Northern California Area Real Estate Markets Overvalued
SACRAMENTO, Calif. -- A recent report rates several Northern California cities among the most overvalued real estate markets in the country.
http://www.thekcrachannel.com/money/3947226/detail.html
Simply know the risk when investing in a bubble market! A bubble market is simply when real estate is overvalued in a market area!
When dealing in an overvalued market as an investor you need to heed caution with long term investment properties or should I say hold properties.
Edward Leamer, economist at the University of California Los Angeles, has used his own version of price/earnings ratios to determine relative values of real estate in a given city. The system is based on the fair market rent for a particular property type in relation to the median home price for that particular type of property. Averaging these figures from a period starting in 1988 and ending in 2000, Leamer came up with an average figure of 22.8. For 2001 San Diego's real estate market earned itself a ratio of 29.7/1. That is a 30% jump over its average for the previous 12 years.
See:
http://sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2004/06/17/BUGND776191.DTL
http://www.findarticles.com/p/articles/mi_hb204/is_200307/ai_n5778117
CHAPTER 26 VALUING REAL ESTATE - in stocks and measures risk relative to this ... is worth bearing in mind that the ratios should ... and provisions on lease renewal will determine cash flow ...
www.stern.nyu.edu/~adamodar/pdfiles/valn2ed/ch26.pdf
Simply Don't buy the:
- The nicest, biggest or smallest house on the block.
- Avoid subdivisions that are not completed or have a lot of homes for sale similar to your property.
You can still make a great return in an overvalued market by flipping homes for profit but do consider the risk.
From the national association of realtors annual sales data and local market monitor displays what investing risk are in a real estate bubble or the top of the market areas. If you purchased during the top peak of the real estate market it can take years to recoup your loss. Below is based upon the top of the market purchase and the decline of the market.
Market Areas | Honolulu | New York City | Houston | Los Angeles | Hartford | Boston | Syracuse | |
| Drop in value | 19% | 8% | 21% | 21% | 23% | 6% | 8% | |
Years to recoup loss | 7 years | 10 years | 7 years | 11 years | 13 years | 6 years | 8 years |
Housing Horror stories are around the country and below are a few examples:
Houston, TX. When the oil market bottomed out in the 80's, home prices tumbled. From 1985 to 1988, the typical home price dropped by 21 percent from $78,600 to $61,800.
When the stock market crashed in 1987 New York City was hit hard. Prices peaked at $183,000 in 1988, and anyone who bought then had to wait until after 1997 to get to brake even.
In Hartford, CT. From 1984 to 1988, the typical home price soared 92 percent to $167,600 from $87,400. Then the insurance industry started laying off or moving out. Hartford's population growth slowed to zero. And home prices starting falling. In fact it wasn't until 2001 that someone who bought at the 1988 price would have made his or her money back.
Real estate investing is not rocket science just simply know your market area, investing strategies and by all means have what I call an escape plan on the subject investment. "The what if factor".
If you can't sell it what do you do!
Rent it!
Lease option it out!
Owner finance it out!
Use its equity to buy another property and turn profit by way of another deal.
Consider following time honored principles when investing in real estate or simply think twice when investing in a real estate bubble or the top of the market areas.
John,
I've been seeing references to Leamer's paper in a number of places lately but I've not been able to get an actual copy of it anywhere. I'm particularly interested because his P/E analogy is pretty much the same as a cap rate argument I've been trying to make. At least as far as I can tell from your and others summary.
Can you tell me how you found a copy of the Leamer article or forward one to me. Any real estate guy who gets quoted in Federal Reserve Bank analysis is interesting to me.
By the way, I noticed you've changed your signature. What does BTO stand for?
You can find information and contact information on Edward E. Leamer at the University of California's web site.
A "BTO" is a Big Time Operator. A shrewd or unscrupulous person who knows how to circumvent facts in discrediting another. Self-serving. A delusional protagonist who thinks they can dupe the world.
"A delusional protagonist who thinks they can dupe the world."
"To dupe" means to trick or mislead or deceive. "To plagiarize" means to use the ideas or writings of another or try to pass them off as one's own or to appropriate the work of another without giving the author credit.
So, someone who plagiarizes is trying to dupe the world, and delusional plagiarizers are those who think they are duping the world by taking somebody's work and trying to pass it off as their own.