Is it time to start investing in real estate again?
First positive sign, I am writing again. While I write that half-jokingly, there really has not been a lot to write about for the past six months. My previous advice was to take shelter and start researching the markets. Well, I have done that and I hope you have too. It’s just about time to put that great research to work.
Second positive sign, mortgage rates are still historically low and the media has begun to talk about a real estate recovery. Since the news outlets are always about six months behind the real estate market, I would assume we are probably at least six months into a modest real estate recovery. Low real estate prices and low mortgage rates create an excellent investing climate.
Third, mortgage rates are beginning to rise and there is substantial talk of a market recovery. As the economy recovers, expect mortgage rates to rise. Depending on the inflation indicators, we could see mortgage rates rise rapidly or we could see a gradual increase interest rates if it remains tame. Regardless, no one expects rates to get substantially lower, so if you can qualify for a mortgage (and that could be a big IF), it might be time to buy.
Expect more from me as I see a general market recovery. As one of the few real estate investors on this blog, I like to consider myself a slightly more objective analyst of the real estate market, as oppose to the perma-bull Jeff Brown. Agents should start contacting their investor clients now and investors should start contacting their mortgage brokers.
Brian Brady says:
Bold call, MC. Looking forward to the criteria screens you use to analyze properties and your arguments for investing in certain cities
September 19, 2009 — 8:12 am
matt mathews says:
Bold call indeed!!?? I assume your not from California like Brian and myself. Show me that shadow inventory and I might consider picking up a few investment properties.
September 19, 2009 — 1:54 pm
David Losh says:
Prices are high and the focus of construction has shifted to apartment buildings. This will increase downward pressure on rents. Let’s remember there were 15 million empty housing units in the United States last year and nothing near the absorption rate to cover that. As a matter of fact an increase in foreclosure should have added to that number.
As construction projects that were past site development continue to be finished, sold, or foreclosed there will be even more housing units available for rent.
If rents decline, erode, and fall to new lows there is going to be less for an investor to capture in returns. There again let’s also remember that commercial loans will be coming due on declining property values. 2012 should be the first wave of balloon payments from the heady days of 2007.
All in all I don’t see the returns.
My strategy would be to find properties on thirty year fixed loans that are seasoned over five years then apply cash to the principle balance to amortize the loan more quickly. The previous owner would still be on the Note, but a paid in full is much better than a foreclosure.
September 19, 2009 — 6:39 pm
Sean Carr says:
Mike,
It’s good to see your writing again. Perhaps its time to come out of the bomb shelter but I’m still afraid to touch the radioactive debris. Rates are down but I’ve reset my thinking that lower leverage is the new game which takes the edge off the animal instinct to grab the lowest rate. I’m curious to see how housing and the economy looks like without trillions in stimulus. Allot has been made of the 8K tax credit but I’m more interested in seeing what happens after the FED finishes buying 1.1+ Trillion in Agency MBS in a few months. Will another Trillion have to be allocated to prevent round two? Will a private CDO market live again? What would be the implications of an FHA bailout? Will the 300K monthly foreclosure rate begin abating or the growing segment of super-prime defaults? What about that pesky HR1207?
Anyway, if you were a financial advisor and I told you I’d like to put about 5% of the purchase price of any new real estate investments into put option leaps across various home builder stocks (which have railed strongly since March), would you say I’m wasting my money? I’d like to put the W recovery theory to bed but clearly it’s too soon for that.
September 19, 2009 — 7:23 pm
Robert Worthington says:
I have not spoke with any CCIM’s recently but after taking 3 of the 4 course my instincts are telling me not to invest that this point especially if you are a cash buyer. As the interest rates will eventually go up…ha ha, the value of investments go down. Cash investors hear me out, pay cash and wait for inflation to hit and interest rates to sky rocket, then pull the hammer and buy cheap for cash investment properties
September 19, 2009 — 8:47 pm
David Losh says:
I came back this morning to add a positive note to my comment, but Robert put in cash buyer advice. A lot of that talk has been coming into the Seattle area. Some people did buy and a few have done well this year. There have been some significant short term gains if you bought in February and March.
The problem is that those dollars will be dead in the next few years. You can sell for a loss or hold out to recapture the declines in prices that are coming. Real Estate is worth what it will rent for and rents have yet to begin to come down as fast as property prices.
In the system we have today we use sales data to determine future or present pricing, that is a very long stair step down. Rents follow what new investment dollars will get in rental income.
If I buy a property today for $100K I want a $10K return per year. How close are we to that? If the property goes down in value 10% how long will it take me to recapture the loss?
It seems to me that cash would be better invested in any number of enterprises other than housing units. Solar energy comes immediately to mind for Phoenix.
September 20, 2009 — 7:49 am
Al Lorenz says:
I’m eager to hear more. There’s always money to be made, if you can find the right thing to buy in the right market at the right time. I’m also not yet clever enough to know what that is going to be with a high confidence level in my market.
