Is The Housing Market Due To Implode?
March 13th, 2007
Written By: Adam Sussman
You know something is not right with the housing market when a family who earns way more then the average cannot afford to buy a decent home to live in.
Living in
In the past few years prices have skyrocketed so much that buying a townhouse and renting it out as an investment is impossible unless you’re putting down 40% to 50%. Now I am no expert but if I can not even come close to a fetching rental income for what the mortgage is, to me it’s a bad deal.
It’s hard to hold off and not buy a home when you’re sick of living in a place that you can not call your own. It is also hard to see what appears to be everyone jumping into new homes in the neighborhoods we want to live in.
Let’s face it, there are good neighborhoods and there are bad. My wife and I were both raised in some nice neighborhoods and we have every intention of raising our family the same way we grew up. So the homes we are looking at can be considered to be in the more upscale suburbs of
From my perspective it appears that the tides are changing in our favor, at least here in
As we’ve been stock piling our money away in savings, we have been keeping our eyes open on the neighborhoods we want to live in.
Last weekend I could not believe my eyes. As we drove down certain streets it appeared to me that everyone is trying to sell their homes. Every which way we looked houses were up for market and the prices are definitely dropping.
Now the prices are still much too high for what I consider a good deal but this is exciting news for us.
Am I correct in thinking that we could start seeing many foreclosure deals open up in the market? Are the homeowners who jumped on the misleading super low adjustable rate mortgages now feeling the squeeze as their monthly payments are becoming unmanageable?
I wonder how things look where you live?
March 13th, 2007 16:09
When I was a kid, my folks bought a 5 bedroom house with a big yard, etc, in Santa Barbra for 35K. About 5 years later, it had more than doubled in price so they sold it for about 75K. Woohoo! 40k!
A few years ago, I visited Santa Barbra with my wife and wanted to show her the house I grew up in and… It was for sale! Not only that, they were having an Open House so I gave my wife the grand tour.
I was amazed to see that it was now selling for over $1.2 Million. That was 6 years ago. It’s probably 1.5 by now.
March 13th, 2007 16:23
Oh Yeah… One more thing…
When the folks sold the place, my dad was working in Santa Barbra as a real estate appraiser. He also had a degree in economics from UCLA. At the time… Everything looked like it was the right time to sell. There was no way to know that the price would just go up and up, faster and faster for the next few decades.
You never know about these things sometimes.
March 13th, 2007 16:25
It’s crazy how things work!
March 14th, 2007 10:13
If the stock market the past few days due to these “creative and subprime loans” that have just been handed out to any Jo Shmoe is any indication to where our housing market is heading, I think your question is about to be answered.
March 15th, 2007 09:27
I agree with Anonosham. I think within 8 - 12 months you’re going to see a lot for sale at much better prices (lower) than they are right now.
March 15th, 2007 21:05
Excellent point all…will there be a complete bust… most likely not. Having over a decade in RE experience I can say that I too have never seen such a bullish market as we have all lived in these past many years. Has it come to a halt. For sure…will there be some blood in the street, certainly, will it be a blood bath…probably not. Yes, the subprime market took a major hit this week which will have recourse across the whole market. However, to what extent? There is so much liquidity out there still that for all those steal of a deal will be many bidding to buy which in turn will inflate the price. I must say though that this means that things will be more affordable, but to expect prices to decrease to the real value will take a hell of a tragedy to occur such as an earthquake, terrorist attack, etc. As long as cities like LA which have population growth at decent percentages still remain the case, prices will not tumble! I would suggest, save as much as you can, use an agent that you can trust and lender that you can trust, be creative, make silly offers and be ready to jump. As a RE investor, manager of property and of an investor group there is one common saying… it doesn’t matter what the market is doing, it is all about the numbers!!!
March 19th, 2007 03:55
My short answer is… because the US dollar may be less than stable. If there is a real possibility of inflation, people don’t mind borrowing because inflation causes the value of the loan to depreciate versus the value of the asset. Also… Real Estate is “Real” unlike cash or stocks. It’s a physical item like a bar of gold but better because shelter is one of the fundamental requirements for survival like food, water and air.
But… Here is my Tinfoil-hat reason why housing prices will continue to go up due to inflation and a weaker dollar. In my opinion… “The Real Reason” we went to war with Iraq was to help prevent further OPEC momentum towards the Euro as an oil transaction currency standard.
(This deals with inflation and the overall value of the dollar, which affects the cost of real estate.)
