Posted on 08/20/2008 6:30:46 PM PDT by SeekAndFind
The statement above means: once people learn how to make money in residential real estate, there is no going back. Many people believe that real estate as an investment is dead, buried and never to be seen again, but I sincerely believe they are wrong. As I write this, there is a new class of millionaires-in-training who are preparing to get wealthy in real estate. They are buying all the foreclosures, in good areas, they can find. About 3% of the population is busy in this enterprise and about 30%, 10 times more, are people who will tell anyone who will listen that real estate investment should be talked about only in retrospect. Let them talk, while the smart ones are out there. Oh, by the way, not all the smart ones are Americans. Many from across the pond are here spending like they have 50% more money than they do…well actually they do as many currencies have a very positive exchange rate with the dollar.
Why am I so sure about real estate investment? During my early financial training in the securities business, I watched a small-business environment become a mega-industry, showing how great wealth can come from inauspicious beginnings. When I was active as a stockbroker in the 1960s, the number of shares traded in a day would not quite equal the number of shares traded in a minute today. A billion shares change hands each day the markets are open now; about 6 million changed hands then. The ‘60s even had a mini stock market crash and managed to get up to 28 million shares May of 1962. How could this almost 100-year-old business become a giant in its most recent decades? I will be happy to give you my eyewitness account.
The mutual fund industry came to life in those swinging ‘60s. The growth of the Fidelity Group of Funds, for instance, was so phenomenal that one of the fund managers, Gerald Tsai, became a superstar and launched his own fund that was oversubscribed upon the offering. How could this happen? Thanks to mutual funds, ordinary people, not just bankers and corporate presidents, could take advantage of the stock market by making small investments, and they did in droves. In turn, the mutual funds would buy the common stock offered on the stock exchanges and volume started to build. From here, Congressman Keough authored the House of Representatives HR-10 bill which became law and the Keough accounts for retirement were born. Today they are better known as IRAs. Once the ball got rolling, there wasn’t any stopping it and people found the stock market a fine place to invest their money thanks to the new-found security and simplicity of mutual funds and IRAs.
The stock market had its setbacks as well and people lost money, swearing that not only would they never invest again, that the stock market would never rise again. Wrong! But it does sound familiar. As volume grew, the brokerage houses began inventing some of wildest investments commonly known as derivatives and the rest is history. A billion shares a day is nothing to sneeze at and we are only just beginning. In the 1990s, the Internet craze hit Wall Street and the “new economy” pushed even the poorest of Americans to find a way into the market and receive riches beyond their wildest dreams.
At the dawn of the 21st century, Wall Street ran out of steam and all the riches started to look like “fool’s gold.” People pulled out, gains turned into losses, and the stock market came down. Again the thought was “it’s over and it isn’t coming back.” For the general public, “never” lasted only about four or five years. That’s when investors and stock market gains returned.
Now let’s take a look at real estate. I bought my first house in 1968 for $37,500, and five years later I sold it for $43,000. It took 6 months to sell, which wasn’t unusual at the time, and the profit was about right. I bought a bigger house for $44,000 and 3 years later I sold it for $72,000 over a weekend. Wow! How did I yield that tremendous return? Inflation, inflation, inflation! What got it going? Believe it or not: oil. It came with an embargo that drove prices up. Houses couldn’t be built for the same costs because building materials were spiking. Sound familiar? Starting in the early ‘70s, everything went up in real estate in Southern California until the late ‘80s and early ‘90s when the aerospace industry, one of the largest employers in the state, stalled with the end of the Cold War and moved to less-expensive states, triggering a mini-recession. Prices fell and didn’t return until the middle ‘90s. What helped bring the market back was the Federal Reserve cutting interest rates and ushering in 30-year lows in rates in 1993. By now you must be getting the picture.
The turn of the century also brought an unprecedented attack on our shores that changed a stock market recession into the beginnings of another bull market in both the stock market and the real estate market. What facilitated this was another drop in interest rates by the Federal Reserve to 40-year lows in the early 2000s and we took off, full speed ahead, until we hit the wall. Is everything the same as it was in all the earlier times? Not exactly, but we are a pretty smart nation and we will figure out how to get rolling again. If it doesn’t appear to be happening, check the underlying data and you will see that we could be close to or have already hit the bottom in a number of real estate markets. The fact that real estate is more a local phenomenon and the stock market a national one should be noted as some real estate markets will soar from this point and some may never rebound.
Five to ten years from now, we will look back, wonder what the fuss was all about, and ask why we all didn’t take advantage of the opportunities. That also never changes because as they say, hindsight is 20/20.
I have tried to paint a picture of the investment world and why we always say it’s changing while it basically remains the same. At least now you can tell the “naysayers” to take a hike and feel confident, based on history. Like I said, the genie is now out of the bottle. I’ve told you why you should be investing in real estate. There is no going back. Time to make your wishes come true!
