Is it time to buy real estate?

[lazygood4nothinbum]

Palm Beach real estate industry escapes housing bubble

"It's the opposite of a bubble," Evans said. "Demand is increasing while supply is decreasing...

...the median sale price of single-family homes was up $870,000 to $4.67 million in the first quarter of the year...investors recognize the growth potential for Palm Beach real estate and are putting their money there instead of in the stock market or other investments....

guess i'll have to take you guys on a phototour of palm beach one of these days.

[inquisitive]

I see what you are saying, Marquette, I was using an incorrect idea of market value.

As a soon-to-be homebuyer, I was trying to figure out how to get a good deal on a house, and I came across erroneous ideas of market value in books and in newspaper articles that factored into my thinking. My plan was to look at the prices of similar houses in the neighborhood that sold within the past 6 months and then buy at less than that, but what about a few years ago when everyone was buying into certain neighborhoods at really high prices which have since come down tremendously? Had I compared myself to the other homebuyers I would have thought I was getting a good deal when in fact I was overpaying. The other thing is that what was market value a year ago has no relationship to what is market value now, so trying to get a house at any percentage less than current "estimated market value" might not even work. There are ebbs and flows in market value, and as someone pointed out, inefficiencies.

It seems to me the best idea is to come up with an idea of what the market value of a particular property will be in a few years and then try to buy at a discount now from that future estimated market value. Since I have no idea how to do this at the current time, I am going to look at listings of houses in my price range and ~20% greater than my price range, which could be significantly discounted from a year ago, as well as look at bank-owned foreclosures, preforeclosures, auctions, and other kinds of bargain areas. Then I can make a comparison of all of these kinds of houses to come up with the best deal.

[Marquette]

Inquisitive. Keep in mind, since the definition of market value includes a buyer and seller that aren't under duress, you can generally get a much better deal as a buyer when you're not under duress and the seller is ;-)

I think your approach is solid. Just stay rational and walk away if the deal doesn't get to where you want it to be. We've had several people laugh at our offers only to finally end up selling to someone else for less than we had put on the table.

[Abreutime]

Originally Posted by inquisitive

Let's take an extreme example. Someone who knows nothing about houses walks into an open house of a FSBO in new development where every other house has sold for $200,000. This new house is the exact same size and specifications. This naive buyer seems very interested in the house and the builder says he can have it for $300,000, which he pays. The market value of that house is now $300,000?

Take bidding wars where the price goes up because of emotions and irrationality. The house is not worth that much, it only sold for that amount because of emotional attachments.

If someone purchased a house for $300,000 and now cannot sell it for $270,000, I don't consider $300,000 the market value even though that is what he paid for it. The value might only be $260,000.

The market value of a house is the amount of money the house could fetch if you were to sell it. So, if someone pays 300K for a house that sells for 200K ordinarily, the market price is whatever the house could be resold for (closer to 200K than 300K). Selling a house for 300K to an uninformed buyer does not mean that the market price is now the new sales price, if it would be impossible to find a new buyer for the 300K.

Bidding wars usually reflect rising market values, but not necessarily whatever definition of intrinsic value you're using (ie. some combination of rent ratios and sales prices).