The ART in FIRE

The Bloody Truth About Investing in Real Estate

On The Money

by Rilian Ball

The Bloody Truth about Investing in Real Estate
Bad times typically make for good buys.  Successful investors have historically made their best investments during times of market turmoil.  Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets.”  He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. But that’s not the whole story. The original quote is believed to be “Buy when there’s blood in the streets, even if the blood is your own.”
Today there is “blood” in almost every street and it’s easy to believe that the bad times for real estate will never end.  You might not believe it… But the terrible market in housing is almost over.  It really is almost time to buy residential real estate. Let me show you why…
I track three main indicators to tell me the “health” of the residential housing market. They’re all pretty simple to understand… and two out of three are incredibly good in their timing (the third is a good judge of value). Let’s look at them, one by one…
First up: The number of new homes started by builders. After “housing starts” hit a bottom, home prices tend to bottom six months to a year later. Importantly…Housing starts are at a record low right now.

Builders start too many homes (when the blue line goes above 2,000) in good times. Prices peak soon after. In bad times, builders start too few homes (when the blue line goes below 1,000). A bottom in home prices follows.  Based on this chart, housing prices could bottom soon… possibly in the next 12 months.
Second: The supply of homes available for sale.  This indicator is typically called “months supply.” But it’s really a ratio of the number of houses available for sale divided by the current rate of sales per month.

A high supply of new homes on the market causes prices to fall. (It’s simple supply and demand.)  Once the supply of new homes peaks and starts to come down, home prices bottom and start to rise. Today, the supply of new homes is near a record peak, and it’s coming down.  So a bottom should come within the next 12 months.
Lastly: Housing “affordability.” People buy homes when they’re affordable. In technical terms, homes are “affordable” when the median family’s income can afford the mortgage payment on the median home at current mortgage rates.

Right now, homes are more affordable than ever, based on this ratio.
Since houses have fallen so quickly in price and mortgage rates have fallen to record lows, housing affordability is at record levels. This is a great “value” indicator for housing… and value is great now.
Housing is not like the stock market. Cycles in housing move slowly.  So we can wait on an uptrend to “confirm” the housing market is back before we move in.  Since houses have fallen so quickly in price and mortgage rates have fallen to record lows, housing affordability is at record levels. This is a great “value” indicator for housing.

It’s important to remember that housing is not like the stock market.  Cycles in housing move slowly.  So we can wait on an uptrend to “confirm” the housing market is back before we move in.
We’re lucky here… we have a few good “leading” indicators, with good track records. Of course, my indicators could deteriorate from here.  But right now, they’re at record levels and showing signs of improving.
Look at today’s “blood” as opportunity.  The government and private industry are working hard at healing the wounds in the housing sector.  There is no question that the bleeding will eventually stop and the Real Estate market will become healthy again.  As Warren Buffet would say, “What the wise man does at the beginning [of a rising market] the fool does at the end.”