Thanks Chuck a clear explanation & to us with a few miles up pretty
bloody obvious; now about you write something on how we can get our
daughters & sons'-inlaw to actually believe it, rather than believing
the spruiker real estate agents???

K


Gould 0738 wrote:
That's not an acceptable answer even if it does happen to be true. In
politics it ALWAYS has to be someone's fault, and it's ALWAYS the
other guy. If the economy is really so bad, I'd like to know who
these people are bidding up the price of housing to stratospheric
levels.


The Federal Reserve.

Home buyers are the ultimate "payment buyer." The percentage of folks writing
out a check for $468,900 to move into a rickey-tickey cul-de-sac clone 40 miles
from town in "New Westchester Estates" (or some other pretentiously named
community) is likely to be in the low single digits. Even if you can afford to
pay cash for housing, the interest rates make it more atractive to borrow.

Housing prices are no more logical than were the prices of stocks in 1999.
"It's worth it because that's what the last guy paid for the same offering, and
it's going up in value so fast we have to buy now or we'll never afford it
again!"

While declining interest rates have allowed payment buyers to pay some very
high prices for housing of late, those same interest rates cannot continue to
fall. My wife recently mentioned to me that the overnight Fed Funds rate is
hovering around 1 percent. That has to be about the bottom, unless investors
are going to be willing to pay to have their money stored for them. :-)

When those interest rates start to rise, as they will to cover the cost of the
Iraq invasion and attract investors to cover our
record national debt, housing prices could be a short-term victim. People might
want to move to a newer, nicer, house but if stepping up $100k in mortgage
balance at a higher interest rate changes that just barely doable $2500 a month
mortgage note to $4100, a lot of people will decide to
"stay put" instead. At that time, those who
*must* sell will have no choice except to dump the price as low as they can
manage to go, and that will bring the price of all similar houses down as well.

Higher end houses in areas with a lot of unemployment have not appreciated at
all, and have declined in supposed "value" in many cases. Seattle is a good
example.
Our own place is a humble little tarpaper shack, of course, but our run down
dump is surrounded (by outraged neighbors) in one of the priciest districts in
town. We couldn't afford to buy even our meager little hut if we moved to
Seattle today, but we have lived at our present address about ten years.

As the dot.com boom roared on, housing prices in our neighborhood of 100-year
old
wood frame houses blew clear up into the seven digit category. We were shocked
when prices crept up to this level, but the houses sold fairly quickly and in
many cases before there was an advertised reduction in the listing price.

Some of those "Million dollar" houses have since resold. The one on a corner a
block away started at $1.1mm, dropped to $950k, dropped to 895, 875, 845, 825,
and finally $795k before the "SOLD" sign went up. $795k was less than we
remember the house advertised for when it last sold- so it's likely the latest
reseller sacrificed some of his initial down payment just to get rid of the
house at this point....and of course just forget any "appreciation."
Some houses in the neighborhood have started extremely high, dropped a few
steps, and then been withdrawn from sale.

Low end houses (meaning in the low six-figure category in W. Wash) have held
their own and shown some appreciation in this region, but there is a lesson to
be learned from the decline in prices for the
highest priced homes....the price of a house is not supportable unless it is
affordable to enough buyers to create competitive demand.

When the mortgage rates rise much faster than wages, something has to give way.
Price is usually that something.
Remember that when 5% mortgages go to 6%, the interest rate has gone up only 1%
but the cost of money has increased by a factor of 20%....(6 being a number
120% as large as 5). With workers having to strike to get 2, 3, or 4% annual
raises these days, (and many others willing to forego any sort of raise and
just grateful to be working at all) an overnight 20% increase in the cost of
*anything* will put a damper on demand for that item.

Thanks Chuck a clear explanation & to us with a few miles up pretty
bloody obvious; now about you write something on how we can get our
daughters & sons'-inlaw to actually believe it, rather than believing
the spruiker real estate agents???

K

While I am bearish on the near and mid term potential for property values to
appreciate much, and would not be the least surprised to see some short term
"correction", I still believe that home ownership is a good investment for most
people. A lot of people lack the self discipline to save money. I see case
after case where elderly people get very sick and need to go to an expensive
facility for care, and in those cases where the people
have paid off a home over the years at least there is something to sell so the
kids don't have to go broke as quickly keeping Mommy or Poppy alive at Golden
Age Acres.

