Close to the place I live was a house staying empty for a few years. Once my wife even assumed that it should be demolished completely and lot can be simply used for building a new home. I thought no one is willing to invest in such property because there are plenty of houses around for sale in decent condition.
A few months ago very strange thing happened. On a weekend we took our usual walk around the block and saw people putting new shingles overtop of a roof which, on my opinion, has to be at least partially fixed before covering it with a new roofing materials. Same happened with exterior walls where in some places you literally saw rotten studs and no insulation. In any case, everything was “fixed” pretty much fast and the house with new vinyl siding, replaced windows and 3 - tab asphalt shingles roof was ready for sale. Truly to say if you didn’t see the house before you might even consider purchasing such property.
What was unrealistic is the price – $270,000 for 3 bedrooms 2 bathroom 1,700 house with tiny backyard and a detached two car garage. Compare with many neighborhoods it might even seems like a great deal, but only a year ago houses on same street with no major issues were sold for $160,000 - $180,000. The most interesting part and the whole point of this introduction is that the house was actually sold very fast despite, on my opinion, unreasonably high listing price.
With all that in mind, I want to raise a question which might be interesting not only for those who see the property only as a product to generate some income, but for most of us who are simply buying houses as a place to live.
Do people start buying again just to resell?
I personally know many families got into huge financial troubles just because unwise house purchase, but many individuals made a fortune simply by reselling homes not thinking much into a right moment.
Let’s compare two real life situations.
Mike who earns $60,000/year purchased 2,800 ft2, 4 bedroom house in 2004 for $410,000 with a main reason – to resell it in a few years and get some cash into his pocket. 2007 wasn’t the right time to deal with all selling – buying stuff and property seems like won’t increased in value much. Three years later the house was worth $210,000, but Mike wasn’t qualified to refinance the mortgage and until now (2013) sending unrealistic payments to the bank every month trying to keep the property he even doesn’t need.
At the same time, John who didn’t even have a full time job was able to get a loan in 2004 and purchased tiny house for $175,000. A few months later he realized the property could be sold for $195,000 and John didn’t even hesitate to make some cash. By the time housing market messed up completely he was able to put close to $300.000 on his savings account from flipping houses. But John ended up with owning $410,000 property which he wasn’t able to sell as expected and decided simply to keep it and live in. In 2011 John, who built an excellent credit history and met all the requirements was even able to refinance the house and decrease his monthly payments.
At present time Mike and John own similar homes, but purchasing a house turned differently for both. There are dozens other examples and some people even lost houses because were unable to pay the mortgage.
Now back to the point. It seems like houses start selling again and prices go up. If financial institutions will simplify the process of getting loans house market might grow again. But who actually play main role in price determination? Right, customers or all of us who need a place to live. Does a person who has a steady job with $50,000 yearly salary with not much of prosperity to at least double it in the next couple years has to think about purchasing $350,000 house with a single purpose of reselling?
There are certainly many factors affect the value of a property and it is normal that land as well as houses will increase in price simply because of inflation, but unreasonable increase in cost, not in actual value is definitely anomaly with hard to say whom to blame.
Looking deeper into to the situation many homeowners even didn’t care or were in any meaning affected by this un-normal housing market behavior in the last few years. Buying a house which high probability you can afford for the next 10 or more years is a wise decision no matter what’s going to happened with a market. But purchasing already overpriced 70 years old house and trying to cover mortgage with other types of personal loans while waiting until property will increase in price and can be resell with a profit is one of the most irrational decisions you might come up with.
There is no advices implied and I personally do not care much what my neighbor will pay for his house, but unusual observation made me to edit this post. What will happen next we’ll see in the next few years meanwhile I’m not planning to make a fortune by investing into a new house, but will concentrate on what I can do and predict results with higher accuracy.