The long road to the bottom of the market.

Are we there yet? Are we there yet? Are we there yet?


Those of you that receive my emails of foreclosures have been seeing notes on some of the properties saying things like “This price must be the bottom of the market,” or “this house is another sign of the bottom of the market.” (Those of you who don’t receive these emails, and would like to, please tell me. Those of you who would like to receive the cheapo cheapo listings, that I no longer send out, email me to be put on the cheapo cheapo list).

In preparation of writing this article, I gazed at my crystal ball, read tea leaves, threw tarot cards, and counted the bumps on my head, to find the answers. What did I find? I found Questions, like:

Which market are we looking at for the bottom? We have the stock market, we have the bond market, we have the gold market, we have the Real Estate market, and lots of other markets.

The Stock Market

The stock market reacts to all of the markets. Wall Street says that this recession and fall of the stock market is in response to the crash of the subprime mortgage market. My friends in the market tell me that the market still hasn’t dealt with the inflation, and unemployment, so the stock market has not hit bottom, and could even have another serious down spin, or crash. Of course that’s easy to say.

The Unemployment Factor

Many say that we haven’t peaked in unemployment as yet. That as unemployment grows, more people will lose their houses to foreclosures, and there will be more REO property on the market, less buyers due to unemployment, and on and on.

345,000 US jobs were lost in May 2009, and the unemployment rate jumped to 9.4%, its highest point in 25 years (1984- just before the wild 80’s took off?). Economists said that job losses are likely to continue to pile up through the rest of the year.

Yet the stock market took this as a good sign, because the pace of losses was lower than they anticipated, and that is was showing sustained signs of stabilizing (does stabilizing mean hitting bottom?).
But does the stock market really ever make sense?

There are lots of people selling books and emails, and courses that offer advice on how to buy and sell stocks, and play the market, based upon their formulas which always worked, always did better than the stock market. I just Googled “bottom of the market” and came across one of these guys, who shows how to tell the signs of the bottom of the market. This particular genius stated that after a crash; check the BKX index for a 10% rise…that will be the bottom. He also said when the economy reaches the front page of the NY Times, and every other major newspaper, that is when the market has hit mega bottom, and it is time to buy. He was wrong, the market continued to tank.

I never trusted the stock market. I never trusted the prices of stocks, IPO’s, stock tips, etc. If I got a stock tip, I know how far down the food chain I am, it can’t possibly be any good at that point. It was probably time to sell, by the time I got the tip. Especially after watching the films Wall Street and Pretty Woman. And what about Ivan Boesky, Michael Milken and Nicholas Leeson,… companies manipulate stock prices for their own accounts, and to big Wall Street players. We all know that.

Over the past several years, prior to the crash of the sub-prime mortgage crisis, I sat on the side lines, and watched as the prices of real estate climbed, and the stock market went up, despite our financial losses and costs in running the war in Iraq. (Which at this point seems small). I never could understand why the prices of stocks kept going up, and why the prices of real estate kept going up. Made no sense then.

So why should the stock market make sense now? Has anything changed? Aren’t the big players, just buying up the bargains while they can? They have the money; they borrowed billions from the fed. They had to have done something with the money; they bought stock that they can manipulate later. And didn’t they clean house? Got rid of the older high paid employees? Trimmed the fat, as it were? But mark my words, when the time is right, when the money is flowing again, when their customers are in the mode called buy and spend, they will re-sell these companies and stocks at huge profits. Next time the stock market is on the rise.
Housing Market

Now the housing market is different than the stock market. The major difference is that housing is a necessity shelter. People have to have a place where they can go with a roof over their heads to protect them from the elements. I don’t have to explain the use and necessity of housing.

But in the housing market there are certain constants, and there are always new people entering the housing market, and people ready to make a move to their next house:

People graduate; get married; have babies; get new jobs; get promotions; hit the lottery and/or have other windfalls and inheritances; children grow, and leave the house (empty nesters- I wish).

So there is a constant flow of new people entering the housing market, but what happens during the bad market times (or whatever you want to call whatever it is), these people don’t enter the market.

Why aren’t they entering the market now?

People aren’t entering the market for the obvious reasons, like they are afraid, they want to wait until the bottom is hit, they are waiting for the buy of their life to come knocking on their door. No one wants to buy on the way down, when it could still go down further. When things start to go up however, “when the train is starting to leave the station” according to my friend Jon Salmon, that’s when everyone wants to buy!

While there are good reasons to buy now, and good reasons not to buy now, the result of these people not buying is being felt in the market. Today, there is a growing amount of pent up demand for housing. At some point, we will understand that we have passed the bottom, and that it is “okay” to buy real estate now. At that time, there will be a rush, which will bring the prices up, because of this pent up demand. (Look what happened with the stimulus package to buy a new car and trade in your clunker- all of the pent up demand hit the market and the program was overwhelmed- The amount provided to last for 3 months, was used up in 3 days).

History has this strange habit of repeating itself.

In the late 70’s and again in the early 80’s, our economy was in really bad shape. We had left Vietnam, in disgrace, and the Shah of Iran was overthrown and our embassy was held hostage for 444 days. Our cities were falling apart; New York was on the verge of bankruptcy. Money for mortgages disappeared. Interest rates were up to 16% for a home mortgage, if you could get one.

And the real estate industry, including new home construction, grinded to a halt.

So some of the builders and some of the bankers came up with an idea, where they could lower the interest on the mortgage for a short period (3 years or so), and make them affordable.

