment the 200K house will remain at 200K value?

As an american society we seem to have gone the way of the car salesman; “how much can you afford monthly”? With 200K at 10% you just priced alot of the people out of that market… Not to mention the banks dumping property all around the neighborhood. I simply dont see how houses will appraise for the proverbial “200K” if the house down the street just sold for 150K…

I am simply referring the seemingly coming lack of affordability in the loan market. The dollar is becoming devalued; dollar investors will begin to search for higher interest based on the risk of holding the dollar as an asset… If you held 100 dollars and 100 Euros in the last 5-8 years you would have seen your 100 dollars buy ~60 Euros now vs around 110 Euros 5-8 years ago… That is loss of value/buying power plain and simple…

I think the homes that were overpriced/overvalued will start to come down to realistic levels. If you leveraged yourself at an inflated (false) value and you need to sell for some reason, you’ll take a loss. At one point in 2005, my home’s MARKET value was $275K. I knew my home was more in the $165k range due to a recent appraisal. Now the MARKET VALUE has fallen back to the realistic $175k range. If you’re doing an owner finance, generally the price is a little higher but the monthly pmts are more affordable if the interest rates are much lower than a bank. We are a nation of CONSUMERS. Just tell us how much it is per month. If we can afford the pmts., we’ll buy it!! Your home is only worth what someone is willing pay for it. As far as an investment property goes. The income the property genereates is the deciding factor for price. But if the interest rates go into the double digits and you’re financing is tied to those rates, that will lower the total purchase price. If your mortgage is higher, your cashflow will go down. However, I don’t see the interest rates raising quickly. That would be too much too soon. They’ll start creeping back up but it would take a while to get them into the double digits.