Capitalizing on the Housing Correction

Depending on what you’re reading or with whom you’re speaking, the current state of the housing market is described as either a slow-down, a correction, a cooling, a bust or any number of other descriptors referring to a significant drop in new housing starts and interested buyers. And all those descriptions are probably accurate, depending on what part of the country you’re referring to. In Baltimore, Maryland and the surrounding areas, the last five years brought unprecedented growth in real estate values and the speculation, bidding wars, and wide-spread home-seller jubilation that accompany them. Now, it is one of the areas where the recent correction in the real estate market is most severe. There are currently record numbers of homes for sale in the most popular zip codes of Baltimore City and investors that bought at the peak of the market in 2004 and 2005 are now realizing that their investments may offer a negative return.

This presents an outstanding opportunity for anyone that is exploring a home purchase, either as a primary residence or as an investment vehicle. Those who intend to purchase a home and occupy it long-term are now going to have an opportunity to catch properties as their asking prices fall quickly below their true value. Investors that mistimed their buy into a hot market are now faced with the prospect of holding onto properties that will not yield a profit. The carrying costs alone are going to be a major impediment to waiting out the current down cycle and will ultimately force property owners to make significant price reductions to entice would-be buyers. This is a great scenario for people that are making a first-time home purchase. Instead of pondering the missed gold rush of the last five years, they can now take pleasure in the fact that they have their pick of a huge housing inventory and the leverage to demand concessions from anxious and often desperate sellers.

Another product of the recent housing slowdown has been a resurgence in rental activity for residential real estate. Rising interest rates and the shakiness of the housing market have made renters of many of the people that were considering making home purchases. This bodes well for savvy real estate investors who can scoop up reduced-cost investment properties and immediately charge premium rents for the space. In this regard, the correction in the real estate market is again an opportunity for long-term investors to benefit from the mistakes of those previously rehabbing and/or simply flipping houses for short-term profits.

In a recent article in the Baltimore Sun, Jamie Smith Hopkins explained the real estate investment frenzy that gripped Baltimore and how the end of that rush will create new opportunities for the patient investors:

The phenomenon was national, prompted by low interest rates, quick appreciation and several years of poor stock market returns. But Baltimore stood out. Its prices looked cheap to people from the suburbs and more expensive U.S. cities, and average values were going up fast - nearly 25 percent in 2005 alone.

Nationwide, a record 40 percent of transactions last year had non-owner-occupier buyers, a fair chunk of whom were vacation-home purchasers rather than investors, according to National Association of Realtors surveys. In Baltimore, it was 80 percent, state numbers show - up from 35 percent four years earlier.

And while Baltimore is probably an extreme example when viewed from a national perspective, it is certainly not the only one out there. Even areas that experienced far less investment activity will still offer new opportunities as the market slows.

The same individuals that found themselves priced out of a hot housing market less than a year ago are now going to find opportunities for purchase and investment that they probably felt certain had passed them by. But as we saw with the stock market boom of the late 90s, everything in our economy tends to be cyclical. Five years of boom, then a bust/correction/cooling, then a slow and measured recovery complete with potholes and doomsday scenarios miraculously averted.

With regard to the real estate situation in Baltimore City, I speak from some experience. I bought my first home there in 2002, still relatively early in the real estate boom and in an area that was just outside the established hotbed of growth. I lived there for two years before buying my current residence well outside the city in an area that had enjoyed property appreciation, but not to the extreme of city properties. I rented my former city home until recently and will soon be putting the property up for sale in what is now a pretty miserable market for sellers. Why am I selling now, you ask?

Convenience. I’ve gotten more out of the property than I probably could have hoped and, even in a down market, I’ll still be able to list at significantly under the current comparables and make a small profit. At least, that’s the plan. If worse comes to worst, I will simply rent it again to offset the carrying costs that might otherwise threaten the lavish lifestyle to which I am now accustomed.

But that doesn’t change the fact that I’m one of the property owners now offering a great opportunity for the next wave of home owners and investors that are looking to Baltimore for value. The air is rapidly coming out of the inflated prices of the past five years and once again people are going to be bargain shopping for real estate. And the deals will be there, perhaps in great numbers. It’s only a matter of time.

Tags: baltimore real estate, housing bubble, housing correction, housing market, real estate bubble

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