Are We Nearing a Bottom in the US Housing Market?

This may seem like a laughable point to even consider, given the current somber mood that surrounds the American housing market.

This has been a "perfect storm" of negativity. First you had the collapse in subprime mortgages. Then you had banks writing down huge losses due to their exposure to subprime. Because of these losses, banks tightened their lending criteria, largely signalling the end of "liar loans", "no doc" loans and "stretch" loans. Because there were few people being approved for mortgages, the housing market started to stagnate and then drop, due to the fact that demand had fallen off sharply. Half-finished condominium projects (most notably in the Miami area) halted construction, due to lack of funds and lack of interest. House prices fell sharply in many areas as sellers scrambled to find prices that buyers would be able to stomach. Some sellers were stuck in their houses, having taken every penny out of their homes via home equity loans. Now that their homes dropped in value, they realized that the tap of money had been shut off, and many homes were eventually foreclosed on when people either couldn't pay or simply walked away. Adding to the number of foreclosures were the people who simply paid too much and then walked away after their home values declined.

So with all of that, could the housing market possibly be in for a turnaround?

According to unconfirmed reports, some big money is starting to be put to work in US real estate. Robert Paulson, the man who profited so handsomely from the bust in the housing market, has apparently been buying up large chunks of land in California. Another large investor has been buying up properties in Arizona, Nevada and California.

A general rule of thumb that usually works pretty well when it comes to investing is: buy when everyone is selling, and sell when everyone is buying. Or as Warren Buffett put it, "Be greedy when others are fearful, and be fearful when others are greedy." I would say that people are pretty fearful when it comes to the US housing market right now, so now might be the time to buy. There seem to be some pretty smart people starting to put some money to work in the real estate market - have we finally hit bottom?

Many people point to the fact that the US is likely entering a recession as one reason why the housing market has further to fall.

I say that if the US is in a recession, then it is in it right now - you don't know that a recession took place until after the fact. If we are in a recession, then I believe that it will be a light one. I would look for the economy to start to recover as we reach the late spring and summer, and I think that the housing market will strengthen along with the economy.

Things are darkest at the bottom, and the prevailing attitude surrounding the US housing market is one of doom and gloom. There are some outstanding issues right now (increased supply due to foreclosures, uncertainty over economy, continuing writedowns at banks and brokerages), but I feel that now might be the time to start cherry-picking some of the better investment opportunities that are out there. You may not time the bottom precisely, but I believe that 2008 is offering the savvy real estate investor a great deal of potential value due to many people simply walking away from their homes or selling at bargain basement prices.

Filed under: Real Estate News | The Economic Meltdown