Second housing bust on the way

[Win]

That method of picking a capitalization rate is probably as good as any.

Usually I see income approach to valuation as Pv=Pi/Ro, where Pv equals present value, Pi equals annual net income, and Ro is a capitalization rate. There are some other methods.

Net income is pretty easy to figure, but deciding on Ro can be problematic, and it makes all the difference in the final value. The last professional appraisal I had done a few months ago used 8% (0.08) as the local cap rate for that particular type of property being appraised (multi tenant commercial).

 

[Win]

Originally Posted By: Cutehumor
I was interested in a 350k house (3500 square foot)foreclosure, but wife won't do it. she thinks people trash foreclosed homes.


Certainly possible.

Most of the residential foreclosures I see noticed out around here are on loans taken out within the last few years, so the debt is likely close to fair market value or more than FMV in places where the market has tanked. No advantage there, so it is best to let the Bank get those, deal with evicting the occupants, and take the financial hit.

The ones to look for are completed homes that have never been occupied, as when the Bank gets them from a builder that has gone belly up, and wants them off the books.

If you are really serious, the best way is to get prequalified for a loan if you can't pay cash, and let a realtor know what you are looking for, and that you are a serious buyer. The one I went through just saw the house the morning it was listed as he was drinking his morning coffee, he called me and I drove up to meet him later that morning, and I bought the house on the spot.

 

[PandaBear]

Originally Posted By: Win
Originally Posted By: Cutehumor
I was interested in a 350k house (3500 square foot)foreclosure, but wife won't do it. she thinks people trash foreclosed homes.


Certainly possible.

Most of the residential foreclosures I see noticed out around here are on loans taken out within the last few years, so the debt is likely close to fair market value or more than FMV in places where the market has tanked. No advantage there, so it is best to let the Bank get those, deal with evicting the occupants, and take the financial hit.

The ones to look for are completed homes that have never been occupied, as when the Bank gets them from a builder that has gone belly up, and wants them off the books.

If you are really serious, the best way is to get prequalified for a loan if you can't pay cash, and let a realtor know what you are looking for, and that you are a serious buyer. The one I went through just saw the house the morning it was listed as he was drinking his morning coffee, he called me and I drove up to meet him later that morning, and I bought the house on the spot.


The houses are also in better condition if they are short sales rather than foreclosed. If you buy foreclosed, it is important to expect the unexpected and be ready to do repair yourself. Not for a non-hardcore property owner that wanted a "like new" house.

 

[oilyriser]

There will also be some partially finished homes, and if you can get in touch with some good contractors you might be able to get them completed.

 

[Amkeer]

Yup, deals to be had. Most of the people that are very wealthy, did it by investing in real estate. They unloaded some assets during the cyclical peak. Those same sellers are now buyers again.

 

[Brett Miller]

What really burns my @SS about news stories like this is they don't tell us about the 98%+ of homeowners who are making their payments on time. Or that most of the delinquencies are due to fraud or property flippers....

 

[ArrestMeRedZ]

Originally Posted By: Brett Miller
What really burns my @SS about news stories like this is they don't tell us about the 98%+ of homeowners who are making their payments on time. Or that most of the delinquencies are due to fraud or property flippers....


It might be like that in your part of the country, but here in Vegas that 98% is down to about 85% or less. They have already gone through the first wave of fraudulent transactions, flippers, variable rate loan buyers and novice investors that got in over their head. The last wave consisted of the homeowners that have had trouble making the payments due to layoffs, underemployment, overextended lifestyle or large loan payment increases.

The tsunami that started last month is the huge number of homeowners that realize their loan is for fully twice what they can pick up virtually the same house on the market right now. They just stopped making payments on a $350k loan for (what is now) a $175k house. This group discovered what their house was really worth when they found out the actual sales numbers from the "Dead Cat Bounce" of increased home sales that happened last month.

I'd be willing to bet we are looking at another significant drop in median home prices here. As Scott Glenn said in Silverado: "Be careful. You're in it now, and it's gonna get mean."

 

[Amkeer]

I love hearing all the negative sentiment! It tells us we are near a bottom, which is what we have decided.

 

[ArrestMeRedZ]

I'm just saying there will be a lot more foreclosures in my local market, and if you have to get rid of real estate, you won't be able to do it.

Even though I think there is more downside, I think it is approaching a good time to invest. You just have to be very careful. If you find an ideal home that you are willing to stay in for a long time, buy it (if you can get it for your price). For investments that pen out, it's a great time to buy and hold.

My business model is to make cash offers for 20% under the already depressed price. After you are the owner, perform any repairs and upgrades that need to be accomplished, then finance it and use the cash pulled out to do it again. I'd even be able to implement that model if I had the cash.

