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The Stars Don’t Always Align

Posted on February 6th, 2012 by John Reeder

In our local market we’re running up against the very real problem of declining (to gone) REO inventory for residential development sites.  The interesting thing is that the housing market has been flat to down for the past three years that it’s taken for that inventory to burn off.  This has created a dynamic where vulture buyers continued to buy into a market whose fundamentals appeared to worsening.  Housing prices were actually declining for much of that period, even if they were declining slowly, or the declines weren’t dramatic.

Potential investors over that time who might have asked themselves the question “Has the market bottomed?” could have realistically answered themselves with a “not yet”, and yet the time to buy might have passed them by had they decided to wait for the rock bottom.

It’s impossible to know right now whether the vulture investors of the past three years were right to buy when they did.  Only time will sort that out.  There’s always the possibility that their money could have been better deployed elsewhere.  But what we do know is that if better deals are to be had going forward, the volume of those deals will be extremely low.  There just isn’t really a lot more that can be transacted.  If you’re an investor and you wanted to get great deals on distressed residential sites, you better already have the bulk of the portfolio you wanted to put together.

We’ve done some work in-house to verify our anecdotal assessment that REO inventory is burning off.  One of the things we did was to check the property tax status of every development site.  If taxes were paid, that was a sign that the deal wasn’t distressed.  We came up with less than a handful of remaining development sites that we think could be distressed.

Investment isn’t always, or really ever, easy.  The stars don’t always align.  Only hindsight creates the illusion of certainty.  Sometimes you have to make deals when the market is giving you conflicting signals.  Sometimes the window to buy distressed development sites closes before the market’s fundamentals have shown any recovery signs.

February 6th, 2012 | Category: Uncategorized

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