Real estate investors, like mortgage note buyers, need to have a clear understanding of not only their own investments but also of the broader real estate and economic world. Your decision on whether to put up your own money would vary widely based on differing assumptions of property values declining 20% over the next five years, versus those values climbing by 20% over the same time period. As a mortgage buyer, I’d like to know what interest rates will be over the next few years so that I calculate my rate of return appropriately and with the right risk parameters.
Of course, there is no way to know trends in advance, so we can only make educated guesses and try to cover our downside risk. Even the smartest economists and market analysts have been wrong more often than right over the last five years, so it is perilous to make forecasts over any lengthy period of time. I’ll give it a shot here anyway, and maybe someone will come back to me in 2016 to tell me how right or wrong that I was.
My line of thinking is that it took a lot of years to get ourselves into this mess so it will take a long time to get out of it. No matter who wins the election next November, we will still be scrambling to get out of the current economic wilderness at the end of their first term in November 2016. The country’s total debts will be worse than today, with the politicians still dickering and perhaps putting in place weak deficit reduction plans. Interest rates will be much higher than they currently are as U.S. and European country debts stay out of control and thus pose more risks. Unemployment will come down slightly, but still remain at 7.5% or higher. Rioting across the U.S. will increase dramatically from the current “Occupy” protests as the population grows increasingly frustrated.
What will this mean for real estate? Well, not much to smile about. High unemployment and high interest rates will mean less demand for housing, so lower property values. State and federal governments will pass laws to make foreclosures more lengthy and expensive, which will make investors and banks alike more picky about what they will buy. In general, politicians will feel like they need to bend over backwards to appear consumer-friendly, making an already challenging environment even more treacherous for investors and for business. All in all, the real estate market will be seen by the general public as difficult and a poor place to invest. For savvy investors, there will be plenty of opportunities to make big money as long as they have their eyes wide open to the risks.
On a positive note, the short term outlook for real estate and the stock market should be more stable, as the administration “shines the apple” prior to the next election. After that, reality will strike hard.
I certainly cannot guarantee the accuracy of my opinions, but am letting them guide me through the current environment. Over the past five years, I have been right much more than the “experts”, as I am not political, not beholden to any organization, and cannot be bribed. Whether you agree or disagree with my forecasts above, your comments are welcome.