Buying House with Plans for Return on Investment

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ack012's picture
ack012
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Buying House with Plans for Return on Investment

My sister is looking into buying a house(condo) in the next few months and I was curious if you guys think it is a smart idea.  I asked her how much she plans to make off it, and she says that she expects the home value (280,000) to increase by 100,000 in the next five years.

strabes's picture
strabes
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Re: Buying House with Plans for Return on Investment

Bad idea.

 

 

ack012's picture
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Re: Buying House with Plans for Return on Investment

can you elaborate on that?

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mainecooncat
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Re: Buying House with Plans for Return on Investment
ack012 wrote:

My sister is looking into buying a house(condo) in the next few months and I was curious if you guys think it is a smart idea.  I asked her how much she plans to make off it, and she says that she expects the home value (280,000) to increase by 100,000 in the next five years.

Why on Earth would the price of said property increase by almost one-third in the next five years? It's more likely to fall by that much. No offense to either you or your sister, but if that's her belief, it's at serious odds with reality. Robert Shiller of Case-Shiller Home Index fame believes that home prices may have only retraced by half.

I just looked for a second and couldn't find the exact article I was thinking of, but wade through some of the recent Daily Digests and you'll come across articles regarding this.

Here. Read this by Charles Hugh Smith at his Of Two MInds blog.

machinehead's picture
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Re: Buying House with Plans for Return on Investment

Buying a house isn't necessarily a bad idea -- if you compare owning
vs. renting and conclude that owning is competitive. Another potential
reason for buying now is if you believe -- as I do -- that mortgage
rates are going to rise in the future.

However, planning on a
100,000-dollar capital gain is purely speculative. In past housing
busts, prices have usually been flat for several years after the
bottom. Weak employment and income growth are likely to cause the same
pattern again.

The only way to lock in a $100,000 capital gain is to buy a $280,000 condo for $180,000.
This can sometimes be done if you're very patient and find a distressed
seller. Otherwise, there is no particular reason to expect capital
gains on real estate in the near future. If it doesn't make sense today, assuming zero appreciation for five years, then it's a mistake.

strabes's picture
strabes
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Re: Buying House with Plans for Return on Investment

I was hoping to skip that elaboration due to time...  Laughing

1.  That "flipping for profit" mentality is precisely one of the causes of this current collapse.

2.  This collapse has a long way to go.  She should rent and let some other sucker continue paying the bank too much money for an inflated asset.  The buy opportunity will come once deflation has run its course, our government realizes it can't reflate, our economy makes the incredibly painful shift back to a savings-based economy, etc.  When that happens, it is time to buy.  It might not happen for 5 years...who knows when it will happen.  But it's nowhere close to bottom yet.  Her mentality is evidence that a lot of people are still thinking that acquiring debt and liabilities is a good way to make money...so sentiment hasn't shifted yet...evidence the bottom hasn't been reached.

3.  Assets will not reflate for a long time.  And even if they do within 5 years, real estate will CERTAINLY not rocket up 36% like she is planning.

4.  Again, acquiring a liability (a live-in house is a liability...a drain on cash...not a cash-producing asset) in the hopes that it will make you money is a legacy mentality of the bubble.  The only way real estate is an asset is if it's an income-producing property, more precisely a profit-producing property (income>costs).  But even if she was planning to rent it, there's a very low chance it will be profitable...in the couple markets I'm in, rent is dropping fast.  

 

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Re: Buying House with Plans for Return on Investment
machine wrote:

Buying a house isn't necessarily a bad idea -- if you compare owning vs. renting and conclude that owning is competitive. Another potential reason for buying now is if you believe -- as I do -- that mortgage rates are going to rise in the future.

If you believe rates will skyrocket in the future (as I do), that's bad news...a signal to NOT buy because higher rates guarantees further deflation in real estate prices, lower demand for housing.  So there's an even greater chance that what you're buying today will be worth less tomorrow if you're confident rates are heading up.  On the other hand, if ownership is in your blood and you'd rather not be renting (a belief that's worth reconsidering in this environment), then of course getting a mortgage rate locked in now is better than waiting.

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Re: Buying House with Plans for Return on Investment
mainecooncat wrote:

Why on Earth would the price of said property increase by almost one-third in the next five years? 

Oops. Just for the record, meant to say more than one third. Idiot!

strabes's picture
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Re: Buying House with Plans for Return on Investment

ack, let me clarify...

I'm evaluating her investment/financial basis for the decision.  It's completely wrong.

On the other hand, if she were buying for security, for a piece of land (the real asset is the land on which the house is sitting, not the house), then an argument can be made for that.  Land should be a good thing to have as things collapse.

