I wrote this article for the Bruce Norris Newsletter and decided to include it here also - it is a perspective on the real estate market here in the valley and where the opportunities lie for 2009.
What a year it has been both locally and nationally for real estate and for the economy in general. No one could have anticipated the large quantity of banks and financial institutions that have become insolvent this year!
The Silicon Valley, home of many multi-national corporations appeared to be navigating the storm pretty well, but finally the housing marketwent into double digit declines this year locally and in outlying Bay Area counties, some of which have lost more than 50% of their previous value. This created opportunities for investors from the Bay Area as we wait for our local market to reach affordable levels that make financial sense.
Every economy presents opportunities, and this type of recessionary climate has provided opportunities in past cycles and will do so today for those who are educated,savvy, self-reliant, and ready to take action. Being your own biggest ally and having the ability to analyze deals
is critical in this rapidly changing environment. If you have a criterion where, for example, you are happy to invest if you can get a 15% return on your money, then regardless of what the market does if the deal meets your criterion then you can participate. Additionally, this is a way to dollar cost average into the market.
A lot of our members are sitting on the sidelines watching how things unfold, but those who are participating are buying in sub-markets that they have been watching and tracking. Every area is unique, and each market is declining at a different rate. It is important to stay in touch with the market you are exploring. At some point, when one can purchase houses at 50% of replacement value – this is something that makes sense financially, particularly if it cash flows in addition to that. Some ofour members are licking their wounds as a result of bad investments they made doing deals at the wrong time, or doing the wrong types of deals, and essentially not staying close to sources that predicted this market downturn. My take on 2009 is that there will be lots of great deals available as jobs are lost, and REO inventories mount - newer properties will be discounted, and investors poised to act will reap the benefit. Recently we have noticed that the quality, location, and condition of REOs has improved dramatically with the increasing job losses; executive homes that are going back to the banks are available at substantial discounts from the peak.
In a market where prices are declining it makes sense to have multiple exit strategies. Buying properties that you plan to flip, but will be fine holding long-term makes sense in this environment as it gives you choices inthe event that things play out in a different way than
originally anticipated. Recently, we purchased a house at an online auction for $68,000, originally valued at thepeak at $400,000. I doubt this house was ever worth$400,000 – a 3/bed, 1/bath, 1,000 square feet, but at$68,000 it is well priced and in the event that we do not flip it, we can rent it out for at least $1,200. Further, it was purchased for cash in an Individual RetirementAccount (IRA), and however you look at it, it will be a better return than the stock market right now... Happy Investing for 2009!
