Tuesday, September 11, 2007

Housing - How Low Can It Go - The Real Estate Bubble is Bursting

It is interesting to look at how people have been valuing property over the past 5-7 years, logic has seemingly left the building and until it is fully restored, the bottom will not be in sight.

One of the primary factors that is missing from the market has been to establish the rental income that the property can produce. With this figure in mind plus all costs, can the property cashflow and service a capital and interest debt as well as taxes, insurance and expenses!!!!

This is the real and true value of the property, what it is worth. If you find property that meets these criteria then it is worth buying as it will cashflow if not from day one, then very soon thereafter.

The other factor which is critical to successful investing, is the lack of emotion. A pure and empirically derived decision is essential to success in real estate as with any other investment. One of the major factors that plays into the volatility is peoples knee jerk reactions to the media which is trying to sell advertising (lets be honest) and needs as many "hooked readers as possible!

Don't buy a house because you love it, or it feels right, buy it because it is a good investment. Location, Location, Location is critical to this. Are there good or great public schools in the area, is it near good shops, are there areas that will decline and become less desirable situated nearby, does it have a good water supply (this will become an increasing issue over time)

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jonsyrose said...

I read your blog....enjoyed it !....I disagree though with your premise in "Housing..How Low can it go"
that the true value of a property is based on its potential to cash flow. Why? About 34% of all residential
real estate transactions last 3 years have been investment/vacation/retirement homes. But the remaining 66%
are bought as an alternative to sleeping on the ground...and having a place to plug ones appliances into....just a place
to live....not an investment, so potential roi or cashflow is irrelevant just as it is when buying a toaster, tuna fish sandwich,
etc. Their value is set by a different standard....what an alternative to the desired item can be purchased for and their
comparitive desirability to the purchaser. In markets like Summit County, where rental income is sought by 60% of owners,
you are right !.....but none even come close now to cash flow with 20% down, and they are still flying off the shelves !
partly because we are still in a very rare rising local market, and partly because folks realize it is an increasingly scarce
comodity and that goes back to my point....the alternative mountain real estate is also just as pricey.

jonsyrose said...

the previous comment was left by an esteemed realot colleague of mine from colorado......

my response is as follows....

I hear you but that's because you as a realtor sell property on emotion and try to get the woman too fall in love with it! If you look at all times in history prior to crashes the one constant factor is that rental income is not equivalent to the mortgage!

If a rent is cheaper than owning there is no point to owning apart from emotion and capital appreciation! In periods of zero or negative capital appreciation this factor becomes even more apparent! Also when you calculate the actual value of owning the property "paying the mortgage" you will see that your average $600,000 house will cost in excess of $1,800,000 which invariably means no capital appreciation when "true" value is considered either