by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Ronald Reagan asked us that question in the 1980 Presidential debate. The obvious answer, in 1980, was NO.
Are we better off now, in the real estate markets, than we were four years ago? I think the obvious answer is YES. Now, bubble bloggers and end of the world prognosticators will most likely throw out graphs, cite the reasons for a depression, and suggest that Greenspan created an artificial bubble.
The problem with bloggers is that we have a short-term memory. We should; we’re rewarded for doing just that. Let me give you an example: I tripled my page views by covering the Countrywide Financial crisis on my home weblog. If I want more traffic, all I have to do is research the referring search terms and tailor my new content to those interests. The result? An exponential climb in page views.
Bloggers are rewarded for living in the moment not for seeking the truth (or a deeper understanding of it).
How different is your net worth today from 2005? Well, if you’re in San Clemente, CA, Goodyear, AZ, Naples, FL, or Henderson, NV, it’s probably down. These four areas have been brutally hammered with foreclosures while the rest of the country has been riding out this slowdown. And that makes good headlines fodder for the mainstream media and good page view bait for the real estate weblogger.
How different is your net worth in the aforementioned cities if you bought, say, four years ago– in 2003? It’s pretty darned good ! In 2003, a home in Goodyear, AZ could be had for about $200,000. That home may have risen to a peak of $325,000 in 2005. It may have retreated to $275,000 today. Let’s say it drops to $240,000 in two years. A 20% down payment (of $40,000) would have doubled in value in a six year period. The debt service could be written off to rent collected or opportunity cost (rent that would have been paid). The resulting return on equity, for that Goodyear, AZ home purchase, would have annualized out in excess of 11%. That’s on the roof over your head!
So, where am I going with all of this? Real estate, as a long-term investment, is a sure-fire winner in areas where the demographics make sense. The four troubled states aren’t going to lose population growth. So, while the buzz phrase of elections is always “Are you better off now than you were four years ago?” , we should be asking potential home buyers, “Will you be better off in ten years than you are today?” when considering a home purchase.
I think the undeniable answer to that question is… ” Yes”
Robert Kerr says:
“Will you be better off in ten years than you are today?” when considering a home purchase.
Why not ask: “Will you be better off in 2017 if you wait 2-3 years to buy that house rather than catching the falling knife in 2007?”
Looking ahead, I see at least 2-3 more years of degeneration, with inflation adjusted declines of 20-30% over that period.
What’s your crystal ball say will happen to prices between now and 2010?
Does it ever make sense to buy a heavily leveraged, rapidly depreciating asset, if you can wait to buy it a few years later, on the upside and at a significantly reduced price?
September 19, 2007 — 10:36 pm
Chris says:
I think a lot of the people who are freaking out havn’t been in the market that long. They probably got in, in 2003 or 04 and this is a new thing for them.
This happens every few years, things slow down for a bit, but they always pick back up.
September 20, 2007 — 10:43 am
Brian Brady says:
“What’s your crystal ball say will happen to prices between now and 2010?”
Prices will go up and down.
“Looking ahead, I see at least 2-3 more years of degeneration, with inflation adjusted declines of 20-30% over that period. ”
…and if you’re wrong by 10%, you could potentially miss another bull market. That’s why market timers look for bottom quintiles of cycles rather than the absolute bottom. The absolute bottom is nearly impossible to predict.
If you like a stock, and think it’ll will go to 20 in six years, you buy it at 10 even if the bottom may be 8. We’re still overleveraged in some parts of the country but the bargains are starting to pop up all over the midwest.
September 20, 2007 — 11:04 am
Greg Swann says:
> the bargains are starting to pop up all over the midwest.
A newer 3/2 in suburban Phoenix will cash flow at $160,000 with 20% down — which assumes low rents and high vacancy. Prices may continue to decline for a while, but the home will cover its own risk. Cash-on-cash return will require a return to positive appreciation, but, failing all else, the property is self-amortizing. I just ran a bot for houses like this: There are seven already under $160 and a couple of dozen more within bargaining distance. I have seven in that range with community pools, three of those over 1,500sf. It’s not a buyer’s market because the buyers are too thin on the ground. But it sure looks to me like a shopper’s market.
September 20, 2007 — 12:16 pm
Eddie D says:
How about this? Buy in 2003, sell in 2006, buy again in 2008.
I bought in 2003. I sold in 2006. Made $190K profit. I will rent until 2008 or 2009 and buy the same house for 2003 price plus 10-15%.
So am I better off than 4 years ago? You bet. But not because I listened to people like you.
September 20, 2007 — 5:22 pm
John Wake says:
Brian, Great hook!
Greg, With more numbers, that would make a phenomenal post.
September 20, 2007 — 6:29 pm
Brian Brady says:
Good job, Eddie! Thanks for reading!
September 20, 2007 — 8:20 pm
Anonymous says:
re: Greg
If Moody’s is right, Phoenix will be even more affordable next year: Double digit home price drops coming
“Six of the nation’s 10 biggest cities face price declines of 1 percent or more with Phoenix, at a 17.8 percent loss, undergoing the worst reversal.”
September 20, 2007 — 8:36 pm
Robert Kerr says:
re: Greg
If Moody’s is right, Phoenix will be even more affordable next year: Double digit home price drops coming
“Six of the nation’s 10 biggest cities face price declines of 1 percent or more with Phoenix, at a 17.8 percent loss, undergoing the worst reversal.”
