The Upcoming Home Shortage Crisis

The Upcoming Home Shortage Crisis
(and How to Profit from It)

By Your Name

As you are probably aware, real estate was at the heart of the 2007 financial crisis, which started in the United States and became a global problem.

It was caused by what everybody now calls the real estate “bubble” – a speculative mad rush by the masses to buy housing units that caused rapid appreciation and over-inflated values.

To make matters worse, financing was so easy to get that people were able to buy homes they couldn’t really afford. When homes dropped in value because the market could no longer support the over-inflated prices, people defaulted on loans. The resulting foreclosure crisis further depressed the market, and real estate became a real drag on the overall economy.

But you know what? Eventually, it was the foreclosure market that helped start the housing recovery in the United States. Investors, who are the typical buyers of “distressed” homes, bought one out of every four homes sold across the country in 2011, according to the National Association of Realtors.

Shortly after the foreclosure crisis broke out, distressed sales – foreclosures and short sales – made up about one-third of the home sales in the United States. Since these homes typically sell at a discount, they were the affordable homes. They were what was selling.

Most of the real estate markets across the United States were buyer’s markets. Large unsold inventories of homes, fueled by the foreclosed and bank-owned properties, provided buyers with many choices and bargain-basement prices. If it weren’t for distressed properties, U.S. home sales would have been dismal. They led the recovery we’re now seeing.

But there’s a problem. And it was first noticed in the fall of 2009, when banks ran into what is now known as the “robo-signing” scandal.

The nation’s largest lenders faced a ton of criticism for their foreclosure practices. Procedural problems became public, and a foreclosure moratorium was laid out. Banks stopped foreclosing on properties. The result was a decline in the number of distressed sales.

Over 31 percent of all sales in 2008, distressed properties dipped to 29 percent of sales in 2009, as banks stopped providing new distressed properties. As the procedural problems were ironed out, they were still slow to foreclose on homes, and distressed sales made up only 26 percent of the market in 2010.

Even as the major lenders settled a gigantic legal case with states’ attorneys general in April 2012 and were given the all-clear to start foreclosures again, recent figures have distressed sales still making up only 25 percent of all sales. The number continues to drop.

As distressed sales have shrunk from 1 out of 3 homes sold to 1 of 4 in a relatively short period of time, what do you think has happened to prices? Well, from January 2012 to June 2012, the U.S. median home price went from $154,700 to $189,400, according to the National Association of Realtors. That’s a 22-percent increase.

And it’s easy to see why prices are rising. Foreclosures sell for about an 18-percent discount to true market value, and short sales are at a 15-percent discount. As the inventories of distressed properties fall, so do the number of homes that are sold at a discount.And there’s no doubt that inventories are falling.

And this is what’s at the heart of what is likely to become America’s next real estate-related crisis …

An upcoming housing shortage.

Now, you might be tempted to echo what some financial “experts” are predicting – that now that banks have the green light to foreclose on homes again, there will be a new wave of foreclosures to hit the market and provide a new injection of affordable housing. But let me tell you, it’s not going to happen.

You see, banks learned a lot about the foreclosure issue while they put the brakes on after the robo-signing scandal.

They learned that it’s not profitable to repossess a home from a delinquent borrower, which is why bank repossessions are way down and part of why the bank-owned home inventory is all but dried up in some markets.

They learned that it’s hard to sell a home once it’s been repossessed. In fact, mortgage guarantor Fannie Mae earlier this year said it could only list about half of the homes it owns right now because 48 percent of its repossessed homes were either still occupied, rented out or under repair.

Banks have learned that it’s better to be in the banking business than the home-selling business. And as prices have risen in areas that were crushed by the number of foreclosures a few years ago, banks have also learned to strategically introduce their real estate owned (REO) inventory to the market.

One recent report said that there were about 390,000 bank-owned homes in the United States at the start of summer 2012. Of those, only about 10 percent – less than 40,000 – were actually on the market.

Meanwhile, some markets are scrambling to find inventory. The markets where distressed sales dominated, in particular, are discovering there’s a shortage of the inventory that’s been selling in recent years. The two-fold result is that the discounts on distressed properties are shrinking and overall home prices are starting to rise.

