正文
I have done detailed researches for pricing behavior in metropolitanareas. Especially, I pay attention to pricing trend in good, median andbad neighborhoods. What I found out is that Return on Investment (ROI)is very similar between these different areas if their distance are nottoo far apart (20-25 miles apart at maximum).
For example, in DC area's Maryland suburbs, a house in Rockville's goodarea were priced at 500K in 2000. By 2006, this same house doubled inprice to $1.1 million.
Another house in Germantown (a traditionally blue colar neighborhood)were priced at 190K in 2000. By 2006, it doubled in price to 400K.
Now, fast forward to 2008, the same Rockville house dropped in price to 950K from its peak at 1100K.
The same Germantown house dropped in price to 300K from its peak at 400K.
Here are what we find out:
1) During a good time, a house in lower income area can make the samepercentage appreciation as that in higher income area. But most peoplehave an ** illusion ** that they would make more money by investing ingood area because it went from 500K to 1.1 million, a net profit of600K. Whereas they would make less money in lower income area, forexample, from 190K to 400k, a mere 210K profit. However, themathematical percentage of return is exactly the same: ~100% gain inboth locations. The only difference is that, you can use 500K to buymore than 2x 190K houses. Therefore, the feeling of making more moneysimply is an illusion. You can simply buy more houses in a lower incomearea and achieve the same (if not greater) return, if you plan to do so.
2) During a recession time, like from 2006 to 2008, a house inGermantown dropped from 400K to 300K, but the Rockville house didn'treally budge. A house in good area can hold its value better, as itappears to be. The percentage drop so far from 2006 to 2008 is verysmall for good area compared to that for less-good area.
3) In a recession, it's always that the house prices in outer suburbsdropped harder and they happen earlier. Good areas always seem to lagbad area by 2 years in terms of price drop. It's often the sign of abottom when a house in good areas started to drop significantly after along hold-up. I am not sure if that Rockville house will ever go backto 500K, but as this housing collapse continues to unfold, the chanceis definitely there. The concept that a house in good area can alwayshold on to original peak pricing level is an illusion. History from myresearch shows no evidence for that. The significant lag time betweenthese locations may have created some illusion for people living ingood areas wishing that their house never suffer the same fate as theirneighbors in lower income area. But these wishes can't be reliablycounted upon, honestly speaking.
4) It's very true that when recession is over, when the market slowlyrecovers, the house in good area may be the last one to drop, but itcan often be the first one to rise in price. History has shown thatclearly.
5) With similar 2 year lag time, prices in lower income, outer suburbanareas will start to rise to catch up the trend in good area, leading upto another bubble in price. By the peak of the new cycle, bothlocations show almost idential price appreciation in *percentage*, thusyielding mostly the same Return on Investment (ROI).
Conclusion: If you want to buy a house for yourself and your family tolive, you want to buy an expensive house in good area for quality oflife concern mostly, provided that you can afford them. However, if youare a pure investor and you intend to do rental business, investing inlower income area will give you huge advantages in reducing entry cost,reducing carrying cost (mortgage) and increasing cash flow (rent inlower income area is not significantly lower than good area). How many950K house can you buy in good area? you are lucky to get a loan to buyjust one, let alone an extremely poor cash flow situation. Nobody insane mind would buy a $950K house for rental. Using that same 950Kborrowing power, you can buy 2, 3, even 4 lower priced houses in lowerincome area. That's the game investors play. Therefore, never confusewho you are and what you intend to do, to invest? or to live inyourself and family.
For example, in DC area's Maryland suburbs, a house in Rockville's goodarea were priced at 500K in 2000. By 2006, this same house doubled inprice to $1.1 million.
Another house in Germantown (a traditionally blue colar neighborhood)were priced at 190K in 2000. By 2006, it doubled in price to 400K.
Now, fast forward to 2008, the same Rockville house dropped in price to 950K from its peak at 1100K.
The same Germantown house dropped in price to 300K from its peak at 400K.
Here are what we find out:
1) During a good time, a house in lower income area can make the samepercentage appreciation as that in higher income area. But most peoplehave an ** illusion ** that they would make more money by investing ingood area because it went from 500K to 1.1 million, a net profit of600K. Whereas they would make less money in lower income area, forexample, from 190K to 400k, a mere 210K profit. However, themathematical percentage of return is exactly the same: ~100% gain inboth locations. The only difference is that, you can use 500K to buymore than 2x 190K houses. Therefore, the feeling of making more moneysimply is an illusion. You can simply buy more houses in a lower incomearea and achieve the same (if not greater) return, if you plan to do so.
2) During a recession time, like from 2006 to 2008, a house inGermantown dropped from 400K to 300K, but the Rockville house didn'treally budge. A house in good area can hold its value better, as itappears to be. The percentage drop so far from 2006 to 2008 is verysmall for good area compared to that for less-good area.
3) In a recession, it's always that the house prices in outer suburbsdropped harder and they happen earlier. Good areas always seem to lagbad area by 2 years in terms of price drop. It's often the sign of abottom when a house in good areas started to drop significantly after along hold-up. I am not sure if that Rockville house will ever go backto 500K, but as this housing collapse continues to unfold, the chanceis definitely there. The concept that a house in good area can alwayshold on to original peak pricing level is an illusion. History from myresearch shows no evidence for that. The significant lag time betweenthese locations may have created some illusion for people living ingood areas wishing that their house never suffer the same fate as theirneighbors in lower income area. But these wishes can't be reliablycounted upon, honestly speaking.
4) It's very true that when recession is over, when the market slowlyrecovers, the house in good area may be the last one to drop, but itcan often be the first one to rise in price. History has shown thatclearly.
5) With similar 2 year lag time, prices in lower income, outer suburbanareas will start to rise to catch up the trend in good area, leading upto another bubble in price. By the peak of the new cycle, bothlocations show almost idential price appreciation in *percentage*, thusyielding mostly the same Return on Investment (ROI).
Conclusion: If you want to buy a house for yourself and your family tolive, you want to buy an expensive house in good area for quality oflife concern mostly, provided that you can afford them. However, if youare a pure investor and you intend to do rental business, investing inlower income area will give you huge advantages in reducing entry cost,reducing carrying cost (mortgage) and increasing cash flow (rent inlower income area is not significantly lower than good area). How many950K house can you buy in good area? you are lucky to get a loan to buyjust one, let alone an extremely poor cash flow situation. Nobody insane mind would buy a $950K house for rental. Using that same 950Kborrowing power, you can buy 2, 3, even 4 lower priced houses in lowerincome area. That's the game investors play. Therefore, never confusewho you are and what you intend to do, to invest? or to live inyourself and family.
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