Embracing Good Debt in Real Estate: A Smart Investor's Guide to Building Wealth

Building Wealth Using Good Debt

Embracing Good Debt in Real Estate: A Smart Investor's Guide to Building Wealth

Are you intrigued by the potential of real estate investing but hesitant about taking on debt? You're not alone. Many people shy away from using debt in real estate because they associate it with risk and financial strain. However, understanding the concept of good debt can be a game-changer for your financial future. Let’s explore why leveraging debt in real estate investments can be a powerful wealth-building strategy—and how to do it wisely.

Why Does Using Debt in Real Estate Scare Most People?

The fear of debt is deeply ingrained in many of us. We’ve been taught that debt is risky and should be avoided. But not all debt is created equal. Here’s why the idea of using debt in real estate often scares people:

• Fear of Financial Burden: The thought of owing money can feel overwhelming.
• Concerns About Market Volatility: Fluctuations in property values can make investors nervous.
• Lack of Understanding About Leverage: Many don’t realize how borrowing can amplify returns.
• Worry About Potential Foreclosure: The risk of losing a property looms large for some.
• Misconceptions About “Good Debt” vs. “Bad Debt”: Not all borrowing is harmful—some debt can actually build wealth.

Understanding Good Debt in Real Estate

Good debt is an investment that has the potential to increase your net worth or generate long-term income. When used strategically, real estate debt often falls into this category. Here’s why:

Leverage: The Power Multiplier

Leverage allows you to control a larger asset with a smaller initial investment. In real estate, this means you can purchase properties worth much more than your available cash, potentially amplifying your returns. For example, putting down 20% on a $500,000 property gives you control of the entire asset, and any appreciation applies to the full value—not just your initial investment.

Cash Flow Potential

Rental properties can provide consistent passive income, helping to cover mortgage payments and expenses while potentially leaving you with positive cash flow. This steady income stream can reduce financial stress and improve your overall return on investment.

Appreciation Over Time

Real estate typically appreciates over time, increasing your equity and net worth as you pay down the mortgage. But where does this appreciation come from? There are two key drivers:

• Inflation and Currency Debasement: As governments print more money, the purchasing power of the dollar decreases. This drives up the prices of tangible assets like real estate, which act as a hedge against inflation. For example, if you take out a $400,000 mortgage today, inflation ensures that those dollars become “cheaper” over time, meaning you’re effectively paying back the loan with dollars that are worth less in the future.
• Supply and Demand Dynamics: Population growth, urbanization, and limited land supply create upward pressure on property values. Even modest annual appreciation rates can lead to significant gains over the long term.

Here’s the math behind it: If you buy a property for $500,000 and it appreciates at just 3% annually, its value will grow to approximately $672,000 in 10 years. Meanwhile, the $400,000 mortgage you took out remains fixed (assuming a fixed-rate loan), meaning the real cost of your debt decreases over time due to inflation. This dynamic allows you to build wealth while reducing the burden of your loan.

Tax Benefits

Real estate investments offer numerous tax advantages, including deductions for mortgage interest, property taxes, and depreciation. These benefits can significantly improve your overall returns and reduce your taxable income.

Strategies for Using Debt Wisely in Real Estate

To harness the power of debt in real estate while minimizing risks, consider these strategies:

1. Conduct Thorough Due Diligence

Before investing, research local market conditions, economic trends, and property specifics. Thorough inspections and assessments can help identify potential issues early on, saving you from costly surprises later.

2. Diversify Your Real Estate Portfolio

Spread your investments across different types of properties and locations to minimize risk exposure. This strategy can help protect you from market downturns in specific areas and ensure a more stable income stream.

3. Maintain Adequate Cash Reserves

Always keep a financial cushion to cover unexpected expenses or periods of vacancy. This can help you avoid defaulting on your loans during challenging times and ensure your investments remain sustainable.

4. Choose the Right Financing Options

Explore various lending options and choose those that align with your investment goals. Fixed-rate mortgages can provide stability, while adjustable-rate mortgages might offer lower initial payments—each has its pros and cons depending on your strategy.

5. Focus on Cash Flow Positive Properties

Prioritize investments that generate positive cash flow from the start. This ensures that rental income covers your mortgage payments and other expenses, reducing financial strain and improving your overall returns.

6. Implement Effective Risk Management Strategies

Develop comprehensive safety plans, review contracts thoroughly, and maintain proper insurance coverage to protect your investments. A proactive approach to risk management can save you from costly mistakes.

The Six Pillars of Successful Real Estate Investing with Debt

1. Leverage: Use borrowed funds to amplify your returns with minimal upfront capital.
2. Cash Flow: Generate consistent rental income to cover expenses and build wealth.
3. Appreciation: Benefit from increasing property values over time.
4. Tax Benefits: Take advantage of various deductions to improve your overall returns.
5. Equity Build-Up: As you pay down your mortgage, you increase your ownership stake.
6. Inflation Hedge: Real estate often outpaces inflation, protecting your purchasing power.

Mitigating Risks When Using Debt in Real Estate

While using debt in real estate can be powerful, it’s crucial to manage risks effectively:

• Conduct Regular Market Analysis: Stay informed about local and national real estate trends to make data-driven decisions.
• Maintain Properties Diligently: Regular maintenance and upgrades can help preserve property value and attract quality tenants.
• Build a Strong Team: Surround yourself with experienced professionals, including real estate agents, property managers, and financial advisors.
• Plan for Market Fluctuations: Have contingency plans in place for potential market downturns or changes in your financial situation.

