The (Property) Price is Right ... Come on Down!
Friday, January 8, 2010 | Ethan RobertsRating:
It's a cloudy, cool morning, and I'm sitting at my computer, scrolling through the new listings and price changes on the Northeast Florida Multiple Listing Service.Like a wide-eyed kid in a candy store with way too many choices, I'm beside myself trying to figure out which house I want to look at first.
So many houses, so little time...
Should I start with the two-bedroom, $25,000 townhome that sold for $88,000 a few years ago?
How about the two-bedroom, $75,000 patio home (single-story-attached) that has current comparatives at about $105,000?
But now, on the other side of town, a three-bedroom, single-family detached home has just appeared in the listings for $67,000. That's less than what the first owner paid when the home was built in 1994!
How about the two-bedroom, $75,000 patio home (single-story-attached) that has current comparatives at about $105,000?
But now, on the other side of town, a three-bedroom, single-family detached home has just appeared in the listings for $67,000. That's less than what the first owner paid when the home was built in 1994!
One-story townhome for $25,000...
And that, in a nutshell, is a typical morning in the life of a realtor these days.
Welcome to Real Estate Investing, 2010-Style!
It's almost four years from the peak of the hottest real estate market ever, and the world looks completely different.
I'm heading to the shed to drag out my rusty old time machine once more...
and I'm setting the controls for 2004...
(Ah, the good old days.)
Bubble, Bubble ... Toil and Trouble
You may remember the real estate markets of 2004-'06. They were exactly like the dot-com bubble of 1999-2000, and many other boom markets before.
People were quitting their day jobs to flip homes they owned for half an hour, and making thousands of dollars on each transaction.
In those days, when people talked about their "broker," they meant real estate -- not stocks.
I remember one gentleman in 2006, telling me that his new $324,000 home would probably be worth about $500,000 in a few more years.
I reminded him that, historically, real estate prices typically do not appreciate at double-digit percentages, as they had been doing in recent years.
But he didn't want to hear me. He, like most others during that time frame, just wanted to believe that what he owned would just keep going up and up in value.
Now they all know better.
And now, just as everyone believed that prices would keep rising indefinitely, many people might warn you not to invest in real estate -- saying that prices will continue to go down, down, down.
I have heard all the arguments. There are more foreclosures to come, inventory levels are still too high, overly tight mortgage standards still exist, the unemployment rate is sky-high, and young people are moving back in with Mom and Dad.
You know what -- all of that is true!
But let me tell you what is missing from that equation.
Consider the following factors, which both short-term and long-term should have a positive effect upon the national housing market:
1) If the recession has had any good effect, it's that people are buying fewer gadgets and paying down their debt, while saving more money.
Eventually, this will lead to more people being able to buy homes.
2) We still have another few months before the $8,000 homebuyer tax credit ends. Who knows -- Congress could even decide to extend it one more time.
3) The ratio of home sales prices to rent has been decreasing. This means that while, in 2007, most young couples found it much cheaper to rent than to buy a home, in 2010, the gap has narrowed to the point where if you buy right (more on this later), it is now cheaper to own than to rent!
4) The ratio of income to home prices has also declined considerably, making home prices more affordable than they have been in years.
5) Although inflation is looming in the distance, interest rates are still near historic lows. With prices having declined and interest rates low, that makes mortgage payments substantially cheaper.
6) Baby boomers are nearing retirement age. Their children (the ones who didn't move back home) are grown and out on their own. Eventually the boomers are going to sell their current homes and begin to purchase homes in less-expensive areas such as the south, southwest and the less-populous areas of many states.
Eventually, this will lead to more people being able to buy homes.
2) We still have another few months before the $8,000 homebuyer tax credit ends. Who knows -- Congress could even decide to extend it one more time.
3) The ratio of home sales prices to rent has been decreasing. This means that while, in 2007, most young couples found it much cheaper to rent than to buy a home, in 2010, the gap has narrowed to the point where if you buy right (more on this later), it is now cheaper to own than to rent!
4) The ratio of income to home prices has also declined considerably, making home prices more affordable than they have been in years.
5) Although inflation is looming in the distance, interest rates are still near historic lows. With prices having declined and interest rates low, that makes mortgage payments substantially cheaper.
6) Baby boomers are nearing retirement age. Their children (the ones who didn't move back home) are grown and out on their own. Eventually the boomers are going to sell their current homes and begin to purchase homes in less-expensive areas such as the south, southwest and the less-populous areas of many states.
And speaking of inflation, real estate has historically been a good hedge against inflation. As the cost of building materials rises, new construction prices increase, and this pushes re-sale home values higher.
But the key, historically, has been to buy it at the right price.
And the right prices are now here in 2010.
But what houses am I talking about?
Is your neighbor's home -- with the fancy upgrades and the neatly trimmed lawn, that's selling for top dollar -- the right price?
Absolutely not!
How about that ranch down the block, in fairly decent condition, where they are behind on their payments and are looking for their lender to do a short sale?
Well, maybe. But you can still do much better than short sales.
The one I'm talking about is the one down the next block.
You may have passed it on your way to work.
You noticed that the lawn had not been cut in a while, and the bushes were up too high. A few windows were boarded up. The paint was fading a bit, the house needed a good pressure-washing, and the mailbox door was missing.
Maybe it looks something like this:
Let me tell you a bit about this house.
It has three bedrooms and two baths, and a total of 2,165 heated-and-cooled square feet. It was built in 1949, a time in our history when homes were built to last.
In 1994, it sold for $51,300. Then in 2006, at the peak of the market, it sold for $93,000.
That's an 81% appreciation rate in 12 years, or a bit over 7% per year.
When it came back on the market in 2009, it was listed for $49,900. It didn't sell, so a few months later it was dropped in price -- first to $39,900, then to the price that I am looking at right now.
That price is an incredible $29,900!
But that's not all.
The bank is so eager to sell this house, it is willing to pay up to 3.5% of the purchase price in closing costs for owner-occupants, and it will even give up to 3% for investors. (Note: most investor loans are capped at 2% on seller concessions, and few lenders will even do a loan on a $29,900 house, so this will be a cash deal.)
I'm going to be very conservative now, to prove a point.
If you bought this house, and rented it out for $1,000 a month (the actual going rate for this size house is $1,000-$1,200 a month), that would be $12,000 annual gross potential rent on a $29,900 purchase.
OK, Ethan, but what about the repairs needed?
Fine, I will throw in $6,000 for repairs, so your cost basis is now $35,900. (And that assumes you pay the full listing price on the house.)
If we divide $12,000 into $35,900, our gross potential return is over 33% per year! And that's without figuring in any possible appreciation, or built-in equity.
Other homes in the same area have recently sold in a range from $76,000 to $120,000!
So, do you really care if the market goes up or down a little bit more from here?
Even if housing prices do not appreciate at all for the next 10 years, like Japan in the 1990s, could you still make money by buying homes like these now?
Absolutely, yes!
"Opportunity 2010" is knocking at the door.
Don't let it pass you by. ...
See you next week!
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Ethan Roberts
Contributing Editor
The Tycoon Report
