Why the Bottom Is in for U.S. Real Estate Prices

US Real EstateThere is no doubt in my mind that the real estate market has bottomed out. I’m in Miami this week trying to pick up some “deals” in this recession-hit-hard town and I’m starting to see some changes in the marketplace for real estate.

I want my dear readers to be aware of two important changes in the property market:

— While there is still a glut of property (condos and vacation properties) on the market, prices have stopped declining because foreign buyers are in the marketplace buying up the deals. Florida and Arizona, in my circle of associates, are the places real estate investors are buying in.

— The bank-foreclosed deals and properties about to go into foreclosure (also known as “short sales”) are being bought by investors with cash. No financing. When you see cash buyers that usually signifies patient money that believes now this the time to buy. Cash buyers often do not have the pressure to sell. When cash buyers come in, it is usually a signal of a bottom in any market.

In Florida, the more inland you go (away from the ocean), the more prices for real estate have dropped. It is common to find inland property selling at half the price it sold at during the property market peak in 2005. There is a glut of product and cranes still stick through the top of unfinished condo buildings.

But, slowly, these depressed properties are being taken up by investors (or people looking for vacation homes) who are taking the “I might never see prices like this again” attitude.

While I’ve given my readers two important positives for the real estate market in the U.S., if you are planning to jump into this market, I also want to give you three warnings:

— A great number of homes in the U.S. (that have not been foreclosed on yet) are worth less than their mortgage. At any point, these homeowners might cave in and walk from their homes. That would put more product on the market, softening prices again.

— Interest rates cannot stay low forever. Once the Fed starts to tighten, which the majority of economists believe will happen in late 2010 or into 2011 (barring an inflation surge), real estate prices will come under pressure. In general, property prices rise when interest rates fall, and property prices fall when interest rates rise.

Yes, the bottom might be in for property prices in the U.S. But, because of huge inventory overhanging the market, prices may stay at the same level they are today for many years to come. So, if you are looking to make that real estate investment today because of depressed prices, you will need the patience to wait several years before those prices move back up again. As the old adage goes, “Patience is friend of the investor, enemy of the speculator.”

Michael’s Personal Notes:
Are the car-makers coming back to life?

Ford, GM and Toyota are all obviously doing better now that the recession is over. But how about the side effects of the recession, like the high unemployment rate — will that not keep consumers
away from buying cars?

Toyota, the world’s largest automaker, reported its biggest quarterly profit in two years yesterday. The company also hiked its sales forecast for 2010 to 7.38 million cars. Ford and GM sales are on the upswing, too. Rumors of a GM public offering persist.

Make no mistake about it, the economy is fragile. While demand is slowly rising for the car-makers, companies like GM, Ford and Chrysler are not as bloated as they used to be. By “bloated,” I mean they have closed dealerships to concentrate on only the most profitable sales locations, slashed overhead, and cut employees and employee costs. They are more efficient.

In the years ahead, as the economy continues to improve, the automakers will do better. But I wouldn’t personally be a buyer of the GM public offering, because the overhang of stock owned by the government could cause resistance on the stock price if the government decides to sell its stock into the market.

Ford stock has been a good play. But remember that looming higher interest rates could be another big problem for the automakers.

Liking the auto stocks, but not enough to buy them yet.

Where the Market Stands:

The Dow Jones Industrial Average opens this morning up two percent for 2010. After some seesawing in June and July, the bear market rally that began in March 2009 is back on the upward swing.

The economy is doing better, the stock market is moving higher — maybe retail investors (the majority of which missed this current market advance) will start getting back into the stock market. The bear would like nothing more than that.

Enjoy the rally and remember, “The trend is your friend.” We are up in the stock market for 2010 again, so that trend is “up” for now.

What He Said:

“If the U.S. housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure — these are the bank stocks I wouldn’t own.” Michael Lombardi in PROFIT CONFIDENTIAL, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.

“I’ve been writing to my readers for the past two years claiming that the decline in the U.S. property market would not be the soft landing most analysts were expecting, rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most can realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007 Michael was preparing his readers for worse times ahead.