Where can I find the best real estate bargains on single family homes?

Where are the best Real Estate bargains now for single family homes? Or what is the best way to research that answer as a lay person with little real estate knowledge?”

The Harvard MBA Says:

I’m hardly a real estate expert, but as the masthead says, you can ask me anything!

I have been following the housing bubble for years, and I do think that in the inevitable overcorrection, there will be some great bargains.  The trick, of course, is figuring out when things have bottomed out.  There’s an old investor’s expression that I think is quite apt: “Don’t try to catch a falling knife.”

Every housing bust follows the same script.  First, transaction volume dries up as buyers refuse to pay, and sellers refuse to drop their prices.  Eventually, prices decline while volume remains low (the phase we’re in now).  The bubble hasn’t truly ended until volume picks up again (the precursor to rising prices).

In addition, homes, like any other asset class, can be valued using objective criteria, allowing you to tell if they are over- or undervalued.  Here, there are two primary criteria to apply. 

The first is to look at the ratio of median home price to median income.  When the ratio is high by historical standards, homes are overvalued.  When the ratio is low, they are undervalued.  Homes in Silicon Valley have a median cost somewhere in the $1 million range.  Homes in the Houston area have a median cost somewhere in the $200K range.  Even if the median income in Silicon Valley is twice that of Houston, housing still looks overvalued.

The second is to look at the ratio between the cost of owning a home, versus the equivalent rent.  In an efficient market, the costs should be roughly equal.  The cost to rent my home in Palo Alto is around $2,600 per month.  The cost to buy it (assuming a 100% mortgage–not that I recommend such tactics, but it’s better for an apples-to-apples comparison) is almost $7,000 per month.  Even accounting for the mortgage interest deduction (which most people overestimate), it’s clear that Palo Alto housing is still overvalued.

Armed with these principles in mind, there’s a simple way to find housing markets that are truly bargains.  What you’ll need are historical data on housing prices, transaction volumes, median income, and median rent.  The ideal time to buy is when:

  • Transaction volumes are rising rapidly
  • The ratio of home prices to incomes is historically low
  • The ratio of home prices to rents is historically low

I don’t have time to find sources for all this information, but I suspect that you’ll be able to get most of this data from free sources on the Internet.

To these quantitative measures, I’ll also add one qualitative measure: If people say that real-estate investing is dead, start buying like crazy.  During a bubble, a sure sign of a market top is when people start saying the fateful words, “This time, it’s different.”  After a bubble, a sure sign of a market bottom is when people start saying the fateful words, “X investing is dead.”

Good luck!

5 Comments

  1. Ryan
    Posted April 7, 2008 at 3:55 pm | Permalink

    Not to beat you up but I think the question states “where are the best real estate bargains now for single family homes? ” I think the simple answer is all over the United States there are opportunities to buy real estate at discounted prices.

    Using Google to search for realtor’s in your area and using sites like forsalebyowner.com and realtor.com will put you on the right track to start to learn about real estate in your area or an area you are looking to move into.

    The next question “what is the best way to research…”?

    Again use the web and call starving real estate agents on the phone, they will return your call and will be the best source of information. A real estate agent is going to sell to you retail but travel down the rabbit hole further it will start to become obvious there are opportunities to buy at wholesale or even FIRE SALE!

    As an MBA student I can see how your answer translates for academic reasons, however it totally misses the point from a practical standpoint.

  2. admin
    Posted April 10, 2008 at 4:38 pm | Permalink

    Ryan,

    Thanks for the comment. You’re right, I assumed that the question related to determining whether or not to invest, not how to find specific properties for sale.

    I think your advice there is sound. People shouldn’t forget to check Craigslist as well, which is also a great source of information.

  3. Brett
    Posted April 22, 2008 at 2:28 am | Permalink

    Thank you! Very good information there. And Ryan’s follow up was perceptive as well. Using those qualifiers mentioned it will help in knowing when to pull the trigger as I didn’t really know how to assess what a good deal is. Buy low sell high is pretty obvious but the mechanics of how to do thatis what people need to know.

  4. Market Dragon
    Posted June 26, 2008 at 5:05 am | Permalink

    Obviously the question is about single family homes (SFH). But since the questioner admits to having little real estate knowledge, he should consider carefully the ramifications of SFH ownership versus other forms of residential real estate investing.

    While SFH’s are the first thing many newbie real estate investors consider, as a whole they are seldom the best way to invest, if your goal from investing is to obtain a high rental yield. This is because SFH’s have high maintainence costs and it is very difficult to obtain the economies of scale in maintenance and repairs with a SFH that you can get with a larger building. (One possible exception would be if you could buy multiple SFH’s in the same vicinity).

    The classic way some people do make money from SFH’s is through buying a rundown property, investing lots of sweat equity in fixing it up, then selling at a profit. Great if your home repair knowledge is already very good or you are willing to learn. This is essentially buy low/sell high investing rather than investing for income.

    There are also some unique ways to make money with SFH’s that require a bit of research or local knowlege on the investor’s part. For example, a morning spent at the town hall building investigating local codes can yield some interesting possibilities. For example, can a single family house be converted to a two family? Can a lot be divided into two? Most likely the answer is “No”, but sometimes it is yes, creating several new avenues of profit.

    But speaking generally, the type of investment I’d recommend to a real estate newbie is a 2 family or 3 family house. They can be financed as easily as a single family house and allow one the opportunity both to have a place to live and get one’s feet wet at being a landlord. Living in the house you are likely to be around to nip any problems in the bud - and guaranteed there you will find problems.

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