Smart Money and Risk Reward Revisited

I saw a good post on twitter about smart money always seeking risk adjusted yield. Nothing could be more true. There has been a definite acceleration in the turnover rate of distressed property in Central Florida.

From peek retail prices of 2006 to liquidation prices of 2009 I am seeing a price collapse of some 60-80%. However thanks to things like section 8 subsidized housing, there is a natural pricing floor in the rental markets. That being said, it makes houses a lot like bonds. In a nutshell bonds pay a fixed amount called a coupon payment, when a bond price rises or falls that coupon payment remains the same thereby raising and lowering the yield on the bond.

With falling prices on houses and stable rental rates you have skyrocketing yields!! Smart money understands how to value assets correctly using metrics like this. When the reward does not compensate you adequately for the risk they will back away, but when the reward is excessive with regard to risk then the opposite will be true too. Orlando Real Estate is being gobbled up at such a feverish pace once again because everything that was true in 2006's overvalued market is now false. In some cases homes are selling for less than they sold for in the 1980's. The Greenspan bubble has been completely demolished. Prices are where they are supposed to be when looking at median incomes and rent. The risk/reward ratio has completely flipped around and made Real Estate Investing very attractive once again.

There will always be late comers at the top and early birds at the bottom. The difference between those two is just knowledge.