Conclusion: Embracing Good Debt for Real Estate Success

Using debt to invest in real estate doesn’t have to be scary. When approached with knowledge, strategy, and careful planning, it can be a powerful tool for building long-term wealth. By understanding the concept of good debt, implementing sound investment strategies, and effectively managing risks, you can leverage debt to create a robust real estate portfolio that generates passive income and builds equity over time.

Think of it this way: When you take on good debt backed by real property, you’re essentially betting on the value of tangible assets over the declining value of fiat currency. As inflation erodes the dollar’s purchasing power, your property’s value rises, and the real cost of your debt decreases. This creates a win-win scenario where your assets appreciate while your liabilities depreciate in real terms.

If you’re ready to take the next step toward financial independence, consider exploring how real estate can fit into your wealth-building strategy. Start by educating yourself on market trends, analyzing potential properties, and consulting with financial professionals to create a plan that aligns with your goals. Remember, the key to success lies in making informed decisions and embracing the power of good debt to secure your financial future.

The Power of Good Debt: Building Wealth Through Real Estate and Leverage

When most people think of debt, they associate it with stress, financial strain, and something to avoid at all costs. However, not all debt is bad. In fact, good debt—when used strategically—can be one of the most powerful tools for building wealth. 

By leveraging debt to acquire valuable assets like real estate, you can take advantage of tax benefits, hedge against inflation, and grow your net worth over time. Let’s dive into how good debt works, why it’s so effective in real estate, and how you can use it to achieve financial success.

What Is Good Debt?

Good debt is borrowing that helps you generate income or build long-term wealth. Unlike bad debt—such as high-interest credit card balances used for discretionary spending—good debt is tied to investments that appreciate in value or provide consistent cash flow. Examples include mortgages, business loans, and student loans for education that lead to higher earning potential.

In the context of real estate, good debt allows you to purchase properties that generate rental income or appreciate over time. For instance, taking out a mortgage to buy a rental property lets you use other people’s money (the bank’s or a private lender) to acquire an asset that grows in value while producing passive income. This is the essence of using debt wisely to build wealth.

The Role of Leverage in Real Estate

Leverage is the practice of using borrowed funds to amplify your purchasing power and investment returns. In real estate, leverage allows you to control a larger asset with a smaller initial investment. For example, by putting down 20% on a property and financing the remaining 80%, any appreciation in the property’s value applies to the total value—not just your initial investment.

Why Leverage Works So Well in Real Estate

• Increased Potential Returns: If a $500,000 property appreciates by 5% annually, that’s $25,000 in gains. With 20% down ($100,000), your return on investment is 25%, far higher than if you’d paid in cash.
• Diversification: Leverage enables you to invest in multiple properties instead of tying up all your capital in one asset.
• Cash Flow: Rental income from tenants can cover mortgage payments and other expenses while leaving you with positive cash flow.
• Tax Benefits: Mortgage interest and depreciation are often tax-deductible, reducing your taxable income.

By using leverage wisely, you can grow your real estate portfolio faster and build long-term wealth.

The Tax Advantages of Borrowing

One of the most overlooked benefits of good debt is its favorable tax treatment. When you borrow money to invest in real estate, you can take advantage of several tax-saving opportunities:

• Mortgage Interest Deduction: The interest paid on loans for investment properties is often tax-deductible, lowering your taxable income.
• Depreciation: You can deduct a portion of the property’s value each year as it "depreciates," even if its market value is rising.
• Capital Gains Tax Deferral: Strategies like 1031 exchanges allow you to defer taxes on profits when selling one property and reinvesting in another.

These tax advantages make real estate one of the most tax-efficient ways to build wealth over time.

Inflation and Currency Debasement: Your Secret Allies

Many people fear inflation because it erodes the purchasing power of money. However, for those who understand how to use good debt strategically, inflation can actually work in your favor.

How Inflation Helps Borrowers

• Fixed-Rate Loans Become Cheaper Over Time: If you lock in a mortgage at today’s rates, inflation reduces the real cost of those payments over time.
• Asset Appreciation Outpaces Inflation: Real estate tends to appreciate at or above the rate of inflation, preserving and growing your wealth.
• Debasement Benefits Borrowers: Fiat currency loses value over time due to government policies like money printing (COVID!). By borrowing money today to acquire appreciating assets, you’re effectively paying back loans with cheaper dollars tomorrow.

While many people seek security by saving money in bank accounts that lose value due to inflation, savvy investors borrow strategically to acquire assets that hedge against this very phenomenon.

Why Saving Money Isn’t Enough

Traditional financial advice encourages saving money as a path to security. But in a world where fiat currencies are constantly losing value due to inflation and debasement, saving alone won’t build wealth.

The Case Against Saving

• Savings accounts offer minimal interest rates that don’t keep up with inflation.
• Cash loses purchasing power over time.
• Saving delays wealth-building opportunities, as it takes longer to accumulate enough capital for investments.

Instead of focusing solely on saving money, consider borrowing strategically to acquire assets like real estate that grow in value and generate income.

Building Wealth Through Good Debt

To achieve financial freedom, it’s essential to shift your mindset from avoiding debt to embracing good debt as a tool for building wealth. Here’s how:

1. Identify Quality Assets: Focus on investments like real estate that appreciate over time and produce cash flow.
2. Borrow Strategically: Use fixed-rate loans with manageable terms to minimize risk.
3. Leverage Tax Benefits: Work with a tax professional to maximize deductions and minimize liabilities.
4. Hedge Against Inflation: Invest in assets that grow faster than inflation erodes currency value.
5. Think Long-Term: Wealth-building through good debt requires patience and discipline but pays off significantly over time.

