house prices going up?

General Real Estate Investing
21
houses priced according to what the market will bear

Houses are always sold at what the market will bear, right up to the minute they will no longer sell at that price. However, the key to recognizing a bubble is that speculators are buying things at irrational and rapidly rising prices. In addition, there is always the idea that somehow things are different this time. Why shouldn’t a tulip have the same worth as a house? Things are different this time! That is the nature of a bubble.

It was the same thing in the tech bubble. Stocks were priced at and sold at what the market would bear, right up to the point that the market crashed!

Mike

22

While I don’t agree that “the end is near” with respect to real estate prices, I would be interested to hear what factors, in the opinion of the doon-n-gloomers, are specifically going to cause the crash.

So far, it seems to me that most of the rationale behind it has been that prices have been going up too high for too long. Well, that’s just not reason enough.

For what it’s worth, I completely accept the fact that there are markets where housing prices are out of line with reality. I think I read that in 2005 fully forty percent (40%) of real estate purchases were investments. That seems a little nuts, but I don’t know that it’s enough to cause a crash. I mean, supposedly rents are on the rise and the rental market is getting stronger, so maybe it was a good time to buy investment property after all.

However, and at the risk of speaking for Funder when he’s clearly capable of speaking for himself, I think there are people in parts of the country who can never seem to accept that, yes, there are markets where a 2,000 square foot home sells for $600,000, and you know what? There’s nothing wrong with that.

People pay not only for bricks and blocks and land but for location and quality of life. There are lots of people making $200,000-plus these days, and they can afford what many people might think of as an “expensive” home. That house might not have cost more than $100 a square foot to build, but it’s selling for $300 a foot because it has value to the buyer, and at the end of the day, that’s all that matters.

Did it cost $1 million to build a '60s Hemi 'Cuda? Of course not, but the demand is great and the supply is nil.

As long as there are people with incomes, there will be people willing to pay dearly for things they want. And there are a LOT of people with good incomes these days.

In 2005 when we sold our little 1600 square foot house in Montgomery County, Maryland, I thought there was no way we’d get more than $350K for it, but our Realtor advised that we put it on at $409,500. I thought he was on drugs. We got a CASH offer, no inspection, for $410K the very first day it was on the market.

I thought, “Well, some sucker just made a huge mistake. Hah!”

I looked today, and wouldn’t you know it that the same houses are today selling for $460K-plus. Why? Because there are people with good incomes who do not want to drive in to the places they work from West Virginia or Pennsylvania (as some do).

Supply, demand…supply, demand.

23

Start reading, there’s a ton of threads on this site posted by Pete that outline many of the causes of decline including tightened lending practices, reduced liquidity, etc.

If you are having trouble finding his posts click here: http://www.reiclub.com/forums/index.php?action=profile;u=13930;sa=showPosts

Here’s a few threads to get you started:

http://www.reiclub.com/forums/index.php/topic,29566

http://www.reiclub.com/forums/index.php/topic,29543

http://www.reiclub.com/forums/index.php/topic,29343

24

Home prices are expected to rebound in 2008:

http://www.msnbc.msn.com/id/19710279/

:beer

25

I saw that and don’t believe it. Based on what I’ve read lately I don’t think we’ll see the bottom until after that and then when it starts to come back up, a full rebound will take a lot longer than that.

26

As always EVERYONE brings great points to this discussion. And the bottom line is this, If Funder is in an area that has strong pricing and he’s making money on his investments? My opinion (as always) isn’t worth a dime. He put up some examples of homes in his area and their prices, they may be bargains? My point was as a whole, look at where we are in relation to where we came from. In the Northeast (the only area I can claim some indepth knowledge of) Things are WAY over priced. Just my opinion, like propertymanager, I lived through and INVESTED through a price correction in the late 80’s that went longer and deeper than ANYONE expected. Knowing that, I compare economic factors that WILL definitley effect lending like changes in laws, liquidity, debt ratios, ect. I can draw only one conclusion. We have a LONG way to go yet, before MY area (and others) see’s ANY type of price APPRECIATION.

As far as the NAR (nat. assoc. of realtors) 2008 predictions? Let me run down to my local car dealer and ask a salesman if he thinks I should buy a new car? Same amount of research goes into that response. These are the people that told buyers for the last few years “better get in right now, before prices go even higher” and my personal favorite “everything is DIFFERENT now”

I have a good friend who lives in Massachusetts, he and his wife were just about ready to sign an interest only, get in the door, loser, ARM mortgage in 2005. The home they wanted to buy was on the market for 1 DAY!!! Asking price $600,000. I BEGGED THEM not to do it. I literally drove up there with about 30 pages of financial info for them, reguarding, sub-prime, adjustable rate mortgages, everything I had. I showed them what they’d be paying when that mortgage RE-ADJUSTED, AND most important …

Where they’d be WHEN, not IF prices turned down!

