Real Estate Bottom - or Prelude to a Drop?

I had an interesting call from my father-in-law last night. It was a bit different than the normal conversation topics we cover like weather, fishing, sports, etc. — you know, the kind of subjects that create a dialogue without really digging too deep.

Last night was different. We talked about money, the markets, and especially real estate. You see, my father-in-law lives in and owns a few businesses in Juneau, Alaska. The current financial fiasco is a huge concern for him.

For over a year now, he has been looking for a suitable real estate buying opportunity. It sounds as though he has put his search on hold.

“The prices are still really high up here,” he said. “Like the rest of the country, I am not going to buy anything until this whole mess is sorted out. I think prices will really begin to drop soon.”

His thoughts sound like those of so many other Americans. Should America put its money on the sidelines?

Although we have heard stories of horrific markets from across the country, the really negative action is coming from just a few localities. Places like southern California, Las Vegas, Miami, and Manhattan have gotten slammed. But the true heart of the nation, places like North Dakota, Kentucky, Delaware, Colorado, Georgia and every other moderate population center, has not seen a huge plunge in its real estate market.

A firm price floor

There is no doubt some home prices are about to drop. But will they ever see the 20% or 40% drops making headlines? I doubt it.

In the average American market, a drop of ten percent or more would be an extreme case. Most likely, thanks to mortgage rates hovering just below 6% and thoughts of the Federal Reserve dropping benchmarks even lower, potential buyers will begin to trickle in on any news of price reductions.

To prove that I think we are quite close to the bottom, I put my own money on the line and purchased a house. The asking price on this particular property has dropped by over fifteen percent since it was originally listed over nine months ago.

Like so many other properties on the market, its selling price could not go any lower or the current homeowner would be upside-down on his mortgage. In other words, he would still owe money on it after he sold it.

There are a lot of properties on the market in a similar situation, especially recently built homes. These “over-mortgaged” homes are helping the market keep from making a dramatic and sudden plunge.

Thanks to this phenomenon, the markets may slow to a crawl, but prices will not plunge.

The real estate market is making a lot of headlines and buyers are sitting on the sidelines. The wait may payoff for a few, but for most of America the bottom is so close the risk of missing out on a cheap dream house may not be worth the possible reward of saving a few bucks on your monthly mortgage payment.

Make a realtor happy and start looking for buying opportunities today.

Comments

[investor88:]

ok go and buy but on reasonable leverage with generous allowance for unexpected downside?

2008 Oct 07 10:27 AM

[anarchist:]

9.09 A.M.
SRS is up over $5.00 a share and hasn't seen a down day in a long time. Maybe real estate prices are near a bottom but it isn't today.

2008 Oct 07 11:11 AM

[PastTense:]

"Like so many other properties on the market, its selling price could not go any lower or the current homeowner would be upside-down on his mortgage. In other words, he would still owe money on it after he sold it."

Of course it can go lower. Continuing to own a house costs money and it can prevent him from buying another house. So he pay the loss or he can walk away from the mortgage and the bank will lower the price as it doesn't want to pay for empty houses either (while they are getting vandalized..).

2008 Oct 07 11:36 AM

[Marcus Aure...:]

A few things I have been hearing for sometime and continue to hear.

The main group being foreclosed on are not families but speculators. People who decided to develop ten too many condo developments or built yet another office park. No doubt, there are families being foreclosed on but the lion share of foreclosures is on over-leveraged speculators.

I am looking to convert a loan that just transitioned from a construction to a one year ARM (I have a real heckuva rate on it too) to a 30 year fixed. So, I am talking with bankers on a regular basis (still some work to do on our project) and they tell me in our market property values are holding on okay and in fact varies in our locality (northeast WI). Of course, the couple divorcing across the road may sink your property value but that applies in good times too. I have heard starter homes are still moving well around here, that is properties with values up to $150,000 or so. I have seen more expensive houses site for years.

Of course they can go lower, but the money owed on a house is strong boundary. My uncle has an extra house in Orlando and is renting it right now rather than selling it because of market conditions.

Back in the bubble days I would hear story after story about people in the hotspots mentioned doubling their money on a property after one year of holding the property, in contrast a banker friend of mine informs me we can expect about 4% appreciation around here (and she told me back in the bubble days). Tortoise vs. hare.

2008 Oct 07 12:10 PM

[Urbane Gori...:]

It would probably help if you told us where you bought (maybe in Juneau?).. But I'm willing to bet we haven't seen the bottom in California yet... And I'll toss in Nevada .... Hmmm, let's see.. Who else is hurting... What about Detroit... Yep! Maybe the Right Coast... Ya think with all the firings in that neck of the woods we'll see a downturn in that market? I think so. Furthermore, as our economy keeps tanking (Gee! "Yer doin' a great job, Dubya!") ... I don't see what would encourage anyone to buy right now..

jegan ;-)

2008 Oct 07 04:57 PM

[JVan:]

Andrew has some very fine observations. But I believe the opening of his piece says it all--there is a generational difference. And it has to do with fear. With fear driving so much of the financial world the older, more experienced generation has been through some horrors we younger ones cannot imagine. Their experience should be considered carefully.

Andrew says, "will they ever see the 20% or 40% drops making headlines? I doubt it." Had I listened to my financial guru (who began saying in January the financials had bottomed) instead of my father (another depression era worrier) I'd be broke.

If the fathers are right, upside-down mortgages will not ultimately slow down price erosion in real estate. With the government insuring that the banks cannot be hurt, they will foreclose on overdue debt. Too bad for those who are upside-down, but reality will win out. Prices can go lower! Congress can only go so far legislating that lenders give "holidays" or "relief" or God knows what to strapped mortgagees. In the end, a slow down with global implications will wallop the upside-down mortgages too.

I'm with Andrew's father. Hold your water!

2008 Oct 08 11:46 AM

[User 276068:]

Andrew Andrew Andrew - Hope this was a primary residence and your planning on living there for a long long time.

2008 Oct 08 03:45 PM

[jurrassic:]

You over paid by 20%

2008 Oct 08 08:41 PM

[bobcatalaska:]

Good job Andy! I've always taken my advice from people that have made things work, usually those people that have worked(or studied) hard at what they do .I must say There is a lot to be learned from the people that grew up in the depression era or were raised by depression era parents.One of the things that isn't talked about much is the deep down honesty of most that generation.If our generation was half as good or honest as theres I really think we as a nation wouldn't be dealing with such a huge mountain of problems. By the way I dont beleive Andy's father-in-law is old enough to be from that generation!Hey Andy keep up the good work , keep your nose to the grindstone, and treat your wife with way more imortantance than your work.

2008 Oct 27 01:16 AM