Real Estate Hits Slack Tide, Investors Jump Back In

The Earth rotates around the sun, the moon waxes and wanes, tides rise and fall—an intricate, yet simple relationship based on gravity. Real estate, if a less predictable system of variation, is much the same.

While I don’t know why the Bay of Fundy in Canada exhibits such a dramatic tidal range (click here for more on that), or why other places have very slight tidal changes, I do know that the tidal phenomenon is rooted in gravity. Similarly, money and its availability acts as gravity in real estate.  

For example, in some markets (let’s call them “Fundy Markets”), as banks clamped down on money, prices went into a freefall. 35%-50% price reductions exist in many markets across California, Nevada, Florida, and elsewhere. These Fundy Markets were also the beneficiaries of dramatic gains when the market was on its sustained rocket ride (fueled by low cost money) into the stratosphere during the early 2000s—a time of laissez faire lending practices.

On the other hand, some local markets (I refer to these as “Kevlar Markets” because they are largely bulletproof) around the country have felt a minimal effect from the clamp-down on money. Areas such as San Francisco (and surrounding counties like Marin, San Mateo, and Santa Clara) have experienced limited price declines. Banker money just doesn’t impact Kevlar Markets as they do Fundy Markets.

Real Estate Prices Rise and Fall Like the Tide.

Low tide is interesting (and in real estate, often heartbreaking). Things become visible that were hidden before. For most people, the inter-tidal zone is a source of curiosity—many folks are now out looking to buy distressed homes and 30–minute television commercials show how (for a small fee) you can learn the secret to buying homes at auction or via some other semi-exotic method for pennies on the dollar. For these people, it is interesting to watch the drama unfold. Indeed, sometimes after a big storm and at low tide an old sunken ship may pop up out of the sand, something that people haven’t seen for decades. And this is the kind of stuff that happens when money is not available. And of course, unusual things are being observed today in real estate.

But, “slack tide” is also appropriately called the “turning tide.” It is the point at which a low tide stops and begins to turn around. This is important because for some people slack tide is a source of wealth. Within one-hour of San Francisco (because I sell homes in Marin County, part of the San Francisco North Bay region, it is an area I can speak to with authority) there are numerous areas where single family homes, condos, and multi-unit prices have plummeted in a Fundy-like fashion such that with 25% down, the properties are in the black. And, investors are starting to notice.

Even local small-scale investors who belong to investment groups or other real estate advice groups have, within the past month or so, begun making offers and snatching up properties at a fearsome rate. These are the people who have been telling me for 2 years that they think prices will continue to drop. I don’t hear that anymore. The result is that many low-end properties are seeing 5, 10, or even as many as 20 offers—how’s that for a slack tide oddity?

Although reluctantly and after an often excruciating underwriting process, banks are opening up the vaults for more people. More money means more sales, which in turn stabilizes prices, which instills confidence in others to go ahead and write offers. Pretty soon, even the media will recognize this and begin publishing stories with a positive spin on real estate. And then things will truly turn around, in Fundy and Kevlar Markets alike.

After all, long term appreciation in real estate is virtually an immutable natural law. And while there is no table or graph or other source of information that can definitively inform us when we have hit bottom in real estate, investors know that timing is everything and that gravity will pull prices back up if given a little time.

by: Kyle Frazier, CRS (Frank Howard Allen Realtors, Broker Associate) — (415) 350–9440; [email protected]