Six reasons why real estate is a good investment

Times of India, Bangalore trumpetting the cause of the builders. The article is right next to an advertisement from Credai - Karnataka (The builders lobby) which is touting a property mela on the 15th and 16th of August at the Lalit Ashok Hotel. Can someone from Bangalore visit and give us a real report of the ground situation. I'm tired of these soft marketing articles from the Times of India. They are as one-sided as a the coin from Sholay.

This is a good time for investors to buy property as part of a portfolio, says Kavita Sriram
Leading a life of luxury on borrowed money may not always be the right thing to do. How prudent would it be to make an exception on home loans? Should you buy your dream house or invest in some piece of land? Is it time to invest in real estate?

Stability
Real estate is less volatile than stocks. While real estate may be less liquid, and you may have to wait indefinitely before a buyer agrees to purchase your property for the price you seek, the prices are not as volatile as the stock markets. The transition towards a correction or boom takes place gradually, giving ample time for investors to read the transition and safeguard their positions.

Price correction
The economic slowdown had an impact on this sector. The rates have come down over the past few months. Wouldn't it make a lot more sense to invest in real estate when a price correction is taking place rather than in a heated market?
People with a large disposable income can explore investing in real estate for diversification of their assets. Lowering home loan interest rates and lower property prices makes it an opportunity hard to resist.

Good in recession
Some investments are considered safe in times of recession like precious metals and foreign currencies. In this list of investments that are popular during times of financial uncertainty, real estate can be included. Focus on achieving positive monthly cash flows rather than immediate appreciation. Cash flow refers to the amount of cash coming in relative to the amount going out.

Hedge against inflation
Real estate and gold are considered a hedge against forces of inflation. Inflation has led to the rupee value depreciating and property prices travelling upwards. Property investments are typically held over a long term.

Tax benefits
Home loan borrowers are eligible for tax deductions on their interest and principal repayments subject to a certain limit. Further, you can use the rental income from the property to make a portion of the EMI repayments.

Good returns in long term
Investments in property has always proved to be stable and yielded good returns over the long term. With lesser risk and probability of higher returns, this is a much favoured investment option.
Stimulus packages announced by the government are expected to show good results and bolster the economy. Cement, a key construction material, has indicated a growth of 12 percent in May. This is enough indicator of vigorous economic activity.
Borrow as little as possible and consider investing in property.

Underwater Mortgages Reach Epidemic Levels

Heard on the radio today. Caller bought a house in Merced, CA for 300k in 2005, now the house is worth 150k. Multiply this situation for all purchases made in 2005 in Merced. Isn't everyone who bought a house in merced in the last 4 years under water ? When the loan goes into foreclosure the caller loses all the equity he has paid up to the bank and the interest payments for sure. All housing loans are structured to pay of the interest first so the principal payment to the house is negligible.

Now assuming an area like Cupertino, CA which hasnt' seen such a drop, maybe 10%. By definition if the owner's equity portion on the house in the first few years is negligible so without doubt this buyer is under water too. By this metric all housing transactions made in the past 4 years should leave their owners under water. Houses prices have dropped to levels more then the outstanding loan amount because of negligible payments made towards the principal.

Lets random sample a house in Santa Clara, CA using Zillow in one of the sought of areas by Indians and Chinese first generation immigrants.

06/19/2009: $660,000

03/14/2001: $650,000

4% closing costs of $650k = $26,000

Total cost (2001) = $676,000

Downpayment ~10% = 76,000

Total Loan ~90% = 60,0000

Total interest paid at 5.4 % till date = 243,311.60

Total principal paid till date thru monthy payments = 80,000

Property taxes = 8,000 x 8 = ~64,000

Income Tax Interest deduction in taxes at 30% = -80,000

House maintainence cost 3,000 x 8 = 24,000

Total equity in the house = 76k + 80k = 156k

Total cost of ownership = 243k + 64k + 24k = 331k

Outstanding loan =520k

Total Loss = 660 -(520k + 331k)  + 80k(IT deduction) = -111k

Total Loss for owner over 8 years = ~$111,000

Lets assume owner had rented the place for 2k a month as an average over 8 years = 2 x 12 x 8 = $ 192k total

Assume the owner saved the difference between mortgage and the rent (3.3k -2k) = 1.3 x12 x 8 = $125k

Total savings in the bank of renter  = downpayment + difference = 76 + 124k = 200k

Assuming an average return of 3% over 8 years of 200k, yielding simple interest = 48k

Total savings with renter in the bank = ~248,000

http://www.zillow.com/homedetails/charts/19597851_zpid,1year_chartDuration/

24x7 Wallst reports

Underwater mortgages hurt home sales and increase delinquencies and foreclosures.

People who have to pay their mortgage holder to sell their homes are less likely to be sellers. A home sold for $200,000 when it has a $250,000 mortgage is a home that the owner may not be able to afford to sell.

People living in homes with monthly mortgage payment that stretch their abilities to cover their living costs may stay in homes that they believe have a lot of equity and where a sale will eventually bring them a profit. That hope for a bonanza may encourage them to go through the agony of making large payments. People who have no hope of making money on their homes are more likely to be willing to abandon them or be kicked out.

Both of these trends make it more likely that the housing sales pace will continue to be slow and property values will not recover.

Real estate research firm Zillow says that 23% of mortgages are now underwater. The company adds that the number could be 30% a year from now.

One of the major reasons for the trouble is that home values fell 12.1% year-over-year in Q2 to a Zillow Home Value Index of $186,500, resulting in a total 22.3% drop in value since the market peaked in mid-2006. Twenty-two percent of all transactions in June were foreclosures, a possible sign that people are not willing to fight until the end to save their houses.