The Upside of a Down Market

The real estate market experienced such a prolonged downturn that it created a number of new opportunities for those who stopped wallowing in misery and got on with their business. Few areas were hit as hard as Las Vegas yet many investors and realtors are thriving. So many real estate agents left the business that it reduced competition among those who remained. It also allowed the truly skilled to standout. Some whined about the lost commissions of yesterday while others adapted by becoming experts in foreclosures, short sales, and property management. Guess which ones are thriving? Those investing in real estate experienced a similar shakeout. The pseudo-investors and part-time builders and Realtors who flipped houses like pancakes and later lamented the loss of double-digit monthly appreciation are gone. What remains are a lot of true investors who make decisions based on hard facts and numbers that pencil out. Good riddance to those who subscribed to the greater fool theory of finding someone even more reckless than them to pay ridiculous prices for what often turns out to be a terrible product.

Lately I’m seeing something I thought would take a decade or more – stalled projects are coming back to life. Whether investing in a low-cost fixer-upper or a multi-billion dollar project the factors are the same, only the scale is different. There is the cost of acquisition, carrying costs, and development costs. Many of these stalled projects wound up in foreclosure where investors were able to buy them at a fraction of their original price. Interest rates are at historical lows which greatly reduce the carrying costs. There is such a surplus of construction labor that those prices have been slashed as well. This means that the finished product can be sold at a realistic price. When a white elephant comes back to life it changes the way people feel. Who wants to invest in the vicinity of a failed real estate project? When work begins again and a development is completed it contributes to increased optimism. When people are more optimistic they buy and the market improves.

I’m not suggesting that things are going to instantly turn around, and we shouldn't expect instant gratification - that's what got us in this mess to begin with. I am saying we are rebounding. There is no sign of the irrational exuberance that characterized the real estate bubble. The market is strengthening in a way that should be sustainable and that is good for everyone.

-Richard Warren (Las Vegas, NV Broker and Investor) contributed to this post