Foreclosures are peaking in 2010. New home construction is at record lows. Fed intervention in the mortgage-backed securities market is over. The home-buyer tax credit expires in a few weeks. Interest rates and inventories are set to rise. Housing normally leads us out of a recession but it won’t lead us out of this one. Jobs will and that doesn’t seem to be happening anytime soon. The real estate market looks like it will limp along until sometime in 2014 or 2015. Welcome to the new economic normal.
How will you as a real estate investor to prosper during this new normal?
This new economic normal is scaring many of you reading this into not doing anything. And if you don’t do anything we already know how your story will end. Having a working knowledge of what’s going on in the marketplace is the first step to replacing your fear with understanding. In doing so, you need to reevaluate your real estate investing strategy and make adjustments where necessary. Before you do, consider these key points that will undoubtedly affect your strategy over the remainder of 2010:
If you read this blog often, you already know the Fed’s purchasing of mortgage-backed securities just expired. And rates increased. Interest rates increased to the highest point since Freddie Mac’s interest rate survey since January 7th, of this year. Expect this trend to continue.
Takeaway: Super cheap money will be replaced by cheap money over the next 12 months. Adjust your cost of money if you are plan on buying and holding.
An expected 1.4million foreclosures will hit the market in 2010. This will be the peak year of foreclosures in the US. Despite this peak, homes foreclosing will continue to stay high for roughly another 3 years while delinquent loans cycle through the process and homeowners who can no longer hold on let go of their homes.
Takeaway: If you’ve focused on wholesaling, consider opening additional doors with a real estate license (I believe having a license, especially if you’re wholesaling, transacting, trading, etc, is a no-brainer). I did this when I entered real estate investing and it propelled my personal cash flow as I buyer-represented many investors looking for bank REOs. Consider being a listing agent as well.
Inventories are set to rise due to ballooning 90-day+ delinquencies causing further declines in real estate prices in the next 3 quarters. Certain areas have seen reductions in inventories because of a lack of new home construction, but overall the consensus calls for inventories to rise nationwide. If your focus is appreciation, we likely haven’t hit the very bottom yet. See Peter Gardini’s recent supply and demand blog.
Takeaway: Look for local boomlets within your desired market, preferably areas where there is little-to-no land and inventories are contracting.
Home-Buyer Credits are Expiring
By the end of this month, we’ll see the home-buyer credit program offered by the Fed, officially expire. Last year this spurred significant activity and has continued to bring buyers off the fence to purchase many investors’ rehab-to-retail flips, causing many investors and wholesalers to shift their strategies temporarily to these buyers. Also some states (like California) are announcing their own extensions of these programs creating prolonged artificial demand.
Takeaway: As these credits expire, the artificial demand will disappear with them creating less demand for the flip deal you’re thinking about doing. Timelines and days of market will grow as a result of this. Consider this before doing your first or next retail flip.
Short Sale Help Arrives
Today the Home Affordable e Foreclosure Alternatives (HAFA) program goes into effect and is supposed to streamline the process of short sales. In part the HAFA program will compensate both the lender and the borrower for resolving a short sale. In some cases investors are also incentivized to help subordinate lien holders minimize their losses. This may reduce the shadow inventories currently on the market. Many investors have currently avoided short sales because of the red tape involved, while lenders have avoided it because it has been more efficient to foreclose.
Takeaway: As government intervention in the real estate market shifts from incentives to transact business to preventing foreclosures, investors who’ve been avoiding short sales should take another look. Those who educate themselves on the process and real estate agents who specialized in this area are set to capitalize on deals many people have avoided. Political pressures on lenders will cause them to embrace short sales even if only temporarily.
As the era of easy money in real estate investment has been replaced by a new normal, many people have left the industry. For the opportunity seekers, this has left a large gap. I believe those who will prosper in the new normal are the ones who can truly add value to the market. What does this mean for you?
This means those who are wholesaling will have to do more than just flip properties. They’ll have to offer rehab and property management services or connect investors with those who do. They’ll also have to truly be an advisor by offering properties which will perform. People doing retail flips, can no longer rely on fluffy appraisals and will have to inject quality into the renovation, truly restoring homes and neighborhoods. Realtors will need to become specialists and learn to connect with their customers like Jerry Maguire. People looking to own real estate long term will need to have an “I” (Investment) to draw an “ROI” (Return on Investment). Throw technology in the mix and a few short years from now the real estate investment market will be unrecognizable as we knew it in 05-08 ushering in an era of the haves and have-nots. For those of you getting into real estate investing for the first time, finding a reputable, knowledgeable, successful mentor and change agent will be more critical than ever.
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