Synergies in the Market
A friend told me that you never see the progress when you are knee deep in the process. I use this little pearl of wisdom to explain why some investors and owners are having a tough time seeing positive changes in the housing markets.
We look for signs of change and benchmarks that are measurable. I’ll share a few that have been shared with me:
- You know when the market has topped out when brokers start buying their own listings. (The drug dealers shouldn’t smoke what they are selling example)
- You know when you hit the market bottom when prices have retreated to the pre-bubble lows.
- You know when the market has peaked when your mailman starts lecturing you on his investment property portfolio.
I can remember selling lender owned buildings on the I-17 corridor in the early 1990’s for $5,000 per unit. I underwrote buildings in Texas for $4,000 per unit. But…that was 20 years ago. That was when gasoline was under $1.25 a gallon and you could buy a pack of gum for $0.25. Adjusted to the current market prices for consumer items, wouldn’t a west Phoenix building selling at $11,000 per unit today be equal to that building selling at $5,000 per unit during the last recession? Have we lost perspective? Maybe. I seem to meet many investors that are convinced values can go lower and are waiting for the illusive bottom of the market to jump in. Maybe we’re there?
Here’s another benchmark I’ve been watching for: second generation defaults vs. second generation sales.
Second generation defaults defined as a home or property recently sold as a distressed sale that is again in default by the new buyer. The new buyer is now losing the property.
Second Generation sales are defined as the resale of a building that had been sold at a profit after the initial flip/fix up sale.
Both definitions explore the two sides of equity. Assets gaining enough equity that a profit is realized in the second sale or, in the case of the default, the asset is loosing equity so quickly, that the new owner can’t maintain it..
The bad news is that we are seeing Second Generation defaults in the single family home market in Arizona, Florida and Nevada. The good news, I’ve seen some second generation sales in Arizona, Nevada and Florida multifamily sales.
These phenomenons can be synergistic. A wave of second generation defaults can lead to a “double dip recession”, while a market budding with second generation sales can lead to the growth of value and reinvestment.
It’s too early to see which effect is gaining and interesting to see them simultaneously in certain markets.
As always, open to your thoughts and comments.
John