 

[BGK]

I've heard stories of people buying foreclosed houses at what they thought were bargain prices from the property's high value. Then soon after, they realize the house is still going down dramatically. You are a real gambler to buy now regardless of where the house is located, who built it, who lived in it, who designed it or any other factor simply because there is no way of knowing when the bottom will occur for that particular piece of property. Based on the overall economy, I would guess we are far from a price bottom in most major housing markets.

 

[Gary Allan]

There will probably be some additional culling ..but the world is hemorrhaging while we get cut. At some point ..some "X" factor will alter the doomsday scenario. Seeing the first indicators of this alteration will be the key to capitalizing on the whole mess.

 

[Kestas]

The layoffs continue in our area. I can only see it getting worse. Houses are still overpriced, verified by the fact that nobody is buying.

I'm peeved at the $8000 incentive given to first time buyers. All it does is inflate the price of starter homes by the same amount. This leaves the same out-of-pocket cost to the homebuyer, but leaves you and I (the taxpeyers) with less money. The only people making out are the sellers.

Stop offering programs that inflate the housing prices!!!

 

[Shannow]

Kestas, the easiest way to pay off debt is if you make the quantum of it smaller.

Inflate it closer to zero, and everyone is happy (well maybe 70 percent)

 

[Gary Allan]

Originally Posted By: Kestas
The layoffs continue in our area. I can only see it getting worse. Houses are still overpriced, verified by the fact that nobody is buying.

I'm peeved at the $8000 incentive given to first time buyers. All it does is inflate the price of starter homes by the same amount. This leaves the same out-of-pocket cost to the homebuyer, but leaves you and I (the taxpeyers) with less money. The only people making out are the sellers.

Stop offering programs that inflate the housing prices!!!


How will all homesales get inflated under the assumption that all buyers will have an extra $8k to haggle with? It sounds like a car commercial to me. 0% financing ...up to $3000 in rebates and incentives to qualified buyers ---which always too few truly qualify.

 

[Kestas]

Simple economics tells you that when a large number of people are given $8000 on top of their personal financial input, this increases demand (or makes more money available) on the same number of homes. Since buyers are competing for the same market, this extra money - all other things staying the same - puts upward pressure on the price of homes. Granted, it won't raise the price of every home by $8000 (I was being dramatic), but the upward pressure is there. Without the incentive, the price of homes would need to be lower to attract the same buyer.

Look at the actions in the past that artificially inflated the price of homes over the decades... 0% down... creative financing... ARMs... inclusion of risky buyers... government programs to disadvantaged groups. Without these actions, homes would be harder to buy, and the market would have to adjust downward to accomodate reality.

 

[PandaBear]

Originally Posted By: BGK
I've heard stories of people buying foreclosed houses at what they thought were bargain prices from the property's high value. Then soon after, they realize the house is still going down dramatically. You are a real gambler to buy now regardless of where the house is located, who built it, who lived in it, who designed it or any other factor simply because there is no way of knowing when the bottom will occur for that particular piece of property. Based on the overall economy, I would guess we are far from a price bottom in most major housing markets.


That's exactly what happens to many of the home currently being foreclosed upon. My friend is negotiating on one that was recently foreclosed (2 years ago) and once again currently foreclosed, and my other friend and I are doing the same with the apartment complex/duplex that was bought 2 years ago as a foreclosure.

Buying foreclosed properties needs a lot more capital and is not for someone that does not have enough capital to endure the time and expenses. It is like catching a falling knife. You better have a chain mail glove thick enough and an arm strong enough to catch something that is bigger than your eyes can see.

 

[Gary Allan]

Well, in our mortgage debacle, the government programs got applied to everyone due to loopholes exploited in the drafting of the program. Everyone was a disadvantaged buyer getting the benefits. It allowed everyone to buy beyond their normal capability. If it was restricted to a given income level, indexed for the local cost of living, then we wouldn't be here.

There were all kinds of reactive components to it. Those would have shown themselves too ..if it was run on a sensible level. You have to "make room" for all those of alleged disadvantage to acquire home ownership ..and "rationing" is just too anti-free market ..but at very high cost (as we've seen). "YOU'RE LIMITING GROWTH!!! sound bites and the other garbage you would hear in the promotion of self destruction since to do otherwise "would be unfair"

 

[Kestas]

Good point. How would keeping housing prices low (by not artificially raising their prices) limit growth? These are statements from people (i.e., mortgage brokers, realtors, insurance companies) who want to scaremonger the public with their greed.

 

[Gary Allan]

Well, lower pricing wouldn't ..but we're not in a growth environment.

This is going to be a very long and deep "purge" cycle since the quench cycle was so over extended in accomplishing what it did.

 

[PandaBear]

Originally Posted By: Kestas
Good point. How would keeping housing prices low (by not artificially raising their prices) limit growth? These are statements from people (i.e., mortgage brokers, realtors, insurance companies) who want to scaremonger the public with their greed.


One simple answer: increase supply.

That's the only way to increase growth without keeping price low without artificially raising their prices.