Question Details

Sammy, Home Buyer in Santa Clara, CA

DON'T BUY at this time - STAGFLATION around the corner.?

Asked by Sammy, Santa Clara, CA Sat Feb 23, 2008

This was a advice given to me by somebody who understand economics. What effect will stagflation have on residential housing market. Mortgage gimmick in last 3-4 years have created such a big mess of real estate market. It has left consumers totally confused about what the house really worth ??

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Hey Michel,
Did the author of this article flunk Econ 101 too?
NEW YORK (Reuters) - One-tenth of U.S. homeowners hold mortgages that are larger than the worth of their homes, Moody's Economy.com said on Friday.

Nearly 8.8 million homeowners, or 10.3 percent, are in over their heads, its chief economist, Mark Zandi, estimates.

As a result, millions of U.S. homeowners have the incentive to abandon their properties.


http://www.reuters.com/article/domesticNews/idUSN2259847620080222

Or how about this one:
http://www.businessweek.com/magazine/content/08_06/b40700407…


The only folks who would fail Econ 101 right now are self-interested real estate agents who cannot bear the facts that housing is and always has been a horrible investment.

You should check out IRRATIONAL EXUBERANCE by Robert Shiller. He shows hundreds of years of evidence showing homes trailing the pace of inflation...
John
1 vote Thank Flag Link Sun Feb 24, 2008
Anyone who has done well in investments will tell you that the best time to invest is when prices are low. The reason so many people are taking a bath right now is because they bought when the market was high. There is no doubt in anyone's mind that the market has gone down considerably over the past few years. Has it hit rock bottom? I don't know. But what I do know is that it will go back up. And the interest rates now are at an all time low. And the inventory is so plentiful that you have a choice of properties like you never had before. And to me, those are three critical factors that indicate that NOW is the time to buy. More than ever. Do not confuse the mortgage mess with the issue of buying. I fully agree with you that many people are in a mess because banks gave money to anyone who asked for some. They relazed their ability to repay criteria and now they and the customers to whom they loaned money are paying the price for that hysteria. Get yourself a good realtor. Find out what you can spend on housing without hanging yourself. Get a fixed rate long term mortgage and look for distressed properties. Make a bid you can afford and remember that investing is a long term game. If you want to gamble, go to Vegas. And you'll lose!!!

P.S. Forget about that expert friend of yours who's using terms that are only designed to flunk student in Economics 101 at the local college
3 votes Thank Flag Link Sat Feb 23, 2008
hey John,

I do not want to get into an academic debate here. We are here to help people who have legitimate questions. If you really believe that housing is and has always been a terrible investment, then how do you explain that almost everything single wealthy person in the world has more than one property in their investment portfolios and that the poor are typically characterized as not being able to build wealth through equity. Housing offers also many advantages besides its guaranteed long term appreciation. The reason that some people are in trouble is that they became greedy and bought way beyond their means. And that was not entirely their fault. They got sucked into the sytem by listening to cheap advice or taking adavantage of easily obtainable funds without wondering what would happened if they lost their jobs or if the short term deals were going to be like that for ever.

