Double-Dip Used To Be Fun and Exciting…

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For most of you I am sure you remember the days as you were growing up stopping by the local ice cream store and getting a “double-dipped” ice cream cone.  Those sure were simpler times and the thought, even in mid-March, inspires memories of warm summer evenings and special treats. 

A Reality Check…

And now it seems that the term “double-dip” does not foster memories at the ice cream parlor, but instead visions of continually declining housing prices and more challenges for the economy and real estate investors.

From Warren Buffett whose insight can be obtained in, “Is Warren Buffett Right About the Housing Market Recovery?” to this article “The Next Wave Of The Housing Crisis: Much More Pain In 2010, 2011” — talking about the continued pain in the housing market through 2011, the message is clear:

Most if not all of the country is going to experience another round of property value decreases and that is where the “double-dip” terminology comes from.  I don’t believe that this is avoidable… so the million dollar question is this…

What Should An Investor Do Next?

This is a question that I know by my various discussions is on almost everyone’s mind. 

For the seasoned investor making the needed adjustments to their business – whether it is going from outright purchasing and selling to lease options or just purchasing rentals – they have been through enough challenges to know they have to adapt their business strategies to the ever changing market.  Adapting is what they do, and that is why they are still in the game!

I talk to many, many beginning investors, and to be frank, they are at a disadvantage; mostly because they have not learned to read their local market in a way that the seasoned investors have.  And, they put themselves under tremendous pressure to get started, but are concerned about choosing the right “formula” for their market and instead of making a choice, even if it is a less then optimal one, often times end up doing nothing! 

Here’s a given!  The housing market in most areas of the country has not stabilized.  As an investor you need to understand where your market is and much more a decline is anticipated.  Below are few things that will help you understand where your housing market it and where it might be going.

  1. Look at your local economy and the strength of your areas employment numbers.  Are they going up, down or have they stabilized.
  2. Determine the number of mortgage delinquencies in your area.  The higher the number of delinquencies, the higher the probability that more foreclosures are on the way — with the effect being declining property values.
  3. Know and understand how long properties are sitting on the market and what the local absorption rate is.  If properties are sitting longer or the absorption rate is increasing, you can anticipate continued value declines.
  4. Develop an understanding of your local rental market.  Know what is happening to rents and the vacancy rates within your community.  Declining rents and rising vacancy rates only support further declines in property values.

Sounds great… but where do I find this type of information?

There are a variety of sources.

On the macro level the Case-Schiller Index is a good place to start.  Keep in mind that this is just a starting place, and due to its national perspective, may not be reflective of your local market.

Another source for this data is your local Chamber of Commerce or if you live in a large enough community your local economic development agency.  You should be able to get employment and job growth numbers from these organizations.

Local Realtors are your best bet for the days on market, total inventory on market and the absorption rate.  Also, they would be a great place to uncover rents and vacancy rates within your area.

I am sure there are others, but this should be a good start.

The next action is yours.  And, taking the actions outlined above will allow you determine where the market is headed in your area so that you can make informed decisions. Instead of fearing this “double-dip” you can enjoy and profit from the ride.

Photo: Joe Shlabotnik

About Author

Peter is an active and successful real estate investor in the Baltimore Maryland region for the past 8 years and is one of the founders of The Club Mastermind a real estate investing coaching program focused on local coaches helping investors to perfect their game.

3 Comments

  1. Great advice. Unless you’re fully versed in the neighborhoods that you’re investing in, you find yourself in some real trouble. Protecting yourself from making avoidable mistakes by understanding demographics, job growth, etc is the only way to go.

    • Linda… You are so right! The challenge for most real estate investors is that they are not taught the importance of economic indicators and most “gurus”, who don’t understand them either never take the time to explain their importance. Some approaches may work great in one area, and spell disaster in others.

      Pete

  2. Peter,

    I think people focus too much on the surface numbers of investments. This is where I made many of my mistakes in the past. I like your focus on demographics. Socio economic factors are overlooked almost 100% of the time. People simply compare the “cash flow” on a 1940’s constructed home which is a 3 bed/1 bath in a high crime, poor schools, high unemployment, neighborhood 60% owned by investors as they do a 3/2, 2 car garage home built in the 1980’s in a low crime, suburban community, with good schools, low unemployment, high education levels, and primarily owner occupant neighborhoods. Unfortunately the reality we know is that those 2 investments behave differently. They can’t really be compared apples-to-apples. The lower end deal might require a section 8 voucher and a seasoned investor who can weather the storm of plummeting property values when the factory closes.

    Any neighborhood demographic sites you recommend to investors? I personally use ZipSkinny, however many zip codes can have varied neighborhoods within them. Excellent advice in your article.

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