Endless Bottom

Published: December 11th 2010
in Economics » Local

Scottsdale Arizona

Across the border


Since the 2008 crisis, many investors are looking for the opportunity of their lives. One of the favorite sectors to look for such an opportunity is the real estate sector, especially the US housing sector that in some states around the country has been "squashed to the ground".


When looking for residential real estate investment in North America you’re likely to see two scenarios. The first is a house in city which was largely unaffected, like Toronto, and the owner is asking for $540,000, not a penny less.


The second house is in a city which took the brunt of the recession, like Florida. Both houses are the same size, both were built in the same time and both look well maintained, but the owner in Florida is asking for $53,900, which is 90 per-cent less than a comparable house in Toronto.


Before you start asking questions, the real estate agent in Florida will tell you that only the replacement cost of the house is $150,000 and until three years ago the prices in the neighborhood were no less than $300,000.


To buy or not to buy, that is the question


The No Argument


If housing prices are so low, why are there more sellers than buyers?


If the deal is so attractive, how come there is no queue of buyers and how come the only interested buyer is you?


There are many questions to be asked, some of them are not that simple to answer. There are many opportunities in the US real estate markets but there are also many risks to asses before spending a penny there.


In some cities the economic situation is so bad that there are more houses than people living in those cities.


If you’re thinking of finding someone to lease the house and make the yield of your life, forget it. No real estate agent will assure you that you will find a renter immediately. Besides, if you find someone rent your house you have no assurance that they will pay the rent and bills.


Check what your expenses, taxes, maintenance and of course the management company fees, which today are around 8%, an all-time high. They may consume your capital faster than you think.


Also, know that you will need to finance the purchase yourself or get private investors to do so.  No financial institution will loan you money today to purchase distressed assets in the US.


The Yes Argument


The US is still the world's biggest economy. Sooner or later it will recover from its illnesses and will flourish again.


This is how it was in the 1930s, in the 1970s and this is the way it is in 2010.


The US population is growing and in the future there will be a shortage of houses. As soon as people get stable jobs, they will be confident enough to take long term commitments and the first thing they will do is buy a house.


If and when this will happen, housing prices may surge by hundreds of percents and a $50,000 investment can become $250,000 in only few years.


The risk comes in knowing which housing markets will bounce back sooner.  Depending on who you speak to, many believe that Las Vegas will be the first city to bounce back, probably in 3-5 years, as local casinos have seen their business recover faster than expected.  Arizona will likely be the last state to bounce back, with some investors estimating at least a 10 year recovery time.




The aggregate loss of value in the US housing markets between the 2006 peak and 2009 is $9 trillion. According to Zillow (Zillow.com) the aggregate value may fall even more by $1.7 trillion in 2010. So while you may think we’re scrapping the bottom now, there might still be a ways to go.


This article does not recommend investing in the capital market

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