Are Home Prices Rising Or Falling Where You Live

I played fast and loose with some of the math (assuming they paid only 22 900 and it was only the first year) but that's a pretty good picture
 
jweldon said:
People speculate and bet on the appreciation and eat a small monthly payment instead of being able to cover their mortgage in high demand areas like NYC, San Francisco, LA, and Hawaii. Everyone says it cant continue forever but they keep making money...

They pull in 42 000 a year theoretically, and you said they pay around 3000 in property taxes so that knocks it down to 39 000. Let's estimate capex at around 3 000 since prices and labor is more expensive in Hawaii. So NOI is somewhere less than 36 000, which means their cap rate is a paltry 3%. However, assuming the property continues to appreciate their cash on cash when they sell will be insane.

That's also true if a family takes out an FHA loan and bought a 740 000 property at 3.5% down and 5.6% APR. Their monthly payment will be close to $4100, so lets assume they collect $3000 a month in rent. (somehow) Let's also make a fair assumption that rent increases with inflation which is 2%. Since their mortgage terms are hopefully fixed and the rent goes up (somehow) perfectly with inflation they will make $3000 dollars just from rent at year thirty. So if the house burnt to the ground and they had no insurance they would have made -$22 900 because of the down payment. However, they decide to finally sell their house and move. During the 30 years the house has appreciated 2.38% a year. Here's the magic: they only spent $22 900 after all is said and done during that 30 years, but they got the appreciation from the full value of the house. So, the house sells for 1 498 000. Which means they essentially got a return of 15% on their money.

Everyone that buys low cap rate properties is betting on appreciation. It's a pretty sweet bet when it works though.
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How many houses have you rented out? I'll tell you from experience, the math you have done is laughable. That is assuming no upgrades, or mx, or evictions, or other expenses. Good luck with that.
 
Stone Cold said:
How many houses have you rented out? I'll tell you from experience, the math you have done is laughable. That is assuming no upgrades, or mx, or evictions, or other expenses. Good luck with that.
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Yeah that's why I said "fast and loose with the math." I personally would never invest small cap but appreciation with a small down payment is why people do it. I assumed it was their primary residence as well, so you're right I didn't address capex because nobody does on their own residence.
It could have been better but I feel like that addresses the primary reason people buy and hold RE with negative cash flow. Sorry I didn't make that clear enough.

And hypothetical rent was 3500, so I took out 500. Once again not enough, but "fast and loose"
 
drunkenbeagle said:
In "irrational" markets, it can work out. Until it doesn't, anyway.
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Lot of military pilots bought townhouses near flight school bases to take advantage of the buyers market rentals and build equity.

Worked out well.... right until the force cap for the military was cut under sequestration. Now there's guys with a 230k dollar townhouse in lower Alabama begging for rentals along with the other 500+ empty units available. Their only option is to eat the expense of being empty for a period, or lower rent prices until the locals can afford them and invite all the risk of that.
 
Zapphod Beblebrox said:
IMHO, like the last housing bubble, this one, at least in part, is being driven by low interest rates. Yes unlike the last bubble, (Inside Job / The Big Short), the underwriting of current loans are much more sound. However this does not address what will happen with a significant rise in interest rates. When rates do go up I believe it will be difficult to sell without a loss.

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The above graph shows where historic interest rates have been since the start of the 20th century. Warren Buffet has stated that the current period is unprecedented in history for interest rates to be this low. A historic norm is slightly more than 5%. The thing one needs to think about is not so much
buying the home but being able to sell later if interest rates go back to historic norms.
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Home prices actually go up during periods of increasing interest rates.
 
z987k said:
How do you figure? If interest rates are higher I can't afford a higher principal.
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I don't have to figure, you can just look at past history.

Rising interest rates denote a better economy which means wage and job gains which is typically what pushes housing prices higher and higher.

Today you have more robust demand coupled with a significant lack of supply in many areas. We met with a Realtor yesterday and the average days on market (DOM) in our area is under two weeks. That is crazy.

This is different than the 2004-2007 run up as people are (still) mostly buying homes to live in; not buy and sit on, sell six months later for $50k in profit. Also back then there was an overabundance of supply of new homes on the market, no-doc loans, etc.
 
Real estate prices here in DC have been fairly crazy for years, but the People's Republic Of Maryland and the Commonwealth Of Northern Virginia are right behind it. There are bidding wars for small homes, and a "junior studio" in one of the new, nicer apartment buildings by the Navy Yard goes for about 2,000 a month. That's for around 300 square feet. A 2/2 in most places is close to 3,000 around here.
 
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