Blood in the Streets

By Michael Douville - Real Estate Analyst,

The legendary John D. Rockefeller once said, "Buy when there is blood in the streets." Conversely held true is the adage, when everyone is buying, it is time to sell - - something likewise confirmed by the latest mania gripping the current housing market.

Prior to the downturn, everyone had a need to buy something, anything. And as we all can remember, droves of people flocked to the front of housing developments to purchase new homes. Bidding wars soon erupted over resale homes, with agents and buyers hurriedly scribbling escalating offers on the front lawns and adjacent parking lots of the properties up for sale.

At the time, value was not even considered, as everyone knew the prices were quickly ascending, and would continue to do so. Lenders allowed either no- or low-documentation loans to accommodate buyers' wishes, leaving them vulnerable to fraudulent activity by those who knowingly and deceptively misstated their qualifications. To make matters worse, speculators were operating in "get-rich-quick" mode, and now, nearly two years later, we know most of them were wrong, very wrong.

The media is continually covering the bad news. Lenders are liquidating properties that have been returned to the bank and accepting losses of 20-40%. This move has resulted in significant price drops in home values and placed intolerable levels of hardship for all involved. Those needing to sell their homes must now compete with asset managers at REO pricing; otherwise they are unable to sell.

Homeowners who are current with their loan balances are likewise affected, as their home value is, in many instances, lower than the mortgage balance. The good news, though, is that the healing process is underway, and those who purchased their house for their family within a neighborhood in close proximity to good schools, public transportation, shopping, etc, will be fine. The average family lays down their roots for at least five years. Within that time frame, chances are good that a new cycle will begin anew, and this current housing crises will be history.

However what must not be forgotten is that with lender-owned and REOs comprising roughly 20-30% of the real estate market, and prices declining another 20-40%, there is "blood in the streets."

Real estate investors, unlike speculators, have a plan with a clear entrance and exit strategy. There is a two-fold reason to purchase: Cash flow and capital gains. Pricing becomes an extremely important component of the acquisition, along with future growth potential, the latter of which has become very favorable. Homes are on SALE.

There is a risk/reward balance and most of these investments are leveraged, adding another component to the equation: Interest rates and liquidity. The Federal Reserve and the Treasury Department are now restoring liquidity, helping to provide support to families struggling to remain in their homes while offsetting the harrowing rate of foreclosures. Traditional financing limits have been raised for conforming loans and FHA/VA loans to allow more buyers to purchase. The supply of foreclosures should soon peak and start to decline, limiting REO impact, and thereby normalizing the market.

However, prices are still depressed. Buyers are still acting with extreme caution and mindful of not wanting to make a mistake. News commentators continually stress how bad the real estate market is and how everyone knows it is not time to buy. However, when everyone is selling, as the greats of investing have taught us, it is time to BUY. Within two years' time, we will know if I was right, and I expect very very RIGHT.

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