Values Are Down But There Is a Silver Lining – Part 2

What has been the motto of real estate location, location, location is truer today than ever. Location both affect commercial and residential real estate values in ways not seen before. In this post today, I want to start reviewing how location affects properties values and the state of the market in these different locations. For private lenders it is a crucial element of approving loans even more so since “conventional” banks are giving location a higher importance in their approvals.

Private lenders are in general regional lenders in a number of cases we are able to fund nationally. In part this is due to lending regulations, however, it is also due to our ability to understand markets. We could make the argument that one reason today we are in the mess we are in, is because the same lending and underwriting criteria were applied across then United States. Thus market differences and nuances were not taken into considerations.

Before moving forward with location, lets go over one crucial elements, the availability of capital. We have learned since August 2007 that if there is no money available to borrow and buy in this case real estate, then no transaction will happen. No Transaction means, no demand, no demand means prices are going down. Until buyers comeback with capital to buy properties value are not going to stabilize. Once enough buyers start making buys then a bottom has been achieved.

Different locations represent different types of borrowers and different market profiles. If we stay within the residential market we are able to see a couple of interesting patterns. The real estate markets first touched by the down turn are now starting to stabilize. These markets are in general in the blue collar neighborhoods. Properties in these markets are trading in general at 25% to 30% of their former market values. Borrowers did not have the best credit profile, they had lower reserves and lower paying job. When credit started to tighten they did not have the reserve needed to survive a change in lending policies. These markets have been depressed now for 18 months. Based on what we are seeing, I believe that we are starting to see price stabilization. Numerous investors are moving in and buying properties at 25% of their former values.

Even in these markets, there are differences. The markets that are seeing stabilizations are the ones that are closer or within larger metropolitan areas. Markets that are further away are not yet at the bottom. The way to measure this is by realizing that no investors are interested in buying properties that are further away at current prices. In addition, no private lenders are interested in making these loans yet. This may change when property are being exchanged at 15% or 20% of their former market values. Something we will follow.