When do you guys think we've reached a bottom in real estate? The reason I'm asking is because I'm in the market to buy a house. I live in Wilmington Delaware and real estate hasn't sold off that much (10%) I think we are in inning 2 of the real estate sell off. More foreclosures are coming and mortgage rates are really low. I think the real blood bath will come when you see a 8-10% mortgage rate. I'm just trying to get others opinions to see where we are.....
The cost of living keeps rising, but wages don't. Either wages need to increase or real estate prices need to drop, and we all know that the former isn't going to happen.. I believe that prices need to drop at least another 20% in large cities. Otherwise, we'll be seeing mass exodus in places like New York, Chicago, and SoCal.
I agree.....the thing I'm interested in is how the fed handles the inflation. They've been suppressing interest rates for years to help real estate but they have to eventually start to raise rates to combat inflation.
The bottom hit April 2009. Its going up now. Interest rates hitting 8% is a result of high inflation. A good way to tell when you've hit a bottom is that if rents are as high or higher than mortgages with 20% down. For instance a 3/2 in my area rents for about 1300-1500 per month. Homes are around 200k. So consider 20% down with a 160k mortgage and your P&I is $908 (at 5.5% interest) Taxes and insurance are another $300 per month which comes to $1208 per month. Even 100% financed its still about the same to buy as to rent. So of course its better to buy when prices drop below rent. Now sure you could live in a state like arkansas where a 30,000 dollar house rents for 1100 per month, but generally in places like CA you will never see that. Odds are that we are not going down in prices. There are many buyers now and they are picking up properties they can rent out for a profit now.
I thought this was an excellent post. Solid method to determine when it would be sensible to buy, not just a bunch of hyperbole about "prices are heading into the crapper". I would only point out that in some areas, like the Midwest for instance, you have been able to buy houses for less than rent for a long time. Lately those areas have dropped despite this. Still, the government is giving you alot of excellent reasons to buy. Tax credit of $8K. Low rates. Rates have gone up recently, but at 5.5% they're still low. If I were a first time buyer I'd be actively looking. You should be able to find a motivated seller (read bank), needing to dump. Low rates and the tax credit complete the picture. You may not have the low. But we're well beyond your "2nd inning" scenario. And one wonders what happens if prices dip another 10-20%, and rates go to 8-9%. You won the battle, but lost the war, because your mortgage payments will be higher on a lower price because of the higher rates. OldTrader
An 8% Mortgage rate isn't a sign of high inflation...that's What an average 30 year fixed mortgage should be at...that's about average I've been told never to buy during low rates always when rates are high. Values in homes come down...
I was just about to make the same comment! Low rates simply allow the shrewd operators to transfer unsustainable risk to the gullible. When interest rates are high, unemployment is high and there's blood on the streets, thats when you lock into long term investments with expensive exit costs. Regards Johno
Rental yields act to support prices. I only really know about the DC area, but 7%-8% after taxes and other expenses (condo/HOA fee etc.) seems to be an important number. Mortgage rates are IMO less important to follow, because when you start getting those 7% yields it becomes worthwhile to move cash out of other asset classes. Inflation changes this calculation but RE is generally a good inflation hedge. At this point, the only places you really see with that kind of yield (again, in my local area) are foreclosures where the asset manager hasn't researched the local market and doesn't give a f*ck what the house goes for, so long as it leaves the books. However, almost without exception these places get bid up and go for above asking. Sometimes 10-20% above. My sense is that, while we're nearing the bottom, there's still some slack in the market. The caveat to this is that rents could always begin to fall. Ultimately RE markets are very local, and different places will bottom at different times and prices. My suggestion is that you focus on buying a house you like in an area where you'd want to live, rather than on trying to catch the exact bottom.
I think my area has another 20% to drop. I'm looking at properties that are around $185k. So I figure another 40k drop. I feel sorry for anyone that bought at the top of the market. That same $185k house would have sold for about $210k three years ago. I'm looking to buy it at around $145k. Overall a 30% drop. It's going to take another 10-15 years to get to those highs from three years ago...