It seems that in these past two weeks, we have experienced a tremendous increase in relatively negative news regarding the real estate market. Usually I just chalk up all this negativity to the media working hard to score a few extra bucks. However, this time I am choosing to not be so hard on the media and the bad news.
Is Housing Overheating?
The biggest reason is that I believe that the housing market in general is in danger of becoming overheated… again. As evidence, just look at who the buyers are:
- First-time homebuyers getting loans that for some consume almost 50%of their income
- New investors with little cash and less knowledge rushing into the market because they see the “opportunities”
- Seasoned investors buying everything they can… because the prices are just too good to be true.
While I could spend a considerable amount of time discussing each item above, I would like to focus instead on the second item: “new investors with little cash…”
New Investors Jumping In Too Soon – Unprepared?
Much of the news these past 10 days has either discussed the extreme number of foreclosures in the past 3 months or the fact that housing prices will continue to decline for the next several years.
Consider this article in the Miami Herald that indicates that housing prices will decline another 30%, and that is already on top of 48% declines since 2006.
Or this article on DailyFinance that talks about every bubble following the same trajectory on the way down that it did on the way up. The chart in the article tells it all.
Most experienced real estate investors know how this works. They understand that old mantra, “You Profit When You Buy,” and purchase their deals accordingly. Making sure their deals reflect projected value trends which they factor into their purchase price.
Where it is more unsettling for me, at least regarding the new crop of investors, (did you know some gurus estimate that there is a 50% churn rate of noobs into real estate investing every year?) is that these investors just see low prices and without knowledge of or consideration to long term trends they jump in and ultimately end up getting slaughtered.
Bottom line, the overall housing market has a long way to go before things return to normal, whatever normal is at that time. Don’t be lured into deals that look too good today, because depending on your market, prices have not yet bottomed out.
If you doubt this statement just ask someone who purchased a $40K property in Detroit last year, what it’s value is today.