Short Sale & Foreclosure Frenzy–Is Real Estate Really the Best Long-Term Investment?
Real Estate Investors and wanna-be real estate investors are drooling over the millions of properties that are currently selling for cents on the dollar. Short Sales and REOs/Foreclosures are what the big buzz is about and everyone is charging into the real estate ring, trying to find the best deals out there.
A home in Memphis, Tennessee that appraised 3 years ago for $145,000 is being sold for $48,000. A home in Salt Lake City, Utah that someone purchased 2 years ago for $1.4 million is selling today for $750,000. An apartment complex in Chicago, Illinois that appraised for $4.4 million 4 years ago is being sold for $2.1 million. The list goes on, and on, and on, and on….
Why wouldn’t you be chasing these deals? It’s like instant equity and any dummy can see the value in these properties. Right?
Because I see so many of these types of deals every day, I’ve started to wonder about the perceived value of these properties. Are these values ‘real,’ or, are these just ‘assumed values?’
In the book, Irrational Exuberance by Robert Shiller, something made me test this ‘value assumption’ further. This ‘something’ is related to the average yearly increase in home prices in the United States between the year 1900 and the year 2000. In that 100 years, the average increase was approximately 3.4% per year.
Interestingly enough, according to the Case-Shiller 10-City Index, from 1997 to 2006, home prices increased by an average of over 19% per year. The most obvious reasons for this break-neck growth seem to be both the mania for ‘real estate riches’ and loose credit. But there is surely so much more to it. On a macro-economic level, the fundamentals were altogether absent and the Federal Reserve’s power has far exceeded any dreaded dictator or unruly tyrant in the world’s history.
Was this break-neck increase in home prices from 1997 to 2006 a result of rampant inflation, investor speculation, bad lending practices by U.S. banks, or a combination of the three? I think a more important question is the next one. As the stimulus/bailout pumps more U.S. Dollars into the market to counteract our downward spiral, will home values be artificially propped up as hyperinflation sets in?
With these questions on the table, how valuable are these supposed “undervalued” real estate investments in the long-term compared with an investment in a commodity like gold or food?
Posted by Corey Curwick on May 22, 2009
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Great points, thanks for sharing and asking some tough questions. There are lots of opinions out there, just about every report I have seen shows that a long term investment in real estate in pretty hard beat!
Dan,
Thanks for your comment. However, what is your opinion about the rising prices of just about everything as hyperinflation sets in? How “real” is the value of real estate in the wake of hyperinflation over the next 5 to 10 years? Any further thoughts or opinions on this?
Corey Curwick
I think you need to go back to the principle of “Dollars follow Value”..
The old adage of something is worth what someone is willing to pay also applies here..
RE has always been an excellent inflation hedge, some would argue that it’s better than gold because you can leverage it more.. I won’t go into that discussion, but, I tend to agree that during inflationary times, RE is a good place to be.
In a deflationary environment, CASH IS KING, and IMO we have just finished our deflationary scare, but, what is still keeping RE prices low are the problems with bank financing.. If no one can qualify for a loan, then no houses are getting bot/sold.. if no houses are getting exchanged, then the prices go down due to comps.. so, housing prices go down, without INflation or DEflation in that scenario.. Remember there are 3 entities involved in any housing purchase, the buyer, the seller, and the bank.. all 3 are equal partners.. if one of those 3 legs is broken, then the housing market gets severely affected.. Right now, the banks are broken.
So, if the banks stay broken, then housing will remain at low values, even in an inflationary environment.. BUT, once the banks get fixed, and inflation sets in, then watch out!!
Thanks for the useful info. It’s so interesting