Slowing Housing Market Can Slowly Boil Investors

[powayseller]

FoxNews.com writes a story likening a RE investor to a frog in boiling water. (The metaphor is creepy, just don’t think about it too long)

“When a market starts to turn, it doesn’t have to be quick. It’s more likely to be slow and painful – like boiling a frog. (The idea goes that a frog would jump out if it were thrown into a pot of boiling water. But if it’s put into a pot of cold water and then the heat is turned on, the frog could not judge the threat.) In fact, economist Gary Shilling wrote in Forbes magazine last September, “History also suggests that a housing boom does not have to end violently.”

A recent national survey of homeowners by the L.A. Times shows ‘widespread faith in the real estate market.’ The worst possible scenario, that prices would ‘stay the same’ over the next three years, was selected by just 5 percent of homeowners. That total was less than the 6 percent who said they expect to see a rise of 31 percent or more.

No matter how much talk of a bubble there may be, homeowners continue to demonstrate that they have no clue about the ramifications of one. And this is in an environment in which prices actually are falling! The denial runs so deep, it’s not even denial anymore. It’s some kind of epic disconnect between the reality of a newly falling housing market and an unwritten social contract that says home prices do not fall. [The Elliott Wave Financial Forecast, April 2006]

END OF FOXNEWS QUOTE

Many homeowners and investors don’t realize the market is turning down, or turning down for good, and will keep hanging on. One day, they will wake up and realize they lost a ton of money, the market is down, and it’s too late to be saved.

Anyone reading this, get out before you boil in the water.

Some of you think we’ll see corrections of only 10-20%. Are you prepared to be wrong?

I am writing this in the spirit of helping, because it’s so clear. If you haven’t already sold your house, do so now. Now you have the option, the power, the equity. Once the house is 40% -50% down, it will be too late. At that point, will you still love your house, and be glad you kept it? Or instead, be filled with regret? Just like the frog.

[Anonymous]

I agree with your assement of the direction of the RE market, but many (if not most) people cannot really sell, nor does it makes sense for everyone to sell.

My house has nearly doubled in value since we bought it in 2000. Even a 40-50% correction would probably not bring us below the purchase price, and definately not below the balance of our mortgage (we put 25% down when we bought). Since we plan to stay in our house (good schools, location, etc.) I can see no reason to sell and move.

I do agree the frog metaphor is disturbing…

[ocrenter]

The frog is kinda like this guy: Flipper in Trouble

[PD]

You aren’t chained to your house….yet.
The only people who can’t move right now are those people who are already in the red. If you are still in the black, sell and rent in your neighborhood. You still shop in the same places, hang out with the same friends and your kids still go to the same school.

The only difference is that you have potentially paid yourself hundreds of thousands of dollars to rent for a few years. How many hours would you have to work to make that much? How many hours will you spend on a move? I’m going to be generous with numbers.
40 hours to sell your house
10 hours to find a rental
80 hours to move and set up a new place
Assuming your house is worth 800k and it goes down 20% (a conservative number, I think), you have paid yourself $120,000 (realized after realtors fees).
That means you have earned $923.00 an hour for your trouble. Whow! What a great job.
If your house goes down 40%, you have paid yourself $2,769 an HOUR.
Plus, your monthly expenses are going to be much lower than your mortgage because rents are so out of whack with values.
I live a house right now that is worth 3 times the one I sold. The garage door just broke, a gate needed to be fixed and the stove top is being replaced. I paid nothing to fix these problems. Someone else had that burden.

[powayseller]

PD is right. Why is anyone not able to sell right now? The longer you wait, the lower your profits.

I think in another year, when prices are down 20% and foreclosures are increasing, listings are increasing, and sales keep dropping, then those who said they couldn’t sell now, will wish they had. Take advantage of time, which is now on your side. Get out of Dodge before it’s too late.

[bmarum]

Have you considered what your downside is if you are wrong? What happens if prices only drop 15%? Will you still come out ahead by selling your house and renting?

[PD]

There is some risk. However, if the house only goes down 15%, you don’t save only 15%. You will have access to all that cash, having it earn money during the interim. Your equity is currently invested in your house. Pull it out and make 4% in a long term CD (very safe).
Plus, how long will the house sit at the bottom price? You could have 5 years making interest on your equity instead of letting it stagnate.
I hate to sound like a salesperson…

[powayseller]

I’m 100% sure of being right, so I made the move. But all good investors must consider all the angles.

Assume prices go down 15%, then climb back up. All I need to do is keep renting, because they’ll still be overvalued, and all assets revert to the mean. There are dozens of examples in history: tulips, florida swampland….

If for some odd reason, this time really is different, and I was attached to owning a house (which I’m not), I could buy back in at 15% less. That’s a savings of $120K on a $800K house. Even after closing costs and two moves, I’m ahead by $100K.

[Author]

Posts