First of all, I am not a real estate expert (I trade currencies), but I could really use some help from those of you that are. My father has been investing in single-family homes for 6 or 7 years (he buys the home and then rents it out). We were talking last weekend about his business and I warned him that I thought we were in a housing bubble given the current circumstances and he laughed and said that historically real estate has NEVER declined in value and that historically real estate doubles in value every 9 years. I told him I was certain that real estate does decline in value, but I have had difficulty finding charts that track the value of real estate over any real length of time (I found charts that display the last 4 or 5 years, but figured I would need something that showed the last 50 years or so to demonstrate that there is risk in what he is doing). Anyway, I could really use some help from those of you who know more, or who have experience in this field. Thanks in advance!
^^^^^^^^^^^^ Zigrivers; Actually figure your Dad maybe mostly right,besides; you are in Zion Bank country. This may or may not affect your Dad; trends are not predictions. Have tracked RE prices for decades , occasionaly buy/sell, and you may want to search ,ask Jeeves about appraisers. EliteTrader has had some helpful reads; explore here. Do NOT care for the highly inaccurate , anti-capitalist word ''bubble''; but more ARM [adjustable rate mortgages], some mortgage brokers/bankers trying to cheat/micro manage appraisers, may result in plenty of bargains , next correction. Move not the ancient boundary marker-Solomon,trader king.
I would think that his first concern would be his exposure. In a nutshell, when things get rough, and your exposed, by renting, you are bound to get hurt. People default on their rental payments, and for good reasons, loss of a job. I recall a tenant, he started out his lease with an income of $250 K, left with an income of $12K. BTW, a securities broker... There are also some issues, apart from the charts to consider, like: * How much would it cost to build and buy the land for each house? How big is the difference to the selling price of each house? * The dollar is cheap right now for many europeans, for instance, or Canadians, buying in the east Coast. So, there is an extra demand in this housing market. * When interest rates go up, all asset values come down, just because of the discount rate effect on future earnings (rentals and appreciation minus expenses, in this case). * When interest rates go up, loan monthly payments go up, so the demand for housing goes down. On the other hand, the supply also comes down, but, generally delayed, which may bring about a temporary oversupply of housing. * When interest rates go up, the economy in general slows down. The whole point of the Fed raising rates is to correct an excessive misallocation of resources, like into real estate (i.e. Japan, China), by putting the brakes on the economy. * When interest rates go up, the currency becomes more interesting, or goes up, which is nice on one side, but weighs real estate prices more heavily on the side in which you also lose the demand from foreign buyers. * Don't forget the tax ramifications. By selling, huge earnings for that year will be generated... So, it's definitely hard to time the exit. I thought we'd hit the ceiling two years ago in Miami, hadn't considered the foreign buying effect of the dollar, and the poppies effect, and real estate has gone up 40% in this area for this period. Soros comes to mind. I insist, exposure is key, if you don't make the mortgage payments, you lose all... Can he afford to scale down his rents? Hope this helps.
Thanks for your replies. My concern for him basically comes because he's not a good manager of the properties (I sarcastically joke with him that he's running a charity and not a rental business). I believe that he's consistently lost money on the properties over the last 5 years, but believes he'll make it up when he ultimately sells them - hence my concern around the potential for real estate to take a hit. If the real estate market does take a hit, it ends up being a double whammy for him as he hasn't managed the rental part of his business well. He made the comment that home prices double every 9 years. I told him that if our home price doubled in 6 years (we've been living in our home for 3 now) that I would get down and kiss his feet. We live in Utah, btw. The housing market here is okay, but certainly not anything close to what we're seeing on the coasts. He followed up that comment with, "There has never been a dip in real estate prices - they've always gone up. Always." I traded through the internet stock bubble and those times are still very fresh in my memory - his comments about real estate and almost everything else I've read are startlingly similar to what we went through 5 years ago now. However, I am not a real estate expert and recognize that these markets are not the same. I would love to see a long term chart of real estate prices (something over the last 50 years). Commodities go through extended "bullish" periods that can last as long as 22 years, so it wouldn't surprise me to see that real estate has been rising over a significant period of time, but it is hard for me to believe that there has never been a "dip" or "correction" in this market. That make sense?
Does anyone know what a standard deviation is? BTW in march of 2000 Nasdaq was at 1.5 RE at 2.0 now. Can it go to 3.0? nobody knows.
As populations rise, as incomes grow and as the availability of good pieces of land become more scarce, real estate over the long term will always outpace any and every other form of investment. Bumps will always be there but over the long run, its a nice smooth upward climb.
rule of 72? at 7% national average should double about every 10 years. ... and you could say the stock market doubles every 7 years on average too but to say Real Estate has never declined is misleading. If you bought a condo in NYC in 1988 you would have had to weather a stomach turning down until 1994 to sell it at the same price. Boston was worse. Phily is still a mess. If your father is generating a positive cash flow from his holdings he will be more likely to weather a bust cycle. But, if he is tolerating a negative cash flow and counting on appreciation - he may be in danger. I am no expert, by any means. Here is a link to an expert: http://www.npr.org/templates/story/story.php?storyId=4579179
Double in 9 years? More like 2 yrs in San Diego. Maybe never in some other place. Location, location, location + timing, timing, timing.
About prices doubling every 9 years...maybe...who cares....Many advantages to owning real estate. 1st...as long as you make the mortgage pymt, one has a place to live. If your stocks crash...oh, well.... 2nd. There are still tax advantages for most people who run their properties. Your concern that your dad is running a charity...that is a different issue. As long as he has EQUITY (down pymt plus any appreciation since he bought) he will be ok. Obviously your concern is valid. The one downside I see is the fact he has single family rentals.....that can be a problem like you say if tenant does not pay. Might want to suggest a 1031 tax-deferred exchange. That is a Legal way of selling what he currently owns and exchanging it for a different piece of real estate without having to pay any capital gains taxes!!! Make sure you speak to a professional who does this. Many experience real estate guys DON'T DO IT or DON'T KNOW ABOUT IT. An excellent way of buying real estate....then selling it and buying another piece of property WITHOUT having to pay on CAPITAL GAINS... Good Luck....