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How Do These Disasterous Times Affect Real Estate?

Opinions from a 30 Year Veteran…

As the events on Wall Street continue to unfold in the days and weeks ahead, a reality check in your personal real estate business is advised. How do we make sense of the panic and fallout in the financial world? What effects will it have locally on main street? What should I do? I’ve had many Dwellgo members this past week call for advice. Fear and uncertainty are apparent.

So before we start, be aware I ran out to the pool and did my very best to walk on water and to my dull surprise I sank to the bottom again!
Translation: I am one more opinion.

A multitude of councilors creates wisdom

With that said…………..

In times of uncertainty, people tend to hold on to their cash. They spend less for big ticket items, namely cars and homes. It’s natural for real estate sales to slow down at this moment because of the monumental events on Wall Street. After all, Lehman, Morgan, Merrill, Freddie and Fannie are all household names. They represented stability, superstar status, and financial excellence to us and the world. In a very short period of time they ALL failed….WOW! Of course, we are concerned about tomorrow. If they can’t get it right, how can we possibly get it right? If their demise is not enough, the underlying failed securities that brought them down came from our back yard…..mortgages, sub-prime loans to be specific. How many of us in the last several years wondered in amazement how so and so could secure a mortgage loan so effortlessly? How could a loan ever be made on the basis of “stated income”? What effects will this have on our local Austin Real Estate market, and how do I prudently maneuver in my business?

Story: A particular tenant I knew who was perpetually behind on $600.00 monthly rent, utilities, and credit cards, and who kept a filthy house, secured a $150,000.00 mortgage with nothing down.  Her PITI payments were lower than current rent for the first year. I was appalled. Just for fun, I decided to casually keep an eye on the new home purchased. Eighteen months later with the yard a wreck, the home was vacant… foreclosure notice on the door and a mailbox full of unpaid bills.

This story is typical of the problem. A roaring market creating great wealth opportunities from Wall Street to Main Street entices everyone into the game. Bankers got greedy, Real estate Investors got aggressive, home buyers got careless. Now, we have a problem unseen since the Great Depression, according to some economists.

So, what can we expect?

Effect # 1……The Republicans and Democrats are in full swing doing what they do best: Blaming the other party. When they have sufficiently assigned blame for maximum party benefit (much like children do), mortgage reform will hopefully begin by first addressing Wall Street greed. If properly addressed, Sub Prime Loans and Stated Income Loans will be eliminated forever. Mortgages will be granted only to Americans that have good credit history, plentiful time on the job, and who have a meaningful down payment. Prudent lending is good for business, but it’s immediate effects will remove a sizable segment of would-be buyers who otherwise would have bought with a Sub or Stated loan in ‘08-’09. Furthermore, reform tends to swing far right for political reasons which will likely result in even some qualified buyers not getting mortgages in the short run. Demand will slow (Actually has already)

Effect # 2……Washington will create a vehicle/policy to enable institutions holding the toxic loans to unload them from their balance sheets. Supply will increase.

Effect # 3…..Bureaucrats are not business people. Remember the RTC from late ’80’s-’90’s They took over a problem and made it worse. Why, because they are not equipped or qualified to run a business. It is contrary to their nature. If word gets out that the U.S Gov. is making concessions with homeowners who are at least 3 months behind on their payments, look for homeowners who are presently current on payments to get 3 months behind on their payments. It happens every time someone starts handing out money. Supply further increases.

Effect # 4…….This time last year the Fed declared the Sub-prime problem was all but behind us. Sure we would have more foreclosures but not to the degree we had experienced thus far. If you 3x every time prediction in Washington you will be close to reality. That would suggest we are in this for 2 more years. Prices will decline as supply grows

Effect # 5…..At some point, this will pass. When it does, prices will likely be lower than today. How much lower is impossible to determine, and it doesn’t really matter. We are real estate investors and therefore it’s our job to read the Austin Real Estate market and respond accordingly. When sales increase by at least 20% year over year and prices stay flat, it is the right time to aggressively buy Austin Real Estate.

What to do in the interim? Why buy a house today and rent it out for 1-2 years if there is sufficient evidence that prices will stay flat or go down? Why take on a rental and a tenant if appreciation is not going to accompany the deal? Why not just wait for 1-2 years and then buy it? Sometimes we feel like we fail if we are not actively buying. Is it likely in the next 12 months that Austin Real Estate prices will skyrocket? If not, prudence suggests waiting to buy property for rentals.

For those Buying/Selling/Flipping: Remember, there is always a healthy market for buying, selling, and flipping property. The challenge is to stay within the disciplines of the market, something much easier said than done. What may have been the buy of the year in June ‘07, might be a marginal deal today because of price reductions in the last year. When buying to resell, you must always consider if the market falls while you are holding the deal, what should you pay today to still realize a profit in 6-8 months? This is the hardest task of a Real Estate Investor and clearly the most difficult time in the cycle to successfully buy and sell for profit. I personally have lost plenty of money at this juncture in past cycles.

Finally, lets be reasonable and remember:

• Strive to maintain a relationship between how much property you are carrying and how much carrying power you have
• Sell one before you buy another one, for awhile. Make the market perform in uncertain times.
• There is always another deal to look at tomorrow, I promise
• Study data daily. If our market falls apart, wealth will change hands at some point in the future. Strive to be in business on that day
• Have a Plan B if your project does not work out as planned
• It’s a great idea to buy property with no money down….It’s a bad idea to buy real estate with no money in the bank!
• Always consider worst case. Then you are prepared if it happens

Jay Otto, Founder - Dwellgo.com

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