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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: Crusader who wrote (37446)8/1/2005 3:18:22 AM
From: John Vosilla  Read Replies (1) of 110194
 
"Of course there is speculation that will definitely become subdued but in the end I just find it hard to believe that house prices will drop in value below replacement cost which keeps rising"

In most bubble markets you'll find much of the value is in the land. To get a bottom for median priced property assume land is zero and what you have left is depreciated replacement cost of improvements, which could be anywhere from $50-100 psf + cost to build infrastructure such as paved roads, water, sewer and impact fees which could run $20-60k. Then I would also look at the operating cash flow the property would generate and give it a multiple that yields a return of the risk free 10 year + 4% which today gives us 8.5% yield or a multiple of about 12. Under either valuation matrix most bubble market residential RE can easily drop 50-75% before any support at a bottom. Anyone still around from the RTC days knows what I'm talking about and it is very possible it happens again.
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