Home Shopper

Dash,
My guess is that home prices will fall a little but not by much, particularly if the bailout happens.
But if you are looking to buy a home as an investment, please make sure you calculate all the expenses that go into home maintenance and compare it with renting. If you come up with a number where renting is cheaper, it is better to rent.
Five years from now, you can probably sell the home for a slight profit, but after you account for all additional expenses, home improvements and realtor commissions, you would have lost a lot of money.
For home prices to appreciate every year, you need salaries to increase. The wall street meltdown will keep a tight lid on salaries for years to come - Fri Sep 26 2008, 18:51

victor,
I was replying to cheng's statement that real estate can never crash like stock do.
But I have to change my whole view on real estate and any dollar denominated assets after this mother of all bailouts. http://www.reuters.com/article/rbssFinancialServicesAndRealE…
My head started to hurt after I started to think about the ramifications of this bailout. So, I stopped thinking. Anticipate nothing and be prepared for everything is the way to go.
On a different note, I never thought mortgage fraud was a big problem in NJ. Are you seeing a lot of those in NJ?
Cheng here has been trying to convince all of us that most people buy homes in CASH. - Sat Sep 20 2008, 17:17

Cheng,
I think you also wanted to know if real estate can go down like Bear Sterns or Lehman.
Here is a home for sale at $1
http://beta.realtor.com/search/listingdetail.aspx?loc=detroi…
I am sure it sold for more than $170 at one point.
You can actually find several homes on realtor.com that are on sale for less than $2
You could argue that Realtor.com is conspiring to bring down everybody's home values, but I tend to believe that it is not in their best interest.
You want to know the big difference between stock crashing vs home crashing?
On stock you can take tax write off, but on home, you will have to keep paying property tax. - Sat Sep 20 2008, 07:05

Cheng,
Here is an article which validates my opinions.
http://www.bloomberg.com/apps/news?pid=20601109&sid=ajRX_QI2…
Basically a third of NJ economy is dependent on wallstreet as confirmed by your ex-colleague Corzine.
You can argue that Corzine is no longer with Goldman and so lost his intellect, but I tend to believe him over you.
I am not sure if you actually expected us to believe that folks will sell 1.2Mil condo in NY and move to Edison, but if they actually have to do that, I think they will consider jersey city over edison.
By the way, I am still waiting to learn how much your property tax, condo fee, home insurance and other home maintenance went up by over past 5 years. It is called inflation, not insult. - Sat Sep 20 2008, 06:26

Cheng,
First time home buyers, by definition come from rentals. That's what makes them "first time". You could argue that they were previously living with their parents, living in a jail, living on the street, etc.., but it is unlikely that they can qualify for a loan or buy in CASH like most of your buyers tend to do.
I was more referring to auto insurance in NJ being ridiculously higher than most other states. There is one way auto mechanics can get rich using insurance companies, it is called Insurance Fraud. It happens all the time. I know about it because I used to listen to ads from insurance companies asking people to help stop it as it takes rates higher for everybody. If it got to that level that insurance companies had to advertise on radio, I can guess that it is a rampant problem in NJ.
My rent went up by 8% over the last five years. Can you tell me how much your property tax, condo fee, home insurance and other home maintenance costs increased by over the past five years?
I still can't buy this whole auto-mechanic theory, and believe that home buying power comes from good job/salary growth or speculation. I don't think we had a lot of speculation in NJ. I would appreciate if you could post some valid data about the industries where first time home buyers came from over past 4 years. - Wed Sep 17 2008, 19:25

Cheng,
I do agree that falling mortgage rates is a huge positive for the real estate market, even though, it comes at a huge cost of making the tax payers potentially responsible for trillions of dollars of Fannie/Freddie debt. The ramifications of that will be felt for decades to come.
But, nothing comes close to job market in having a big influence in home prices.
May be you can tell us a bit more about where the first time home buyers came from in the past 4 years.
If they are all auto mechanics, I think that solves my puzzle about why my auto insurance stays flat or keeps going up even though I never have a claim or a traffic ticket. It looks like I am paying for their investment properties. Then why do you keep talking about great schools, they don't teach how to become an auto mechanic in schools. - Tue Sep 16 2008, 19:56