Final Thoughts (Not Financial Advice)

Good debt is more than just borrowing—it’s about using leverage intelligently to acquire assets that build wealth while protecting against inflation and currency debasement. By shifting your focus from saving money to borrowing wisely, you can take control of your financial future.

However, this strategy isn’t without risks. Always conduct thorough research, consult financial professionals, and ensure your investments align with your risk tolerance and long-term goals.  This is important!

Remember: The goal isn’t just financial security—it’s financial freedom through smart borrowing and asset acquisition.

What Are Your Thoughts? Using good debt to build wealth through real estate isn’t a one-size-fits-all strategy. Everyone’s financial situation and goals are different. Have you used leverage to invest in real estate or other assets? What challenges or successes have you experienced? Share your thoughts, questions, or stories in the comments below—we’d love to hear from you!

Residential Real Estate Market Update: February 2025

The real estate market in early 2025 is shaping up to be a mix of opportunities and challenges. With mortgage rates still elevated, home prices continuing their gradual rise, and inventory levels shifting, both buyers and sellers need to stay informed. Let’s dive into the latest trends and what they mean for you.

Home Prices: Slow but Steady Growth

National home prices have seen steady appreciation, with an annual growth rate of 3.4% at the end of 2024. CoreLogic predicts a modest dip of 0.2% from December 2024 to January 2025, followed by a 4.1% increase by the end of this year. This suggests a market that’s stabilizing rather than experiencing extreme highs or lows.

For buyers, this means home values aren’t skyrocketing like they did during the pandemic, but affordability remains an issue. Sellers, on the other hand, can still expect their property values to hold firm, though pricing competitively will be key.

Mortgage Rates and Affordability

The average 30-year fixed mortgage rate is still hovering above 6%, making homeownership more expensive compared to the historically low rates seen in previous years. However, experts anticipate a gradual decline in rates throughout 2025, which could provide some relief to buyers on the fence.

Higher borrowing costs mean first-time buyers need to budget carefully, considering not just the mortgage payment but also rising insurance and property tax costs. Those looking to refinance may find better opportunities later in the year if rates trend downward as predicted.

Housing Inventory and Market Activity

One significant shift in 2025 is the increase in available homes. Inventory levels are projected to rise by 11.7% compared to last year, offering buyers more choices. However, demand has softened in some regions. In the Tri-Cities area, for example, home sales were down 25% in January compared to the previous month.

More inventory is generally good news for buyers, as it can reduce bidding wars and stabilize home prices. Sellers should be aware that with more competition, pricing their homes appropriately and ensuring they’re in top condition will be crucial for attracting offers.

Regional Spotlight: California and the Bay Area

The California housing market remains a mixed bag. While some counties are seeing price gains, others are stabilizing or experiencing slight declines. The Bay Area, in particular, continues to be a high-cost market, but with mortgage rates still high, some areas are seeing longer days on market and more price adjustments.

For potential buyers in California, this could be a window of opportunity to negotiate better deals. Sellers, meanwhile, need to be strategic with pricing and marketing to stand out in a more competitive environment.

Policy Changes Affecting Real Estate

Federal and local policies are playing an increasingly important role in shaping the housing market. The Federal Reserve recently introduced stress test scenarios for major banks, assessing their ability to withstand downturns in both residential and commercial real estate. While this doesn’t directly impact homebuyers, it signals the government’s concern about economic stability and housing affordability.

On a local level, zoning reforms are gaining traction. Cambridge, Massachusetts, recently ended single-family-only zoning, allowing for higher-density housing developments. Similar initiatives in other cities could increase housing supply and improve affordability over time.

Looking Ahead: What to Expect in 2025

• Gradual mortgage rate declines – This could make homeownership slightly more affordable later in the year.
• More inventory on the market – Giving buyers more choices and potentially moderating price growth.
• Policy changes impacting housing development – Which could affect affordability and market accessibility.
• Regional variability – Some markets will remain competitive, while others may see cooling trends.

Final Thoughts

The residential real estate market in February 2025 presents both challenges and opportunities. Buyers should keep an eye on interest rates and explore markets with increasing inventory. Sellers need to be strategic with pricing and marketing as competition rises.

Whether you’re buying, selling, or investing, staying informed on market trends is crucial. As always, working with a knowledgeable real estate professional can help you navigate the shifting landscape and make the best decisions for your situation.

Despite a Cooling Real Estate Market, Billionaire Grant Cardone Predicts Investors Will Come to the Rescue

Billionaire Grant Cardone Predicts Investors Will Come to the Rescue

The real estate market is a key indicator of the health of the economy, and when it's in a slump, it can have a domino effect on other industries. The current market conditions have left many homeowners, buyers, and investors feeling uncertain and hesitant.

Buyers are looking for deals, not wanting to pay full price, and sellers have been, thus far, reluctant in taking less for their home than what they "feel" it's worth - especially after the big runup most local US housing markets saw during the pandemic.

Housing prices sticky on the way down

There's always an emotional component to buying or selling one's home, so prices are usually "sticky" on the way down.  It's a hard pill for most to swallow that you're going to get less for your home today than yesterday, so the natural tendency is to wait "in hopes" that the "perfect" offer comes in.

In an appreciating market, procrastination can be your friend.  In a depreciating housing market, price reductions may not even keep up with or get you out in front of falling prices.  There's always a lag between what's happening on the ground today and when the data is released, so we must use data, not our emotions, to project out future possibilities and probabilities to better guide our decisions.

