how will the cycle go back up again? - Posted by Shayla

Real Estate Investing Industrial
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Posted by Frank Chin on September 08, 2008 at 05:43:48:

Dave:

You’re absoluttely right on. Pricing is everything.

I posted here about selling a property least, late last year in August, it was listed the week of Labor Day 2007, had eactly ONE open house, we planned for two, 20 buyers showed up three written offers, with two pending. We cancelled the second showing.

Values peaked around here in April of 2007, the property would’ve fetched 760K to 775K at the time. By August though, enough bad news caused prices to drop to around $700K.

Anyway, I bought this little gem before the last RE crash at 180K, in 1984, so there was no need to squeeze every last nickle out of it. I was happy with anything OVER 700K. Two years before, I was happy with anything over $600K, but the prices rose too fast for me to catch my breath, and I MISSED selling it for $625K. LOL.

Had it listed for 699K to move it, last September, but the offers came in at 720K to 730K. I took the most solid, the guy putting 350K down, and gave the broker copies of his bank statements.

It closed last Dec 19, and I couldn’t be happier.

I thought the rental was in good enough shape, had several new kitchens put in, but the buyer said he was going to rehab it. I was planning to do 15K of work to get the back yard up to shape, but decided on “as is”, without all the aggravation.

You can imagine my surprise driving my girl to a “play date” passing by that place in April with a “for sale” sign out front.

Apparently, a bunch of “never say die” brokers were trying to convince me to go for $775K in 2007. Anyway, I’ve been thinking about this for the last few months, with the wife saying I should call the listing broker.

I rather NOT know.

Anyway, I stayed away from, it, and considering I put in 40K before the last crash, and taking it out right after this last peak, I can’t say I feel sorry.

Thank God for market peaks and crashes. Of the several remaining properties, I picked one up at the bottom here at $220K, in 1993, and peaked at $950K a year ago, till I got my tax bill showing a market value of ONLY $850K. I’m not crying though.

Frank Chin

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how will the cycle go back up again? - Posted by Shayla

Posted by Shayla on September 06, 2008 at 02:22:44:

Concerned homeowner here, just visiting to learn what I can about the market. Would love to hear from seasoned investors…will the market rebound? What steps must be taken before that happens (are there economic indicators when it will start to rebound).

The big what if…what if it never rebounds? Is it possible values will keep dropping on homes? What would be the end result? Not trying to be pessimistic just trying to understand the cycle, I find it fascinating.

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Re: how will the cycle go back up again? - Posted by John

Posted by John on September 14, 2008 at 05:17:44:

This process is going to take a long time. Unfortunately we are coming out of a bubble bigger than any other in history. The related crash will naturally have to be just as big for everything to go back to normal. Prices rose doubled or more in many areas, even accounting for inflation. You can probably expect 50% or more decreases in those areas. The real question is how long will that correction last. Normally housing corrects slowly, using inflation to silently eat up most of the losses. However this time housing seams to be crashing extraordinarily fast. So far, ~30% drops in about a year in California, Phoenix, Las Vegas, Miami, as well as other places. Even NYC has had a ~10% drop over the past year; although not widely reported. With any luck that will continue for another year at the same pace and this will be over rather quickly. Unfortunately the likely course is that the government will continue to try and support bubble prices costing us all more in the long run and just dragging this all out even more. Once we are back or below what houses should have been worth historically (adjusted by inflation) then it should generally settle back to slowly appreciating with inflation, not above it. Hopefully at this point people will finally see houses as the commodities that they are and not the sure thing pots of gold that they were though of in the past few years, although I have little faith in that. Just looking through the other responses you can still see people expecting us to start shooting back to the moon any time now.

You want to know what to look for in a bottom? All property has a base value, that which is equal to the return on investment either through rent (investment property) or through the saving of the need to pay rent (owner occupied) minus the operating and owning costs of the property and an appropriate risk premium for ownership. Keep in mind that sometimes that value may actually be negative. Also you should bare in mind that any and all cash money that you put into a property also has a lost opportunity cost. Throughout the US, operating expenses (everything other than the mortgage and your own profit) runs at about 50%. So find out what a particular piece of property will at the minimum rent for and divide that monthly rent by .02. monthly_rent / .02. If you can make a mortgage payment on 100% financing and pay yourself (you don’t work for free) and appropriate amount with the remainder, you have probably found a bottom. Even if you pay cash you should figure 100% financing as your cash isn’t free, it could be working for you elsewhere. Beside, another buyer from you probably will be getting a mortgage. Also you should adjust for any possible rent drops during the current recession and excess housing inventory.

