Between 2005 and 2009 I annoyed local realtors by claiming that real estate values were headed lower . Then in a column in July 2009, I said it was the time to buy a house. And now in the spring of 2010, it is still the time to buy a house.
Early in 2005 my father George Marotta and I explained the coming subprime debacle and predicted “the bubble, if it is a bubble, could pop as late as 2006 or 2007.” Our projection was accurate. Real estate continued to rise that year. But it was relatively flat in 2006, underperforming the markets that appreciated over 15%.
Two years later, I wrote, “Many homeowners with adjustable rate mortgages have seen their monthly payments increase 50%, due to the higher rates. With the sudden jump in monthly mortgage payments, many are finding they can no longer afford to stay in their homes. The rate of late payments and foreclosures has continued to rise, leaving many lenders on the brink of bankruptcy themselves.”
Again, the prediction was accurate. In 2007 the Cohen & Steers Realty Majors Index turned negative, losing 18.03%. Residential real estate did even worse. Apartments suffered one of the largest declines, down 25.4%. In February 2008 in my column “For Now, Avoid Real Estate Investment Trusts,” I warned again to stay out.
It wasn’t until well after the financial implosion that I suggested to readers it was the time to buy a house. I said, “Nathan Rothschild offered the contrarian advice to ‘Buy when there’s blood in the streets and sell to the sound of trumpets.’ It is time to consider buying residential real estate. The bottom is forming, although it may continue to do so through early 2011.”
I believe that advice will also prove accurate. Comparing last month’s statistics from the Charlottesville Area Association of Realtors, the median home price has dropped from $247,000 last July to $238,000, but the rate of decline has slowed. The average days on the market have risen from 125 to 153. And although the number of active listings is still high at 3,312, the number of houses actually selling has started to pick up.
Home prices are well below 2005 averages, and time on the market is well above the healthy market average of 90 days. Sellers have been slow to realize that their home isn’t necessarily worth the appraised value or what they paid for it or even what they owe. Houses are simply worth whatever the market will bear, which is a lot less than it was at the peak of the market three years ago. National trends have followed a similar cycle.
Half the advisors at our firm have purchased real estate in the last year, and I’m personally still looking for investment opportunities. It isn’t too late because the recession has been prolonged and the recovery delayed.
Investment real estate isn’t for everyone. You shouldn’t have more than a third of your net worth bound up in real estate. For many families the home they live in provides them with more than enough real estate exposure.
Also, you don’t need to buy and manage individual properties to get an exposure to real estate. Publicly priced and traded real estate investment trusts (REITs) offer an easy way to get in and out of real estate for the average investor. In a favorable climate, up to 8% of your portfolio might be invested in REITs this way.
We got out of REITs entirely and are only looking to get back in recently. My father would always say, “Make half a mistake,” which suggests putting perhaps 4% of your portfolio back in REITs now and waiting until early 2011 for the other half.
If you are looking for an easy recommendation for an investment vehicle, try the Vanguard REIT exchange-traded fund (symbol is VNQ). The expense ratio is only 0.15%, and the yield is 3.6%. This is by far the simplest way to take advantage of this trend.
Specific individual real estate holdings offer investors the opportunity to leverage their investments by holding a mortgage on the property. Lending requirements are very tight right now, so for investors who can still get credit, there is real opportunity.
Investors could invest $1 million in appreciating securities, or they could invest $700,000 in appreciating securities and put $300,000 down on a $1 million commercial real estate holding. Assuming normal conditions, the second arrangement will produce a better return. The danger is that you do not want to be highly leveraged in a falling real estate market. Borrowing the money you are investing amplifies the gains, but it also amplifies the losses.
I’ve heard a number of bleak predictions for the housing market recently. Everyone is expecting real estate to underperform the stock market for many years going forward. Maybe they are right.
With the $8,000 first-time homebuyer tax credit expiring, demand may shrink. Starting your search now may be the perfect time. And there will be another opportunity at the end of the summer when buyers shrink even further. But maybe they are wrong. By this time next year, I expect the markets to turn positive. And I think it is time to make half a mistake and invest a little back into real estate.
It was only a few years ago that everyone was boasting about how real estate was appreciating by 1% every month. They made us feel like fools to be out of the market. With only a handful of listings out there, we were told that even if a glut of houses came on the market it would take years to satisfy the demand. But markets can turn quickly. Now we are contrarians again, looking at the trends and trying to gauge if there will be a second precipitous drop before the bottom. I don’t think so. I think that we are near the bottom and brighter days lie ahead.
In the meantime, there’s still blood in the street. Don’t miss this opportunity to look for a great real estate deal.
Photo by Rowan Heuvel on Unsplash