With inflation on the rise, corporate America cutting jobs and a wave of foreclosures sweeping the country, is it time to dive in and start buying real estate?
At the risk of sounding like a 2 a.m. cable pitchman, I think the answer is “yes.”
Now, hear me out. While banks are still gun-shy about making loans and vast inventories of housing stock still sit on the market, new buyers are surging in–bargain-hunting investors looking to snap up distressed properties at fire-sale prices, and first-time homeowners who couldn’t afford to buy when the market was red hot.
According to an article in Reuters last week, home sales in California–which accounts for 25 percent of the nation’s housing stock–are picking up, indicating that home prices may stabilize before year’s end. The California Association of Realtors reported that the state’s June home sales rose 17.5 percent from a year earlier, while the state’s median home price plunged 37.7 percent. June also marked the third consecutive month of increases in California home sales over last year’s levels.
What’s more, California’s backlog of homes for sale shrank in June to 7.7 months of supply, down from 16.8 months in January. The average California home stayed on the market for 49.1 days in June, down from 71.6 days in January, another indicator of a possible recovery.
As goes California, so goes the nation?
Not necessarily. Unlike stocks, bonds or commodity futures, all real estate is local, and every house is unique. So, while one market may be on the verge of recovery, another could sit in the doldrums for decades. And unlike other asset classes such as stocks, where one share of IBM is identical to every other, houses aren’t fungible. One house may be worth more because it has an in-ground pool or is located in a good school district, while another may be worth less because it lacks central air or is on the wrong side of the tracks.
Here in New York City, for example, $6 million-plus luxury apartments with three or more bedrooms in desirable neighborhoods have continued to surge in price, while one-bedroom apartments are going unsold even as their owners slash prices in order to move them.
A front-page article in the real estate section of The New York Times on Sunday told the story of John and Wendy Penn, a Long Island couple who bought a one-bedroom on West 72nd Street for $650,000 in May 2007, spent $30,000 on renovations and put it on the market for $769,000 last February. They still haven’t been able to unload it despite cutting the price to $725,000, which would barely allow them to break even after paying their broker’s commission.
But, while buying a one-bedroom apartment in Manhattan may not be a great deal even at today’s reduced prices (most affluent buyers with families want at least two bedrooms and a nice-sized kitchen), there are other pockets of New York real estate that look attractive at twice the price.
For the past two years, I’ve been hunting for houses in The Hamptons. It’s not because I take my summers off and want to relax on the beach. It’s because hedge fund managers, wealthy Europeans and other affluent people are willing to pony up $100,000 or more to rent vacation homes in East Hampton, Bridgehampton and Amagansett from Memorial Day through Labor Day.
When houses like these were going for $3 million to $4 million, the numbers didn’t make sense for me as an investor. But now that these houses are selling in the $2.5 million range, the rent roll they generate can cover my debt service and operating costs without requiring me to go out of pocket. Plus, I can use the house myself during the other nine months of the year if I ever have a free weekend to lie on the beach.
While every real estate investor is different (some like to renovate foreclosed properties and flip them, others prefer beachfront condos in Miami that they can rent to New York snow birds), I tend to favor unique properties in prime locations with a limited supply of real estate. That’s why I snapped up two townhouses in The West Village for $5.25 million right after 9/11 when many people feared that New York would be hit by another terrorist attack. That property is worth $13 million today.
As an investor, I’ve always believed that you make money in real estate when you buy, not when you sell. That’s why I don’t chase deals when the market is hot and there are lots of other buyers. I prefer times like these when the market has cooled and I can take my pick of great properties at attractive prices.
Will the housing market ever go back to partying like it’s 2007? Probably not any time soon. But if you buy wholesale, who cares?
This entry was posted on Tuesday, August 5th, 2008 at 7:27 am and is filed under Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.3 Responses to “Time to Invest in Real Estate?”
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August 5th, 2008 at 12:38 pm
Great advice for those considering properties in New York- while the “recovery” appears to be fickle, pockets of NY offer some realistic pricing- it’s just taken some time. Buying a property in a “frenzy” is without a doubt the worst way to make a decision, but only hindsight affords the luxury of that assessment!
August 5th, 2008 at 1:05 pm
Here in Central PA we did not experience the massive slide in values and subsequent bounce in inventory. I suppose we were “lucky” but a stable economic picture (lowest unemployment in the state) and a mostly middle-class workforce keeps the demand for homes steady. Prices have leveled off, though, and inventory did creep up – in my opinion as a result of the media blitz on our TV screens.
August 6th, 2008 at 6:34 am
New York State home prices are still up 610% since 1981; the biggest state increase in the nation. Wages are up 210% since 1981. Simple math shows prices have another 66% on the downside.