THEY COULD NOT BELIEVE IT! NO ONE had laid it out for them. NO ONE! The mortgage broker just gave them percentages, he never tied dollar figures to it.
Thank GOD they held off.

2 years later 2007 ,they bought the SAME EXACT house, not one LIKE it, THE HOUSE, for $400,000 with a traditional 30 year mortgage at 6.5%.
They said " we will never be able to repay you for what you did for us"
I’m not trying to be a hero here, far from it. How do you guy’s think I learned this stuff? Answer… THE HARD WAY> Like EVERYTHING I’ve ever learned. Maybe someone here can read this crap I write, do some of their own research and save themselves a lot of grief.

That’s it.

P.S. I would NOT want to be the guy who paid $1 million for that Hemi Cuda.

WE live in THE GREATEST COUNTRY to ever exsist on this planet! If you can’t make it here, forget it. Just take some time, learn why things don’t ever change (it’s the people) an PROFIT from it.

27

DITTO!!!

some folks will NOT get it, AND NEVER WILL!!!

i already advised a few folks in chicago to wait and house prices has come down…

i also think those short sales folks will be reamed too,they think they are getting a deal but those prices are near the realistic values after the short sale (and maybe should be lower in some areas) lol hehe

my 2 cents

Robert A. Doncaster, Jr. - “RAD”
Import/Export Entrepreneur & Investor
*** DO YOUR HOMEWORK ***

Chicago Illinois USA
& sometimes Salzburg, Austria

28

I posted the realtor article and don’t agree with them. First, unless personal incomes change I can’t see it happening. Affordability is limiting growth. The rise up was fueled with cheap, easy money and short demand. The cost of money is rising, lending guidelines are tightening, speculators are on the sideline and Inventory is plentiful. Unless something changes the fundamentals to drive it just don’t exist.

29

Personally, I love to watch the two sides of this coin argue. You either spout ‘doom and gloom’ or ‘everything’s great’ with no room in the middle. People like Paul above, who is one of the masses of the in betweens are usually stuck, since nobody likes a moderate (happens everywhere).

Truth is, its usually the moderates that have got it right. Real estate is a local event, based on local happenings and surroundings. Sure, national and international events will cause change in those markets, but it is NOT what drives them.

Why is the national RE market (a myth of itself) down in the first place? Think for a minute and you’ll get it. Ca is a BIG state with BIG RE prices. If it falls, what happens to your total figure? Add in all of the Katrina area and a few other previously booming large markets and what do you have? A warped average.

Why is Texas (and others, including NC) doing so well? Where are all those Katrina victims moving? Markets there (and here) are appreciating, and I’d wager are set up to become booms themselves, yet they make very little impact on the Nat’l RE market. Why have they not become total boom markets, only slowing appreciating? Mainly because of the national doom and gloom reports, IMO.

There’s talk about another major depression coming. It may happen. Economic forces currently make that a real possibility. But even during the Great Depression, there were RE markets that were still appreciating (not booming by any stretch).

Raj

30

So basically what you’re saying is that no one likes me?

:tear:

31

We already knew that… :lol

32

No one likes US, Paul :biggrin

Raj

33

Roger,

I actually agree with your post. You’re right.

The Carolina’s haven’t seen 200% increases in home prices over a 7 year period. So, again you’re right. Your market will react differently than mine. If your market hasn’t experienced huge price increases then OBVIOUSLY things are different there. But Your market is in the minority. Come on… a few states South of you in Florida it’s a BUST like they havent seen since the 1920’s. I know, friends of mine jumped on the “things are different HERE” bandwagon, and NONE of them can sell their pre-construction condos for what they owe on them.

The point I try to make with these posts is… in most areas of our country THIS is a dangerous time to invest.

