Has the real estate market hit bottom? Is it time to buy?

Dennis Norman

By: Dennis Norman

Recent reports on the real estate market have been pretty encouraging and, in fact, many are suggesting the real estate market has hit bottom or is even beginning a recovery.  Some of the current stories I’ve seen are:

• Stocks spike on recovery hopes- CNNMoney.Com - ”The report is basically telling us that the housing market has hit bottom,” Hoffman said.
• Sales of big-ticket items soar- MiamiHerald.com – “It looks like we’ve hit bottom and we’re now slowly trying to dig our way out,” said Nigel Gault, chief U.S. economist at IHS Global Insight.
• Local brokers see signs of real estate recovery-EagleTribune.com – “The combination of stabilizing sales and declining inventories suggests the housing market may finally be recovering from the steep decent that began about four years ago..”
• U.S. Housing Market Recovery- MarketWatch.com – “Recent data from the U.S. suggest the U.S. housing market has bottomed out.”

Based upon some of the above articles and the recent reports real estate investors that have been cautious to buy homes out of fear home values would continue to decline,  may feel now is the time to buy property before the housing market recovery is in full swing, prices go up and the deals dry up.  Before you grab your checkbook and run out the door you may want to read on…there are plenty of people out there, including myself, that have concerns about this market and feel this may in fact be a “false bottom” and the housing market has not seen the end of the challenges to come it’s way. Here are some articles suggesting that the housing market has not bottomed out and call the recent good numbers on housing a housing recovery is premature:

• Beware the false bottom in housing- RealEstateConsumerNews.com - ”Few beyond historians know that half of all urban homes were in default/delinquency during the Great Depression of the 1930s. Various Federal schemes were put in place to suppress this national default: bans on foreclosures, renegotiating existing under-water loans, etc. None of them changed the fundamental reality or “fixed” the housing market. We would be wise to recall this history before placing too much faith in re-runs of the same policies.”
• DataQuick Confirms False Bottom in Housing - Mark Hanson .” The bottom line is that Case-Shiller reports what sold, period. It is my opinion that the real estate market is so thin and fragmented, across all pricing bands, that what is selling today is not representative of the true real estate market. This is especially true at the mid-to-high end.”
• Almost one-third of home loans under water -Marketwatch.com – “More than 15.2 million U.S. mortgages, or 32.2% of all mortgaged properties, were in a negative-equity position on June 30,”
• Foreclosures drag on U.S. recovery – Dismal Scientist – “Foreclosures pose a major obstacle to recovery for the U.S. housing market and thus the broader economy.”
• Mortgage delinquencies reach record levels - RealEstateConsumerNews.com – “According to the Mortgage Bankers Association statistics over 13 percent of all loans are now past due and 1 in 12 borrowers is seriously delinquent on their mortgage.  This is a 45 percent increase from a year ago when 1 in 22 borrowers were seriously delinquent and a whopping 70 percent increase from two years ago when it was only 1 in 40.”
• What rebound? Foreclosures rise as jobs and income drop - McClatchy Newspapers – “Delinquency and foreclosure rates for U.S. mortgages continued to rise in the second quarter, with loans to the most qualified borrowers going bust at an unnerving clip, especially in hard-hit states such as Florida and California.”

So what’s a real estate investor to do? 

There is no clear or risk-free answer.  I have been mulling this over for a while now and I see the following options for real estate investors in the present market:

• Retire – If you can afford this option, it’s my favorite and has the least amount of risk.  The problem is where to invest the money you have saved for retirement? 
• Stay on the sidelines and wait out the market until there are clear and sustained signs of recovery.  Then jump back in.  The problem with this approach is that it is impossible to clearly identify the bottom of a market until it has passed and by that time the recovery may be well along the way making “deals” harder and harder to find.  However, this is definitely a safer route and savvy real estate investors do find opportunities to buy homes and make money in good real estate markets as well.
• Buy properties with a mid to long-term plan.  There is no doubt that, particularly in some parts of the country including Florida, California, Nevada and Arizona, home prices have been beaten down tremendously making them much more affordable.  In addition, there are markets out there where the rents are strong enough to provide decent cash flow at these reduced prices.  I think this presents an opportunity for investors to buy homes to lease them out until such time the market has recovered and home prices begin appreciating again.  Assuming you select the right areas and buy at prices that you are confident will give you reasonable cash flow you should be able to sit back and ride out the storm (as long as you have the cash and/or credit available to do this).  Even if home prices drop further, you will still have cash flow and can stick to your long term plan (just don’t over-leverage yourself to the point that a decrease in value could cause your lender to call your loan).  When the market has fully recovered and prices have appreciated adequately then, unless you have fallen in love with being a landlord, you can then sell the homes you acquired and reap your reward.  

How does a real estate investor find a housing market that should offer better than average appreciation and rental returns over time?  I would suggest checking out my post about SmartZip.com.  I like their approach to analyzing real estate markets and they are supposed to expand their coverage of markets to nationwide soon.

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