The Street has some thoughts on how to profit from the housing downturn. In particular, they list how to profit if you're an upwardly mobile buyer -- the category I fit into. Their thoughts:
Say you're in a $300,000 home and want to upgrade to a $450,000 house. To do so in a stable market, you'd have to pay an extra $150,000 (ignoring the extra costs involved with moving). But if both houses suffer a 10% price decline, that difference drops to $135,000: Your home is down $30,000, but the new house drops $45,000.
Yep, my thoughts exactly. Now make the spread even bigger (say $200k house to a $400k house) and you've got an even bigger savings. ;-)
They also make the following comments:
The trick to getting a deal on the home of your dreams is to find a home currently owned by a motivated seller -- someone who desperately wants to offload their home, perhaps because of high mortgage payments, a job offer out of state or simply a deal that's about to close on a new house.
One key indicator of a motivated seller is the number of days a house has been on the market. Another hint is the number of times the sellers have dropped the price.
This is exactly the situation we're dealing with. The owner moved out of state and is very motivated to sell (he's lowered the price $100k already.) He's just not motivated enough for us, yet. We're giving him time to stew and we're sure the price will drop some more in the coming months.
We have an advantage over many other buyers (and against sellers) because we know the market we're looking at very well. The reason we're so knowledgeable is that we spent last spring, summer, and fall scouring over hundreds of properties (looking at 30 of them) and we know what the market has offered and has to offer. And in particular, we know what homes were on the market last year, then removed for a month or two this winter before being placed back up for sale. This gives the appearance that the house has only been on the market for a little while, but savvy buyers know differently -- that a given house may look like it's just been put up for sale, but has really been available for a year or so. This gives you a lot more insight when setting a price and negotiating a final deal.
Of course, your agent can and should be telling you this information anyway, but I prefer to know it myself as well.
The piece ends with some absolutely great advice:
As you look at houses, remember to take your time. If a house doesn't seem quite right, don't feel like you have to compromise. With so many houses on the market, you've got plenty more to choose from.
Exactly. There's no hurry. Simply sit back, keep your eyes open and watch the prices fall. ;-)
So, if you're in a $300k house, and prices drop 10%, you should buy a $3million house. That way, you have doubled your money. :)
Posted by: Eric Toya - LWM Blog | March 11, 2008 at 12:33 PM
You should buy and sell in the same market - if it's your own home - you should also obey the 20% Rule.
Posted by: 7million7years | March 11, 2008 at 12:44 PM
I am one of the people trying to sell a home in this market and I find your post interesting. I have your feed coming into my reader so I read your posts consistently in an effort to better my financial position.
I can't help but feel a bit angered by your post. I fully understand the strategy in "getting a great deal", but have you considered the people that are taking a beating in this market? Due to a loss of my job and a subsequent move to another state, I am currently in the position of renting in one state and trying to sell a house in another state while still paying the mortgage. Perfect for you. Not so much for me!
We've been through turmoil and have been on the emotional roller-coaster for six months, with several drops in price. The problem is that this attitude of yours and others that you cam simply wait until the bottom drops out is pathetic. Yes, you will save lots of money, but how will the lives of the people you are buying from be impacted?
I started reading your site because I thought it was designed to help people like me to get out of debt and hopefully make a better life for myself and my family. After seeing this post, it appears to me that you are only in it for what you can get out of it, with little mind towards the people on the other side that may be trying to get into a better situation.
The way you callously say "He's just not motivated enough for us, yet" after this poor guy has dropped his price by $100K is very telling.
Also, you say "Simply sit back, keep your eyes open and watch the prices fall. ;-)". Great, why don't you just wait until the guy goes bankrupt, and then you can get a foreclosure. Even more "profits" for you!
Have you considered that this ideology is part of the problem with the housing market today? Lots of great houses out there for sale, but "simply sit back..." and wait for some poor slob to be totally down on his luck.
When is enough going to be enough? 100K, 200K, foreclosure.
Get a good price and buy the house you can afford instead of waiting for someone else's life to be destroyed so that you can rake in the profits!!!
Posted by: | March 11, 2008 at 02:24 PM
Anonymous at March 11, 2008 at 02:24 PM - You seem to be attaching your personal situation to the sound advice given to prospective buyers. I think anyone can feel for your situation but it appears to be a separate topic for another post. I don't think any offense was intended toward current sellers.
FMF is simply trying to make a good finaincial decision and unless there is a charitable attachment to the purchase then he's just working in his own best interest. No one is holding his feet to the fire to buy this house. It's not priced at what he believes it's worth so he's chosen not to purchase. There's nothing underhanded about making an offer and then deciding to wait. Maybe someone else thinks the house is worth the asking price, and if so, they can certainly buy the house.
