Does this have an impact on your investment strategy?

Question

http://money.cnn.com/2011/02/22/real_estate/december_home_prices/index.htm

Jon Holdman · Answer

Indeed those are national numbers. More detailed data is available. The LA areas has indeed done much better, showing only a 0.2% decline. San Diego has actually improved. Boston and SF have shown only small declines while DC has also improved. Several cities show declines nearly as bad as Detroit, though, including Atlanta, Portland, Phoenix, and Chicago. The rest of us are in the middle of the pack with declines around 5%.

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Will Barnard · Answer

Keep in mind that such studies are Nationwide based and since every market is different, I don't worry about nationwide studies so much. It is much more important to know the future potential of your own market.

Secondly, since I flip right now, and am in and out inside 90 days, price depreciation has much less effect on me. Even if I was in  a market that declined by 25% in one year, that is only 6% for the time I hold it and I have much more room than that. To top that off, if my market was declining at such dramatic levels, I would also adjust my offer prices by reducing my exit price.

Summary - No, this and many articles like it do not deter me or cause me to sit on the fence.

Jon Klaus · Answer

Shiller says prices could fall another 25%, the mortgage interest deduction may go away, interest rates have been rising.  It's tough out there.

Now, more than ever, do not over pay. Make sure everything you buy cash flows with room to spare. Be ready to hold long term. Stay up to date with your market. And run your deals by BP!

Greg B. · Answer

It may have an impact if lenders get nervous.  As I understand it, most mortgages have a little known and used clause.  If the value of the property goes down below the value the note can be called.  I know, I see the humor in it.  Banks calling notes, like, what would THEY do with the property if I had to give it up?  However, there are multiple stories on this forum that prove that dealing with banks is not all logical.

Good luck to all.

Bryan Hancock · Answer

As long as the property cash flows I don't really care a whole lot about whether or not I will be able to buy it for a bit less in 6 months.  I plan to hold our property indefinitely so the appreciation doesn't really matter a whole lot except as additional collateral to borrow more going forward or to make me feel good about our net worth numbers.

Will Barnard · Answer

Nice job Jon, you stepped into Steve Babiak's spot on this one!

As you can see by the numbers, my market is doing just fine (appreciation/depreciation standpoint) and with the huge amount of distressed sales (short sales/REO) it makes for an absolute perfect flip environment.

@Max - Since my market is not declining at such an example's rate, no, I do not consider that, however, if it were, I would want to know EXACTLY what was creating the price drop. Usually, it is supply vs. demand, so if prices were dropping that fast, then I would have to assume that the supply was high and buyers demand was poor, thus I would not be flipping at all in suchj an environment. I would do something else or go somewhere else.

Sharad M. · Answer

Great points so far. Keep them coming.

I agree with Will that these are nationwide studies and local markets can always be exceptions. But it's still interesting to note that even though economy is doing slightly better, but that is not having an impact on the housing market yet.

The housing market depends a lot on the lending situation and until the lending situation is sorted out, the housing market will not recover. With the government considering major changes with Fannie and Freddie, this has gotta make lenders nervous about making mortgages. I don't see banks willing to tie up their money at around 5% for 30 years.

@ Will, you say that if the market drops another 25% over next year, it will impact you around 6% because you are out in 90 days. Does this also consider the possibility of a difficult borrowing environment for your end buyers in the future?

Jon Holdman · Answer

You should care, though, if its worth 25% less in a year than it is now.  Even if you buy a 70% of the current value, which as we know is difficult, then you're in the hole if you need to sell, after including selling expenses.

Yes, it influences my thinking.  I've not bought anything in the last year and don't plan to buy anything anytime soon.  I also am holding off on making any more hard money loans since the last deal appraised at 20% lower than the pre-loan appraisal.  Borrowers think you're being a loan shark but I see huge risks right now with valuations.

May turn out that these guys are wrong.  They have a pretty good track record, though, and certainly much better than organizations with a vested interest in convincing people to buy.  IMHO, we need to stop with any more propping up the market and just let it get the adjustments over and done with.

They may be overly pessimistic.  But I'd bet (OK, I AM betting) that its more likely prices will be lower a year or two from now than they will be higher.  Local exceptions, of course, always excluded.

Jake Kucheck · Answer

The CS data compares YoY numbers, which is generally a decent way to measure appreciation (or decline), but comparing artificial growth (first time/move-up buyer tax credits) to a normal market isn't exactly apples to apples.  I'm not to worried about YoY declines, and I agree with Bryan that if the numbers work on a long term hold deal, there's not much reason to care what the actual asset value is.  If anything, it just means you're paying (slightly) less in property taxes.

Now if you're trying to flip... the deals will be harder to find, but still there.

Does this have an impact on your investment strategy?

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