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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Crusader who wrote (37446)	7/31/2005 11:14:11 PM
From: Crimson Ghost	Read Replies (1) \| Respond to of 110194

Once house construction slows, replacement costs will drop as well. The current surge in costs reflects the peek of a boom

To: Crusader who wrote (37446)	8/1/2005 3:18:22 AM
From: John Vosilla	Read Replies (1) \| Respond to 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.

To: Crusader who wrote (37446)	8/1/2005 7:55:21 AM
From: Tommaso	Respond to of 110194

>>>how long would house prices be down when the basic raw materials to replace them are rising?<<< I think there is a surplus of housing. There has also been a surplus of demand--up to this point. I know that this is a purely anecdotal piece of evidence, but my closest friend owns three houses, none of them producing enough in the way of rent to be considered and investment. At any given time, two of the three are likely to be standing vacant. When he travels, all three may be vacant. When rising mortgage payments begin to bite, the desire to hold such properties may diminish. The people who would really be hit hard are the speculative builders, many of whom may be ruined.