More Reflections on The US Real Estate Market

MSN came out with an article today about how the real estate market in the US has ‘dropped to 2005′ prices.  The article’s tone and sensational journalistic style made it seem as if that were an unprecedented disaster and the world was coming to an end.  Imagine!  House values are now at 2005 levels!

The surprising thing to me is that people have such short memories.  God gave us a brain and the ability to remember, so why not use it?  The real estate market in the US (or at least most of the US) was stagnant from the mid 80’s to the late 90’s with typical appreciation of 3-5% annually, maybe less.  It was common knowledge that to  break even you had to stay in your house for at least 5 years after buying it, otherwise you’d take a bath.

When the stock market went kaput in the year 2000 and the tech stocks plummeted in the year 2000, everyone dumped what little money they had left into real estate, thus dramatically increasing demand for real estate and coupled with low interest rates, created unprecedented ability to buy.  Naturally, prices started to rise and just like every other bubble,  everybody jumped on the bandwagon because nobody wanted to miss out on quick and easy money.

So, from the year 2000 through 2005 prices escalated very quickly (in real estate terms) and certain demand markets like California, Florida, Nevada and Arizona of course, went through the roof.

In 2005 fear started creeping into buyers since everybody already knew prices were too high (in the year 2005 mind you) and in 2006 demand started to slow down and the rest is history.

The point is prices were already way too high in 2005.  To read now, in 2008, how ‘tragic’ it is for housing prices to fall to levels that were already unsustainably high in 2005, doesn’t strike me as a tragedy.

I remember reading in the Fort Lauderdale Sun-Sentinel (in 2005) that the median wage of income earners in Broward County was approximately $46,000 a year and the median house price (in 2005) was approximately $325,000.  Now I ask you… how is somebody making $46,000 a year going to buy a $325,000 house?  They aren’t.

I can deeply and sincerely sympathize with people who bought their house at high prices and now their house is worth less than their mortgage.  It’s a terrible position to be in.  However, the same thing happened in the early 80’s when housing prices suddenly took off (although not nearly to the extent they did in the early 2000’s) and also at that time interest rates rose dramatically and people were scrambling to lock in their mortgages at 12%, 15% and even 17%.   But the point is that many, many people ended up owning a house where the mortgage was way more than the house was worth.  The suggestion of such a thing now-a-days is met with a look of horror and shock as if you were telling them a lie. They seem to think this is the first time it’s happened.

Nobody remembers.

But the answer is ALWAYS the same.  When you buy a property, buy it only if you can afford to hold on for the long term.  In the end, property is just about the surest way to build long term wealth.  It hasn’t changed.  Historically, it’s always been a long-term asset.

Are you worried about how horrible the crisis is in California, Arizona, Florida and Nevada?  Well, listen up…

One time I was on a plane and sat next to a realtor from Laguna Beach.  We were talking about prices in Orange County and she said that for the last 100 years  Orange County real estate has gone up, then dropped somewhat, then gone up again, then dropped, etc… The drop in price after the rise was NEVER as low as the previous low.  She then mentioned that people will ALWAYS want to live in Southern California.  Nice weather, beautiful scenery, healthy economy etc. etc…  Guess what?  She was right.  I would like to expand her comments to Arizona, Florida and Las Vegas too.  People will always want to live there.  Right now times are tough, but hang on to your house and someday, when you least expect it, the market will take off again, demand will increase and there will be a short supply.

Perspective on the Housing Market

We can’t escape it.  Every time you turn on the television or read a paper, you are slammed with how terrible the housing market is.  Well, it’s true, but it’s not entirely true.  Sure enough, there are many people suffering greatly.  They can’t make their mortgage payments, their house goes into a short sale or maybe even gets forclosed on.However, that isn’t the whole story. Prices in good neighborhoods are declining, but they are not plummeting.  If you are looking for a nice house to buy in a nice part of town,  most likely you are not coming across a tremendous amount of bargains.  As a matter of fact, in the ‘best’ part of most American towns, prices are still increasing (not tremendously, but thats not the point).I was reading an article in MSN money today, and I came across this quote: “Despite rising foreclosures and skittish buyers, housing demand continues to grow every year through the creation of new households, whether from children moving out on their own, new couples getting together or couples splitting up. With current level of 111 million U.S. households growing by about 1 percent a year, new households will absorb about 1.1 million housing units a year, according to RDQ Economist chief economist John Ryding.”    The article went on to mention that 1.1 million was approximately the inventory of unsold houses in the US. What this tells me is that there ARE buyers looking for houses.  You’d get the impression from the media that no-one is buying a house these days.The bottom line is that people have to have a place to live.  You can either rent or own, but everyone needs a place. A few years ago, people who owned rental property were having trouble renting them, because everybody was buying their own home.  Nobody wanted to rent.  Now, its the opposite. But the way it has always been, and the way it will always be is that if you want to accumulate wealth over the long term,  you need to own property, including rental property.   The key is, though, you need to do it right.  You can’t just buy any old place and think you’re going to strike it rich.  That is what happened in the last few years and for that reason a lot of people are suffering. 

