Homeward Bound

Falling prices and rampant foreclosures are not the stuff of healthy housing markets. But to some real estate investors, the dismal market can signal that it is time to invest.

So what if cities like Phoenix and Las Vegas have regularly appeared on RealtyTrac's list of top 10 foreclosure markets quarter after quarter? Or if the National Association of Realtors is reporting that more than one-third of all existing homes for sale in America are "distressed," meaning they're in foreclosure or approaching it?

To some investors, the persistent price declines and prolonged sales downturn signal something positive: The possibility of future profits.

Just ask Christopher Yates, president of CM Yates Real Estate Investment. Yates, who is based in Colorado, has invested in residential real estate since 2003. He bought a Las Vegas home for $226,000 in 2003 and sold it about a year later for $370,000, making a tidy profit. He's avoided Las Vegas since 2005, but is now planning a return — by way of Phoenix, another hard-hit market.

"It's time," he says. "The Las Vegas area is really landlocked, and prices have to go back up eventually."

A house in Las Vegas similar to the one he sold for $370,000 three years ago now fetches just $200,000, he says, happily. Because the rental market in Las Vegas is relatively healthy, it's possible for him to buy a house like that now with a sizable cash down payment and operate it profitably as a rental. Had prices not fallen, this wouldn't be possible.

Investing in these markets requires a strong stomach, and a lot of patience.

The risk of future home price declines rose in 94 percent of 381 metropolitan areas last quarter, according to  PMI Mortgage Insurance, based in Walnut Creek, Calif. Prices are likely to be down more than 20 percent this year alone in Las Vegas, Phoenix and many California and Florida markets, with no clear sign yet of a bottom.

Investors wading back into these troubled markets say they are buying for cash flow rather than for the quick appreciation that was possible in frothier times. Investors who can get a fixed-rate loan and find tenants to pay rent steadily can afford to hang on for a long time until housing prices rebound. 

"You don't wait for the bottom of the market," Yates says of sale prices in the markets he's investigating. "You wait till it makes sense."

Nationally, existing-home prices in September 2008 were 9 percent lower than a year earlier, according to the National Association of Realtors. Several recent reports have shown home sales activity rising as buyers are lured in by falling prices. Even if prices continue to fall, many investors say they can wait for the market to rebound as long as they can get cash flow from renters.

"I was one of the people criticizing the enormous amount of investor activity over the past three or four years," says Andrew Jolley, a partner at Capsource in Henderson, Nev. "I think in some ways we're now helping the market by purchasing inventory, but real recovery will have more to do with the credit market improving."