We’re now in the final quarter of 2009, traditionally one of the busiest times of the year for businesses. This year is radically different to most of course, because we’re still trying to get out of a severe recession. Others might call it a slowdown, but I’m not particularly fond of that description – recessions tend to shake things up rather than slow them down.
A recession will expose weak business models, destroy bloated companies and create unemployment – this has been well documented. For stronger and healthier individuals and organizations, a recession will reveal hidden strengths, create new opportunities and release pent up energy. Companies can hire top class people on the cheap. Talented executives in large corporations will find their bosses’ much more willing to listen to ideas for developing new businesses and revenue streams.
Most importantly, at least from my narrow point of view, a recession means that distressed assets can be bought for absolute song.
The bad news is that opportunities for easily purchasing a property at the very bottom of the US market are gone. This isn’t necessarily making front page news in The Times but statisticians and reporters tend to print yesterdays news.
There are two fundamental market forces at play. There is the “real market” which comprises 90% of existing US residential property. This stock may have lost significant value in the last few years but it is neither distressed nor foreclosed and the vast majority of it is not for sale.
The other, temporary market is the “distressed market” which completely undermines all efforts of the real market to sell surplus stock. This is because the “distressed market” as you will guess, is comprised of foreclosed and distressed property from banks and developers. This market is the only show in town as far as bargain hunters are concerned.
One of my main challenges is communicating the furious pace of the distressed USA property market to clients. With property activity moving at a snail’s pace in Ireland and the UK, there is an understandable but hugely misleading feeling on this side of the pond that there is plenty of time to invest in distressed assets and that it is a “buyers market”. As the monthly statistics have been showing, the reality is completely different.
For starters, the blind fear and panic of late 2008 and early 2009 are now distant memories. Regular investors are back and like all smart investors, they are ruthlessly snapping up the best properties in the best locations at the best prices.
Secondly, regular Americans with good credit ratings have been availing of large housing grants (up to $8000) and high LTV mortgages (up to 97%) to purchase their own homes at 10 year lows. This is having a profound effect on the market.
Thirdly, capital has been flowing back to private equity investors, pension funds and hedge funds. These are the silent whales of the market and they are literally hovering up thousands of foreclosure properties before they even register on a normal investor’s radar.
Total housing inventory is 40% down on last year and real bargains on high end foreclosure properties are like hens teeth. I have seen seasoned operators bidding cash on 5 or 6 deals before getting one of them accepted.
Torcana Ltd is a property investment consultancy dealing with investments in foreclosed property, distressed property, and discounted property in USA, Spain, UK, and Panama. For more information please visit: – http://www.torcana.com
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