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The advantage of investing in today’s market is the potential to capture appreciating assets that provide strong cash flow. These investments are the holy grail of real estate investing. In strong markets, these properties simply don’t exist, but in down markets, a smart investor can pick out these diamonds among the rough.

Consider the price declines in many areas of the US. Housing prices in the strongest metro areas like Los Angeles, New York, San Francisco, etc. have dropped in the double digits. But what have rents done over that same time period. Honestly, they have dropped as well, but not nearly as much. Rents did not experience the same run up in values as home prices because renting or owning is a zero sum game. As more renters decided to become owners, owners of rental units had to lower or at the very least not increase their rental rates. Rent growth slowed and owner-occupied values soared.

Now the pendulum is swinging the other way. Many buyers are returning back to the rental market by choice or by force. Rents are still experiencing some stress because of the increased inventory of rental units and shadow rental units (people renting their home or rooms because they cannot sell). Renters are moving back home with their families or doubling up. Despite these negative signs, rents should not be expected to decline at the pace or to the degree of the housing market.

This presents an interesting opportunity to buyers of small multifamily or single family homes as rentals. Areas that made no sense to buy for rentals now make sense again. Some areas in LA, San Diego, New York City, etc. should be re-examined. Buyers in these markets have a rare opportunity to buy cash flowing properties with the prospects of double digit appreciation. Even if that appreciation doesn’t come back for five to seven years, the buyer has the luxury to wait because of the cash flow coming off the properties.

The combination of low interest rates, level rents and a steep decline in property values has created an interesting market opportunity. Investors should reconsider hot markets that were closed off to them a year ago. Cash flow and appreciation, yet another reason to consider buying now.

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As I begin analyzing a variety of markets, I thought I would quickly share some tips for investment strategy consideration. In thinking about an investment strategy it is important to consider the volatility of the market you are investing in. For example, a market like Los Angeles might see double digit growth one year and negative growth the next, while a market like Chicago might see low single digit growth one year and simply lower growth the next.

When thinking about whether or not to get into a market early vs. late and when considering whether to get out early vs. late, it’s important to understand the market dynamics. Consider a market like Los Angeles. Over the past 20 years, this market has seen growth as high as 33% to as low as (25%) in one year. From 2001 to 2006, LA experienced double digit growth every year. Conversely, from 1991 to 1997, that same city experienced negative growth every year (data from Case Schiller Home Index).

In a market like this an investor is better off getting in early and getting out early. If you are a year early, you might experience one year of negative growth, but you would then be rewarded with rapid growth. Even if its not double digit growth, it will trend significantly higher than the national average. On the other hand, it also benefits those investors to get out early. Given the rapid change in markets, a double digit growth year could easily be followed up by a double digit negative growth year. Getting out early and moving to a safer market would typically be better than staying even one year too long.

Less volatile markets afford investors the opportunity to wait and see. Markets like Chicago experience much slower growth trends and decline at a much slower rate. In these markets it’s smarter to invest after the market has begun its rebound because the growth from year to year is rarely significantly different. Additionally, investors aren’t penalized by rapid negative swings as much. Typically investors might experience slower growth, but rarely will it be negative.

Keep this in mind when I suggest investing now. This advance is clearly not for all markets. But for markets with significant upside and high volatility, early may not be as bad as some might have you think. Don’t be afraid of -5% or -10% growth, when the possibility of 15%+ growth is possible.

Additionally, when the market is down you have your pick of the properties with little competition. As the market heats up, so does competition for the best properties. A property that could have been purchased at a steep discount with seller financing in the best neighborhood will be the first to go as the market heats up. While timing is important, sacrificing perfect timing can yield positive results.

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My previous article suggesting today was the right time to start getting back to real estate investing was met with expected cynicism. Investors make money by going against the crowd, not with it, right? By the time everyone agrees that you should be getting back into real estate, you really should have been back six months earlier.

But it is important to address the very legitimate concerns of those still urging caution. The major concern was what if the market gets worse. I would answer this concern by first looking at what would need to happen for things to get worse. Inventory is already running pretty high and building has been stalled for almost a year. In order for things to get worse, even more inventory would have to hit the market, but would that really make things worse? In places like Florida and California with hundreds of thousands and homes and condos already on the market, ranging from vacant, bank owned, distressed sellers, non-distressed sellers, etc. what would a few thousand more do? In my opinion, not very much.

The economy could also get worse. Investors are demanding a stiff return on capital today under Draconian underwriting, so fire sale prices are in effect in most parts of the country. Sure, it’s currently tough to get financing and it’s expected to remain so over the next couple of years, but investors are pricing that in to their offer price. Rents are low and expected to remain so for the next year. Great, price that thinking into your offer price, every other investor has been doing that for the last six months.

Ok, so the final argument is no one would sell at those prices. The great thing about millions of homes being for sale is that someone will sell at that price; you just have to find the right property. Smart sellers are wising up to the fact that a low offer is better than foreclosure. Banks are wising up to the fact that a low offer is better than a vacant property.