That being said, I really like the original post, because the first quote, "Say you're in a $300,000 home..." fits with my situation and my philosophy. So many people got caught up in the speculative run-up in house prices and attached their net worth to the market value of their home. I even had some friends who had their home reassessed a few years ago and said, "Wow, we made 150k!" How? It's just like any other investment...unless you're going to 'cash-out' that value is only speculative and if you're going to buy another house you are still faced with buying in the inflated market (assuming buying in the same market area) - as The Street points out - your upgrade is only going to cost you that much more.
I want prices to come down - I don't care that the 'fair market' value of my home that I bought in 2001 is falling...I'm not taking out a loan against the equity. I too am waiting, and hoping, that prices will continue to fall and maybe I too can get a smaller mortgage on a home upgrade!
Posted by: John Z | March 11, 2008 at 02:54 PM
Anon --
I'm sorry for your situation -- I really am.
I can't speak about your personal situation, but I know that many people in this market have made unwise financial choices and are now suffering because of it. This site is designed to help people NOT make those choices and NOT get into a financial situation where they have no choice. I know it's helped some, though maybe it's been less fruitful for you.
As far as my attitude, what would you have me do -- pay more than the fair/market price simply because the potential seller has come down so far? Consider the following:
1. Who said his original price was even fair to begin with? Using your thinking, when I sell my house, I'll simply price it $100k over what I want to get for it, then drop the price by $100k. At that point, someone should buy the home simply because it's dropped so much, right? I'm sorry, but no.
2. In a capitalistic society, the free market determines what a "fair" price is -- which is defined as the point where one buyer and one seller agree on terms. Obviously, my seller hasn't yet come to a fair price or else he would have a seller by now. In other words, HE'S being unfair by asking too much for the home. Again, why should I accept an unfair price?
3. The second I'd over-pay for the house (as you suggest), it would be worth much less than what I paid for it. Why would I want to make such a financial move?
4. I'm a seller too. I will need to sell my house when I buy. However, I've built up my finances so I can afford to sell at market price -- though that's substantially lower than what it was a few years ago.
I guess you could blame my "ideology" for a part (a VERY SMALL part) of the mess in the housing market. But the second people get too greedy, others will come in and snap up the bargains and prices will rise. I think much more of the blame can be placed in other areas: banks lending too much, people borrowing too much, and so on.
If you'd like to email me a detailed description of your situation, I'll post it in one of my "help a reader" posts so you can get advice from FMF readers. Perhaps they can give you some options you haven't thought of.
Posted by: FMF | March 11, 2008 at 02:59 PM
The concept of capitalism is that everyone working in his/her own best interest results in the greatest net benefit.
An economic system is amoral. No one has a moral obligation to pay someone more than the market determines a product is worth. With housing, the market has typically said a house is worth, each month, a little bit less than the cost of renting a similar home. We've had a lot of speculation in the last five years, so these numbers have been off. It is sad that people believed the speculation and real estate frenzy would continue indefinitely. It led to a lot of people owing more on their houses than they are worth.
But anon -- would you buy a 1995 Honda Civic for $20,000? I sure wouldn't. Sure, the original buyer took out a loan for that much, but the market today determines it just isn't worth that much.
Also, anon, do you shop at big box stores? By your logic, you should shop at only more expensive, local stores, that sell the same roll of duct tape for twice the price.
Anon, I don't mean to sound mean. But markets work how they work. This sometimes means people lose money.
In 2000, the Nasdaq closed at over 5000 points. Today, eight years later it is around $2300. A lot of people lost their shirts because of that, and it is sad, but had those artificial prices remain propped up, the economy would be the worse for it. Who knows, maybe a house in LA that today costs $500,000 will cost $230,000 in 2016.
Posted by: AdamCO | March 11, 2008 at 03:26 PM
To Anon.
The problem is that the recent number of forclosures are not due to people losing their jobs or other unfortunate hardships. The housing status was caused by pure greed by the lenders and people that didn't properly evaluate what they can afford. My mortgage interest rate could go up to 10% and I would still not be in danger of losing my house. This is because I was not one of those people who bought a house that was 5 times my income. 0% down, 35-50 ammoritizations, interest only or people making 50k with 500k mortgages are the reason why the market is in financial turmoil. I have no bad feeling for anyone who bought under these terms. If someone bought there homes in the 90's and are selling now they should be making good money off of them anyway even in a down market. However if people bought one to three years ago , too bad. I am no financial guru, but I talked to some friends two years ago about the housing bubble. It just happened quicker then I thought.
In a situation like FMF's . Why should he over pay for a house just because some smuck really over paid for a house?
Posted by: Ken Adams | March 11, 2008 at 03:33 PM
In regards to be fair. I don't think it is fair that I had nothing to do with the current state of the housing market. However, my property value goes down and financials in my portfolio are down a little bit, okay quite alot. That's life or maybe someone can buy my house for more than it is worth and inflate some stocks prices to help out my portfolio. If anyone out there would do this drop me a line. I would greatly appreciate it.
