From the Grand Junction (Colorado) Sentinel, surely not typical of other places, where real estate has gone up much more. “During the period between 1993 and 2002, home prices in the Grand Junction area grew at a much faster rate than per capita personal income, according to a Daily Sentinel analysis. In 1993, per capita income in Grand Junction was $17,528, according to the US Bureau of Economic Analysis. By 2002, the latest year for which data is available, that figure had risen 48% to $25,940. During that same period, the average “sold” price of a three-bedroom house in the Grand Junction area increased 82%, from $83,022 to $150,874, according to real estate information supplied by First American Heritage Title Co.” This was two years ago, and now real estate is far higher in dollars, while wages are virtually constant. In California and other places, the ratios have become much worse, where a teensy three bedroom home can go for a million bucks. The payments, interest only, will more than eat the entire wages of a typical husband and wife. Only the rich can afford a modest home in California at this time, it seems.
To me, the writing on the wall could be no clearer. No one can make a living on a farm, when the price of the land is $5,000-$10,000 per acre. Homes, which sell at absurd prices, which no one in their right mind would buy, simply have to come down, and come down radically. In Silverton Colorado, a two bedroom home in nice condition, owned by a man I know who lives in New York, is renting for $500 per month. If it were placed on the market, it would fetch $200,000. $500 per month X 12 is $6,000 per year in rental income. Deducting taxes, water, sewage, and insurance, plus at least 15% for repairs and maintenance, leaves the man about $4500 net, or a 2% return on his home at its current value, and this does not include vacancy, which may take it down to 1% return. Why own? The same thing goes on everywhere, and not just in Silverton Colorado.
Rentals should net a property owner a 10% on his investment. If the man paid probably $10,000 for his now valued at $200,000 house, (He probably paid less, as he has owned it for a long time), he should sell it! Since he is 86 years old, and has no offspring, and has never been married, he will probably leave the house to the local historical society, as he loves Silverton. Any other man would sell the damned thing pronto, and take his profits. As it is, the man is, and has been getting a decent return on a probable $10,000 investment, made many years ago. I’ve known him for over 25 years, and when I met him, he owned it. He’s not stupid, but anyone who owns a rental, and doesn’t get a decent return on his investment, ON THE VALUE OF THE PROPERTY AT CURRENT LEVELS, is not acting wisely.
Look at it this way. If you owned gold in 1980; at $850, you should have sold it, and certainly not bought more, assuming you knew it wouldn’t go higher, and there was no reason for it to do so, because it was already at a level for which there was no logical reason. If you owned NASDAQ at 5,000, with no dividends, and tiny or no P/E ratios, there was no reason to buy more, as it already was a lousy investment, and there was no reason for it being as high as it was. The logical thing would have been to cash it in, and buy gold, which I believe was about $260, and should have been higher. If you own a rental property, and you are getting a very poor return on it, based on its current net sale price, this means that you should get rid of it. If you recently purchased a rental property, and you aren’t getting a 10% net return, you paid too much for it.
If you own a home with a huge mortgage on it, and you bought it recently, at current high real estate prices, you shouldn’t have, and if it were me, I would get rid of it. Rent a home from a rental property owner who is getting a poor return on his investment, till prices go down, and then buy at a much lower price. In the Grand Junction Sentinel piece, the story details a couple, who bought a 1200 square foot home for $110,000, which was a “fixer-upper.” They bought it with a three year 5.5% mortgage. In three years, practically the entire thing will be due, and who knows at what rate they will have to re-finance it. It’ll be more than 5.5%, the odds say, and they might lose their house. ARMS are almost a guaranteed loss, because interest rates are going to go up even more.
Real estate and other investments, including stocks, bonds, and yes gold and silver too, should return something for your dollars invested. Stocks should pay a dividend. If they don’t, owning them is a gamble, not an investment. When you “invest,” in something, it is, even by dictionary definition, to get a return in the form of a profit. While investing to get a profit, certainly can involve buying low and selling high, when the high point is reached, one should sell, and do something else with one’s capital, as the profit is gone. Anyone buying a house for $10,000 and finding it now worth $200,000, should sell it, except old man Miller, who owns the one in Silverton. If gold goes to $1500, and the buck has slid but 10%, sell it. If your stock has quadrupled in price, and there is still a high P/E ratio and there are no dividends, it might be a wise move to sell it All investments run their course, and real estate is no exception. Gold and silver pay no dividends and have no P/E ratios, but now they are a good “buy low,” and in the future a good “sell high.” The NASDAQ had a wonderful run-up, and real estate has too. The real estate market now, is comparable to the NSADAQ at 5,000, in my opinion. I am not saying sell your home, but for damned sure don’t buy one now at these prices.
$5 trillion was lost when the NASDAQ crashed. Real estate won’t “crash,” but will gradually go down because of the following reasons, which can be seen right this minute. When a home is listed in a “hot” market, it will sell quickly, often within hours. This means that prices will continue to go up, because the public wants homes at current prices. Since they sell so fast, sellers raise their prices. As long as homes sell quickly, prices will go up. When homes stay on the market longer and longer, it means that prices have leveled out, and the demand is not there at the prices listed. Eventually they might sell, but usually sellers lower their price to move the house. This is the beginning. Then, after prices go down a bit, they still stay on the market, and don’t sell. Then sellers lower them again, till they sell. This process continues time after time, and each time prices go lower, till homes are once again a hot item, and sell quickly. Then, the market has set the correct price.
The correct price will be when buyers can and will afford them, and in most places, housing has a long way to fall. When this happens, those who bought at the top with low down-payments, find that their home isn’t worth what they owe on it, and if they get scared, fired, or have to move, they’ll just abandon it. A ruined credit rating, is often cheaper than being saddled with huge payments on a home, which is worth tens of thousands less than is owed on it. This throws a lot of overpriced houses into foreclosure, and the market becomes gutted with houses for sale. Then it is a buyers market, and prices really go down quickly. The market fixes all things, left uncontrolled. Gold and silver have been manipulated to a degree, but the manipulators have failed. Millions of homes in thousands of communities can’t be manipulated. Real estate is truly the market at work. Think twice about that house you are thinking of buying or selling, and don’t get burned. Protect yourself.