Realty Check. The cold hard reality is that the prosperity of real estate attracted people to the industry that were un/under-qualified. Many people purchased homes then were qualified to be owners. There were attorney, mortgage companies, and real estate agents who came to real estate for the low hanging fruit in the economy. Most of those companies and people are gone. Over the last two years, 317 banks have closed or were purchased to avoid going out of business. Since 2006, the National Association of Realtors reports a decline in membership of approximately 245,000. According to historic data the surge in real estate agents has declined back to the level of the pre-boom era. If the number of real estate agents is any indication of a return to sanity in the market, then the days of recovery are near.

 

Reducing Debt. The first trend in society is the decline in the amount of consumer debt which Americans are holding. In 2008, the total consumer debt reached an all-time peak at over $12.5 trillion. The most recent numbers show that Americans have shaved about $922 billion off the total debt and have reduced the number of open credit cards by 24%. There’s no doubt that people were spending more money than they made. The return to rational fiscal responsibility is a positive sign for the economic future of the country.

 

Shadow Inventory. The real estate market currently suffers the effects of a phenomenon called “Shadow Inventory”. Shadow inventory are the homes that are not currently on the market but are expected to come on the market via foreclosure or short sale. Today, the biggest challenge to the real estate economy is foreclosures that have not been executed. The effects of today’s shadow are far different from the previous shadows seen before. In normal times, it can be expected to see a small inventory of bank owned homes on the market and to have some shadow market lurking to the side. One of the major problems is that the velocity of home sales has slowed to near record lows resulting in a much higher supply in relation to the actual sales. It is estimated at current velocity that there is close to 40 months of shadow inventory in the US. The inventory problem is a challenge to the market and an opportunity for investors.

 

International Investment. The rewards in the market are to the prudent buyers. Since so many people have been burned in the US, there has been a surge of international investment in the US real estate. Investors who focus on the fundamentals of the investment see the opportunity in the economy to realize cash flows with potential for increasing value. Even if values were to decline, the monthly cash flows make the investments appealing. Over the last year, stocks have been struggling to maintain growth and the cost of bonds has been rising driving the yields down.  As true investors get a stomach for real estate again, the returns available will attract American investors back in the market again.