How can real estate values be falling or crashing...?

Question

I thought land's value always goes up no matter what. Is it a myth that real estate values will crash, they keep saying that every year but from my experience the housing value always goes up - even if it's a little bit. Isn't there less and less and available as time goes on so wouldn't the value always appreciate.

Answer 1

It's all based on demand.

When more buyers are out than there are homes, it's called a Seller's market.

When more sellers are out there than there are buyres, it's called a Buyer's market.

The real estate values depend less on the value of land and more on the demand of the buyers.

Think of it like Ebay.

Let's say you bought an iPhone and listed it on Ebay. You were the only one, so buyers were lining up trying to win that iPhone! Let's say that you listed it a month after you bought it, so there were thousands being posted as well. Instead of buyers lining up, you have to coax buyers to want you, such as lowering your price or offering more incentives.

Same goes for the real estate.

Answer 2

There will be no percentage drop, across the board. When the stock market "crashes" it means the market value of stocks, on the average in a particular exchange, drops 20% or more. Not all stocks decrease in value under those circumstances. It's just an average. Some companies may go "bust" during a crash and lose all of their value. The value of stocks is easily measured. That is not the case with real estate. While it is unlikely, the average selling price per home in a given area can drop 50%. But you then have to do a comparison to see if you are measuring sales of similar homes. In a down market, cheaper homes will sell quicker than luxury homes, therefore "skewing the curve." For homes, a second factor affecting sales in a down market, is the mortgage balance. People cannot sell homes if they have to accept a price lower than what they owe. Where would they get the money to pay off the balance? Nowhere. In cases like that, on the average, people hold onto their homes until the market goes back up. It always does. Like the stock market.

Answer 3

Real estate is like any other asset -- its price depends on supply and demand -- so it goes up and down like any other market. And it does crash. Before 1929, some properties in the New York area that sold for more than $100,000 dropped to only $10,000 or so during the Great Depression. In my own neighborhood in California, a house near mine went up for sale for over $1 million about six months ago. Now, according to a sales brochure, the price is $660,000. Who knows, it could go much lower if buyers stay away. Property is only worth whatever a buyer and seller agree on, and there is no guarantee it will go up, anymore than there is a guarantee that the Dow Jones Industrials will always go up.

Answer 4

I have been a real estate broker in Texas since 1978. In late 1980's and early 1990's the savings and loan's went broke and the oil business's went broke, a lot of people got laid off and had no money. Huge numbers of houses got foreclosed and sold at much cheaper prices than they had just a few years before.

My brother bought a house in 1986 for 125000 and had to sell it four years later for 105000. In Houston things were worse than here in North Texas, some of their houses sold for half what they had sold for before.

By the very late 1990's things had recovered and people that had hung on could sell for the same price things were worth ten years before. Since then we have gained and done fairly well.

Also I have heard that in Seattle when Boeing was having a rough time it affected their prices and in Detroit when the auto plants closed they had a rough time.

I think that over the long term there is nothing more stable than real estate (our ten year "depression" was very unusual) but over the short term anything can happen.

Answer 5

Supply and demand the price of housing has been going up in double digits, yet income has risen in the 2-3% range add that the costs of fuel heating gas etc has doubled, and taxes have risen at double digit rates have made the home unaffordable to most Americans. The market was propped up by the subprime borrowers who when interest rates rose could no longer afford the costs, and now it is building beyond them. Like in the 90's tech bubble the housing market was in an unsustainable bubble held up by speculators, using the quick flip to get great profits in a short time. Now is the correction period and I do not see it getting better for at least a year, and I do see continued depreciation of the market.

Answer 6

Supply and demand is only one factor is real estate valuation. Values decrease when there is more inventory available than there are buyers. When local economic crisis occur, like a high unemployment rate for example, the value of the property on the open market may decrease as there is a smaller pool of buyers who can obtain financing and more owners who cannot afford to make their payments.

Answer 7

Yes, it is a myth that land value always goes up and never down.

There are environmental factors, economic factors, and others, that can affect the appraisal value.

Don't ever assume that interest rates will never go up to double-digits again.....don't ever assume the real estate market won't go downhill. No one has a crystal ball and predict the future...and it can all change on a dime.

Answer 8

home values do not always go up. If you have alot of homes for sale in a partiular area, or something dramatic happens in the area, such as a major drop in the jobs, or a lot of foreclosures in an area, property values can decrease. For example in Detroit area alot of car manufactors have closed plants, causing not only autoworkers out of jobs, but several other businesses that depended on the autoworkers incomes are closing, alot of houses are for sale, since no one new is moving to the area.

Answer 9

Supply and Demand. In some areas there just appears to always be more demand than the supply.