Who wins in a real estate market downturn

Perspective: Many lose, but some win when housing market slows

Friday, October 07, 2005

Inman News

If the housing market turns south, a lot of people will lose: homeowners, investors and real estate professionals, to name a few. But a lot of people would benefit from a slower real estate market. Inman News has compiled a list of beneficiaries:

1. Foreclosure and pre-foreclosure investors: Marla Webb, a senior advisor to the Foreclosure Economic Advisory Council, a non-profit group affiliated with the for-profit Foreclosures.com, said experienced foreclosure investors and investment groups who are wise to long-term real estate cycles can profit in a downturn.

"The folks who do best are those who are already engaged in foreclosure investing – people who are building a portfolio. It's not those who like to buy and flip," she said. "Much of the hot markets have been heated up by people who don't have a real understanding of long-term management aspects of real estate. People who are speculators jump in and out."

Real estate speculators can boost a booming market higher and, similarly, drive a slumping market further down, Webb said. Rising foreclosure rates may scare some short-term speculators away while attracting the more seasoned investors, she added.

"Investment in real estate, like in many other commodities, tends to provide momentum in the direction it started to go. I call it the 'greased rails syndrome.' I think investors are greasing the rails in the direction of less of a seller's market." As investors who rode the boom bail out, they may precipitate a faster downturn, she said.

While foreclosure statistics don't yet indicate a significant turn in the U.S. real estate market, Webb said there are signs of cooling. And higher interest rates and higher energy costs could be a factor in a real estate downturn.

2. Borrowers who took out conservative mortgages and didn't get in over their heads: Prudence wins in a slow housing market. While those buyers who took a risk with exotic products like interest-only, no-money-down loans could get hit hard, the ones who borrowed under more traditional terms and stayed within their buying power should have no worries.

Likewise, lenders that kept tight underwriting standards during boom times shouldn't have to worry too much about excessive defaults or foreclosures coming their way.

3. Tax lien investors: These investors would benefit if there's a rise in delinquencies, said Howard C. Liggett, executive director of the National Tax Lien Association, which represents lien investors. Investors buy liens on the property taxes, which are auctioned off by local governments, and profit from the interest that is set by the state. In some cases, investors can receive up to 18 percent return on investment, according to NTLA.

The property tax lien market has prospered during boom years, with 32 states auctioning off $5 billion to $7 billion of unpaid cash bills per year, Liggett said. This segment also is expected to do well in a housing slump.

4. The prognosticators: While most economists and academics have shunned the notion of a housing bubble, some have been talking about it and predicting it's downturn for years. Among them: Yale University Economist Robert Shiller, author of "Irrational Exuberance" and cofounder of real estate analytics firm Fiserv Case Shiller Weiss; Dean Baker, co-director of the Center for Economic and Policy Research; and economists working on the Anderson Forecast produced by the University of California, Los Angeles.

"Each month that goes by with higher and higher levels of spending on homes, and higher and higher prices of existing homes, we are building a larger and larger mountain of adjustment to come," according to an analysis by Edward Leamer, director of the UCLA Anderson Forecast, said in a June forecast. "The next recession is highly likely to get started in the housing market, which has been made very fragile by very high levels of appreciation in some markets and by high levels of residential investment nationwide."

5. Wait-and-see buyers: They shopped around for a home at the top of the market, but backed off because there were too many multiple-offer situations and the asking prices were too high. As long as interest rates for mortgages remain low, these wait-and-see buyers will benefit from a slowing market, which shifts the balance back from the seller's corner. Plus, real estate agents will be fawning over them and treating them much better than during boom days when buyers were a dime a dozen.

6. Auction companies: Historically, auctioneers have done well in booming markets, and even better in slower ones, said Tony Isbell, president and CEO of RealtyBid International, an online auction company based in Gadsden, Ala. "Auctioneers as a whole had a record year last year in real estate, and it's anticipated that (the sector) will really explode as things slow down," he said.

Auctions typically take less time than traditional selling methods, Isbell said, and especially during slower markets. The two main benefits of selling by auction are that sellers maintain more control over the terms of the process, and the process is expedited, he said.

7. Lead generation companies: Companies offering up home buyer leads to real estate brokers and agents may see a surge in customers as more agents eye prospective buyers as clients. The listing agents who relied solely on listing properties for business during boom days will be looking for new ways to build up a network of buyer clients since listings will be scarce during a slowdown.

8. REO companies: These companies will benefit because slower markets tend to churn out more real estate foreclosures. Banks that end up holding title to a bunch of property will likely hand it over to an REO outfit that can sell it off quickly so they don't have to waste any time holding ownership of the property.

9. Wall Street: During the housing boom, many investors turned to real estate while the stock market slumped after the dot-com bust. If home-price appreciation rates slow or stagnate, many investors will pull out of Main Street and head back to Wall Street.

10. Scam artists: They benefited from the boom and they'll benefit from the big chill too, but will switch their focus. Instead of offering people broad advice on how to get rich quick in real estate investment, they'll be offering to save troubled borrowers from foreclosure using dicey tactics that many times result in the borrower losing his or her home.