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Real Estate

June 23, 2007 by  


By Bob Wood, Muslim Media News Service (MMNS)

As investors, we are always looking for great opportunities to buy something low enough in price now to assure a nice profit in the future. But in today’s environment, stocks and bonds sell at premium prices. Those prices are a result, in part, of the propaganda we often hear reported as news about the economy. But one asset class is now shaping up to what might prove a great buying opportunity.

Where in the world can we look to find undervalued investments? My best guess is that in the year ahead, real estate may well prove to be a wonderful investment. That’s right — good old residential real estate!

Let’s face facts, as much as that sounds opposite to what passes today for economic analysis. Currently, we hear so much about the ‘’Goldilocks economy’’ where every asset class seems to reflect all possible good news, present and future. But isn’t real estate now under enormous pressure? And where that pressure exists, prices will drop and present rare opportunities for astute, patient investors.

But patience is required, since the worst is yet to come for real estate prices, I think. Both enormous excesses in granting credit and growing demand for houses in the past few years have resulted in inflated home values. But that situation is rapidly changing. As home sellers more widely accept the bad news ahead, prices should fall into very reasonable territory.

And since virtually everyone who has wanted to own a home, or maybe several of them, already has one, future demand appears to be muted, at best. Due to changing times, the supply of homes now far exceeds demand, and that helps bring prices down.

Two other factors helping future real estate buyers involve the vaunted Spring/Summer selling season. It is now drawing to a close, and home sales are far below estimates. In my local area, a densely populated location in Florida, the percentage of single family homes listed that sold ran about 6% in May 2007, slightly higher than the trend for the past few months. In May 2005, that number was closer to 50%. Recent condo sales have been even worse, with about 4% of listed units selling in May.

In Fort Myers, Florida a developer held an auction to sell his remaining unsold townhouses. What made this a newsworthy item was that some of the units sold at auction for just under half of what previous buyers had paid at the end of the housing boom in the summer of 2005. Of course, those early buyers were none too pleased to see the value of their homes cut almost in half, but that happens to people who buy during manias such as the real estate bubble now ended. Remember those who bought technology stocks in the late 90s when “perfection” added cost to those assets, as well?

Those of you living in the Detroit area can well see what has changed in the real estate market there as well as or better than anyone else in the country. Also, investors living in the Cleveland area may see much more opportunity in real estate now than they dared to think possible two years ago. We can thank those government officials and domestic companies who pushed for globalization for the economic hard times now seen in these two industrial areas.

But an astute, patient investor can begin to look around for bargains most anywhere, knowing full well that this is actually early in the game for buyers looking for bargains. And bargain prices are much easier to find now than they were two years ago.

To be sure, though, there is plenty of time for investors to look for bargains in homes. By now we are all well aware of problems in the “sub-prime” mortgage market. Too many home buyers with marginal qualifications were granted credit for mortgages. Those buyers were convinced to buy by the constant sales pitch that owning a home would be almost as cheap as renting. Unclear to or unconsidered by to too many buyers were those ancillary costs borne by owners that renters never see.

Think about taxes, insurance, repairs and maintenance costs. Renters simply pay the going market rate for rental properties, while owners pay all costs. And in some areas, those costs are rising faster than they have ever risen in the past. So now, many new home owners find themselves unable to keep up with the true costs of ownership. For others who squeezed into unaffordable homes with the use of creative financing options like adjustable rate mortgages, the teaser rates used to lure them won’t last forever.

As we know, the real estate boom ended about two years ago. For many buyers, those low, introductory interest rates are now due to reset to current market rates. For buyers with marginal qualifications, those rates are much higher than their initial rates. This means increases in their monthly payments. But with the savings rate for consumers now residing in negative territory, budget stretching is probably unlikely. No discretionary income remains for making these higher payments, since it is already being spent.

The bad news for current home owners is that a huge portion of those adjustable rate mortgages are facing higher rates in the fourth quarter of this year. That factor should add even more real estate supply over and above today’s bloated inventories. And this may help depress prices even further.

For these reasons, I think waiting until the end of 2007 to begin the search for a bargain real estate purchase makes sense. It is when others think that buying real estate is crazy that you should be ready with cash for a down payment, knowing that buyers will be scarce and sellers will be desperate to sell. What will help buyers as much as anything will be the knowledge that buying a house or condo is not a necessity. If that perfect home is not selling at the bargain price you want to pay for it, you can simply move along, as others will become available.

To be sure, I am talking about a kind of speculation here. But I am not advocating that readers of this column should rush into the real estate “flipping” game. I advocate investing, not trading, and that means buying a great house or condo and keeping it until the economic environment improves. That process could take years. And buyers will have to wait patiently during that time, while continuing to incur the costs of ownership.

But I believe that the bargains will be plenty, and prices should fall to levels where a home can be bought at such a reasonable price that those additional costs can be recovered at the time of sale well into the future. The sheer volume of homes available for sale later this year should provide wonderful buying opportunities, maybe even as good as those for buying townhouses in Fort Myers, which are now selling at half their prior asking prices.

Whether or not you really need another home, prices could fall so low that investing in real estate will make sense. And until stocks and bonds become more reasonably priced, hiding out in real estate could make the perfect option. For now, it seems more reasonable than investing in stocks, where so few bargains present themselves as a great warning sign. Those people standing in line to pay more than the listed sales prices for homes in 2005 should have been seen as a warning by smart buyers, who would wait for the crowd to tire and thin before going in search of properly priced homes themselves.

Start looking now, but waiting a few more months, I think, will be the best approach. With asset values so inflated in other markets, real estate might well be the best place to seek bargains now.

Have a great week
Bob

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., invest@muslimobserver.com.

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