Why Buy Real Estate Now?

The LRC Client Theory…

We ask our clients that choose the present as the proper time to buy, why they feel comfortable doing so.  So far, they have consistently responded with the following ideology.

Future Inflation:

Inflation increases the value of assets across the board…especially real estate.  As the inflationary actions that the Fed has thrust into place begin to work, the markets will bottom, inflation will ensue, and real estate values will increase.  Also, although mortgages in theory could also go higher, the underlying assets are worth more, and although credit is tighter, 30 year mortgage rates continue to be historically very low.  It may take some time to see this occur, however, those buying now do not have a very short expected time frame…they are not short term real estate “flippers.”  Also, since most purchases are pre-construction it takes about 18-24 months for the property to be delivered anyway, giving the cycle some time to form a bottom and for outlook on real estate in general, and especially the finest real estate to change.  

Real but Delayed Demand:

Buyers that are acting today believe that demand trends are real, and that they have just been delayed.  Buyers believe and it has been documented by many censuses and third party studies that for example, in the next ten years over six (6) million Americans and Canadians will acquire second home/ investment real estate in Mexico.  Similar demand projections exist for millions of Americans, Canadians, and Europeans to acquire second and investment homes in the Caribbean, and most desired Latin American countries.  If the demand is real, and delayed by fear, credit restrictions, and an economic downturn, it is critical to notice and move before it is restored.  For once the cycle turns positive, pent up demand will flourish, the herd will be back, and prices will be going higher once again.  Many buyers choose to engage and position before this move so that they can maximize their long term rate of return and real estate capital appreciation.

Supply of the Finest Real Estate is Finite

Although there seems to be an infinite supply of repeatable primary residential housing available, the same is not true for five star, new construction resort real estate, located in the world’s finest locales.  Real estate project cancellations, and delays make the best and approved projects that are moving forward even more unique, rare, desired, and less risky now and in the future.  The best projects that are moving forward no longer have to compete with lesser competent real estate ventures, and many benefit from the lack of new originating projects. 

The projects getting built and selling consistently will also benefit because the right real estate will not be just another development, and will not have to be concerned with over-crowding in a particular area.  These projects will become the most desired addresses and will help define the communities in which they reside.  They will be the hubs of their locales and once credit again becomes available, resort real estate developers will get back in the game to satisfy all of the pent up demand, but they will do so around and behind the leading, delivered communities.

Purpose/Timeline:

The buyers investing their hard earned capital into the finest pre-construction real estate opportunities globally right now ARE NOT the storied flippers using leverage to pick up as many $200k condo’s as possible and hoping for a quick buck upon delivery.  That type of irresponsible speculator has been washed out of the marketplace and can no longer use the leverage model with no capital to finance and flip their way to riches. 

Present buyers have very strong cash positions and are looking to invest their capital with at least a several year timeframe.  In many cases he/she is looking to enjoy some of their time at the residence once it is delivered and is happy to be patient.  Also, since most pre-construction real estate takes about 18-24 months from ground break to delivery, buyers are able to invest their capital at ground level pricing now and can wait for the market to correct and the cycle to turn before they ever even have to commit their final payments and take ownership of the property. 

In a couple of years, the cycle should turn and reward the patient buyer with a significant appreciation premium in the face of much pent up demand pushing prices higher.  In the end, sophisticated buyers will be in the desired position of choosing to sell for a significant profit or holding on for awhile to enjoy their luxury second home property. 

Summary:

Increased inflation causes increases in asset prices, especially the finest real estate.  This  combined with future increases in demand caused by real demand trends and pent up ability to buy, combined with shrunken supply that will eventually need to expand to meet demand will drive the next long term luxury second home real estate investment appreciation cycle.  Our clients that are buying now say that it isn’t if it will happen, it is when it will happen.  They feel that if they wait until the “all clear” sign and the global economy recovers to act, it will be too late and they will be forced to compete with increased global demand for the finest real estate… and the easy money will be gained without them. 

But it is hard.  It is hard in a chaotic world of bubbles, greed, system risk, and financial difficulty to summon the discipline and perspective to “zig” when everyone else is “zagging,” or hiding with their head under their pillow!  But as Warren Buffet said in his 10-17-08 NY Times article…. “If you wait until you see the robins to take action…you will miss the spring.”