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Is This The Bottom? (Oct/Nov 09)

by admin on November 18, 2009

Thanks to lower home prices — caused by a flood of foreclosures — and the $8,000 tax credit, home sales (and prices) are up slightly in most local real estate markets. However, the increase in prices is only over the last six months. Year-over-year prices are still down 11% for most major markets, including Sacramento, but the lower prices have caused home sales to increase dramatically at the lower end. Many first-time home buyers are now able to buy, and bargain hunters are picking up more investment property in Sacramento.

Many have been wondering if this is “the bottom” of the real estate crash, to be followed by prices steadily rising like the good old days. While no one has a crystal ball, there are several important facts to consider. First, it’s unreasonable to expect a real estate recovery with millions of lost jobs, bank failures and foreclosures accelerating, and a huge “shadow inventory” of repossessed homes that lenders are withholding from the market (approx. 2.5 million homes). In fact, there are so many foreclosures that Fannie Mae has practically given up on selling them and is now renting them out (see the Fannie Mae Landlord post). So we probably have another two years to go before things get better long term.

Home prices might drop some more (like they do every winter), and they might go up a little (like they do every spring). Another huge government tax credit for home buyers could boost prices again, while another flood of foreclosures could depress prices. Get the picture? (It’s cloudy.)

So, is this a good time to buy investment property in Sacramento? It is if the numbers make sense and you’re buying at wholesale prices. Since no one can know the exact bottom until the market goes up (and stays up), smart buy-and-hold investors buy when the ROI/cap rate numbers look good, and smart rehabbers buy when prices are cheap enough to make a profit. Just don’t get caught up in bidding wars with others who buy on emotions, not on the numbers. Remember, your profit is created when you buy. Pay too much, and there will be little or no profit when you sell, or a poor ROI/cap rate if it’s a rental.

{ 2 comments… read them below or add one }

1 Nathan April 29, 2010 at 8:56 AM

I think its pretty tough to call the bottom of anything that fluctuates in price. With that being said, I’m a little skeptical about this slight bump. With the tax credit being extended and more people being motivated to move into a new home how much of this recovery is just the Government propping up the market?? However, as of April 2010 when I write, we’ve seen a major recovery in the stock market.

2 John @ Minneapolis Real Estate January 21, 2011 at 2:04 PM

Good advice. Profit is definitely made when you buy the house and based on the situation of the market right now home buyers can certainly look forward to real estate prices rising in the future, so investing in property at the moment is definitely a wise decision.

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