One thing that I don't see mentioned in the media when factoring in value investing in Real Estate is combination of inflation in the dollar and deflation of the real estate market.
A little background first. The CPI is a artificially manipulated inflation figure that doesn't count two important staples which would show true the inflation figure and scare the pants off of people, food and gas. CPI would have you believe inflation is running below 5%, while true CPI is running upwards of 12%. M3 (a best measure of money supply, and important number scratched by the Fed, but still tracked by others) paints a picture to support this as well.
The housing market on the other hand is experiencing deflation. Now approaching close to -30% off peak.
When factoring in value, and how much lower can you go, it is not just based on discount of the property in shear terms of price, but also price properly weighted against the dollar.
Just for an example, not as a actual investment equation, let's say there was a house in 2006 selling for $500,000. To buy it with today's cheaper dollars back then, it would cost you around $590,000. That same $500,000 house is selling for $350,000 today. So you actually got much better than a 30% discount from those peak prices, you got a 41% discount in real value. But we don't like to pay asking price, so let's say we picked that house up at $300,000. Now we're talking about a 50% discount off the peak prices.
Let's assume the Fed is going to take inflation serious again once they get a grip on the financial and credit markets, and they get inflation under control, the dollar strengthens. When it does, you'll be spending more expensive dollars, but right now, you are spending cheaper ones.
This should be taken into consideration when determining how much of a deal you are getting, and where market support can be gathered. Some have said support will not form until mid 1990's prices are reached. Factoring true inflation and we're there in some markets. The caveat is that personal income is not keeping pace with true CPI, which in turn will effect a portion the demand side.
The morale of the story is right now property is property prices are at a big discount from a couple years ago, the value of the dollar is down considerably as well. So, not only are you spending less on the price, you are spending less buying power also.
I've always believed if you have a asset with a track record of appreciation over the long term, it doesn't matter which way the market is moving if you get it cheap enough. Look for the deal of deals. Quality, not quantity.