Posted: Jul 02, 2007
For those of us who own investment real estate and/or work with clients who do, the state of the market is presenting some interesting challenges today. These challenges include such things as increasing mortgage payments, decreasing valuations, and in some parts of the country increased insurance and property taxes. The pinch is on and is causing more investors to sell, even “dump” their properties.
As real estate investors, what should we be doing now? When will the market improve and current investors get some relief?
Both of these common questions are difficult to specifically answer, but allow me to shed light on them.
The past year has been a tough one for many of us who own investment real estate, especially for those who own in markets that saw strong appreciation in 2003 to 2005. Some of those great gains are being depleted by the current market correction. Even if it’s just “on paper”, it still hurts to see valuations decline. A number of investors are seeing their negative cash flows swell as a result of increasing mortgage payments. No question, it’s getting tough out there!
This is a subjective question that can only be answered by each investor. Objectively speaking, I believe now is the worst time to sell a piece of real estate. Many buyers have taken to the sidelines as sellers are out in great numbers. This is what creates a buyer’s market.
A buyer’s market simply means that the buyers have the advantage. The buyers today are in the driver’s seat. They are experienced and know when and why to buy. Whenever a buyer’s market develops it is always the best time to BUY, not sell!
Why then don’t more buyers buy in a buyer’s market? Initially, one might think inexperience, but the primary reason is fear. Fear that prices will drop further. Fear that they will lose money if they bought now. All the “negative press” tends to get to the masses of people as they wonder, “Maybe the sky is falling, or at least about to fall”. Today, fear and uncertainty is keeping people out of the buying mode and creating this buyer’s market.
Selling into a buyer’s market assures you will sell at or near the lowest price. It books your loss as it provides the buyer a great deal. I’m not saying don’t sell in a buyer’s market such as this, but ONLY sell if you absolutely have to.
Again, don’t sell in a frantic emotional state, it is easy to do. Those who manage their real estate holdings prudently, keep their wits about themselves and hold on as they move through a market correction have always come out well down the road. Those who buy in market corrections come out even better.
This is nearly impossible to “predict”, but we can rest assured that corrections are only temporary, just as they have been in the past. Real estate prices will rise over time. History will repeat itself.
Owning real estate has many advantages, and of course, some risks. Nothing is risk free, but real estate provides some of the best advantages out there. These include tenants who help pay down our mortgages, governmental tax breaks that lower our tax burdens and offset other income, long term equity build up on properties that have amortized loans and of course something solid we can touch and feel. That is why people love real estate!
Over my 16 years as a real estate investor I have had setbacks in various real estate investments. I have lost money in numerous occasions when a tenant damages property or when I have had a vacancy for any period of time. Today, I along with many others am experiencing some losses due to a price correction, increased interest rates, increased taxes/insurance and in some cases, poor property management. No matter how we look at it, a loss is a loss.
Losses vary in magnitude and never come at the right time. In fact, I experience some form of loss every year! One thing is for sure, as painful has it gets from time to time – I have stayed the course. I keep the faith and resist the negativity and fear. I have a choice; and I choose to work through the challenge. As a result, I am far ahead of where I would have been if I had dumped my property when trouble arose, or if I had chosen not to continue to pursue real estate investing after encountering a setback. Overall, there are just too many positive benefits of owning real estate!
I’ll say it again – historically property values rise. Over the past 60 years there have been a handful of occasions where the media has hammered the real estate market with negative commentary. At those times real estate seemed to be the worst possible investment. But shortly after all the “bad news” had saturated the market, healthy appreciation returned. Every person I know would love to have purchased real estate back in history when the news was bleak, the buyers on the sidelines and the sellers out in full force.
Allow me to turn back the clock for a moment to drive home my point:
“The prices of houses seem to have reached a plateau, and there is reasonable expectancy that prices will decline.”
- Time Magazine, 1947
“Houses cost too much for the mass market. Today’s average price is around $8,000 – out of the reach for two-thirds of all buyers.”
- Science Digest, 1948
“The goal of owning a home seems to be getting beyond the reach of more and more Americans. The typical new house today costs about $28,000.”
- Business Week, 1969
“You might well be suspicious of ‘common wisdom’ that tells you, ‘Don’t wait, buy now.’”
- NEA Journal, 1970
“The median price of a home today is approaching $50,000… Housing experts predict price rises in the future won’t be that great.“
- Nations Business, 1977
“The era of easy profits in real estate may be drawing to a close.”
- Money Magazine, 1981
“Most economists agree…. a home will become little more than a roof and a tax deduction, certainly not the lucrative investment it was through much of the 1980’s.”
- Money Magazine, 1986
“Financial planners agree that houses will continue to be a poor investment.”
- Kiplinger’s Personal Financial Magazine, 1993
“A home is where the bad investment is.”
- San Francisco Examiner, 1996
With all that historical “bad press”, the real estate market has continued to appreciate despite the media’s doom and gloom reporting. Check out these numbers!
National real estate values have appreciated:
The temporary market correction may have real estate investors nervous today, but the market will improve soon and I plan to be in the game and enjoy the rebound!
Commenting is closed for this article.
Our nation is at an interesting juncture. Our economy and banking system is under incredible pressure; one of a serious nature.
The mortgages which were written between 2004 and 2006 paved the way for the collapse in real estate prices, which in turn has been pulling down all other areas of the U.S. economy. Currently there are over 1 million foreclosures across America. The frightening fact is that there are more than 6 million mortgages that are 30 days or more in arrears! This is potentially more serious than anything we’ve seen yet.
Posted: Sep 25, 2008
We are in the midst of tough real estate recession; the worst this country has seen in decades. Real estate prices in some areas have fallen to the point where many people are paying more on a mortgage than their property is actually worth!
Posted: May 14, 2008
©The Scislow Group, Inc 2007 All Rights Reserved