How Do The Rich Make Money?

How do the rich make money?  This is how:

 

Buy when every body is selling and sell when everybody is buying. 

‘So’, you say.  ‘Tell me something I didn’t know!’ 

Yes, I admit it. Everybody knows this.  It’s intuitive, even if you never, ever heard anyone say ‘Buy Low, Sell High’.  That sort of advice is common sense. 

Still, if everybody knows it, and it sounds so easy, why doesn’t everyone act on this advice and become rich?

First of all, is it true?  Yes.  It is.  It is the basis for almost all wealth generation.  It applies to stocks, real estate, gold, jewelry, inventory, supplies, food, foreign currency, commodities: just about everything.

So, why don’t we do it?

Let’s take a look at today’s world right now in the United States.  Today, when I turn on the television, or read a magazine or newspaper, I read or watch stories on how absolutely terrible the real estate market is.  I hear everywhere about foreclosures, people being thrown out of their houses, real estate values plummeting,  banks writing off billions of dollars of dubious loans, recession, unemployment and general catastrophe all around me.  It sounds absolutely terrible and totally intimidating.  I think to myself ‘Wow, Now is a terrible time to buy because nobody wants real estate…’ Right? 

Wrong!!

 First of all, the media has always made every news story as horrific and fearful as possible without coming right out and lying about it.  If there is a hurricane, and you watch the news, you will think the world is coming to an end.  But guess what?  The hurricane passes, the trees that were blown over get cleaned up and in a few days, life is back to normal.  It wasn’t the end of the world.  So, if you are wise, you will temper everything the media says with the knowledge that they are trying to sell their product, which is fear.  Why?  Because the media’s product is fear, and fear sells.  My advice is to ignore them.  Listen to the news if you must, but only pay attention to the facts.

 

Secondly, it is human nature and good sense to take precautions.  If a storm is coming, you go inside and seek shelter.  If it’s cold outside you put on a jacket.  The way the media presents the horrific news to us, it is common sense to stop buying real estate until ‘the worst real estate situation since the great depression’ is over.  But, there you would be wrong.  Economically speaking, now is exactly the time when you want to buy real estate.  What you have to ask yourself are the following questions:

 

Will people ever again need or want a house?

How has real estate been as an investment over the last 100 years?

Is everybody selling now?

Are prices falling?

 

Let’s answer these questions.  Will people ever again need or want a house?  Yes.  Without a doubt.  People will always want and need a place to live and call home.  (This applies to unimproved land as well).  What are people going to do instead, live in caves?  I don’t think so.

Has real estate been a good investment over the last 100 years?  Yes.  If you were to chart the values of homes/land you would find in most markets that the price goes up, drops somewhat, then goes up again, then drops again, then goes up, then drops etc…  The interesting thing to note is that the drop is almost never as much as the previous low.

 

Is everybody selling now?  Yes.  Why is everybody selling?  They’re scared and have gotten themselves in a bad economic position.  You can’t blame them.  However, if every body is selling and nobody is buying then that means there is high supply and low demand.  That means the price will fall until demand picks up and there is an equilibrium.  Now is the time to buy since the prices are falling.

 

Are prices falling?  Yes.  Economically speaking, they have to fall since there is an oversupply and under-demand. 

What is the rule we talked about earlier?  Buy when everybody is selling and sell when everybody is buying.  If you do that consistently, you might just end up rich.

Tips for Renters

There are several things you can do to save money on rent.  Here are a few suggestions that might help you lower your rent expense. Read more

Tips for Homeowners

Owning a home is expensive, but there are a few things you can do to lower your ownership costs.  Try to do as many of these tips as you can and you will save money.

