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Looking forward to 2009, I daresay that I am an optimist. Yes, indeed, in 2009 we are staring down the gullet of the darkest economic times this nation has seen since the Great Depression.
But then, what comes of such things?
The answer is: it depends.
For one, real estate prices still need to fall further, and with some luck, they will.
"Ouch! No way!", some might retort, failing to understand the realities of real property.
Fundamental of Real Estate Value #1: the present value of a property is never worth more than its market rate rental would support. This means that, assuming that the property were rented, the rental revenues must pay for all expenditures associated with the property, assuming 100% financing of the property. This includes: mortgage, including both principle and interest; maintenance; management; taxes; insurance; utilities; all the rest.
This applies even if the intent is to buy a home to personally live in it. It's ultimate use doesn't matter, the rental rate that it could collect still dictates it's real present economic value.
ANY amount paid for a property in excess of that calculation is a gamble on future appreciation.
This is the most basic, most fundamental, most important reality of real estate for any buyer to know. Unfortunately, few did, and our current mortgage crisis has been caused by fraud committed by the real estate and financing industries upon buyers/borrowers. Industry insiders grievously misled buyers/borrowers into believing that inflationary "comp values" (prices of recent sales in the area of properties of comparable character) represented property values and justified the purchase price.
This was, flatly, fraud. And it was a fraud that led buyers/borrowers to gamble away future appreciation of real present values for the next generation or two or three, or more in some areas.
A quick and easy rule of thumb for determining real present property values: for every $100 rental revenue the property can generate, it is worth very roughly $10,000.
So, indeed, property values remain inflated in many areas, particularly in California. A quick survey of properties for sale, excluding bank owned (REO) properties, in the San Francisco Bay area, particularly the Peninsula, are still generally priced at twice or more of their current real present value. Perhaps, as the economic conditions in the nation worsen progressively through the coming year, this inflation may finally evaporate. Certainly, reform is required, and the past practices of misrepresenting property values should be prosecuted industry-wide. Moreover, laws must be enacted specifically forcing everyone involved in real estate and financing, from real estate agents to financiers to government assessors, to identify those real present values and disclose them to buyers.
More importantly, it is the buyers/borrowers themselves, the victims of this fraud, whom the U.S. Treasury should be disbursing bailout funds to, and not to the perpetrators that helped defraud them.
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