I just recently wrote in this space about the housing market’s affect on our broader economy. It appears as if real estate is the Pareto principle at work. Five states (Arizona, California, Florida, Michigan and Nevada) have generated a shocking 46% of the nation’s foreclosures[i].
While there are a number of forces as work, there is one explicit predictor of foreclosure activity. States where judges must approve foreclosures in writing have 260% more activity than in other states. As homeowners and banks wait for the government to take action, markets spiral downward, only diminishing the value of properties that have positive equity.
In the states where foreclosures are dealt with quickly, the market has already begun to turn. Each of us can reach our own conclusions about the role of government (this is not the appropriate venue for such a debate).
The broader point is that the U.S. real estate market, like many other markets has vast regional differences and elements within it moving in different directions. The concept of the “business cycle” is a bit of a misnomer. Traditional cycles have been disrupted and replaced with a series of variables that drive markets very quickly, sometimes without pretense or warning.
The events that created the recent housing bubble created the perfect storm. The recovery will be another type of storm, with regions and even areas within regions recovering more quickly than others. We see similar phenomena in employment and growth in various industries.
It used to be that selecting the right industry was enough to ensure some level or prosperity. Today, entrepreneurs and investors need to find very specific opportunities and niches where growth and profit are plausible.
Like everything else, choose your real estate carefully.
[i] The Kiplinger Letter March 16th, 2002