We will get into choosing the right properties and the right cities in short order, but for now understand that these are the right dynamics to get back into the real estate investment market. Be aggressive in negotiation and be diligent in underwriting. In my opinion the likelihood of upside under these factors far outweighs the downside. There is no need to rush the diligence process, but at the same time, there is no need to wait for even lower prices.

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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.

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Quite a while back I asked a question, if the early bird gets the worm, what is the early worms reward for being early? In this tumultuous market we have already seem many early worms. Several months ago a lot of people began jumping back into real estate only to be crushed by the weight of numerous new market developments. But surely the worst is behind us? Think again early worms…

Real Estate is as slow as the stock market is fast. It takes time for sellers to get desperate enough to lower their price and it takes time for buyers’ incomes to rise to the level where they can afford housing prices. The income / price equation did not get out of whack overnight, so buyers and sellers should not expect it to correct itself overnight either.

The Bloodhound Blog is a very deceptive place. You are looking at some of the best real estate agents in the business here. So when they write that their business has not dropped off, it might lead the casual reader to believe that the real estate market is not in a tailspin or even that real estate is close to a bottom. Do not be lulled into a false sense of optimism. This group is adaptable, smart and most of all well above average.

Consider these national facts about the economy and then let’s draw some conclusions about the future of real estate (taken from the latest release of the Biege Book and other financial sources):

-Consumer spending is down
-Manufacturing is down and declining
-Jobless claims are up and rising
-Housing remains weak
-Housing inventory remains well above average
-Dow Jones has dropped nearly 40% over the past six months

The most significant thing on the list above has to be the decline in the stock market. This represents a decline in confidence in the global economy. This level of decline says that investors believe businesses could be in for sustained economic distress. It stands to reason that businesses in distress tighten their belts by laying off workers and reducing compensation. It further stands to reason that consumers without jobs or with reduced salaries do not buy houses (at least not anymore). They rent or remain in their house, using their current savings to cushion the blow of a potential layoff.

To add even more words of caution, it can still be said that prices and income are not aligned. Lots of people point out that housing still has room to decline because the historical ratio of median housing prices to median income is still too high. Couple that with the increased scrutiny that consumers face at the mortgage desk and you have a recipe for further price decline.

And for those readers who would still throw caution to the wind, think about the way real estate equity works. Real estate is a highly leveraged investment. For this reason an investor can generate a 10% return a year on 2% price appreciation. Unfortunately leverage cuts both ways. A 2% decline in price would result in a 10% loss in equity. Here is a very simple example. Let’s say I find a house that was selling for $150,000 and I get it for a steal at $100,000. I put 20% down or $20,000 and take out a mortgage for $80,000 and the house is mine. If in the first year the value goes down 10% to $90,000, I lose 50% of my equity because I still owe about $80,000, leaving me with only $10,000. Even if the market then settles and I get the standard 2-3% appreciation per year, it will take me about 6 years to get back even.

On the other hand, let’s say I wait a year and the market settles. Sure, I may pay $105,000 for the same property, but I am still getting 2-3% appreciation a year, which translates to a 10-15% equity growth. There is really no penalty for waiting in a market like this. The days of 10-15% appreciation in any market are gone, so there is no fear of missing the boat. The only fear now is getting on the Titanic.

This writer suggests that readers should find a safe place to watch the fireworks. Now is a great time to get to know your markets better and survey properties of interest. Cruise the foreclosure / short sale circuit, build relationships and hoard cash. As the markets begin to turn, the best informed investor will be able to react quickly. Having cash available and a strong knowledge of where and what you want to invest in will position investors much better than those that caught the falling knives.

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Many people will be surprised to know that “The Spiral of Death or Death Spiral” is actually a financial term and not just reserved for the latest sci-fi film.  Ok, maybe its not approved by FASB, but most people in the industry have heard the term once or twice.  For those people who may not be familiar, “The Spiral of Death” refers to an event or series of events that triggers and inescapable decline in market value, usually leading to a change in ownership or bankruptcy.  The term is most often used in conjunction with Start Ups that issue convertible debt that can be converted to common stock at a deep discount.  As the stock price falls, the convertible debt can be converted to a great percent of ownership, until some tipping point where the debt holders own the company.

But as the title betrays, Washington Mutual is the focus here and they may be facing their own kind of “Death Spiral.”  With the recent downgrade of WAMU to Junk Bond status (Ba2), their cost of borrowing increases substantially.  This becomes very problematic for a bank because they make money by lending at high rates and borrowing at low rates.  As their cost of borrowing increases, the amount they must charge customers for loans must increase and the amount they pay for the use of customers funds must decrease.  In plain English, their lending rates have to increase and their saving/CD rates have to decrease.

Unfortunately for Washington Mutual, many of their competitors remain in the A+ credit range, putting them at a significant disadvantage.  It does not take an rocket scientist to figure out if your competitors can do exactly what you can do for a much lower cost, you should probably find another line of work.  Many investors find this obvious, making it even harder for WAMU to raise much needed capital.

