Foreclosures + Unemployment + High Interest = Movements in Property Inventories
by Jose E Lorenzo, MBA jelorenzo@yahoo.com
Increases in foreclosures could seriously affect the recuperation of the real estate market.
Historically, real estate experiences an upswing in March. In normal conditions, spring brings about warmer temperatures and longer days as well as property buyers and sellers. Consequently, prices tend to climb higher as well.
This year, however, is far from normal. The problem is the large number of properties that have been foreclosed by banks and placed at extremely low prices on the market. The worst is that this trend is likely to continue. Banks are oversupplied with foreclosed homes as mortgages were defaulted since buyers could no longer afford payments on their loans. For this reason, it is a buyer’s market and prices are lower than even the same time last year.
The overall outlook is particularly dim for those buyers who bought or mortgaged a home during the real estate boom in 2006. According to First America (a firm that collects data on the real estate market), three percent of mortgaged homes are in or near foreclosure, an increase from 2.2 percent recorded this time last year.
It is estimated that this trend will continue unless the economies improve the property’s region. Otherwise, homeowners will find themselves failing to make payments on time with more frequency. In 2008, those who could not pay mortgages in less than 90 days were 1 in 22 people. That number increased to 1 in 14 people in 2009. This data was conducted on a national level. Some cities have actually seen this number increase by six to eight times above the national average.
Unemployment effects
It is not surprising that with increases in unemployment means increases in late payments. This in turn leads to more foreclosures and property prices to fall. Those cities that were able to keep most of its inhabitants working have been able to recuperate economically faster. Austin, Texas, for example, is forecasted to increase employment by eight percent in the next three days. Dallas will increase employment by seven percent; San Antonio and Houston will also have growth. Of course, these cities have the fortune that their economies are based on technology, government as well as the petroleum industry, alternative energy and livestock. What has the impact been on the real estate market? Texas has not suffered from much foreclosure nor have they experience the rapid burst of the real estate bubble like other states including California, Nevada and Florida. Florida has also suffered from foreclosure fraud that has damaged the real estate market but have made investors delighted with the enlarged property inventories.
Interest rates will increase
Wall Street is obsessed with high interest rates. So are consumers and potential homebuyers. For at least 10 years, we have enjoyed low interest rates especially during the two years before the bubble burst. Unfortunately, like every party this one had to end; expect to see higher interest rates on mortgages too.
Generally, in an economy that has generated immense amounts of debt (like the one we have in this country right now), those people with the lowest salaries pay the highest interest rates. Even the US government is in debt and has been able to slow down the inevitable onslaught of interest rates by the sheer fact that they are powerful and control vast amounts of the world’s money.
Nonetheless, mortgage interest rates will begin to rise during the second half of 2010. At that moment, property sales will begin to slow down temporarily while the economy readjusts to the higher rates. What does this mean? Yes, we will see inflation in goods and services as well as properties and even rent.
Real Estate a product of exportation!
Without a doubt, these events that have affect the real estate market has brought a lot of international investment by foreigners wishing to buy a vacation home in Miami. They pay cash and rent out their properties on a monthly basis generating profits.
An interesting phenomenon is the creation of new entities that buy properties, repair them, install high quality appliances and rent the place out with a return rate of about six to eight percent. Once they manage this return, they either sell shares to other investors or wait three to five years to sell to buyers. These entities not only recuperate their investment but continue to buy, repair, rent and sell shares. It is a great investment and a product of exportation.
Foreign capital funneled toward the real estate market in the US are taking advantage of this rare opportunity– prices at or lower than market price. However, they know that soon enough interest rates will increase, property price tags will increase and their business will diminish.
Right now, these frantic buyers are the ones that are moving inventory and that are preventing the real estate market from collapsing completely. That is why we are hearing that property prices have finally bottomed out. Could it decrease some more? Maybe three percent? One investor in Broward said his rental property gave him an immediate return of 9 percent.
The hot spots for investors who wish to generate high returns are those located close to employment, airports, ports, and public buildings because renters usually desire to live near business centers. Thus, we continue to have a battle between supply and demand, although prices are still very low and confuse many market rules. - Remember as you head out to buy a property that this is a buyer’s market. It is the best moment to invest in real estate. You must identify the amount of returns you wish to receive, and understand the best way to invest for you. Interest rates remain low, the country is in debt, and inflation will eventually arrive… Invest your earnings in real estate now and protect yourself from inflation. Act now. Ride a bus, drive a car, walk, but do not miss this opportunity
