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Monday, July 20, 2009

Banks Shoot Self in Foot, Investors Drool

The other day I pulled up the MLS and found a home for sale for $29,900. It had a new kitchen and new bathroom, it just needed paint and flooring and a few windows. I was literally shocked to see a price point like that. Well yesterday it happened again and yet again today.

These are all bank owned or REO property. Why are banks giving away these homes? Well the answer is tighter lending practices by these same banks.

Home prices are made up of two components: Credit and Cash. Banks give you credit and you earn and save cash. The combination of the two determines what you are able and willing to pay for a home. Over the last 10 years banks gave too much credit to people who had no cash. Now banks are not giving credit to most people, even if they do have lots of cash. Ironically, bank owned homes, the ones in need of repair and TLC, must be bought with cash in most cases. Since most people today don't have gobs of cash laying around, prices appear to be plummeting for REO property. Hence today's chart:


The moving average in this scatter chart shows the price decline since 2008. Wholesale property in downtown Ogden needs to be purchased for below $50 to begin to make sense. During the boom in 2007, price points surged above that benchmark. The subsequent lack of financing has now caused a significant correction in wholesale REO pricing.

This is an awesome opportunity for investors. The old a maxim "Buy Low, Sell High" is now possible during this market phase. I plan on taking full advantage of it.

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