Real Estate will not meet the same fate as Tech.

[NickelScalper]

Quote from Sparohok:

Oh, I agree. Most, but not all.

Opportunity cost is included in discounted present value by definition. That is what discounted means. The discount rate is the time value, or opportunity cost, of money.

In my neighborhood, the intrinsic value of virtually all houses is negative. That's why I think there's a bubble.

A quick run through of the numbers. A $750,000 house I looked recently at earns $2300/month in rent and pays $100/month association fees and $7000/year in property taxes. I'll ignore transaction costs and use 5 year treasuries (4.13%) as the risk free rate. The house earns $19,400/year, but the money used to buy it costs $30,975/year. That's a case study in negative intrinsic value.

Martin

If your definition of "discounting" already included such a broad use of opportunity cost, then you got your money's worth. Apparently, I was robbed.

Concerning the real estate situation in California, even the Central Valley agricultural area is going up fast.

 

[The Kin]

Quote from Sparohok:

Hey man, you started the thread. You said discuss. I discussed. What's your issue?

You're right. I'm sorry. Donno what came over me.

 

[The Kin]

Quote from spyderman:

Where are these properties, especially the waterfronts? I may want to start bottom picking!

They don't exist unfortinatly. He just made the price declines up.

 

[The Kin]

Quote from dddooo:

During this period, the Bank of Japan (BOJ) cut the discount rate in half from 5 percent to 2.5 percent. Following the economic stimulus, asset prices in the real estate and stock markets inflated, creating one of the biggest financial bubbles in history. The government responded by tightening monetary policy, raising rates five times, to 6 percent in 1989 and 1990. After these increases, the market collapsed.

The Nikkei stock market index fell more than 60 percent-from a high of 40,000 at the end of 1989 to under 15,000 by 1992... The Nikkei fell below 12,000 by March 2001. Real estate prices also plummeted during the recession-by 80 percent from 1991 to 1998 (Herbener 1999).

http://www.gold-eagle.com/gold_digest_02/powell120602.html

Finally, some real proof. Thank you very much for posting. The link is insightful.

 

[The Kin]

...Austrian theory identifies monetary expansion as the problem. "The market process set in motion by credit expansion does not depend in any essential way on there being a change in the general level of prices" (Garrison 2001, p. 71)."

Is the U.S. increasing it's monetary supply by as much as Japan did?

 

[drsteph]

Quote from The Kin:

It's not true. That's why. Do people who believe the housing market is crashing remove logic and only hear things they want to hear?

Why do people believe that the housing market is going up forever & hear only things they want to hear?

Thanks for the compliment by the way... I specialize in smart-ass responses to not so smart questions.

 

[Mike805]

Current real estate valuation is perception - i.e. speculation.
This is where I see the problem. Current prices are based on speculation and perception, not value or fundamentals.

Fundamentals should be 90% of RE investing IMO. Right now for many so-called RE investors, fundamentals probably constitute 5% of the decision to take a highly leveraged Interest only ARM - otherwise they WOULD NOT BE TAKING THAT TYPE OF LOAN. This is a speculative purchase that uses perception, not value, as the basis for a decision. This is impulsive and will lead to loss IMO.

For those that argue "limited supply" as a support for continuing price increase, I say that supply nor demand is the issue. Supply/Demand is perception. Well informed investors who buy real estate DO NOT CARE about supply/demand because it is NOT QUANTIFIABLE. It is irrelevant. Trust me on this.

What is happening right now is the use of leverage. This leverage has created a speculative perception based market. Speculative markets exhibit similar tendencies to the zero-sum idea - there is a loser for every winner. Who will be the loser and when is a good question.

I am not a negative person nor do I have a "there will be a crash" philosophy. I am simply stating what I have learned in over 9 years of RE experience. I got lucky with timing and that's it. All the purchases I made were based on value and cost, not perception. The gains were substantial because I got in at the right time. I do not see any reward in the coming years without an overwhelming risk. Let me say it another way: speculative purchases at this point in the game are a poor investment decision and you may get lucky but eventually this type of behaviour will be punished.

Mike

 

[gr8trader]

I met an investor a few weeks ago whom bought 20 properties in the last 18 months. He loves real estate. When I was reviewing his positons and his cash flow, he was negative cash flow about $300 per month, but I couldn't help but wonder what wwould happend if he had two or three simultanious vacancies for 3 months. How would he manage this given he wasn't a rich man. He had $1 mm in equity, but no cash. Tough positon to be in. You can't eat equity!

 

[ElCubano]

Ive been buying lots in central florida....i have accumulated 8 lots so far and they are up about 30-40% according to what ive seen sold lately...they are paid for...i was thinking long very long term...should i sell???

 

[dougcs]

Quote from Mike805:

Current real estate valuation is perception - i.e. speculation.
This is where I see the problem. Current prices are based on speculation and perception, not value or fundamentals.

Fundamentals should be 90% of RE investing IMO. Right now for many so-called RE investors, fundamentals probably constitute 5% of the decision to take a highly leveraged Interest only ARM - otherwise they WOULD NOT BE TAKING THAT TYPE OF LOAN. This is a speculative purchase that uses perception, not value, as the basis for a decision. This is impulsive and will lead to loss IMO.

For those that argue "limited supply" as a support for continuing price increase, I say that supply nor demand is the issue. Supply/Demand is perception. Well informed investors who buy real estate DO NOT CARE about supply/demand because it is NOT QUANTIFIABLE. It is irrelevant. Trust me on this.

What is happening right now is the use of leverage. This leverage has created a speculative perception based market. Speculative markets exhibit similar tendencies to the zero-sum idea - there is a loser for every winner. Who will be the loser and when is a good question.

I am not a negative person nor do I have a "there will be a crash" philosophy. I am simply stating what I have learned in over 9 years of RE experience. I got lucky with timing and that's it. All the purchases I made were based on value and cost, not perception. The gains were substantial because I got in at the right time. I do not see any reward in the coming years without an overwhelming risk. Let me say it another way: speculative purchases at this point in the game are a poor investment decision and you may get lucky but eventually this type of behaviour will be punished.

Mike

Mike,

I'm not a RE speculator but I do own a condo in Fl that in the past 3 years went from 135 to 400k in value based on sales of similar units. It seems to me there is a bubble there but each time I review the RE sales in the area (Palm Beach County, property is on the ICW), the prices go up.

My question is you state the price is not based on supply/demand but rather on perception, isn't that pretty much the same thing? I'm assuming by "perception", you mean perception of supply demand.

Also, you say buy based on "value" not "perception". How do you go about determining value?

TIA,
DS