The only savior for WAMU is the Federal Government’s open lending policy.  But with the government up to their eyeballs in debt (Fannie, Freddie, Bear, Lehman???), one has to wonder how long WAMU can survive?  In this not so humble writer’s opinion, not much longer.  I would love to hear from the mortgage brokers and those of you out there that depend on WAMU for loans.  What is their tone?  Have they been more eager for short sales, tighter on lending guidelines???  They are not the first to face this situation and will certainly not be the last.  What does a lender do, when lending because a liability rather than an asset?

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One very unique thing about investing is the valuation process.  While there are numerous ways to value an investment, the only true measure is what it can be sold for.  While I can say a piece of property is worth $1 million, if it does not sell at that value it is simply not worth $1 million.

This is essentially the free market concept.  You can set your own price and your business will succeed or fail based on the number of people who think they are getting value.  Another interesting part of this equation is time.  The more time you have to wait, the more likely you are to find someone who agrees with your valuation.  However, as the saying goes, “the market can stay irrational longer than you can stay solvent.”

This is the crux of a very important issue in investor perception.  Most investors make irrational decisions quite rationally.  If I see a house that seems unreasonably valued, and then I see a similar house that is even more unreasonably value, the first house now seems like a bargain.  This cycle continues until investors either run out of money or some event scares investors back into rationality.

The problem then over corrects itself.  Investors go the other way, thinking that every house is overvalued, when it may have only been a handful.  This happens until there is an overwhelming amount of value on the table; so much value that even the most naïve investor could make money.  And the cycle begins again, and again, and again.

Small investors are always the most susceptible to these cycles because they have the least amount of information.  They have no idea where interest rates are heading or where the next hot spot is emerging.  At best they might read the Wall Street Journal or Businessweek.  The problem with this strategy is that by definition news is old.  By the time something is reported, it will already have happened.  Furthermore, by the time your neighbor mentions it to you or by the time you see a special report, the market has most certainly moved on.

This begs the question, what is the small real estate investor to do?  Simple, make the news.  If you want to win big at real estate investing you have to know your market inside and out.  This means that by the time the Wall Street Journal says Florida Condos are over-valued, yours has been on the market or sold.  By the time Business Week says the new hot market is some where in Idaho, you have already bought five places from Jeff Brown.

Most of the time this will make you a contrarian investor, which is a risky proposition.  The irrational markets and personal solvency issues come right to the forefront of this issue.  However, if you know your market like you should these calculated risk should pay off more often then not.  Its very rare to buy at the bottom of the market and to sell at the top of the market.  Be happy just getting the cycles right.  Buy and hold is a great strategy, but never look a gift horse in the mouth.  If your market has gone crazy, there is nothing wrong with profit taking or buying like it’s a Blue Light Kmart Special.. 

If you read me often you know this is nothing new.  I do, however, want to call your attention to the real estate climate we are in right now.  Most pundits are predicting an extended decline in the real estate market.  While now might not be a time to buy, it is certainly a time to start researching where you want to deploy your capital next.  You could call this the calm before the perfect storm.

Again, don’t shoot for the bottom of the market.  Look for rational places to invest that are currently experiencing irrational price declines.  These could be normally hot markets experiencing flat growth levels (some parts of New York City), markets that have been pummeled back into reality (some parts of Florida), or emerging markets poised for a run (get Jeff Brown talking about Idaho).  Regardless of where or what your strategy is, downturns in the market are a great time to get your ducks in a row.  By the time the Wall Street Journal reports that the real estate market is back on its feet, you should already have made your decisions and closed on your properties.  In real estate the penalty for buying a little too early is offset by the gains you can reap when you make the right call.

Closing Note to Realtors Out There: You should know your market better than anyone.  If you know its a great time to sell, give your investors a heads up.  If you can make a great case for buying, send your investors a list of homes that seem right.  You would be amazed at how often this produces results.  People tend to have lots of money or lots of time, very rarely do they have both.  If you can provide a quick and sound investment idea, you will be certain of repeat business from busy investors.  I was probably a human cash machine for my Detroit realtor because she knew timing and value.  Its was a great win-win relationship.

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Much like the real estate market my life has taken on significant changes over the past two months.  Fortunately, unlike the real estate market, my life has been on the upswing.  A major focus for me has been weight loss, resulting in my dropping nearly 40 pounds in about two months.  As I am not one for long personal stories, the major reason for sharing this is to relate how weight loss and real estate seem to go hand and hand.

The Realization

I am fat.  Plain and simple, one day I realized I was fat.  There were plenty of signs, quite obvious to others, which I chose to ignore: tighter pants, lower energy, the mirror, etc.  Eventually the mountain of evidence reaches a tipping point; a point at which, despite my best efforts, I simply could not ignore the fact that I was no longer the chiseled college athlete of six years ago.  For me, this point was when, on a whim that was clearly not thought out, I decided to weigh myself.  When the scale read 260 pounds and I officially weighed more than my father, it was a sad day.  The day became even sadder when my wife thoughtfully pointed out that the BMI for a person my height (6′ 2″) suggested that I should weigh 190 (thanks, dear).  

