Friday, July 27, 2007

Finances and Current Real Estate Markets

It still is amazing to me in this real estate market that things are still doing as well as they have been over the past few months (the last couple of down days in the market notwithstanding). Here's what I've been thinking about.

The problem, as I see it, with many people is that they bought more than they can afford. Surely, if you can barely afford your 'monthly nut' when it comes to your mortgage, it is going to be a bad scene for you when other expenses creep in like increased property taxes or an accident or a sudden layoff or medical emergency.

Regardless of the nature of the emergency, it is important to realize the importance of common sense when it comes to purchases.

Remembering that the nature of our capitalist economy (which I happen to like, thank you very much) is that people are going to be making money during every transaction. If they aren't, they won't last long.

When you buy a car, you get hit up by the sales guy for sales (commission) and then the financing guy for the loan (loan interest).
When you buy a house you get hit up by the real estate agent (commission) and the mortgage broker/bank (loan interest).
When you go to college, you get hit up by the college (profits) and by the financial aid office (commissions on loans? or perhaps perks) and the banks (interest on loans).

The bottom line is that all of these things which seem like "good things" to do end up costing you money. And if you aren't extremely vigilant, you will be sunk. I've been sunk before and it is not a pleasant feeling. Do yourself a favor by being extremely skeptical, reading everything, and asking people to explain all of the money that something will cost you before you sign or do any deals.

As for the current situation with housing, even if people were careful, they still might be stuck going forward. Here's why:

1. Housing is still down. Real estate in many areas is hard hit and people are having to reduce the price of their homes/condos, and in some cases take losses in order to sell.

2. Due to the increased inventory, as more people have problems like emergencies, job changes, etc and need to move, they have a harder time selling for "legitimate" sales that have nothing to do with financial hardship really. But in the end, carrying multiple house payments or trying to juggle finances for longer than anticipated (perhaps 12+ months) while trying to sell, but still not selling due to reason 1, they find themselves losing the house due to foreclosure.

3. Now due to #2, there's even more houses on the market. But now the economy is starting to slow down, and in some cases, unemployment has started to creep in and even more people default and face foreclosure.

4. As a result of foreclosures, prices have started to hit bottom and people with cash have started scooping up properties for prices as low as 75 or 70% of what the original value is.

5. Some time passes and the economy and housing market comes back. You rejoice. You're ready to finally sell because you think you can get what you need to get in order to sell. Unfortunately, the guy from #4 bought a place like yours for 70% of what you paid. Now he is looking to get 95% of what you paid and decides to sell, making a tidy 25% profit in under a year or two. You, unfortunately are stuck waiting until all those guys have discarded their properties.

Many people would have helped themselves quite a bit by understanding the fine print and true costs of the deals that they were getting into. I really hope it doesn't play out the way I've outlined above, but I don't really see how it doesn't.

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