What some people may be missing here is the PERIOD we are in with relation to this cycle. If you look at a chart of housing prices in the U.S. for the last 7 years it looks like a verticle climb, staight up. We hit the top (last year) and are now coming down that slope. Compare the same price rise to the DOT COM stocks of the late 90’s (it’s almost identicle) The reason SO many people lost SO much money was they refused to believe it would get as BAD as it did. The downward curve of ANY depreciation cycle is when peoples minds start playing games with them. It’s the classic “as soon as it goes back to $$ I’ll sell” In our case it’s the “I’m not selling it for THAT” scenerio. That’s were this housing cycle is NOW. Lot’s of people DO NOT want to admit things have changed. This only lasts so long, again look no further than the dot com’s, when the reality finally hit then the SELLING really started. At that point people want to just preserve ANY part of a gain or stop the pain of more losses. Housing can not be compared 1 to 1 with stocks but the bottom line is it’s all market sentiment. And peoples interpretation of what THEY see as reality. House prices will continue to slowly fall until something changes. That change could be the THOUSANDS of homes coming to market in 2008 owned by banks, these homes are not sold with the purpose of obtaining THE best price. Oh they try, but in the end they will be sold to STOP the financial BLEEDING. Next year will be unprecidented as far as foreclosures go. It’s a fact. Look at the ARM data. If you think that huge discounted inventory being sold into a market with tightening credit standards will not have an adverse effect on pricing, things must REALLY be different where you are.

I understand that it’s dangerous to invest ANYTIME, if you don’t do your homework, don’t know your market, or don’t buy right. But… looking at the majority of the U.S. real estate market, THIS is a dangerous time. Prices ARE falling (excluding some markets like yours) and people need to know the game HAS changed. It’s changed because a few years ago you COULD be a little sloppy on your buying and appreciation would heal all wounds, you get sloppy or just misjudge pricing trends and you’re out a pile of money or worse.

No one knows what WILL happen, BUT we can look at what is PROBABLE.

IS IT PROBABLE??? that after THIS unpresidented run up in housing prices over a 7 year period the correction is over after 18 months???

NOT LIKELY!!!

As a result SOME of us (your market is good, that’s great for you!) but some of us CAN’T LOOK on the BRIGHT side, because optimisum in this type of market is GOING to cost you money.

There’s an old WALL ST. saying “NO ONE is bigger than the market”
That holds true now especially. if I invest in the market I’m in (Norhteast) with an outlook like “the worst is over, I think it’s going to get better” most likely I lose money. If on the other hand I keep a GOOD dose of FEAR in my vest pocket and invest with the feeling that things WILL get worse, I probably won’t get hurt. If it gets better I make MORE money, if it doesn’t I’ve taking steps to reduce my exposure and limit my buying to absolute steals. The days of buying houses up here with a $30,000 potential profit ARE OVER! It’s too tight, commissions, holding costs, longer sales time, and MUCH HIGHER INVENTORY levels will eat that $30K up FAST. Your neighbors in Florida have 7 YEARS WORTH OF INVENTORY RIGHT NOW!!! ( Yea, that should turn around any day now)

It’s not about who is right, who is optimistic, or who is in the middle it’s about being REALISTIC about the long range outlook in MY market.
I don’t have to be right, I just don’t want to get it WRONG.

Wrong = loss of money, TIME and effort. The thing people ALWAYS neglect to account for is loss of TIME, you CAN NOT get TIME back, and as we all know TIME IS THE REAL ESATE business.

34 
 Many people pointed out the insightful feedback in this thread and I have to agree completely.  I would like to clarify that my position on this topic is not unbridled optimism.  I completely acknowledge that these are uncertain times and that national real estate, on average, is in a correction following unsustainable growth.
 I feel compelled to address the original post by saying that California is too large a market to give a buy or don’t buy recommendation.  If you are a new investor, you should begin by conducting an exploration of your own goals.  Either decide to invest in real estate, or decide not to.  If you are undecided, you probably do not have the emotional fortitude to deal with income producing real estate.  Be willing to study and learn.  As a new investor, find an area.  Do not go all over the country or the state, or even the city looking to buy without carefully researching the subject properties and neighborhoods.  To maximize your chances of success, select a strategy, carefully choose small areas, and analyze and research them deeply.  Simplicity and discipline work well together.  Put together a criteria based upon your analysis (go to the glossary and look up gross rent multiplier or income capitalization method of appraisal).  Do not buy too much property.  Buy at enough of a discount to make your money when you buy.  Make the deal based upon your analysis and manage your own properties at least until you have enough competence to recognize good property management from bad property management.
 Once again to the original post, if you are asking for the purpose of your personal residence, many of the points mentioned above still apply.  Blanche Evans, author of  Bubbles, Booms, and Busts points out that the easily borrowed money of the last few years has resulted in buyers either getting luxury homes or buyers being frightened INTO the market, due to the escalating prices, which raised demand for apartment to condo conversions.  Her point is that older homes with no improvements were abandoned by people buying up, and too expensive for first time buyers.  Her recommendation is to buy working class houses close to the center of urban areas and public transportation.  Folks on this thread have already pointed out the risks of buying into the luxury market.  There will be more choices, more leveraging power in negotiation, more foreclosed properties, and more desperate sellers in this market.  There is never a bad time to change from renting to owning as far as your taxes are concerned.
 I don’t know where you live or your reason for asking, but I do not want my opinions to be misunderstood.

