... in response to Real Estate Guru's, posted by Onephd on Mar 18, 2005I lived 37 years in the San Jose area.Most of that time I was involved in real estate and also worked for the City of San Jose reviewing real estate development.I have seen 2 really huge booms and another slower one similar to the last year.20% in a year is huge but I have seen 40% in 3 months,as in spring 1977,the first huge boom we had.In 1999 we also had a huge boom,I saw some properties go 250% from 1987 to 1989.We then went in a slump for about 5 years,started coming out of it in 1995 and I saw some prices more than double from 1998 to 2000.
On the commercilaside I saw industrial land go from $20,000 an acre to over $1,000,000 a acre between 1977 and 1980.
These residential real estate booms have several ingredients.
First a short supply which we almost always have in the San Jose area except in real estate slumps.
Second,people always want to hop on after prices start going up.In 1995 you couldn't get people to act that were going crazy in 2000 and now in 2004 and2005.
Third,and this is a newer thing,really cheap and flexible financing that gives people the power to act on this urge.
There are loans with 1% start rates out there.One of my loan broker friendsin theSan Jose area says the price hasgotten sort of irrelevent,the question is can I buy it?
So with little or no down payment people are able to jump in and buy properties at huge prices for affordable STARTING payments.The ARM type TEMPORARY financing is feeding this whole thing and in my opinion will will cause in 3 years or so some huge probloems when people can no longer afford what they bought.This will happen without interest rates in general going up,which they will do also.People will not be able to afford the loan they already have and new ones will be more expensive.
I have been overly bullish on real estate watching all this.But in 1989 I said it finally went over the top,which it did.We went in to a6 year slump.Prices on condos or low cost homes dropped maybe 10% to 20% .Big dollar stuff,then maybe $1,000,000 up dropped back like 50%.There was even a significant drop back in big dollar propertiies in 2001 before this latest boom that started last year.TheLosAQngelesareawent through amuch bigger slump than the San Jose are and recovered later,since2000 basically.
In my opinion weareway moreover the top than in 1989 and because off the short term loans and the rising interest rates the1989 to 1995 slump will look like nothing compared to what will followthisone.And the slump has the ability to affect thewhople country because the cheap teaser financing is going on everwherein the US.
Real estatewill still do OK long run and if you can buy income property that makes sense you will still do OK locking in todays low interest rates,as long as you have renters.
I really didn't see this last boom coming.I thought we were pretty much maxed out but the financing angle has
caused prices to continue on up.I also didn't see the1977 boom.I had nmo ideapricescould do what they did.I did see the1989 boom and got in on it qa little.I also saw thaloer boom of the late 90's but could only get in on it in a limited extent becauseI was buying back in to my pension.
An example.My son bought 4 condos in 1989 for about$145,000.
They went to $305,000 in late2000.Droppedback to $265,000 in 2002 and nowaregoing for $375,000.The last oneat least,The one before that went fr $359,000 in February.My wson just put asignout,bo realtorandsellsone of hisfor $359,000 fast.The next one,with a bad location overlooking the freeway they ask $359,000.It gets bidup to $375,000.We are talking 880 sq ft 2 bedroom 2ba condos.My opinion isthewill probably reach around $400,000 in the next 2 month sand then they will stall.When you get a stall every thing stops because nobody wants to buy if prices are not going up.
I told my son to sell them berfore May,even if he can find anything to trade them in to.Take your $250,000 profit andpay the capital gainsif you have to.
Hewent to Alberquerque NewMexico 2weeksago and bought 4 newhouses,1600 sqft or so for about $150,000 each.But therewill be no cask flowwith 20% down.He can buy maybe 4 moreof then just off the money from the one condo hesold.ButI'm not sure thatwa good idea if there isno cash flow.$ plexes that were reported to have good cash flow therewere junk.Propery managers wouldn't touch them.The rents wre not what he was led to believe and the problems and vacancies would be huge.
So,I just told you about San Jose.Anybody out there know good places to buy nowwhereyou can get cash flow on decent properties with a chance to still go up?I know Florida is hot but I think it might be too late there.
BUT,the real beauty of real estate is if you can catch some good appreciation with levearge your return is huge.The oneplacemy son did sell,700 % return in 6.5 years.He could have made 500$ in 2.5 yearshadhe soldthem in early 2001,then still caught some good upsomewhere else,like Sacramento and Florida.Good ups may be hard to find right now.
And the old man,me misses this mostly refinancxing hishouse andspending the money on his Colombianaifeinstead of buying moreproiperty.My son hasmy ideas,hismotherstighnesswith adollar,something I never had.
Sorry,no time to check for errors here.
Pete
