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Is Residential Real Estate Really a ‘Crapshoot’?

Is Residential Real Estate Really a ‘Crapshoot’?

Our founder, Steve Harney, occasionally asks to do a personal post on what he sees as important to our industry. Today is one of those days. Enjoy! – The KCM Crew

That is what a headline announced in a CNNMoney post Monday. They were quoting Karl Case “an economist whose name is synonymous with home prices. He is co-creator of the much watched S&P/Case-Shiller home price indexes with Bob Shiller, who won the Nobel Prize in economics last year.”

Case did explain that the commonly held belief that housing prices could ‘never’ depreciate was corrected over the last decade. And it is true that Case referenced a home he bought during that time had lost almost half its value.

However, there were other comments attributed to Case in the article:

  • He bought one home at $54,000 which he later sold for over four times that amount ($240,000)
  • Another home he purchased for $375,000 is now worth a million dollars.

He bet on three houses; one lost 50%, one gained over 400% and the other gained approximately 300%. Sounds like great odds to me.

Give me the dice and get out of my way.

Last week, John Maxfield, in a The Motley Fool blog post, wrote:

“Over the past year, [home prices] are up by 8.9%. Over the past two years, they’re up by 19.7%. Over the past three years, they’re up by 23%. And there’s little evidence that this trend is coming to an end anytime soon…

[It] should be obvious why now is such an opportunistic time to buy a house. Of course, if you want to wait, that’s up to you. But doing so could very well be a source of regret later on down the road.”

Give me the dice and get out of my way.

If buying residential real estate is actually a crapshoot (as the headline claimed), it seems the odds are in the shooter’s hand.

PLEASE give me the dice and get out of my way. I really want to roll.

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2 replies
  1. Michael J. Kelly
    Michael J. Kelly says:

    “Crap Shoot”? When did owning a home become a gamble? The crash we had in real estate was fueled by folks who didn’t wish to own a home but a super hot investment commodity which consumers felt would be their big financial SCORE! And it was as they refinanced every 6 months and pulled big chunks of cash out of their investment commodity. They didn’t care nor understand the type of loan used for the re-finance. Prepayment penalty? LIBOR indices? Adjustable index? What the lender charged for the refinance? In this environment the “Home” became just another speculative investment with unsustainable returns based on faulty information. They submitted to the siren song of instant cash and the hollow promise, “We’ll always have appreciation”.
    What ensued was a major crash of housing prices. Those who owned a home didn’t really care about the run up and the crash. They purchased their home at a price with monthly payments they could afford. These homeowners didn’t think they bought an ATM but a place to be free from the whims of a landlord and escalating rent. They might have refinanced or taken out a credit line for home improvement or sending a kid through college–both good returns of money borrowed. They didn’t go out and buy a hot ski boat or a trophy wife. When the market crashed they lost their equity but that was also sort of o.k. because it was never in their initial home purchase equation.
    Many a lucky homeowner sold their homes at the height of the market and took their money and ran. Retirement, relocation or estate settlements. A windfall for all. Many of my clients moved out of this wacky state of California settling in other parts of the country not effected by our price appreciation juggernaut. They would sell, and if a couple, take their $500,000 capital gains forgiveness and pay cash for the next home plus have money to buy a couple of investment properties. Today they have a home with modest appreciation, owned free and clear plus two rentals paying them monthly income which has increased also.
    However, we all now know these folks where few and far between. Prices crashed in Sonoma County up to 60% in some areas. Many of those areas have come back to their pre-crash prices but still many homeowners are still underwater with their loans. The crash also presented the best buyers market in decades. Those who bought in the ensuing buyers market comprised new homeowners and savvy investors. The new homebuyer bought at fire-sale prices and have reaped the tremendous run up in home prices in the past three years–median home price up 44%.
    We represented many institutions in the sale of the foreclosed homes and also processed “Short-Sales”. Our buyers from this era are now sitting on big equity with a stunning return on investment. One single guy purchased a cute, 2 bedroom in Rincon Valley at a super discounted “Short-Sale” price with only 5% down. Return on investment, his down payment, has been astronomical. Did he BUY for a super return on investment or ROI? No, he was looking for a home for he and his finance with great schools for their future family. The 2 bedroom would eventually become a rental as their family grew and they moved on up the home ladder.
    Another couple, relocating from a condemnation procedure and road widening, got a great deal on a newly “Flipped” home. The “Flipper” buying a foreclosed home in bad shape at a great price, recycled it into a charming home which our clients purchased. They were seeking another home and not an investment vehicle. With their low down payment and tremendous run up in prices their ROI is also through the roof. Crap shoot? All depends on your point of few.


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