  ·       Save money on homeowner’s insurance.  Shop around every time your policy comes up for renewal.  It is imporant to lower your insurance costs and maintain adequate coverage.  If you shop for home insurance using online insurance quote comparisons, you can know very quickly if you are currently spending too much on homeowner’s insurance..  I’ve found Insureme to be a good source for high quality insurers at very good prices www.insureme.com.  The point is never pay more than you absolutely have to.  If you live in  Florida you may be stuck for finding a cheap policy for windstorm, especially if you are within a mile or two of the beach. If so, the only carrier is probably with Citizen’s Ins.  At any rate, SHOP AROUND.  

·       Do maintenance to your house when it needs it.  Don’t put it off or wait.  It will always cost you more to fix a problem later than it will right away.  I have owned several houses and normally the big ticket maintenance items are the roof, the AC (or heating), the plumbing and the electricity.If any of these need repairs or replacing and you don’t have a friend who is a contractor to help you out, then SHOP AROUND.  Get at least three quotes from REPUTABLE contractors.  Throw out the most expensive and the cheapest.  (Assuming the cheapest is way cheaper than the others).  You don’t want a contractor who does a crappy job.  GET REFERENCES from other clients who’ve used them before.  If they won’t give you references, then tell them to get lost and find another contractor.  Call up the references and find out.  Walk up and down your street and ask your neighbors who they’ve used for roofing, electrical work, etc… and whether or not they’re happy with the work and how much it cost.  Bottom line… DO YOUR HOMEWORK.  If you can do it yourself, consider it seriously, but many times, you will spend more doing it yourself than hiring somebody who does it for a living.  You save money not by being cheap but by being wise.   Check out contractors here:          Angie’s List - Find thousands of unbiased ratings and reviews on service companies in your area, join Angie’s List today.         Also, you can check out www.improvenet.com, www.renovationexperts.com, www.contractors.com           The federal Trade Commission has a great site for information on contracting/contractors.            Read this first before you begin any home improvement project…          www.ftc.gov/bcp/conline/pubs/services/homeimpv.shtm

·       Landscape your home if you want to sell it.  If you want to increase the sale-ability of your house, you must landscape your home.  Its hard work, but this is a task you can do yourself.  It doesn’t have to be done all at once, but before you begin, draw it out and have a plan.  Do it right.  Go to the library and get some books on Landscape design.  Find a picture of something you like and copy it.  Remember two rules.  First, never have more than 5 different plants in any single garden and second, group large plants (like trees) together in odd numbers.  If you buy large plants like trees, buy them at a tree farm or wholesaler.  You’ll save significantly over what you would pay at a nursery.

·       Don’t put in a pool unless you live in Florida, Arizona, California or Hawaii.  Yes, I know they’re nice, but save the money.  In almost every other state it won’t increase the value of your house.  In the four states listed above it might, but even then not significantly.  It will, however, make your house more sellable in those states.  If you must do home improvement, then improve the kitchen and the bathrooms, then finish the basement (if you have one).

·       Pay more for a house in a landlocked area, close to the beach or in a great school zone.  Yes, you should pay more.  If you buy a home in the middle of nowhere because its cheaper, chances are it won’t go up very much in price, if at all,  and you’ll have a hard time selling it.  If you buy in a landlocked area (think Manhattan) or close to the beach, or on a lake, or in a built up area (any good area close to a downtown, like Queen Anne Hill in Seattle, Highland Park in Dallas, Coral Gables in Miami etc…) you will never have trouble selling the house and it will go up in value.  Why? Because everybody wants to live there.  If you cannot afford the fancy area of town, then try to choose an area that has a ‘feature’, like is close to a lake, close to a subway stop, or in a good school system, close to a University, etc…

·       Don’t spend money on projects you like, but won’t increase the value of the house.  You might like gardening, but don’t build a greenhouse (if you can’t afford it).  It won’t increase the value of your house.  Remember, if your house gives you money, you can give money to it.  If it doesn’t give you money, don’t give your money to it.  

·       Lower your property tax if you can.  Always contest what the county wants to tax you.  If it goes up at all, contest it.  Why?  You might win and thereby save yourself a lot of money.  If you don’t you’ve lost nothing.  If you don’t try, you will most certainly pay more than you did last year.  Chances are in the next few years your house’s value isn’t going to skyrocket, so neither should your taxes.  

·       If you have a mortgage, then think about refinancing.  Of course, it goes without saying that you have to shop around.  Only refinance if it will save you money and you’re not going to pay off the mortgage anytime soon. Pay attention to closing costs, interest rate, hidden fees, fixed, arm etc… Don’t rely on anybody but yourself.  Find out.