Have Housing Values Bottomed?

Some of you may know that along with a partner, have been buying a few rental properties in the Tampa area. I thought you might like to know how and why I am doing this and in the process of telling you, I hope to provide you with some very interesting information that you should share with your database. You may copy the information below and resend it to your database.

Three years ago, if you asked a room full of people "what is the best investment available today?", most would have quickly answered, "real estate".

But when everyone is positive about an an investment, that's the time to sell. Not an easy thing to do, to sell when everyone else seems to be buying.

Now we're on the opposite side of the spectrum - very few people believe that real estate is a good investment. But I want to share 3 charts with you that show why it may be getting very close to a great time to invest.

The first indication that real estate is near bottom is to look at new homes started by builders. When "housing starts" hit a bottom, prices tend to bottom 6 to 12 months later. And housing starts are at a record low right now:



As you can see, housing starts are lower today than anytime they have been in the past half century! The longer this continues, the better for real estate prices in the future.

Now let's take a look at the supply of homes that are available for sale. This indicator is called "month's supply" and is supposed to indicate how long homes sit on the market before they sell. But in reality, its simply a ratio of the amount of homes currently on the market divided by the amount of sales that occurred in the previous month.

If, in the previous month sales were low, then the "month's supply" increases. If, in the next month, sales pick up, then month's supply will drop the next month.



Month's supply looks like it peaked in early 2009. Look at the upper line after each peak in the lower line - the months supply of new homes. Prices continue down for a bit, but then start a new trend heading up. This also looks good for higher prices in the future.

Finally, and this one really says a lot, is the Housing Affordability Index. This index tracks the ratio of median family income vs. the mortgage payment for a median value home at current mortgage rates. Rates are low right now and that of course helps the index. Rising rates would change the index quickly but with all the troubles of today's economy, it certainly looks as if today's low rates will stay with us for a while.

Most experts would advise to wait until there are more clear cut indicators of a bottom before jumping into real estate. But I disagree and here's why...

When I first moved to Florida, I began looking at rental properties. I came up with a simple ratio - with a price of 100 times the gross monthly rent or less, and with 80% financing, I'd see a small positive cash flow. But around 2002 - 2003, there were no homes to be found that cash flowed. So I stopped looking for rental properties.

But today, as prices have basically dropped off a cliff, I started looking again and began to see some amazing deals. The homes we have acquired so far have come at prices equal to 30 - 40 times gross monthly rents - and that includes closing costs and rehab costs. Ridiculously cheap if you ask me. If you look at gross annual rents, we are at "multiples" of only 4 - 5, meaning 4 -5 times gross annual rents - again, very, very cheap for real estate.

Maybe, we are still a bit early buying at this time. We could see further price drops. Certainly, we need to see lenders relaxing their underwriting criteria before we begin to see price increases again. But before they do that, there needs to be stabilization. So yes, it may still be early. But if we have learned anything from the past few bubbles - tech stocks, oil & housing values - better to buy early and sell early than the other way around. Why not seek out potential investors and discuss these points... if I'm right, you may create some "Raving Fans" for your advice and services.