More Housing Update Comments
From Deb & Steve:
I believe you are correct that SD housing is headed for a fall. If your premise about hyper inflation is correct then if an individual homeowner can hold on to his home through the downturn and doesn't refi into the higher interest rates then his real estate investment could be a good hedge against inflation. If the investment is highly leveraged they could see even stronger performance. However, from a macro standpoint, hyper inflation could crash the RE market if personal wages/income can't support higher prices which brings us back to today's situation.
Agree or Disagree??
Not easily answered, but we endeavour...
Personal wages/income do not support the current prices, nor do they support the rental rates necessary at these price levels, as artificially low interest rates and bogus lending instruments (creative financing), and sheer greed and hubris have brought us to this point.
SFR's, condos and even investment rentals do not pencil out. There used to be a simple RULE in housing, with 20% down, could you rent the property and break even for PITI? If the answer was no, you did'nt buy it. Why?
Because if your in for the long haul, (read not speculating and not flipping) you need to be able to hold your breath during a cyclical downturn, which could entail your being flipped upside down and being held underwater for an extended period as the FMV fell below your loan balance.
In the current frenzy, FEW HAVE REMEMBERED OR OBEYED THIS RULE. Those doing 1031 exchanges UP the food chain are still in good stead, unless they opted to pull out equity to make the exchange or after the exchange to speculate, and many have.
We are seeing many high end multi million dollar homes selling, and the owners are DOWN grading to the 500K price range. Their fear is the new tax law proposal that would eliminate the interest deduction after a certain price level. The high end homes would take a hit in value while the "affordable" housing would not.
Those locked in with a fixed rate 30 year loan may also be in good stead, as they qualified and can supposedly maintain their FIXED obligations, barring the 4 D's (death, disability, displacement or divorce).
Being in for the long haul and hanging on is the key in any scenario. What goes up must come down and always does as the central banks debauching scheme always requires bouts of inflation (to erode your money) and deflation resets (to wash out the weak hands).
This cycle, like all cycles will see a downturn, to which degree 10, 20, 30% or more TBD? After which another upcycle will begin, how long it "deadheads" till the next spike is anyone's guess.
This much is certain, the next spike will take us above the current peak, it always does with the following caveat. That we do not see a deflationary collapse like Japans over the last 18 years. Japanese real estate fell 70% in value after their stock market crash and has not appreciated since.
Most of todays homeowners, those who bought at or near the peak, with ARM's, interest only, neg am, no or little down lending products, are underqualified, over-leveraged and ill prepared for the inevitable reality check that is coming.
That reality check is a wave of Tsunami proportions as this upsurge in prices has been exponentially larger than the last. Those who have not locked in on a fixed rate will get a rude surprise next year or in the near term. Bottom line one must be positioned and moored properly to weather the squall for the long haul.
To answer your question, your leverage is relative to your situation, and if you can hold on, it should come back and rise above the current level in the next go round. How long? Who knows? This we do know, while the cycle plays out interest rates will rise and fall again, and you would do well to take advantage of that cycle.
I believe you are correct that SD housing is headed for a fall. If your premise about hyper inflation is correct then if an individual homeowner can hold on to his home through the downturn and doesn't refi into the higher interest rates then his real estate investment could be a good hedge against inflation. If the investment is highly leveraged they could see even stronger performance. However, from a macro standpoint, hyper inflation could crash the RE market if personal wages/income can't support higher prices which brings us back to today's situation.
Agree or Disagree??
Not easily answered, but we endeavour...
Personal wages/income do not support the current prices, nor do they support the rental rates necessary at these price levels, as artificially low interest rates and bogus lending instruments (creative financing), and sheer greed and hubris have brought us to this point.
SFR's, condos and even investment rentals do not pencil out. There used to be a simple RULE in housing, with 20% down, could you rent the property and break even for PITI? If the answer was no, you did'nt buy it. Why?
Because if your in for the long haul, (read not speculating and not flipping) you need to be able to hold your breath during a cyclical downturn, which could entail your being flipped upside down and being held underwater for an extended period as the FMV fell below your loan balance.
In the current frenzy, FEW HAVE REMEMBERED OR OBEYED THIS RULE. Those doing 1031 exchanges UP the food chain are still in good stead, unless they opted to pull out equity to make the exchange or after the exchange to speculate, and many have.
We are seeing many high end multi million dollar homes selling, and the owners are DOWN grading to the 500K price range. Their fear is the new tax law proposal that would eliminate the interest deduction after a certain price level. The high end homes would take a hit in value while the "affordable" housing would not.
Those locked in with a fixed rate 30 year loan may also be in good stead, as they qualified and can supposedly maintain their FIXED obligations, barring the 4 D's (death, disability, displacement or divorce).
Being in for the long haul and hanging on is the key in any scenario. What goes up must come down and always does as the central banks debauching scheme always requires bouts of inflation (to erode your money) and deflation resets (to wash out the weak hands).
This cycle, like all cycles will see a downturn, to which degree 10, 20, 30% or more TBD? After which another upcycle will begin, how long it "deadheads" till the next spike is anyone's guess.
This much is certain, the next spike will take us above the current peak, it always does with the following caveat. That we do not see a deflationary collapse like Japans over the last 18 years. Japanese real estate fell 70% in value after their stock market crash and has not appreciated since.
Most of todays homeowners, those who bought at or near the peak, with ARM's, interest only, neg am, no or little down lending products, are underqualified, over-leveraged and ill prepared for the inevitable reality check that is coming.
That reality check is a wave of Tsunami proportions as this upsurge in prices has been exponentially larger than the last. Those who have not locked in on a fixed rate will get a rude surprise next year or in the near term. Bottom line one must be positioned and moored properly to weather the squall for the long haul.
To answer your question, your leverage is relative to your situation, and if you can hold on, it should come back and rise above the current level in the next go round. How long? Who knows? This we do know, while the cycle plays out interest rates will rise and fall again, and you would do well to take advantage of that cycle.
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