Value Real Estate

by | Jan 18, 2011 | Archives

How can one value real estate?  See below one way to protect against the risk of  falling real estate.

Our upcoming February 11-12 International Investing Seminar looks at five ways to earn in today’s low return environment and yet protect against inflation.

#1: Multi Currency Investing.

#2: Commodities.

#3: Living in Low Cost Places like Ecuador.

#4: Your Own Micro Business.

#5: Real Estate.

However with real estate we have this pesky question… what is the true value?

Real estate prices have fallen a lot… but can they fall more?  The article below suggests… yes. 


Our February seminar will be held in Mt. Dora’s finest historic Donnelly House which is now the Mt. Dora Masonic Hall.    

A recent Wall Street Journal article entitled “Home Prices Are Still Too High. They would have to decline another 20% just to get back to the historical trend line.” by Peter Schiff suggest that real estate can fall further.  Here are excerpts:

Most economists concede that a lasting general recovery is unlikely without a recovery in the housing market. A marked increase in defaults and foreclosures from today’s already elevated levels could produce losses that overwhelm banks and trigger another, deeper financial crisis. Study after study has shown that defaults go up when falling prices put mortgage holders “underwater.” As a result, the trajectory of home prices has tremendous economic significance.

Earlier this year market observers breathed easier when national prices stabilized. But the “robo-signing”-induced slowdown in the foreclosure market, the recent upward spike in home mortgage rates, and third quarter 2010 declines in the Standard & Poor’s Case–Shiller home-price index—including very bad October numbers reported this week—have sparked concerns that a “double dip” in home prices is probable. A longer-term view of home price trends should sharply magnify this fear.

Even those economists worried about renewed price dips would be unlikely to believe that the vicious contractions of 2007 and 2008 (where prices fell about 30% nationally in just two years) could return. But they underestimate how distorted the market had become and how little it has since normalized.

By all accounts, the home price boom that began in January 1998, when the previous 1989 peak was finally surpassed, and topped out in June 2006 was extraordinary. The 173% gain in the Case-Shiller 10-City Index (the only monthly data metric that predates the year 2000) in those nine years averaged an eye-popping 19.2% per year. As we know now, those gains had very little to do with market fundamentals, and everything to do with distortionary government policies that set off a national mania for real-estate wealth and a torrent of temporarily easy credit.

Valuing real estate is a lot like valuing gold… difficult.  Gold prices were manipulated for so long that it’s hard to find a starting point.  Real estate has so many variables and appreciated so high.  

We tried to asnwer the question “How much is gold worth now?” by comparing its price with other commodities and services since 1942.  That comparison can help us understand why US real estate (overall) is still too high.

Here is that comparison from the recent message Gold Summary 2011.

Prices (1942 to 1967 source: “Remember When” by Seek Publishing 2007 to 2010: US Bureau of Labor)


The biggest increase was Harvard tuition which is up 80 times More on that in a later message.

House prices from 1942 until 2010 increased 67 times.

Gold rose 41 times.

Cars jumped 30 times.

Movies  27 times.

Wages increased 24 times.

Rentals are up 20 times.

Gas 20 times.

Postage 15 times.

Bread 15 times.

Pound of sugar 10 times.

Hamburger about 9 times.

Coffee, bacon, eggs all about 8 times increase.

Milk increased only five times.

This comparison agrees with Schiff’s article above that there may be a 20% real estate over valuation.  The comparison suggests that gold may be a bit overvalued in the $1,380 price range and that real estate is overvalued even more.

So how can we invest in real estate and get good deals?

One way to get the best value in real estate is to buy and fix up real estate.  Merri and I always have a fixer upper project going.

This, for some, is a great way to earn and live in a very tax protected way.

Merri and I are currently redoing a big, old house near Mt. Dora.

Here is the house we are redoing now.


Merri and I love new ventures and bringing old things back into service… old houses. ancient knowledge about better living… even old hotels to live better in.   This is fun to us… enormously satisfying, great for the environment and the process has treated us very well financially.

On top of this, the US government in its infinite wisdom makes this process, if the fixer uppers are your residence, tax protected.

I have told each of my children… if they love the idea… the most tax efficient way to live is to buy an older house… live in it and fix it, and then sell it after two years.  Capital gains (up to $250,000) on your residence is tax free.  Where else can you earn $125,000 a year and not owe a penny of income or capital gains tax?

Some of our children have done well with this advice.

Fixer uppers offer five features I love in business… fun… satisfaction… environmental soundness… profits and tax protection.

If you love fixing up… there are incredible values on the real estate market now. It is difficult to sell new homes in good shape… much less places with problems.  You get extra low prices and yet can increase value dramatically with your energy and a can of paint!  Few outlays bring as much return on investment as a small… a few bucks a gallon… investment in Sherwin Williams, Behr or Valspar.


Read the entire Wall Street Journal article on real estate value here.