what's going on with real estate?
- Thread starter lasner
- Start date
Well, I'm in my mid-20s, so I haven't exactly missed out on all those years of appreciation, they probably wouldn't have approved me for a mortgage when I was, say, 10.
The reason I feel we are close to a top is that many "serious investors" in real estate have become speculators, and by "serious investors" I mean Joe Blow that is actually purchasing a home for the purpose of living in it for a few years. I've seen lots of customers with significant amounts of equity in their homes (due solely to market price appreciation, not just paying down their mortgages) deciding that their house that they bought 2-3 years ago just isn't good enough, selling them, then buying a much more expensive house. Basically these types of customers are the ones that call up and say "what is the biggest possible mortgage that I could be approved for?"
My point is that much of the current price appreciation that we are discussing is not real money. I'm not using a proper economic term for it, but essentially it is money that is being fabricated by speculation - higher prices produce more "equity" which in turn gets invested in even more expensive homes, driving prices up further, and creating more "equity". It's like trading stocks with a margin account, initially being very successfull (during the late 1990s let's say), then trading larger and larger size until they blow up their account when the market turns downwards. Only let's pretend that your stock broker is letting you trade retail with extremely high leverage, where you only need $5-$10 for every $100 of stock that you are trading.
Also, please do not forget that people need to actually be able to afford their mortgages. Alternative mortgage products have recently become much more common for exactly this reason - many purchasers simply cannot be approved for traditional mortgages at the current housing levels. Real estate pricing gains are easily outstripping employment earnings power gains.
Most of the people calling a top in real-estate that I come across have sold within the last 2 years and are comfortably waiting for it to decline, but not the slight decline that you expect. They will most certainly be back investing in real-estate in better times which by the looks of it are some years away. If their call is wrong however they could get back into real-estate with far greater ease than one could get out of real-estate if it busts. The real idiots as things stand IMO are the holders of investment property ,especially those that bought in recent years, for they are likely to incur a significant cost in terms of opportunity in coming years.
Quote from Chagi:
Well, I'm in my mid-20s, so I haven't exactly missed out on all those years of appreciation, they probably wouldn't have approved me for a mortgage when I was, say, 10.
The reason I feel we are close to a top is that many "serious investors" in real estate have become speculators, and by "serious investors" I mean Joe Blow that is actually purchasing a home for the purpose of living in it for a few years. I've seen lots of customers with significant amounts of equity in their homes (due solely to market price appreciation, not just paying down their mortgages) deciding that their house that they bought 2-3 years ago just isn't good enough, selling them, then buying a much more expensive house. Basically these types of customers are the ones that call up and say "what is the biggest possible mortgage that I could be approved for?"
My point is that much of the current price appreciation that we are discussing is not real money. I'm not using a proper economic term for it, but essentially it is money that is being fabricated by speculation - higher prices produce more "equity" which in turn gets invested in even more expensive homes, driving prices up further, and creating more "equity". It's like trading stocks with a margin account, initially being very successfull (during the late 1990s let's say), then trading larger and larger size until they blow up their account when the market turns downwards. Only let's pretend that your stock broker is letting you trade retail with extremely high leverage, where you only need $5-$10 for every $100 of stock that you are trading.
Also, please do not forget that people need to actually be able to afford their mortgages. Alternative mortgage products have recently become much more common for exactly this reason - many purchasers simply cannot be approved for traditional mortgages at the current housing levels. Real estate pricing gains are easily outstripping employment earnings power gains.
Well, I basically agree with you ..... No need to argue with all the people here though ... most of them haven't been through real estate cycles (both national and regional.) For someone in the mid 20's you sure have more common sense than most people twice your age.
Act on your knowledge .i.e. play this cycle as the speculative momentum comes off the market and things reverse .... basically averaging as the downward mometum starts to ebb .....
Dude - do you even know what a CAP rate is? Believe it or not there is still value to be found these days. A blanket statement like this shows your ignorance of the RE market: "The real idiots as things stand IMO are the holders of investment property ,especially those that bought in recent years, for they are likely to incur a significant cost in terms of opportunity in coming years."
Craig, I'm in my mid-twenties too. The difference is when I was 19 I invested in my very first home. Now I'm a millionaire thanks to those smart decisions I made not to long ago. I took on a lot of leverage. Bought property which I believed to be undervalued, and in which net rent covered at least 120% of the debt service.
People who rent for whatever reason allow people like me to get rich. And I appreciate you for it.
There are far too many tax advantages that come from home ownership. I cannot understand the mindset of long-term renters.
It's not like a mortgage is hard to get these days either.
I also pray there is a housing crash so I can pick up some property dirt cheap. I been wanting to own a Manhattan penthouse for awhile now but I would never buy at this point because Manhattan is one of the few markets which are significantly overvalued. Until then, my money will go toward 3 bedroom/2bath houses to be found in north Florida for under 100k. As I said, there are still markets where you can rent for 120%+ of the mortgage and escrow.
People who rent for whatever reason allow people like me to get rich. And I appreciate you for it.
There are far too many tax advantages that come from home ownership. I cannot understand the mindset of long-term renters.
It's not like a mortgage is hard to get these days either.
I also pray there is a housing crash so I can pick up some property dirt cheap. I been wanting to own a Manhattan penthouse for awhile now but I would never buy at this point because Manhattan is one of the few markets which are significantly overvalued. Until then, my money will go toward 3 bedroom/2bath houses to be found in north Florida for under 100k. As I said, there are still markets where you can rent for 120%+ of the mortgage and escrow.
I was talking in general terms and agree that it is wise for anyone with sufficient capital to at least own their own house rather than rent. You may well be certain of the interest rate if you cap, but what you do not know, leaving aside the fact that housing is precariously perched for a big drop, is the level of future employment and the certainty of the rental income stream. This at the end of the day may prove to be your undoing, as well as the undoing of anyone taking your advice at this very late stage in the cycle. Time will tell.
^ I was speaking about a Capitalization rate...
You do make an excellent point here. The future of the rental income stream is uncertain and significant risks do exist. However I am aware of and satisfied with the risk premium I'm currently receiving on my rental properties. A reasonable amount of vacancy has been built into my model and contingency funds do exist.
You do make an excellent point here. The future of the rental income stream is uncertain and significant risks do exist. However I am aware of and satisfied with the risk premium I'm currently receiving on my rental properties. A reasonable amount of vacancy has been built into my model and contingency funds do exist.