Foreclosure rates are low when housing prices rise quickly and the economy is good, so high foreclosure rates mean “stay far away”.

The last 5 years in CA, foreclosure rates have been abnormally low, because prices were rising so fast. When a homeowner ran into payment trouble, they listed their home for sale, and within days, they got their asking price. There is a normal national foreclosure rate of under .5%, due to illness, job loss, mental problems, etc.

As housing prices flatten out, or decline, it is impossible to sell the house for the mortgage amount, so the homeowner just lets the bank foreclose. What is raising the foreclosure rates in CA is the use of exotic loans. In other cities, like Denver, it’s the poor economy.

When you see foreclosures rising, you have a lagging indicator that homeowners did not have the wages or employment to make their mortgage payment PLUS the demand for homes is so poor that they could not find a buyer during the long preforeclosure period.

Foreclosures put a lot of downward pressure on prices, because the bank is a very motivated seller, and they will sell at a rock bottom price. But before you think you are getting a good deal, beware that with all the recent real estate seminars, the competition at the auctions usually leads to people paying above market prices, plus you don’t get to see the house or do an inspection first: it’s as-is, not a good way to buy a house in my opinion.

In a period of declining prices, why buy? Why catch a falling knife? How do you know that prices won’t keep falling? Today’s $350K foreclosure house could be worth $290K next year, $213K the next year, etc.

I am waiting to buy until prices come back up, as indicated by the leading indicators. NOT median price, which is a 2 year lagging indicator. Prices in SD have been falling 2 years, and our median just showed it this month.

Work with a good realtor, who can keep you tied in to the months supply, HAI, and can tell you when prices are starting to turn around.

I am sure there is money to be made in real estate somewhere, but I do not know where. Definitely, not residential. Maybe land used for oil drilling, or areas where people might buy housing if oil rigs come to town, or some other unique idea. I think commercia/retail is still spending, as they lag the slowdown by 9-12 months, and since retail is just now slowing, they have already made their building construction plans are completing them. My friend is a RE attorney in Phoenix, and just finished the legal work on a very large retail center in Phoenix; by next year, the anchor tenants will not be in the mood to rent/build these buildings, but today, maybe they are still out buying land. I have no knowledge of these things, though. Perhaps others on this forum do.

Why real estate? Why not oil stocks, Precious metals, euros, yen? I also want to diversify, but am in cash until I figure it out. Why not farmland, water? Isn’t water supposedly in short supply?

Well, if you can buy a house for 8-10x the annual rent income, then the price is right. OTOH, your house will decrease in value, because of the high foreclosure rates there. Depending on the types of jobs there, which I have not researched, the upcoming recession could result in more job loss, and more foreclosures.

Again, why the interest in rental properties? The housing boom is over?

I hope I am not offending you, but your interest in buying rental property now is like someone wanting to buy Qualcomm in April 2000 (one month after the collapse started). So we are past the peak, and coming down.

Don’t feel bad, I also missed the real estate run-up. I thought this whole thing was crazy. If I’d been smart, I would have flipped properties from 2000-2003. Now it is too late, but let’s look for where we can make money…For now, I am preserving my assets in CDs, but will oil, commodities, gold be the next bubble? Is there enough global liquidity to support another bubble, or are the bubble years gone? Can any asset rise by more than the 5.5% paid by CDs?

For what it is worth, the most successful RE investors know the market (geographical location where they are investing in) well. Don’t rely on stats, do the work yourself… travel…. If possible choose a place you have been or plan to visit or maybe have a relative. When you create your spreadsheet make sure you allocate all of your costs accordingly. I know this is all basic stuff and you may know all this… yet… ya never know. Check for demographics and find fast growing communities. 4 years ago my wife BEGGED me to by land in the Imperial Valley and I poo pood it… maybe not a good idea on my part. Research fast growing cities, research where Wal-Marts, Home Depots and other signs of infrastructure growth are occurring. Not long ago I saw a posting by Powayseller about Yuma… now I don’t know if it is good or bad there but every year or two I drive through it, including about 2 weeks ago and every year it is bigger and bigger…

You may also want to think of joining investment groups and work with people who have done it before.

Consider this article – from early 2005.
Prof Piggington linked to it long ago.
I keep it around because it shows distinctions between the cyclicality of different cities. At this point in the cycle, it would be better to look at markets that are less cyclical to avoid plummeting prices.

The Cycle Turns

Also, consider Japanese real estate. I don’t know anything about it, but after 15 years of flatness, it may be ready for growth, and it would get you out of dollars.

For the most part, this is the article that convinced me to sell last year.

Japan has been flat for years and years. I’d be surprised if we missed the bottom, as it hasn’t really come up yet.

Even so, the high-growth period in the cyle comes after the bottom, anyway so missing it isn’t so bad.

I wish we could find the Piggington-son site that does brilliant, in-depth analysis on Japanese real estate, with lots of data.