Global Financial Crisis

[Rich_in_CT]

I thought about it last night and I think my ultimate $ goals for the next 2 years are $1-2 million in aquisitions in 2008, $2-3 mil in 2009.  In my market that amounts to quite a few 4 families with each costing around $150k at 50 cents on the dollar. 

[Funder]

     The two things that drive market prices more than supply and demand are greed and fear.  Many markets are overbuilt, and it would be good to avoid those neighborhoods when purchasing properties.  We cannot afford to allow fear to push us all into the status of economic destitution.
     I believe that really good investors can use panic markets to their advantage.  If my goal is to get rich in real estate, why would I want to pay top dollar for my properties?  Declining real estate prices, nervous investors and predictions of bleak outcomes are the best kind of markets to make savvy investors very rich.  The best thing that anyone can do is keep a cool head.  Watch the numbers.
     The biggest problem that people have is the inability to interpret what is going on.  We have had predictions of inflation, recession and stagflation all on the same thread.  Sorry folks, but all of those things simply cannot occur.  The efficeint market will not allow it.
     I predict that inflation is on the horizon.  There are several witching factors that will come together to make inflation inevitable.  The falling value of the dollar, thanks to unprecedented foriegn debt, the volitility of energy and food, and all time lows in personal savings of American citizens.
     The upside to a falling value of the American dollar is that foriegn investors will ultimately begin to purchase American real estate and American products.  The more the dollar falls, the cheaper our real estate and products are for purchase with currencies like the Australian dollar, the Euro or Canadian dollars.  Warren Buffet has predicted a fall in the value of the American dollar for some time.  The efficeint market prevails, though, and the more our currency falls, the more our trade surplus will rise.
     The Federal Reserve Board continues to discount food and energy when they consider the adjustment of interest rates.  Ultimately, this could be a big mistake.  Aside from house and car payments, the biggest cost that consumers have is food and energy.  Right now, oil futures are at an all time high, while the price of gasoline is falling.  Does it seem to intuitively make sense to say "milk is $6 a gallon and oil is $110 a barrel, but there is no threat of inflation."?
     We are up against a pattern of printing and spending money, and our gimmickry and debt instruments have finally revealed America's weakness.  The consumers in our country who do not know what they can afford.  A paper (prime mortgage paper) has demonstrated it's resilience against default, but our mortgage companies have blended A paper with B paper and C paper, and a few bad loans have spoiled the whole bunch.
     Ultimately, the Fed, in my opinion, will have to raise interest rates.  The contrarian reality, though, is that a falling currency will wipe you out financially if you have all of your money in cash.  True, rising interest rates will shake out all of the ARMs, and breifly cause an oversupply of real estate, but when the smart money starts to see interest rates rise, money will be poured into commodities, including real estate, with fixed interest rate debt instruments.  Then, by definition, the value of everything from guns to butter to condos will rise sharply.  That chart that keeps rearing it's head on this website (the value of homes from the 1890's to now with values flat until the last 5 years) has been adjusted for inflation.
     Just my opinion...

[petemfa]

Funder brings up a lot of good points here.

I guess the bottom line is we'll have to watch it.  The one thing I'm very sure of though is we will see buying opportunities in real estate that won't be around again for many years.  As you all know I expect prices to fall substantially.

Funder was proven right this morning by Wells Fargo.  They raised their interest rate on a FIXED 30 mortgage to 8%!!!!!!!! and it's not a rate for bad credit applicants, this is for top shelf scores. That may not sound like a big deal but the reason behind it IS.  Usually banks follow the 10 year bond for their rates.  Wells Fargo broke with that tradition and JUMPED their rates higher.  The reasoning???  They're losing so much money on their ARM and Sub-prime businesses. If they can markedly increase interest rates on TRADITIONAL mortgages, they can make more money to cover some of those losses. This isn't something they WANT to do, they HAVE to do it.  Banks have more exposure here than people think.   The good and bad news for us is this will further depress housing prices, but it will also increase our financing costs to purchased those homes.  Add it up and either way housing gets hurt.

As far as that housing price chart posted here, you can make numbers say what ever you want them to.  But here's some real world numbers from Southern New England.......

1988............ I build a spec home in a affluient neighborhood, before it was finished 3 people start a bidding war for it.  Initial price was $225,000 it ended up selling for $300,000 and it all happened over 2 days.
3 years later (1991)  the market pulls back (see chart) and the same owner had to sell due to loss of a job.  The home sat for 11 months and finally sold for $200,000.  That's a $100,000 hair cut. 

2001............ I buy a small Cape in a nice blue collar neighborhood, 3 bed 1 1/2 bath, it needed some cosmetics, Purchased for $79K put $8K into it and rented it.  total cost $87,000. Jump ahead to..................2005
I'm watching the insanity of my market (people buying houses with no inspections, interest only loans ect) and remember how 1991 went. I decide to sell this and other rentals.   Bidding war starts between 2 people, final sales price,  $265,000 sold AS IS.

$87,000 to $265,000 in 4 YEARS!!!!!!!!!!!!!!!!!!!  WHO THOUGHT THAT WAS SUSTAINABLE???? (PS that home is currently on the market for $199,999 along with thousands of others and a slew of foreclosures, who knows maybe I'll grab it back in 2 years?)

The price drops around here will be just as dramatic as the increases were.

 I've seen this movie before.............you'll LOVE the ending!!!

That 1900's to present price chart for housing is 100% on the money IN MY MARKET.  Not every place saw that insanity but I'll argue that the majority did.  It all ends the same.  The difference THIS time is we should ALL see the writing on the wall.   

I can't for the life of me see how rising interest rates makes home prices go up from here.  This mess will be a GLOBAL event.  I wouldn't count on  Russian couples coming here and buying your flips from you any time soon.