The housing bubble has already started to deflate – but we have a long way to go until we hit bottom. Housing prices are so out of line with their investment values that we’re due for one of the hardest and biggest financial corrections in the history of the world. We could go into more detail here, but these two sites do a good job at explaining exactly what is going on with the housing bubble.
It’s not a question of IF we’re going to have a correction, but whether it’s going to be a sudden plunge or a prolonged correction as there was in Japan:
Prices were highest in Tokyo’s Ginza district in 1989, with some fetching over US$1.5 million per square meter ($139,000 per square foot), and only slightly less in other areas of Tokyo. By 2004, prime “A” property in Tokyo’s financial districts were less than 1/100th of their peak, and Tokyo’s residential homes were 1/10th of their peak, but still managed to be listed as the most expensive real estate in the world. Some US$20 trillion (1999 dollars) was wiped out with the combined collapse of the real estate market and the Tokyo stock market.’
The time after the bubble’s collapse, which occurred gradually rather than catastrophically, is known as the “lost decade” in Japan.
I recently had a chat with someone where I (hopefully) convinced him not to buy a house. He’s looking to put $80,000 down on a $400,000 house with mortgage and tax payments of $2500 per month. He can rent an identical home for $1650 per month. That means that instead of risking his $80k investment on Real Estate at bubble prices he could:
Put that $80k into a savings account
Earn 5% ($333 per month in interest).
Protect the principle
If he applies that interest towards his rent, his monthly payments will be $1316 ($1650 - $333) vs. $2500. Clearly, it makes no sense to buy right now.
Now is the time to unload those investment properties. Now is the time to take a cash position. Now is the time to be a property renter rather than an owner. If you are leveraged, it’s time to sell before you really get hurt.
The reason I’m even posting about this is because primarily we deal with making money on SEO Black Hat. The last thing I want is for you to work your ass off and make tons of money, only to squander it at the peak a bubble.
13 Responses to “On The Verge of Financial Crisis”
Absolutely - some places have a lot more to fall than others.
Dallas is certainly on the cheaper side:
http://www.housingtracker.net/affordability/
If your rental income > Fixed rate Mortgage payment + Taxes + Upkeep then you’re not going to get hurt.
It’s where people were buying houses with Interest only ARMs to barely break even or lose money on rent where we’re going to see the bulk of the carnage.
I’ll third all that. Moreover aside from it having to do with what city one’s talking about, IMO a lot of things at the more granular levels add up to make for potentially huge differences. For instance, one can look at the Bay Area - where some find the hardest challenge is just getting in in the first place - as “battered,” but then look within SF and find more “scattered,” that is a mishmash of increased values in some ‘hoods and property types but decreases in others. Beyond that it’s about collateral - how one lives today and what scenarios one can prepare to potentially tough out for how long, especially in context of whatever one’s plan is for how to someday be able retire (which one should start working on decades in advance no matter what).
Ya, it is definitely a regional thing and it does annoy me when people think the entire country is like the SF Bay Area. Just because houses there appreciated like crazy and people were doing interest-only mortgages to buy them and them counting on the monthly appreciation and refinancing or flipping (betting on continued huge appreciations) doesn’t mean the entire country went crazy like that.
Real estate is still a good, safe, investment in most areas. People will always need places to live. Your plan just needs to be buying it and holding it and making rental income. In 10 years you can refinance it and get a nice tax free check from the bank, and that should be your goal. Not flipping it in one year’s time for a profit. If a housing value decrease over 2 years would cause you serious financial problems, don’t buy, you’re basically gambling.
If I were a young single guy I’d buy a duplex in an area where rental units don’t go vacant, and then rent out one half and live in the other.
I’m not talking about just San Fransisco.
San Jose, CA
Honolulu, HI
San Diego, CA
New York, NY
Orange County, CA
San Francisco, CA
Newark, NJ
Los Angeles, CA
Sarasota, FL
Riverside, CA
Seattle, WA
Miami, FL
Washington, DC
Portland, OR
Orlando, FL
Las Vegas, NV
Long Island, NY
Edison, NJ
Reno, NV
Cape Coral, FL
Sacramento, CA
Chicago, IL
Phoenix, AZ
Milwaukee, WI
Baltimore, MD
Tucson, AZ
Boston, MA
Richmond, VA
Charlotte, NC
Virginia Beach, VA
Tampa, FL
Salt Lake City, UT
Minneapolis, MN
Boise City, ID
Philadelphia, PA
Denver, CO
Raleigh, NC
Nashville, TN
Jacksonville, FL
all have price to rent ratios greater than .9
That means the ROI is under 6.5%. The price to borrow exceeds 6.5% even for those with the best credit.
When TV shows showing bartenders who know NOTHING about remodeling making 40K in a week flipping a condo, you know the market is peaking.
I grew up in Hawaii, and back in the late 80s lots of Japanese investors flush with cash were coming over and buying up all the real estate and building luxury homes and resorts everywhere, generally making a mess of the place. Luckily (for us, but not them) all their cash dried up before they could do too much damage.
Now the whole scene is replaying itself again, but instead of coming from Japan, they’re from California. But it looks like that may soon be coming to an end too.
Putting money in a bank account, high interest or not, is a bad idea. You’ll never keep up with inflation.
Precious metals such as gold and silver are a good idea. Other currencies could work well too.
one flaw in the original post is the fact that the 1300 or 1600 rent payment is a loss, equivelent to 3-4% of home value. The gample is will your home lose 3-4% annualy over the long run (15 or 30 years, depending on your friends mortgage as well as incorporating interest on the note) - bottom line is there is a lot more involved in this type of decision then the simple scenario stated.
Assuming the investor would not make the poor decsion to get out of the investemnt when it is down (and therefore only have a ‘good’ result if terminating early): you want to consider asset gains/losses over the lenth of the note minus interest, taxes, and necessary upkeep vs your opportunity lost which is the down payment * the low risk rate (savings) minus the monthly rental payments.
Areas that have been saturated with new build properties over a short space of time will probably see the worst of it. Over supply is an investors biggest problem.
If this was Fark.com, this post would have an “obvious” tag. I never could figure out why investors couldn’t be bothered to do basic math. I live in one of those high risk markets, and I am renting, not owning. Some of my friends can’t figure out why. Gee.
The curve ball that even the common sense guys were not anticipating is the tightening of credit and lending. People with good credit are having difficulty getting mortgages right now. Throw in speculation about a government crackdown on lenders, with new and more restrictive laws involved, and things really look questionable. The final push upwards in the housing market was done by those with liar loans (i.e. no proof of income to get a mortgage) and speculators. Those are fundamentals to cash out on, not buy in.
There are other global real estate markets that are even hotter and have appreciated more than the US — the UK specifically. Common sense is telling me watch the hell out.
The first post was in August 2007. Is it agreed that we are now in a Financial Crisis? 2008 will be the year when this surely takes hold.
[…] Who could have predicted that we were on the verge of a financial crisis last year? […]
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I’d slow down on that sort of blanket recommendation. It really has to do with where you live or invest. Much of the west coast, Nevada, Florida, and so on you are spot on. Here is Dallas though and much of Texas, we never saw the huge increases in homes. In fact while other places were going through a boom, many places here in Texas had almost no growth and some even went down a percent or two a year.
One of the main reasons for this is national publicly traded new home builders wanted both huge profit increases at the same time as increasing the number of units sold. They managed to pull this off by selling for ridiculous amount in many places while selling new homes for a loss in places like Dallas and I am sure many other places.
I’m sure there are other states and regions of the country that are also this way and will see little or no deflation.