According to Bloomberg News, Billionaire Warren Buffett said the U.S. residential real estate slump will end by about 2011, predicting that’s how long it will take demand for homes to catch up with the supply. “Within a year or so, residential housing problems should largely be behind us,” Buffett wrote on February 27 in his annual letter to shareholders of Berkshire Hathaway Inc. “Prices will remain far below ‘bubble’ levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits.”
I’d like to say that this statement is comforting, but as I analyzed the exact meaning, I became a little more skeptical. Let’s suppose we take the above quote as most housing industry participants are and run with the positive side first: It’s somehow comforting that Warren Buffett has predicted the end of the housing crisis and we now have a date to look forward to as the time we exist the dark housing tunnel. It’s also comforting to know that enough buyers will be back in the market that properties won’t languish in perpetual purgatory while housing demand continues to build.
Let’s now take Warren Buffett’s quote and look at it from the new skeptical and cynical point of view that has now become the initial response to any real estate or financial news: There appears to be another 12 months of real estate inequity that would seem to point to continued falling prices. This in the face of a federal housing credit program ending, banks continuing to foreclose at breakneck paces, measurable unemployment near 10% and a general public who feels defeated by their homes. How’s that for a counterpoint?
The Truth is Somewhere In-Between
As I have said for more than 2 years now, the national housing market can have nothing to do with your local market other than to wear on your psyche during the 6 o’clock news. That being said, where the real national effects are truly felt is at your local bank or credit union that is now unable or simply unwilling to take the risk of writing a new residential loan on a certain product type or in a certain part of your town. In Nashville’s case, this selective lending practice was clearly discriminating against the condo market. There was a period of 14 months when several local and region lenders would write a new purchase loan on a condo, but would also raise their rates in order to “cover their risk” of lending on what they considered to be a volatile real estate product. They called it a “condo rate hit”.
Fast forward to 2010 and most of these lenders have dropped their “condo rate hit”. In fact, one lender, Bank of America, appears to be giving below market rates to new condo purchasers in an effort to gain lost market share after a period of selective lending. When I ask a couple of originators what had changed in the past year, there really wasn’t a uniform response until I spoke to an underwriter who has processed loans for more than two decades. She stated that since condo inventory in Nashville had burned off rapidly in 2008 and 2009 coupled with very little new construction that her bank felt like the period of mass oversupply had ended. This sounds a whole lot like what Warren Buffett just said, doesn’t it?
The Nashville Real Estate Market Moving Forward
There is no reason to fear the Nashville real estate market as a buyer, but only if you are being smart about it. You should consider all types of properties, both distressed and non-distressed and not jump on the first deal you see. You can still overpay for a foreclosure or short sale. You should also consider the fact that not all sellers are distressed or have to sell their properties. Less than 18% of homeowners in Nashville are underwater and most are just like you, well capitalized and smart. Don’t badger these folks, but don’t hold back any punches either. Be swift, but respectful with your offers that are testing the waters.
Consider the fact that the Nashville market did not take the massive hit that other markets did, mostly because we did not receive the massive run up either. Banks, lenders, builders and distressed sellers still offer the greatest potential for a phenomenal deal, but those deals are not like the ones you read about in Florida or Las Vegas so be realistic. Do your market analysis and buy at a price level that beats the 5 year average.