How to Get Two Scoops from a Double Dip (The Heery Brothers)

July 20, 2010


Taken from The Heery Brothers Blog

Clearly the buyers’ market of a generation of Americans is going to continue for a good bit longer.  Whether that is amidst a “double dip”, “jobless recovery” or various other shapes found in the alphabet is a matter for economists.  Heery Brothers has some experience with housing economics and the Atlanta market place.  Let us outline how continued economic uncertainty can be an opportunity.

Weird things indeed are happening in worldwide markets.  Spending, austerity, liquidity and other market pressures are tearing at each other to create an age of volatility that the most bullish of economists had not predicted.  Underscoring all of this is one clear trend – a flight to quality.  The flight to quality is pervasive across all asset classes.  In fact, investors are only all too eager to sacrifice yield in their pursuit of quality.  People pay for quality.

Real estate has a clear flight to quality.  Try getting a Class C investment property at a tertiary location financed.  There is hardly financing available for investment property that does not have a main-and-main location and a blue-chip stream of income.  Financing for housing is much more available.  Excellent rates abound for FHA loans (maximum of $350,000) or conforming non-jumbo loans (maximum of $417,000).  Under a variety of programs, regrettably high leverage is available.  With cheap money available, the question is what are people buying? Commodity condos (no), 30,000 square foot energy monsters (no), sprawl developed houses 20 miles outside the urban core (no), vacant lots (no), $900,000 houses at nice Buckhead locations that needs some work (yes)  … Stop the presses.

The good stuff is selling, the bad or mediocre stuff is not.  In fact, there are many buyers in the in-town Atlanta market that are having problems finding suitable alternatives.  Buckhead’s single family rental market has actually firmed up because people want nice houses, but cannot buy them.  There are several bread and butter market segments that have strength and even upward pricing pressure.  For example, high quality new construction in Chastain Park around the $1.5 million mark was once a staple for Heery Brothers …  We only have one such listing now and it is just getting started.

Alas you cannot buy if you cannot sell.  What is it that you need to sell?  Does it need work or is it rough around the edges?  Perhaps over leverage is a problem.  In many situations people must stay put.  However, in many other situations people are pleasantly surprised. Over the last year we have found fixing, staging and presentation to be more important than ever.

Lastly, we will reiterate a central point about real estate that we do not foresee changing.  Real estate is the most commonly used tax shelter.  The use of interest deductibility, cost recovery (aka depreciation) and the deductibility of loan points often lowers effective tax rates.  Therefore, if you are disappointed with cash/short term yield and have consternation about where to invest in major equity market – real estate beckons as a safe haven.

Ice cream melts when things heat up.  Enjoy your two scoops while you can.  Let us hope that bankers do not add a third scoop by dumping inventory.

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