Real estate bubble?
 

I'm thinking of buying my first home. Is this bubble going to burst, or should I not bother waiting and buy now since I'm wasting money on rent anyway? I'll be relying on a combination of savings and family loans, so low interest rates aren't really to my advantage anyway. All the agents I've talked to say prices might level off but shouldn't fall. Of course that's what I'd expect an agent to say, so I'm interested in hearing opinions from more objective people.

My son works for a mortgage company. The execs there say that here in California the bubble is gonna pop. Prices have gon up toooooooooooo fast and too high. In a crappy area of Los Angeles you are looking at 400 grand! It happened about 15 years ago. HOuse prices dropped in my area by 100 grand.

If you need help contact me, icq is 237842929.

They did a show on this on CNBC last night with 6 experts. half said its a bubble that's going to pop, and the other half said these gains are permanent.
So no one knows.

I wouldnt buy now, Id wait a few years. a lot of people got ARM's and when those rates go up they wont be able to afford their payments and there will be a sell off.

As long as the government doesn't stop the constant invasion of illegal aliens and foreigners into the US, the real estate market will continue to climb.

This is basic supply and demand, but many real estate "experts" are not really aware of the impact of illegal immigration on the market. That is why they aren't factoring it into their predictions. Plus they're not fully aware that Bush has absolutely no intention of controlling the US border

If you buy property that you can afford to sustain no matter what the cycle you will be ok.

The folks that get hit hard in the down cycles are those who bought entirely on speculation without the resources to sustain their portfolio in a buyers market.

Uh, I *promise* you... the illegal aliens in the US aren't buying houses around here :) Shit, my buddy runs construction crews and the mexican guys live in group apartments.

I'm guessing you blame the dot com bubble on McDonalds workers?

Thanks, that's a good point. I guess the horror stories you do hear about are from the people who overstretch themselves financially. (But even if paying cash instead of mortgage, I'd hate to buy at the peak of a bubble.)

It's hard to say and no one knows when it's gonna burst... actually, I'm looking forward to it, but that's another story. In your case, get the house! Renting is throwing $$ out the window, plus you don't have the tax advantages as you do when you get a home. Don't worry about the bubble, just get something soon. If you overpay a few bucks, so be it... the rewards outweight the risk. Also, I'm assuming you plan on living in the house, so don't worry about trends. You'll make your money back and then some as long as you hold it for a few yrs.

Interesting thread..

real estate is physical like brick. it will always have some sort of intrinsic value.

Not sure where you live, but California is still way to inflated. I bought back in 2000 and made a killing but my place is way over priced in my opinion. I am going to look in Austin, Texas in a few weeks since the prices there are really low and it seems like it is going to give me a great return. Phoenix too, my buddy is buying a huge house for less than 300k for investment.
You should definitely get in the real estate game, it just might not be for your own home. If you have cash to put down so money find a developing area and get in on the ground level.

I agree. My house went from $380,000 to $600,000 in just 3 years. Something's gotta give.

damn, nice increase! yea... CA, FL, NY etc is crazy! How does the avg family afford a 500k house working a 9-5. I def agree... it's gonna happen real soon

If you have the money and don't care about interest rates, then definitely WAIT. Real estate may have intrinsic value, but California (and the bubble) isn't built on bricks rather it's delusions. The price of a house in Los Angeles is just insanity. I know someone who got a great deal on a house in the Hills during a real estate recession and I couldn't imagine what it is worth today.

You don't buy when things are good and sell when they are bad! You should try borrowing someone else's house, sell it now, and then have them buy it back from you in a few years. :)

They've been saying it'll burst here for a couple years. There are signs of slight drops here and there now but it is still pretty ludicrous.

Far from LA here but still :2 cents:

The place to buy in Cali is not L.A. but Riverside county. I just spent two weeks down there and I spent a whole lot of time scoping the situation out.

While I was down there, NY Times identified Riverside as one of the top 5 hottest markets in the country, and it's easy to see why when you're there. In fact, some friends told me that developers are creating such a stress on the infrastructure with all this building that there is serious talk about creating an 8 lane freeway from L.A. out to Palm Springs.

If that happens, your investment will be virtually guaranteed, as long as it's not all the pennies you have, as KRL says, and you can stay in for a bit of time.

The other side of the coin is that many American investors are going north to major cities like Toronto and Montreal and snapping up what are, to Americans, absolute bargains. It's not just individuals who are doing this, but institutional investors, which tells you something.

I don't know if GFY is the best place for advice for this, while there are some good knowledgable people here on this type of stuff you will also get a bunch of idiots so you have to decided which is which and go from there ;)

First of all you NEED to decide if this purchase is going to be your " dream house" not going to move for like 20 years kinda house. If so buy now, if not I would wait a little longer to see what happens. If you buy now at 700K and the market pops and your house drops to 600K in value next year who cares if you not going to be selling soon, it will go back up in value and in 10 year prolly be worth 1 million or more. If you buy now, and in a couple years it is worth less and you want to move to a bigger or nicer house and you sell you will lose money, not wise.

