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State of the market – Fall 2008

I’ve been posting regular updates on what I have been seeing in the investment real estate market since I started this blog, but I decided I needed to develop a method to my madness. These updates will now come on a quarterly basis with occasional updates interspersed throughout the year. Keep in mind that all these impressions come from someone who works in the multifamily and rehab niche in South St. Louis. I am not really going to get into residential housing or other areas. I’m not going to be spouting of statistics and setting up year-to-year charts to explain trends. These are merely impressions.

Demand is out there

So how are things looking out there? I guess there is some good news and some bad news. The good news is that despite all this recession talk, it seems like there is a significant demand for property at the moment. Anything of interest that has come on the market, whether its a foreclosure or retail sale, seems to have a parade of buyers running after it. A lot of these are repeat players who buy often in the area, but there are also a noticeable amount of new buyers trying to get into the mix. Their reasons for choosing to enter the market at this time are diverse, but I look at their entry as a positive sign that the confidence of educated consumers is still high.

For example, I listed a 4-family on Arsenal in early August. I haven’t worked with sellers a lot recently with the glut of foreclosures constantly coming up, but this was a good property in a great part of the Tower Grove South neighborhood for reasonable price (NOTE: As I write this, the old listing packet for the property is still up on the right hand side of the blog’s homepage). I figured I would be able to find someone to buy it within 90 days. Imagine my surprise when the building went under contract in only two days. Not only that, but there were many people shuttling through the property in those first days. I had numerous agents and investors who were quite disappointed that they couldn’t submit an offer. We closed on the building late last week with no issues. I’d like to think that I am good at what I do, but I can’t make something out of nothing. I didn’t create that demand. The market created it. It’s not all gloom and doom people, whatever you might hear. That being said, I want to emphasize that this building was priced appropriately and in an area with high demand. The days of unjustifiably high prices are over. Don’t take this as an indicator that you can sell a bunch of 4 families in struggling areas for premium prices. Everything has to be justifiable in this market.

Changing opportunities

Another bit of good news, at least if you are an investor, is that there are still plenty of opportunities to buy great foreclosure properties. The only thing is that the kind of properties available has changed a bit over the summer. In April, May and June there were so many great multifamily buys coming on the market each week that I couldn’t keep up with things.  Prices were ridiculously low (probably too low) and the quality of the inventory coming out was really great. Over the summer,however, things changed. I think the banks started to realize that they were selling off properties for too little and that they were being impatient. As a result, prices seem to have gone back up a little bit. There are still great deals, but relative to what I was seeing in the spring and early summer, they are not quite as compelling.

Other than price, there has also been another shift in the market. There are still good buys of all shapes and sizes coming up, but there has definitely been a shift toward the single family. I actually posted about this situation a couple months back, but the trend has continued. It seems like all of the best opportunities coming up are actually small to medium-sized houses. Some of these would make good rentals, while others would really need to be sold to owner occupants after doing a fix-up. Thankfully things are looking good on the fix-up angle. Quality housing priced between $100 and $150,000 seems to be selling quite well at the moment. I feel strongly enough about the saleability of these products that I am working on one myself (I’ve been chronicling the rehab on this blog if you want to check it out). There is certainly a lot of money to be made with these kinds of properties, but it definitely a change of pace. That isn’t to say that you can’t find quality duplexes and four-families on the market, but they don’t dominate the investment landscape at the moment. The one thing I am not worried about right now is the well drying up. Foreclosures are still coming in at record numbers and it will take months before all the properties being foreclosed on today hit the market. I would expect these quality buys to continue well into 2009 and possibly beyond.

Financing

So far I have only really been talking about the good things going on in the market. Unfortunately there is one big issue I haven’t touched on: financing. Great returns are well and good, but if you can’t get the financing to buy and/or fix up a property you can’t reap the benefits of this great buyer’s market. I won’t go into too much detail about the current financing situation here since I just posted a focus article on the topic, but it’s the only thing keeping a lot of the current “for sale” inventory on the market. If you asked me to find you a good South City 4-family right now I could find you one that would give a great return. The trouble is that for many buyers the tight lending market would allow they to buy one property at the most. Everyone wants to hit a home run when they finally buy their property so there are a lot of really good deals sitting out because they just aren’t quite good enough. If the lending reigns would loosen just a little bit things would really take off.

From what I have been hearing from a few lenders I know, it sounds like things are going to get worse before they get better. Of course, this could also be yet another shift in the market. Banks have been the choice source for loans in the past two years, but their lack of willingness to lend money might open things back up for the mortgage industry to step in again. Then there is always the prospect of owner financing and lease-purchase. Its something most investors haven’t touched in years, but they are increasingly attractive options. And there is always federally backed FHA loans if you are going to live in the property. Things are tight on this front at the moment, but where there is demand, someone will usually come in to capitalize. I just wish they would hurry up.

In Summary

Overall I would say I like where we are at right now. Many of the shady lenders and investors of the past few years have been pushed out of the market and those still able to buy are getting some great deals. The shift to single families as the prime investment available is a change of pace, but the prices are so low its hard to screw these things up. I really think there is a hunger out there to jump into or increase one’s presence in the real estate market. If financing would just loosen up a bit I think the market could really start to gain value in a hurry. The next year is going to be very interesting, seeing where the rabbit hole goes.

*NOTE – For the nitpick lot out there, I will start off by saying that I know that the technical start of fall isn’t for a few weeks yet, but in the modern day, Labor Day is the unofficial start of fall.


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Matt Kastner

Matt Kastner is an Investment Real Estate Consultant at St. Louis Real Estate Society in St. Louis, Missouri. He is also develops properties on the side through Threshold Properties. When he isn’t representing investors in the purchase or sale of multifamily properties, rehabs, foreclosures and other income producing properties, he is often taking on rehab projects himself. He lives in South St. Louis and has been in the real estate business since 2004.

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