The Top Five Signs of More Real Estate Pain to Come

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  1. Unemployment – Official unemployment rates are now above 10% for many areas of the country. If you factor in the number of people who are under-employed or who have given up looking for work, the number is closer to 20%. If unemployment levels continue to rise or even stay the same it does not seem likely that the number of new buyers for real estate will increase any time soon.
  2. The New Nationalized Mortgage Market – It seems as if the real estate world has forgotten that Fannie Mae and Freddie Mac are still being operated under a federal conservatorship. In fact, they received over 500 billion dollars of federal bailout money. Fannie Mae had a $19 billion loss for the third quarter of 2009. Most of the financing for home loans funded through Fannie Mae and Freddie Mac is done through the bond market. The numbers are so large that eventually the bond market is going to lose its appetite for the government-sponsored paper.
  3. Phantom Banks – Many economists agree that Japan’s “lost decade”, a prolonged 10 year long recession, was made a lot worse by policy maker’s decisions to allow the banks to keep inflated assets on their books. If the Japan’s banks had written down the lost value on their properties then they would have been able to clear the system and begin to lend. A similar situation can be found here right now in the United States. Banks are being encouraged by policy makers to “extend and pretend”. Banks have no incentive to write down loans on overvalued assets.
  4. Option Arm Loans – Subprime mortgage default is what many analysts believe touched off the real estate crises in 2007. Meanwhile, the majority of option arm loans are due to readjust over the next two years. It seems likely that many homeowners will be unwilling or unable to pay a higher monthly mortgage payment on a house that has already lost 30% of its value over the past two years.
  5. A 5.4 Billion Dollar Apartment Foreclosure – Stuyvesant Town and Peter Cooper Village, Manhattan’s largest apartment complex, is facing foreclosure. A headline like this doesn’t need an explanation.

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4 Comments

  1. Well Ted, it looks as if we are going to continue to struggle with the housing market. I saw a statistic that the houses in Anchorage were selling for nearly 95% of the buying prices. However, as a Realtor, I have not yet seen this trend.

  2. Hey Ted, what are your thoughts on where Fannie and Freddie are headed over the next 5 years or so? Any opinion when the bond market will loose interest? What happens then?

    Also I saw the news on Stuytown and Peter Cooper in NY. They totally walked away from management and everything. That’s a huge blow. Of course they overpaid for it.

  3. Eric in Silicon Valley on

    Hi Ted,
    Thanks for keeping things in perspective. It seems the real estate world wants to believe that things are getting better – for example, here in Santa Clara County we are seeing a double digit rise in home prices when compared to the same month last year.
    However, looking at the macro picture, it does seem like the “double-dip” is inevitable, especially with the option arm debacle still ahead of us.
    What is your opinion on inflation? Are we headed for a period of high inflation as well?

    • It is my opinion that the U.S. will eventually see higher inflation. It only stands to reason that if the Feds are printing money to pay off debt that a larger number of dollars will saturate the economy. Dollars are like any other commodity; if supply rises while demand decreases then the value will drop.

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