I went to a foreclosure auction
Posted by Frugal on April 23rd, 2008
You will be amazed on how fast these homes get sold. In a single day, some 500+ homes get sold. And you will be amazed too by the number of people in the crowd. Definitely, there are still way too many would-be speculators who want to pick up investing properties on the “cheap”.
Most homes that are very far from metropolitan area are selling 50% off or more. The homes that are near to where the jobs are, they are at best 10% lower than the listing prices. And the most amazing thing is that there is a huge crowd, probably more than 1000 people. Certainly, very few of them realize that the housing markets just won’t be the next best investing vehicle, possibly for the next decade. From the number of people going to auction, I’m fairly certain that this housing bear market has definitely not hit the bottom.
Again, I have been projecting a potential intermediate bottom for housing market at about 2011, which is still 3 years from now. Depending on how the inflation unfolds, that bottom may or may not be the lowest bottom. If $US tanks and US interest rates soar, I believe that US housing markets will tank beyond the level of 2011. How high the interest rates may go under a hyper-inflationary scenario? No one knows, but I think it could be more than 10%. At an interest rate of 10%, compared to a 6% rate on 30-year mortgage, the monthly payment will go up by 46%. Alternatively speaking, for the same fixed “affordable” payment, the loan amount will go down by 32%. In that scenario, I believe housing prices will fall, despite the supposed belief that houses are a good inflation hedge (only if it’s not hyper-inflation).
Some of my colleagues at work have been buying several investment properties, and I’m talking about 3 to 6 properties. I am fearful of their bets turning bad, but since I’m no oracle, I won’t comment on their purchases. My position has been bearish, and my projection is also bearish. The nasdaq is still not even 50% of its height back in 2000. That’s how a bubble can wreck your finances for a couple of decades.
Don’t be too greedy. The only result coming out of tremendous financial leverage is either a great success or a great failure. And you know for a fact that a great success is simply a much rarer event probabilistically speaking.
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April 23rd, 2008 at 6:22 am
You are exactly right. Housing probably hasn’t hit bottom. When you go to an auction and there are only a hundred folks there, then you know we hit bottom. I also agree that your friends may be setting themselves up for a rough patch by purchasing so many rental properties. When you experience a boom where prices doubled in less than 8 years, a 10% decline is not enough. Also, if rates do rise, then prices will have to fall as affordability, which is still out of whack, will get worse.
I wrote on my blog about Wachovia’s recent earnings conference call. Their risk management executive said they expect the bottom in mid-2009. Since banks have a vested interest in getting through this mess, I would add at least a year to this projection, maybe more. What was interesting is they aren’t calling a bottom now like many banks.
April 24th, 2008 at 2:38 pm
The problem is not investing in real estate right now or investing in tech during the dot com bubble. The problem is putting all your eggs in one basket. There is no reason why the bursting of the dot com bubble should have wrecked one’s finances for a couple of decades. There is no reason why the current real estate crash should wreck one’s finances for a couple of decades. If one was sufficiently diversified then the pain would be felt but wouldn’t kill you. The problem is when investors go “all in.” When they do, they cease to be investors and become gambling idiots.