Posted by: Steve | March 11, 2008 at 03:42 PM
Thanks for your response. I can tell you that I am not in my situation because of "poor decisions".
I was employed by the state making a good wage. After 5 years of getting excellent reviews along with good salary increases, the state decided that my job was "no longer necessary". NOT MY DECISION.
I tried to find a job in the same state so that I would not need to sell my house, but after several months of interviewing and offers approximately 30k per year below the salary I was making I decided to look elsewhere.
My house was priced correctly for the market that we were in. We had done our homework/research. We talked with Real Estate professionals. We did not arrive at our price by some pie in the sky overpriced method. We are in fact priced substantially below other similar homes that are currently on the market in that area, as well as below prices of homes that had been sold prior to our house going on the market.
As I've said we've also lowered our price several times.
I'm not a "greedy" person. I'm just a father and husband trying to support a family and get two kids through college. If I were "greedy" I would probably hold on to the house and rent it. I...just...want...to sell...it and move on!
In regards to "what would you have me do?" I would suggest just what I had said in my original response. Find a house that you can afford and buy it. Look for a good price-absolutely-but don't wait until the person is going into foreclosure and has his life destroyed just so that you can get into a 400k house for 200k. This is the situation that is now happening all across the country.
My house is/has been priced well. We've had a few offers that were 120k below the current asking price, even after we've lowered our price. I'll reverse the question to you. What would you have me do? Take a huge financial loss and pull 10's or 100's of thousands of dollars out of thin air to cover the cost of selling at a loss while I'm trying to support a wife and get two kids through college?
All I am saying is that people need to think about both sides of this, and not just the side that says "look how much MONEY I can save", or "look, I can ride this poor slob long enough so that I can get his 400k house for 200k"
This stalls the market, and places hard working people like me in a financial bind. I didn't make the decision to leave a good paying job. It was made for me. With no other options, I had to find a job in another sate, which I did. My wife has also found another job in this state. Still think that I'm trying to fleece buyers?
Now I'm waiting for someone like you to come along and "snap up" a deal that will put me in a huge financial crisis.
My ultimate goal is to sell the house and move on. However as long as there is this mentality of "wait until he is motivated enough" (or the bottom drops out) I'll probably end up renting it until the market bounces back, a situation that is certainly not optimal being 8 hours away.
I think it's rather shallow for you to say that the seller is "not motivated enough". I don't know the details of the seller that you are dealing with. Are you absolutely sure that he placed his house on the market at 100k over what it should have been, as you suggested? I can tell you that this is NOT what I have done. I am very motivated. I am not, however motivated enough to put my family in financial duress, so that people can simply "wait" for the deal of a lifetime.
I have a few comments for your itemized list of thoughts..
1. Who said his original price was even fair to begin with? Using your thinking, when I sell my house, I'll simply price it $100k over what I want to get for it, then drop the price by $100k. At that point, someone should buy the home simply because it's dropped so much, right? I'm sorry, but no.
Wrong. I'm not suggesting this at all. This is not what I've done with the pricing of my house at all. As I stated earlier we did our research into the market at the time that we decided to sell.
2. In a capitalistic society, the free market determines what a "fair" price is -- which is defined as the point where one buyer and one seller agree on terms. Obviously, my seller hasn't yet come to a fair price or else he would have a seller by now. In other words, HE'S being unfair by asking too much for the home. Again, why should I accept an unfair price?
Just because you do not want to pay the price that the seller is asking doesn't necessarily make the seller unfair. As you said the buyer and seller need to agree on the price. Why is it the seller who is unfair if you do not want to pay his price? As far as being overpriced because he has not sold, then I guess you are suggesting that my house is over-priced as well.
3. The second I'd over-pay for the house (as you suggest), it would be worth much less than what I paid for it. Why would I want to make such a financial move?
I never suggested that you over-pay for the house. I said that you should find a house that you can afford and buy it. Why would this be "over-paying"?
Posted by: | March 11, 2008 at 03:56 PM
Anon --
I don't know where to start commenting, so I'm just going to let it pass. In the end, a "good" price is where a buyer and a seller agree it is and is based on the value of the home today -- not based on what it once was worth, what the seller owes on it, etc.
I wish you luck.
Posted by: FMF | March 11, 2008 at 04:13 PM
Anon said:
"I never suggested that you over-pay for the house. I said that you should find a house that you can afford and buy it. Why would this be "over-paying"?"
Could I afford a vehicle for $30,000? Sure. But what if I find the same vehicle for $15,000? Should I feel sorry for the guy with the operpriced vehicle, and buy it just because I can afford it? Absolutely not.
