How to Spot Undervalued and Overvalued Real Estate Markets
Archives: Daily Issues
Issue #2222
- WEALTHY: 6 signposts of a money-making opportunity (Justin Ford)
- HEALTHY: The perfect body weight? (Craig Ballantyne)
- WISE: An Wang on success
ALSO IN THIS ISSUE:
- The convenience of online ordering… with no shipping fee (Lori Allen)
- Why Ann Mulcahy has been with Xerox for more than 30 years
- It’s Fun to Know… about autumn leaves
- Add "presentiment" to your vocabulary
The World Is Shrinking… and the Opportunities to Make Money With This “Global” Economy Are Nothing Short of Staggering! If You Know How…
Imagine how well your business would be doing if you could slash your costs by more than 49% while boosting your profits by more than 57%.
You can do it… if you know how.
Today, as a matter of fact, all the Fortune 500 companies are doing just that, and they’re posting record-breaking profits by taking advantage of the “Global Economy.”
Unfortunately until now, only big companies could even think of doing this. But not anymore. Now it’s your turn.
Click here to find out how you can put the “Global Economy” to work for you.
The global borders are shrinking… The world’s becoming a smaller place… Will you just stand there watching opportunity go by or will you seize the moment and put the “Global Economy” to work for you? Click here to read more…
"Success is more a function of consistent common sense than it is of genius."
An Wang
How to Spot Undervalued and Overvalued Real Estate Markets – and Profit From the Difference
By Justin Ford
Former Fed Chairman Alan Greenspan has gone from genius to goat in recent months. Pundits wonder whether his ultra-easy-money policies were responsible for the meltdown in sub-prime mortgages and the collapse of formerly hot real estate markets.
The answer is yes, he is responsible. But he’s not alone.
Greenspan kept the bar open, but Americans drank themselves silly. They ran negative personal savings rates, turned the equity in their homes into ATM machines, borrowed on all sorts of "time-bomb" terms – from adjustable to negative-amortization, interest-only, short balloons, and more.
Then they used this cheap and seemingly endless supply of money to buy properties – pushing prices to points that simply no longer made any fundamental sense.
That’s what this article is about. The fundamentals. The kind that can save you a lot of pain and make you a lot of money – in any kind of real estate market.
There are simple rules of logic that can steer you away from trouble in bubble markets and toward profits in value and growth markets. Learn these, and you can spot the next bubbles as they develop. Better yet, you can use the same rules to identify some of the strongest investment opportunities in today’s real estate markets.
Even Kids Can Identify a Bubble
In testimony before Congress a few years ago, Greenspan said you can’t identify a bubble until after it bursts. Baloney!
Public companies typically sell for about one times sales and 15 times earnings. You might pay 30 to 40 percent more or less, depending on the industry, the company, how fast it’s growing, and where you are in the economic cycle. Yet, eight years ago, we had hundreds of companies sell for dozens, even hundreds of times sales… and hundreds and thousands of times earnings. Many of the fastest rising stocks, in fact, had negative earnings!
And behind it all, savings were falling while personal and corporate debt was skyrocketing. Cheap money was chasing tech and spec stocks, and pushing prices far beyond the economic fundamentals of sales and earnings.
That was a bubble. Stock prices no longer had any fundamental connection to sales or earnings.
In residential real estate, it’s even easier to identify a bubble. One big telltale sign is that homeowners can no longer afford to buy their own homes.
I know a mechanic, for instance, who bought his home for $150,000 10 years ago. Today, it’s worth $500,000. His house has gone up by 233 percent, yet his income is up only about 40 percent. He could not afford to buy the same house today.
In fact, even if he sold his house and went to buy another house for the same $500,000, he’d still have a tough time doing it because his new taxes and insurance would be based on $500,000 instead of being anchored to $150,000.
My friend is no longer a potential buyer for the same kind of home he bought 10 years ago. And most of his longtime neighbors are in the same boat.
Fact is, large groups of people are being priced out of their own neighborhoods. If, for example, you’re trying to sell a typical median-priced home in Los Angeles today, your market of potential buyers is 90 percent smaller than it was six years ago. In 2001, one out of every 2.4 households was a potential buyer for your home. Today, only 1 in 33 is.
You didn’t have to be a genius or have a crystal ball or wait till "after the bubble burst" to recognize that bubble. When the median-priced home is not even remotely affordable to the median-income household, something’s gotta give.
That something has been prices. And prices are likely to continue to give way in the bubble markets until properties or money or both become cheap enough that the median-priced home is once again affordable to people earning the median income.
Investors Can Get Priced Out of a Market Too
Another irrefutable sign of a bubble is when investors can’t find properties at prices that cash flow. When people pay $350,000 for triplexes that generate $25,000 a year in gross rents, they’re no longer "investing"… they’re speculating.