September 20, 2007 — 8:37 pm
Brian Brady says:
Robert:
I think you’re missing the point. Predicting the bottom of a market is virtually impossible. You can look for support levels (like a stock) that psychologically attract buyers.
What if Moody’s is wrong by their prediction and Phoenix drops 8% (still, a significant decline)? You could be waiting forever for that final drop as the market accelerates. Long term, you can still make money, buying today.
There are significant psychological factors is market pricing. For example, when I lived in Phoenix, surpassing $100/sq ft was significant. The significance of $160K for a 3/2 is that it is just above the $150K mark. That $150K mark represents a psychological support level for many people. (I can own a 3/2 for about $1000/month with no money down).
What Moody’s predicts may happen but that lower price point may very well establish a support level at $150K before it takes off. That’s the value of an informed local real estate agent; they spot these opportunities.
September 21, 2007 — 8:28 am
Greg Swann says:
> That’s the value of an informed local real estate agent; they spot these opportunities.
Check. And even ignoring markets and trends, particular houses can make sense even if nothing else does. All real estate is local? All real estate is particular. It’s the individual property that matters. A few weeks ago, I wrote about a house that was making me nuts. The bears were all over it, and I didn’t care enough to get tangled up in it. The house sold in just a few days, as I knew it would. It’s a fix-and-flip. It doesn’t matter what is the long-term price trend for a four-month hold. If you can buy low and sell low and still make a profit, you can do houses like this over and over again. Easy money is thin on the ground, but profit opportunities abound nevertheless.
September 21, 2007 — 8:41 am
John Wake says:
Did Moody’s Economy.com predict the huge run up in prices in 2004 and 2005? I researched it and couldn’t find anything, they charge for everything.
I would bet money that they absolutely did not predict that run up in prices and most likely were predicting the opposite at that time.
Hey, they could be right this time. Just be aware that if you had listened to them back then you would have missed out on the biggest real estate bull market in a “generation.”
Do your remember how common it was to read articles on an impending housing “bust” in the early 2000s long before prices really started to take off?
Some sources are almost always negative and others almost always positive (eg. NAR). You need to take that into account when you hear their estimates.
September 21, 2007 — 12:26 pm
Brian Brady says:
“Hey, they could be right this time. Just be aware that if you had listened to them back then you would have missed out on the biggest real estate bull market in a “generation.””
The S&P 500 annual return from 1994-2004- 12.07%
Return for same time period without the 30 best days- LOSS
http://www.accumulatingmoney.com/smart-money-remains-fully-invested/
There is value to being invested for the long-term
September 21, 2007 — 12:35 pm
Robert Kerr says:
Brian,
The two of us are obviously looking through different filters.
You’re asking if real estate bought today will be worth more in ten years. Yes, I think that’s a safe bet.
But I personally have no appetite for the anemic growth I see for real estate in the next 10 years.
That’s why MY question is “Can I make MORE money by putting my cash elsewhere for the next few years and buying later?”
And I think that’s also a safe bet. In fact, I dare say it’s a sure bet.
re: Predicting the bottom
I don’t need to predict the bottom. I only need to see that we’re overpriced. Rents don’t work anymore. PITI:income is broken, income:price is broken. Prices are still substantially – 20%, 25% or more – above the long-term trend line.
We’re clearly overpriced and coming down. Fast.
September 21, 2007 — 8:30 pm
Robert Kerr says:
Do your remember how common it was to read articles on an impending housing “bust” in the early 2000s long before prices really started to take off?
Now, in retrospect, you must realize they were right.
They just didn’t anticipate the Fed recklessly (IMO) lowering rates all the way from 6.5% in ’00 to 1% in ’03, to stifle the recession of ’01 … beginning the destruction of the dollar and the creation of the massive credit bubble that drove real estate even higher.
The good news (good for us all, long term) is: the party’s over and the bill is due.
The dollar’s worth about half what it was in 2000, the economy is hemorrhaging jobs and we’re staring down a (probably) protracted recession, much worse than we were facing in ’01.
Am I negative on this economy? You bet I am. If you think I’m wrong, show me your data and let’s talk it out.
Looking back on ’01, wouldn’t we all be much better off now if Greenspan had just let the recession of ’01 run its course?
September 21, 2007 — 9:35 pm
Robert Kerr says:
The S&P 500 annual return from 1994-2004- 12.07%
Return for same time period without the 30 best days- LOSS
As long as we’re cherry-picking data:
The NASDAQ composite index from Jan 1, 2000 to today: 4131.15 to 2671.22, a 35% LOSS
If you heard the warnings in 1999, got out and then back in a few years later: Jan 1, 2003 to today: 1384.85 to 2671.22, a 93% gain.
Jan 1, 2000 is not a randomly picked date. Robert Shiller began publicly warning on the tech bubble in late 1999; his book was published in March, 2000.
So, you see, getting out for a prolonged, continuous period can be very good, in times of severe, prolonged downturn.
Also, as you can see, you don’t need to know the peak or the bottom, or even be close, you just need to see the crash coming and be disinvested when it arrives. And jump back in later.
September 21, 2007 — 10:54 pm
Brian Brady says:
Robert:
We’re coming from two different mindsets. You are analyzing real estate as an investment without measuring its utilitarian value.
Sometimes, you just need a roof in your head. And in some markets (like always) it makes sense to buy.
September 22, 2007 — 9:44 am