I would really appreciate if you could post a near-accurate break down for the past few years.
Couple of changes though, I am only interested in first time home buyers and if they work in IT, I need to know their actual industry, as IT is mostly a support role dependent on another primary industry. For example most of the asians in the region work in IT, but I think at least 70% of them are in Financial Services.
My belief is that over the past few years, real estate in NJ has become so expensive relative to salaries and rents that most of the first time buyers had to come from Financial Services, where salaries went through the roof with the paper profits that these companies enjoyed. Now that these profits have evaporated and large companies employing tens of thousands of people are going bankrupt, the most important player in this market, that is the first time buyer is going to be missing for some time. When there is no bidder in the market, bad things happen. If more than 70% of your first time home buyers had nothing to do with financial services, then we don't really have a disaster at hand - Mon Sep 15 2008, 20:04

Mary,
I really like it that we are doing some good analysis here rather than some obscure theory that only very smart people like Cheng understand.
I would love to be wrong in my dire forecast about real estate in NJ.
Just to help me more with my analysis and predictions, can you please tell me what percentage of the buyers in your client transactions in 2005,2006,2007 and 2008 were working in Financial Services or an industry deeply linked to this industry.
In my opinion, there are 4 major industries in NJ, Financial Services, Telecom, Pharma and others(Utility, Real Estate, Govt, etc..)
My guess is that Financial Services should have contributed to somewhere between 30% to 50% of your buyers.
If you have the breakdown for a broader group of realtors, that will be even better. - Mon Sep 15 2008, 17:48

The events in the financial sector are taking a worse turn. I was really bearish, but even I did not expect things to get so bad. It looks like Lehman will file for bankruptcy and BOA is in talks to buy Merril and AIG is going to come under fire. These events mean loss of several thousand high paid jobs in the state and this region. No industry will be able to replace these jobs. I would say, if anybody is over leveraged and needs to sell, they better price to sell and get it over with. Also, conserve cash, as much as possible, even though it means paying a little bit more in interest. It is better to live to fight another day. This could get very nasty. If anybody has any doubts as to what happens to real estate market when jobs go bad, they can look at Michigan. - Sun Sep 14 2008, 15:04

the entire nation and a generation has been brain washed into thinking that investing in your home and building equity is the sure way to retire rich. It is a numbers game after all and when you add up all the numbers, it makes no sense as an investment. Just like any other major index, home price index is also a mean reverting machine and it never stops at the mean when it reverts. In a state like NJ where the property taxes are just plain ridiculous, and a major source of employment like financial services is going through a structural damage, some of which is going to be permanent, I can't believe that people are trying to convince themselves that we are back on track to home prices doubling every 10 years. - Sat Sep 13 2008, 20:41

I don't understand why no body ever includes closing costs and realtor commissions when reporting gains on real estate. If you deduct 6% from sale price and add a 5K in closing costs to the purchase price, the return is just under 22% for 5 years.. Not that impressive considering we have lived through the greatest real estate boom of all times in the past five years. I am not even considering home improvements that the average seller might have done over the past five years. - Sat Sep 13 2008, 11:42

here is one in edison
http://unitybank.com/rates.asp?id=2 - Thu Aug 28 2008, 15:37

Cheng,
If she has a positive cash flow on the 203K apartment after accounting for all expenses and interest on 203K, sure it is a reasonable investment because she can afford to wait for the market to recover.
I don't really understand the point you are making about Bear Sterns. They got into trouble by investing real estate(through mortgage backed securities). I can show you stocks that went from 10 to 170, you never invest everything in one company. I can also show you FDIC insured CDs yielding more than 5% today.
If we need people with 200K in cash to buy 1bed 1bath apartment in Edison, I think we are in deep trouble.
1Bed 1Bath is too small for me. So, I rent a bigger place near Edison and pay less rent than what it would cost me to carry a 203K 1Bed 1Bath apartment. - Wed Aug 27 2008, 21:25

I am still waiting to find out the annual rent on one of these town homes.
If anybody has an idea, please post.
If we can go back to the opinion that real estate is an investment after all, In my opinion NJ real estate, market is the worst market to invest in today. It didn't really have a real correction in home prices because the boom was not speculative but based on good job and salary growth we have seen during the period. The biggest source of jobs, financial services is going to shrink big time. That is going to have an affect on other consumer related industries and state tax revenues. That will keep property taxes high for a long time. To sustain these high real estate prices, we need growth in jobs and salaries. I also believe that the financial sector will come up with some new way of making money, but that will take some time and when it does, the job growth might happen in some other state or country - Sat Aug 23 2008, 21:31