If you read my profile, you would realize that I was not around in real estate when all that frenzy happened. I was a university professor who tried to teach my students good common sense and that included using credit properly and not believing everything that was printed in the newpapers.
2 votes Thank Flag Link Sun Feb 24, 2008
Now is a Great time to buy! Activity is starting to pick up, prices are low enough to get a great deal, there are still people who need out of their current situation, and $$ in their motivator. If you're looking to buy I think it's a great time. As I stated things are picking up, and the buyers will price thier property accordingly. Real Estate is a cycle, the 1st to get hit is the 1st to recover. People will always need a place to live, if you buy right you won't end up like some of the peolpe who overextended themselves. Just don't buy more than what you can truly afford.
0 votes Thank Flag Link Sat Mar 8, 2008
Sammy- My opinion is this (i) there is no GUARANTEE in owning Real Estate and or Stocks. If you approach each as an investment, than there is the upside risk as well as a downside. The average length of time homeowners live in their homes is from 5 to 7 years. Very few live in the same home longer than that statistics indicate. So your point of reference would depend on what YOU consider LONGTERM. Longterm, just for comparison basis, stocks have out performed Real Estate, from 1896 to the beginning of the purported "BUBBLE". Obviously, there are short term fluctuations within the normal cycle of these types of investments where one would say either "I'm glag I'm not in that, or I wish I were".There are advantages to owning each, as well as disadvantages. Longterm investment goals should be looked at with clear vision and understanding. I believe the jury is still out whether the U.S. will be in a recession for 2008, and or whether inflation or defalion will be a concern. There are points of view that suggest that "Stagflation" is a word too loosly used, and it can only be either one or the other. My suggestion to anyone looking to purchase Real Estate in the coming months is to buy for the right reasons, understand the consequences of so doing, and know what your goals are i.e., place to live, investment etc. Do your homework, get as many reliable sources of info and then decide. I also suggest taking a look at Rent-To-Price Ratios and Gross Rent Multipler conversions for the specific area you are interested in. These computations, and others, will give you a more definitve idea about where values are headed, or need to go. I would not necessarily buy into the "gloom-and-doomers" any more so than the "cheerleaders" who say all is well and buy now. There are obviously many thoughts that go with your question, and what I have provided are just my own, and in no way does it disparage form others views. Good Luck , stay informed, and remember the only things GUARANTEED in life are "TAXES and DEATH".
0 votes Thank Flag Link Sun Feb 24, 2008
I have cut-paste some of the advise I was given...What do you people think

This is what real estate industry has seen in last 5 years.

PAST
=====
- Extreme greed of people who were getting in and out of houses just to cash in the gain.
- Folks were using their house appreciation as ATM machine
- Traveling around the world
- Buying world class luxury vehicles
- Remodeling their houses with latest/greatest luxury
- It was really amazing to see people whose income was low - they were living life of millionaires
It made me wonder- what is this path to success ? What is going on ? How can this be sustained ?
Every loan you take on has to be paid....many not be right away but within certain time. If people can't really afford why are they taking these loans like crazy...It was free credit , easy money and free money. It felt spoilt kids kid of rich dads just spend and have money.
- Real Estate broker was the most sough after career. Everybody is in real estate was making money like never before it was sort of like windfall and lottery. Even people did not know anything about real estate started behaving like Donald Trump and felt themselves like real estate Gurus.

NOW
====
People are at sidelines... The wealth which was generated by sudden house appreciation has started feeling UNREAL. Buyers are confused what is the real price...is it still the price which people used to pay in year 2000-2001 or current price is really the real price of the ASSET... At least the appreciation which it saw in last few years does not seem real any more.

People are not going to see this kind of appreciation going forward. Lending standards are tough. It is no more free for all game.

Sellers are having tough time believing that their worth id diminishing and will continue to diminish at faster rate. Lot of people want out before it gets to bottom... At least they can come out positive

Future
======

My advise to buyer is if it does not make financial sense from your monthly/yearly payment point of view...Net in versus net out - do not get into real estate. The appreciation which we saw for last couple of years were not real and it is not going to happen again for many many years .

My advise to sellers are -- if you can afford it it is all fine but if not you should move out ASAP because worst is yet to come and trust me it is not going to be comforting.
0 votes Thank Flag Link Sun Feb 24, 2008
John, Housing has not ALWAYS been a terrible investment. At the present time, depending on where you live, I would be careful of what I bought and I would only buy or sell because I absolutely had to. (And if all those who are just seeing what they could get would take their homes off the market, things would improve. I have in the past month had TWO buyers make offers only to have the homeowners decide they don't want to move right now. Look for these same folks to test the waters around June). I would give the same opinion of the stock market: there are places to make money and places to lose money. I realize that being in California you see the entire country thru the filter of CA, but just like posters who complain about agents from NJ answering questions from consumers in GA, I would stay away from making blanket statements about the entire country when my experience is based on living in one of the worst places for home values right now.
0 votes Thank Flag Link Sun Feb 24, 2008
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