If you mean you have to buy properties with extra discount in order to deal with the decline in value of properties while you're rehabbing them, then, you are absolutely correct.
In my opinion, different areas are going to be affected differently. We have lots of areas around here that are already hard hit with foreclosures and have seen pretty significant price drops. I don't really think we're going to see those decline another 30%, though that's a possibility. Other areas that saw huge runups may still have a way to go. If I look back at a house I used to have in Bakersfield, CA, it looks like its dropped in value about 20% over the last year. However, between when I sold it in 1999 until late 2002, the value was unchanged. From late 2002 until 2006, it more than doubled. So, the current value is still double what it was in 1999 or 2002. Do I think that's the real value? No. I think the real value is the 2002-ish value plus inflation. Which is about 30% below the current value, and close to 50% below the peak.
In that particular case, I think the pricing in Bakersfield was driven by people being priced out of LA and realizing they could get a nice place at a much better price. As prices collapse in LA, people may well move back.
So, I really think you have to try to understand your local market, and what's driving it. If you think 30% declines are a possibility, you're very right to factor that into your buying.
Jon
Feb 05 '08, 01:26 AM
