There are 2 reasons that can make a house valuable (i.e. worth keeping):
1. It’s a shelter.
2. It’s a “profitable” investment.
Shelter: Currently, there’s a large surplus of homes. So, there’s more than enough “shelter” for everybody. Of course, over time, the population increases. But it will take a long time for the population count to catch up.
Keep in mind that builders are currently still building, adding more to the existing surplus. While the population count is “catching up to the supply”, prices will keep going down.
Investment: At current prices, it’s impossible to generate REAL positive cash flow. That is, without using an exotic mortgage to artificially lower the payment. As long as it’s unattractive to buy, investors will stay away.
A “bottom” will be found when prices are low enough that it’s profitable for investors to buy properties & rent them out.
It will be the investors who will save the market. Note that I said “investors” not “speculators”.
Unlike speculators, investors make their buying decisions based on fundamentals. They will buy ONLY when prices are low enough that it’s profitable to buy properties & rent them out.
Most speculators don’t understand the RE market. They are driven by market psychology, emotions … So, the role of speculators in “firming up prices” will be small. If anything, speculators will panic & drive prices down further.
It probably seems counter-intuitive that price can fall to levels where it’s less expensive to buy than rent. But, it can, here’s why:
If you don’t have a place to live, then a “roof over your head” has a lot of value. Now, once you already has a place to live, an extra house only has value if it’s “profitable” to keep it.
When that “extra property” has excessive negative cashflow and/or is a depreciating asset, there’s a very strong motivation to get rid of it.
A valid/fair question would be: If it’s less expensive to buy, why don’t all of the renters buy ?
Answer: it’s only less expensive to buy IF one has:
1. The down payment
2. A good credit history to obtain a loan
3. The income that qualify for the loan.
Not all renters have all of the above.
This is why there is an old saying: “Excessive things correct themselves excessively”. That is, not only will the correction bring prices back to where they are in-line with incomes, the correction will “overshoot”.
