Blog Topic

A couple of comments from some experts on the future of the housing market and the economy I came across make me ponder where and how to invest my money in real estate in the future.

Yesterday Gary Shilling predicted a 20% drop in real estate values in the next 2 years. According to him, the good news is that there's no double dip but the bad news is that there'll probably be recession in 2012. There's an excess of 1.2 million homes. Thus housing starts will have to go down until the excess is cleared. Presently there are 20% of homes that are "underwater" - which means the home is worth less than what's owed on the mortgage. That number will increase to 30%. There'll be more and more strategic defaulters - people who can afford their mortgage but simply don't want to pay but to "walk away". Not a popular view around here but not one to be taken lightly, from someone who predicted the tech bubble crash. (I'm one of those who got burned by the tech bubble so I take note of his comments seriously)

This morning I read another commentary that says the real estate market is going to stay stagnant for years to come. "The Housing Slump Is Worse Than You Think", the title reads. Whether you want to admit it or not, I feel the same way. Affordability Index hasn't been this high for many years. Yet sales are not picking up. Why? Credit market is as tight as can be. Wait till October when Fannie Mae and Freddie Mac lower the conforming loan to $625,000 from $729,000. Thanks to the all cash buyers from China. If not for them, with the credit market so tight, it could've been worse.

For most people, their own home is their biggest investment. You can live on it and it goes up in value year after year. Makes sense, right? That theory doesn't seem to hold much water lately. Just ask the strategic defaulters.

But if you still want to put your money in real estate, how should you invest and come out ahead?

A couple of friends gave me some ideas. One friend bought a single family home in Phoenix for $120,000. The down payment was $30,000 and loan amount was $90,000. She lives in Los Angeles but hires an agent to manage the property for her. She easily found a tenant who's willing to pay $1400 per month. She's investing for long term until the market recovers. Another friend of mine uses a different strategy. She doesn't have a lot of cash but she believes in paying cash for her properties. So she buys them cheap at trustee's sale. Thus far, she's bought two, each for around $65,000. She's able to rent them out for $900 a month, both in the San Bernardino county area. That's $1800 income for a combined investment of $130,000.

Experts estimated that 5 to 6 million renters became homeowners during the boom due to easy financing but these same people are facing evictions due to foreclosure.

Lately I'm seeing an increase in my eviction cases. So perhaps there are more renters now than before. From what I've heard, rents only go up, not down. So perhaps the rental market is not a bad place to put your money. I'm seeing more and more investors becoming landlords, especially if they can't flip the properties they got the auction sales in time before the prices drop. So investing in low-priced properties and renting them out for a profit may be the way to go.

Any thoughts?