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As noted earlier, we believe the free-fall may continue all the way through 2009, even assuming that consumer and institutional confidence is restored and that credit is eased during that period. In some markets, it may last much longer due to heavy inventory overhang. Luxury housing is falling more slowly, but resort and destination markets are falling faster than more diversified markets.
A good strategy for investing in residential real estate is to maximize the ratio of net rental income relative to asset values, as long as net cash flows are positive. This generates earnings while property appreciates and equity grows (if there’s financing). One must buy move-in quality properties at the lowest possible cost in markets that have underlying fundamental economics that support both continued occupancy and property value growth.
The coming year will offer opportunities to acquire investor grade properties at low prices in markets that will sustain housing demand as the economy recovers. It may also offer the opportunity to convert assets between markets or grades in anticipation of higher demand for entry-level housing once credit eases.
TARP, inauguration of a new President, and developments in the world economy will have a situational impact on investment opportunities. For example, President Obama’s focus on reviving rustbelt industries and employment may revitalize and fund demand for housing. It’s too early to tell what will happen, so from now until early 2009 may be a good time to take a wait-and-see approach in the market.
