Real Estate Sky Won't Fall: Here's Why
Jun 07, 2007, 12:06 pm PDT
Real estate hasn't made much of a case for itself lately and it's not getting much help from any of the sub industries, such as builders and mortgage makers. Just in the past few weeks, so called experts from the mortgage industry, the building industry, and the resale real estate industry have all been quoted as saying that the sky is falling.
Nice job guys!
And while real estate's reputation as the number one investment is on the ropes, the general media and other investment categories have stepped up their attacks on real estate value.
What do you need to know?
The Sky isn't falling.
The real estate market always fluctuates.
Real estate sales prices are largely determined by the principal of substitution and reflect the uniqueness of the property, at a specific point in time, competing against only those other similar properties that happen to be available for sale, at that point in time.
If there are many similar homes available at that time, there will be downward pressure on sales prices. As an expanding population absorbs the excess, competition for a dwindling resource will cause selling prices to escalate.
Real estate is unique.
There's a reason that homes and real estate aren't traded like commodities on the Chicago Mercantile. They are too dissimilar. Even each tract home has a somewhat different location, orientation, lot dimension, proximity, and view.
There is no bubble.
The value of real estate isn't driven by speculation; it's driven by its utility. If the economy moves away, such as in the rust-belt, that utility may decline. If high paying jobs are headed into a region, the value of the scarcest of all commodities, real estate will rise.
Increasing development costs absolutely guarantee that new construction will cost more than existing properties are selling for.
This factor alone has caused many developers to mothball projects in the pipeline until shortages again push prices up.
Value is a complicated cocktail.
Assessed value, appraised value, market value, replacement value, and selling price all mean something different. When the media says that real estate values are falling, they really mean that the prices people paid for a small number of homes, last month, was less than what a different group of people paid for a different assortment the month before.
There is always a baseline of demand.
An increasing population must be housed. There is a natural ebb and flow, not a boom bust. At various times, demand outstrips supply; supply is increased until the surge recedes to baseline or below.
There is always a baseline of mortgage defaults.
There will always be unforeseen circumstances that will bring some homeowners into default. Even in good economic times. And even with good mortgage loans. In an appreciating market, they are able to sell in a short period of time. So, in most markets, foreclosure activity has been below the historic baseline.
Now, it could increase, spiking a little to reflect those who can no longer survive on increasing equity and then may level out at baseline again. When the next rapid appreciation cycle begins, and it almost assuredly will, rates may fall back below the newly adjusted baseline.
There is no risk.
Save the term risk for high stakes poker in Vegas.
Buying real estate isn't inherently risky. But it isn't a get-rich-quick scheme, either. It's a formula for building long term wealth.
Real estate is a great way to build wealth.
You have to live somewhere. If you rent, you are making some or all of someone else's mortgage payment. But even if you have to work two jobs and barely scrape by to make your own mortgage payment, you are building equity that over time will be quite substantial.
So, perhaps, don't believe every "the sky if falling" report or article. Educate yourself on the market and happy wealth homeowning!