An Illiquid Market Has Benefits

In our analysis dated in November of 2009 called “RE/Set RE/Position RE/Start”, which is available for download on our website, we outlined the four stages of the real estate cycle. For those who have not read the report, the first stage is the Boom, followed by a Decline, followed by an Illiquid Market, followed by Recovery.

The real estate market in central and southside Virginia has been in the Illiquid Market phase for approximately 12 months. It was the summer of 2009 that the bank examiners began to force banks not to make loans on real estate, even if they were exceptionally good loans.

Even more critical is that the examiners want the banks to reduce the percentage of their loan portfolio that is in real estate loans. It is not the quality of the loan that is critical, it is whether or not it is a real estate loan. Some of the stories in the industry are remarkable illustrations of this misguided attitude.

If you asked me to identify the single greatest barrier to a rebounding economy, it is the current attitude of the bank examiners and therefore the bankers. Second would be the lunacy of raising taxes on entrepreneurs, but that is another topic.

To an investor, the illiquid real estate market is an absolutely amazing opportunity. The best real estate investments are made in the trough of a real estate cycle, not at the peak.

In a trough the prices are “softer” and a buyer has the improved perspective of identifying the real strength in the real estate market. The opposite is true at the peak of a cycle when everyone thinks everything is great…a form of delusion.

The current opportunity in the real estate market can best be illustrated by the stock market comparing March of 2009 with the market in the fall of 2009. Most of my investments are in real estate as opposed to the stock market, but in February of 2009, I figured that the stock market was somewhere close to its bottom. I knew that I couldn’t predict the absolute bottom, but I just wanted to get my money invested at somewhere close to the bottom and ride it up as it recovered.

In February of ’09, I purchased stock in approximately 10 different companies. The stocks I selected were stocks that would benefit from an economic recovery of a period of several years.

I have to admit that in March of 2009 as I looked at my portfolio and realized that all of them had lost value, there was a short-term concern. But I remained convinced that I had bought companies whose stock would benefit from the economic recovery.

In September of ’09, I once again looked at my portfolio and realized that all were in the black. In fact, approximately five of the 10 stocks had more than doubled in less than seven months. After thinking about it for a few days, I decided that anything that more than doubled in less than seven months needed to be harvested because that was such a phenomenal annual rate of return that it would be hard to beat.

Therefore, I sold half of my portfolio in September of 2009.

In the real estate market, there are similar opportunities today. In the land market, it is true that all tracts of land are successfully holding the world together. However, after that common trait, each tract is remarkably different.

As you look in the land market, buying now offers the following benefits:

1. Clarity – You really can separate the wheat from the chaffe, as opposed to in the peak of the market everything looks like it is valuable;
2. Pricing – It isn’t always the least expensive property that is the best investment, it is the combination of the best land at a really good price that you want to purchase;
3. Ride the Recovery – As the real estate market recovers in the next few years, the demand for land increases.

Call us if we can help you find the best land investment.