The rents are not enough to cover a traditional mortgage and expenses. The only reason people pay those prices is they expect someone else to come along and pay an even higher price. Why? Simply because… well, because that’s what’s been happening so far.
So you end up with a market where homeowners no longer provide buying support because they’ve been priced out. Investors no longer provide buying support because they’ve been priced out. And only a few last speculators, armed with self-detonating loans, push prices up the last few dollars until the cheap money stops. And "pop" goes the bubble!
The Flip Side of Bubble Markets: Great Opportunities in Value & Growth Markets
The same criteria used to identify bubble markets can be used to spot value markets. And to find strong investment opportunities, you only need to look for value markets that also are showing strong signs of growth.
First, let’s take a look at the value criteria…
For the last two years, I’ve had my research staff pull together data on over 130 U.S. metropolitan markets. I’ve used this research – plus travels throughout the U.S. – to identify value and growth markets.
I’ve formed limited partnerships and have invested in some of these markets myself. This has allowed us to continue to make significant profits even though many of my passive investors and I live in South Florida, perhaps the worst bubble market in the country.
For value, we consider how the typical house is priced relative to rents and relative to household income. Here are some examples:
In the U.S. right now, the typical house trades for about 21 times annual rents. That means if a house would rent out for $12,000 a year (or $1,000 a month), it’s selling for about 21 times that amount – or about $252,000. At these ratios, the rents won’t come close to covering your typical mortgage and expenses. In bubble markets, it’s even worse.
We’ve put together a Bubble Index that shows key value and growth criteria for some of the most overvalued markets – from Los Angeles to Miami to Boston. In these markets, the typical house sells for almost 29 times gross annual rents!
So, in most markets, to get cash flow in small residential properties, you have to (1) focus on special situations and find motivated sellers so you an buy deeply under value; (2) buy small multi-unit properties (2 to 4 units); (3) buy in a market outside your home area where properties do cash flow; or (4) some combination of these things.
Another key value criterion is the price of the typical house compared to the typical household income. Nationally, the median-priced home tends to sell for just over four times the median household income in the area. Historically, this is a little high, but still affordable. But not in the bubble markets…
In Los Angeles, the median-priced home is $586,500, while the median household income is just $56,200. That’s the kind of ridiculous situation that prices homeowners out of their own neighborhoods. In other words, at current prices there is almost no market for median-priced homes in LA.
By contrast, Houston has a higher median household income, at $60,900. And the median-priced home is just $148,600. That’s extremely affordable – which means you have a market for a home you’re selling in that city.
But don’t forget the growth factor. Value alone is not enough.
Growth Counts Too
If you just looked at value, you might conclude that Pittsburgh and Detroit are great buys right now. After all, their median-priced homes trade at only about two times household income and 10 and 13.6 times annual rent, respectively. Trouble is, their economies are struggling. Both these areas have had negative population growth in recent years. Pittsburgh has had anemic job growth and Detroit has been losing jobs as well as people.
So to look for the best investment opportunities, you want to look for value and growth. You also want to look at markets with diversified economies. They shouldn’t be overly dependent on one industry, as Detroit was with automobiles and Houston was with oil when they went through their major real estate crashes.
My favorite value and growth markets tend to have the following characteristics:
- The median home is priced well relative to household income. (Typically three times or less.)
- The median home is priced well relative to gross annual rents. (Typically 15 times or less.)
- The market has experienced appreciation in the past few years, but at a sustainable pace, in line with the long-term average or slightly below it.
- Population and jobs have been growing faster than the national average.
- The economy is diversified. (One of my favorite markets has five strong sectors in the economy: a state capital, a major university, a tech corridor, music industry, and local industry.)
- It has lively emerging or re-emerging downtown areas with a diversity of cultural activities.
Once you find your new target market, focus on buying undervalued, cash-flow properties in that market. Then fix your interest rate and make sure you have the right management in place.
Investing is a forward-looking process, and no one can claim to know the future. Yet you can get a pretty good look at the present. So don’t believe Alan Greenspan and bubble-boosting brokers. The fact is, yes, you can identify bubbles.
Likewise, you can identify value and growth markets. And when you consistently put your money to work in undervalued properties in these markets, you can make a fortune.
It ain’t rocket science. It’s common sense. But that’s a commodity that is rarer than cash flow in today’s marketplace.
[Ed. Note: Justin Ford is an active real estate investor, the author of Main Street Millionaire, and the editor of the recently updated Secret Value & Growth Cities: How to Make 6- and 7-Figure Profits From the Flood of Money Away From Overvalued Bubble Markets and Into America's Best Priced Growth Cities. To learn more about the best real estate markets in the country, click here.]