Good Luck

35

I agree with everything you just pointed out.

Especially the target market…working class!

And…no one knows your market like YOU.

Great comments by all. As usual

36

:group hug:

And now, let’s muster up a rousing rendition of “Kumbaya,” shall we?

37

It’s OFFICAL!!!

CALIFORNIA…highest foreclosure rate in the U.S.

That number is based on foreclosures per 100 homes.

1 in 5 California home owners have risky negative amortization loans. It’s not just sub-prime we’re talking about here. In 2008 the HIGHEST NUMBER of adjustable rate mortgages will reset.
If it doesn’t look good in 2007, what the hell is it doing to be like when 3 times as many ARM’s hit the first adjustment???
And good luck if you got in with a low down payment, falling prices WILL prevent you from refi. because the house is NOW not worth what you owe on it.

This ball has just STARTED rolling.

38

i just want to say thanks to all the people who gave their opinions…
i am totally new to this market and industry, but am looking forward to learning and growing.
i found this thread to be a lot of help… especially the last few posts.
thank you much guys…

39

Well, petemfa, I’d say that the only thing that we disagree on then is that the Carolinas are in the minority of markets.

I don’t think that’s true. The reason that the Nat’l RE market looks so bleak right now is because the major markets that have for the last several years been experiencing double digit appreciation are currently doing a market correction, ie a serious slump in housing prices. Though major markets, when compared to every market nationally, are actually the minority. However, they account for a majority of the numbers when talling any kind of numbers.

Heck, the 200% increase for the Carolinas is even flawed. Why? Because the major jump in value here came from coastal property flying off of the market faster than people could sell them. You could buy a property on the coast and it be worth $5K-$10K MORE before you closed on it!!! Now, that market has tanked, too. I’m going to love to see what the Carolinas report now. Whatever it is, it isn’t a true indicator of the ‘Carolina’ market, mainly because there isn’t such a thing.

The true majority of markets are really somewhere in between those booming and those tanking, and it’s those of us who are in them that shake our heads whenever we here the doomers or the angels talk, as we usually trudge through life with a measly 2-3% increase, or decrease, year after year.

Foreclosures are up. Things will be slow. I don’t recommend for new investors to get into the game unless they are fully prepared. In fact, I think that a portion of the current situation is due to new investors that didn’t know how to do this and simply bought in to the boom, but that’s another post altogether. However, I don’t think that there will be a major, National housing price slump (real, not a data sheet spread). Markets are simply too local for one, and there are simply too many stop-gaps and safeguards to prevent such a major collapse. Worst case, we, as taxpayers will more than likely be forced to bail us out before that would happen.

The will true scare in all of this is the Chinese stock market. For history buffs, China is in a very similar position as the USA was when our market crashed in 1929, and that plunged the whole world into a depression which sparked WW2. Now, that’s scary!

Raj

40

Roger I agree with a lot of what you wrote.

But, the idea that there is some type of safety net out there is just not true.

Look at THE most REGULATED market we have…The Stock Market…Safety nets galore, trading curbs, SEC, margin requirements, limit orders, ect. ect. It still had NO effect on the PRICE blow out that occured in 2000.
That market tanked because PEOPLE no longer saw VALUE there, stocks that 6 months earlier were selling for $200 now sold for $20.
Were was the safety net???

Housing is NO different. A home is worth a certain price until the market decides it isn’t.

I think we’re sitting on a ticking bomb. Sub-prime, U.S. dollar at ALL TIME LOWS, negative savings rate for the FIRST TIME SINCE THE DEPRESSION! people up to their eyeballs in debt, the Democrats want to tax hedge funds and private equity just at the EXACT time these fianacials are up to THEIR eye balls in debt, tightening lending standards. Where were all the safety nets when this sub-prime fiasco started? or interest only loans? Your telling me the goverment safety net thought THAT was a good idea?? Hey, they regulate it. A little regulation and those loans would have NEVER exsisted. But we have a GOVERMENT that doesn’t believe in reguation of business. Christ, look no farther than ENRON, THEY were responsible for the rolling blackouts in California, that’s a fact PROVEN in court. All because George W. didn’t want to step in and regulate that industry. It was a free-for-all. Just like this over financed housing boom was. I know mortgage brokers who were making $500,000/year PART TIME!!! NOW it’s time to pay for ALL of it.

I respect your opinion, we shall see how it plays out.