It seems there isn't a day that goes by I don't hear about a thing dubbed the real estate bubble. I managed to catch the last 25 minutes of a show on CNBC last night called "Town Hall". They had a panel of six guests from a variety of real estate sectors, discussing the current real estate market. It was interesting to watch. One guy, who was a law professor from Yale, was constantly saying the buble was still growing but would pop any time now. Several others were riding the fence on the issue, and 1-2 others (especially one economist) pretty much said a bubble doesn't exist. In the 25 minutes I saw, they didn't really talk in detail about REI, but glazed over it every now and then. One panelist - a new home builder - was irate that investors would put a deposit down for his houses, wait for them to be built, and then resell them at ungodly appreciated values. I was thinking to myself, "What a clueless SOB." He said that putting "For Sale" and "For Rent" signs in a neighborhood that is still growing hurts his business. WTH???? Maybe he should go into that business then and stop complaining. The law professor also gave an example of Los Angeles and its depreciating home values in the early 90's. Another panelist debunked his claim, since it had to do with other variables (mainlylayoffs in the defense industry) that caused home values to depreciate during that time in LA. The professor also made a claim that house prices are at their highest price-to-salary value than in any other time in US history. The economist made claim that although his claim is true, that ratio should not be used to justify his position. A more inline ratio would be salary to debt service. And with rates today at their lowest in years, this is actually the best time in history to buy rather than the worst time.
I heard this segment aired last week, too, so I'm hoping it will aire again sometime this week. Again, it was on CNBC's Town Hall, and I believe the segment was called "The Real Estate Boom". Keep an eye out for it.
On an aside, I found the following article on CNBC's web site that talks a little more about it.
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Okay, according to CNBC's schedule, the Town Hall for this program will aire Tuesday-Thursday this week from 8:00-9:00pm EST. Hopefully, this is this week's schedule and not last week's.
I've heard about this too, and I think as interest rates have dropped, house prices have increased. I wouldn't worry about it too much though. If home prices start to drop, they aren't going to "burst" and drop dramatically in a single day. They could start declining as rates start to climb - because people can't afford them anymore with the higher rates. Its easier for them to stay in their lower rate financed houses. I think this makes it even easier to buy homes - people that need to sell and can't find a buyer start to become very open. As far as how it would affect an investor - I'm not sure exactly. If you're doing buy and hold and youre leveraged to the hilt on everything, you wont be pulling any more cash out soon, but rents would probably start to increase as people cant afford to buy homes. IF youre flipping, you wont be in the house long enough to really be affected by dropping values. If youre doing Rent to own or Lease options, people will already be locked in on a contract - worse case scenario is they walk away from their lease option payment (that 3-5% you should get upfront), but I dount most people really watch the home market that closely, so they probably wont realize that the values are dropping because they arent looking for ahome to buy - they already have one. Plus if it does become a big issue, and you dont want to find another tenant buyer, you could always try and renegotiate the purchase price with them. I can see how this could affect homebuilders and developers, but they couldnt expect this building boom to last forever. I think if youre even somehwat prepared and know your strategy, it should have minimal effect on a real estte investor. If you see something else that I may have missed, let me know.
Sorry about the previous deletes, Steve--I'm trying to get this link to appear in its entirety.
An REI friend of mine were just talking about this today. I listen politely to the people who warn me of a "bubble", but always think to myself, "this means more for me".
Here's a poignant article I found on CNN.com today:
money.cnn.com/pf/features/lists/home_valuations/
I buy Stock, and have lived through a market correction, and I just bought more at a discount. Doom-sayers don't really understand investing. Although I enjoy your REI blog. Haven't invested in property yet.
Trish - I saw a similar report a month or so ago. I remember it because they had Austin, TX in the -5% slot. Austin saw a huge boom in properties in the 1998-2000 timeframe due to the dot-com bubble. Demand couldn't keep pace with supply, and sellers could ask for any price and it would be sold within a week or two. In the next several years, 2001-2004, there was a complete opposite trend. The market here is still stabalizing, but most feel the time is ripe for buying in this area as businesses are coming back. My loan officer told me last week that the property I am buying for $101,000 is now worth $130,000, and will probably be worth $150,000 in two years. Time will tell, though. Thanks for the post!
Richard - Very true. My feeling is the RE market will see ups-and-downs on a regional scale - always has. Even in the downturns, a savvy RE investor can still cease opportunities. For example, once interest rates start climbing, people will be more apt to buy with owner financing.
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