Do you think banks are going to do anything to change that trend? Why would they?

A well-known blog, Naked Capitalist, in June posted:

“… supply is being constrained and the resulting ‘market’ prices are above where they’d be based on fundamentals. So any price improvement is based not on improving conditions, but the manipulation of supply.”

If banks can manipulate the supply to improve their own financial situation, don’t you think it’s going to continue? They’ve already demonstrated that, green light or not, they’re not re-opening the foreclosure floodgates. And we know they’ve only got about 10 percent of their REO inventory for sale now.

Banks are going to pull off the Band-Aid slowly, not rip it off and get it over with. You can expect to see this inventory slowly released onto the market over three or four years, not flooding it all at once. The distressed sale flow that’ had been providing a steady supply stream to the market is going to stay at a trickle.

But wait, there’s more.

Not only are banks reluctant to dump their existing properties right away AND reluctant to foreclose on delinquent loans, there’s another indicator that the foreclosure supply is going to be squeezed.

In June, NAR chief economist Lawrence Yun said:

"The distressed portion of the market will further diminish because the number of seriously delinquent mortgages has been falling."

The number of distressed properties on the market is limited now by banks, and it will be further limited by the fact that not as many people are behind on their mortgages than they were a few years ago.

Eventually, how banks handle foreclosures won’t matter because there won’t be the level of delinquencies there once was.

On top of that, individual investors and typical home buyers will be at an increasing disadvantage when it comes to distressed sales. That’s because institutional investors – real estate funds, large private partnerships, etc. – are starting to buy distressed properties in bulk.

If banks can sell hundreds of homes at a time for cash, do you think they’re going to pay much attention to Joe Individual Investor, who might buy one or two at a time? All this means is that this already-reduced inventory of distressed homes will be further shrunk in bigger chunks, which will make the process quicker.

Despite the concern over the shrinking inventory of affordable homes, it’s hardly the only factor that’s contributing to the housing shortage we will experience in coming years…

FACT: Inventories of non-distressed homes are falling, too. From June 2011 to June 2012, the total unsold inventory in the U.S. shrunk from 9.1-month supply of homes to a 6.6-month supply. That’s a 24-percent decrease in inventory in just a year at the same time distressed sales have fallen in relation to the overall market.

FACT: New home construction has been relatively non-existent in recent years.New home sales went from about 1.2 million at the real estate peak in 2006 to not evenan average of 372,500 per year from 2008 through 2011. The 307,000 new homes sold in 2011 represented the lowest total in history, and it’s less than a thirdof the 973,000 new home sales averaged from 1996 through 2006. In 2012 new home sales have not fared much better than the dismal 2011.

FACT: While the economic crisis slowed the rapidpopulation growth of the United States, the population IS still growing. In fact, though growth dropped from the steady 1% annual increases to about 0.7 percent, the country did add an estimated 2.2 million people from 2010 to 2011. In other words, even when population growth is slow, it’s in the millions per year. All those people will need somewhere to live, and as economic conditions improve, growth will likely resume at a faster rate again.

So, to recap:

Even when there’sslow population growth, more people need homes each year.
Distressed sales, which have provided a large percentage of available housing, are drying up.
New homes aren’t being built anywhere near a normal rate.

Now I don’t have to tell you what happens when the supply of something shrinks to the point where it doesn’t meet demand. You already know that the value of that something increases. I’m not going to predict that we’ll see anything like the price run-up we saw mid-last decade, but in coming years the shortage of homes will definitely increase home values significantly.

Remember, the median U.S. sales price for existing homes went up 22 percent in just the first six months of 2012. That increase occurred when only certain markets were affected only by a shortage of certain kinds of homes. The shortage is only going to spread and tighten things further.

Right now, you might be asking…

So what can I do about it?

The short answer is a simplistic way to look at investing: Buy as much as you can of that which will soon be scarce.

It’s what people were doing when gold was $700 an ounce, back in 2007, before everyone started to hoard it to hedge their bets and it became scarce.It’s been between $1,200 an ounce and $1,800 an ounce since 2010. Do you wish you had bought as much gold as you could get your hands on when it was $700 an ounce?