Considering that this is a condo, she's obviously not doing it for security/land reasons.   

Ragnar_Danneskjold's picture
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Re: Buying House with Plans for Return on Investment

After all the crap that has happened in the past several months, you and your sister still look at a house/condo as an investment?  Wake up!  It isn't!  A house is a place to live.  If she is planning to buy AND sell a house in the next 5 years, I'd say don't bother.  If she isn't prepared to accept the possibility that she may suffer a loss if she moves in the next 5 years, she shouldn't bother.  This housing correction is not over. 

ack012's picture
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Re: Buying House with Plans for Return on Investment

Thanks for all the comments, I've tried to tell her that it isn't a good idea, but my knowledge is limited so it's hard to make a persuasive argument.   

 mainecooncat, thanks for the article. i'll take a look at it 

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Re: Buying House with Plans for Return on Investment

I'm with ragnar... :-)  This is surely the worst time ever to buy a piece of a building I can think of, even if she could get the loan.  Suggest that she read around this place, but expecially that she take the Crash Course.

 

Rosemary

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Re: Buying House with Plans for Return on Investment

You could try to make the very compelling argument to her that there's so many already foreclosed houses in the inventory of banks that only a fraction of them have been put on the market and the remainder will continue to depress prices once banks get around to listing them. You could dig up some articles on the next couple of waves of ARM resets due to start happening in the next few months, and point out how they will trigger another spike or two or three of foreclosures, further depressing home prices.

There's *a ton* of very solid, quantifiable evidence out there that the housing market is nowhere near a bottom. But in my experience, people who are still, at this point, thinking about buying houses and making a profit, aren't going to register a thing you say. It's the weirdest thing. People will hang on to their preconceived notions, hopes and beliefs in the face of overwhelming evidence to the contrary.... Hmmm, am I venting? Have I spent too much time trying to convince family members to wake up and see what's happening? sigh....

machinehead's picture
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Re: Buying House with Plans for Return on Investment
Rosemary Sims wrote:

This is surely the worst time ever to buy a piece of a building

Surely
the worst time to buy real estate was three or four years ago, when the
cover of a U.S. newsmagazine featured a cartoon of a guy hugging a
house. The caption was, 'Why We're Gaga About Houses.' As usual, the
'tell 'em what they want hear' MSM picked the exact top.

With
house prices down 20 to 50 percent, depending on where you are, real
estate prices are back to average levels in some areas. Average prices
imply average returns going forward -- not great, not terrible. Five
percent mortgages, in my opinion, are attractive. Grab 'em now, because
when the crisis passes, interest rates are not going to remain
abnormally depressed.

California actually looks cheap to me. I
don't have a reason to go there. But if I had a hankering to live in the
'Southland' [as KNX radio calls it], I'd be L.A.-bound right now to
sniff out some bargains.

strabes's picture
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Re: Buying House with Plans for Return on Investment
machine wrote:

 real estate prices are back to average levels in some areas......California actually looks cheap to me

I guess it depends on the baseline and the definition of "average."  Some are projecting another 25% drop this year in CA.  At least another 10% in 2010. 

Rosemary Sims's picture
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Re: Buying House with Plans for Return on Investment

Please excuse my ignorance, but is "real estate" the same as a piece of land now?  Maybe I'm being too much of a pessimist, but I can't imagine how buying a "piece of a building" on somebody else's land might be a good idea considering such lethal unraveling in our markets.  Does anybody really know what is going to happen tomorrow?  Who would have ever thought that the sacrosanct Lloyds of London would be nationalized as it recently was??  (gee, was that yesterday or Friday - I'm losing track of time with all the swift unraveling going on....) Who can even imagine what will happen to "multifamily dwellings"?  Who can even know what will happen to one's wholly owned land in such uncertain times?

Speculation in such times is a time honored tradition here in the south, but only if you have a lot of bucks and land in quantity beyond which most of us here today possess.  Or are a single, unattached carpetbagger type for whom financial opportunity is your drivingforce.   We do so soon forget the lessons taught in our own country.  As my grandmother said "Those people were...ah..uncivilized!" (she meant they hurt other people)

Rosemary

 

 

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Re: Buying House with Plans for Return on Investment

case-shiller-chart-updated.png

The biggest bubble ever.

Wave 2 s heading to shore http://www.cbsnews.com/video/watch/?id=4668112n  it is bigger than wave one that triggered this, how do you think that will play out?

Oh, and don't believe the experts when they bemone 4.5 million homes on the market, no one is taking into account this http://www.bloomberg.com/apps/news?pid=20601087&sid=aKufqJK9j1cY&refer=home 19 million vacant homes, in my book that is 24 million unsold homes, quite an overhang. 

.

 

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