Big Profits in Real Estate
March 24th, 2005 by 
InLibrisLibertas
Everywhere I go, I hear about the great profits people have made in their houses. Usually this consists of refinancing debt to “take money out” or selling and rolling up to a bigger house. With housing affordability down to less than 10% in some markets and over a quarter of new home sales to speculative buyers (over a third when “second homes” are included), it seems that some caution might be warranted. I therefore offer the following cautionary tale, a reader’s letter submitted to Richard Russell’s newsletter. ‘Steve’ recounted:
“For the person that said housing never crashes let me pass on these facts that I know only too well. My wife and I purchased a new starter home in Dallas in 1984 for about $102,000 (which is about $190,000 in today’s dollars) and within a few years the area did well and houses were selling for about $115,000. Naturally, we felt very smart about our ‘wise decision to purchase a home.’
Along comes 1988 and an economic downturn in Dallas which knocked down oil, technology and banking. Jobs that had been easy to find at good money started to disappear and people in the neighborhood started to talk about moving to another area if necessary to find work. The nice, cute little neighborhood started sporting “for sale” signs and then when the local economy got really bad, families just started leaving the neighborhood without even selling their home. They just sent the keys to the bank.
Suddenly a home like ours was selling for $48,000 and when I received a good opportunity in a different state I could find no buyers for our home at any price above $50,000. At that point in time my mortgage balance was around $92,000 (we had put 5% down) and it was not possible for me to take such a sizable hit. To make a long story short, after losing money every year paying for hail damage, repairs to appliances and the like we sold the house in 1992 for $72,000 and had to cover the difference. That size of a loss on a home is very painful and really puts your savings plans into reverse.”
But this time it is different. Right.
Posted in Manias, Real Estate | 
March 24th, 2005 at 6:28 pm
Re: “an economic downturn in Dallas …”
It was no economic downtourn. It was a true regional depression that hit Texas as well as Oklahoma, and, I reckon, Louisiana and anywhere else that Oil was King.
March 24th, 2005 at 7:26 pm
Yes. I remember. But that’s what the man said.
On Bill Fleckenstein’s rap today:
“Speaking of the FT, in an article today titled “Property Price Rise in Japan Fuels Hopes for an Upturn,” the paper quoted a survey by the Japanese Ministry for Land, Infrastructure and Transport, citing that housing prices rose 0.9% in Tokyo in 2004, the first rise in 17 years. However, the story also noted that property prices plunged 80% during Japan’s bust. For all those folks who think real estate can’t go down because “they’re” not making any more of it, Tokyo is a clear refutation of that myth.”