How is the Real Estate Market?

In the last 8-12 months there was a huge inventory of houses for sale especially in places like Concord, Martinez and Antioch - California. On the contrast, San Jose did not encounter a scenario like that except in some parts - like South/North San Jose. Right now, the market is not that active and foreclosure/REO (Bank-Owned) properties appear on the MLS, may be once-a-week. About 6 Months back there used to be at least 2 houses 'just listed' on MLS (Multiple Listing Service).

Just to share my experience, I bid on about 5 properties. The plan was to wholesale it to a real estate investor with cash. Such properties will prove to be awesome returns for them - compared to the then declining Stock market. Anyways, along with my offer on every property I bid for, there were at least 20 offers varying between the listed price to about $50,000 more than the listed price.

Eric (my Real Estate agent friend/mentor) used to say, 'Ram, it's a feeding frenzy'. At one point, I saw a couple properties (thru his automated emails of the MLS listings - that he provides as a service to his clients) and requested him to take a look. When he went there, one of them was filled with about 7 other agents excl. himself and the other he was the only one. Unfortunately, he returned back to the 2nd property, NOW he was one among the 7-10 agents who were already there.

Remember the Black Friday, where it is AAA (Almost Always Assumed) the items from a dozen pencil @ Staples to kitchen model @ Home Depot are offered at a very good price. My wife and I go to the stores on normal days and I would still see those signs of 30% discount / 50% discount / 70% discount, etc. I used to wonder why would they discount so much and hurt their margins. Technically it does but not to a great extent. This is my theory:

For Example...

A shirt bought by the store from the manufacturer cost them $10. It is listed for sale at a retail price anywhere between $35 to $70 depending on the "Name" of the store. That said, the discount season typically will increase the price tag on the shirt to $50 and give about 30% discount making it $35 to go. The margin has NOT changed in one bit!!

Again, that according to me is how the stores make business. I do not think for one moment that they are losing money by selling their inventory. If you talk to me about storage cost, days the inventory is in their store and their payment owed on the borrowed money to acquire these goods, etc. - that I guess would make sense. Reason being, they are the liabilities they cannot avoid, however, the margin would still make up for it and still make them a decent NET PROFIT. The NET PROFIT declines when the consumer spending goes South. Well, longer the inventory stays in-store, payment owed or interest owed on borrowed money for the inventory before they can move out and you know what I mean.

I am going to have to apply the same theory NO, sorry, 'Corollary' (as that term sounds more English and Bombastic to me) ;) for the Real Estate. The properties that are selling for $150,000 or $180,000 should have been SOLD only for that amount or less prior to this crazy boom. However, they were sold at THREE TIMES the actual value and the mortgage interest that the banks got is way more than what they deserved. After the downturn, it is obvious they had to cut some slack and they had to compromise on the price points.

Yet, there are some properties which have a wonderful intrinsic value at this time of the year. While most of them are not that 'Great', there are some 'Great' assets anybody would want to own. Those 'Great' assets (that needed minor rehab) were outbid with several investors' ALL CASH bids leaving a few for the homeowners who wanted to avail the $8,000 or $10,000 tax rebate.

Oddly enough, there are still homeowners crazy about buying a house now, bid WAY more than the actual intrinsic value of the house/property (like $50,000 more than the actual as I mentioned earlier). According to them, any price these days is good because they are not the highs of the 2004s/5s/6s.

Believe it or not, 2010 is going to be another turmoil but a tolerable Tsunami. With the unemployment rate already @ 10.2% (the last I remember) and growing, the projected foreclosure properties in the market is some more millions according to a Consulting group President dealing with the banks in this area. I am not saying buying a house now is NOT OK. It is ABSOLUTELY OK even if we bid lower than the listed price.

That indicates, the Real Estate market is still in the process of correcting itself. It's not too late already to buy a wonderful / comfortable / cozy house for you to live and enjoy the next 5-10 years. In other words "Do some research and use this simple formula"...

Go to Zillow - Check the price of the property/house you are interested in during 1999 and prior (if it shows - the max. history of price is 10 years prior). Let's say it is about $200,000 - rule of thumb (be it Stock market or Real estate) the average appreciation (for satisfactory investment returns) is 6%. From 1999 to 2009, it should 60% appreciation. That puts the current price of the $200,000 property you looked at, @ $320,000.

My closing argument, this one house listed for about $118,000 - utter trash I tell you, Eric and I went there. There was NO Kitchen (total rehab needed there), a dilapidated living room, smelling like crazy all over the place, dirty bedrooms, lousy molding, needing 100% paint work, siding work, roof is gone bad, windows totally out, half-done lousy and pathetic windows dual panes, sick foundation, enormously-work-needed back yard and a couple more. I was frustrated and said, 'Eric, this is not going to be worth $118,000. What do you think?'. 'I think so too' came the reply along with his side note 'but there will be people ready to bid more than the listed price'... I wanted to bid $18,000 for that property and my dear mentor was OK with it too!! On the contrary, I am sure that property would've gone Pending by now... :(