There's quite a bit of bad financial advice polluting the airwaves. In particular there is far too much noise about the real estate market. I've heard on several nationally syndicated programs that 'now is the time' to purchase distressed property. This advice is never qualified with no caveats or disclaimers warning the listener off of properties that may remain toxic even during a strong recovery. Since these pundits have chosen to shirk their responsibility in this regard I've taken it upon myself to provide the necessary cautions in this post.
Those who have been around the block once or twice might remember that before the current crop of Wall Street hooligans scammed the world of high finance there was Enron. Combined with the Worldcom con confidence in Wall Street was shaken. At the time many talking heads wondered if Wall Street would ever recover.
It did.
Let's not forget, however, that while the stock market recovered Worldcom and Enron did not. In the same manner the construction sector of the economy will indeed recover, but certain business models will no longer be viable. In markets saturated with single family snout houses there will be no need to build more since supply will far outpace demand. In other markets where empty condos dominate the skyline, and with lenders leery of the financial problems inherent in the type, more high-rise condos will simply not be needed.
If a unit type is not bankable, as is the case with many condos, then it will sit on the market unsold as potential buyers will not be able to arrange financing. If there is an oversupply of a specific type, such as suburban snout house in a sea of other empty snout houses, then it won't appreciate in value. They will be the preferred vehicle for slumlords and therefore be a poor choice for investors.
This gets further complicated with the time value of money and the potential devaluation of the dollar. Suffice it to say these two complications could make a bad situation worse for unwitting investors.*
It may very well be that the snout house becomes the Enron of unit types and the high-rise condo the Worldcom. A recovery may happen without them. Like all hooligans, though, they may rear their ugly head again sometime in the future.
* I call them investors but perhaps should identify the parties at risk as speculators. Those looking to flip properties will get burned as will those looking to rent properties in a market saturated with rental stock. Investors, however, who purchase properties in a strong rental market will benefit from the current low interest rates. The coming devaluation of the dollar will cause interest rates to rise and lower buying power. Paying off a lower interest rate loan with cheaper dollars can be a very lucrative proposition. Just know what you're buying.
Sent from my iPhone
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