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Home Ownership: How to “Buy on Fear” in Real Estate
by Marc Lichtenfeld, Advisory Panelist
Thursday, July 9, 2009: Issue #1036
Almost half of all American adults no longer believe that home ownership is a realistic way to build wealth. That’s according to Gail Cunningham of the National Foundation for Credit Counseling.
Given that home ownership is a cornerstone in almost every wealth-building plan, this is astonishing.
Even if the days of selling a house for an enormous profit are over, building equity in a home beats the pants off paying rent.
Of course, ownership is not always better than renting, but in most cases, it still is. And even if home prices are flat, building a little bit of equity makes it worth the cost of ownership, especially when you add in the tax breaks associated with owning a home.
Trouble is, some of the statistics are frightening:
- One-third of those surveyed don’t believe they’ll ever be able to afford a home.
- Forty-two percent of those who once purchased a home, but no longer own it, don’t think they’ll ever be able to afford to buy another one.
Recently, Karim Rahemtulla detailed the problem that the large number of short-sales are causing in the real estate market. Today, I’m going to give a couple of tips to both house-hunters looking for bargains and investors looking to “buy on fear.”
Buying Property With “Blood in the Streets”
There’s an old Wall Street axiom that says you should “buy when there’s blood in the streets.” And throughout the real estate market, there is clearly blood in the streets.
In some markets like in Oakland, California – where prices have dropped 32% in the past year and 75% of first quarter home sales were distressed sales – there’s not only blood in the streets, there’s a virtual river of the stuff flowing down Broadway & 17th St.
But if you’re considering buying a property – either as a primary residence, investment property, or vacation home – now is probably a good time to start looking. Desirable vacation and retirement spots such as Southern California, Miami and Naples, Florida, Phoenix, Arizona and Las Vegas, Nevada have suffered a particularly bad beating and likely contain many desperate sellers and foreclosed properties.
And even in markets that have held up relatively well compared with the rest of the nation, you can likely find some bargains…
Use Homeowner Desperation to Your Advantage
Take Asheville, North Carolina, for example…
The average sales price of a home there is only off by about 15% from the peak, but homes are now sitting on the market for an average of 144 days, up from 94 days. The number of houses sold in 2009 is down by one-third from last year.
Even Austin, Texas, which has weathered the real estate storm better than most, has seen the average price of a single-family home decline by just 3% from a year ago, but volume has slipped 25%.
As Karim suggested on Tuesday, the best strategy may be to find a desperate seller who is forced to compete with short-sales and the foreclosures. Plus, you’re likely to get the deal wrapped up in a much more timely fashion than if you’re dealing with the banks’ lawyers. Sure, you may find bargains on foreclosed properties and short-sales, but the process will take much longer.
For those of you not looking to buy a house but still like the idea of buying fear, consider this option…
Go Contrarian on Commercial Real Estate
Many experts believe commercial real estate will be the next big shoe to drop. And my colleague David Fessler, recently published some alarming statistics about it. Take a look:
- During the first quarter, businesses vacated 8.7 million square feet of retail space. Not only was that a 10-year high, it compares with 8.6 million square feet vacated for all of 2008.
- Vacancy rates at regional malls, strip malls and neighborhood centers are increasing at the highest rate in 30 years.
But if you’re looking for an uber-contrarian way to play this commercial real estate trend, consider REITs (Real Estate Investment Trusts) that specialize in commercial property.
Take a look at Kilroy Realty Corp. (NYSE: KRC). Founded in 1947, it develops and manages office and commercial property in Southern California – one of the hardest hit markets in the country.
The firm just cut its dividend to $1.40 per year, but that still equates to a beefy 7% yield. It’s cash flow positive and has a healthy return-on-equity.
Currently trading at just under $20 per share, it’s down considerably from its high of $88 back in February 2007.
And while it’s not always easy to buy when everyone else is selling, history has proven time and again that it is precisely those who are able to buy in scary times are the ones who make that make the most money.
Hoping your longs go up and your shorts go down.
Good investing,
Marc Lichtenfeld
- Rethinking Foreclosure: Is There a More Sensible Way?
- Buying Real Estate: This Century’s Greatest Investment
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Marc Lichtenfeld is embedded in the biotechnology and healthcare sectors. As Healthcare Specialist for The White Cap Research Group, his days are spent tracking the clinical trials of various companies seeking FDA approval on pharmaceuticals, which oftentimes means interacting with CEOs of companies.
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July 9th, 2009 at 10:57 am
According to yahoo.com/finance the payout ratio for this 7% yield is 204% 2009e earnings. That is a VERY HIGH ratio and would lead me to believe the 7% can’t be sustained very long.
There are MUCH safer bets elsewhere.
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