Can you believe this?

Jazen

Doesn't give an author but, boy oh boy what a load of mallarcky. Someone writes this after the ten yield breaks new highs the other day? Mortgage rates are going to go up up and up.
Dumb.
Real Estate Sky Won't Fall: Here's Why

Alan

1. The Sky isn't falling.
The real estate market always fluctuates.

Subjective. True.

Real estate sales prices are largely determined by the principal of substitution and reflect the uniqueness of the property, at a specific point in time, competing against only those other similar properties that happen to be available for sale, at that point in time.

True.

If there are many similar homes available at that time, there will be downward pressure on sales prices. As an expanding population absorbs the excess, competition for a dwindling resource will cause selling prices to escalate.

They aren't really destroying real estate so the dwindling resource bit is false. The expanding population bit is also probably misleading -- at least for this area as Tim so aptly showed several months ago. I wonder if there are areas where population growth has far outstripped housing.

Real estate is unique.
There's a reason that homes and real estate aren't traded like commodities on the Chicago Mercantile. They are too dissimilar. Even each tract home has a somewhat different location, orientation, lot dimension, proximity, and view.

Yet houses are similar enough that we use 'comps' to help guide us in pricing.

There is no bubble.
The value of real estate isn't driven by speculation; it's driven by its utility. If the economy moves away, such as in the rust-belt, that utility may decline. If high paying jobs are headed into a region, the value of the scarcest of all commodities, real estate will rise.

I think there is a bubble. 8 out of 10 house sales in my neighborhood last year were to people who owned more than one house. That sounds like speculation.

Increasing development costs absolutely guarantee that new construction will cost more than existing properties are selling for.

This factor alone has caused many developers to mothball projects in the pipeline until shortages again push prices up.

Advances in technology can also push prices down. As long as it is profitable, houses will be built. There may even be some builders who aren't so good at math that will build houses when it isn't profitable.

Value is a complicated cocktail.
Assessed value, appraised value, market value, replacement value, and selling price all mean something different. When the media says that real estate values are falling, they really mean that the prices people paid for a small number of homes, last month, was less than what a different group of people paid for a different assortment the month before.

Except the Case-Shiller index compares sales prices on the same houses. And that seems to be indicating that prices are levelling off if not falling even while the median price increases.

There is always a baseline of demand.
An increasing population must be housed. There is a natural ebb and flow, not a boom bust. At various times, demand outstrips supply; supply is increased until the surge recedes to baseline or below.

There can also be an increase in demand when speculators try to make a quick buck. See my comment above about 8/10 sales being to investors. What happens when 80% of the demand goes away?

There is always a baseline of mortgage defaults.
There will always be unforeseen circumstances that will bring some homeowners into default. Even in good economic times. And even with good mortgage loans. In an appreciating market, they are able to sell in a short period of time. So, in most markets, foreclosure activity has been below the historic baseline.

Now, it could increase, spiking a little to reflect those who can no longer survive on increasing equity and then may level out at baseline again. When the next rapid appreciation cycle begins, and it almost assuredly will, rates may fall back below the newly adjusted baseline.

Newly adjusted baseline? Why not back to the original baseline? Is life going to become less risky once a bunch of extra people who took on extra risk default? Maybe you think loans are going to become ultra-conservative.

There is no risk.
Save the term risk for high stakes poker in Vegas.

Buying real estate isn't inherently risky. But it isn't a get-rich-quick scheme, either. It's a formula for building long term wealth.

Tell that to people who bought in Japan in the early Nineties. Tell that to my cousins who were forced to sell during a temporary dip in CA. Every investment has risk. No risk = no reward.

Real estate is a great way to build wealth.
You have to live somewhere. If you rent, you are making some or all of someone else's mortgage payment. But even if you have to work two jobs and barely scrape by to make your own mortgage payment, you are building equity that over time will be quite substantial.

Real estate can be a great way to build wealth. It can also be a great way to go bankrupt. I think we have discussed the opportunity cost of putting your money in real estate on this board enough. Historically, real estate tracks inflation -- over the long term. Any investment that does better than inflation is predictably better than real estate.

So, perhaps, don't believe every "the sky if falling" report or article. Educate yourself on the market and happy wealth homeowning!

Translation: There's a sucker born every minute.