Woodbrook Condominiums had just opened its first phase, and they offered a deal where you could get a mortgage at Citibank where the interest rate for the first three years was 10.5%. The builder paid the bank three years interest on the difference in rates, and sales were phenomenal. (they were called negative amortization mortgages).Other builders got the idea, and the market began again, slowly. And then we ran out of inventory, the builders that had the jobs ready to go, became the biggest builders. (Does Mirador ring a bell?).

Perhaps what really kick started the real estate market was the influx of foreign money, in the mid 80’s, as the United States had become such a terrific bargain. Large buyers from Japan, Germany and other European countries went on a buying spree, stimulating the market, as these dollars trickled down. Of course they not only spent money on real estate, they also spent money buying companies, and stocks. Next came the wild days of the 80’s where people made so much money that opulence was the way of the day.

The buzz around was he who has the most toys at the end- wins. Michael Douglas’ movie Wall Street had a scene where he was preaching GREED to his shareholders.

The builders on Staten Island decided that the best way to go was to utilize existing zoning laws and build as many townhouses on a piece of land as was possible. Houses went from 20 feet wide to 12 feet wide. Townhouses’ were built attached on all sides including the rear so the only property would be the 8’ front yard. And the price of houses went through the roof. I remember wondering how a person making $40,000 is going to be able to buy a house that cost $180,000. The price of homes went up faster than the salaries.

But then in the late 80’s government got into the act and all of a sudden the market crashed, and all of the banks built on their houses of cards fell with them.

In New York City, government (city council) decided to change the zoning laws and created something called contextual zoning. This only affected houses in Staten Island and Queens. It meant that from then on, garages counted in the computations of FAR (Floor Area Ratio’s), and other changes that made absolutely no sense to us on Staten Island were enacted. The net effect was that houses would either be 1/3rd smaller, buyers would get less room (no more garages, lofts, splays, etc.) and builders would get less units or yield from their land.

At the same time, President Reagan changed the tax code and eliminated capital gains treatment in real estate. That meant that profit from real estate was taxed as ordinary income, instead of as capital gains, which is taxed at a lower rate.

Bye Bye foreign money, hello recession.

Bye Bye banks, hello RTC (Resolution Trust Corporation.)

And then there were lean years and slow markets, etc., but then a funny thing happened.

Instead of building townhouses, some builders started to build detached one and two family homes, and the people who were ready to move out of their “starter home” into their next home, started buying these homes. The new entry level buyers, with all of that pent up demand, started buying the resale’s from those I just mentioned, and again we ran out of inventory, and prices started to climb again.

Only this time, they were fueled by real easy credit, and the subprime mortgage business, which enabled anyone who could breath and had a driver’s license (or was it a library card) could get a mortgage and buy a house.

So what will happen this time?

Smart money is already buying up the bargains. How much longer do you really believe that you will be able to buy a two family house for under $200,000? C’mon. Maybe we haven’t hit bottom, but some of the merchandise has.

Is now the time to invest in Real Estate?

Yes


Here are some of the reasons why:

First: $8,000 Tax Incentive available at closing- does not get paid back. (Unless you don’t live in the house as your primary residence or violate the other terms). Expires November 30, 2009. (First time homebuyers- haven't owned a home in 3 years)

Second: 96.5% Financing FHA & SONYMA

Third: Lowest Rates in History, and below market programs available.

Fourth: Lowest prices in 20 years

Fifth: This is a buyer’s market- Huge Inventories. Sellers are nervous and are negotiable.

Sixth: High amount of foreclosures and short sales available. There are bargains galore in every area of town, even Million dollar short sales.

Seventh: Prices in the neighborhood that you are interested in are relatively stable- either they are holding their own, increasing, or the pace of decline is slowing.

Eighth: You plan on staying in this home for more than 5 years. That way regardless of the market at this point, it will have stabilized and you will ride out any downturn, and come out ahead in price.

Ninth: Your rent equals a mortgage payment.

Tenth: You can use the tax deduction against your income.

Eleventh: You’ve found the right house in the right area for you. The schools are great. You know that if the market were better, this house would have been sold already, or there would be more competition for it.

Twelfth: You’ve got equity in your house, and want to move to a smaller house (empty nester). Although you will not be getting as much for your sale, you will more than make up for it in your purchase.

Thirteenth: If you don't buy now, you will kick yourself for the rest of your life.

Fourteenth: There probably will never be another market like this one in our lifetimes.

There is a lot of competition for the bargains

While there are lots of good deals out there these days, there are also a lot of savvy real estate professionals in the marketplace that are buying up the good deals wherever they can. Here on Staten Island, because of the large numbers of foreclosures on the market, there are a whole new group of OFF Island Realtors® who have joined SIBOR, because they receive foreclosures (REO) from the banks. These off island realtors also have “off island customers” who have discovered Staten Island as a fantastic bargain basement -the best bang for the buck- (compared to the prices of real estate in Brooklyn and Queens, and are grabbing huge amounts of these great deals as they occur.)

So how will we know that we’ve hit the Bottom of the Market?

We will know for sure that we've hit the bottom of the market, well after we are on the way up. We will read about it in Newsweek and Time Magazine, we will see TV shows about it. More and more of the articles and stories we hear and read about will be talking about the bottom, and then they will be talking about the bottom as having passed the bottom. In other words, we won't know for sure officially that we are at the bottom, until we are well passed it.

So are we there yet?

Yes and No.

The June numbers are in, and new construction sales are up for the 4th month in a row, although still below last year's numbers.

New Building Permits are up for the 4th month in a row, which means that the Building Industry is confident that the worst is over.

I am getting more calls than ever before, and more inquiries and requests to be added to the email list to receive free foreclosure listings.

Some aspects have hit bottom, others haven’t. Some things will get worse, some things are getting better.

Some house prices have hit the bottom, others have a ways to go.

So what is the answer?

…………………to be continued