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Re: how will the cycle go back up again? - Posted by Shayla

Posted by Shayla on September 08, 2008 at 24:26:28:

Thank you for the comments and discussion, it is very interesting to read. I am happy that we do not have any debt at all. How about other forms of investing right now…are they as unstable or cyclical? Like buying a life insurance policy that compounds interest over time, or bonds? Thank you. I’m trying to learn as much as I can about investing and finance as my parents never taught us anything about it.

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Re: how will the cycle go back up again? - Posted by mikestz

Posted by mikestz on September 06, 2008 at 15:46:55:

Real estate has had its ups and downs over the years, but it is generally stable, with no drastic swings per se. If you were to look at the cycles on a chart you would see a clear pattern of gently rolling swells. This pattern is consistent across cities and regions all across the United states, although slightly varied in degree.

In addition, the cycles tend to favor the ups rather than the downs. It is not uncommon to see large cycles of appreciation and much smaller downward cycles. In other words, the current double-digit growth we’ve all come to know and love in recent years will likely be followed by downturns of single digit declines. Its like taking two steps forward and one step back.

In the big picture you will still be further ahead than when you started. You may see slower growth, but it will still be growth.
People need to live somewhere. They need a roof over their head and their children’s heads. Like food and clothing we must have a home. People don’t need stocks or bonds. Therefore, you can be sure that whether the market is high or low in growth, whether interest rates are up or down, people will be buying, renting, leasing, and selling homes. It is as perennial as the years.
I don’t know when you first realized we were in an up market in real estate, but it has been on a solid upward trend for at least the last 3-4 years. It didn’t just happen yesterday. Of course like anything else, awareness of the general public is a bit latent, and dependant upon the media. It has only been lately that the media has really focused on it and thrust it onto the front page.

The old adage ‘Success breeds success’ is also true. The momentum will grow as other more traditional investors continue to jump on the band wagon and pour their money and resources into real estate investment. It tends to create a perpetual, self-feeding market that is ideal for more seasoned investors.
t is true that even in today’s real estate boom, there are areas in the United States that are not enjoying the high rates of return that others are experiencing. California is a fantastic place to invest, so is Arizona and a host of other places.But the Rust Belt states are not as fortunate. Watch what happens to Florida home values after this horrendous hurricane season. This is because real estate is driven by the primary capitalistic force of Supply and Demand.
Generally speaking, property values increase in areas where the job market is strong, and where there are more people moving into than away from. Of course there are other factors to consider; including interest rates, availability of funding, climate, and governmental policies. These are all important and you must be cognizant of their impacts to your strategy.
However, it is true no that matter what the rates are or how nice the climate is, people will continue to migrate where there are abundant job markets and affordable housing. If you can stay just slightly ahead of that migration, you will profit immensely.
The key to successful real estate investing is to understand the forces, trends, and conditions that are driving the market. BE AWARE of your surroundings.
There is no real estate bubble, but there is a real estate wave. Like any dedicated surfer, when the surf’s up, get in the water and catch a wave! But watch for danger, be flexible, and be smart. Invest wisely and you can prosper in any real estate market.

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Re: how will the cycle go back up again? - Posted by lukeNC

Posted by lukeNC on September 06, 2008 at 13:18:04:

i think it will rebound, but it will be very slow going.

I see prices dropping at least 50% before its all over. This stuff is going to go on a loooooong time.

When you have a monetary system and economy that is based 70% on consumer spending? Thats not good. Then, you have a “federal reserve” that prints and continuously creates credit out of thin air? Wow…you kinda know that it cannot go on forever.

I dont think either political party’s main guy has any real options, just ways to try and prop up a system based almost solely on borrowed money.

Tax cuts are good, but you only when you cut spending too, otherwise you get hit with the INFLATION tax which is prices rising as the value of each dollar declines precipitously.

I say the best way to survive is to GET OUT OF DEBT NOW. Try your darndest to pay down your home mortgage. Buy cheap homes CASH. Save money…invest in other things…diversify…

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Cycles - Posted by Rich-CA

Posted by Rich-CA on September 06, 2008 at 11:39:30:

The cycles of all businesses, not just RE, go in both directions. Every period of growth is followed by a period of contraction that is based on what caused the growth in the first place. In the recent RE history what has happened is that traditional requirements for financing were supplemented by financing that essentially caused people who would have waited either by choice - saving up a down payment - or by necessity - improving their creditworthiness to buy until sometime in the future. Bottom line, cheap financing moved future customers into the present which means that when it all settles there will be a period of low activity equal to the number of future customers that were moved into the present by the cheap money and low standards. I would expect that in some areas you are looking at a ten year period of reduced activity during which many houses will end up owned by buy and hold investors once the banks realize they either get them off the books or end up like Indymac.