Also, while prices will likely level off there is no gurantee that they will drop. you could be waiting a long time for them drop if they ever do, and all while you do that you are wasting money on rent. Not sure how much you are paying rent, but if you are dropping 2,000K a month and you wait 2 years you better hope that the market DROPPED 50K in value just for you to even out.

I would suggest getting a loan and financing it. We may never see these intrest rates again in our life time. You should be able to invest your money safely and make more then 6% on it. Not to mention you get tax deductions off of the interest. And for this reason I would buy right now because there is 100% rates are going up and could be as high as 8% in the next year or two.

We've been researching this very thing. It seems our home value has increased 65k each year for the past two and one half years. That seems dreamlike.....so, we started checking it out.

Here is one thing we've learned and maybe it only applies to our area; but, we are within an hour's commute of Seattle and my small city is now considered a bedroom commute community for those who can no longer or don't want to pay the prices commanded for Seattle real estate.

In both directions, an hour north and an hour south, the housing market is exploding...not like a bubble bursting, but people are considering the commute as part of the price they have to pay to get a house that is both affordable and large and modern, etc.....bigger bang for your buck, the further out you move.

Plus, look at the land. Many communities are now permitting house separation to be four feet or less from foundation to foundation. Hard to believe, but true. So, it's entirely possible to buy a 3200 sq.ft. house on 5000 sq. feet of land....plant one bush and your landscaping is done.
Yet, people are paying for it because they want a badass huge house.

In our area, Walmart is moving in...we seem to be following the pattern occurring in Riverside County, CA.....my friend lives there....she said, as soon as Walmart moved in, her values went up. And, Walmart doesn't come in, unless there is a population to support it.

So, visit your county and find out who is coming to town, as far as commercial properties are concerned. That should help, too. We are learning that Walmart is usually followed by Target and Lowe's...which means we are now a bedroom community for Seattle, Tacoma, and Olympia.......

While we might level off, I can't see values decreasing......I'm sure we will level off....65k a year is outstanding.

Definitley depends on where you live, what the industries are that support the local workforce and what the availablity or inventory is for availiable housing or land for development.

It just depends on the Area. Rental rates are a good guage of what a house's price should be. Rental rates are more stable and consistent than housing prices, and right now they're down cuz so many people have bought houses. If you could rent the house out for what the morgage will be (at a slightly higher rate than the lowest right now).... then you'll be fine.

Great advice in this thread :thumbsup

If there's any land available in new estates then grab some now. Its value will go up once it becomes harder to get vacant land in that area. Then you can either sell for profit, or build your dream home.

We were lucky enough to source a block of land in November 2003 at April-May 2003 release prices. That was about a +15% difference in market value in our favour straight off the bat. We could have sold it a couple of months later and made $20-$30k without even thinking, but we bought it to build. :)

I agree with some of your post, but for the most part I wouldn't touch Riverside in terms of real estate investment. A couple months ago Smart Money mag ranked the inland empire as one of the top 3 overvalued areas in the country. Also, Riverside gets hit hard when Cal goes into an economic recession and real estate seems to go down just as hard. ie (early to mid 90's) Real estate in so Cal has been flatlined since last Sept and all indicators are suggesting this will be a year of only single digit increases if any.

Right now Phoenix is the hottest real estate market in the country. Instead of investing here in San Diego, I'm building a new 5br home w/ pool in the southeast valley of phx that will be done in June. I bought it last Sept for 300k and the builder is selling that floorplan now for 400k and expected to be 425k when I close in two months, not bad for 9 months. Whats happening there is what happened to Cali last year and Vegas two years ago. Phoenix should continue to increase rapidly the rest of this year and eventually slowdown probably by next Jan. Housing there went up 7% in Feb and 8% in March. If these increases continue housing will double there during the calendar 05 year, not even including the phenomenal growth of 04.

What's interesting about this topic is that there are GFY threads dating back to 2001 / 2002 re the imminent collapse of the bubble... hasn't happened yet. Of course, the Fed's actions after 9/11 helped stave off any real estate collapse... Now that we live in a completely different world--$50+ per barrel of oil, weak dollar, has any factors changed to SUBSTANTIALLY increase the chances of an RE collapse?

Even if there was a collapse, Im sure it would be REGIONAL as opposed to the WHOLE US real estate market.

buy waterfront and you won't have to worry as much

You are right. No one should EVER predict an IMMINENT crash in any market! No one is that smart. Just that lucky. It was obvious in the mid-1990s that the stock market was fundamentally over-valued and that holders of stock in companies like Etoys and WebVan were heading toward disaster. If you would have said in 1996 that a market crash was imminenet you would have been proven a fool. Of course, it kept rising. Then in 2000 the NASDAQ crashed in the world stock market crash since 1929. It lost 80% of its value. The other markets got shelled too.