Housing inventory supply and demand stalemate 

The emotional dynamic is even more in play today because housing inventory levels remain historically low which is strongly overshadowing the increasing headwinds in the residential housing market.  In particular, affordability continues to erode as the Fed remains steadfast in raising interest rates to fulfil their promise to do whatever it takes to curb inflation.

Watch what they do as it will clue us in and significantly impact the direction of the market.  As long as they remain restrictive in their policies, that will force a continued cooling of the housing market (again, with a lag effect when it comes to their policies actually impacting home prices).

Until then, there's a stalemate unique to this housing market that we didn't see back in 2008.  Since many potential sellers locked in 2-4% mortgage interest rates over the past few years and their home is worth substantially more today, they don't have to sell.  And, in most cases, they're not as they'd have to buy less of a home (due to the price appreciation over the last few years) and do so with mortgage interest rates now over 6% (resulting in a significantly higher monthly payment).

Ultimately, the erosion in price will come when this stalemate breaks.  For now, the bulk of the housing market is made up from "transactions of necessity" (people having to relocate for work, family circumstances, etc.), so most local housing markets are seeing falling prices, but they aren't dropping as quickly or as much as some expected.

What will the spring housing market bring us?

In fact, in many local housing markets, there's been an uptick in demand this early spring, but there hasn't been a flood of homes hitting the market.  With spring approaching, how this plays out will also give us a better feel for what's to come.

Will we see the typical seasonal trend of an increasing number of homes hitting the market this spring?  And, what will happen with buyer demand if interest rates keep rising?  Even though buyer demand has dried up considerably, the right home, in the right market, is still selling with multiple offers - the Sacramento real estate market is one such example highlighted by Ryan Lundquist a Sacramento appraiser and a great follow on Twitter - @SacAppraiser).

Inventory levels are key to 2023 home prices

Again, the key to 2023 home prices is seeing what unfolds with inventory levels and buyer demand.  As it sits today, these historically low inventory levels are keeping the housing market propped up to a large extent, so it will take time, but billionaire investor and entrepreneur Grant Cardone believes that investors will play a vital role in reviving this slowing real estate market when that time comes.

Economists have been calling for a housing crash for several months. Some even predicted that home prices would fall by as much as 30% in 2023. While these claims are understandable considering that rising mortgage rates have priced many would-be buyers out of the market, it appears that a different scenario is beginning to play out.

Best-selling author and real estate fund manager Grant Cardone agrees that the housing market is in trouble, but points out that investors will create enough demand to keep the market from crashing.

“Banks don’t trust borrowers, and those they do trust will have to pay. This will move homeowners to the sidelines and slowly reduce home prices,” Cardone said. “Investors will step in to pick up single-family homes at lower prices with less competition. That being said, there will be no housing crash! Investors, like myself, will save the day and step in to buy the homes, put renters in place and enjoy them for the cash flow, not the kitchens and cabinets.” - Yahoo! Finance

The Interplay of Supply and Demand: Understanding San Francisco's High Housing Prices

San Francisco Bay Area Sky High Real Estate Prices

San Francisco has long been known for its high cost of living, especially when it comes to housing. In recent years, the city's housing market has become even more expensive, with prices continuing to rise. This can largely be attributed to the interplay of supply and demand in the city's housing market.

Supply and demand are two key factors that impact the price of housing in San Francisco. When demand for housing in the city is high and supply is low, prices tend to go up. Conversely, when demand is low and supply is high, prices tend to go down. This is the basic economics of the housing market.

There are a few reasons why the supply of housing in San Francisco has not kept up with demand. One major factor is the city's restrictive zoning laws and regulations, which make it difficult to build new housing. In addition, the cost of construction in San Francisco is notoriously high, which further limits the amount of new housing that is built.

Another factor contributing to the high cost of housing in San Francisco is the city's strong job market. Many tech companies are based in the Bay Area, which has led to an influx of highly paid workers who are willing to pay top dollar for housing. This increased demand for housing has put further pressure on prices.

Additionally, San Francisco has limited geographic space, which means that the supply of available land for new housing is limited. This has led to increased competition for existing housing units, which further drives up prices.

Overall, the high cost of housing in San Francisco is largely driven by the interplay of supply and demand in the city's housing market. While there are a variety of factors that impact the supply of housing in the city, the limited supply of land, restrictive zoning laws, and high construction costs are major contributors. Meanwhile, the city's strong job market and high demand for housing among highly paid workers also drive up prices. As a result, housing in San Francisco remains one of the most expensive in the country.

Even with people leaving the San Francisco Bay area, prices remain elevated because of the huge supply and demand imbalance:

"More than 90,000 people left Silicon Valley during the first two years of the COVID-19 pandemic, according to an annual report that found a slowing “exodus” has reverted the tech center’s population to 2013 levels.

A net total of 43,800 residents moved out of the region from July 2021 through June 2022, the fourth consecutive year that the region’s overall population has shrunk and the second year that net domestic migration topped 40,000, according to the Silicon Valley Index. The annual look at the health of the region found housing prices and job numbers continuing to rise well into last year, even as the number of people in the region returned to levels not seen since Google Glass still had a chance to be the next big thing." - MarketWatch

To expand on these dynamics even further, @Mikesimonsen, Co-founder CEO Altos Research, has a great Twitter thread on how home prices can "... still be so unaffordable when the population is declining?"

