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The Economic and other Forces Impacting Your Real Estate Business

Peter Giardini
3 min read

It seems that everywhere you look now days the news stories, regardless of their source, provide nothing but conflicting points of view regarding the economy and where it is heading.

Prices are up, sales are down.  We’re at the bottom… no it’s going to double-dip.   Credit is available… no it’s not!

As a real estate investor, I am sure you will agree,  trying to figure out how to position yourself, your capital and your business has never been more challenging.

Hopefully this article will help to shed some light on the current landscape and the forces that are sure to impact you and your profits.

The Obvious

Current Unemployment – the unemployment numbers are not going to go down any time soon.  There just is not enough overall economic activity to lure businesses into hiring more employees.  You can anticipate the unemployment rate to hover around 10% through most of this year.

 Foreclosures – the number of foreclosures are not going to drop significantly until the unemployment rate start to decrease.  Coupled with high unemployment is the high number of loans that are due to reset, many of which are upside down. Foreclosures are going to continue at their high rate for many, many months.

Housing Prices – are starting to stabilize in many markets.  Don’t be fooled however.  It is hard to accept that high unemployment coupled with the high number of foreclosures, could move housing prices higher.  The pressure put on the prices of existing inventory are just too great for prices to consistently move higher.

Fannie and Freddie – Fannie Mae and Freddie Mac are still struggling.  With that being said, the Treasury has indicated that they will cover whatever shortfalls or losses are experienced by these two organizations.  Given this support, they remain viable players in the market, but the number of loans issued have been greatly eclipsed by the Federal Housing Administration.

Federal Housing Administration – FHA has become the big player in today’s mortgage market.  There total loan portfolio has increased from a low in 2006 of 4%, to over 30% of all outstanding mortgages.  Their biggest problem is that many of their loans are heading into default.  As result they have increased their underwriting requirements, effectively forcing many buyers out of the market.

The Not So Obvious

10 Year Treasury Bonds – as most of you know mortgage interest rates are tied to the 10 Year Treasury Bond Yield.  The current yield is around 3.36% and the 30year fixed mortgage rate is just over 5%.  The uncertainty here is when, not if, the 10 Year yield will start to increase due to the Government having to sell a never ending supply of bonds to cover budget deficits.  Expect bonds and mortgage rates to head up.

Mortgage Backed Securities – If you don’t know what they are, you should.  This BiggerPockets article, Fed Leaving Door Open to Extend Mortgage Backed Security Purchases, by Ryan Hinricher, discusses whether the Government will continue their program of buying mortgage securities after the program is set to expire at the end of March.  Overall the Government has purchased well over a Trillion dollars in mortgages, a role many investors played until the sub-prime meltdown occurred.  Assuming the Government stops this program, and they most likely will, you can expect mortgage rates to increase by at least 1%.

Local, State and Federal Governments – with the exception of maybe North Dakota and Alaska, every state in the US is in dire straits.  Revenues have been dropping faster then costs can be cut, and the only solution seems to be higher taxes.  I am sure that you are aware that any increase in taxes will only delay full recovery, and individuals and businesses will have to make adjustments to cover that increased expense. Oh, and you can expect increased taxes.

While I can’t predict with absolute certainty that any one or all of the above will play out as discussed, the reality is that you have be prepared to adjust or the market will steal your profits. 

Now that you are armed with a basic knowledge of the landscape ahead of us, you should be able to intelligently position yourself to both protect and grow your businesses.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.