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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (5719)	10/1/2002 1:01:45 AM
From: Conan	Read Replies (1) \| Respond to of 306849

Elroy: To get at your 2.14% annual return you are assuming that each buyer pays 100% of the purchase price when they buy a home. But most people are paying far less than that... as low as 3% as people here on the thread have noted. So real estate is more like a margin account for most buyers. The returns on capital invested are much better than your 2% number when you take the leverage into consideration. On the downside, your equity can get wiped out very easily in a down market when you have a 90%+ LTV loan. In that situation the owner either has the cash flow to make payments until things turn around OR they mail in the keys to the lender if they have problems, lose their job, etc... Most people are able to avoid the affects of marking the value of the property to market in a sale unless things are really bad in the economy. I look at real estate as a call option on a property where the lender or ultimate buyer of the securitized loan is the final bag holder when things go badly. And as I learned in Wealth and Democracy--which MSI kindly recommended we all read--the goverment has a tendency to bail out the owners of the bag holder when such owners are rich and powerful. Remember the S&L crisis? Conan