In short, easy as Mike notes, "The median home can (forever?) remain unaffordable to the median income in the Bay Area because only the richest 2000 can buy."

Again, there are countless variables at play in any local housing market, but at the end of the day supply and demand rules the roost and strongly overshadows many extenuating circumstances.

When you have so many people chasing such a limited supply, there's always a group doing well (good economy or bad) to create a market that wouldn't otherwise exist if there wasn't such a large housing supply / demand imbalance.

Don't lose sight of this otherwise your perspective will be skewed towards what makes sense comparatively even though the same dynamics don't exist across all housing markets!

Unlocking the Secrets of Success in Real Estate Investing: Insights from Brandon Turner

Real estate investing is a popular choice for many people looking to build wealth and secure their financial future. However, despite its potential rewards, the majority of people who venture into this field fail to achieve their goals. Why is this the case? What are the keys to success in real estate investing? In this blog post, we delve into these questions and more as we explore the video "Why Most Won’t Succeed in Real Estate Investing with Brandon Turner."

Who is Brandon Turner?

Brandon Turner is a well-known real estate investor, author, and educator. He is a co-host of the BiggerPockets podcast, a popular resource for real estate investors, and has written several books on real estate investing. In the video, Brandon provides valuable insights and advice on why most people fail in real estate investing and how to increase the chances of success in this field.

Real Estate Education and Preparation

One of the key takeaways from the video is the importance of education and preparation. According to Brandon, many people jump into real estate investing without fully understanding the risks and rewards involved. To succeed in this field, it is essential to educate yourself on the various investment strategies, as well as the legal and financial aspects of real estate investing. It is also important to have a clear understanding of your goals and what you hope to achieve through your investments.

Discipline and Perseverance to Become a Real Estate Pro

Another important factor that Brandon highlights in the video is the need for discipline and perseverance. Real estate investing is not a get-rich-quick scheme, and success in this field often requires hard work, patience, and persistence. It is important to have a long-term outlook and to be willing to weather the ups and downs of the market.  

The Magic Happens When You Put in the Hard Work

This is key.  It requires work.  Deals don't fall on your lap while you're sitting on the couch hoping for something to role your way.  Most people are drawn in because of the potential "rags to riches", but don't realize real estate doesn't turn into a "money tree" without tilling the ground, planting the seeds, and nurturing the seeds until your trees mature enough to bare fruit.  Again, this doesn't happen overnight.  Once most realize this, they move on and lose any shot at living up to their potential. 

Networking and Building Relationships to Build Your Real Estate Business

In addition to education and perseverance, Brandon also stresses the importance of networking and building relationships in the real estate industry. Having a solid network of professionals, such as real estate agents, mortgage brokers, and contractors, can help you make informed decisions and find the best investment opportunities.

Take Action

Finally, Brandon emphasizes the importance of taking action. No amount of knowledge or preparation will lead to success if you don’t take the necessary steps to put your plans into action. Whether it's finding your first investment property or expanding your portfolio, it is essential to take calculated risks and be willing to put in the effort required to succeed.

This BiggerPockets video, "Why Most Won’t Succeed in Real Estate Investing with Brandon Turner" provides valuable insights into the keys to success in real estate investing. From education and preparation to discipline and perseverance, to networking and taking action, Brandon provides a comprehensive overview of what it takes to succeed in this challenging but rewarding field.

Remember, none of this becomes a reality without taking what you've learned and putting it to use.  Again, the magic happens in the work.  Doing the small things and building the good habits.  Doing this consistently is no secret.  The secret is most won't play the long game to achieve their goals, but I trust that won't be you!

S&P Case-Shiller Housing Price Index - October 26, 2010 Release

S&P/Case-Shiller Home Price Indices - Prices stable today and headed lower tomorrow was the story of the last housing report.  Today, as expected by most analysts, the report points to housing prices heading lower again.

"A disappointing report. Home prices broadly declined in August. Seventeen of the 20 cities and both Composites saw a weakening in year-over-year figures, as compared to July, indicating that the housing market continues to bounce along the recent lows," says David M. Blitzer, Chairman of the Index Committee at Standard & Poor's. Over the last four months both the 10- and 20-City Composites show slowing growth, after sustaining consistent gains since their April 2009 troughs.

"The month-over-month growth rates tell the same story. Fifteen of the 20 MSAs and the two Composites saw a decline in the month of August as compared to July levels. The 10- and 20-City Composites fell 0.1% and 0.2%, respectively. Indeed, the housing market appears to have stabilized at new lows. At this time, it does not seem that any of the markets are hanging on to the temporary momentum caused by the homebuyers' tax credits."

(S&P/Case-Shiller Home Price Indices - 

Click on chart for larger image in same window)

In consideration of current economic conditions and recent housing data that continues to point towards increasing inventory levels in many locales, the downward pricing trend highlighted in this report should continue to be reflected in the next S&P / Case-Shiller release.

Actual S&P/Case-Shiller Housing Price Index PDF report: "Home Prices Increases Slow Down in August According to the S&P/Case-Shiller Home Price Indices".

More to come ...

CoreLogic: Home Price Index for August 2010

According to the CoreLogic Home Price Index released reflecting August 2010 data, home prices declined 1.5% year over year nationally and values appear to be be trending lower:

"Price declines are geographically expanding as 78 out of the largest 100 metropolitan areas are experiencing declines, up from 58 just one month ago” said Mark Fleming, chief economist for CoreLogic."

12 Month House Price Index Change: Single-family combined series

(Click on chart for larger image in same window)

12 Month House Price Index Change: Single-family combined excluding distressed series.

(Click on chart for larger image in same window.)

