Home » Investing, Real Estate

Are You Waiting To Jump On A Piece of Real Estate? Don’t Rush, You Have Plenty Of Time

19 May 2009 No Comment

For many 20-somethings, the prospect of owning one’s first home is a common goal, and a great goal.  With the bubble and the bursting of that bubble, many people are saying there has never been a better time to buy real estate.  While prices have come down considerably, I believe they have further to go.

First, you need to realize that real estate prices go up and down based on the balance between sellers and buyers.  When there are more buyers than sellers, prices go up; when there are more sellers than buyers, prices will come down.  This is the common behavior of any open market, and real estate is no different.

For prices to stabilize (stop going lower) and eventually turn around, we need a big jump in the number of buyers versus sellers.  There are two categories of buyers, first time buyers and buyers who must sell a home first before buying another one.

The government has done a lot to attempt to stimulate first time home buyers to go out and buy that first home.  Tax breaks and incentives make it a pretty good deal.  Countering these incentives are the much tighter loan standards requiring first time home buyers to save up for a decent sized down payment in order to get a loan.  Let’s say, for simplicity, that these forces even each other out.  As a result, there is no net gain in first time home buyers.

Now, let’s look at the other buyer category:  people who need to sell a home first before buying another home.  These people are either upgrading, downgrading, or re-locating for some reason.  Here is the major problem with these buyers.  With a greater percentage of home owners under water on their loans (they owe more money to the bank than their house is worth), a huge percentage of people literally have to save money up to sell a house.

What do I mean by this?  Let’s say Joe Blow owes $300k to the bank but can only sell his home for $250k.  This means that he must save up another $50k to pay the amount of the loan that the proceeds from selling his house cannot cover.  Do you understand how large of an obstacle to selling a house this is? It’s enormous.

In a good, normal real estate market, people have modest mortgage payments to where they have money left over to save.  They save money to put towards a down payment for their next house.  Now, the mortgage payments are so large that they aren’t saving money, and they would have to put that money towards their current house.  Forget buying a new house!

There are absolutely huge obstacles to people buying up homes in any decent manner.  Add in the huge amount of excess inventory and you have a long way to go before a real estate bottom.  There are some condos near where I live that a few years ago, you had to win a raffle to get the opportunity to buy one for $350k.  Now, they are selling for $175k and they are still building new units!  Having to win a raffle to pay $350k for one of these units is the epitome of a real estate bubble.  Now, the bottom arguably would be the complete opposite of such a scenario; a scenario where literally nobody wants to buy these things.  Unfortunately, I don’t think we’re there yet.

The only way out of such a real estate mess any time soon is for the government to literally flood the economy with dollars.  Eventually people would have so many dollars that the prices of all things, including real estate would stabilize and move upward.  If you understand high inflation, you know this would cause significant damage to our economy.  Our government is pursuing this exact course by the way.

So, what do you do?  Well, if you buy into my argument here there are two potential avenues our economy may take: continued real estate weakness or serious inflation.  You can prepare for both by buying some gold and patiently waiting to buy real estate.

Full disclosure:  I own a home and I own many gold stocks.

Comments are closed.