The real estate market reached this point about six months to a year ago.  Much like me, the market chose to ignore that fact that real estate prices were increasing much faster than wages.  Additionally, prices continued to increase at break neck speeds assuming the lowest interest rates in history would get even lower.  At the height of market gluttony, people were using homes as personal cash registers, spending as if the money created from nothing, would magically go on forever.  Then one day, the market hit a tipping point.  For the real estate market, my guess would be the subprime market disaster acted as this point.  At this point people begin to wake up and come to their senses.

The Action Plan

Getting back to the fundamentals of eating right and exercising brought me back to the land of the fit.  Starting by eliminating the delicious foods of Taco Bell, McDonalds, and other fast food crutches, I was able to initially lose weight quickly.  Next, I wanted to arm myself with more information about what I was eating.  Healthy items like granola and nuts pack quite a calorie punch, so sadly they had to go too.  Even salads can be deceptive (especially when you add bacon bits, cheese, and creamy ranch dressing).  By adding fun outside activities with my wife Natalie and Angel (our five pound Yorkshire Terrier), I was able to get down to the mid 230’s.

Similarly, buyers and sellers must now get back to the fundamentals of real estate.  Lenders need to get back to serious underwriting by looking at customers ability to pay based on their cash income and not their property’s appreciation.  Buyers need to understand that real estate is a long term investment, as such the simple buy low sell high approach works well.  Current homeowners need to treat their home like an investment.  When considering taking money out of their home, buyers should be looking to either put that money into a better investment vehicle (rental property, stocks, bonds, etc.) or using that money to better themselves and their family (education, job training, etc.).  Focus on putting money into assets that appreciate, again, a very simple concept that many homeowners got away from.  

Finally, sellers need to act like sellers.  The days of three buyers for every one seller have gone, replaced by the reverse.  Smart sellers will be armed with great neighborhood information, well read on the art and science behind selling a home, and equipped with the best real estate agent in their area.  A great agent and a great seller (in many markets it takes both) can get a home sold in any market, trust me, I sold a home in a very down market in Detroit.

The Future

Now at 215, I am at a cross roads.  I am physically fit, have tons of energy, and really enjoy eating healthy food.  Unfortunately the odds are against me maintaining this weight loss.  Many studies have proven that the majority of people who lose weight gain at least 5% more than their original weight back.  Lucky for me, my wife and I have made a life change.  Working together I have no doubt in my mind we will never see those large numbers on the scale again.  Only by being constantly vigilant, however, can I be sure.  Everyday the lure of Buffalo wings and Big Macs tempt me to lose sight of my final weigh target, but I will always remember that sad day on the scale.

Here is where my weight loss and the real estate market differ.  The real estate market has a surprisingly short memory.  While the market is well short of a recovery, it has shown a habit of repeating the same mistakes over and over again.  Lest we get too abstract, that means you buyer, you seller, and you homeowner, will have the same tendency to repeat the mistakes that have lead the market to where it is today.  Like it was easy for me to blame McDonalds, it’s very easy to blame the Fed and lenders for poor decisions made by buyers and homeowners.  The only way to avoid repeating this cycle is to act rational.  Money is rarely free, and when it is, it should be invested, not squandered.

People have great willpower for a short time.  Many people will be able to bootstrap themselves back into financial stability, much like I was able to work myself back to a reasonable weight.  Unfortunately, people also tend to be complacent and forgetful.  Remember the lessons of today and avoid this road next time, and trust me, there will be a next time, a next time, and then yet another next time…

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There has been a lot of talk about how to fix the National Association of Realtors or even how to supplant the organization completely.  As an outsider looking in, I have one simply question:  Why are realtors paying good money to an organization that they hate?  As an investor I cannot not think of a more egregious instance of throwing good money after bad money.  I have said more than my fair share of bad things about the NAR and realtors, so I think it is my turn to be solution-oriented.

My solution is simple, instead of working from the bottom up, start top down.  If the best realtors/agents formed their own group, they would instantly dominate whatever market they chose.  Imagine, if you will, that the NAR was made up of only the top 10% of agents in the country.  These agents have a proven sales track record, impeccable ethics, and strong client feedback.  Additionally, the MLS is one of many marketing vehicles they understand and use regularly.  Simply guessing, this group would probably have quicker close rates, achieve better prices for their clients, and have a much better pulse of the direction of the market.

Such a simple idea must have many flaws, so I will start naming a few obvious ones and propose solutions that would seem to work.  Remember, I am on the outside looking in, so feel free to comment if these are way off.  First, the most obvious problem is the MLS access issue.  I think this problem actually solves itself.  Consider how large the listing database would be if the top 10% of the real estate community decided to leave the MLS and start their own listing service.  Additionally, many areas now have a public MLS or many other listing services in addition to the current NAR controlled MLS.  Finally, imagine the hit the MLS would take if the top 10% of the real estate community chose to stop listing with them?  That might open some eyes at the top.

