There’s always something to howl about.

The Glass IS Half Full

The “new, post-bail-out era of real estate” is how Cheryl Johnson describes things going forward amidst the “collapsing global financial markets” in Back At The Ranch. In a comment to Friday’s edition of the Bloodhound Blog Radio Mortgage program Brian Brady and I co-host, the optimistic view I have for real estate practitioners was gently questioned.  I believe the exact quote was “I thought you were starting to sound like NAR spokesmen”… a particularly disheartening comparison on a number of levels.  The truth of the matter is this: I believe we are entering one of the greatest real estate opportunities in years – maybe decades.

The idea is two-fold:

  • Consumer credit has collapsed and will not be coming back any time soon.  That means store credit, car loans, credit cards, home equity and so on have stopped flowing.  The bailout package did not make a dent in this secondary level of credit.  Financial institutions (those that are left) are hoarding cash; when they finally do trust enough to poke their heads out, consumer credit will not top their list of “things to finance.”
  • Real estate mortgages have gone vanilla.  Similar to Henry Ford‘s sentiment when he said: Any customer can have a car painted any color that he wants… so long as it is black.  We have Fannies, Freddies, FHAs and VAs – you can have any mortgage you like… so long as it is a conforming government loan.  BUT, these vanilla loans are being served with gusto.  Money for these loans is flowing though the pipeline and the valves are wide open.

So, what does this mean?  It means the government wants to see real estate serve a function it has come to perform so well: propping up a sagging economy.  The government is pumping money down this pipeline and will continue to do so.  Combine that with the lack of consumer debt and you only have one place where people can spend: real estate.  The demand created by cheap money and even cheaper homes is causing volume to increase in many of the hardest hit areas.  According to the NAR (I know, I know), pending home sales recently increased by 7.4% – the largest increase in close to seven years.

In many of these same areas home prices have breached their fundamental values, driving investors back into the market for the first time in years.  This confluence of ready money, pent-up demand and over-sold values should make real estate an increasingly appealing investment and create great opportunities for those in the industy who know how to capitalize.

(There is one caveat: this opportunity is capped by the conforming loan levels.  I discussed this in more detail here, but the salient point is this: make sure your focus is either within the limits – lower is better – or comfortably ensconced within the luxury/cash market.  The gray area between the two is going to flatline.)