Friday, May 16, 2008

Timing the real estate cycle, and getting in front of the next BOOM!

As you might already know, I live and invest primarily in South West Florida, and this area is among the top areas in the country that have suffered the most from this recent real estate turbulence.

In fact, just south of Sarasota (where I live) about 20 miles in Cape Coral is ranked on and off as the #1 area in the U.S. for the highest foreclosure rates.  And where I am it’s not much better.  When the real estate market was cranking, we were seeing better than 30% annual appreciation rates.  A house that you bought for $150,000 in 2003 was worth over $300,000 by the end of 2005… and then seemingly overnight it just came to a screeching halt!

Everyone was talking about how this market bubble was going to pop, but no one knew it would happen that fast, and this severely.   Financial institutions have mounted HUGE historical record breaking losses in the 100’s of billions of dollars on mortgage write offs (nice work short sellers!)… and when a financial giant like Bear Stearns almost goes belly up… you know there are some serious issues in the financial markets.  It’s this financial liquidity crisis that is really causing the pain right now.

Housing prices in our area are just about back where they were in 2003… so now that house you paid $170k for in 03 is probably worth just about that.  And now I hear it all the time from people saying… “I knew this was going to happen”… yet these same people are the ones that are over leveraged and have 5 or 6 properties headed into foreclosure.  It’s like the stock market correction in early 2000… everyone that got financially smacked around by that one will tell you now… “I knew that was gonna’ happen”.  Yeah… good job Nostradahmas!

Ok, so maybe we weren’t completely prepared for this drastic of a real estate correction… but perhaps we can get prepared for when the market starts to shift again.  This is where smart investors make their big moves… they get ahead of the market cycles and capitalize BIG TIME on them.

If you study the financial markets and economic cycles you would find that the stock market tends to lead the economy out of recessions.  Now I don’t know if we are technically in a recession or not, but it sure feels like one.  In fact, it’s often the case that the FED will go back and determine that the US was in a recession a few years after the fact because only then will they have enough statistical data to be able to truly analyze the situation.  So, for argument sake let’s say we are *almost* in a recession, and we should be looking for indications of light at the end of the tunnel.

And so if you follow the stock market, you would see that the market has been slowly and steadily changing direction and is within a few hundred points of being considered in a long primary trend… meaning its technically moving in a strong upward direction.  Its currently in a short-term and intermediate upward trend, so that is very promising. 

Then next positive indicator of a switch in the real estate markets is the fact that much of the initial losses have been realized in the financial intuitions and they are now for the most part starting to lend again.  But of course they are only lending to the most qualified of borrowers.  Building a buyers list is more important now than ever before as investors because finding a house for a buyer is much easier than a buyer for a house.

And the last indicator that I have been watching is the month over month MLS inventory numbers in my area.  Being that we are in one of the most depressed housing markets, it tends to speak volumes when you see any kind of positive change in our market.  The inventory here has stopped rapidly increasing, and were actually starting to see sales volume beginning to increase.  Buyers here are starting to feel comfortable with making a purchase, and FHA financing guidelines have increase the loan amounts to allow qualified buyers to purchase houses at higher price points, therefore the need for creative financing is not as necessary for properties that are purchase above the median home price.

And last but not least, were starting to see the new construction inventory begin to stabilize. Lennar homes is one of the nation’s largest home builders and they are starting to report better (not great) retail sales numbers, and large developers are beginning to buy up large tracks of land again.  These builders have the best resources to determine market conditions, and when I see them buying land for future development that is a pretty good sign that they are preparing for something.

Now the big issue is the cost of fuel, commodity prices, and the weakening dollar.  Many analysts believe that the commodities market is the next bubble to burst, and I happen to agree.  The question is when… of course.  But if commodity prices drop, then the dollar should strengthen…. And because Oil prices are pegged in dollars, we should see the cost of fuel and energy come down, as well as the cost of groceries, and so on.  All this makes it a little bit easier for people to buy a home.

Based on the few market reports I subscribe to and the industry analysts that are tracking this type of economic and financial data… this commodities market should shift sometime in the summer or later part of the year… which historically is the busiest part of the real estate market (in most parts of the U.S.).  Plus… Wal-Mart, McDonalds, and many other large retailers are reporting great earnings, which for the most part seems that the consumers are still consuming. (must be that $600 bucks that G.W. gave us)

So, what I personally derive from all this information… is that we’re at the bottom, and it’s time to get your game face on.  The smart investors are getting prepared to take advantage of yet another amazing opportunity that real estate has to offer.  So even if you were beat up, or discouraged by what has happened in the last two years… get over it!  Nothing in life worth having comes easily.

Anyway, I hope this post will give you some inspiration to do your own homework and look at the true market conditions in your area… and don’t let all the doom and gloom reporting (FOX!), and whiny investors out there get you down.  Just remember, problem solving is how we get paid. And the bigger the problem… the bigger the payday.  This current real estate market is just a GIANT problem, and if you keep your eyes open it could mean a tremendous payday for you!

To your investing success!

John Schroeder


At 9:23 PM, Anonymous Anonymous said...

Hey John.

Thanks for the email I got a lot of help Looking at the Filtering targeting mailing list from the county tav office. Great Info thanks again



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