Second, how do you get the top 10% of the real estate community to come to this new organization?  Entice them with cold, hard cash.  Consider certification organizations like ISO or even the CFA.  While these organizations do not guarantee their members more money through membership, it comes with the territory.  ISO certified companies charge customers more because of the implied guarantee of better service.  Members happily pay more because they know they are getting the best of the best.  This is the same with any “best of” membership.  How much more could the top 10% of the real estate community charge?  Maybe 0.5-1%?  Regardless, they would have more customers beating down their door simply because they have proven time and again that they can provide superior service.  This might also have the unintended affect of self-selecting bad customers away from the top 10%.  Let the cheapo customers not willing to pay their agent and inevitably the appropriate price for their home (either buyer or seller), deal with sub par agents.

Third, how do you get the word out about this new organization?  Promote the heck out of it and let the service speak for itself.  Buyers and sellers are hungry for honest agents working in their best interest.  While we may currently have a horrible perception of most realtors, it’s not because we want to.  I, and many of my counterparts, would gladly pay above average rates for a trained professional that could give me great industry analysis and make the transaction go as painless as possible.

Last and most important, how do you determine who gets in the group?  I have been using the top 10% of agents as an arbitrary number, but this group has to truly be select.  It should almost be the opposite of the National Association of Realtors.  This new organization should have hurdle rates that even an average agent could not exceed.  I would propose a mix of number of transactions (note this is very different than number of years in the business), random customer satisfaction surveys, market analysis certification, plus a minimum number of recommendations from their peers.  Think national honor society of real estate agents.

In addition to simply selling real estate, this group could offer classes, lobby for good real estate legislation, and literally change the perception of real estate agents.  I really think real estate is an 80/20 business, with 20% of the agents generating 80% of the sales.  If you sliced off the top 10% or even 20% of agents, you could put together an organization that could literally change the way real estate is sold.

 
More viewpoints, pro and con, on supplanting the NAR:

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Inspired by the glut of controversial posts appearing here lately, I thought I would add one more to the fire. In my recent browsing I stumbled upon a blog that asked a simple question, “Do we need Realtors?” That’s all. That was the whole post. While the questioned seemed relatively simple, the 1000+ (literally) comments made me think a bit harder about this question.

First, let me say that the comments came down on both sides. Many people screamed Yes and No for a variety of reasons, some valid and some simply ludicrous, but the most interesting point that came to my mind was what if someone asked do we need investment bankers? My immediate reaction would be outrage at the attack on my profession. After a bit more consideration, I would ask the more complex question, what has caused that question to be asked? What am I not doing to make my services indispensable to my client?

As an outside observer, I would like to turn this around to suggest what I need and then take a look at how well consumers view realtors meet their needs. Obviously, there will be generalizations here, so if they don’t apply to you, don’t take offense to them.

First, as a consumer I want a realtor to relentlessly try to get me the best deal possible. If I am buying a property, I would like a realtor to help me get the lowest price and if I am selling I would like the opposite. In order to assess this, I need a realtor that knows the market beyond printing out a set of comparable transactions. I would like to know the best blocks to buy and why my house should be valued differently than the house next door.

Realtors fall all over the map in this area; however, on the buyer side they really don’t cut the mustard. To start, the commission structure favors the seller. Most realtors will tout their ethics, but on more than one occasion I have heard and seen realtors take a price that was clearly inappropriate for their client (too high and too low). Even if every realtor was perfectly ethical, consumers see this as an unnecessary temptation; they don’t see it as only several hundred dollars.

Second, realtors need to be consultants, ensuring I find as close to what I am looking for as possible. If this means a quick sales or the right neighborhood, realtors should have enough connections to get me where I want to be. Furthermore, they should be willing to tell me if they just can’t meet my needs. Again, this goes beyond putting my price range in the MLS and handing me a print out. Talk to me about how good the school districts have been in the past and where they look to be going in the future. Show me how many new families have moved in or connect me with some of your previous clients in the neighborhood.

Again, realtors often lack the analytical skills to provide this service. Most consumers actually don’t know this, however. Until you have experienced great service from a great realtor, you would simply be under-whelmed with the services most realtors provide. Case in point, I asked my current realtor for some simple market information and she sent me their quarterly report wrought with poor and incorrect analysis. I might have thought nothing of this, if I had not had a great realtor in the past. Now I just chalk it up to another average realtor.

Finally, I want a realtor who can get me through the transaction as painlessly as possible. While the other things mentioned can be overcome by an active consumer, a bad realtor in this area really engenders negativity. There are countless things that can go wrong as the deal closes and most of them have nothing to do with the realtor; however, realtors are paid to be the experts in this portion of the transaction.

