Ignore Housing Price Volatility and Focus on Fundamentals
As economic experts search for clear indicators of a housing turnaround, signals point to increased volatility in home prices. Housing prices showed a slight decline of .3% March 2010, according to First American CoreLogic , over February 2010, while the Year-Over-Year numbers show a 1.7% increase. Further the Case-Shiller Index is expected to show Month-Over-Month declines when it’s released on Tuesday. So as the numbers improve over the last 12 months, we’re seeing volatility from month-to-month. Expect this to continue and even get a bit more volatile as prices adjust from the home buyer credit transactions closing. In fact, my bet is we’ll see stock market looking volatility over the remainder of the year as the real estate market tries to find footing.
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Much like in the equities markets, the average investor can’t sustain the day-to-day volatility watching their asset values. Real estate investors need to be looking at the fundamentals of the investment they either currently own or are planning on purchasing rather than obsessive tracking of housing prices. Here’s a few quick ideas for doing this:
Shore up underperforming properties
In my last article, I wrote rent decreases lagged price declines by 6 to 12 months. If you’re one of the many investors noticing the timeline on getting your property rented is sliding, consider lowering the rent to a realistic value and get the asset performing. The substandard performance you’ll receive is better than non-performance. The fundamentals of your property have changed. How can you make the most of it? Understanding how the fundamentals have changed is the key to building a portfolio or rebuilding your existing one.
What if the maintenance is higher than expected? Could a home warranty be a good hedge? Sure there’s upfront cost, but if you have a large portfolio, one can usually get a steep discount on them. Might not be a bad idea to minimize the next 12 months of maintenance during this turbulent time.
Consider shopping property management companies in order to decrease management fees. Could you save 1-5% by moving your portfolio to another firm? If so, what about alerting your existing firm that they no longer are competitive and negotiating a discount?
Buy the dividend stocks of real estate and not the high growth stocks
Until the market is on very solid footing you can expect this price volatility to continue in a big way. Place your focus on ensuring the performance of the property based on cash flows. Consider discounting the rents even further. Most homes have a specific rent range. Does the property you’re considering purchasing cash flow if you take the bottom of the rent range and subtract another 10%. View the appreciation as a bonus not as a focal point of your strategy.
Model the next purchase with a potential price decline in mind
Just a few short years ago real estate investors planned on prices only to go up. What if you analyzed potential purchases with a 10% decline in mind. Would you still buy the property? What’s the neighborhood like? Is it declining? Pricing in the majority of neighborhoods is declining, at least for appraisal purposes. If prices decline another 10% what’s your chance of liquidating the asset at 80% of that price? Buying distressed assets right now and taking the risk on the renovation can a great way to get properties significantly undervalued in order to guard against further price declines.
We live in a new era
Real estate investment in this market requires an extra level of dedication, patience, and analysis. As we enter this new era of price volatility, it’s now more important than ever to manage the fundamentals of your existing portfolio and have a new mindset when evaluating a potential property purchase.