The severity of our financial (and real estate) crisis that hit in 2008 has created a predictable panic and resulting multi-year recovery (and slog-through) that is starting to show signs of picking up steam. As I’ve always advocated, it is important to stay nimble and ramp up your operations towards what works and when the winds of changes become consistent -you will move with it. I think there were 3 key events that have occurred that will assist in setting the basis of a floor in the real estate market as we enter the “Panic Phase” (of the pyscological stages) of investing in 2011.
Alot of people underestimated the impact of the expiring Home Tax Credit in mid-2010. I would encourage your reading my “You Can’t Handle the Truth: Part II”. In that article I stated that I didn’t believe our government could afford to let it expire and if it did, a good 10-15% drop in valuations would occur. It appears that the credit was providing a good 15-25% of the home sales volume. Scary. I believe the initial goal of the stimulus was met (by helping slow the rapid decent in valuations that were occurring in 2009) while attempting to re-ignite the market (a rare few realized the damage). Truth be told one common factor that I could never get a grip on was the amount of vacant homes -something we’ve not been able to grasp up until now with the latest census count figures. Those area’s that were hit with the greatest Boom & Bust are now reflecting pretty scary numbers of some 10-30% vacancy rates. I don’t even want to calculate the net absorption rate in those areas.
I thought that we would see the rapid-panic sell in homes (by both homeowners, investors, and even the banks) in the Fourth Quarter of 2010. What I didn’t anticipate was the ‘robo-signing’ fiasco. Without getting into what’s right or wrong, this temporarily stalled lenders to enforce their rights to take back the collateral on a loan were the borrowers failed to meet their commitment. It will be rectified. This fiasco has delayed the whole foreclosure cycle. Thus the supply of vacant homes on the market will feel additional pressures as we go into the Summer of 2011. The ramp up in more distressed housing product hitting the market (for sale) coupled with the $1.00+ increases in gas and World uncertainty (middle eastern uprisings & nuclear fallout in Japan) will cause a systemic rise in the homes available for sale. Watch the consumer confidence numbers over the next few months -we’ll see a slight deterioration that will result in fewer home-owner sales.
This is a time to buy folks!!!
When I’m jumping in the car looking at deals -I’m telling you the time is now. Can you buy a $30k rental and achieve $600/mo rent in our markets now? Yup! Not to mention, we are not talking the worst of the worst neighborhoods. I recommend your looking. If the price is right you can almost pay any terms, so focus on REAL-DEALS with an eye towards owner financing or private money. Read my article, “The Money is the Easy Part”, for thoughts on ramping up the lubrication that gets the deal done. Folks -I don’t know how to say this more clearly! If you have a real buying opportunity, you will get the money. Do you know what one of the greatest challenges I face? Getting calls from real estate investors that think they have a deal -but don’t. Those that do find the money, provide a good return for their investor with a strong collateral base.
Think rehabbing-to-resale retail is dead?
Think again. I know a few investors that focus on this short-term cycle of real estate investing (really a business) and we all held our breath for 2-3 months last year. From June to September 2010, a huge hang-over effect hit the markets as first-time home-buyers scrambled to get the Housing Tax Credit before the June 30th closing deadline. Come September-October though -the market came back and came back strong through the year-end for those that focused on conservative purchase price, craftsmen like fit & finishes, while putting out realistic asking prices. Those who are struggling in this segment of the business are failing to see were the demand is. Low income (sub-prime markets) neighborhoods and dysfunctional (where distress sales versus non-distress sales of 1 to 1 or greater) neighborhoods are not consistent places to park your money.
It will be interesting to see how the Spring/Summer real estate markets work. Remember: the year over year numbers should be down as last year was the end of the Tax Credit. Lending criteria has remained high (although -really no different then in the 90’s prior to the fog a mirror days). Cost of living increases -yes inflation (minus real estate)! These are just some of the headwinds (not to mention the huge supply of homes) that the real estate market is facing. Look for a 5-10% drop in valuations through the end of the year with alot of “Once-In-A-Lifetime” buying opportunities. Cash-flow! Rentals must cash-flow.
Really there are two great trends that will come out of the FED and their printing money theories. Think emerging markets for stock (sorry couldn’t resist a stock thought) with inflation and lower U.S. Dollar valuations and real estate. The home builders (as a whole) will suffer continuous pain, while the average age of our growing population will continue to increase. What does that spell!?! Inflation. Growth in Demand. Downward supply cycle.
Jobs will occur. Ah yes, this is the main ingredient that will heal all and pull real estate off the bottom. Now -I am not advocating any short-term appreciation in real estate. Here are additional economic thoughts I posted a few months back: Going Up. We are real estate investors right? Ok -then if we are buying at a discount to value (no different then a trained eye buying an antique at a garage sale) then during these lows the opportunity for distortions in valuation are great.
Relax and become a “Contrarian Value Investor”. Ignor the ‘Talking Head’s and their rhetoric of a double-dip in housing valuations. They are reporting lagging indicators -as the ‘double-dip’ is already here my friends. We as investors know this right? If not, you should! Yes -2011 will not be pretty. This is the moment.
