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Getting Paid to Borrow Money

September 22, 2009 by Marco Santarelli

It is well known that income producing real estate is one of the best investments you can make. What is less well known is that income producing real estate allows you to get paid to borrow money. At least that’s been the case historically.

The reason for this has to do with the reality of inflation. In times of inflation, your best protection against the declining value of the dollar is high quality, long-term, investment-grade, fixed-rate debt attached to a piece of income producing property. In a nutshell, the right kind of debt is good.

Here’s how it works:

Assume that you purchased a property back in 1979 and that a dollar was actually worth a full dollar ($1.00). Then, thirty years later you find that same dollar worth only $0.24 because of continued inflation (driven by the government’s absurd economic policy).

Although the overall purchasing power of the dollar has decreased over those thirty years due to inflation, the principal balance on your long-term debt is never adjusted in step with that inflation. By paying down your fixed-rate debt with continually CHEAPER DOLLARS than those you originally borrowed with, you are effectively saving yourself a lot of money each and every year.

Now, think about it another way:

Assume you purchased $1 million worth of income producing property with a combined mortgage balance of $800,000. And let’s assume that over the course of one year you didn’t pay down any principal and there was a 4 percent rate of inflation. Your loan of $800,000 would now be worth only $768,000 in terms of real dollars. That’s a reduction of $32,000 in one year!

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Filed Under: Economy, Real Estate Investing Tagged With: housing, income property, inflation, real estate, Real Estate Investing, real estate investments

Why Housing Prices Are Essentially Meaningless

July 30, 2009 by Marco Santarelli

It took the Wall Street Journal an entire survey to prove what readers of this column have known for months: The housing recovery, as it plays out, will be a localized event, varying greatly city to city, neighborhood to neighborhood, street to street.

The Journal, god bless them, compiled housing data to compare inventory changes, months supply, price drops, unemployment, and default rates across 28 US metro areas. Unsurprisingly, bubble markets like Las Vegas, Phoenix, and Miami look particularly horrid, whereas areas like Dallas (which avoided much of the housing mania) and cities like Charlotte and Seattle (which are just now seeing price declines accelerate) appear to be holding up rather nicely.

But drilling deeper into the raw data reveals a housing market that's deeply bifurcated, even within individual cities.

As low-end markets experience a sharp increase in buying activity due to supply shortages and vastly lower prices, illiquid high end markets are experiencing violent price swings — typically in the southward direction. This much is already known, and the Journal's study simply shows what we're told ad nauseam: real estate is, in fact, local.

What's far more applicable to home buyers and sellers around the country, however, isn't what a few broad (yet important) data points show about what's happening in a few hundred neighborhoods all lumped together. Instead, it's where individual submarkets are headed. After all, owning a home is an investment in a neighborhood, a street, a community — not necessarily a metropolitan area at large.

Housing prices, by extension — when measured as broadly as a metro area — are basically meaningless.

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Filed Under: Economy, Housing Market Tagged With: home prices, house prices, housing, Housing Market, Real Estate Market

False Housing Bottom

July 7, 2009 by Marco Santarelli

Everyone is awaiting the miracle signal of a housing bottom. False media-hyped-market-predictions are certain to play an important role in each of our lives. Listed below are a few of the recent indicators that present opportunities for newscasters to call a market improvement or decline.

  1. May annualized sales pace of home resales expected by NAR are 4.8 million, down 33% from our 2005 peak.
  2. Annualized new home sales expected for 2009 are 360,000, down 72% from our 2005 peak.
  3. Depending on your location, average mean home prices are down by 5% to 38% from the 2005/2006 peaks. May 2008 to May 2009 has the worst statistic with a decline of 14.9% on average.
  4. Commerce Department reported a sales drop of 0.6 percent in new home sales in May.
  5. Sales of existing home sales rose by 2.4 % from April to May 2009. This represents the third monthly increase this year.
  6. The number of unsold homes inventory fell 3.5% in May. This means there is a 9.6 month supply of property at the current sales pace. Normal market is 6 months or fewer, however the 3.5% improvement shows signs of market turnaround.
  7. The worst hit markets are showing inventory improvements. For instance, California has market supply of inventory for average priced homes at a 6 month level. These levels signify a market bottom.

Enough of statistics, the numbers confuse the best economists, let alone you. The bottom line is that real estate has market cycles. What goes up, has its time to go down, and then to stabilize. For those of you who enjoy analogies, we are in the 9th inning of this market downturn. Our next game is market stabilization (usually a 3 year time period). This means prices are somewhat flat while demand and supply equalize.

[Read more…]

Filed Under: Economy, Real Estate Investing Tagged With: housing, investing in real estate, real estate economy, Real Estate Investing, recovery

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