Real Estate Opportunities in 2008

2008 is here!

But so many of the issues from 2007 are still haunting us.

In Q1 of 2008 I'm certain we'll start to see the greater picture of how the massive write downs from 2007 will effect the greater market as a whole. Then again, there are people that I know within the banking and finance industries who believe that, perhaps, these write downs may have been calculated overestimations on the part of the banking industry; an attempt to write off bad debt and bad loans without cutting into bank profits which, in many cases, are still at a pretty robust 6-8 percent. I know several people who are buying up bank stocks because they strongly feel that the beatings the market gave the banks last year have actually left the bank stocks significantly undervalued. Let's see if that play is right.

But what about real estate? What about the golden child of years past that has suddenly become the diseased bastard child?

Well, it seems that there is a lot of interest and opportunity within the real estate market, it just depends on where, what, and how you look at it. My friends who are in land acquisition and development have whispered that they are scaling back their actual development plans. That conversions of condos or the building of new residential units, has been intentionally scaled back to allow for absorption by the market. Let's face it, these guys didn't become rich by being stupid! On the other hand, they have no intention of slowing their purchase of land for future development. In fact, a friend of mine at a largely diversified development firm who does residential and commercial development has also confided that he has been diversifying the company's assets further by purchasing interest in REITs (Real Estate Investment Trusts), which have been pummelled in the market for the last year or more. In his opinion, this is the land of opportunity because these large real estate holding companies have been bludgeoned more by a perceived loss of value rather than any losses to hard assets, (meaning to the real estate itself).

But what about losses to and of "hard assets" like real estate? As much as real estate may have over inflated over the last several years, the recession of these prices in all but a few extreme cases seems to be fairly moderate or is moderating. Many of us have acted like unruly children and the banks were more than happy to help us out, by allowing us to use our homes as ATMs so that we could live the lives we thought we needed to.

Life now, must return to more conservative and realistic choices. We have been living above our means for too long and there is going to be a consumer backlash. Over consumption will, in the coming years, give weigh to moderation and conscious consumerism. We will work on controlling our impulses. We will emulate those who are truly wealthy. I'm not talking about the neaveau riche who opitimize the overconsumption and gluttony of the last several years; I'm talking about "old money." Old money prefers quality over quantity, substance that still exudes style, and old money makes a conscious effort to live comfortably within their means. The goal of "old money" is to avoid waste so that wealth is perpetuated. After all, it is easy to make money but it isn't so easy to keep it.

So what are smart people doing with their real estate dollars these days? Why moving UP of course!

As I've watched the housing market bounce around like a rowboat in a hurricane, I've noticed a trend: a "stealth recovery," of sorts. One aspect is the people who were reluctant to purchase before. The first time buyers who, having good credit histories and a bit of saved money, were reluctant to jump into the frenzied highs of the markets last few years. They quietly, (and it would appear very shrewdly), recognized that the market was too rich for their blood. Now, with receding prices and desperate sellers, these buyers are making the most of this market which is loaded with opportunity.

The second group, ironically, has been the "move up" crowd. Whatever their financial situation, one of the strongest group of buyers at this very moment seems to be the group that is looking to upgrade from their current home. In general, this group has, for some time, been looking to make that move to a larger or more posh home, but often found the price too steep for the upgrade in the hot market of the past. For example: if the client has a $500k home and is looking to upgrade to that $1mil home in a nicer area, even though they could sell their home for top dollar in the hot market, they would pay top dollar for the upgrade.

Now look where we are:

Say we take the same client with the same home valued at $500k. Now let's say because of price recession the home now could only command $450k or 10% less than at the top of the hot market. Most of us would say OUCH! That's a $50k loss that really hurts. But the smart money sees it as an opportunity.

Here's why:

Let's now take the upgrade house that was valued at $1mil. Now let's apply the same percentage of price recession to this home and now, in the cooler market, the home has a top value of $900k. The value and potential for gain lies within the incrimental loss to this property.

Where at the top of the market the swap of the $500k home would cost the buyer an additional $500k, the swap NOW only costs them $450k or a savings of $50k over an upgrade in the hotter market. And that is despite the loss on their current home.

It seems that folks are really starting to wake up to this and, in fact, a lot of the people who I'm dealing with right now are in that 700k plus price range. They are taking their time and being very particular because of the amount of homes out there, but they recognize the opportunity and are ready to take it.

I predict we see a surprising spike in the Spring market, particularly in the Chicagoland area, in the sale of homes priced 500k and above.

The by product of this is that there will be a solid number of homes for new buyers that will be relative bargains. Once the "move up" crowd spots an opportunity, look for them to make more aggressive deals on the homes they are leaving.

2008 will be full of opportunites in Real Estate and this is the tip of the iceberg.

Rick