Thursday, April 23, 2009

We've Found The Bottom

Each day new reports continue to surface sighting data that suggests the real estate market is beginning to rebound. I, like many others in the industry, try to read the signals to gain a better understanding of where the market is headed. Once the winds of change reveal themselves, the industry can chart a course for recovery.

One of the most critical things to watch is the state of existing home sales. In our area, we continue to see progress. It may be slow, but at least it is occurring. The inventory is decreasing and the average time homes are spending “on the market” has also gone down. These macroeconomic signs are beginning to breathe life into what was a market on life support.
Whether it is the low interest rates, affordability index, or outright great deals on real estate, people are beginning to feel comfortable with the current value. As the market begins to climb the mountain of recovery, there will now be new challenges and pitfalls to face.

More and more contractors and builders are on the brink of insolvency. The increase in work may actually be a curse instead of a blessing. When new home construction picks up, so does the need for working capital to fulfill the labor and material liabilities. In the process this uses up the cash on hand. Due to the rapid change in risk evaluation from lenders, it is almost impossible to get financing once the cash is used. In many cases this is putting the final nail in the coffin.
It will be prudent for anyone purchasing a product or service currently to seriously consider the long term health of the organizations they will be purchasing from. If the builder or contractor cannot finish the project or is not around to service the warranty, it will not do much good for the consumer. Many of these construction companies are privately held and currently show no signs of financial distress making it very hard for the consumer to be aware of any potential problems. My suggestion is to ask other people in the industry and also trade organizations they belong to in order to acquire good background knowledge on the company’s health.

The signs point to the beginning of a long and slow recovery, but this may just bring an end to many of the companies that have struggled thus far to stay alive. It is an era of great opportunity but also of increased risk for those who do not do some homework. I know our organization is optimistic about the future and will begin to navigate forward with a road map clearly marked to avoid these obstacles.