Housing Market Trends

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Housing Market Trends: Attention Bargain Shoppers, Real Estate’s New Buying Season Is Here

by John Schaub, Special to Investment U
Thursday, March 30, 2006: Issue #522

Editor’s Note: Oxford Club Investment Director Alex Green and I are currently heading up an investment tour of China. While away, I’ve asked real estate guru and friend John Schaub to tell us his current views on the slowdown in real estate and share today’s housing market trends, as well as how you can profit.

John is the smartest real estate investor I know, and author of an excellent book, Building Wealth One House at a Time. For the past 30 years, he has invested in single-family homes and become a multimillionaire without ever getting into trouble. – Enjoy, Mark Skousen

The real estate housing market has changed. It’s no secret.

Even with cheap long-term mortgage rates and credit still available, homebuyers and investors have quit buying. In fact, prices have reached a point where home seekers find it cheaper to rent than to buy, and investors have lost confidence in the market.

Contrary to the doom and gloom reports you hear on the Street, that’s great news.

The coming months – and possibly years – will be ripe with opportunity to buy high-quality real estate investments at bargain prices. In addition, rents will continue to rise to a level that will produce a respectable return. Discount housing prices and extra income is an attractive duo. So, here’s why the housing market is a top choice right now for long-term real estate investors

Housing Market Trends: Lagging Salaries Push Housing Rents Higher

A house that sold for $125,000 five years ago now sells for $375,000 in my market and in many mid-priced markets. A family with a $40,000 income could easily afford to buy that house at $125,000, but not at today’s price.

Additionally, while prices have skyrocketed, wages and rents have lagged behind. It is likely that the same family still earns about what it did five years ago, and can afford to rent that $375,000 house for roughly $1,200 to $1,400 a month. Problem is, as more families compete to rent a dwindling supply of available units, rents are beginning to increase.

In a town that is gaining population, however, the fundamentals will continue to push home prices higher. As more people move into a desirable area, political pressure will be brought to limit growth, thus driving up the cost to develop more homes. An increasing world population is demanding more dams, roads and housing, driving materials prices ever upward.

Housing prices have no where to go but up. What about rising interest rates? Take a look at the chart below. Clearly, housing prices have found a way to endure volatile rate periods.

“Falling Home Prices” – A Misleading Figure

Indeed, many recent buyers financed their properties with alluring variable rate loans with low initial teaser rates. Now that the Federal Funds Rate has jumped from 1% (June, 2003) to 4.75%, the payments on these loans are increasing dramatically. Although long-term mortgage rates are still a bargain, the honeymoon is over for the variable rate borrowers.

And homes now take months instead of hours to sell in this more normal housing market. As the market slows, the higher-priced houses in a market will typically take the longest to sell. This distorts the average prices of houses sold. Occasionally, a story will report falling house prices when the reality is that higher-priced houses are simply taking longer to sell.

For example, suppose three houses in your town sold this week – one for $100,000; one for $200,000 and one for $300,000. The average price of a house sold in your town this week would be $200,000. If next week only the two lower priced houses sold, then the average price of a house sold would drop to $150,000. This obviously does not prove that house prices are dropping, but a reporter looking for a headline would be tempted to put it that way.

Understanding the Trends in Your Own Market

Try tracking a particular house in an average neighborhood in your town. You can get sales information online from your property appraiser’s office. Track the sales price for the last 30 years and you will know how houses have performed in your town.

The reality is that many new investors won the real estate lottery. They did nothing but buy at the right time and watched as house prices increased at record rates. The lucky ones sold and collected their winnings, and are now hoping to get lucky again.

The less lucky ones may own properties that will not rent for enough to pay the holding cost. Often, they financed these properties with variable interest rate loans, and their payments are increasing as the time it takes to sell a house is increasing. Many of these speculators are about to become opportunities for long-term investors who have been waiting for the right time to buy.

Where Are The Bargains in Real Estate Right Now?

I met with a seller this week who owns several empty houses, all with variable rate loans. He has refinanced several times to raise the cash to continue making payments on his empty houses. These houses are no longer appreciating in the market, so he has no ability to refinance again. Each day he owns these empty houses he is going further in the hole. If he cannot sell something soon, his house of cards will fall down.

Buying a house at a deeply discounted price is what the pros call forced appreciation. You make it happen; you don’t just buy and hope that the house will go up in value.

You make your money when you buy when the market is flat. Look for a speculator stuck with an empty house, and offer to buy it at a discount large enough to compensate you for buying in a flat market with low rents.

Would you pay $375,000 for a house that only rents for $1,400 a month? If not, how much would you pay for that house? $325,000? $275,000? At some price, you will want it as the profit you are realizing by buying it below the market will make up for the low rental income. Would you buy a share of stock that has a low dividend if you could buy it a 30% discount from its real value? Of course. And the same logic applies to buying a bargain property in a flat market.

John Schaub
Guest Editor

Today’s Investment U Crib Sheet

For more information on profiting from the changing market, take a look at my new book Building Wealth One House at a Time. In it, I detail how to get started in the rental business and all of the mistakes to avoid that I’ve made in more than 30 years of real estate investing. You can find it on Amazon.