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Doom & Gloom For R.e. Market?

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Austin

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Virginia
What is just around the corner in the real estate market? First let me set this up by relating some of my prior predictions:

1. That if the Federal government ever reduced or eliminated the deficit for even a short period, interest rates would subsequently drop like a rock.
2. I got into a debate on-line with a member of the NYSE and told him a few years ago that the market was hyper-inflated because it was impossible for the price level to be correlated with the rate of growth it would take to justify the P/E ratio. Like some on this forum, he said I was out to lunch.

Here is my point about the future of the real estate business; The next thing to happen to the real estate market, both residential & commercial, is that the bottom could drop out of the market at worse with a 25% price correction in some areas, or prices could stagnate for a long period of time at best. Here is the scenario: If you buy a commercial or residential property at today’s artificially low interest and equity rates, you may get a good deal if you hold onto the investment, which is an incentive not to sell commercial property in the future. Low interest and equity rates result in very low capitalization rates with resulting inflated present value indications, and low interest rates are fueling a residential buying binge in some markets around the country driving prices sky high. However, when the economy recovers and interest rates return to normal levels, two things are going to happen:
1. The higher rates will depress the market to a level far below what it is now for the same economic laws that drove prices up. Commercial property owners will be getting a good return on their investment but can’t sell them.
2. The result of this will be that in these hyper-inflated markets fueled by the low interest rate inspired buying going on right now, the market will be upside down with owners having negative equity in their properties. That being the case, property owners won’t be able to sell.
The end result will be an economy like Japan’s that is, locked down and stagnant for an extended period of time.
 

Gen Lawson

Freshman Member
Joined
Mar 15, 2003
Professional Status
Retired Appraiser
State
New Mexico
Well, I am considering buying a house myself soon and was almost hoping the rates start to climb again, thinking that would create more of a buyer's market.... But I hadn't thought about it on the larger scale... Where I am we have had lots of new construction and so far it isn't affecting value but it is lengthening time on the market.

One effect of low interest rates, though, is that the money once spent on interest payments can now be spent elsewhere. For residential payors that means Wal-Mart. :D That must be good for the economy...
 

Carnivore

Elite Member
Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
North Carolina
Austin,

If I accept your premise then would you agree that I must:

1. Sell my curent home and downsize immediatedly.

2. reduce personal debt as quickly as possible.

3. increase personal reserves significantly

4. create as large a market(service & geographic) as possible for my services.

5. purchase new equipment quickly

6. Make as much hay as possible while the sun is shining.

any other suggestions?
 

Dee Dee

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Hi Andrew,

Your little list is exactly what we've been considering doing for the past year or so.
 

Austin

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Virginia
Andrew:
All good ideas except # 1. You can refinance with a low rate and stay put. The market is going to down size anyway with the baby boomers retiring.
Concerning down sizing and economic cycles; Over a year ago on this forum, I guess it is still in the archives, we had a post on catalog kit homes that were sold starting around 1916. Someone posted a link to the Sear’s catalog of these homes and I followed the evolution of these kit homes up to the 1940’s. Here is what happened: These kit homes started out big and fancy with a lot of detail. This lasted all through the 1920’s during the boom times. Then they gradually started getting smaller with less detail. All during the 1930’s the detail was gone and they were down to basic bungalow type homes. The strange thing about it all was that as the size and quality went down, the price stayed the same or went up. I might do a search and post a link to that thread. It might be in the old forum achieves but it was really interesting.
There is a beautiful mansion type home near where I live. About 20 years ago when I was in the Auction business I sold it at public auction. Just before the auction started a car pulled up and an elderly woman got out and came up to me. She told me that her dad built that house and she thought I might be interested in the history of the house. It was a Sear’s kit home. It came on a rail road car in about 1918, and her dad picked it up on a mule wagon and hauled it to the site. Every piece including bricks and mortar were included.
 

Mike Garrett RAA

Elite Member
Gold Supporting Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
The John Birch Society has been saying that very thing since the 1960s!

The sky is falling, the sky is falling!

I have lived through and sold real estate during the late seventies when mortgage interest rates reached an all time high of 17.5%. I am now living through what no one ever thought would happen...the lowest mortgage interest rates in more than 38 years.

You know what? I am just going to keep on truckin! My business is good, my wife is beautiful, and the sun keeps shining. Peddle your doom and gloom else where!
 
Joined
Jan 28, 2003
Professional Status
Certified General Appraiser
State
North Carolina
Austin,

One of the things the US has on Japan is that the capitalism here is a lot freer with less government interference. I suspect things may unfold more quickly in the US as opposed to the protracted situation there. The rebound should come more quickly. And that immigration you love so much IS a big demand force on housing and it should also provide for a more rapid recovery. But what do I know.
 

jtrotta

Senior Member
Joined
Jan 16, 2002
Austin,
I think you mean we're going to see Salesmen become Salesmen (saleswomen-whatever) pretty soon instead of order takers. The difference this time around will be that most of the creative salespeople have left the building, this will effect the stagnating market more than anything else ;) . As you noted only part of in your rendition of the 20's to 30's scenerio - in Chicago during that Era, the creative salesperson was the "Donald" of the day and I'm not sellin the steak, jus the sizzle :mrgreen: - creative I yam :beer:

Also, in your scenerio and Mike G. - knows, in the early 80's housing values were about 300% below what they are now (my area) - but you have to consider evrything else during those periods that affected the market; same as your going to have to in the next downturn / market adjustment / market correction / whatever. But here's what needs to be reviewed, if housing prices were at- 70-80 K (80's) and are now selling in the 200 to 300k (00+) range, what has caused the disparity :question: - oh yea, check gas prices then & now; prices of bread & milk B)

It's called the political :p magic carpet ride :rofl: - well they do control rising & falling markets don't they :mrgreen:


:ph34r:
 

Eric Boggs

Sophomore Member
Joined
Feb 23, 2002
Professional Status
Certified Residential Appraiser
State
Florida
Right on, Mike!
 

Austin

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Virginia
jtrotta:
As to your general level of price increases example, my answer to that is inflating prices was built into the system because it causes certain economics results like facilitating economic growth by artificial means. It works too, I will admit that. Where we differ is that there is a barrier out there to using these methods and that barrier is that when one nation like the USA inflates its prices out of kilter with the rest of the World, the result is a World economy and free trade to counter act the high prices. The WTO agreement is killing this country at this moment for this very reason. That is what the US government is doing at the moment, and that is undermining the global economy by playing games with the value of the dollar and doing everything in their power to lower energy costs. As they say, "The jig is up" and the lets raise prices game has had its day. I know it is still going on in some venues, but just wait until the interest rate goes back up and all of that magic equity the raising tide created is "Gone With The Wind." No one is going to want to sell that has a 5% loan because if they re-purchase they will have to pay 8% interest and move down. Why do you think some outfit last week suggested a portable mortgage? It is because they know this will happen. When rates go back up it should be clear to us all that the result will be a huge price shift due to the rate difference alone. End result is no one wants to sell with a low interest loan and any one that wants to purchase ain't paying those high prices generated when the interest rate was ats 5%. If you think things are complicated now, just wait until the wrap-around mortgages get started and you have do do cash equivalency adjustments.
 
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