Is real estate a good deal yet?

Many of our title search clients are investors, looking at foreclosure and tax auction properties. At the same time, many potential property owners are on the fence, wondering if property prices have declined enough to represent a good investment. The answer is yes. And no.

In general, the “average”, “median”, or overall real estate market is has not reach the bottom. In general, it will continue to decline. The problem is inventory. It will be many years before the number of available houses is absorbed by buyers. The reasons are many. In the first place, there are simply too many houses for the number of people who need them. Homebuilders put up new houses as fast as they could from 2005 – 2007, many more than there are families who need them. This overhang of inventory will bleed off slowly of the next few years, as more households are created who need homes.

Second, there is some percentage of property owners who own more than one home. Whether their second (or third) home was intended as a vaction property, rental, or to “flip”, a large number of these property owners will be looking to reduce the nuber of properties in their own personal inventory. Whether it happens immediately, or at some point in the future when circumstances appear “better”, these extra properties will satisfy what little appetite for properties there is, displacing purchases of other homes.

As important, is the lending environment. Almost every mortgage lender has eliminated sub-prime and alt-A programs. These changes by themselves removes from the market 15%  – 20% of buyers who could purchase during the past 5 years.  On top of this, the remaining lender programs are skewing towards requiring 10% downpayments, and will likely require 20% for most purchases shortly. This raises the bar for home purchase to a level reserved for a small percentage of interested buyers.

The pool of buyers who qualify under the new more stringent lending guidelines is throttled by the most severe obstacle, the underlying economy. Over the next 12 – 18 months, the recession economy will continue to decline. It is likely that the rate of deterioration will even accelerate. Consumers and businesses are hanging on by a thread. Behind the facade of financial stability exists, well, nothing. Thirty days from today, I suspect that many companies who kept up appearances through the holidays will fold or begin massive layoffs. Similarly, consumers will literally turn off the tap of consumption.

In spite of this, or more accurately because of this, a buyer can purchase something right now for “bottom” prices. There are sellers in the market right now, who will sell for bottom market prices. The catch for buyers is finding the 1 out of 20 sellers who will do that.  The legwork for the buyer will be extensive, but for the buyer intent on purchasing now, this is the way to buy at the bottom, only 18 months early.

It has been difficult to find true “steals” for the past 24 months, but we have seen many examples of properties selling for the right number today. The “right number” is 1999 market value, minus 5% – 10%.  Do not fall into the trap of looking at how much of a discount the property is from what it sold for in 2005, or how much less than the mortgage it is, or how much less than appraisal it is. Use 1999 prices for a target. Why? This number reflects a comparative multiple to income, rental value, and intrinsic value. Look where the market range has traded forever, and when it jumped. Guess where it is going to land back to?

Most houses can’t be bought for this amount. But a few can. Don’t write a check until you find one at this level. We see them out there every day, so we know it can be done.