Politics can effect this, specifically regulation of things like rentals and tax policy. History has shown that the effect of any tax increase is to drain growth out of the economy. All the next Pres/Congress has to do is not extend the tax cuts in 2010 and the bottom and middle income tax rates go up. That would mean rents will have to go down because if a person has less take home pay, they can not pay as much for rent. The poor will be the hardest hit since the 10% tax bracket goes back to 15% and the people who don’t even file now will go back to having to file tax returns. Add to that the proposed elimination of the Social Security and Medicare income cap for tax payments and you effective change the top tax rate from 28% (I may have this number wrong) to 50% (that is the income tax increase PLUS the additional taxes for SS and Medicare). The more money the government takes the fewer buyers there are and the lower the rents the same people can pay.

In addition, unemployment will go up. For example, my family is an ordinary middle class family in the San Francisco Bay area. We employ a house keeper, handyman and private school all of which will have to be cut if our income drops. That means these same people may go out of business is the same decision is made by enough of their customers. In my business I employ 3 property managers (I am not their only customer but if the number of clients drop below what is required to make payroll, they go out of business and everyone gets laid off). And this just from a tax increase that hits my family and those like us you effect a dozen other people.

In economics this is called the multiplier effect. Every dollar a person earns circulates through the economy several times in a year. But only if those dollars are spent in the private sector. Because government does not produce anything, all it does is absorb some of those multiples so the remaining money has less effect on the economy.

The next year will be a bit tough while the financial industry, on which so many other rely, shake themselves out. Government can try to help, but the effect is usually to make things worse. Also industries that tend to use their own cash rather than borrowing will recover first. That is because leverage (borrowing) magnifies results (both good and bad) by allowing you to take a more substantial position than you could on your own. Business that rely heavily on financing will recover last.

An example. During the Great Depression, right after the 1929 crash, the economy had actually started getting better. Then the Feds started in with their make work programs and the Federal Reserve started playing with the money supply which resulted in a 1 year adjustment taking a full decade to recover. By contrast in the 1980s (October something - I forget the exact date) we had a stock market crash that exceeded the losses (adjusted for inflation) of the one in 1929. The government did nothing and within a year or so things had basically recovered. So if a President and Congress that believes government should take the lead in fixing everything, we can expect a long and miserable depression.

One last story. When I got out of college I went to work for the VA at a VA hospital. I have seen several government run hospitals since then as well as having private insurance myself. If the government runs anything like health care crappy care like the Walter Reed situation is the rule not the exception. The government does nothing well, so the cycle will either be longer or shorter depending on how much of our money they take and how much of our lives they take over.

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yes - Posted by David Krulac

Posted by David Krulac on September 06, 2008 at 08:56:43:

but the big question is when and by how much.

The depth of the retrenching is varied depending on area, region, employment, interest rates and price range.

I just sold a house in July, where we had 20 showings the first day and multiple contracts and final sale price above asjing price.

But I also know of other houses in the area that have remained unsold for 18 months.

Some of the keys are to know your market and invest in such a way that you reduce the chnaces of getting burnt.

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Re: how will the cycle go back up again? - Posted by Jimmy

Posted by Jimmy on September 06, 2008 at 05:22:56:

patience. down markets happen. the key is to get through to the other side. down markets will wash out the over-leveraged and the speculators. its a natural process that repeats itself every 10-12 years.

last one in CA was in 91-94. doom and gloom everywhere. but people who got in that market in 94-95 quadrupled their money by 2005.

Texas was clobbered in 85-88, but rebounced nicely. and had been hit lightly in past 3 years.

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Thanks Luke… - Posted by acw

Posted by acw on September 07, 2008 at 08:04:03:

Wave after wave of foreclosures…make it very difficult to surf.

Financing is the key. No Financing…no sales. How many buyers have cash to purchase a home?

Financing drove the market up 300%…and now…it will crash 300%. The next wave will hit in the 4th quarter and again in the 2nd quarter of next year.

Try catching a falling knife.

