War Zones

[Brett K.]

I've been watching neighborhoods in my market and I have really good data going back to 1998. Since the mortgage debacle I've seen our inner-city neighborhood prices plunge. It used to be possible to pick a house up in the 20's (as in $20k) rehab it and sell it in the $70's. Since the crash I haven't seen any of that; rehab flipping evaporated. Prices are topping out in the $50's. There are a ton of cash transactions so I assume these are investors accustomed to operating in this area and they are scooping them up for rentals. I just updated some of my market data for this area and I'm seeing a turn in the market. Inventory is very tight and there are no properties listed as cheaply as they were just a few months ago. Prices at the low-end have nearly doubled in just a few months. I have yet to see the prices at the top, that is the $70k price range and up, emerge. Am I correct to assume this is going to happen soon? I'm looking at buying a property in the area but I don't want to be a long-term landlord. I'd like to have the option of selling. I'm also apprehensive about trying to operate in this market. It seems like a specialized niche.

[Patrick L.]

@Brett K. Assuming anything is generally a bad idea and in this case it's really misguided. You can't look at the old prices from the peak of the market as any guidance to future prices, those were from a time when anybody could get credit and a down payment was optional. The people that lived in those war zones could get a loan to buy a house when they probably wouldn't have been approved for a car loan. The prices were artificially driven up and people that had no clue what they were doing, people that had no business owning a house, and shill buyers created high prices.

War zones are not for flipping, they're for experienced investors that know the ropes. Those investors also know what returns they need in order to buy in those areas. If the prices were 50% higher those investors wouldn't be buying there anymore because the rents aren't going to increase to support the return they need.

If the prices top out in the 50's there's no way they're going to immediately jump to the 70's. In a market like that where people are buying for pure cash flow the prices will move slowly and you won't see a 50% jump.