Posted by Kenneth Hocking on April 09, 2008 at 08:31:16:
Anyone Else see the ABCNEWS clip I think it is on YAHOO today about Is Real Estate a Good Investment?
When you take a step back and look at the graph the Report shows about home vlaues on and Inflation adjusted average and look at just how Tremendous the Growth was over the last 8 years... It is no wonder that the values are still falling in many markets..
As I have said many many times but it bears repeating for those newly to the board...
Take a look at your market from the point of Affordability. Use Walmart Mentality
What can the median income family afford in a mortgage or rent? And adjust your purchases accordingly.
For example if Household income in your are averages 75K the the TOP END of this household purchasing power on a conforming loan would be 75K*45% divided by 12 to get the top end PITI payment ( Prinicpal Interest taxes Insurance) which in this case is $2812.55 to cover the ENTIRE payment for te home if they family has no other debts but in DEBT-America that would be RARE.
So lets assume that this 75K income family has just one car at 450 a month and one student loan at 125 a month. Very typical and actually about $300 too low, but let's just assume we have only 575 in aditional debts.
Quick Math would give us 2812.50 - 575 = 2237.50
Lets assume Insurance is 125 a month and property taxes are 250 a month so quick math reduces the amount to cover principal and interest payment of 1862.50
Lets assume there was a 100% program and the blended rate between the first and second liens is 6.5 percent together.
take 1862.50 as payment, 360 months as term, and 6.5% as interest and solve for principal amount and you roughly have 294,667 loan amount. BASE average pricing in a 75K household income neighborhood and this is what most people will drive their Buying decision upon
BUT LOOK AT THIS
But what happens if you add in the National averages of another car at $400 and $275 a month in crdit card debt.
now you have 1862.5 - $675 or a maxium available for payment of Principal and interest of 1187.50
THe new affordable loan Max allowed on conforming loans with a Debt to income ration of 45% is now lowered to 187,875 with a 30 year term 6.5% blended rate and a payment of 1187.50 for PI and 250 for taxes and 125 for insurance...
106,000 swing in value on conforming loans just witht the addition of 1 car and a couple of credit cards...
What is the Household income in you market and mark to that affordability number back into to the average debt loads for that market and reach you own conslusion of were you should be buying to rent or flip...
I think many markets still have a ways to fall before the reach affordability to average incomes.
And yes I understand some will want to point out Compression ( 2 generations living in the same home) and unaverage incomes such as silicone valley but that is what makes this intersting apply some common sense to your market and invest accordingly.
Buy Cashflows or do not buy it is Very Simple!