Same goes with a house. Just becuase you think the price is fair, doesn't mean anything. What if I buy your house, just because I can afford it, but the price drops 50% over the next few years? Will you feel sorry for me and buy it back (only if you can "afford", of course)?
When you got a rental in your new state, did you sign a lease on the first place tou saw that you could "afford"? Or perhaps you looked around until you felt like the location, amenities, price, etc. all equated to what you felt like was a good deal...hmmmm....are you contributing to the financial ruin of the apartment owners whose places you did not rent? No...you are simply being a smart consumer.
As are the people who are not purchasing your house at the current price.
Sure I can "afford" drugs, prostitutes, all that jazz, but I don't feel sorry enough for the dealers and hookers to actually buy what they are selling. That is my choice as a consumer....
Posted by: wanzman | March 11, 2008 at 04:48 PM
Along those lines...
Anyone interested in some Enron stock???
I am sure at the price I can offer...any of you can "afford" it :)
Posted by: wanzman | March 11, 2008 at 04:50 PM
To Anon,
You situation is alot different then other peoples. You have the option to rent it out. It may not be ideal but it is a good idea compared to selling at a lose. I think you are a victim of circumstance because people don't usually want to buy into a falling market and for alot of people the money just isn't available. Fiancial institutions don't have the money to put out. As a buyer is real estate I can say that a sellers personal fiancial sitiuation is none of my business and it doesn't even factor into my consideration.If someone owes 400k on a mortgage and they decide to sell for 300k that is their decision as I did not force them to sell in the first place.
In regards to your situation. If rents in the area cover costs I wouldn't even bother selling now anyway.Then later if you move back to the state your home is still available to you. If you don't move back the market will settle and you can sell or the rent will give you cash flow. Good Luck
Posted by: Ken Adams | March 11, 2008 at 05:01 PM
Anon -
We don't know when you bought your house or how much you paid. I am very sorry if you bought at what turned out to be artificially high prices driven by speculators that you had no control over.
If you do want to sell, just be careful about "chasing the market down." Figure out how much the place would rent for and multiply that number by 120. That is a historic calculation to determine a home's value. If you think you can sell for more than 120 times rent, then it might be wise to sell. If the number you think you can sell for is below 120x rent, then it might be wise to wait.
With the country returning to traditional lending standards (20% down) and speculation having mostly dried up, the next 5 or more years will be a return to that magic 120-times-rent number.
If you're absolutely upside-down in the mortgage (e.g. you owe $500,000 but the house will sell for $320,000), your best move might be to simply walk away.
Posted by: AdamCO | March 11, 2008 at 05:14 PM
What do you think about building a custom house in this market? How is the building cost compared to the house price? Thanks.
Posted by: TC | March 11, 2008 at 07:08 PM
The original post has some good food for thought.
Anonymous --
It's a tough thing for sellers to hear, but the value of your house, or my house, or any house, is what a seller will pay for it. That's it.
Renting it out might be a good option for you.
Posted by: Suze | March 11, 2008 at 08:01 PM
TC:
It might be a good option, depending on the cost of land. Here in SW Colorado, land is still bubbilicious, costing four times or more what it cost just four or five years ago.
If you can get a decent lot for a fair price (or if you have land already), you'll find that in most parts of the country building costs have gone down as contractors are out of work and there is less demand for raw materials.
Consider looking into factory-built home options. I live in an isolated town and the constant transport of materials over the mountains is very expensive. For this reason (and a labor shortage in town), I know a number of people who bought factory-built houses that were trucked in and framed together. I would never have known if they hadn't told me. In fact, the fit and finish and material quality far surpasses what I have seen in some suburban developments. These aren't double wides or anything, just regular houses.
Posted by: AdamCO | March 11, 2008 at 08:57 PM
Anon- Guess what? FMF isn't the only one waiting for prices to go down, everyone is. Anyone with half a brain knows prices are nowhere near bottom, why in the heck would we buy now?
Posted by: | March 12, 2008 at 11:26 PM
Anon - here's an article to read that I think provides some thoughts for you to unload your house. I think we could continue this subject for weeks, but I'm not prepared to relive Microeconomics 101:
http://biz.yahoo.com/cbsm/080311/272be88dea3549b6bc83d67bae07edbd.html?.v=1&.pf=real-estate
Posted by: John Z | March 13, 2008 at 10:19 AM
This blog post has been included in the "Carnival of Money Stories #51" at Life Lessons of a Military Wife. Hope you will drop by and read some of the many other wonderful entries received this week!
Posted by: Veteran Military Wife at Life Lessons of a Military Wife | March 19, 2008 at 08:42 AM
Hey there Anon, let me tell you something that everybody else knows already, maybe it will clear things up in your head: DON'T CATCH A FALLING KNIFE!
Think about it!
Posted by: there is a saying | April 11, 2008 at 03:41 AM