Distressed Asset Housing Clearance Sale of the Century
Every shopper knows that good buys are available at sales, but the best buys sometimes are at the clearance sale. Well, distressed asset housing is having what may be the final clearance sale.
"Michael Douville has been in the Real Estate Business since 1974, over 36 years. From 1982 through the early 1990's, Mr. Douville executed upon his well-thought-out business plan to accumulate income producing properties. Michael now represents and consults with investors while overseeing a portfolio of investment properties."
The worst is over and the healing is well underway. The most destructive recession since the Great Depression ended months ago, and the direction of the economy is up. The decade long expansion created huge excesses, and these excesses have been wrung out of the economy for the last 18 months causing massive disruption. Unlike Japan in its "lost decade," the US is acknowledging the mistakes and writing them off the books with huge losses. Over zealous lenders and optimistic buyers are facing their mistakes; those who were un-qualified or under-qualified to own their current property are working with their lender to modify or mitigate the existing loan to a more affordable level; if the loan modification fails, the options are usually short sale or foreclosure, and the property is sold as a distressed asset. The market is correcting for its excesses and setting the stage for future growth and expansion.
Problems still exist, and the economy is still in trouble. Should the Federal Reserve raise rates and remove stimulus too early, the economy could falter and inflation might ignite. External factors and geopolitical issues still haunt the fledgling recovery. However, there is a natural and typical time-line through which this recession has traveled. A new business cycle has begun; business, employment, and asset prices all should get better soon. The debris is being cleared away to create a much more viable foundation.
Housing segments in the US are still correcting. Homeowners and investors who purchased properties in the bubble years of 2005-2007 probably owe more than their home or rental unit is currently worth. Luxury homes are experiencing a severe correction, due in part to the restriction of available financing in a risk averse environment; but more due to the nature of supply and demand. Many luxury homes were started during the "bubble" and not completed until after the bubble burst. The timing of their investment doomed them to failure. Huge profit margins lured technicians, lawyers, doctors, insurance agents, and even real estate agents into becoming general contractors with bad results. Over-improved and hastily built homes further added to an already burgeoning housing supply that resulted in a glut. As in any commodity that is plentiful, prices dropped. Add to the mix not only over building, but an economic downturn, and expected profits and rewards became terrible losses and nightmares that have haunted the builders, investors, and owners until the lender had foreclosed the property, sometimes with a resulting deficiency judgment attached to the former owner. This deficiency is often dependent on the luck of the boilerplate verbiage embedded within the trust deed or mortgage. The use of short sales, whereby the lender negotiates a payoff for less than the balance, has mitigated some of the losses. The resulting turmoil has disrupted lives and investment plans.
A New Corrected Cycle is Beginning
Distressed luxury homes that are being short-sold or have already foreclosed represent extraordinary value. Discounts of 50% from 2006 values, and at times below replacement cost, are still available in markets like Scottsdale and Paradise Valley in Arizona. The outright purchase, or for the more sophisticated investor, the purchase of the discounted note or mortgage, may lead to enormous gains in the next 24 months.
Problems still exist. However both Case-Schiller and Economic Cycle Research Institute data both agree that housing seems to have bottomed many months ago, and their leading index is pointing toward higher prices. Many excellent properties have corrected to extremes and represent historic value. What has been a nightmare for some unfortunately timed purchases are dreams come true for current buyers. Mortgage rates are near their all time lows which have pushed affordability higher to levels never before attained. Meanwhile, the US government has added tax incentives to purchases. US housing prices are correcting, sometimes over-correcting, creating values the likes of which have been absent from the housing market for years.
As the recovery accelerates, demand will re-enter the markets. Many economists expect the employment and general business climate to show noticeable improvement by late 2010. Some economists remark that prices of homes may not fully recover until 2014. That is good news for everyone, but it is exceptional news for recent buyers of distressed and corrected real estate.
The four MSA's of Southern California, Southern Florida, Nevada and particularly Las Vegas, and my home market of Phoenix, collectively represent most of the distressed properties and may represent extraordinary opportunity. Prices have fallen as much as 40-50% in most of the market segments; some even greater. A home purchased for $400,000 in 2006, may be valued at only $200,000 to $240,000 now. If demand and/or possibly asset inflation returns, homes could appreciate quickly from their currently distressed levels. Should home prices recover only half of these 5-year projections, it would mean that a property purchased today for $240,000 could recover to $320,000 in 5 years; that would be a gain of $80,000 or a 33.3% for a cash transaction.
Many investors judiciously use leverage such as a 30-year fixed rate mortgage with 75% loan to value, a reasonably conservative loan. Down payment, closing costs, and repairs typically amount to about $65,000 on a $240,000 investment purchase; with 5 years of recovery, the property would appreciate to approximately $320,000 and would deliver a capital gain of 133.33 %. This would not include any tax advantage, principal reduction or cash flow.
Through the ages, the adage that "timing is everything" has proven true. The recent turmoil has created discounted pricing that is particularly evidenced by distressed sales. Every shopper knows that good buys are available at sales, but the best buys sometimes are at the clearance sale. Well, housing is having what may be the final clearance sale. Many advisers believe most of the downside price risk for general housing has been mitigated. Talk to your advisor and determine if your investment portfolio is ready to be diversified into distressed housing.
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