Industry NewsOpinion

Market bottom exists — how to get there

Guest perspective: No real estate death spiral here
Published on May 20, 2008

I spend all day every day looking at and working on foreclosures. It can be depressing. And given that the primary causes of foreclosure are price declines brought about by excess inventory, created in part by foreclosures, it's easy to see how the doom-and-gloomers argue that we are in a self-reinforcing death spiral with no bottom. In reality, nothing could be further from the truth. There is a bottom, and the gloom will clear. Let me explain. Nearly all residential appraisals are based on comparable sales -- comps. However, most commercial appraisals rely more on the "income capitalization" approach to valuation. This latter method, applied to residential real estate, casts a lot of light on the market run-up and can help you find the bottom of the bust in your market. The idea with the income-capitalization approach to home valuation is that rents (income), minus expenses and divided by investment (sales price) equals the return on investment (capital). Th...