Make Big Real Estate Profits Now… Without Monthly Mortgage Payments!
There hasn’t been a better time to buy residential real estate in 15 years. But many would-be investors fear the cash crunch of making monthly payments… especially if a home takes months to sell.
But when you buy like Alan Cowgill, you won’t just avoid monthly payments… you’ll get a chunk of cash when you buy and when you sell! Best of all, you can do it without investing a dime of your own money, even if you have less than perfect credit.
And that’s just one of the powerful techniques you can use to make 6- and 7-figure profits every month, in this market or any market.
Click here to learn more about these lucrative secrets…
Holiday Shopping Tip: Free Shipping
By Lori Allen
If you’re like most people, you’ll probably do a lot of your holiday shopping via the Internet. According to a recent USA Today/Gallup poll, nearly half of Americans plan to shop for presents online this year. While shopping online has plenty of benefits, it does have a few flaws. Namely, you have to pay for shipping. Plus, you risk buying out-of-stock products that ship late… or never show up. This year, you have a better option.
Major retailers like Wal-Mart, Circuit City, Sears, Best Buy, Lowes, Linens-n-Things, and CompUSA are adding an in-store pick up option to their websites. That means you can order online and avoid the shipping fees by picking up your purchases at the store.
[Ed. Note: Lori Allen is the Director of AWAI's Travel Division. For 94 time-saving, money-making travel tips, click here. Find deals, ensure a smoother trip, and even find out how to get paid for your travels.]
Worth Quoting: Anne Mulcahy, Chairman and CEO of Xerox, on Focusing on Core Values
"I’m what you call a ‘lifer’ at Xerox; I’ve been with the company for 30 years. I joined the company because it offered me a chance to compete in a meritocracy as a salesperson where performance is fact-based – you’re either selling or you’re not. I stayed because I became enthralled by a culture that broadly defined ‘citizenship’ to include how you treat your people, your customers, your suppliers, and the communities where we work and live. It wasn’t talk. It was action, and still is. More than 40 years ago, our founder, Joe Wilson, spelled out a set of core values that cover how we engage with employees and customers, how we deliver value, and how we behave. Every decision I make is aligned with those values."
(Source: Business 2.0)
Don’t Get Too Skinny
It seems strange in this day and age to recommend gaining weight. But according to research from the United Kingdom, being too skinny as you age can kill.
Doctors studied 4,107 men aged 60-79 for six years. During that time, 713 of the men died. Here’s some of what the researchers learned when they analyzed the data:
- The underweight men (those with a body mass index of less than 18.5) had an exceptionally high risk of death.
- Those with more muscle mass had a reduced risk of death.
- Men with a waist circumference under 102 cm and with above-average muscle mass had the lowest risk of death. As waist size increased, so did the risk of death.
The doctors concluded that having a slim waist and training for muscle mass are two ways to help prolong your life. That’s a good reason to include total-body strength training and interval cardio training in your workout three times a week.
[Ed. Note: Fitness expert Craig Ballantyne is the creator of the Turbulence Training for Fat Loss system. If you want a free online source of information, motivation, and social support to help you improve your health, lose weight, and get fit, sign up for ETR's free natural health e-letter.]
It’s Fun to Know: Autumn Leaves
If you live in a part of the country where most of the trees lose their leaves before winter sets in, you may have wondered why some of those leaves turn red and some turn yellow. Well, a University of North Carolina undergrad has found that it has to do with the amount of nutrients in the soil surrounding the tree. Soil rich in nitrogen-containing nutrients tends to produce yellow-leafed trees in the fall. Soil poor in nutrients are more likely to produce red leaves.
(Source: National Geographic)
How to Get the Heart of 370 Business Magazines in Just 30 Minutes a Month
Did that headline catch your eye?
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"32 Ways to Save Time and Money From the Pages of Good Housekeeping."
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If you are involved in any form of sales, the benefits you’ll receive could be worth hundreds of thousands to you in future earnings. Click to continue…
- Patrick Coffey
Word to the Wise: Presentiment
"Presentiment" (prih-ZEN-tuh-munt) is another word for "premonition." The word is from the Latin for "to feel beforehand."
Example (as used by Nina Berberova in Cape of Storms, as translated by Marian Schwartz): "He’d had a presentiment of this. Yes, he had known that this was precisely what would be said."
[Ed. Note: Become a more persuasive writer and speaker ... build your self-confidence and intellect ... increase your attractiveness to others ... just by spending 10 VERY enjoyable minutes a day with ETR's new Words to the Wise CD Library.]
Michael Masterson
Copyright ETR, LLC, 2007
THis issue of ETR ,like all earlier issues is quite informative and useful to take structured decisions.