Primary Buyer Support Levels In Residential Real Estate Markets

By Author: Lawrence Roberts
Total Articles: 4762
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The two true real estate investor types, Rent Savers and Cashflow Investors, move in to a market and create a bottom when comparative rents come into alignment with the total cost of ownership. Rent Savers enter the market and begin purchasing real estate. It makes sense for them to do so because ownership becomes a savings over renting (hence the term Rent Saver).

The "return" on the investment is the hedge against inflation the Rent Saver obtains by locking in the cost of housing with a 30-year, fixed-rate, fully-amortized mortgage. As rents in the area continue to increase, these costs are not borne by the Rent Saver. There will be some buyers who enter at higher prices, but there will not be enough of them to stabilize the market. It takes a decline in prices to where it is less expensive to own than to rent before enough new buyers enter the market to create a bottom.

However, there are some properties that Rent Savers will not purchase because they really do not want to live in them. This includes transitory housing like apartments or small apartment-like condominiums. Prices on these properties will generally ...
... drop below the 154 price-to-rent breakeven for owner occupants until they reach price levels where Cashflow Investors will purchase them as rental properties. Since these investors do not want to merely break even, the price must be low enough for the rental rate to exceed the cost of ownership by enough to provide a return on the investor's capital. Historically, price-to-rent ratios from 100-120 are required to create the conditions necessary to attract Cashflow Investors' capital.

When it comes time to consider purchasing a house, each person should evaluate if their motivation is one of an investor or one of a speculator. Investment in real estate requires an accurate assessment of the revenue (or savings) and the costs associated with the property. If the cashflow from the property warrants the purchase of the investment, without regard to future asset value, then it is a true investment, and the risks of ownership are much reduced. If the property's asset resale value were to decline, the investment value would still be there, and the investor would feel no pain and no pressure to sell.

In contrast, speculation is a loser's game, and if the motivation is to capture a windfall from future appreciation, there is a good chance it may not work out as planned because the emotions of a speculator will cause a sale at the worst possible time. A few can put their emotions aside and properly evaluate the market and trade the asset, but most who profit from speculation simply sell at the right time due to life's circumstances. In short, they get lucky. The people who bought late in the rally and are holding on to the asset while they drift further and further underwater, they are not so lucky.
About Author:
Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: http://www.thegreathousingbubble.com/
Read the author's daily dispatches at The Irvine Housing Blog: http://www.irvinehousingblog.com/ Visit Primary Buyer Support Levels in Residential Real Estate Markets.