Monday, October 29, 2007

It Is A Real Crash


From a reader:

I believe this housing market will decline further. I have an interesting story to offer and give you an idea how bad things have been in Sacramento area. About 3 years ago my wife and I decided to purchase a second house and keep our starter house as an investment. What was happening in the market at the time was really strange. After we bought our first starter home for $150k in 2001, prices began to spike. By the time we bought our second home 2 years later it was worth $80k more (a lot of money back then). Then prices stabilized for a year. In 2003 we bought a slightly bigger home because our family was growing. We paid $223k for the 1441 sq foot home which was I believed overpriced by about $40k at the time. We went ahead and bought it because it was a long term investment. In a matter of 3 short years the price of the house nearly doubled. I was in disbelief. I would see the same homes in my area (I have a cookie cutter house so I had a close idea the value) rise by nearly $10k a month during that period. I tried to research why this was happening. It just did not make sense. As a home owner, you love it when your home appreciates in value, but this was almost unrealistic and made me very nervous. It took my parents 30 years to pay off there home which was worth 300k, while it took my wife and I a little more than 3 years roughly to accumulate that much in equity (on both homes including the rental). I knew something was unnatural and this is when I came across your blog trying to find an explanation on the internet.

My neighbor sold his house (same as mine) for $430K the same day he put it on the market, $30k over asking in late summer of ‘05. A friend of mine in the real estate industry bought multiple homes with little or no money down, a family member bought a 350k home and we was not even working at the time of purchase. How is this possible? At this point I told my wife that it was time to bail out of real estate and sell one of our homes. The market was starting to decline in Jan of 06 in Sacramento and we priced it lower to sell fast. I would much rather price ahead of the curve than follow the market on the way down. So we sold for $400k, 30k less than all time high. We struggled because it took 2 months to sell. Remember my neighbor sold his for $430 three months earlier. So it took a lot longer than we had anticipated. I was about to lower the price to $379K when we found a buyer. To make a long story short, a similar home I saw listed on MLS just earlier this week is selling for $219k. I feel vindicated. Thanks to doing my research and reading your blog, I feel I made a very good decision.

I do feel bad for all the people that losing their homes, but when you work as a janitor (no offense to janitors) and you can own half a million dollar home, it just does not make sense. Both my wife and I are working professionals earning six figures salaries and we live in what many folks consider a starter home. Now with the fallout of the housing industry, I had no idea how widespread and prevalent all these exotic toxic, ninja, liar loans were. I have coworkers who are clerical, custodians and blue collar workers who own half million to $720,000 homes (at the height of the boom). I have to admit but I was very jealous and confused. Both my wife and I have advance degrees and we can barely make ends meet. We have very little left for luxuries. It is sad to see this generation being robbed from an opportunity to buy a home. I see folks driving Escalades and Hummers, and I know for a fact that they are not professionals. Now I know how they did it. It’s all funny money that will have to be paid back. I strongly feel that we will return to 2002 or even to 2001 prices. In the mean time I am just saving the money that I made on the sale of my house.

Ironically even real estate agents are conceding that real estate will further decline. When I talked to my real estate agent about a nice large (3000 sq ft) home 2 blocks from us that has come down from 630k to 419K, he simply told me to wait. He said I would be able to get the same house next year for $300k.

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