Guess What? Real Estate is Making A Bit of A Comeback

At least it is in my neck of the woods, north of NYC. I believe it is also true for other parts of metro NY. In my opinion South Florida has also turned a corner. I don’t have a handle on other parts of the country, but I would be interested if others would chime in.

My thinking is that we have completed the extremes of the cycle. From the silliness of 2006 to the 50% (average) drop in 2010 the process of re-pricing may be completed. We shall see if this lasts. Some reasons why it might be happening and a few that make me wonder if it will continue.

-MERS problems have shut down the pipeline of distressed homes. There was, and continues to be cash buyers of stuff being sold by the financial players (REO). In South Florida hundreds of apartments have been bought (paid with cash) and taken off the market. There is still a lot of junk, but the supply of nicer properties has gotten smaller.

-In NYC the market is good. Apartments are selling faster and at higher prices. The City has always been the driver of RE in the burbs. With prices over 1,000 a foot in town the ‘country’ looks better at under 500.

-There are cash buyers. Some of this is overseas money. To some extent the 100% rise in equities has to be the source of the money. I can imagine the conversations that took place two years ago:

“Honey, we got hammered in the stock market. If we ever get back to “X” we are going to sell half and buy the house we always wanted.”

The Russell 5000 is up $7 trillion in two years. Some of those X’s are being reached.

-A common theme that I’m hearing is “What’s the new construction cost for this property?” The answer to this is that costs have been rising very fast of late. According to Reed Construction Data materials cost rose in the three months ending in January rose at an annualized rate of 5.6%. Some of the contributors: Concrete +10.9%, metal joists 5.5%, tile +6.5%, site preparation +8.5%, fire protection, plumbing and HVAC +19% (copper).

These are January numbers. There will be a big jump again in February/March. Everything is energy driven in construction. Want a new roof? Get it fast. Asphalt shingles are a “buy”.

Net-net there is a “cost pull” that is influencing pricing of older homes. This is exactly what Bernanke has been trying to engineer.

-I don’t know if prices are “cheap” today or not. I know they are a lot lower. Where I live we are back to 2003 levels.

-Brokers have a great selling line to prospective buyers today. “Mortgage rates will be rising, the availability of mortgages will be curtailed in future years due to the wind down of the GSEs. Better to move now.” This is just brokers pushing buyers. An old game. But in this case there is truth to it. The days of the mortgage with a “4” handle are gone. I doubt we’ll see that again in a very long time. The question today is, “Are they going above 6?”

Don’t read this to be some bull case for RE or the great comeback in the US economy. It’s just an observation of where I think we are in the spring of 11′. I think residential RE is a lousy investment. Ownership cost is twice rental. You need 5% annual appreciation just to break even. That’s not going to happen.

Property taxes are going up all over. The cost of maintenance is way up. Interest rates have just started to rise. In a few years they will be much higher than today. Then there is that wild card of energy. The last place you want to be is in a big home and $200 crude.

If I’m right about this you will see it in the foreclosure stats. The bottom rung always has to get a lift first. Outside of the MERS issue the Chairman of the Federal Reserve is bringing this to you. He is responsible for almost all of the factors I mention. But in about six months he is going to be forced to take away the punchbowl.

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