Yes, we have all heard the horror stories coming from Phoenix, Las Vegas and Fort Myers about investors who lost everything when the real estate market collapsed. Property prices in these cities fell by as much as 60 percent – enough to force countless builders and investors to go bust. So, what is wrong with these markets?
That is an honest enough question – after all, with how far they fell from their peaks, something horrible had to have happened right? Well, something horrible did happen – in fact, several things happened. The problems originated from various fronts causing a “Perfect Storm” of real estate market destruction. The economy collapsed, people were laid off, adjustable rate mortgages were reset (causing dramatic increases to people’s mortgage payments), investors and builders over speculated on the market creating a huge inventory or vacant homes – the list goes on and on. Any one of those things could cause a real estate market to fall, but put all of them together and you’re in for some serious trouble.
So why should real estate investors care about all of this? Over correction – that’s why. This is a common phenomenon with investing, and not just with real estate. People panic when prices start to fall, causing more people to sell (some by choice and others by force) and prices to tumble. Every market has an absorption rate, though, and once prices reach that point, homeowners and investors will always return to the market. The trick is knowing what that point is. Some markets are fundamentally flawed and will never fully recover, while others are oversold and are destined to return to respectability. Here are a few things to consider:
- What is the cost of renting compared to ownership? If it is more expensive to rent than to buy, eventually people will return to buying – causing prices to increase.
- Ask yourself, why were people interested in this market to begin with? If those traits (ie natural beauty, weather, proximity to employment, etc.) are still present, than chances are people are still going to be interested in living there.
- What are inventory levels like? When markets peak there is typically a significant excess of inventory for sale – simple supply and demand. Eventually inventory levels should fall in line with demand – that is what you are looking for.
- What are the replacement costs for homes in the area? If the cost to replace the homes are more than what the homes are selling for, that is a good sign that the market is oversold. Just be careful here that you don’t lose sight of other contributing factors. Some markets, in the rust-belt for example, have homes selling for significantly under their replacement value, but that is because those markets are fundamentally flawed.
- What is employment like in the area? If unemployment is falling, that means more people will be looking to buy homes.
- How many people are moving to the market? If lots of people are moving to the market, that increases demand for properties. If inventory is falling at the same time, that is really good.
- What’s happening to the foreclosure inventory? Ideally you want the foreclosure inventory to be shrinking.
- What’s going on with property prices? You don’t want to jump in too early. Make sure property prices are leveling out, or even starting to tick back up before jumping in.
Now that we have some things to look for, let’s look at a real life market and see how it stacks up. Fort Myers, Florida, was one of the hardest hit real estate markets in the country. According to a report from ABC News, the Fort Myers real estate market experienced the seventh steepest price drop. The Fort Myers real estate market fell 58.1 percent from its peak. But, was the drop legitimate, or is the market destined to recover? Let’s ask a few questions:
· Is Fort Myers still a desirable area to live? In short answer, yes. Retirees are still flocking to the area, and the city’s natural beauty and great weather are the same as they were before. All of the same factors that made the area attractive five years ago are still intact.
· How is the job market? Over the past year, unemployment has fallen from 12.7 percent, to 10.2 percent, according to an article from News-Press.
· Is the population growing? From 2000 to 2010, according to US Census data, the population in Fort Myers has grown 29.2 percent.
· What do the real estate market statistics look like? Over the past year (according to Movoto.com):
- Available inventory has fallen 30%
- The percentage of distressed properties is falling
- The median days on market has fallen by over 20 days in the past year
- In 2011, real estate prices increased almost 21% according to Inman News
· Is it cheaper to rent or buy? For this exercise, I went to Zillow.com, clicked on a few listings, and compared the estimated mortgage cost to the Rent Zestimate for the homes. Looking at these numbers, you are able to get a pretty good idea that buying is much cheaper than renting in Fort Myers right now. One thing to keep in mind, though, is that you will need to add on some extra padding to the mortgage number for things like, maintenance, insurance, HOA dues and so on. These are things that you wouldn’t have to pay if you rented the property. In this case, the numbers aren’t even close, but sometimes that will make the difference.
After reviewing the market data for Fort Myers, we clearly see a market that was considerably oversold after its collapse. Fort Myers is already on its way to recovering as we speak, and many investors will be making a lot of money as a result.
Fort Myers isn’t the only market investors should be paying attention too – there are many more to be found all across the country. With the power of the internet behind you, finding the next re-emerging real estate market isn’t nearly as hard as it used to be.
Now is the time to get back into real estate investing. If you weren’t burned by real estate investments before the market collapse, you likely knew someone who was – real estate investing is still scary for most people. Remember this, though, the best investors are the people who are investing before everyone else jumps on board. When the general population gets interested, these investors move on to the next investment. Right now in re-emerging real estate markets like Fort Myers, you can buy property at prices that makes sense, and that’s all any real estate investor can really ask for.