7 Horrible Mistakes You're Making With phuket property

Posted by Keith on June 10th, 2021

After the high inflation rates of the 1970s had been defeated by the Federal Reserve's monetary manipulations, the home foreclosure rate began to rise precipitously. In fact, this rate tripled during the 1980s, despite stronger economic growth in other sectors of the market and the fact that unemployment rates began to fall during the decade.

One main factor that drove the rising foreclosure rates seems to have been the stagnating or declining of real estate values in housing markets throughout the country. High inflation was no longer driving up prices for goods, while collapses in the oil, gold, and other commodities decreased the amount of financial protection a home could offer in the absence of rising prices every year. The lack of appreciation in the housing market generally began to contribute to rising foreclosure rates

Although unemployment actually fell during the 1980s, one important trend had emerged since the previous decade. More workers began to go into business for themselves, which meant that they were much more exposed to the direct working of the market. With the shift in the 1980s from production economy to a service-based one, as well, homeowners could face severe financial disturbances but still count themselves as employed, albeit in a failing business they owned. Moreover, business failure rates did increase during the 1980s.

Thus, more homeowners became business owners, tying their personal financial fortune directly to the sector of the economy they had entered into. A failure of the small business could quickly push the household into foreclosure, and changing market conditions throughout the deregulation period and beyond guaranteed that many companies would not be able to react to the new paradigm.

Two other trends that bear mentioning is the growing dependency on consumer credit and the declining savings rate that occurred during the 1980s. Americans began their love affair with credit cards, and had learned from the previous decade that saving money in a bank could result in the value of that account being wiped out due to inflation or bank failure. So consumers began borrowing money and spending their own incomes on paying off these loans instead of saving for any kind of emergency. When a business failed or property values decreased, foreclosure became more likely.

The mortgage industry had also begun to change in the 1980s compared to decades before. Savings and Loan institutions had been freed from most regulatory burdens and began to use the remaining laws to engage in fraudulent loan schemes, mostly on commercial property, while Wall Street's securitization of mortgages kicked into higher gear. The use of mortgage servicing companies by mortgage holders also grew during the decade.

These three trends virtually set up the economy for a deceptive end run around American homeowners, although the final piece of the puzzle had not been inserted yet. But it was waiting at the Federal Reserve as of 1987, with the appointment of Alan Greenspan as chairman of the Fed.

From opening the flood gates at every sign of economic slowdown and injecting liquidity into the market to lowering interest rates too far for too long, Wall Street banking firms had found a friend in Greenspan. Moral hazard was routinely rewarded in the subsequent decade, from the Mexican peso crisis, to the Asian crisis, to the LTCM crisis, to the Russian debt default.

But during the 1980s, the housing market was increasingly set up for failure, with a tripling of foreclosure rates in the decade. Deregulation meant that large corporations were freed from laws designed to protect consumers, although it also meant that the government would step back into the picture to protect these businesses from failure or accusations of fraud or corruption. For all intents and purposes, deregulation meant giving politically connected businesses free rein to prey upon Americans with no potential for public backlash against such practices.

It was not until the 1990s, though, that the housing market boom began, and not until the 2000s that it turned into the largest speculative bubble the world had ever seen. The 1980s, though, began the necessary trends in the economy, in government policies, and in the personal habits of Americans. Once a few other bubbles had burst, there was seemingly no other option left to obtain massive profits than to blow up the real estate market.

The investment value of a property can only be measured against other investment opportunities available to an investor. If investors can earn 4.5% by investing in government treasuries, they will demand a higher return to invest in an asset as volatile and as illiquid as residential real estate. The rate of return an investor demands is called a "discount rate."

The discount rate is different for each investor as each will have different tolerances for risk. During the Great Housing Bubble discount rates on most asset classes were at historic lows due to excess liquidity in capital markets. The discount rate used in the analysis is the variable with the greatest impact on the investment value. Because of the risks of investing in residential real estate, a strong argument can be made that a low discount rate is unwarranted and investors would typically demand higher rates of return for assuming the inherent risks. A low discount rate exaggerates the investment premium and makes an investment appear more valuable, and a high discount rate underestimates the investment premium and makes an investment appear less valuable.

The US Department of the Treasury sells a product called Treasury Inflation-Protected Securities (TIPS). The principal of a TIPS increases with inflation, and it pays a semi-annual interest payment providing a return on the investment. When a TIPS matures, they buyer paid the adjusted principal or original principal, whichever is greater. This is a risk-free investment guaranteed to grow with the rate of inflation. The rate of interest is very low, but since the principal grows with inflation, it provides a return just over the rate of inflation. Houses have historically appreciated at just over the rate of inflation as well; therefore a risk-free investment in TIPS provides a similar rate of asset appreciation as residential real estate (approximately 4.5%). Despite their similarities, TIPS are a much more desirable investment because the value is not very volatile, and TIPS are much easier and less expensive to buy and sell. Residential real estate values are notoriously volatile, particularly in coastal regions. Houses have high transaction costs, and they can be very difficult to sell in a bear market. It is not appropriate to use a 4.5% rate similar to the yield on TIPS or the rate of appreciation of residential real estate as the discount rate in a proper value analysis.

Another convenient discount rate to use when assessing the value of residential real estate is the interest rate on the loan used to acquire the property. Borrowed money costs money in the form of interest payments. A homebuyer can pay down the loan on the property and earn a return on that money equal to the interest on the loan as money not spent. Eliminating interest expense provides a return on investment equal to the interest rate. Interest rates during the Great Housing Bubble on 30-year fixed-rate mortgages dropped below 6%. An argument can be made that 6% is an appropriate discount rate; however, 6% interest rates are near historic lows, and interest rates are likely to be higher in the future. Interest rates stabilized in the mid 80s after the spike of the early 80s to quell inflation. The average contract mortgage interest rate from 1986 to 2007 was 8.0%. If a discount rate matching the loan interest rate is used in a value analysis, it is more appropriate to use 8% than 6%.

Investors in residential real estate (those who invest in rental property to obtain cashflow) typically ignore any resale value appreciation. These investors want to receive cash from rental in excess of the costs of ownership to provide a return on their investment. Despite their different emphasis for achieving a return, the discount rates these investors use may be the most appropriate because it is for the same asset class. Cashflow investors in rental real estate have already discounted for the risks of price volatility and illiquidity. Historically, investors in cashflow producing real estate have demanded returns of near 12%. During the Great Housing bubble, these rates declined to as low as 6% for class "A" apartments in บ้านจัดสรรภูเก็ต certain California markets. It is likely that discount rates will rise back to their historic norms in the aftermath of the bubble. If a discount rate is used matching that of cashflow investors in residential real estate, a rate of 12% should be used.

Once money is sunk into residential real estate, it can only be extracted through borrowing, which has its own costs, or sale. Money put into residential real estate is money taken away from a competing investment. When buyers are facing a rent versus own decision, they may choose to rent and put their down payment and investment premium into a completely different asset class with even higher returns. This money could go into high yield bonds, market index funds or mutual funds, commodities, or any of a variety of high-risk, high-return investment vehicles. An argument can be made that the discount rate should approximate the long-term return on high yield alternative investments, perhaps as high as 15% or 18%. Although an individual investor may forego these investment opportunities to purchase residential real estate, it is not appropriate to use discount rates this high because many of these investments are riskier and more volatile than residential real estate.

The discount rate is the most important