The Winds of Opportunity

“Forget stocks.  Don’t bet on gold.  After four years of plunging home prices, the most attractive asset class in America is housing.” So began a reassessment of the real estate market by a major media outlet that appeared throughout last week’s news cycle.

Lest you suspect these words were penned by someone with a vested interest in selling new or existing homes, brace yourself for a surprise.   Instead, this was the sub-headline for an article on today’s recovering real estate market entitled “Real Estate:  It’s Time to Buy Again.”  Authored by Shawn Tully, senior editor-at-large at Fortune Magazine/, his only vested interest is giving the best advice to his audience of nine million affluent investors.

Confused?  With all the conflicting news appearing daily about the real estate market, we’d be surprised if you weren’t.  But even in market’s such as ours, with a troublesome backlog of distressed properties to sell before we can get back to basics, the winds of opportunity are blowing favorably.  Quite frankly, its becoming harder and harder to find articles about the real estate market where the negatives outweigh the positives.

We won’t even discuss Tully’s hugely upbeat assessment of what he terms the “non-distressed” markets—so named because they avoided the nastier side effects of the bubble—except to say that their shrunken inventories of homes have placed them on the cusp of a strong market.  With the historic drop in new home construction over the past few years, even a modest uptick in demand—resulting from today’s recovering economy and job market—will likely result in major gains in prices in these markets that will outpace inflation by three to four percentage points over the next few years.

Markets like ours—which Tully labels as the “foreclosure markets”— got this way largely because of their inherent desirability.  People want to live in warm, sunny locations; especially the 76 million trendsetting Baby Boomers who are poised to hang up their careers, head south and reinvent retirement.  According to a new survey by the Pew Research Center, fully eight-in-ten adults agree that buying a home is still the best long-term investment a person can make.

Similarly, the economic turbulence of the past few years has done little to deter younger buyers from actively pursuing home ownership, according to a new study commissioned by the National Association of Home Builders.  Gen X’ers—or those 51 million Americans between the ages of 31 and 45—are also expected to take a leading role in the housing recovery, especially as it pertains to fueling new construction.  With better than 9 out of 10 saying that now is a good time to buy a new home, their motivation is not solely about price.  It’s also about owning “something compelling and unique, from a design or personal standpoint.”

The challenge in foreclosure markets is to absorb the unprecedented wave of distressed properties, whose unnatural influence on pricing has caused these markets to become grossly undervalued.  Many of these properties are what Tully calls such “screaming deals” that investors both large and small are buying them—often in bulk—and leasing them in what remains of today’s strong rental market.

Meanwhile, thousands of would-be buyers—many of whom sat-out the real estate downturn as renters—are being advised to step-up and buy.  In more than half of the 54 markets examined in a new study by Deutsche Bank, it is now cheaper—often by far—to pay the mortgage and other costs of owning a home than it is to rent the same house.

Once most foreclosures are sold and these markets experience fresh demand without the corresponding downward pressure on prices, home prices are expected to rise rather sharply.  If all outstanding foreclosures enter their markets at a fairly even pace, William Wheaton—an economist with MIT—believes most will be absorbed between now and the end of 2013.  Such a scenario nixes the notion that it will be many years before our market fully recovers.  More to the point, well-priced homes and condominiums are suddenly flying off the shelf so quickly that buyers here are noticing a greatly diminished selection of good properties.

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