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Real Estate Prices…

I have been reading the daily news letter from seeking alpha. There are some interesting stories about real estate prices.

I was talking to a guy last week and he was convinced that prices would go up once everyone starts working again.

I believe there are conditions that would cause real estate prices to go up, but I don’t think full employment is one of them.

I believe there is only one thing that can cause real estate prices to go up to previous heights… People have to start viewing real estate as a for profit investment again. This is tricky, because real estate prices need to be affordable so people can afford to buy homes. Then, at the same time, real estate prices need to go up in price so people can justify spending a lot of money buying and maintaining homes.

So let’s think about a very young adult. Let’s think about an 18 year old entry level auto mechanic. The kind of guy that just does brakes or oil changes. I would think this guy would earn about $400 a week.

Let’s think about an entry level home. I would think this is something like a condo or duplex. Maybe a 800-1200 sf home with no or a very small yard.

Let’s try put this puzzle together. So if you take out all taxes (fed, SS, state, gas, sales, tags…) the entry level mechanic brings home around $1200 a month. I would think that he can afford $600 a month MAX. Not a payment of $600 a month, but $600 a month in payment and maintenance. Depending on where you live and how the taxes and HOA cost work, the guy can probably (barely) afford something for about $40K.

The truth is that it probably doesn’t make sense for the guy to pay that much of his money to buy something. He is probably better off just living with his parents or getting roommates at an apartment.

The only way it would make sense is if the price of the house is sure to go up. If he can buy if for $40K and sell it in 2 years for $60K then it makes a lot of sense.

How does that work? Who wants to live in a little place like that? Well, maybe entry level mechanics, but an entry level mechanic can afford $60K.

See the problem?

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