19 March 2009

Bottom Feeders Beware

The very explosion in the number of buyers looking for great real estate investment opportunities, through foreclosure auctions and short sales, virtually guarantees that we are far away from a recovery. The field is already littered with the corpses of value investors who jumped in too early. Just look at how the big investment funds who bought into financial institutions like Washington Mutual wound up seeing their stakes wiped out.

While savvy investors have long profited from dealing in distressed properties,
the soaring rate of U.S. home foreclosures over the past few years has
attracted mainstream interest and crowds of new bidders

The experience of all these novice investors jumping into the market is likely to end in tears, as prices keep falling in the years ahead. Those 30% discounts (from peak prices) won't look so good when prices drop another 30% to 60%. There were plenty of people who bought Japanese real-estate in 1994, after it had dropped some 40% from the'89 peak, only to find the prices fall much further over the next decade. There is no reason such a thing can't happen in the US.

When we finally do hit a bottom in real-estate, there will likely be such a level of disgust with the market that few people at all will be interested in purchasing for investments.

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