To make any real money with real estate, even in a steadily appreciating
market, it is important to own more property than just the piece you're living
in. Short of taking up residence in a pup tent at a highway rest area, we all
need a place to live. If somebody says "your place to live is worth
$50,000" or if somebody says "your place to live is worth $2mm"- it's really
all the same. If you sell it, you will need to do without an equally nice place
to live or spend all the money you get from the sale to replace it. That's one
reason that many people evaluating financial statements mentally subtract home
equity from "net worth", it's too illiquid and is performing a
vital, non-discretionary function.

You might suggest to your daughters that they buy a little *less* house than
they can afford, and put the difference into rental property. ( Caution: Don't
know if that's good advice in Aus. or not, though). In just a few decades,
they'll have built up a pretty decent net worth and be able to live in their
all-time dream home.....if they still have a mind to.

There are some good buys right now in multi plex properties in areas, like
Seattle, where rents are seriously (but hopefully temporarily) depressed. These
properties formula price based on their ability to generate gross rental
income, so prices are way off lately because they can no longer be justified
with the dot.com boom era rent rates. These properties will bounce back some
when rents go back up, but maybe not as fast as rents increase. If rents
increase at the same time interest rates increase, the rising interest rates
put a bit of a damper on the
price of a multi plex.

Like a bond, a multi unit property produces an income stream and the
capitalized value of any given stream is higher when interest rates are low.
(When you can make the same return just parking your money in a CD, the
attractiveness of an investment with "risk" declines.)

Gould 0738 wrote:
Thanks Chuck a clear explanation & to us with a few miles up pretty
bloody obvious; now about you write something on how we can get our
daughters & sons'-inlaw to actually believe it, rather than believing
the spruiker real estate agents???

K


While I am bearish on the near and mid term potential for property values to
appreciate much, and would not be the least surprised to see some short term
"correction", I still believe that home ownership is a good investment for most
people. A lot of people lack the self discipline to save money. I see case
after case where elderly people get very sick and need to go to an expensive
facility for care, and in those cases where the people
have paid off a home over the years at least there is something to sell so the
kids don't have to go broke as quickly keeping Mommy or Poppy alive at Golden
Age Acres.

To make any real money with real estate, even in a steadily appreciating
market, it is important to own more property than just the piece you're living
in. Short of taking up residence in a pup tent at a highway rest area, we all
need a place to live. If somebody says "your place to live is worth
$50,000" or if somebody says "your place to live is worth $2mm"- it's really
all the same. If you sell it, you will need to do without an equally nice place
to live or spend all the money you get from the sale to replace it. That's one
reason that many people evaluating financial statements mentally subtract home
equity from "net worth", it's too illiquid and is performing a
vital, non-discretionary function.

You might suggest to your daughters that they buy a little *less* house than
they can afford, and put the difference into rental property. ( Caution: Don't
know if that's good advice in Aus. or not, though). In just a few decades,
they'll have built up a pretty decent net worth and be able to live in their
all-time dream home.....if they still have a mind to.

That's sort of the problem Chuck they are buying "rental, investment"
properties & they are buying them negatively geared, even at today's
interest rates (tax writeoffs here & I'm guessing there??) Some younger
people can't even remember back to the eighties when interest rates went
up over a very short time, not saying they will repeat that but

There are some good buys right now in multi plex properties in areas, like
Seattle, where rents are seriously (but hopefully temporarily) depressed. These
properties formula price based on their ability to generate gross rental
income, so prices are way off lately because they can no longer be justified
with the dot.com boom era rent rates. These properties will bounce back some
when rents go back up, but maybe not as fast as rents increase. If rents
increase at the same time interest rates increase, the rising interest rates
put a bit of a damper on the
price of a multi plex.

Like a bond, a multi unit property produces an income stream and the
capitalized value of any given stream is higher when interest rates are low.
(When you can make the same return just parking your money in a CD, the
attractiveness of an investment with "risk" declines.)



I guess I have a sharp appreciation for our lack of population, due to
a low birth rate & I say faulty restricted immigration policy. The
result is we build more new houses or home units PA that we generate
people to live in them, assuming not too many are living under
bridges:-) we seem to be moving people around for no other purpose than
to artificially create demand.

K