Has the Real Estate Supertanker Finally Turned?


For the past several years it seems that every time you ran into a real estate agent he would proclaim that the market was at the bottom and it was time to buy. Of course, that was nothing more than the agent’s vested interest speaking. The market continued to slide in just about every city. Some fared worse than others, but few areas of the country were spared.


Many inexperienced and even some veteran investors have an expectation that the real estate market can turn on a dime in the manner of a speedboat. Perhaps they think it’s more like the stock market, which can swing wildly from one trading session to the next. However, real estate is more like a supertanker in that it takes a long time to change course. The reason for that is simply the lack of instant liquidity and the time it takes to complete each transaction.

Recent Data

There is good news. The latest report from the Case-Shiller U.S National Home price Index shows that real estate prices have shown their first quarterly increase in three years. Does that mean that the bear market in real estate prices is over? Not by a long shot. There are many foreclosures on the horizon and the national economy is still hurting. However, it’s a start.

At this point we’ll take any good news we can get. The index tracks twenty major cities in the United States. There were only two that showed declines, Detroit and Las Vegas. Detroit has suffered major declines in jobs, especially in the auto industry. The most recent figures show that the unemployment rate is a staggering 28.9%. The real rate is even higher due to the way those figures are calculated. With so many people leaving the area in search of better opportunities, there is a tremendous oversupply of housing creating serious downward pressure on home prices

Las Vegas is a horse of a different color. Massive speculation during the boom led to overbuilding and runaway prices. Consistently at or near the top of the nation in foreclosures, there is a huge oversupply in Las Vegas as well. The loss of construction related jobs coupled with a decline in tourism have resulted in an unemployment rate of 13.1%, well above the national average. The good news for Las Vegas is that investors have come back in search of bargains. The warm weather, entertainment options and Nevada’s lack of a state income tax make this a desirable location for many.

Better Days Ahead

It certainly isn’t smooth sailing from here, we will have many ups and downs as we move along. The real estate market will never be the same as before but people have a way of adapting. Investors have already adapted to the evolving market by looking for different opportunities or changing strategies. Those who are unwilling to change have left in search of greener pastures or will do so soon. Markets are always evolving, it is up to us to evolve right along with them.

Your big opportunity may be right where you are now. – Napoleon Hill

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  1. The biggest problem facing commercial real estate is the capital markets’ lack of liquidity. CMBS issuance went from $230 billion in 2007 to $12 billion in 2008 to less than a billion dollars YTD in 2009 Higher vacancies and higher reserves can be built into financial models to determine an underwritten cash flow (UCF). We can apply a stressed interest rate and a higher than normal debt coverage ratio to the UCF to determine very conservative maximum loan proceeds. As delightful a math exercise that might be… when there is no functioning capital market to provide liquidity, there are no transactions in some market segments.
    What used to get easily financed at 80% of cost now will only justify 40-60% LTC/LTV (lesser of) financing from long term investors such as insurance companies and pension funds based on the new ultra conservative underwriting standards. This makes commercial real estate a “rich man’s game” once again and will knock all the amateurs out of the business. For those with massive amounts of cash and a long time horizon this is the greatest buying opportunity of our lifetimes. The only thing that can change this inevitability is government involvement in the capital markets through a program like TALF where at least the lowest risk AAA piece has liquidity once again.

    [LinkedIn Open Networker with 1,511+ connections]

    .-= David Repka´s last blog ..About $12B In TALF Eligible Deals Emerge Ahead Of Deadline =-.

  2. Nice article! I think real estate will recover sooner or later. But we were in a bubble. so it will probably be later. The global debtbubble is next to burst. That is why i put my money in gold and goldmining stocks.

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