I just can't stand to see people lose money. And let's face it - most people lost money this year. Even Bill Gates is down $7B from his $50B and Warren Buffet lost $10B of his $40B. More importantly, 23% of U.S. homeowners are upside down on their mortgages. Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic.
While this is old news, here's my current concern: Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home's value. Remember, this would only likely happen in areas where values took a double digit hit this year. I'm afraid many novice buyers could find themselves in exactly the same position next year. California, Florida, Nevada and Arizona are still declining markets. It doesn't appear that way because inventory is down and prices are up. But what will happen when the tax credit disappears in the Spring and the Fed runs out of money to keep interest rates artifically low? Rates could increase at the same time many Option Arms reset - 58% of which are in California.
If you're buying a primary residence to live in, it doesn't matter if prices go up or down 10-20%, as long as the mortgage payment is affordable and you plan to stay for awhile. But buying an investment property that could be worth less next year and generates negative cash-flow may not be the best choice. I'm usually an extreme optimist, but the data has me concerned that it may still be too soon to buy investment property in CA, NV, AZ and FL.
There are certainly exceptions on deals where the numbers work. And that's the key - what does that mean to you? What kind of cap rate do you need to feel comfortable? Linear markets never bubbled much and therefore, aren't busting up. Dallas and Cleveland are 2 markets showing the greatest market momentum in the right direction, according to Robert Campbell, author of Timing the Real Estate Market. In fact, Dallas real estate prices increased this past year. These areas are proving to be a safe harbor during this on-going financial storm.
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