And the money made can be invested back in RE with guaranteed high interest.
In an ideal world, we would have that life of peaceful Utopian bliss, instead of strife and suffering and struggle.
Most people aren’t especially bad or greedy or mean. We just get caught up in life. I don’t like to see anybody hurt. I would sooner that we all had an equal and fair chance.
I guess that is why I am glad to see house prices go down. I didn’t purchase a house because I had common sense and wisdom enough to KNOW that home prices were artificially high — that is, supply and demand from other than fundamental reasons was raising houses to prices that were not sustainable for very long.
So when I had people at work rubbing my nose in the fact that they were getting rich from their homes, and I was still renting, I have to admit that while they were only gleeful to be getting ahead, it did have an edge of superiority to it. Now that prices are falling, I don’t feel vengeful but I do feel vindicated. What I predicted is happening and I didn’t get hurt because I knew what was going to happen.
I don’t like to see people lose a home. That has to be very traumatic. But all of the people losing homes either never could afford their homes, or they were very foolish using their homes as ATMs to live above what their annual incomes could support. I am not happy to see them suffer, but I am grateful to see that the responsible folks are safe and sound and those irresponsible folks are learning a life lesson.
No, I don’t want anybody to suffer or hurt or lose their homes. But for the longest time, I was priced out of the market (ie - I refused to overpay for a home and therefore while I could afford a home, I couldn’t justify buying one at those prices...), those people who are now hurting, put the hurt on me by supporting bubble prices and putting me in the position where I couldn’t buy a home.
For decades now, I’ve been furious at the prospect of creative financing to purchase homes. I feel very strongly that if ALL people had to put 20% down for 15 year loans, home prices would come down and STABILIZE in a way that most people can afford them. Instead, the industry plays all of these creative financial schemes, causing inflated house prices that price me out of the neighborhoods I want to live it.
If there were no gimmicks to home loans, houses by definition would have to be affordable, even if they were smaller than the McMansions so in vogue during the bubble. Even the value of the underlying land would go down to meet what people can afford to pay, since that is what sets the prices by supply and demand. You can’t charge more than people can afford or you can’t sell, and you can’t profit if you don’t sell.
Instead, we have seen a myriad of creative financing that has had the unintended or perhaps intended consequences of pushing house prices higher and making homes more “unaffordable.”
I can’t tell you how mad that makes me.
I wish people would shut up about this. The less competiton I have picking up foreclosed houses for a song, cleaning them out and painting them, and then renting them Section 8 (or flipping them for a cash infusion for my next two purchases), the better.
I believe that the fact we’re talking about “homes” and not some abstract stock makes this debacle all the more painful for many people.
You bet. I'm in So Cal...Lots of jobs, fabulous year round weather, heating bills all but non existent and only used our AC probably 7 days this summer. For us, the great year round weather alone is worth a small fortune.
All the watercooler talk about flipping houses and RE investing sounded great a few years back. But now those unbelievable fortunes gained from watching cable tv shows and fast talking mortgage brokers have faded. Folks are talking foreclosure, bankruptcy, and short sales to get out of the RE mess that once seemed so glorious.
Good on you for sticking to your principles. I bet you saved money by not buying artificially inflated properties.
That SHOULD be the case, I certainly agree.
However "liar loans" or "no doc" (no documentation) loans were in fact given out. In some cases all the illegal had to show were say, a few utility bills.
As you know, loan originators get paid up front, when the mortgage is signed and delivered; and there were many cases where for example, Spanish-speaking reps would get illegals to sign up for a loan that no normal person would approve. However, once the loan is sold, the risk is transferred to someone other than the loan originator.
Don't believe me? Do a Google search on "no doc loan" or "no doc mortgage" and spend a few minutes reading...
I agree but not entirely.
There are folks out there living in homes less than 2 years old that haven’t made a payment in 18 months and still have not been evicted. Living rent free for 18 months doesn’t get a lot of sympathy from me.
So yes, it is painful for many, but been a windfall for some. Even those who just paid interest may have gotten away with paying less than rent cost to live in their own home for years.
I appreciate your compassion, and I share in some of it, but not all of it.
Look at it another way — those loans (both good and bad) were products to be sold. The more loans that were made, the more inventory on hand to sell.
Unfortunately, the folks buying the loans didn’t have a clue as to just how bad they were. And these were some usually smart people — major banks, hedge funds, insurance companies, etc. etc. etc.
This crisis/debacle/mess is one of those deals where you can find examples to back up any case you want to make.
I tend to believe the vast majority of those folks who got stuck weren’t gaming the system. They may have been a few fries short of a Happy Meal in terms of financial sense, but not outright criminal.
That said, I’m basing my opinion on the typical, not the extreme example.
I’m also basing my opinion on the folks who actually did nothing wrong and are actually paying the mortgage, but are seeing their home values sink like a stone because of all the defaults in their area.