Has anything substantially increased the chances of a Real Estate crash? Absolutely. The prices have risen completely out of historical context. An inflation adjusted chart of real-estate prices shows a steep rise the past 5 years completely out of line with anything we have ever seen in the US before on a national average basis. Bubbles usually bring a lot of speculators to the table buying on margin. A LOT of people are speculating on real estate and people are using dangerous leveraging options such as ARMs.

Can anyone predict WHEN a bubble will burst? No.

Can anyone say with certainty that an RE crash will happen? No. because the market could just as well trend sideways for 10 years until values come more in line with what people have historically been willing to pay for real-estate.

On regional vs. whole market. When the markets crashed in 2000 some stock maintained their value, some even rose but overall it was a bad place to be investing.

In 1999 I knew the stock market had become too speculative because every time I would go out to dinner I would overhear a conversation about the stock market. Now, the same thing is happening with real estate. It happened just last night, for example.

Some people get rich in bubbles. Very rich. Others, buying near the top, go broke. They lose their life savings and more. 1929, 1973, 1999, tulip mania, South Seas shares. There are many examples.

Exactly, and one of the best ways to do this is to put more money down on a house. I'm all about managing risk. If you put more down on a house you borrow less, pay less interest and make a better month-to-month profit. It all depends on where you are in life and what kind of rise you are willing to take. People who don't manage the potential downside could really get killed.

How about the people in Sydney who purchased $500,000 houses two years ago with very little down that are now worth $300,000?

http://www.smh.com.au/media/2005/03/...862252221.html

Even if it dips down, all you need to do is think long term (like 20 to 25 years) and you're golden. Real estate keeps up with the ever depreciating quality of money. Spending power erodes over time--real estate appreciates.

Don't put your life on hold waiting for the bubble to maybe burst. Yeah, if it bursts after you buy, that sucks, but life is 20/20, and for something like a house (assuming you want to live in that house for quite some time and perhaps raise a family there) go for it. The whole bubble cycle will come back around again like it always does.

So what if it doesn't burst in the next 5-7 years. That's 5-7 years of rent money vaporized into thin air that you'll never see again and that you have nothing to show for. That's 5-7 years of mortgage payments, even on an inflated house price, that you could have paid.

I'd rather make a mistake in buying an overpiced house, and wait for a new bubble to begin, rather than throwing away money. We can't look into the future so we're bound to have some regrets. But it's not all that bad in the big picture sometimes.

History says differently. Adjusted for inflation the averahe US property sold in 1940 was worth less than when it was if purchased in 1915. Adjusted for inflation real-estate purchased in 1950 was worth about the same in 1985. Those are 25-35 year periods where real estate investments were a poor allocation of capital. (SOURCE: Shiller). Buying into a bubble can make long-term investments become long-term losses. They can also make people rich if they get out at the top.

If you lived in Japan in 1989 making real estate investments you are probably broke today. Now I'm not saying that anything like that will happen. I don't think it will. But if you had purchased a million dollar property in Japan in 1989 with $200k down it would be worth only $200,000 total today. Japanese RE is down 80%. You would have a loss of $600k.

Say a small investor purchases a home with the purpose of flipping it. He purchases the home and accepts a monthly loss (mortgage-rent-expenses-taxes) because he is going to sell it for a large gain later. Now what happens if rents only rise slowly and prices depreciate and don't come back to even for ten years. Now, he is paying out money every year hoping for the market to come back so he can sell at break-even.

Returns are related to risk. High returns, high risk. That is the option all of us have. If "everyone knows" a market is hot the risk keeps going up as there is more and more speculation.

Colin,

You are right about your historical snapshots. But the 1940 snapshot is misleading. Sure, someone unloading in 1940 will be losing money. But check out the outcome if he/she sold after the 1945 and ride the spike up furnished by America's post-war boom.

Just like in any economic time frame there are dips and there are spikes. Perhaps if the snapshot was taken in "middle" periods, we'd see a steady appreciation?

Yeah, but that rise lasted for only about half a decade. If you had bought 5 years later you would have been at break-even for the next 30 years after you discounted inflation.

OK, these are just averages. Out there were many great opportunities and there still are. I have a suspicion they are not in Boston or San Diego though.

Amen to that. And add Los Angeles to that list. Some parts of Northern California too. :thumbsup

We agree :-)

Buy, Buy, Buy.

Assume the market is leveling off here in San Diego, well that just tells me, it is leaning towards more of a buyers market which says, I can work the seller for a better price.

The bubble is a bunch of crap. The only time a bubble will affect you is if you are flipping homes. If you purchase a home and it is within your means, you won't have to worry about anything. A home is a investment as long as you can afford that investment and not try to keep up with the Jone's.