A Saw Tooth Housing Recovery?

As many of you know I spend a lot of time scouring the news looking for valid signs, any signs, that may provide reliable hints to the direction the housing market is heading. I believe that the time spent”divining” the market is critical because when you can position your business activities in front of the market, your chances of reducing your risks and increasing your profits improve greatly.

One of the challenges in today’s market is that no one is really sure where things are headed. There are times, and I am sure many of you can relate, where the amount and veracity of conflicting opinions makes you dizzy.

Now that the market has been left largely to its own devices due to the expiration of the mortgage backed securities and homebuyer tax credit programs, our job is to figure out what’s next!

Lets start with this: What if we run out of existing inventory?

As discussed in this CNN article, there is currently an 8 month supply of inventory on the market. This is great news when you consider that historically, a normal market as discussed in this article, has a roughly six month inventory level. But, don’t be fooled by this relatively low number.

The twist on this article is that as the inventory numbers go down, prices will start to drift upwards, encouraging the shadow inventory and home-buyers sitting on the sidelines into the market increasing the inventory levels and driving prices down. I think you can start to see the possibility of that “Saw Tooth Recovery” in the title.

You could surmise that depending on how you look at things, the housing market, as discussed in this article, is BIPOLAR!

The last paragraph says it all…

“That vicious cycle could cause prices to bounce up and down for years. “I see a saw tooth bottom,” Humphries said. “Prices go up; inventory rises, which sends prices down again. That plays out for three to five years of no appreciation. … Without price appreciation, it leaves more homeowners in negative equity. That’s toxic. Any setback, like a job loss, they go into foreclosure.”

What to do? What to do?

As I mentioned at the beginning of this article our challenge as real estate investors is to make sense of this “bipolar” market. If we succeed in reading the tea leaves successfully we will prosper. If we don’t read those tea leaves correctly… well you see where this could go.

As with most of my articles I will leave you with a few recommendations that you should consider in both predicting the market and positioning yourself for maximum profits.

All real estate is local. It starts with your local economy and ends with your local economy. It goes without saying when people have jobs they buy things… including homes.
First time home buyers will continue to be the primary drivers in the housing market, and while the Federal Government may be stepping back regarding the incentive programs many local governments and some lenders are stepping in to keep this portion of the market viable.
As the shadow inventory of high-end homes starts to present itself… (think strategic defaults on properties with mortgages significantly higher then property values) the market for these higher-end homes will be very profitable. Keep in mind however, that this market segment does not have as many buyers in it nor is financing as available, therefore you can expect to hold these properties longer. Also, don’t loose sight of the fact that determining your ultimate sales price for these properties is going to be tricky due to the lack of reliable comps as a result of the low number of these higher-end homes selling in the past several years.
Stick to the fundamentals of successful real estate investing. What are these fundamentals? A few would include well thought purchasing criteria, staying conservative with your comps, and being aggressive in your renovation management.

The keys to success in this or any market are simple. Know what is happening within your market, develop/revise your plan according and be ruthless in your execution.

As a matter of fact, I really don’t care what our recovery graph looks like, I could have skipped down to that statement above and saved you the time of reading this entire article, but I wanted to give you something to think about before dropping the really important stuff on you.

Best of Luck!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.