Real Estate News & Commentary

Real Test of Real Estate Recovery Starts Now

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Has the tax credit expiring affected your real estate business?   Being a fulltime investor requires doing multiple transaction types.  And for many investors that includes retail flips.   When the tax credit extended many investors (myself included) placed some bets on the owner occupants buying at the second run up to expiration.  This played out exactly as planned with first time buyers gobbling up anything in sight impacting the real estate investment market significantly.   Of course this is all over now and the effect of the tax credit expiring was pretty much instantaneous.   This will certainly find those who are fulltime real estate investors looking for a new angle.

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Now the true test of the real estate recovery begins.

The Federal Government stopped purchasing Mortgage Backed Securities in March and the extension of the home buyer tax credit expired in April.  And although the Fed is still powering 97% of all real estate transactions by insuring them through Fannie Mae and Freddie Mac, the real estate market now has to perform largely on its own.

While the worst may be over for the real estate market, real fears still exist.  A lack of confidence in financial markets seems to be seeping back into consumers’ minds.  I can feel it over the last 30 days here in New York where the 1 day flash crash in the stock market has many people realizing markets are still highly volatile.

A recent survey by the Federal Reserve showed that bank lending is contracting despite an improving economy.   Further, worries about debt are being realized with the Greece situation.   If austerity measures aren’t taken in many cities, states, and countries, the prospects of lending tightening only worsen.   Many of us have experienced a lending freeze in late 2008 when the Lehman Brothers collapse triggered the financial panic and don’t want to experience it again.

For the real estate industry any improvements in price will likely be negated with inventories certain to rise over the next few months.   Although RealtyTrac reported that the annual foreclosure rate dropped year-over-year in April by 2%, I suspect this will be reversed as foreclosures peak in the 2nd half of 2010. One thing I’m paying close attention to is mortgage delinquency rates.  Transuion reported that mortgage delinquencies dropped for the first time since 2006.  A sure signal to the start of a recovery.

For fellow landlords who’ve been in the business a while, I’m sure you noticed the decline in rents lagged the decline in housing as rents were reset lower after leases expired.  Interestingly I saw this across portions of my personal portfolio thinking early in the crisis that despite price declines, rents were holding up.  It was only after tenant move-outs happened did I realize rents were in decline.  Areas in high demand, including one boomlet area of my market Memphis, rents are on the rise.

Any chance of price recovery right now seems near impossible though as I think about the accidental landlords who couldn’t sell.  They contributed to the lowering of rents in many markets by just trying to get a tenant in the house after flooding the supply of homes.

As far as real estate investment strategy is concerned, when I hear new investors wanting to flip properties on the retail market, I get nervous for them.  Retail profit spreads will need to get much larger and planning for a longer hold period needs to be top of mind.  I think wholesalers will need to add more value to transactions than simply finding deals.  The capital coming in off the sidelines to buy and hold seems pretty fickle and isn’t buying just anything.  Think and plan around these real changes happening in the real estate market today.  You’ll need to build a sustainable real estate investing business to ride out this extended period of uncertainty.

    Jason Wheeler
    Replied almost 10 years ago
    I think we are still a long way off from a recovery. Here in CA anyway. I think this says big opportunities for investors though. .-= Jason Wheeler´s last blog ..Reciprocity In Business Leads to More Referrals | How To Build Trust In Your Business Relationships =-.
    Alex Cortez
    Replied almost 10 years ago
    I concur, we are a long way from a permanent recovery. Nevertheless, I don’t foresee the market going any lower and this point stability (with a dash of hope) is all I can ask for. Good post.
    Ryan Hinricher
    Replied almost 10 years ago
    Alex, no doubt. Things have been a little shaky with the tax cred expiration, Greece, and the flash crash. Stability is indeed needed now. Just saw that builders’ confidence is increasing. More news to come. Best, Ryan
    Maxi
    Replied almost 10 years ago
    I live in Flint, MI and there is no real estate recovery. It seeems the city hasn’t hit it’s lowest point yet. 1 month ago, the only Goodwill store left in Flint closed: not enough customers!!!! Does that not say how bad the economy is here?
    Maxi
    Replied almost 10 years ago
    I live in Flint, MI and there is no real estate recovery. It seeems the city hasn’t hit it’s lowest point yet. 1 month ago, the only Goodwill store left in Flint closed: not enough customers!!!! Does that not say how bad the economy is here?
    Matt
    Replied almost 10 years ago
    Funny. MBA says 10% missed a payment in the 1st quarter. Granted, one takes the holidays/other bills into account, but this is the time where they should be “caught up.” http://www.usatoday.com/money/economy/housing/2010-05-19-mortgage-foreclosures_N.htm I have had several pop up on my route/sheet as brand new…then the 2nd/3rd visits prove to me that they are now struggling/falling behind and likely won’t “catch up” anytime soon.