From a national perspective, CoreLogic's report continues to paint a grim housing picture and the trending lower numbers point to more housing woes ahead.

Will the Real Owner Please Stand Up?

It's a three ring foreclosure circus. It would actually be funny if this really didn't impact and negatively affect real people.

When will these institutions every be held accountable for their criminal practices? What a mess!

The Mortgage Mess

It's definitely good politics to claim that you have to protect the private sector, lumping small business owners who truly compete in a free market with the uber / multinational corporations that successfully lobby our congressmen and women on a daily basis to write the laws that create the market they want.

Many good arguments / points made in this video regarding the banks, the mortgage mess, and the housing market, but minutes 6:00 - 7:00 is definitely a good listen.

As Barry Ritholtz noted towards the end of the video, "we have the best Senate money can buy!"

Disgusting, but quite clearly true if you remotely pay attention to how things really operate!

Do Housing Fundamentals Really Matter?

If you're like me, you spend countless hours pouring through data trying to make sense of the underlying economic fundamentals to understand what's happening today and what the data means for tomorrow.  In short, we're always looking for the trend to clue us into what we hope to be sound investment decisions.

Needless to say, rolling out of bed and waiving your finger in the air to determine which way the wind is blowing is not going to be a consistently successful approach.  However, at a certain point, we can outsmart ourselves by basing our decisions solely on what the underlying fundamentals are telling us.

How many home buyers are basing their decisions on the latest S&P/Case-Shiller housing price index?  Gee, let's hold off on making this purchase since the S&P/Case-Shiller index is a lagging housing indicator.  Looks like Diesel consumption picked up for the month of .....  More QE2 is coming in Q4?  Temporary Census Bureau jobs are beginning to clear the system and will have less of an impact on the employment picture moving forward.  You get the point.

Spending time to get a grasp on the fundamentals definitely helps to give clarity to our decisions, but what good are our decisions if the overwhelming majority isn't using the same data and is making decisions based on a completely different perspective?  Isn't this different perspective just as important (if not more important) to understand and to take into consideration?

Courtesy of Jim the Realtor, check out the video below regarding an auction of a lot in Southern California.  Jim notes that the data points to a certain number regarding the sale of the lot, but the actual final sales price defies the data.  In fact, pushing forward, the sale (if it goes through) will greatly skew the data / comps for the next potential buyer in the same neighborhood.

Human nature and the countless intangibles drove this sale while the data floated out the window ... If you think this is an isolated incident or this only happens in high-end micro housing markets, think again!

S&P Case-Shiller Housing Price Index - September 28, 2010 Release

S&P/Case-Shiller Home Price Indices - Prices stable today and headed lower tomorrow?

New York, September 28, 2010 – Data through July 2010, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that the annual growth rates in 16 of the 20 MSAs and the 10- and 20-City Composites slowed in July compared to June 2010. The 10-City Composite is up 4.1% and the 20-City Composite is up 3.2% from where they were in July 2009. For June they were reported as +5.0% and +4.2%, respectively. Although home prices increased in most markets in July versus June, 15 MSAs and both Composites saw these monthly rates moderate in July.

(S&P/Case-Shiller Home Price Indices - 

Click on chart for larger image in same window)

The general consensus seems to be that the next S&P/Case-Shiller report will begin, on balance, to show declining numbers.

I agree ...

The September 28, 2010 S&P/Case Shiller report represents data from May, June, and July. The next report will highlight data from June, July, and August.  Couple extremely weak new home sales and existing home sales in July with typical seasonally slower sales in August, and we have the right recipe for further housing price declines as noted by the S&P/Case-Shiller housing price index.  Furthermore, recent economic data doesn't give us any reason to believe that the future housing price numbers will be bolstered by an unexpected positive economic influence.  In fact, there will still be marginal support from the federal housing tax credit since the closing date to receive the credit on a home purchased during the incentive period has been pushed out to September 30, 2010.

The chart below will give you a look at what happened in your neighborhood.

(S&P/Case-Shiller Home Prices -

Click on chart for larger image in same window)

Actual S&P/Case-Shiller Housing Price Index PDF: - Home Prices Remain Stable Around Recent Lows According to the S&P/Case-Shiller Home Price Indices

Housing Bubble Rant - My Two Cents

During my usual day to day scanning of real estate and economic news, I came across this opinion article over at Inman news, "When will real estate prices rise? Ask the feds".  The author, Sean O’Toole, makes some points regarding past and present U.S. housing bubbles that brought some underlying frustrations to the surface regarding my personal feelings on "how things really work".  My frustrations are not directed at O'Toole!

Initially, O'Toole asserts that past and present housing bubbles are not the result of "irrational behavior on the part of buyers ...".

Obviously, financial bubbles couldn't be created without a market of buyers buying.  Furthermore, this housing bubble wouldn't have been helped along if buyers didn't get caught up in the buying frenzy based on the "whose house increased in value more in the past two weeks" cocktail party conversations.  "We're all investors now!"  But, let's face it, this is human nature.

As I'm sure many of you have, I've read countless articles and endless reactions by people who elevate themselves to a high and mighty platform to simply pass negative judgement on the vast majority who got caught in this housing bubble / financial trap.  Oftentimes, these very same individuals have what I consider to be an extremely arrogant attitude and a "how is this going to negatively impact me" perspective on many things.  They also tend to bunch everyone into a group of "should have known better", "greedy individuals", whose "stupidity and laziness chasing a cheap buck" is now costing them money through government action bailing out the masses.  Are they right?  Are these "should have known better" people who fell into the trap the real problem?  Is the government to blame?  O'Toole does direct some blame to the government:

"Every single significant increase in home prices in the last 100 years was immediately preceded by government intervention or stimulus. The evidence is irrefutable. Every time the government works to make housing more affordable, prices rise.

