I have written many times before that this is NOT the time to buy real estate - even though to many folks it looks cheap.  Here's why:  People are confusing price with value. 

So let's say that you are thinking about investing in a home that is now in foreclosure or offered in a short sale, let’s say just as an example, that the house is in Phoenix, Arizona.  Let's assume that at the all-time high before the crash, it sold for $300,000 and has 3 bedrooms and 2 baths.  Now in foreclosure you can buy it for $150,000.  Wow, you say to yourself  “that’s a 50% discount from what it was worth so it must be a good buy, no?”

Well, no!

You have to ask yourself what you could rent it for.  In other words, since the new mortgage payment will be around $1400 per month including taxes and insurance, can you get that much in rent – especially in a renters market?  Plus on top of that could you get enough rent to reserve for repairs and wear and tear? That would mean that the real number you would need to break even on this property would be about $1600 per month MINIMUM and that does not allow you to reserve for vacancy since there are not that many renters that could afford that price. 

Let's face it; there are not a lot of renters around with 700 plus credit scores.  Now, for many that is for good reason, as they have been caught up in this disaster like the rest of us but others are just plain deadbeats. How would you know?  Don't believe that you can just tell by talking to a prospective renter. Sociopaths are much more charming than honest folk and when they cannot pay the rent, even if they intend to, they will rip the fixtures out of the wall and sell it for scrap while they trash the carpets and God only knows what else. I see questions like this from my members EVERDAY! This is the real world and not Mayberry.

So what would be a real price for this house?  Probably around $60,000 - since you could then find a renter in all likelihood that could pay the $800 per month you would need to provide adequate reserves.  That would mean a discount of 80% from the high. 

Yes, that's what I said, 80%.

Now, realtors and others will say that I am crazy and that real estate prices will never go this low.  I say it is just math.  If the income can't support it without making assumptions like what you might be able to rent it for when things get better (because what if they don't) then I am right.  Don't be a sucker.  Be a good renter for now or live in the house you already own if you can support the value and get ready for further price drops.  One day it will be the right time to invest in real estate.  It is just not now.