This is the foundation of the “greater fool theory” in any market of any product. I have a background in other volatile markets, which many people haven’t been exposed to.
With ANY product,
What is popular, hot or in demand at any point in time, has absolutely no bearing on where the future price will be.
Some people think that it can only drop XX%. That’s nonsense.
Could the housing prices drop 90% ? yes they “could”… but they won’t, because you and I and many others will step in at a level that makes sense to us, based on a return that we anticipate.
Where are the genius investors from 2-3 years ago ? Prices are cheaper now, they should be lining up and camping out.
What happened at the seminars that they attended ??
What you cannot lose sight of is that about 80%-90% (maybe more)of the local population isn’t affected by the drop in housing prices, other than a drop on paper, in net worth.
Many people have mortgages of 50% or less of today’s reduced values. They bought over 5 years ago and are quite happy with where they live.
There have been millions of dollars already received through investments, inheritance etc. Plenty of people are OK financially. Many baby boomers will be receiving inheritances beyond their wild dreams of 20-30 years ago.
I don’t think that ANYBODY expected a 300%+ rise in local property after 1996. The bottom line is that millions of people got very lucky, for one reason or another.
Our local market will probably never get back to a level that I would want to buy rentals. That’s OK with me. There are plenty of other areas that do make sense from a cash flow standpoint.
You seem to be looking for a logical answer, which I gave up on long ago. Many people have rentals today with a pile of equity, and they don’t need the cash. I spoke to one who gets $2200 a month on a home worth $600k today. He bought it over 30 years ago.
In his mind, he’s getting $26,000 a year (less maintenance etc) for nothing. He doesn’t care if the house is $400k or $800k.
You and I might say that on a $600K asset, he could get over $30K without any risk or tenant hassles, in cash, HOWEVER tax consequences keep it from truly being $600k.
He’s a happy camper. There are thousands like him. Of course nobody lives forever, so the property will get passed on to the next generation or sold by the heirs.
I would never buy a property expecting appreciation. I’d want it to pencil out, including a return on my investment, from day one, and have any appreciation be a bonus.
A big trigger for me a few years ago was the realization that probably 80%+ of those living in Southern CA could not afford to buy the home that they were living in, and that continued to worsen. I think that there is something VERY wrong with that, but it’s true in many parts of the world.
You get zero return on equity that is tied up, and most people don’t care, including me.
I think that the underlying force supporting prices is ignorance, not education. It’s easy to do something silly and profit from it when there are more just like you behind you, willing to pay more than you did, whether it makes sense or not.
It’s why I call it the greater fool theory, and in my opinion it’s also what has propelled the stock market to new highs. It could last many more years, it doesn’t have to stop yet.