This actually makes perfect sense. Buyers always have, and always will, buy as much home as their banker tells them they can afford. If you make home financing more affordable, you increase the amount buyers can pay. But instead of getting more home for their money, prices simply rise to reflect the change."

Let's take O'Toole's point one important step further to illustrate why those with the high and mighty attitudes I described above are, in my opinion, largely off base in attacking the wrong people while giving a pass to those at the epicenter of many of these problems.  On its most basic level, you can deduce nearly any argument down to simplistic, black and white, terms, but, in reality the housing / economic woes are the result of systemic issues now wreaking havoc in this country.  Unfortunately, the overwhelming message and media blitz is to look towards fixing your neighbor to solve the problem.  Businesses walk away from assets each and every day, yet many cast morality judgement and consider their neighbor to be the irresponsible one for walking away from their poorly performing asset.

To illustrate this, let's start with a simple question.  Why wouldn't you buy a house during the housing boom if you had the means?

Housing values were consistently climbing and the access to easy, affordable money, bought you much more.  Unless you are inclined to follow the financial markets / trends on a regular basis, many people wouldn't have been concerned or even thinking about what may happen a few years down the road.  By no means do I believe that ignorance makes for a good excuse, but the reality is that, for various reasons, people aren't informed on many issues.  We see this type of behavior every day on countless topics.  Even though we can agree that people should take the time, the reality is they don't.  Business professionals know this and shouldn't use this angle as a means to exploit the unsuspecting.  However, all too often, they do.  And, those who enabled these exotic loans knew this and used every opportunity to exploit this weakness to generate a dollar.  These enablers didn't do the right thing and inform their clients that the short-term benefits of these types of loans could and, most likely, would turn into a detrimental tool in the long run.  Furthermore, and most importantly, let us not forget that the push to move these types of loans came from the very top echelon of these financial organizations.  Again, it's human nature to trust the experts you turn to.  In fact, I'm sure many of you have been in a situation where you have lost some money because you have gone the extra step to put trust, loyalty, and giving someone a chance, over what you would knowingly consider the "smart" business move.

If you were told, "the loan is good, but beware that ...." many people would have thought twice before proceeding.  Of course, plenty of people would have ignored the caution, but, I believe a larger group would have listened to basic common sense and reason.  If your breaker goes out in your electrical panel and the electrician tells you the entire panel needs to be replaced because there's an inherent fire hazard, would you replace the panel?  Some would, other's would opt to get a second opinion.  If the second opinion came in the same, would you now replace the panel?  Most of the remaining people would based on the advice their trusted experts gave them.  And, this is what happened during the recent housing boom.  The majority of experts you went to, regardless of lending institution, hyped the very same products that are now destroying countless lives.  So let's look at it again.  As a consumer, it appears like the environment to buy a home is good.  Prices are going up, your money is stretching to buy you more, and to verify your sentiments, your mortgage advisor gives you the thumbs up, "I've got just the right mortgage to get you what you want!".  After leaving Wells Fargo, they tell you the same at CHASE, Wachovia, Washington Mutual, Bank of America, and the list goes on and on.

O'Toole finalizes his analysis by stating:

"Hopefully at this point you are seeing a bigger picture. Home-price appreciation is largely just inflation, and housing bubbles are a recurring failure of our government to learn from its past mistakes. Rather than looking at the big picture, government officials and our representatives continue to jeopardize our future with the latest quick fix to a problem they don't seem to understand."

In wrapping up my thoughts, I don't totally agree on this point made by O'Toole.  Yes, the government is involved in pushing through policy, however, who is really influencing our government?  Where do these policies and laws come from?  Doesn't the countless millions of dollars being spent and lobbied every day by the uber / multinational corporations have a major impact on dictating government policy?  How many members on the Hill are influenced to the point where the decisions they make don't necessary fall in line with what would be the best policy for the majority of people?  It's tough to get re-elected these days without a few dollars backing you, isn't it?

At the end of the day, we the people need to address the real problems faced by this country not the contrived crap about your neighbor being the root of your problems because he or she belongs to a different religion, has a sexual preference you're not aligned with, looks differently than you, etc.  This is the smoke and mirrors that the powers at be want us to be consumed with.  When we're arguing amongst ourselves, we don't have time to pay attention to the real issues.  Don't continue to fall for this.  Yes, your neighbor got sucked into the trap, but your neighbor didn't create the environment that enabled the known behavior and certainly wasn't the root cause of this housing / financial mess.

Nobody wants the government involved unless it is an issue that is near and dear to their hearts and promotes their ideology!  "Let the free markets work," they cry!  Wouldn't that be great, a world where the uber / multinational corporations competed in a free market like the rest of us rather than spending unlimited funds to write the laws that enable their predatory behavior and create the market they're looking for.

Disclaimer:  I am a business owner.  My livelihood comes from two CA S-corporations.  I'm not anti-business, I'm anti-unfair monopolistic practices that take advantage of the masses to pad the financial bottom line.  The majority of people work hard for an honest living and I am in business to make money, but not at the expense of using my knowledge and expertise to fool unsuspecting individuals into paying me for a detrimental or unnecessary service.

