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Where is the real estate market going?

Has the real estate market bottomed? No, nope, not a chance. We are through 1 of 3 storms and have a crippled economy and really high unemployment. The good news is that we are through the worst. With terrible times come tremendous opportunities. After the last up cycle where everything went way higher then it should have, this had to happen. It is inevitable. If you are like me, you see the next 3-5 years as the opportunity of a lifetime. Here is why.

Storm 1 – We have survived the 1st wave of foreclosures. Properties in some areas dropped 40% and the inevitable correction has begun.

Storm 2 – A 2nd wave of foreclosures is on it’s way and will do the same. Only now home values are already much lower so drastic home value declines are unlikely. This will however impact home values negatively and keep them down for some time, hopefully a plateau for a few years. The following chart show that delinquent mortgages are much higher in 2009 then in 2008 and the previous 3 years.

delinquent11

Storm 3 – The interest rate hike. It is coming. The Fed will eventually raise rates to fend off inflation. This will increase mortgage payments, decrease cash flow, operations and returns and people will not be able to afford as much home with the higher payments. Result? A negative impact on home values.

You can look at this outlook as depressing or exciting. I strongly advise the later. The next 3-5 years there are going to be tons of distressed properties and opportunities to cherry pick from. In 30 years we will look back and say “Remember when we could buy property for nothing.” Will that time is the next 3-5 years. So savvy investors get ready. We are through the worst part, now get out there and make it happen!

For those of you who want a breakdown by State, here is your chart.

delinquent2

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11 Responses to Where is the real estate market going?

  1. steve wolf says:

    I do agree with you, except, I think that it’s going to get much worse before it gets better. The commercial market is just begining to see the effects of this crash. As the banks and the rest of the nations economy begin to feel the full force of the collapes of that market, financing will become more difficult then it is now. That will affect the residential financing and as loans become harder and harder to come by, that will slow down sales, and price will continue to spiral downward.

    So, the queation is, what’s the right price? My first response to that queation is, a price that will allow you to buy, rent, at least break even and hold. However, with unemployment increasing, and consumer confidence dropping, so will rents as well as those who can afford to rent in any segment of the market. So, again, I ask, what’s the right price? I don’t have an answer.

    What’s funny, is you’re right, there will be tremendous opportunities, but, there will be a lot of carnage left in pursuit of wealth in the real estate market, by those trying to take advantage of the opportunities.

    I’ve been investing in real estate for 40 years, since I was 19 years old and I have never witnessed anything like this economy or this market. It will be interesting to see how it plays out.

    We are still buying in this market, but only when we have the property resold before we have to close. Good luck in your endevers.

  2. Paul Spencer says:

    I would suggest you take a basic economics course……..

  3. Ryan Moeller says:

    Awesome post Steve, thanks! With the glut of distressed property hitting the market the next couple years it is hard to conclude anything but the market going down. Some still overpriced areas may see a decent decline, others may stay flat.

    What’s the right price? I think you have to have LTV and cash flow criteria so you have multiple exit strategies. Break even will not give you multiple exits and will lead to disaster if the market goes down. LTVs 50-70% and cash flow must be tremendous. In the areas I invest rents are 1.5-3% of purchase or rents will be 750-1500 for a 50K purchase. That way you can handle vacancy, maintenance, pay property managers, etc and you have plenty of equity in case value goes down.

    There are a lot of followers out there will buy at or near retail with little or even negative cash flow and speculate for appreciation. Most will not have a good experience as their profit is totally out of their control. Savvy investors will buy right with plenty of equity, plenty of cash flow and have multiple exit strategies.

    Thanks again Steve.

  4. Ryan Moeller says:

    Can you please elaborate Paul? Both my undergrad and grad degrees are in business and I continue to educate myself. At the core of economics is supply and demand. Huge supply of distressed properties, demand that does not equal it will cause home prices to drop. Does anyone else agree or disagree?

  5. Caijun Sun says:

    The price is locality depending, but overall is going down for a while. The truth is that those REOs did command a lot of work. I mean it need money and time to make it livable. So opportunity lies in the repair and update those deferred maintenance. So what is the right price, monthly rent is 2% of ARV. But, in some states, extra caution need be exercised, because of the high taxes and insurance.

    Besides those commercial and unemployment, please also pay an attention to those 1/3 the population, Baby boomers, they are retiring and downsizing, so the marketing may never return to peak any more, because, it is the end of the cycle, of course, the next generation also has his cycle, but is not LIKE THIS ONE during our life time.

    We as a industry (Lured by exotic … from Walt Street) built too many houses during 2002-2006, I personally completed four, yet another two never had the chance to be completed because the build is broke.

  6. Ryan Moeller says:

    Great point Caijun Sun,

    Many of the REOs need rehab which can bring on a lot of risk. That can be intimidating to many, to me it just gets me excited.

  7. Max Mara says:

    Where is the real estate market going?
    Does your discussion include European market as well? Then,I do agree with you, except, I think that it’s going to get much worse before it gets better, considering European market off course.

    The commercial market in Europe is deeply effected with this economy crash.
    The banks are forcing the collapse on market, by stopping project financing or making it more difficult then it already is. That affects the residential financing as well as commercial.
    Prices are dropping up to 15% for the rent while construction of the new commercial spaces is improving. Off course for those investors who managed to provide finances. In that way, offer is rapidly incising while demand is almost stopped. Enquires are every were, looking for the right price or right moment.
    I agree with Stewe, what’s the right price? A price that will allow you to buy, rent, at least break even and hold. And off course there is Balkans never solved problem of unemployment which is increasing, consumer confidence dropping in banks as well as in investors. So my question will be who can afford to rent in any segment on this kind of market or get into purchasing?
    I believe that there will be tremendous opportunities in the real estate market, but only those who survive will be there to tell something about it.

  8. Marissa says:

    We continue to see Short Sales as the best investment for today. You are in control of the paper, therefore, you are more in control of the cost. I agree with Ryan that supply and demand will remain a bit of a ? until this employment issue improves. Nice blog.

  9. Todd Coffee says:

    Good Article!

  10. Ryan Moeller says:

    Thanks Todd, best of luck with your investing!

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