Recently, billionaire investor Warren Buffett said he’d “buy a couple hundred thousand homes” if it were practical for him to do it. Instead, he’s bet his money on the housing rebound by having his company, Berkshire Hathaway, acquire real estate-related businesses.

The good news is that you don’t have to buy a couple hundred thousand homes or a real estate business to profit from the upcoming housing shortage. In fact, most Americans will do what they’ve always done: Buy one home as their primary residence and profit from price appreciation and automatic debt pay-down. Americans’ wealth has long been tied to the equity in their homes, and buying a home now, before the shortage is upon is, will help provide equity.

Investors have it even better.

During the bubble, investing in real estate was speculative for many. They bought and flipped, playing the appreciation game. “Buy low, sell high” became “Buy high, sell higher” as the bubble inflated, and those who weren’t standing with a ton of properties when the music stopped made out.

But after the bubble burst, negative equity was more the norm. Prices dropped – to almost unbelievable levels in some areas – and interest rates also plummeted. Investors still bought real estate,but they changed from their buy-and-sell strategy of the bubble years to a longer-term buy-hold-strategy.

The real estate investment game went from one of rapid appreciation and flipping to massive cash flow and holding onto properties for the monthly income.

A rental property secured with a $200,000 mortgage during the bubble years and with a 7-percent interest rate would have a monthly payment of $1,330. A post-bubble mortgage of, say, $150,000 on the same home, along with a post-bubble interest rate of 5 percent, would put the payment at $805 per month. That’s a difference of $525 a month or $6,300 per year.

On top of that, because of declining home prices and homeownership rates, U.S.rental rates have increased across the board. In some markets, in fact, they’ve skyrocketed. So not only are monthly payments lower than they’ve ever been, rent collected is as high as it’s ever been.

Rental rates in the U.S. increased by 6 percent overall from May 2011 to May 2012, and in some cities, the jumps are eye-popping. Of the 25 biggest markets in the U.S., only one saw a decline in rental rates in the past year.

The house that now costs $525 less per month than it did 6 years ago might also generate $100 to $200 more per month in rent, which means investors recently have been making record amounts of cash flow. Also because of the demand, rental vacancies are near all-time lows in the U.S. – it’s not difficult to find quality tenants to rent properties at premium prices.

Before, the appreciation made it attractive for investors to buy and sell properties. In recent years, the crazy cash flow has made it attractive for them to buy and keep properties.

With an upcoming housing shortage, it might be the best of both worlds. Prices are still relatively low for now and interest rates are at record or near-record lows, but the dwindling supply of homes will drive prices up. Soon, investors will benefit from the cash flow they’ve locked in because of high rental demand, PLUS capture the appreciation that’s sure to follow a home shortage.

If you want to profit from the upcoming housing shortage, the strategy should be to invest at today’s low prices and leverage today’s historically low interest rates to lock in massive monthly cash flow, and then enjoy the appreciation that will come with the upcoming housing shortage simply as a bonus! It will be like buying a stock for the high monthly dividends, then unexpectedly having it go up in value.

Hopefully, I didn’t scare you with all the talk of a housing shortage. It’s more of an advance warning than a “Sky-is-falling” alarm, or a gimmicky “Get ‘em while you still can” sales pitch. The ship has definitely NOT yet sailed on distressed property opportunities. But for typical homebuyers and individual investors like you and me, the crew is about to make the final boarding call. Supply-and-demand fundamentals don’t usually lie.

But as you might imagine, there are some great homes available right now that provide double-digit returns for investors looking for to acquire terrific money-making properties.
If you are interested in acquiring one or more of these investments, please complete the enclosed Investor Application and send it to my office.
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Right now, we have availability for three new investing clients. We will review the InvestorApplications on a first-come, first-served basis.

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P.S. As is the case with any investment, the annual return with respect to each investment transaction will vary depending on the circumstances and the economic, political, and social events. Your level of success in attaining the results detailed in this report depends on the time you devote to your investments, your finances, knowledge and various skills. Since these factors differ according to individuals, we cannot guarantee your success or income level. Nor are we responsible for any of your actions. YOUR COMPANY is licensed real estate brokerage, and we are unable to provide tax and legal advice. Consult with your tax and/or legal advisors to determine whether or not each investment is appropriate for your circumstances.

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