Is there any profit to be made from the recent real estate slump?
We kept hearing about the real estate bubble and how it was about to burst as prices on homes in most areas climbed to exaggerated highs in the early part of the decade. This talk of the real estate bubble had a strange metaphysical effect on prices as time went on. In other words, what people heard was going to happen, actually came to pass largely because of the unseen force of the spoken word. You might even say the market is somewhat manipulated in this way.
In 1994 the Northridge earthquake took a great toll on the housing market in Southern California. Prices plummeted in the area and folks who had given up on the prospects of ever owning a nice home in the desirable San Fernando Valley saw their chance. Prices still had not skyrocketed and homes that were not severely damaged were available for the first time in large numbers. Some had cosmetic damage and others were rebuilt with insurance money and placed on the market soon after.
One such home sold for $155,000.00 in 1995 and with the surge in the market fetched a handsome $600,000.00 ten years later. Its true, prices were inflated beyond belief in Los Angeles. Much of the rest of the country was also experiencing a huge rise in home pricing as well but from a base that was initially much lower to start with.
While real estate values have fallen to some degree over the past two years, it is for the most part, a normalizing process. Some areas like the Northwest, Oregon and Washington, have held quite steady and in some cases even risen in value.
You hear a lot about foreclosures these days and it leads us to believe there is something inherently wrong with the real estate market. Well there is, but it has little to do with the pricing of homes. It has more to do with poor lending practices. If a couple with a moderate income purchased a home for $200,000.00 and put a modest $10,000.00 down on that home and financed the balance at 5% interest the monthly payment would be in the range of about $1,800.00 a month. If they qualified with a standard lending institution with decent practices for a thirty year fixed rate they should have no problem at all selling that home in ten years and upgrading to a larger home as their family grew even in todays market.
People are losing their homes today not because of the pricing which if anything is somewhat adjusting to a lower market, they are losing the homes because a lending institution with unscrupulous practices qualified them for a loan they couldn’t afford.
Over the short term, home prices may stagnate or even drop for a short time but property well matched to the buyers established income is still the best investment. With 2009 bringing us a new government administration, confidence in the American economy is bound to grow again no matter what the new administration may offer. The general population has always seen change as positive. It places a new chance in our hands to make changes in our own lives.
Since everything we buy is strongly related to the economy in which we live, rising wages over the years has always been the standard by which we base affordability. Home prices which rise more in tune with the economy will again prevail. Prices will always be higher in large urban areas and their suburbs but this is not so much a bubble as it is a matter of where the values of the consumers lie.
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