Cheng,
You are back with your theories again, now you have parent-in-law theory.
and you claim that you are smart because you work at Goldman???
As far as I know Goldman dodged the bullet by betting against real estate.
It is very hard for me to follow anything you write, so, I will not be able to understand this theory either.
I have a simple question, how much would one of these town homes rent for on a yearly basis and what is the property tax and the community fees - Sat Jul 12 2008, 20:37

Cheng,
You really confuse me. Nothing you say makes any sense to me. But you seem to be an experienced real estate investor and both of us are living in different planets as far as real estate is being considered as an investment.
All I can hope for you is that you are net cash flow positive on all your real estate investment. (assuming you have a term called cash flow in your dictionary). Otherwise, you have no idea what is coming your way - Fri Jun 20 2008, 18:25

I have deep respect for anybody who had the intellect to go against the tide and sell at the top.
You are now going against the tide and buying(lets hope at the bottom), you will do fine.
In my case I am a first time buyer, can easily afford down payment, but really hard earned money, not gains from previous real estate boom.
So, I will probably never buy unless it is comfortably cheaper to buy than rent.
I also expect congress to give a huge tax credit to first time home buyers within the next couple of years.
That probably will tip the scale in favor of buying than renting for me - Sat Jun 14 2008, 07:16

Sarah,
Congratulations on your purchase.
Now that you made the decision, try to enjoy your new home and forget about the market conditions for a couple of years. As long as you can afford the monthly payment and have enough savings to cover disasters, you have nothing to worry about.
If you don't mind me asking, can I know what is making you most nervous?
Are you a first time buyer or a move up buyer?
I am just trying to understand the psyche of the buyers, what is driving the decision to buy and what is holding people back.
I already know the psyche of those sitting on sidelines as I represent one of them. - Sat Jun 14 2008, 06:52

Cheng,
you have interesting theories like 'Homes priced in crude oil theory", "Chinese mother theory", "Serious birthday party theory", ...
I am not disputing your theories, they might be correct, but until, you publish these and win a noble prize in economics, or something significant like that, people are going to believe in conventional ways of valuing real estate, which is why we had home prices correct significantly last month, while crude prices hit new records.
So, for now, I like most people use something like this to calculate return on investment on real estate:
["rental income" + "tax credits"] - ["mortgage interest" - "property tax" - "annual maintenance and repairs"
- "home insurance" - "provision for idle months" - "lost opportunity cost on negative cash flow" - "provisions for disasters like floods, somebody tripping and falling in your drive way, major employer in your area going bankrupt, economy going into serious recession" ] - ["one time selling expenses like Realtor commissions"]
Using this formula, any real estate in new jersey is very expensive.
I am also a big believer in 'Bigger fool theory', where "I know it is a bad investment, but I am going to find a bigger fool who will buy it from me at even a higher price".
But, the way main stream media is bombarding them with depressing news about real estate, the pool of 'Bigger fools' is shrinking rapidly.

Now, you could argue that home is a place to live and not an investment, but as long as I don't run out of places to rent, I choose to treat it as an investment

That said, I hope you are right and real estate goes up forever, as I know other ways to profit from it, which don't include buying real estate. - Sun May 18 2008, 08:13

you can click on the link below to track how sales are progressing
data is 2-3 months old. Until Feb5 they sold one home for 411K

http://php.app.com/websr1a07/results.php?county=Middlesex&mu… - Sat Apr 26 2008, 16:29

I cannot believe a realtor suggesting that if the homes are selling, they are not overpriced.
This is exactly the mentality that got us into this trouble.
It is overpriced if you can rent a similar place for less than total carrying cost if you bought it.
Otherwise, you are just expecting the rents to grow at a much faster to out pace negative cash flow
That can only happen if we see lots of new high paying jobs in this area. Given how exposed the area is to jobs in Financial Services, you are really expecting the banks to add lots of new jobs in this area.
While calculating carrying cost, please consider the high property taxes in NJ and several other expenses
Just my opinion, some how I can't subscribe to the idea that if the homes are selling they are not overpriced. - Sun Apr 20 2008, 11:21

I agree with a lot of others that nobody knows the answer.
Dr Cheng's answer really cracked me up.
As far as I know, there is a tight correlation between home prices and Job Creation/Salary Raises/Credit Availability
His answer seems to imply that our salaries and total job creation and credit availability are tightly couple to gas prices. I for sure know my salary is not coupled with gas prices but my mortgage spending power for sure is coupled with gas prices in an inverse fashion, which doesn't bode well for home prices - Sat Apr 26 2008, 12:52