What will happen to real estate?
For most people, real estate remains a critical part of personal value. Despite the recovery of the stock market, the average value of an American family has fallen by about 25% due to falling real estate values and investment assets.
Market Trends Overview – Focus on Boston
Although still suffering from prolonged turmoil in key employment areas such as financial services, insurance, real estate (FIRE), large metropolitan areas such as Boston and nearby are showing signs of stability. Although the employment picture remains bleak, Boston’s statistical area (MSA) showed the largest increase in property values during 2009, according to a recently published Zillow Real Estate Market Reports report.
Even with strong gains fueled by the federal government’s first home loans and keeping mortgage rates low, nearly 25% of homes that are “inverted” on outstanding mortgages remain.
High unemployment persists as companies continue to announce layoffs or postponements. And given the expected wave of creative mortgage products such as Alt-A loans, interest-only loans and adjustable-rate mortgages, resetting to higher rates puts pressure on homeowners who can’t refinance due to lack of work or lack of value is likely to be an increase in foreclosure.
According to a study by HousingPredictor.com, the real estate boom in major U.S. metropolitan areas is unlikely to happen after 2020. With more than 7 million unemployed and another 20 million on the underemployed list, it could be 2017 or 2020. when these workers are absorbed. And selling real estate depends on who has the job.
The real estate boom typically lasts 7 to 10-year cycles with some external trigger that caused a crisis that exploded a bubble. The current situation is unlikely to be otherwise.
Implications for investors
It is expected that in 2010 the vacancy rate will rise to about 7-10%. The constant decline in trust in work hinders family formation as people may postpone marriage, return to parents or relatives, or double friends.
As foreclosures increase, there is likely to be a greater demand for housing replacement, so the share of vacant space may decline. And as workers try to maintain their ability to relocate in search of work, the demand for rent is likely to grow as well. The caveat is that there will also likely be a number of supply options that will put pressure on rents. And as a result of poor economic conditions, landlords can expect that the credit quality of tenants will deteriorate.
Apartments will have to compete with increasing supply of single-family homes. Currently, the share of single-family homes that can be rented has grown to almost 10% compared to the long-term average of 4.5%. A change in the policy of the mortgage service agency Fannie Mae will no longer evict tenants living in houses or apartments where landlords have been imprisoned. This is likely to mean that the largest landlord of single-family rentals in the US will be a quasi-governmental organization.
Sales in the apartment building are distant and are likely to continue. Potential buyers continue to expect price stabilization. Limit rates will continue to shift by 1% -2%, approaching the 2002 rate (8.2%), which will directly contribute to downward pressure on prices in the range of another 10% to 20%.
And given tougher underwriting criteria, such as higher down payment requirements, the number of investors able to purchase real estate is likely to be limited. But those investors who have capital and credit will have the opportunity to buy when prices stabilize.