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Pervasive Pessimism Prompts Pause by Profiteers - 2008-12-21 |
As I mentioned last week, I recently attended a national convention of professional home investors. These folks put in, on average, over 50 hours weekly chasing down leads on bargain homes, arranging funding, purchasing these houses, rehabbing them, then either reselling or renting them. This is what they do for a living.
In my time with them, I was asked a number of good questions about investing in real property. Here are some of the best:
Q: Depending on which report you read, home prices in different parts of American are down between 1 percent and 25 percent, just in the past year. If home prices are in a broad general decline, does it still make sense to buy and hold real estate for long term appreciation?
A: I am not convinced that home prices are in a broad general decline.
A closer look at the facts reveals that certain parts of our country, particularly California and Florida, saw remarkable run-ups in price that were driven by speculators and over-exuberant builders. The situation was made worse by low interest rates and easy qualifying guidelines from lenders.
Those parts of the country are now seeing sharp drops in property values, and are giving back some or all of the artificial gains they saw in earlier years.
In contrast, most of the United States has seen slow to moderate appreciation in recent years, followed by stable home prices during the current year. While some neighborhoods have seen values drop, others have seen higher prices.
So the media proclamation that "home prices are plummeting" is applicable to only limited parts of our nation.
Q: So you have no concern about home values or our economy?
A: I believe any thinking American should be concerned right now. These are difficult times, and they call for a response from all of us. But I have faith in the ability of the American people to find a way to succeed, even in the face of adverse economic conditions.
The other factor which gives me hope is this: I have seen no fundamental change in the way most Americans view real estate. A home is still perceived to be a good long-term investment, and owning a home still is a goal for most young adults.
Q: Many people feel that this is no time to go into debt. They see debt as dragging down more and more borrowers into bankruptcy, and advise against borrowing now. What is your response?
A: I believe that debt is inherently neither good nor bad. Instead, I view debt as a tool, sort of like electricity, which is available to us. Yes, electricity can be extremely dangerous, especially if we use it carelessly. But properly handled and properly respected, electricity can be used to make our lives better.
Q: With so many people out of work, isn't this the wrong time to be in the rental business? What happens if you can't find a renter, but still have to make the monthly payment on the loan?
A: As with almost any business venture, there is a degree of risk. But we can minimize that risk by understanding how to get the attention of prospective renters before a vacancy arises. The good news is that there are 305 million Americans living in this country, and every one of them needs a place to live. Furthermore, with loan guidelines tight and credit requirements boosted, yesterday's homebuyer is today's renter. Vacancy rates are lower today than they have been in several years.
Q: When do you think the real estate market might begin to show some signs of recovery?
A: One of our biggest problems in the real estate market is the huge number of unsold bank-owned homes. Not only are these homes vacant, but in many cases they are eyesores attracting vagrants and criminals into our neighborhoods.
Because the banks are, by and large, unwilling to bring these homes up to retail standards, they must be sold to the investor market at wholesale prices, thus undercutting any chance of stabilization the market might otherwise have.
Until the tide of foreclosures and the resulting bank-owned homes can be stemmed, I am not optimistic about a recovery of resale home prices. These "distress sales" are not typical of homes in the neighborhood, but they make it extremely difficult to estimate what the true market value of any home might be.
I was initially hopeful that the recent Troubled Asset Relief Program (TARP) was going to help in this regard, buy now the Congress seems focused on direct bailouts instead. Only time will tell.
Q: What is the biggest obstacle to a recovery in the housing market?
A: Lack of any long-term funding for well-qualified investors who want to buy these bank-owned homes and repair them back to community standards. In an arbitrary decision, FannieMae recently announced a ban on loans to investors who own four or more financed properties. This has made a bad situation worse by preventing experienced investors from absorbing these homes.
Q: What is your advice to someone starting out as a part-time investor today?
A: Go slow. Get educated. Take it one house at a time. Limit yourself to one or two houses per year, no matter how good it looks today.
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One of the significant annual expenses faced by any Georgia property owner is ad valorem property tax. Depending on where you live, it can be as high as three percent of the property's fair market value, and it must be paid year after year after year.
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