The Federal Reserve’s greatest nightmare is that OPEC will switch its international transactions from a dollar standard to a Euro standard. Iraq made this switch in Nov. 2000 and later converted his $10 billion reserve fund at the U.N. to Euros. (when the Euro was worth around 80 cents)
http://archives.cnn.com/2000/WORLD/meast/10/30/iraq.un.euro.reut/
(Iraq is now using the Dollar as the currency standard again.)
Why is this important?
At this time… The U.S. dollar is the monopoly currency for the international oil market. (“Oil Marker”) http://en.wikipedia.org/wiki/Oil_marker
The effect of an OPEC switch to the Euro would be that oil-consuming nations would have to flush dollars out of their (central bank) reserve funds and replace these with Euros. If that happened, you’d have foreign funds stream out of the U.S. stock markets and dollar denominated assets.
Since 1945 the Dollar has been the fiat currency for global oil transactions (ie. “petro-dollar”). The U.S. prints hundreds of billions of these fiat petro-dollars, which are then used by nation states to purchase oil/energy from OPEC producers (except Iraq, to some degree Venezuela, and perhaps Iran in the near future). These petro-dollars are then re-cycled from OPEC back into the U.S. via Treasury Bills or other dollar-denominated assets.
World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. To prevent speculative and manipulative attacks on their currencies, the world’s central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces the world’s central banks to acquire and hold more dollar reserves, making it stronger.
This phenomenon is known as Dollar Hegemony.
Iran might be next for the same reasons. This is a great article that explains the situation better than I can. http://www.energybulletin.net/12125.html.
The article is about the “Iranian Oil Bourse” which hasn’t happened yet.
http://en.wikipedia.org/wiki/Iranian_Oil_Bourse
Our rhetoric regarding war with Iran coincidentally goes up and down with this topic. It’s a very under reported story but check out Google trends and compare how the two seem to match. (It’s almost scary) http://www.google.com/trends?q=war+with+iran%2C+Iranian+Oil+Bourse
You should also search Google for the phrases “Oil transaction currency” “Iranian Oil Bourse” “Oil Marker” & “Dollar Hegemony”.
Something is not right with the Dollar. The US deficit is mind-boggling. I don’t know how long we can prop the Dollar up with threats of violence. If something happens and the Dollar is no longer the sole oil transaction currency… Watch your real estate investment go through the roof.
March 22nd, 2007 09:53
DON’T BUY REAL ESTATE
I came to your site to get help embedding you tube. Thanks alot, you saved me a bunch of time.
You can see it here: http://www.bananatreehotel.com/costaricasurfing It’s a Costa Rica surfing video.
Then I stumbled accross your post on Housing. And in the same sense of generosity, I offer to help you save hundred’s of thousands of dollars, for absolutely nothing. DO ABSOLUTELY NOTHING. And you will not lose any $’000’s
I own a small hotel in Costa Rica, and I have put up a blog, specifically so people won’t buy Costa Rica real estate. The blog is here http://www.bananatreehotel.com/costarica
I’ve been telling my guests and visitors, to dump their U.S. real estate holdings, for over a year now.
My friend had just bought a house, his first, and he kept telling me to buy! Buy! Buy! If you don’t buy now you will never be able to afford a house. I said “No thanks, Recession is coming”. 3 years later he was finally able to sell his house. His house lost a third of what he bought it for.
That was California 1990. This time around it is going to be worse.
The macro-economics on this recession make it deeper and scarier. Greenspan and Bernacke have already told you it is coming. Your gut tells you it is coming.
Don’t listen to your heart or your head. Your gut worries about survival. Your heart plans gardens and your head calculates profit.
I’ve been in your situation before. Patience young Jedi. Buy real estate when everyone thinks it will never go back up again.
Now that I’ve saved you several hundreds of thousands of dollars, enjoy life, come to Costa Rica.
Ramsay
May 1st, 2008 21:37
It’s interesting looking back on this post from around this time last year. Quite a lot has happened as predicted - rising foreclosures - dropping values etc. I tell you, if you haven’t purchased in the past year, now is a good time for a rental-type investment property. With pent-up demand, high foreclosures and the inability of homeowners to sell, the rental market is on fire right now. Rents are going up and rentals are getting hard to find.
May 1st, 2008 21:52
That is interesting, looking back.
May 11th, 2008 07:48
Very nice insight by the author of this post. The market has dropped by about 19% in L.A. since this post and guess what? We’re only half way through this correction folks! All you have to do is look at the ARM reset graph and know that many more foreclosures are on the way, so supply will continue to increase while demand will stay at the same pace or decrease due to the overwhelming negative mass psychology.