Tuesday, November 28, 2006

Home Sales Up, Prices Down

Back in September, I wrote about a news story that said home prices had declined for the first time in 11 years. Today, there is another story out: Home sales are up, but prices are down.

The National Association of Realtors has announced that sales are up one half of one percent - the first rise in eight months. However, the median price of a home has dropped 3.5% from last year, a record decline. They also state there is still seven months worth of inventory for sale. (If you look back at the story from September, you'll see back then there was 7.5 months of inventory, which was a record backlog.)

So home sales are up by the tiniest amount, prices have dropped by a record amount, and some people are saying this means the market is stabilizing. Personally, I have to agree with what economist Joel Naroff said in the story: "The housing market is far from the bottom." The story makes no mention of the fact that, not only have housing prices continued their decline from September, but the decline is accelerating.

Once again, real estate investors really need to stick the basics to have success in this market, whether you are rehabbing or renting. Your money is made when you buy, so make sure you get a good deal.


Anonymous said...

Regarding the mantra, "Money is made when you buy"...

Let's say for example, that you get a steal of a price on a very nice home. You're able to snag it for only $200,000. Most homes in the area are WAY above that, but due to a distressed seller, and an impending forclosure, you score a hell of a deal.

Since 'money is made when you buy', how much will you make on this deal?

Well, there's one part of the equation that you'll need to know before you can calculate your profits. That would be the selling price. If you're only able to re-sell for $180,000, you've lost your shirt regardless of how great of a deal you thought you had made.

Bottom line, Money is made [or lost] when you sell.


Shaun said...

Is your example real? Not really. If homes are selling for "WAY above" (your words) $200,000, I would say they are selling for at least $275,000. Call it $280,000 to make the numbers easier to work with. The longest it has ever taken me to flip a house was 214 days - about 7 months. Using that time frame, you are claiming the value of the house will drop $100,000 in 7 months (since I can only sell it for $180,000). Is this realistic? Has there ever been a case where home values have dropped by roughly 35% in 7 months (and that drop has not been caused by an natural disaster)? Maybe. Is it likely? No. It's highly unlikely. Furthermore, could this ever happen without any warning signs that an astute investor could pick up on? Doubtful.

Anyone can invent a hypothetical no-win situation to scare themselves or others, but what matters more are probable scenarios, not improbable ones.

As an investor, you need to know how to estimate the fair market value of a property. Part of that involves taking into account if prices in the local market are trending up or down and how long you plan to hold the property. Like everything else, real estate investing cannot completely be summed up in one sentence. However, the most important point can be and that is: Money is made when you buy, not when you sell.

If you want a sure thing, put your money in the bank. With research and experience, a good investor can minimize the risks.

Anonymous said...

Long time reader, you are doing a great job here. I am looking to buy a house
in six months (till then I am saving up for a down payment). I am a first time buyer and
would like to do my homework before going house shopping. Do you have any suggestions regarding
the books and other resources that I can use for my research. Any pointers in this regard is
greatly appreciated.

P.s: I am an Arizona resident as well. In your expert opinion where do you expect the market heading
in 6 months, specially in the east valley where I am looking to buy.


Anonymous said...

Here's a real-world example that's happening on my block. (first, please take into consideration that I'm in CA and you guys are in AZ, so there is a price difference). I live in a new development in San Marcos. Everything was built in '04 and '05. We bought ours (4br, 2.5ba, 2500sqft) for $810k in December '05. We felt it was a good deal. We were able to lock-in our price by putting 50k down before the house was completed. About 3 months later, one of our neighbors was forced to sell because they were behind in payments. They sold for 769k (same floor plan, same everything. Actually theirs had a larger lot). OK, so this gives you an idea of the values ($769 to $810). Well, the developement sells-off one of the last remaining houses, it's a model home with all the upgrades that ours does not have, it's 2600sqft, has 5 bedrooms, and 3 baths. They have a hard time selling it, so they fire-sale it to an investor for the amazing sum of $568k on 04/07/06! Obviously an awesome deal, and obviosly, the investor has 'made money when he bought'. Easy money, right? Well, he lists it for 688k on 04/25/06.

Here's the run-down on his price drops:

Listed 4/25/06: $688,000

Price Reduced 05/05/06: $688,000 to $682,000

Price Reduced 05/11/06: $682,000 to $678,000

Price Reduced 05/18/06: $678,000 to $671,100

Price Reduced 05/26/06: $671,100 to $667,000

Price Reduced 06/01/06: $667,000 to $665,000

Relisted 6/7/06: $665,000

Price Reduced 06/09/06: $665,000 to $661,100

Price Reduced 06/16/06: $661,100 to $658,000

Price Reduced 06/23/06: $658,000 to $652,000

Price Reduced 06/29/06: $652,000 to $648,000

Price Reduced 07/07/06: $648,000 to $644,400

Price Reduced 07/14/06: $644,400 to $643,000

Price Reduced 07/21/06: $643,000 to $637,000

Relisted 8/01/06: $631,100

Price Reduced 08/04/06: $631,100 to $627,000

Price Reduced 08/11/06: $627,000 to $623,000

Price Reduced 08/18/06: $623,000 to $618,000

Price Reduced 08/26/06: $618,000 to $611,000

Price Reduced 09/04/06: $611,000 to $604,400

Price Reduced 09/07/06: $604,400 to $599,999

Price Reduced 09/15/06: $599,990 to $597,000

Price Reduced 09/22/06: $597,000 to $595,500

Price Reduced 09/29/06: $595,500 to $593,000

Relisted 10/2/06: $593,000

It's November, and he still has the house!

Shaun said...

The way I see it, he can still make money. Of course, I don't know any details about any loan he might or might not have or what other expenses he has, so any detailed discussion cannot be complete or accurate. However, he bought the house for $568K and it is currently listed for $593K. If he pays a standard 6% commission on the sale, he will net $575K on it. He'll have some other fees and such, so he might only break even or lose a little money. (Even so, this price drop is no where near the 35% in the previous hypothetical. To reach that, the price would have to drop to $369K.)

Unfortunately, even the best investment can be screwed up due to the investor's stupidity. Look at what this guy did: He lowered his price WEEKLY by $6K or less, sometimes by as little as $1,400. As a buyer, why would I buy? Just wait and the price will keep going down. This guy was greedy. If he needed to sell it in a hurry, make one price drop from $688K to $600K or so. He'd make less, but it might have attracted a buyer and gotten the property off his hands.

This guy was not investing. He was speculating. An astute real estate investor would have seen the lower trending prices in the area, the slowdown of sales, etc. and would have identified these as warning signs. A good investor, had he bought this property any way, probably also would have dropped the price quicker to unload it.

Again, you cannot protect people from their own stupidity. Someone can invest $10,000 in a 6 month certificate of deposit at a bank, but if they keep withdrawing money from it on a weekly basis, penalties will destroy their investment. So even a 100% safe, federally insured investment with a guaranteed return can lose money for a bad "investor."

I'll say it again: ANY investment strategy cannot be completely summed up in one sentence. There are always other aspects that need to be understood and mastered. However, "You make your money when you buy" is the overriding principle in making money in real estate.

Anonymous said...

It sounds like Anonymous overpaid by more than $200,000. That is over 30%. Wow! I might be a little bit jaded about making money too if I had made that mistake.

Go back to what he says - "we felt it was a good deal". I think this comment speaks to the fact that too many people don't understand what it takes to evaluate a deal. It was easier to go with your gut feel when the market was on its way up!

I tend to agree that you make money on the "buy". At the very least, you can plan to have an exit strategy that will prevent you from losing, even if something does go drastically wrong.

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