In response to the Wall Street Journal

...there may be reasons that the housing market has not yet hit bottom

On Monday, January 08, 2007 the Wall Street Journal published two related articles, both of which point out just how important timing can be to real estate investment. The first article, “Speculators Helped Fuel Florida’s Housing Boom” could be accused of stating the obvious, but buried in the article is the comparison of two investors. The first investor, Ms. Dresner, bought high and is now forced to sell low, but the fate of the second investor, Mr. Krecicki, has yet to be determined, but my money is on him. As Mr. Krecicki says, “Timing is everything.” And he believes that on many occasions, the time is now.

The second article, “Will Housing Finally Bloom In Spring?” gives evidence that there may be reasons that the housing market has not yet hit bottom, primarily that there are a great number of vacant houses on the market. The percentage of vacant houses is disturbing because sellers of vacant houses don’t need to find new accommodations and the ripple effect in the market stops with that sale. The relationship between these two articles is interesting and not presented in either article. A speculator would be selling a vacant house.

Given the choice of starting a new building, or going out of business and laying off employees...

Although the Wall Street Journal points out the fact that there were diminishing construction jobs in December, they were offset by an increase in service-sector jobs. This is the argument that the economy is not necessarily slowing, and then the comment comes that, “With so many empty home out there, one wonders why builders would bother breaking ground on any new ones.” Builders are builders; what else would a builder do? Given the choice of starting a new building, or going out of business and laying off employees or giving up sub-contractor contacts, starting a new building is the obvious choice assuming that the capital is available.

But these builders may not be as naïve as one would think. Mr. Krecicki is buying houses thinking that the market will eventually rebound. Builders starting new homes are not expecting to sell them in the next 6 months. A building takes a while to finish and timing is everything. The builders who are most hurt are those who have inventory coming on the market in the very near future while inventories and vacancy rates are still high.

I can’t help being reminded of the bank-run scene in “It’s a Wonderful Life”

With all the people selling and many investors over-extended, there are opportunities to be had if one is patient in flipping or turning the properties. If there is validity to the argument, and I am not convinced (see “Response to Housing”), that the economy won’t slow due to the slow down in construction, then even if we haven’t hit the bottom of the real estate market, prices will not drop much further. Certainly, the evidence used to argue against a slowing economy will help to mitigate falling prices, in any event. Perhaps it is the season, but I can’t help being reminded of the bank-run scene in “It’s a Wonderful Life”. George Bailey makes the insightful observation that, “Mr. Potter isn’t selling. Mr. Potter is buying!” It seems that Mr. Krecicki and I agree with Mr. Potter