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I think part of the problem affecting this overblown behavior towards real estate investing is that for the past five years no other investment vehicles (stocks, bonds, etc.) have been able to provide much of any return to investors who have some cash readily available to invest, hence the lemming like stampede into real estate. I think some of them are also trying to recoup on losses from the last so called investment “boom,” i.e., dot.com stocks. I have been in commercial real estate for 26 years and have experienced at least three downturns in the market cycle, one particularly severe. At the time I was a portfolio manager for a large real estate syndicate and I recall meeting with an elderly couple who had invested in a limited partnership that contained several commercial properties. The value of their investment had been reduced significantly due primarily to market pressures. However, I remember clearly the one comment that the wife made: “We’ve owned homes for several years and they’ve always appreciated in value; how can this happen to higher quality real estate assets?” After explaining to her the basic economics of supply and demand and their impact on rental rates, and how operating expenses only rise over time, it wasn’t hard to understand how a positive cash flow could turn negative, especially with an overload of what appeared to be a normal amount of debt on the given investment.
Although in my mind there is more emotional attachment to a primary residence as an investment, when people begin speculating on it like any other commodity, combined with easy credit, all bets are off. I thought people had learned enough from the dot.com implosion that these types of skyrocketing values on most investments make little or no sense unless you have the discipline to get out early, and then it’s only a Ponzi scheme. I suspect their thinking is further muddled by the fact that some residual value remains in real estate assets. However, depending on the amount of leverage used, at what point in the cycle, and the future supply and demand economics in their given market, they may very well wished they’d left their money in paltry CD’s. Nothing like selling for a loss, and worst case, if their minimal equity is gone, that nauseating feeling of realizing the net difference is still owed to the bank.p>I further wonder how many of these speculators understand that most residential mortgage loans are recourse to the borrower; i.e., short of bankruptcy (although those rules have changed some, too), they’re still on the hook in the event of a shortfall at sale time. Every time this sort of thing happens, I blow the dust off of my copy of Extraordinary Popular Delusions And The Madness Of Crowds , by Charles Mackay, written in 1841, and conclude speculation occurs from time to time, and is a faulty condition of the human psyche, i.e., greed. Nothing much changes, does it? br> — David P. Bennett br> Chicago, Illinois /p>
My wife and I bought a house in Howard County, Maryland (a higher median family income than oft-sited Montgomery Co., Maryland) in December 1999 for $171,000. It was the neighborhood eyesore, a real fixer-upper. After mucho work and money the house now looks great. We bought this house at the very beginning of the HoCo real estate boom. Even back then, my wife would see a property listed online, we’d go look at it, come home and find five to ten over-asking-price bids. We managed to get our house before it hit the market. It’s in a decent, but not the best, school district, but those change every year in the county. The school system is a big draw to Howard County.p>It was recently appraised for over $450,000 and other comparable houses in the neighborhood have sold for more. We have an affordable mortgage (one) and the house will be paid off in less 20 years. Of course we can’t think about moving because we couldn’t afford anything else and our investment money is in safe, conservative funds. Oh, and the Ravens have an offense this year. Think we’re in better shape than the flippers? br> —