Friday, April 1, 2011

Real Estate After the Economic Collapse

Hi guys, I’m trying to sep up with the emails. For some reason I got several about real estate after the economic collapse. These two cover the questions others asked as well. If there’s other things you’d like to ask feel free to email me and please give me some time to reply.
Hello Fernando,
Read your book and enjoyed it very much.
Lots of good tips for sure.
Question please:  After 1 to 1, what did real estate prices do? go up? down? stay the same or what?
Hi Loren. Real estate stayed pretty much the same, it kept its value in dollars as the peso collapsed. What happened was that it was already “well priced” to being with. By this I mean that well located, consolidated neighborhoods with a well established reputation were priced accordingly, and new developments were more affordable. There was no real bubble in terms of artificially inflated prices. What happens in USA sometimes is that a developer buys a few hundred acres, build several “Mc. Mansions”, houses that look fancy and expensive, and while big are in fact cheaply made, and pretend to sell it for half a million bucks. Its not realistic to pay 5 times the cost of building for a property that is located in an area where there was just wasteland a few months ago. This is what I mean by unrealistic, inflated prices. We didn’t have that so after 2001 real estate properties didn’t fall, there was no bubble to burst.
Prices did go down some in certain low demand areas but mostly because there was no credit and no money so it was a supply and demand issue. At the same time real estate was one of the few things keeping its value in a country where its currency was turning to toilet paper by the hour. As always people saw brick and mortar as one of the few ways of protecting their savings. Prices dropped 10% give or take right after the December 2001 collapse, but a few months later they went back up. Basically what happens is that real estate kept being sold and priced in US dollars, even after the loss of convertibility. A house that cost USD 100.000 during 1.1 peso /dollar conversion rate still cost USD 100.000 after the collapse with a 4.1 Peso/dollar exchange rate. Even today, real estate and cars are priced in dollars.
Fernando, I’ve been reading your book and consider it very valuable and also entertaining. Thanks for the good read.
I’m curious about some additional detail if you have it. Real estate – what’s the deal. I have a moderately priced home that I still owe a lot on and then a condo that’s a rental that I could conceivably pay off at some point and own free in clear. In the event of a SHTF scenario in the US, do you see rampant foreclosures becoming a serious issue. In other words, for shelter’s sake, would it make sense to own something outright so that it couldn’t as easily be taken away by the govt?
I may have answered my own question since this scenario seems like an obvious “yes, pay it off if you can”. But still, I would appreciate any contect you can give me from your experience.
Thank you – G
Thanks G. Rampant foreclosures will be an issue if that happens, yes. If you understand how these things work, you know the government will do nothing about it.
The government (including the USA gov.) considers that certain part of the society (the richest elite) is “too big to fail”, so they get bailed out, while they consider the middle class, “to lazy to care”, so they work out things so that the middle class/upper middle class and rich ends up bailing out the elite. Actual labor and sacrifice has to come out of somewhere, someone has to get up every morning and “work”, create something of certain commercial worth. It’s the average Joe that ends up paying for these bailouts through higher taxes and inflation.
As this inflation and taxation grows, it will translate into higher rent, so this is a way of you using the tools the system usually uses against you to protect your savings. Your property, that’s real, you renting it is an actual service and that can’t be taken away from you through inflation.
After December 2001, people that couldn’t pay their house loans ended up losing their homes. The banks had made the contracts in dollars, so on one hand a) They converted your dollar accounts to pesos, making you instantly lose 66% of your savings, then a few days later 75% b) at the same time they kept you accountable for the loan you took in dollars. Imagine that for USD 13.000, you had to make 60 monthly payments of USD 359,64.
Only after 6 years did the justice system come up with a resolution, and only for those that bought their first and only house under USD 100.000. In that case you only paid back 1.83 pesos for each dollar owed instead of the 4 pesos the dollar is worth. Again, only for houses under USD 100.000 and first and only homes. If you, say, had asked for a loan already owning another house, then you were treated like a greedy capitalist pig, and the socialist loving banks got paid in full. Ah, the system does work! :-)
Anyway, this may or may not happen in USA if the economy ever collapses in full. For some private debts and certain public banks (state or provincial) , you only paid 1.4 pesos per dollar owed and that was a sweet deal for people that took up loans.
Basically, real estate is a good way to protect your savings when done wisely and it does generate an income that somewhat adjusts itself to inflation. Being conservative and avoiding deals that sound too good to be true is a good guideline.
Take care folks and see you around,

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Anonymous said...

Interestingly my latest copy of "International Living" had a short article about the wine country in northern Argentina. The article dealt with the area around Aranel(?). It also discussed living in BA and the overview was positive as far as living in Argentina was concerned.
I 'spect they were visiting different parts of BA AR then the areas you see, Fer, heh, heh, heh.

FerFAL said...