The ABC's of the Real Estate Market

I recently went to a seminar and the presenter had a great way to describe areas in an investment standpoint.





A residential housing market can be broken into 3 parts the "lower end", homes priced under the conforming loan maximum, and the "high end." The high end has two parts. One is the the market that requires leverage to purchase from the conforming lona limit to somehwere in the lo millions.





The lower end can again be broken into 3 parts. Grade A: The areas that had value 3 years ago and will have value again 3 years form now. Grade B : The areas that will improve in the next recovery. Grade C: The bottom and most challenging areas that are currently flooded with foreclosures.





Each area offers a unique opprotunity for different types of buyers. For example, first time home buyers who are interested in appreciation may be advised to purchase in category B areas if they are not financially able to purchase in category A areas since the B areas should improve in the next up cycle.





With regards to investments, this description should hold true as well. The most money would be expected in the category B areas. Category A markets will be tighter and from an investment standpoint will be characterized as good places to park money. Basically a place to preserve capital. The market may go down, but these category A area have historically been the first to recover in prior upswings, currently these markets are under pressure.





Category B areas have for the most part bottomed and should will hold, all other things being equal, being a good place for capital growth in the long term. The lower the price the more this characterization is true. Over the last few years, these homes have fallen further from their highs as a percentage of price and will recover quicker due to the homes being more affordable and in lower price points.





Category C areas are for cash buyers only and only make sense for LONG term holds (like a bond) the appreciation will be slow but the prices on a per square foot basis are generous making rental streams good only when unlevered and price is a factor.





Category A areas are closer to the top of the conforming loan range (629k). Category B and C areas are in the mid and lower price ranges.





In centreal and east Contra Costa County, places like San Ramon, Danville, Walnut Creek, are solid category A properties. Pleasant Hill starts in the lower end A range and moves into the upper end homes. Concord, Martinez and Livermore are solid B categories with category A components. Antioch, Pittsburg, Brentwood and outlying areas are in the solid C category.