In this arena I feel like most realtors do a good job. I have had great experience with realtors, who have not done the top three things well, but have been able to make a closing happen. This is a very underrated skill, but should certainly be considered in this discussion. Is this enough for a competitive advantage? Perhaps, but it is being eroded quickly by real estate lawyers and other transaction specialists.

The last thing I want to mention are the outside factors affecting realtors and their perceived usefulness. It seems like I have harped on the National Association of Realtors for a week now, but I am amazed that they get paid to destroy their members reputation. Instead of being paid to think of industry innovations, they use their members’ funds to fight a fruitless fight against the Department of Justice and other organizations, as well as spout data to undermine their integrity and that of their members. Perhaps I should start charging realtors half the price to bad mouth them, then maybe I could put the NAR out of business. Too many members spout the party line, which has not been consumer friendly for quite some time.

In closing, I would like to point out that I fall more on the realtors are unnecessary side in their current form. If most realtors provided half of the services listed here well, I would change my opinion in a heartbeat. The realtors on this site (and many of those commenting) never cease to amaze me with their brilliance; unfortunately, they represent a minority of the industry.

While there may not be a better alternative out there now, there sure do seem to be a lot of people clamoring to create one.

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Jeff Brown’s, Real Estate Bloggers — Why Are You Blogging? What Currency Does Your Banker Accept?, has evoke a ton of comments and emotion over the past few days. As an outside observer I find it interesting during these crazy times in the real estate market, people get so worked up over SEO, but don’t seem to carry that same passion over to the market.

While I have no real interest in SEO, I thought I would mention that if (and when) the real estate market tanks, it wont matter how many people are coming to your site if they aren’t able to buy. While the point of Jeff’s article got lost after about the 20^th comment, I think that it is really unfortunate. Blogging for business is fine by me, but what about the consumer? There will be a point very soon when consumers will be looking for advice on how to approach and handle a down market. It would seem like everyone’s time would be better spent having these discussions.

I am probably one of the few non-real estate agents writing/reading here, but as a current home shopper, a Realtor could really differentiate themselves by understanding the market and providing helpful advice. In a world where good content is king, I am spending my time reading and understanding where the market is going, so that I can provide readers support as things go from bad to worse.

A major knock on Realtors is the fact that they are always selling, not necessarily with their client’s best interest in mind. The National Association of Realtors makes this perception worse with every rosy real estate forecast they send out to the market in spite of overwhelmingly negative information. Interestingly, two days after I wrote this piece about the NAR forecast, the stock market had the second worse day of the year.

Looking at a variety of the real estate bloggers blogs, who have been commenting here, I have seen very little content on many sites that could really help consumers deal with this changing market. Now before you hit the comment button and link me to all of your consumer friendly articles, take a consumer perspective. If I am shopping in your market and it appears to be declining what do I need to know as a buyer? If you are in a market with a higher than normal percentage of credit challenged consumers, what are you saying to help them navigate the loan process. If now is a crappy time to buy in your market what are my alternatives? When it becomes a crappy time to buy in your market, what will you say?

Realtors have a bad reputation for many reasons, but the main reason is because they so often forget that they represent real consumers. Sites like Redfin and consumer focused sites attack Realtors because they have not showed themselves to be a friend of the consumers. I am not in anyway implying Redfin is a friend of the consumer, but rather, Realtors as a group have left themselves open to attack.

Great sales firms engender consumer loyalty because they are a consultant first and a salesperson second. While working for Procter & Gamble in sales, I learned early on that no one likes sales people, but everyone likes free, knowledgable consultants. When I learned to be both, I started setting sells records and my customers loved me.

My message to the Realtors out there is simple, Wake up. Use sites like this to strategize among yourself about how to better serve your consumers, rather than to debate about the ethics of SEO manipulation. This group as a whole could increase their sales and customer satisfaction by having more pointed discussions about helping the consumer.

Finally, please remember this is one consumer’s perspective. You can say I am wrong and say I am crazy, but this is what I see and this is my opinion. If you feel you are doing this and more, then this does not apply to you. But, if you look at your blog and it reads more like a news report void of analysis, then this message is for you. Analyze and advise and I guarantee there will be less grumbling about your 6%.

Note: I chose to use Realtor in this article instead of agent because the NAR has worked so hard to distinguish the terms. As of now, I don’t see a difference. If Realtors out their want to be different, they need to do more than just run ad campaigns.

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This title truly comes from the heart. Reading the Wall Street Journal today, I stumbled across the latest report from the lead economist at the National Association of Realtors. In the face of overwhelming negative information and despite their own lowered forecasts, Mr. Lawrence Yun states,

Existing-home sales should be relatively stable over the next few months, holding in a modest range, with some pent-up demand growing from buyers who’ve been on the sidelines.” He continues on to say, “A modest upturn is projected for existing-home sales toward the end of the year, with broader improvement to include the new-home market by the middle of 2008

Perhaps he considers the third time he tries to shovel this to the markets will be the charm. I am not sure what it takes to be an economist, let alone head of economic research at the National Association of Realtors, but the first interview question must be “Do you have a pair of unbreakable, impenetrable, gigantic Rose Colored glasses?”

