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The Missing Ingredient to Wildly Higher Prices

by Michael Zuber on January 14, 2013 · 14 comments

  
Post image for The Missing Ingredient to Wildly Higher Prices

I firmly believe we are one step away from drastically higher real estate values.

If you have been paying attention to the press lately you have likely noticed a significant change in sentiment around real estate and more specifically real estate investing. For at least 5 years now, most of the articles and messages have been negative but in the last 6-12 months, the message has started to swing back to positive.

My unscientific estimate is that 90% of the articles as of today are positive and trending higher. This fact means more individual or small time investors are at least starting to look at real estate as a positive investment option. Combine this growing demand with the reality that large and deep pocket investors are chasing single digit yield in a no yield world and you have a recipe for price increases and a positive trend.

While I am fully aware of the backlog of foreclosures, the trending of short sales and the sheer reality that we still have years of clean up ahead of us – I am also not blind to the fact that supply is being “managed” while troubled assets (loans and properties) are being dispositioned in ways in which individual investors cannot compete.

In the end it has been both frustrating and impressive to watch the amount of government intervention in the real estate market over the last five years. I wouldn’t have thought this amount of intervention would have been tolerated in a capitalist world where one of our strengths is to clean out the system of our mistakes. Capitalism has always been about taking risks, reaping rewards and paying the price for mistakes. However, given the size and consequences of the housing bubble it is obvious that the leaders chose the “extend and pretend” route as opposed to “ripping the bandaid off quick.” I get it and frankly probably would have made the same choice if I were staring at the abyss they saw in 2006.

That said I believe we are one final ingredient away from multiple years of 20%+ year over year increases in real estate values.

What is it?

The Missing Ingredient

Simple all we need is banks and/or the federal government to realize that real estate is once again increasing in value and that real estate investors does not equal speculator. If investors can secure near-unlimited financing with 30% down or 70% LTV the market will shoot up almost overnight.

Think about it. If you are an active real estate investor today with 20-50 properties you are locked out of the cheap financing world. So this means the most experienced investors have to pay cash, use hard money lenders or build a track record for private investors.

I ask you what is a safer investment than lending at 70% LTV on an asset that is increasing in value and has a ready supply of renters to experienced investors with years of experience and a portfolio of assets to fall back on?

Mark my words: it will eventually happen. Real estate investors will once again be able to secure cheap bank financing and when that happens we will have multiple years of 20% increases in property values.

In the meantime enjoy the slow build of progress as we are off the bottom and trending higher. I look forward to the day we can once again secure cheap bank financing.

Good Investing

Photo: OliBac via Compfight cc

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{ 14 comments… read them below or add one }

Jeff Brown January 14, 2013 at 4:26 pm

Hey Michael — What you suggest requires a couple things to happen.

1. The federal government to think logically and rationally.

2. The federal government to then take rational, logical thoughts and covert them to equally rational/logical actions/policy.

Are you holding your breath? :)

Reply

Mike Z January 14, 2013 at 7:38 pm

Jeff

If I am correct it is not the Federal Government that needs to step up just smart and well meaning bankers. As real estate values rise they will feel more secure and they will be wildly profitable if they can pay <1% and loan at 6% with 10 to 1 or greater ratio with more security as values rise

Eventually the banks will figure it out and then the government can stop supporting market

Good Investing

Reply

Glenn Espinosa January 14, 2013 at 5:02 pm

Mike,

What about jobs? Investors can churn out all the houses they want with cheap financing, but the demand will plateau without enough jobs.

Reply

Mike Z January 14, 2013 at 7:40 pm

Glenn

Jobs could always be better but I believe lending to investors is key. By the way the more lending, the more repairs, and eventually more construction and guess what jobs will come as construction is very low today

Good Investing

Reply

Melodee Lucido January 14, 2013 at 7:49 pm

I’m not a brilliant financial expert but I think like Jeff does on this. As a matter of fact I have no trust in bankers or the gov.

But that could just be my cynical side showing. Cynicism & realism are only a breath from each other.

Reply

Mike Z January 15, 2013 at 8:27 pm

Melodee

The key is bankers are greedy and they like to make money. You don’t need to like or trust them as they are out for profit and this will be very profitable once they realize it

Good Investing

Reply

Vince January 14, 2013 at 9:37 pm

Cheap bank Financing! Man I sure hope that is soon! lol but i dont think that is the case!

Reply

Mike Z January 15, 2013 at 9:04 pm

Vince

I suspect it will happen inside of two years. Now by Cheap I am thinking 7% Interest fixed and full amortized for 30 years with 70% LTV no cash out.

Good Investing

Reply

Bryan Jaskolka January 15, 2013 at 9:50 am

I don’t think lenders are going to start offering better financing deals to investors, and to be honest, I think investors are shy right now. With the fiscal cliff and debt ceiling looming, things are simply too uncertain right now for anyone to fell confident. At least that’s the feeling I’m getting reading those headlines and newspapers. Things will turn around, but not until the second half of the year when we know what’s what again.

Reply

Mike Z January 15, 2013 at 9:06 pm

Bryan

I hope investors are scared again. I like to invest against the tide. I made my best deals when investors were scared in 2008 and 2009

Good Investing

Reply

Melodee Lucido January 15, 2013 at 9:09 pm

Mike, you like it because there isn’t so much competition?? Yeah, I missed it back then, I was too new and I was one of the scared ones. Not now heehee

Reply

Mike Z January 15, 2013 at 9:04 pm

Lee

Let’s see what happens

Good Investing

Reply

Karen Rittenhouse January 16, 2013 at 3:32 pm

Polyanna with Rose Colored Glasses!

I so hope you’re right! I’d be happy with 20% appreciation for one year.

20% appreciation year over year? Bring me the smelling salts….

Reply

Tracy Royce January 17, 2013 at 5:19 pm

I think just lending getting loosened in general will spark a spike in prices. Yes investors will take advantage of it but FTHB’s and those that foreclosed/short saled years ago are buying again too.

We’re at 3 months supply here in phoenix. THREE months. Hasn’t been this low since 2005, and it’s given us a 30% spike in prices since last year. Demand isn’t going to slow anytime soon, so if in next 24 months if lending gets easier for the average consumer it could certainly be a recipe for another double digit increase in prices, perhaps not 30% but ???

Reply

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