The long-awaited event is gearing up and will greatly surprise the media, the Wall Street gurus, the apartment dwellers, the naysayers, and nervous homeowners. Real estate is preparing for the turn; are you? It will be a small one at first, but its momentum will make some forward-thinking lenders once again focus on profits, not losses. I am going to tell you why this is about to happen and what you can do to profit from this. The rest is up to you.
A little background: the average price of a house, as reported all over this country each and every month, is determined by the number of houses sold in the area multiplied by the value of the houses and then divided by the number sold to get the average price. It is a flawed system and has been used to overstate the upside and exacerbate the problem on the downside. Why? Because there isn't any adjustment for product mix. The price of individual units doesn't work because of the discrepancies in the size and the houses themselves.
The last year brought in a new problem: availability of home loans. In August of 2007, the jumbo market - loans over $417,000 in the continental U.S. and $625,000 in Alaska and Hawaii - started to dry up as a secondary effect of the subprime crisis. By the start of 2008, they practically disappeared, skewing the average home price calculations. Besides foreclosures, the majority of sold houses carried conforming loans, up to $417,000, and were of lower value. Comparing those to the same month a year earlier was akin to comparing apples to crabapples; same family tree but no relationship. Along with the drying-up of jumbo loans came the drying-up of stated loans, so even those few portfolio lenders that still offered jumbo money cut the spigot in half.
The good news is it is almost August, allowing us to compare year-to-year average prices of homes without much jumbo loan participation. 2007 to 2008 will be apples to apples, and the results will be refreshing: rising average home prices. How do I know this? Demand is picking up all over this nation as the investors and the risk-takers have stormed the housing market to capture the incredibly low prices. They have seen the three main factors that will bring a housing upturn.
1. The need for housing to facilitate the ever-expanding population.
2. The weak dollar giving huge discounts to foreigners who wish to buy our real estate.
3. The rise in the price of commodities that make replacement and new construction more expensive than the price of current housing.
And so the demand for housing will soon change from a trickle to a slow stream to a moderate current and eventually to a flood. The average person will watch and wait, all the while muttering, "It isn't time yet." This could go on for several years and basically rules out "Joe Average" for any potential profit. Some will venture forth because they realize that "close to the bottom" is about as close as anyone will achieve. But many others will want to move forward but simply do not know how.
Let's look at the ways this can be done. You can purchase a house (primary residence), a second home or a rental property or you can lease-option a house or a second home. You can also lease-purchase a house or second home. It would be difficult to lease-option or lease-purchase a rental, but not impossible. You would need a tenant so you wouldn't be losing the lease money while you were preparing to exercise the option or the purchase. If you are sharp enough, you can simply buy an option on a house without leasing it or setting up a purchase.
I created an option on behalf of my seller to allow a buyer the time to sell several houses to finance the purchase. It was a multimillion dollar transaction and I didn't want my seller to open an escrow for the sale, even with delayed closing, because I didn't want the buyer or his agent to ever claim the sale was contingent on the sale of his houses. The entire transaction took two years but it preserved the value for the seller as the market had started to fall and made the buyer perform because he spent several million for the option that would be valueless if he failed to exercise it within the designated timeframe.
I am not here to tell you that these are the only ways to take advantage of the coming rebound in real estate because you can always come up with something creative. How about trading stocks or bonds for a residential property? There could be some tax advantages to that type of transaction. (Of course, consult your tax advisor.) Desire finds a way to accomplish anything; skepticism finds very little.
We are already seeing markets coming back to life from North Carolina to Arizona, from Southern California to Washington State. It is a unique time in our financial history that will create many wealthy people. Your decision to become one of the wealthy is up to you. Begin your investigation with those who are associated with the real estate industry and do not get in over your head. This is a great time to start, but a real bad time to be undisciplined.
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