Before I move forward, I want to say that I understand that there are many different economic philosophies out there. From Regan’s supply side economics to our own Jeff Brown’s interesting economic theories, there can be many ways to interpret various economic indicators. Instead of spouting my own point of view, I will layout simple economic trends and let you the reader be the judge of where you think the market will go.

The Current Market Climate:

• The Subprime mortgage market has been shut down, shutting out at least 10% (probably more) of the buying market
• Alt-A (Loans below prime, but above subprime) mortgages have taken a huge hit, shutting out another indeterminate amount of buyers (~2-5%)
• Fed chose to hold interest rates steady, resulting in higher expected mortgage rates
• Adjustable rate mortgage resets hit many consumers in their wallet very hard
• Time on the market has increased significantly for most markets and overall
• Defaults have been climbing and have showed no signs of slowing. Additionally, defaults significantly lower market values, resulting in lower selling prices
• Leverage finance troubles in the broader economy will have an effect on real estate prices
• Economic growth has been strong, but investors fear the debt market and businesses might be hurt. This is evident in the recent volatility in the stock markets
• For the first time in 60 years, the broad residential real estate market is expecting a year over year decline in prices
• Major homebuilders are reporting significant drops in revenue and net income
• Mortgage REITs and Mortgage companies are going out of business
• No one (aside from the NAR economist) is project any kind of recovery on the debt side until the end of the year or later

Clear all that up in five months? You, the reader, be the judge of when you expect a recovery.

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Buyers and sellers should be aware of a general economic slow down in all markets. Everyone will feel the effect of the leverage finance and subprime markets. Since I have been writing about the subprime markets for quite some time, I will focus briefly on the effects of the decline in the leverage finance market.

Leverage finance typically covers loans banks and other financial institutions lend to corporations or large private buyers. Companies like Blackstone use the leverage finance market to buyout companies and REITs. Over the past few years there has been a significant up-tick in Mergers & Acquisitions, leading to strong economic growth. As finance markets close (or shrink significantly) businesses will be less able to get large loans at favorable rates. As buyouts and mergers shrink, expect a dip in the equity markets. Looking at the Dow over the past week bears this out.

Very few people beyond the financial community pay attention to the leverage finance markets. These markets significantly impact the large commercial real estate market. When financing tightens at the top, the price effects trickle down. This could mean a significant negative impact on the commercial real estate market is coming.

All of this will create a drag on the economy, which will serve to slow down most, if not all, real estate markets. Unfortunately this could force even more defaults, putting many real estate markets in quite a tailspin. Buyers with excellent credit that can afford to wait six months to a year to buy will have their pick in most minor markets and increased negotiating leverage in major markets.

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On Friday, August 3rd American Home Mortgage officially closed its doors. That same week Standard & Poor’s cut its outlook on Bear Stearns from stable to negative amid fears of firm wide exposure to subprime lending and the leverage finance market. If all that were not bad enough, the leveraged financed market has essentially shut down. The questions on everyone’s mind are: What is next, how will this affect the housing market, and will loans be available in the near future?

To start on a positive note, yes, there will be plenty of loans available in the near future. Unfortunately these loans will only be available to borrowers with good to excellent credit, who have a reasonable down payment (5-10%). Mortgage lenders and banks have gone beyond scared to downright petrified because they can only see the tip of the iceberg. For the readers out there who are not familiar with icebergs, typically everything above the surface (what one could see) represents 10% of the total mass of the iceberg.

Continuing with that analogy, most analysts expect this situation to get significantly worse before it gets better. While Bear Stearns and American Home Mortgage have been the latest news whipping boy, the market has quietly downgraded many (if not all) banks and mortgage lenders. Furthermore, banks know exactly what they are holding, whether they admit it or not. To soften the final blow, expect them to raise rates, charge higher fees, and tighten their approval process. Even though many financial institutions are being very hush-hush about how much of the bag they are holding, they are diligently working to limit any future exposure.

For a borrower that means anything outside of plain vanilla conforming loans will be very hard to come by. But we here at Bloodhound would be remiss if we only gave readers the gloom and doom story. Despite all of this, here are some suggestions that might help ease some of the burden for those currently looking for financing.

Get a GREAT Mortgage Broker

While this could be my Bloodhound tag line, this is the time where it will pay dividends. Many lenders have been changing their policies, leaving buyers who were previously approved out in the cold. Mortgage brokers that have been around for 20 years or more will have been here before. They will be able to provide excellent advice and great service at a time when both are at a premium.

Push for Seller Financing

As the mortgage crisis continues to worsen, sellers will become desperate. Many sellers are already experiencing higher than normal time on the market. This is just the beginning for many of them because a large number of buyers across the United States simply cannot qualify for financing right now. With less eyes looking at property, sellers and their agents will have to get creative. Financing is a good negotiating tool because it can reduce the total borrowing amount and bring more buyers to the market. Both parties win.

