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Friday, August 15, 2008

Beyond 2010 - Strong Demographics for Housing


By Michael Douville - Real Estate Analyst

As an asset class, real estate is a very long term investment. When I counsel investors, the minimum holding time frame is a reasonable 5 to 10 years.

(Article interests (NYSE: TOL, HOV, BZH, BAC, FRE, FNM, LEN, PHM, NVR, GFA, MDC, CTX, KBH, RYL, MTH, XIN, BHS, SPF, MHO, OHB, WCI, NYX), (AMEX: DIA, SPY, SDS, DOG, QLD, VNQ), (Nasdaq: QQQQ, VGSIX, AVTR).)

As Warren Buffet once said, an investor should "hold your investment forever." Indeed, unless there is a compelling reason to sell, my investment philosophy is just that: buy quality properties in high-growth areas; use leverage very judiciously; employ a principal reduction strategy to produce a free and clear investment as quickly as possible; and enjoy a lifetime of benefits that can be part of a family legacy.

Once the long-term nature of a real estate investment is understood, the location of investment properties becomes extremely important. Real estate markets are local in nature. Within the United States, there are many regional markets, each with their own unique growth characteristics. Some markets have been losing population and jobs for years; consequently, these will take much longer to recover. However, due to the decade's long demographic shift from North to South and East to West, some markets should begin showing signs of recovery.

Population growth in areas like San Bernardo County, California; Harris County, Texas; Clarke County, Nevada; and Maricopa County, Arizona will absorb the excess housing sooner than areas in the North and East. Other areas experiencing the population shift include Wayne County - home to Detroit, Michigan - that by some estimates will lose as much as 705,000 residents by the year 2035, and Allegheny County - home to Pittsburgh – that has estimates as high as 4.5% loss of residents.

Along with the demographic shift, the US population is also increasing at 1% per year, or about 3 million annually, which exceeds the entire population of Phoenix or San Diego. That alone would absorb the glut of 1-1.5 million foreclosures within 12-18 months. Maricopa County is now home to some of the fastest growing cities in the US: Phoenix, Scottsdale, Peoria and Gilbert, which are expected to grow by 184,000 new residents in just 2008. From 2000-2007, Maricopa County experienced a population growth of nearly 880,000 residents, and this surge will continue to resist diminution. The population of the US is projected to increase by 50%, from 303,000,000 today to over 450,000,000 by 2050. This figure points to a very powerful trend and an incentive for the accumulation of properties. Owning a home will thus be a huge accomplishment in the not-too-distant future.

The US Real Estate Market is laboriously walking along the bottom. Unfortunately for recent home purchasers, the bottom is now being defined by aggressive asset managers handling foreclosure portfolios and charged with the orderly liquidation of those properties. These "lender-owned" or REO properties represent a tremendous buying opportunity. Conversely, they represent severe competition when selling. Those buyers who were unlucky to have bought in the 2004-2007 time-frame probably cannot sell without a loss. These home-buyers, in many instances, are unable to sell without help from the lender in the form of a "short sale," lender participation in the new government-sponsored re-finance programs, or possibly an outright foreclosure. These recent home purchasers must reduce their asking price to compete at the bottom or remove their properties from the market and wait for the recovery. Only those needing to sell should be affected, as the average homeowner puts down roots and will live in a home for at least 5 years.

Real Estate investments are a get-rich slow strategy. Using this process, one finds that the creation of wealth is not an event, but a life-long journey. Further, the accumulation of Real Estate Investments is a time-proven strategy and time becomes the real estate investor's friend. There are many potentially lucrative markets within the US that have a huge potential for growth, capital gains and rent increases. The US real estate market will likely bump along the bottom for the next 12-18 months, with signs of normalization returning by 2010. In the meantime, frantic selling by asset managers should produce wonderful opportunities for patient investors.

Full Disclosure: Michael has agreed to Wall Street Greek policy to refrain from authoring articles about securities he personally owns or holds beneficial interest in. In the event of a special case, Michael will make full disclosure of ownership or beneficial interest. The work of contributors to Wall Street Greek is their own, and may not necessarily agree with the opinion of the site or its founder, and does not constitute financial advice. Please see our full disclosure at the site (Wall Street Greek).

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1 Comments:

Blogger Uncle said...

Did you read Barrons this weekend? The interview with CEO, Eric Sprott, with Sprott Asset Management. Page 47. He's not as confident as you are about the housing market....he's sees much larger declines, and greater difficulty with obtaining a mortgage to buy a home...then there was that other article in Barrons about Fannie and Freddie Mac........I'm not so sure about this housing recovery you see in 2010...

11:39 PM  

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