[quote author="columbussquare.com" date=1223992286]IR, thanks for the econ lesson for everyone. I was gone for a few days and my less than perfect statement sent the conversation in a different direction. What I should have said was lack of supply increased the price per sq. foot when compared to R2 & R3 with demand remaining constant.
I noticed that this direct response has been left without a reply. In the post, <a href="http://www.irvinehousingblog.com/blog/comments/fundamentals-at-a-market-bottom/">Fundamentals at a Market Bottom</a>, it was said, <em>"All methods of predicting future price action rely on the same basic premise: prices are tethered to some fundamental value, and although prices may deviate from this value for extended periods of time, prices eventually return to fundamental valuations. This premise has been reinforced by market observation; in fact, many estimates of fundamental value are based on market action."</em>
Although prices may deviate from this value for extended periods of time, prices eventually return to fundamental valuations??? This appears to be your basic thesis yet it is fundamentally flawed. This is like saying that since an airplane returns to the ground it's natural state is not in the air. While I don't dispute that at times the airplane may fly too high it's quick return to the ground does not mean that it's purpose has changed!</blockquote>
History has shown, over and over again, that prices do eventually return to fundamental values. That is why they are deemed to be fundamental. There are certain variables that are consistent at market bottoms, most notably debt-to-income, price-to-income and price-to-rent. If this were not true, then there would be no way to value real estate. It really would be a crapshoot based on the foolish whims of buyers and sellers. Also, it is not just by chance that prices return to these fundamental values. Once the irrational exuberance has worn off, these fundamental valuation levels are where ownership makes sense on a cashflow basis and not on some wishful speculative dream.
[quote author="columbussquare.com" date=1223992286]To equate property value to be equivalent to the purchasing power of rents ignores so many of the upside advantages of ownership. When someone has a lease they do obtain temporary rights to the property but they also incur an obligation. Unless distorted by rent-controls the owner may chose to not renew the lease or to raise the rental rate as the market (or the individual tenant) will bear. They have possession but not control.
Prices are not so much tethered by some fundamental value but rather they expand from this level. Yes, they may temporarily contract to this level again in the future (that's been impacted by inflation) but this will also be temporary. </blockquote>
You do realize that nobody outside of California and a few other bubble-prone markets believe this to be true.
Your point of view seems to be that market values are peak values, and drops to what I am calling fundamental values are periods when the market is undervalued. This is a perspective shared by many people in the market. This is classic kool aid intoxication. What metric would you use to estimate how far down a market price could fall? How "undervalued" could it become?
[quote author="columbussquare.com" date=1223992286]In the post, <a href="http://www.irvinehousingblog.com/blog/comments/investment-value-of-residential-real-estate/">Investment Value to Residential Real Estate</a>, it was said, <em>"The rental equivalence value is the fundamental value of real estate, and it is also its consumptive value....There is an independent investment value that can also be measured and added to the consumptive value to arrive at the maximum resale value of the property."</em>
The statement of maximum resale value is incorrect. The maximum resale value is the most someone is willing and able to pay at any given time. If there is not resale market the resale value is zero. If the market exceeds the combined consumptive and investment then it's the market that will determine the price. Instead it should say, our maximum purchase price is the combination of the consumptive value and the investment value. While I don't agree with that personally, it is better to define what you're willing to pay than to say that the price cannot exceed this level.</blockquote>
I am not saying prices cannot exceed any level. I was just pointing out the the current resale price is the combination of the consumptive value and the investment value. It would probably be more accurate to call it the <em>perceived </em>investment value because this perception is often incorrect in the market.
[quote author="columbussquare.com" date=1223992286]Greed pushes prices up while fear pushes them down. Both actions tend to over excerpt themselves in moving the market. We've both agreed that the real estate market isn't very efficient. Your statements seem to say that airplanes should always be on the ground and when they're in the air it's a mistake. I believe that airplanes, like real estate prices, are most natural when they're off the ground. Just because an airplane has at one time been observed to be on the ground does not mean that it belongs there. Market observation is useful to say where we are (assuming accurate real-time information is available) but it doesn't say where we should or will be. For that we need a crystal ball.</blockquote>
An accurate crystal ball would certainly be helpful, but an accurate, historically proven analysis of fundamental value is even more so.
[quote author="columbussquare.com" date=1223992286]<strong>This get's us back to the original question: Is now a good time to buy?</strong> By the time we have the data to validate one view over another it will be too late. If IR is right, then everybody who owns property should sell right now. Get the best price you can because it's still too high and soon prices will get to where they "belong". But what if his theory is wrong? You won't know until prices are higher and the buying opportunity is gone. Or if you do sell you won't be able to reacquire the same property at the price it was sold. If you use conservative affordability models and the property meets your needs and/or wants and you have a time line that can withstand further drops in pricing (should that occur in the short-term) then now might be a good time to buy. You're first step should be to talk to your CPA, financial planner, and mortgage broker. Develop a solid long-term strategy that is based on current market conditions and your economic goals. Only after this has occurred should you go to look at properties. Do an appropriate analysis of the property and neighborhood. Only after it passes all of your criteria should you consider making an offer. If you won't do the homework then don't even consider it. It's better to sit on the sidelines and say later, "I should have bought", then to jump in and realize. "I can't afford this or I didn't know the risks". </blockquote>
Buy now or be priced out forever... More kool aid.
I had this same discussion with a realtor who used to come to the forums frequently. She asked me if I would feel bad if my convincing people not to buy would cause them to miss their opportunity for ownership. I asked her the opposite question. "Would convincing someone to buy just as their house values dropped 40% which put them into foreclosure and bankruptcy would make her feel bad?" There are no guarantees in life. She was very wrong, and her advice did not help people. If I am wrong, people will go on renting and save money over their cost of ownership. Big deal.
[quote author="columbussquare.com" date=1223992286]Pricing today is good. It might not get better tomorrow. The people who bought stocks on Friday saw value that no one else did. Today we saw the biggest one-day increase in the Dow Industrial Average. What changed between Friday and Monday? Not much except they're is less fear and more rational thought.* As the fear goes away in real estate you should expect to see an increase in prices. When will that happen? I don't know...but we'll only know by looking into the past.
*I'm not saying that the closing price for 10/13 is right but prices have dropped very quickly and this price change appears to be too much too fast for me. We'll have to wait for the volatility to decrease before we can identify proper market prices.</blockquote>
Fear is not what is driving prices down in real estate. The lack of available financing and the constriction of credit is doing that. That is the first stage of the process of prices returning to fundamental values. If anything, the activities of knife catchers has shown that fear has not yet gripped the real estate market here. Fear will make its appearance shortly as the recession causes people to rethink their ideas of this being a bottom in real estate. Fear is what drives prices below fundamental values. When prices get there, the abatement of fear would help the market. At this point, fear is justified because prices will continue to fall.
