BFP Management Blog

Archive: July 2006

Maintaining Your ‘Value Investments’

My opinion about the Southern California real estate market hasn’t changed much over the last 3 years as there is little value for an investor to purchase at current prices.  Inventory of unsold properties is increasing while interest rates continue to move higher.  I believe that the only way that we won’t see significant price reductions (ignoring the prognostications of both the National Association of Realtors and the California Association of Realtors) is if we have a large rise in wage growth.  Over the last several years, more than 70% of local purchases were made using adjustable rate mortgages (or short-term fixed loans that will float adjustable after 3 or 5 years) and this might well cause large portfolios of debt and the properties they secure to go back to the bank.

In the commercial sector, the flow of funds into real estate has been enormous and the allure of converting apartments to condominiums has caused capitalization rates to fall below interest rates.  I believe this trend to be unsustainable and thusly temporary.

Beach Front has continued to be cautious when others are aggressive in the same contrarian manner that we were aggressive when others were cautious.  Our purchases have always been made as “value investments” and not based on predicting market fluctuations whereby we’d be happy owning even if the resale market were closed for ten years.  I’m very patient (as evidenced by this long dry spell) and am waiting until solid opportunities come along before actively investing again.

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