Communicate, Communicate, Communicate

Now is not the time to take the attitude of “everything will be alright.” Stay on the mortgage broker and the bank to ensure things are going according to plan and make sure they have a back up plan. Ensure all contracts have good financing contingencies, which at a minimum give you more time if the bank fails to provide you expected financing.

Sellers be Vigilant

Sellers should be vigilant about pre-qualified buyers. Ensure the buyer has taken adequate precautions and will be able to come to the table with the finances. Now is the worse time to have to put a home back on the market because a buyer is not able to close. As tempting as an offer will be in a market with a reduced number of buyers, it is imperative to hold out for a good offer. In this situation a good offer is a price a seller can live with from a buyer that can definitely close.

While the current market is not all gloom and doom, it is closer to trouble than it has been since 2001. Expect it to get worse before it gets better.

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Real estate enthusiasts have been sounding their trumpet during the latest run in the real estate market. Many real estate focused investors truly believe real estate outperforms every other investment by a wide margin and even go as far as to wonder why investors would choose any other investment vehicle. Our own Jeff Brown even took quite a swing at the stock market in his post, My 4% will Beat Your 10 Any Day — Stocks vs. Real Estate. In the other corner stock market aficionados contend that in the long run stock market returns dominate. As an investor in both I am here to definitively say neither dominates.

Starting with the facts: Long run real estate investment returns average about 3%. This is simply a year over year long run appreciation average (cnn.com report data), while the average long run stock market return hovers around 10%. It is important to note that anyone can point to specific year, or even five year, period that one asset class has outperformed the other. This is not relevant because long term investing is the focus of this discussion.

Many stock market champions simply stop their analysis right there. That is wrong, plain and simple. Of course, as the analysis goes deeper, the water gets muddier and muddier. The starting point is leverage. Very few investors pay 100% of the purchase price when they buy an investment property. At most an investor will put the standard 20% down in a direct commercial real estate investment. This means that an investor could buy 5 times value of an investment. For example, if an investor has $100,000 to invest, they could buy $100,000 worth of stocks or $500,000 worth of real estate. Using some simple math, after 1 year the stocks would be worth $110,000, while the real estate investment would be worth $115,000 ($100,000 + $500,000 x .03).

Unfortunately many real estate investors stop their analysis here. This is also incorrect. Not only is it unfair to compare a leveraged real estate investment to an investment in the stock market that is not leveraged, but there are a host of additional cost to real estate that are not factored into this equation.

The common investor may be unfamiliar with leveraged stock investments. They can be achieved in several ways. Short selling and margin investing represent two ways to invest using leverage. Short selling is simply selling stock before it is purchased. Margin investing involves borrowing money to invest. These two techniques are virtually the same, the only difference being where the money comes from. Consider this example: Homebuilders have a very poor outlook for the next year. If an investor short sells homebuilders, he/she has additional money to invest in the broader market. Instead of $100,000, the short sell now provides the investor $150,000 assuming they short sold $50,000 worth of homebuilders. Assuming homebuilder stay flat or decline, the investor in the stock market has matched the return of real estate with far less leverage.

At this point the waters begin to muddy because real estate investors might argue that leveraging stock market investments increase the level of risk. This is completely true, but while real estate investments tend to have less risk, they have far more holding and opportunity costs. When an investor buys one share of Toll Brothers, they are done with the transaction. Furthermore, when that same investor wants to sell their share of Toll Brothers it can be done immediately.

On the other hand, as soon as an investor buys an investment property they become a landlord. Even if the property is large enough to support a management company, real estate represents a huge hands-on investment. To maximize the value of a property, the investor must make key and critical decisions that take time. Many hardcore investors have to give up their day jobs, eliminating a huge potential income stream. While the opportunity cost differs by the level of direct involvement, it is present in all forms of direct investment.

Transaction costs also must be factored in. An investor can buy and sell $50,000 worth of stock for $100 or less through many electronic brokerages. A real estate investor buying and selling the equivalent investment in property might pay $10,000 or more. Even if an investor does a 1031 Exchange it will costs much more than a typical stock transaction.

The list of considerations goes on and on. Taxes, ability to directly influence investments, holding cost, and liquidity are just a few more items that differentiate these investments. In the end it comes down to investor preference. Many real estate investors get personal satisfaction from owning and managing property, while other investors might be put off by having to constantly deal with investment issues. For this reason, real estate investments or stock investments might provide a level of personal satisfaction that outweighs the drawbacks listed.

Finally, investors should note that while neither investment dominates the other, a combined diversified strategy is better than simply owning one or the other. It has been proven that by adding a 10-20% REIT weighting to an all stock portfolio, an investor can increase their expected return and decrease the overall volatility of their portfolio. While this discussion was a bit academic, the major takeaway should be that real estate investments have the ability to compete with stock market returns. Whether an investor has a passion for real estate or for the stock market, understanding and investing time and money in both provides the highest possible return.

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