Saturday, November 27, 2010

Who Benefits from Weakness in Real Estate?

Real Estate = Big MoneyImage by thinkpanama via Flickr
Since it is now official that the US economic outlook has been downgraded and will be soft for the next 2 to 3 years who could be the beneficiaries? In volatile economic environments all assets are open game to a potential downfall.  Speculators of real estate are poised to benefit from these bad economic times in several ways:

If you currently own real estate
Given that macro-economic conditions will remain soft with employment, consumer and business spending at terminal ebbs current homeowners can benefit in refinancing their existing mortgage to historical low interest rates. Government stimulus will continue to keep interest rates low. This will offer the homeowner lower monthly mortgage payments to help cushion household cash flow challenges given the downturn in the job market. If you own rental property refinancing to a lower rate will help drive down mortgage payments as well and improve rental income. A softer economy means fewer speculators will enter the home buying market and should keep rental occupancy rates high. Though his all sounds good on paper, banks underwriting criteria has never been tougher. An equity position of  less than 25% (75% loan-to-value) may disqualify many wanting to refinance. If you purchased your home between 2004 to 2008 chances are near certain that your home has devalued 30% or more. This reduced equity position may not allow you to share in the benefits of lower rates.  A good resource to check current value of you home is

If you are looking to purchase real estate:
A perfect storm is when two powerful forces converge to create a miraculous event. Due to a Clinton Administration mandate to increase home ownership and an over abundance of bank liquidity, the years 2002-2007 created an unprecedented surplus of real estate transactions. When the clouds cleared and the bubble burst in August 2007 home values plummeted creating a landslide of foreclosures. In the newly downgraded economy banks will try to maintain a "normal" market by not flooding the pipeline with foreclosed inventory. This will be hard to maintain given how much REO inventory bank's are holding on their balance sheets. As the economy slowly improves the real estate market will improve accordingly. During this time of overabundance of inventory good deals on real estate will be found. Brave buyers will find low purchase prices, bank owned purchase transactions taking up to 90 days to close and seller incentives. I have heard from wealthy people that the only time they buy is when everyone is selling. Now is that time..
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Wednesday, November 17, 2010

The International Gage of US Real Estate

This week the BBC reported that Ireland is in secret negotiations with  EU officials to bail out and restructure their country's mounting debt load. Fears of an European melt down begin to surface and news pundants fly internationally. These rumors drive down US stocks and  fog the forecast for economic recovery. Given that the US economy is effected by global events how can you realistically forecast? Since the invention of the Internet and the speed by which information can become viral the standards that were once seemed  insignificant are now very significant. All these market over-reactions are the result of nervous investors and a continuing financial recovery from the 2007 banking melt-down. The US will be sailing through very choppy waters (economically speaking). Given that real estate is a bell-weather for the US economy and a key leading indicator, look for the current flat to minimum appreciation market to remain for the next 2 to 3 years.

Buy real estate for the shelter it provides and only if there is value. Incredible deals can be found in real estate these days at fractions of the costs 3 years ago. Below is an good example of a property here in Santa Cruz offered at only $477,500: