Proceed with Caution, but Proceed

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I wanted to verbalize my thoughts on the market and why I believe people looking to invest in real estate should do so but proceed with caution.

Last week I wrote an article about why I believe investors should use a blue-chip real estate strategy when investing in today’s market.  The focus was on identifying opportunities near median and average prices in various markets to ensure multiple exit strategies exist and homes rent quickly.  I believe that article is timely as it identified a few things that would question even the most optimistic real estate economists.

How long before the inventory is cleared?

One of those items was an article in the Wall Street Journal about the market needing 9 years to clear out all of the shadow inventory and the delinquent loans likely to foreclose.  The article’s premise is that using the current rates of inventory clearing, it will take 108 months or 9 years to clear this inventory out.  The article goes on to say that by picking up the pace of sales, banks will add too much to the supply and boost their losses.  So it implies that an acceleration of clearing won’t happen.  An equally frightening counter point to this is an article by Irving Housing Blog showing that Bank of America is planning to increase foreclosures 600-fold from 7,500 per month in 2009 to 45,000 per month in 2010.  These numbers were attempted to be verified and B of A said they plan on escalating the rate significantly and expected a peak of 45,000 in December with numbers trending down in 2011.  Not 45,000 per month but still a lot more than 2009.  B of A’s statement shows they are ready to put the housing crisis behind them.

I’m all for clearing the inventory out and think the unnatural price support is no longer needed.  Another leg down in pricing is probable but with a record low number of new homes being built and confidence being restored in consumers, I don’t think that leg down will be significant.  I’ve stated before another 5-6% nationwide with the usual suspect states in the Sun-belt being the largest drag on national numbers.  The national problem is becoming localized as certain markets recover from over-corrections.

The government is backing 96% of all mortgages.

Scary number, I know.  Fannie Mae, Freddie Mac, and Ginnie Mae are the mortgage market.   Banks holding new originations in their portfolios are nearly non-existent at this time.   During the peak of non-government servicing entities securitizing loans, they had 40% of the business.  That number now is less than 4%.  So is it safe to say we’re far from normal?

Source: San Francisco Fed

That’s what I thought on the initial outset.  However if you look back 10 years you’ll find that bank portfolios have been between  roughly 7-17% going back a decade.  Normal might be closer to 10%.  That’s still a long way from where we are today.  I anticipate banks will get back in the game but we’re probably 2-3 years away from this.  I say this because loan delinquencies may have peaked and will start trending down.

In the end I’m a big fan of optimism.

I consider myself a realist.  People often think I’m an eternal optimist. That’s partially true, but I believe things are getting better.  I’m a realist because I think all the data needs to be considered, even the bad stuff.   The worst is behind us. Banks are cleaning out inventories and how can you say that’s a bad thing?  Especially at a time when builders aren’t building and people still need a roof over their heads.  And even when prices dip again it will simply extend this buying opportunity out during a period in which financing continues to improve.  This will allow for more investors like you to buy homes you ordinarily couldn’t presenting positive cash flow opportunities or excellent flip opportunities.  I just hope you aren’t on the sidelines trying to time the market.

Image Credit:  San Francisco Fed

About Author

Ryan Hinricher is a Real Estate Entrepreneur, Blogger, Change Advocate and Founder of Investor Nation, a concierge realty and real estate investment company focused on the needs of the residential investment home community.


  1. Ryan, like yourself, I am a realist with an optimistic outlook. Yes, now is a great time to get in the market, but only AFTER performing due diligence to ensure you are making a safe (or least as safe as it can be) investment.

    • Alex, agreed. Finding the RIGHT opportunity is still key. I’m personally seeing a lot of property sellers offering cheap junk at 50% of Zestimates and so forth. This is still way too high in most cases. I like the median-priced opportunities the most. Even then you have to perform extensive analysis, neighborhood, and market due-diligence. Then you have contractors, management companies (don’t get me started), and more.

      Being prudent has never been so important.

  2. Eric in Silicon Valley on

    Hi Ryan,
    I’m getting the sense that slowly but surely banks are getting better, or wiser about property management (meaning the old adage about banks not being in the real estate business is beginning to fall apart), and we may be seeing a greater comfort level among banks with foreclosing on properties and putting them out for rental. At least, it seems small coincidence that in the past few weeks I’ve read articles here and there, and had people mention to me, that this is a growth industry (property management catering to bank REO departments).

    While I can’t imagine what BoA would do with its inventory if they foreclose at the rate you mention in your article, putting some of it on the rental market seems a solution that would benefit everyone.

  3. Your on the money. It is imperative that real estate investors know and understand their real estate markets; whether it be merchandising with wholesale or rehab/retail deals staking a claim in the world of landlording.

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