For Sale By Owner Sign Says it All

When you can't get along with your neighbor, get a sign made, plop it in the yard, and move on.  It's that simple!

Buy Now!

Based on being a "natural contrarian", Brett Arends is giving the buy sign for housing.  He's not suggesting that homes have bottomed in every market, but does believe it's a good time to look in many, especially since mortgage rates remain extremely low.

Needless to say each purchase / deal has to be evaluated on its own merits, but I do agree with many of the points that Arends makes.  Even if homes haven't quite bottomed in your market, most likely they have already tanked from boom highs.  Furthermore, the glut of inventory is your friend as a buyer.  Even if homes in your market stand to fall another 10%, what value does this create for you if interest rates move a point higher and tightening supplies force you to submit a strong offer to compete against other competition?

In our own experience in the Phoenix, AZ housing market, it has been tougher to find our opportunities this year due to the huge increase in investor activity.  Even though values have trended lower in some segments of the market, the increased competition has led to higher purchase prices, a decrease in negotiation leverage, and smaller operating margins.

As always, run the scenarios before you make a blanket assertion on whether or not it's the time to buy, since value is not always what it appears to be!
 

Rethinking Homeownership?

A Business Insider article labeled this recent Time Magazine cover story as, "great news for housing market".  Needless to say, you're out of your mind to use a media cover story to guide your home-buying decisions.  There's no doubt that we can outsmart ourselves by complicating matters, but we can certainly do a similar disservice by taking too simplistic of an approach.

Media and sensationalism go hand in hand these days.  These dramatic statements sell product and help the bottom line.  In reality though, if you have the ability to purchase a home (especially if you're a first-time home buyer), should we really believe that buying a property discounted 50% plus at 3.5% - 4.5% interest rates doesn't make sense?  I'm obviously painting with a broad brush and can't speak to the validity of every opportunity in every market, since all deals aren't created equal and there are plenty of homes out there that still shouldn't be purchased despite how far they have already fallen.  However, there are definitely some great housing opportunities out there carrying extremely affordable price tags.  In fact, some price points make it much cheaper to own rather than to rent even when factoring in insurance, property taxes, and maintenance.

So ... no, I'm not rethinking homeownership and neither should you.  The housing picture remains grim, but don't check your brain at the door and get absorbed in this nonsense.  What's next, "Rethinking Investing?".  We all know that financial independence comes from a working wage, right?  Just ask Bill Gates, Warren Buffet, and nearly every other financially well-off individual.

CoreLogic: Home Price Index for July 2010

CoreLogic reported their home price index to be flat for July, 2010 and noted underlying weakness in housing as a growing number of markets are declining since the expiration of the federal tax credit:

SANTA ANA, Calif., September 15, 2010 – CoreLogic (NYSE: CLGX), a leading provider of information, analytics and business services, today released its Home Price Index (HPI) that showed that home prices in the U.S. remained flat in July as transaction volumes continue to decline. This was the first time in five months that no year-over-year gains were reported. According to the CoreLogic HPI, national home prices, including distressed sales showed no change in July 2010 compared to July 2009. June 2010 HPI showed a 2.4 percent* year-over-year gain compared to June 2009.

CoreLogic made it a point to reiterate that the weakness in housing is spreading and the weakness is continuing to grow relative to market conditions a handful of months back:

"Although home prices were flat nationally, the majority of states experienced price declines and price declines are spreading across more geographies relative to a few months ago. Home prices fell in 36 states in July, nearly twice the number in May and the highest since last November when national home prices were declining," said Mark Fleming, chief economist for CoreLogic.

12 Month House Price Index Change: Single-family combined series

(Click on chart for larger image in same window)

12 Month House Price Index Change: Single-family combined excluding distressed series.

(Click on chart for larger image in same window.)

This report continues to highlight the difficulties that remain in place for the U.S. housing market.  The lack of jobs and disappearing stimulus show how fragile the overall housing market is.  Even the absurdly low interest rates aren't enough to offset the poor underlying fundamentals.

Click the following link to view the actual CoreLogic report: CoreLogic Home Price Index Remained Flat in July [Actual PDF Report].

Real Estate and Economic Links

BiggerPockets.com:
* How Does Your Bank Define “Performing Loan”?

Inman News:
* Near-record affordability in real estate

HousingDoom.com:

* Is Using A “Victim Strategy” In The Housing Market So Bad?

MSNBC.com:
* Home lending pace rises; most are refinancings

Calculated Risk:
* Lawler: Again on Existing Home Months’ Supply: What’s “Normal?”
* Fed's Beige Book: Continued growth, but "widespread signs of a deceleration"

HousingWire.com:
* Double dip in home prices coming in 2011: Clear Capital

Real Estate and Economic Links

BiggerPockets.com:
* Housing Market Insight – Week of September 6th

Inman News:
* Most bankers don't see credit easing

RealtyTimes.com:
* From "Double Dip" to Double Opportunity

New York Times (Economix):
* Mortgage Rates and Home Prices
* Interest Rates and House Prices: A Murky World

Calculated Risk:
* Mortgage Rates and Home Prices
* Housing Starts and Vacant Units
* Housing Completions will set new record low in 2010

Landlord, Tenant, and an Eviction on Rye

This kind of news gets to be awfully exasperating. When do people learn to simply get along and work together? Does everything have to come down to a lawsuit? Are the issues needing to be addressed here so insurmountable that all parties being impacted can't get into a room, have a civil discussion, and find an amicable solution? Oh right, I'm assuming that people are willing to find some middle ground. How simplistic and foolish of me!