I am definitely poised to buy as soon as I want to and I should be able to get into a very nice neighborhood, the nicest I want to spring for.
More than standing on principles, was seeing that there was a housing bubble and seeing that prices would have to come back down to the mean at some point. I work with some exceptionally bright engineers, yet all that brainpower somehow went out the window when California RE was going up a steady 10% or more each and every year and many of those brilliant co-workers just HAD to have a new home — NOW!
I don’t understand how so many really intelligent people could be so badly fooled. Emotions can run high and you can talk yourself into it, but it seems that only 1 in 4 people I knew were like me, and saw the housing bubble for what it was, while 3 in 4 seemed to take prices at face value and assumed that real estate would not come down.
I saved quite a bit of money not buying last year when many urged me to because “houses are now bargains.” 6 months ago my new boss told me it was time to buy, and I told him I was in no hurry at all. 6 months ago he bought a foreclosure for rental investment. Last month he came by to say I was wise in waiting and he jumped in too soon. At least he can see it now.
The slump can’t last forever, and those who wait for an obvious bottom will miss it and catch house prices on the slow creeping upside, but those who jumped in bought Sacramento area homes last year are sorry now. They know they should have waited and saved 20% or more. 20% of $300,000 is $60,000. After all manner of taxes, I have to earn $100,000 to save $60,000. Waiting one year saved me the equivalent of $100,000 in salary.
That is why I am so hard on those who have continuously said, “Best time to buy ever!!!” At least in California, they have been completely and totally wrong each and every month they have said that and they will be wrong again over the next 12 months. After summer 2009, all bets are off. I just don’t know where prices are going after next year. But for the next 12 months at least, it is most certainly not “the best time to buy ever!!!!” at least not in California, and certainly not in the crushed greater Sacramento region.
A house is a home to me. A place to hang my hat. Not so much an investment. But it is a huge relief not to be upside down in a loan right now. I found a house I simply fell in love with last fall listed at $340,000. It just sold last month for $250,000. Had somebody bought it last fall for the asking price of $340,000 just because it was down from its $400,000 peak price, they would be out $90,000 and $22,000 ($90,000 loss wipes out the $68,000 down @20%, plus another $22,000 of negative equity). I am HUGELY relieved not to have been stupid and bought back when those folks were earlier saying... “Best time to buy, EVER!!!!!”
And you may well be right. And like I said, I don’t like to see people get hurt. I like everybody to be happy and be at peace with me and with themselves.
But I have seen your normal nice couple sitting at the slot machines or the gaming tables at Las Vegas Casinos. It is frightening how quickly your normal nice guy can turn into a gluttonous, avaricious pig on the thought of free money or getting something for nothing.
I sure won’t argue your point. I am sure there were many very innocent people who never could afford a home and suddenly they were told they could afford one, they got their hopes up and it seemed their dream would come true. I don’t fault those people. I’m sad for them. They never learned their lesson that “if it seems to good to be true, it probably is”.
So I won’t argue you. I’m not happy there was a housing bubble. I wish it never happened. I wish we had stability and steady, sustainable growth in housing. I’m not happy that now we have rotting foreclosures and slummy neighborhoods. Please don’t misunderstand me.
I’m just saying that many were innocent, but many deserved their lot. I think many people knew they couldn’t afford their home and thought, “hey, lets enjoy this place for a few years, then flip it for a big profit.”
A lot of innocent people may not have been so innocent after all. I am sad for the truly innocent babes that aren’t bright or aren’t savvy or deluded themselves into thinking they could afford McMansions on McDonald’s salaries.
Is that what is happening to your house? Foreclosures in your neighborhood are hurting your property values? Well, sorry to hear it. That is a shame. Can’t be fun to live through. Prices will come back eventually. They can’t stay down forever. Housing always recovers, but this will take longer than usual, so hang in there.
The value of the home, even if land cost is, I concur, about $125,000...is the distance to work, the school district and the absence of illegal immigrant neighborhoods or gangs...
That’s why Beverly Hills exists.
Great explaination. It will be frightening to see what the long-term consequences are if now taxpayers' money will be spent to bail out people from the consequences of this scam and no doubt future scams.
You speak logically...you could never win an election!
In my area, the prices for homes have leveled off and are slightly on the rise again, but condos are still falling and not selling.
Beverly Hills makes a Farsi version of their election ballots available. Does that tell you anything?
That's around 4.25% after the interest deduction.
I've got Countrywide calling or writing weekly, pretty much begging me to refinance - never gonna’ happen, I just sit there, collect the rent, and watch inflation reduce the ratio of rental income to financing cost.
But I was investing, not speculating.
In my area prices on existing property still have a long way to drop (around another 20%) before the numbers again make sense (if they ever will) to me as a rental property owner.
I think you have a point as well. So, I won’t argue with you.
No, that’s not happening to my house. However, I have heard stories of it happening.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.