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Great post! And further… - Posted by AJ

Posted by AJ on September 07, 2008 at 11:26:07:

Does anyone have any specific examples regarding what happened to real estate in other countries when hyper-inflation hit? Germany after WWI is the classic example but look at the hyper-inflations of Turkey, Hungary, Italy, Yugoslavia, Argentina and currently, Zimbabwe. Freedoms wither when government gets involved.

While government programs are the cause, I suspect that waste, fraud, and abuse of these government programs is the root of the evil. The studies show that fully 33% of spending on government programs are WF&A. That’s enough to pay off the debt if it were eliminated.

Churches, charity, fraternal organizations and the private market served to help those in real need. But, because taxes are so high and because government is now expected to “help,” everyone, those traditional avenues are depleted of resources and no longer as effective.

Medicare will be bankrupt in a scant 10 years. There won’t be any government monies to pay for anything, not even defense. That is the real time bomb clock. And don’t be surprised if violence breaks out between those sections of the population that have been “served” and those who have been paying.

I totally agree that we should concentrate on eliminating debt and owning outright. Maxing out your debt against assets held in a entity without your personal guarantee, is also viable and perhaps necessary until you can buy all cash. Additionally, I am trying to own with owner financing with a substitution of collateral clause. Consider getting many vacant tax delinquent lots with a high assessed value; 10 lots x $10K assessed value = $100K

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Re: yes - Posted by Jack e

Posted by Jack e on September 07, 2008 at 14:15:02:

David. To what do you attribute your considerable success on this house, lower selling price than the market?

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When I was in grad school - Posted by Rich-CA

Posted by Rich-CA on September 07, 2008 at 16:54:16:

the MBA program taught that debt was used for the really big things like getting a new plant off the ground.

Meanwhile in the public policy classes they were teaching that for every $1 in taxes earmarked for a Federal program only $0.20 got to the end recipient. Everything else was taken up in the bureaucracy paying for things like bureaucrats, buildings and whatnot. Meanwhile orgs like Salvation Army instead of an 80% overhead have a 10 - 15% overhead. Anyone wanting to actually help the downtrodden would not worry about the SA’s chapels and instead focus on how much bang for the buck they produce.

A study here in CA a while back by one of the Republican senators showed that the cost of complying with Fed highway regs cost 90% of the money the Feds gave us and did not produce any better or safer highways. In fact, CA standards (because of earthquakes) are way higher than the Fed ones. If CA builds the same highway without Fed help, it costs 20% more of “our” money but is half the price to the taxpayer overall. The founding fathers knew what they were doing when they tried to cripple the central government from taking everything over.

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Re: yes - Posted by David Krulac

Posted by David Krulac on September 07, 2008 at 21:12:09:

  1. condition of the property was excellent.

  2. the price range of the property was below the area average, the lower the price the more potential buyers.

  3. the asking price was reasonable, slightly LESS than the highest compt (about 3%).

  4. 20 buyers the first day indicates a strong market for this price range.

  5. multiple offers drove the price up to over asking price, and over comp price establishing a new all time price level for this type house in this neighborhood.

  6. Price was reasonable and afforable as were the reale state taxes.

  7. The typical buyer was a first time home buyer, who currently rent s and therefore does not have a house to sell in order to buy. House sales are down, so buyers who have to sell their existing house are having some difficulties, which doesn’t effect renters.

  8. The house was in move in condition, all new paint, great hardwood floors, large deck, and fenced yard. Its a desirtable property.

  9. I’m not resistent to home inspections, knock yourself out, I have nothing to hide, if there is a problem that I don’t know about and is a real problem, not just a made up negotiating tactic, I’ll fix it no questions asked.

  10. Pricing is more important than most people think. The wrong price will cause your house to lanquish on the market. the right price will sell your house in any market with proper advertising. The price made 20 different people want to see that house on the first day even in a down market. With 4 decades of real estate experience, I’m good, no brag just fact.

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You’ve got it right. - Posted by AJ

Posted by AJ on September 07, 2008 at 18:45:29:

Question: As found by the US Supreme Court, what government program would not be constitutional?

Answer: None. It seems anything goes. Somehow, programs that Madison and Jefferson would shrink from, have been interpreted to be constitutional.

In 1850 France, Fredic Bastiat labeled taxation as “legalized theft.” How true. Recently, by voting that citizens cannot keep arms, 4 of 9 justices found that US citizens do not have the right to defend themselves against the greatest thief in all history - government.

Love is Hate. Peace is War. Black is White. Big Brother is G_d.