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adjustments” expected in the Real Estate market
by Phyllis Espinoza
If Warren Buffett says so… we better listen. After
all, the “Oracle of Omaha” didn’t become one the
greatest value investors of all time, by making
A $10,000 investment in Buffett’s Berkshire Hathaway
in 1965, would grow to be worth nearly 30 Millions
by 2005. By comparison, $10,000 in the S&P 500 Index
would have grown only to about $500,000 during the
same period. I don’t know about you, but I like to
listen to people that outperform the markets
This is what Warren Buffett said at the Berkshire
Hathaway’s annual meeting (May 2006):
"What we see in our residential brokerage business [HomeServices
of America, the nation's second-largest realtor] is
a slowdown everyplace, most dramatically in the
formerly hottest markets. [Buffett singled out Dade
and Broward counties in Florida as an area that has
experienced a rise in unsold inventory and a
stagnation in price.] The day traders of the
Internet moved into trading condos, and that kind a
speculation can produce a market that can move in a
big way. You can get real discontinuities. We've had
a real bubble to some degree. I would be surprised
if there aren't some significant downward
adjustments, especially in the higher end of the
This is not news to Real Estate investors in some
previously ‘hot’ markets that are starting to feel
the overheating effect. What nobody can predict is
the size and duration of this adjustment.
Let’s look at the Dow Jones U.S. Real Estate Index
Since October 2002, the Real Estate Index has
climbed from 136.59 to 293.72, producing a total
return of 115% in less than 4 years.
Now, let’s look at what the Dow Jones Index did
during the same period:
It climbed from 7197.49 to 11670.19, for a total
return of 62.1%, about half the return of the Real
How much higher could the Real Estate market go,
before an adjustment? According to Warren Buffett, an
adjustment may be just around the corner.
The ‘smart money’ has already milked the real estate
index in the last 4 years and may be ready for a
switch. Where to? We don’t know, but what matters to
us is that it’s going to be out of the real estate
This is just our opinion and it doesn’t mean that
there is no money to be made in this market. What it
means is that investors need to be much more careful
and do something other than sitting on their
properties to make money.
As Warren Buffett said, the higher end of the
housing market has the higher risk for a downward
And he had something to say about the current state
of mortgage financing also:
"Dumb lending always has its consequences. It's like
a disease that doesn't manifest itself for a few
weeks, like an epidemic that doesn't show up until
it's too late to stop it. Any developer will build
anything he can borrow against. If you look at the
10Ks that are getting filed [by banks] and compare
them just against last year's 10Ks, and look at
their balances of 'interest accrued but not paid,'
you'll see some very interesting statistics
[implying that many homeowners are no longer able to
service their current debt]."
He is referring to the credit boom that we’ve
experienced over the last few years, and how quickly
it can turn into a credit crunch, where money will
be more difficult to borrow.
A few things to keep in mind during the times ahead:
- Continuous interest rates increases may accelerate
a possible real estate adjustment.
- Higher interest rates will qualify fewer people
for conventional mortgages, increasing the need to
offer ‘seller financing’ to sell a property quicker.
- Offering ‘seller financing’ on a declining Real
Estate market is not for the faint of heart.
- Holders of private mortgage notes may see their
note market values decrease.
- Foreclosures may increase specially in the high
end of the market.
These are some of the things you can do to reduce
your risk in this area :
- Selling high end properties before the adjustment
is well under way, especially if your area has
appreciated in value considerably in the last few
years. Some areas in New York, California and
Florida may fall under this category.
- Unless you are planning to receive monthly
payments for your note for the duration of the term,
this would be a good time to consider selling your
note. During a downward real estate market, your
note may be worth less (or be worthless).
- Deal with low-end properties, unless the high-end
is your niche and you know how to coast the storm.
- If rehabbing properties for a quick return is your
business, make sure that you leave yourself enough
room for a property value adjustment. Try to turn
around those properties quicker, as you may be
selling on a declining market.
- If you are planning on offering ‘seller
financing’, be extremely careful. Select your buyers
and terms keeping a declining market in mind.
But you may ask, what happens if everybody sells
property at the same time, wouldn’t that precipitate
the decline? That is a good question.
Consider that real estate tycoons like Donald Trump
and the Reichmann brothers, people that were so
shrewd during the up times, were caught by surprise
in previous downturns.
People usually won’t admit to a downturn until the
move is well under way and it’s too late to exit the
market harmlessly. History repeats itself.
So, the first ones to exit the market are the ones
that take their profits, cut their future loses
short and come out alive and ahead. The rest may
These are just some scenarios that we have played in
our minds to alert you of possible roadblocks ahead.
We will continue to do so in the future.
are a great alternative to speed-up the selling time
of a property, while providing cash and freeing you
from the risks of holding a note during declining
From buying your seasoned mortgage notes to working
with you to come up with a viable structure for your
seller financed note, there are a number of ways
that we can help you deal with the times ahead of
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About the author
Phyllis Espinoza is an expert in Simultaneous
Closings, an emerging field of creative real estate
financing, and the owner of the website
Her goal is to help as many people as possible by
making this useful technique better known.