For Buyers, There's a Silver Lining!

Brett Arends - Silver lining to housing storm

"Prices in many areas are now cheap. They have corrected a long
way since the bubble began to burst five years ago. Of course, it
depends on where you are. I'm still skeptical of the real-estate
markets that have held up best — prime stuff like Manhattan,
San Francisco or Beverly Hills. It's hard to get a deal there.
But in the places that have fallen the furthest, there are deals
aplenty. Zillow found only four metro areas in America that have
leveled out, or risen, lately. Notably, two of those are in
stricken Florida — Fort Myers and Sarasota. Have they fallen so
far they've hit bottom.

The second reason: There are tons of foreclosures and short sales
on the market. And there are plenty more sitting in the wings.
Banks are holding back big shadow inventories of homes. And that
means you can get a great deal. They have to sell. You don't have
to buy. You hold all the cards. Remember, the name of the game
isn't 'let's make a deal.' It's 'take it or leave it.'

Third, in many places rental yields are terrific. It's cheaper to
own than to rent. There have been some forced sales in my
building in Miami. Based on my math, the latest buyers have
bought condominium units for six times gross annual rents, and
maybe 12 times net rents. We're talking net yields of 7% or more.
And rents are rising, because so many former owners are now
renters.

The fourth reason I'm bullish is that you can get a very cheap
mortgage. Thirty-year conforming loans are going as low as 4.3%.
Throw in the tax break on the interest, and you are talking cheap
finance.

The fifth reason is that, as painful as this collapse has been,
real estate has historically proven to offer very good long-term
protection against inflation. Returns have typically averaged
about 1% or 2% above inflation. At a time when everyone has been
piling into gold, commodities and TIPS bonds to protect
themselves against the possibility of inflation, it seems odd
that the most popular and successful hedge, namely real estate,
goes a-begging. Thirty-year TIPS bonds are yielding just 1.6%
over inflation, and shorter-term bonds offer even lower returns.
Short-term TIPS are actually offering negative real yields.

The sixth reason I'm bullish is perverse, but I'm sticking by it.
Everyone else is bearish. You cannot find a real-estate bull
anywhere. No one wants to own this asset. No one wants to talk
about it. No one wants to hear about it. Everyone seems to agree
it's just going down, down, down — forever. They said much the
same about stocks in 1987, 2002 and 2009; Treasury bonds in 1982;
and gold in 2000. I cannot prove this is capitulation, but it
sure smells something like it. As ever, if you aren't
disciplined and patient, this probably isn't for you.

I have absolutely no idea when real estate is going to hit rock
bottom. It may take several years. I suspect it will do so in
different markets at different times. But there are good homes
out there going really cheap. If you hunt down the bargains,
you're disciplined about price, you get the right financing, and
you hold on for five years or more, you'll probably do pretty
well from here."