Maybe some sort of scarce, quality properties in prime locations at depressed prices? Thanks for getting back in the game and I am eager to hear more specifics of what you think will pay off.
September 20, 2009 — 10:52 am
Michael Cook says:
I think the issue here is that if all signs were pointing to invest, everyone would be heading back into the market and there would be more competition for good properties. Now smart investors have the first mover advantage in my opinion.
With inventory numbers still high, I believe that good properties can be purchased at attractive prices with relatively good financing options for those who have the 20%+ they will need to put down or can obtain seller financing.
The inflation argument doesnt make sense to me. If there was inflation, mortgage rates would increase adding tremendous value to those who have financed their properties at 6%. Additionally, real estate traditionally is an asset class that holds its value during inflation, which for the record I dont believe will be a significant issue. Someone will need to better explain to me why a fixed low rate mortgage on an attractively priced home, would be a bad thing if inflation hit hard in the next 5+ years. Also note with inflation, expect rents should climb right along with gas, eggs, etc. When rents rise, so do property values.
The other piece of the equation is where prices sit now. I dont see a tremendous downside to where we are. There are a tremendous amount of foreclosed condo projects in Florida, California and New York. Builders are sitting on mountains of inventory, so what are they doing? Fire selling. As someone that looks at fire sale prices on a regular basis, I just dont see things getting more than 10-20% worse than right now. Even at 20% worse, locking in financing and concessions in today’s market would give an investor more than enough piece of mind to hold for 3-5 years and make strong profits.
I have a lot more on this to follow.
I hope Greg doesnt mind the one and only personal plug, but I have created a new site http://www.cooksquared.com to prepare investors to get back into the market, so I am putting my money where my mouth is. I am also looking at some investments now myself.
September 21, 2009 — 7:25 am
Justin says:
We have seen millions of investors return to the equity markets over the last 6 months. The good thing about investors, real estate included, is that they are greedy. Most of them will see that the bottom is in and, if they have access to capital, will start investing again. I operate a real estate business in Medellin, Colombia and I am waiting for the second wave of investors to come here as well. For now, we just have guys coming down to meet models! Good luck fellas.
Justin
September 21, 2009 — 9:43 am
Jason Brown says:
I see a whole lot more upside than downside in our market but no one knows for sure. I can show stats that indicate just about any possibility right now. I think determining which properties/areas are likely to have the largest rebound will end up being key.
September 21, 2009 — 10:55 am
Cooksquared says:
Jason,
This is exactly my point. I think now is the time to look for areas that are poised for a rebound. The REIT market has shot up over the last six months and investors have signaled that they believe the downside scenario is manageable.
I agree with many above that the recovery picture is definitely not clear; however, if you wait for a clear picture, I think you miss out on the real opportunities.
September 21, 2009 — 12:39 pm
Sean Purcell says:
Michael,
Great to have you back. So much so that I’m going to forgo the traditional disagreement with you! Seriously, I believe you are right in your timing with one very large proviso: all real estate is local! Here in San Diego the investor market started to take off and then came to a sudden stop. Why? Because the deals are so good and the inventory so low that investors can’t compete with homebuyers (fundamental value vs. utilitarian value). Most of my investors have been sitting on the sideline waiting breathlessly for the inane California moratorium on foreclosure to end on September 15th so we can begin to see some inventory.
But (and it’s a big But) I agree with David Losh that this all hinges on rents. My fear is the oncoming tidal wave of commercial foreclosures which hasn’t reached shore yet. What will rents do and how badly will the commercial storm affect the residential market that is only now beginning to pick up the pieces?
September 21, 2009 — 1:07 pm
William j Archamault Jr says:
Hi Sean,
“How is it foolish to do the right thing? When the rules are morally wrong, do you play by them anyway?”
Among many other things I’m pragmatic with regards to my students and clients! My responsibilities are to improve are to one person or couple at a time. Politically I carry the right side of the convective banner our mutual friend carries the other end of the same banner. Or maybe the center, I’m sure you’re in the parade.
There is nothing to be gained by encouraging a individual not to take the money, in fact it would be “insidious” to leave the client $8,000 poorer.
Insidious is suggesting “the bank is the enemy.” The banks interfacing between the savers and the borrowers have allow the incredible highs we’ve known. The government inserting itself into those relanships have pirciptated our lows.
We can’t hope for reconvey without returning to a free market relationship!
For a bit of pandering check my blog: http://activerain.com/blogsview/1236187/maggiebrady-com-offers-discounted-magazine-subscriptions
For the record I charted an Optimist club, but I’ve never been a Rotarian! >:)
Bill
September 21, 2009 — 6:52 pm
James Boyer says:
I am looking forward to returning to real estate investing. As soon as some family issues are ironed out, I plan on getting in with both feet.
September 23, 2009 — 8:36 pm