Where is the Real Estate Market Headed?
Posted by Bob Yale on Thu, May 01, 2008 @ 02:17 PM
Where is the real estate market heading? Nobody knows, but there are a lot of educated guesses in play - and the guesses seem to fall into categories. First, the doomsayers would like to predict a total bust, a wipe out with a loss of a great deal of value. And there are the Pollyannas who would like to think that this economic climate change is going to be short lived. I'm a "middle of the road" type of guy. The economy has historically gone in cycles of up and down motion just like the stock market.
In the late '80's and early part of the '90's, we were in a downer. The savings and loan instituions had made crazy loans to residential and commercial borrowers. Appraisals weren't always in line with real values and too much money was handed out too easily. The feds had changed the ground rules on investment property depreciation with the Tax Reform Act of 1986. After the fact, the government tried to clean up what had happened, but often used Draconian measures to do so. We had a new term called "performing non performing loans" in which the borrower was making payments on time and was financially healthy, but their property had been devalued by market conditions. Banks and thrifts had to tighten up their own reserves and therefore refused to renew loans that came up for renewal and funds weren't available elsewhere. Result? Foreclosures, low ball sales and market devaluation.
The economy began to improve in the spring of 1991 and the beginning of 1992 saw us in recovery. The rest of the '90's were aglow with good news until the last couple of years when the dot com bust put a damper on.
Now comes the 21st century. We survived 9/11 with all of its trauma - physical, psychological and economic. 2002 through 2006 saw a robust real estate economy. So robust, in fact, that we forgot the recent history lessons and began to believe that it would always last. Sub prime, interest only and other mortgage vehicles crept into the residential mortgage market inducing many to buy homes that perhaps should have remained renters - at least for a while longer. These mortgages were pooled into the securitized mortgage market and swallowed up on Wall Street without regard for the extremely thin equitysupporting the investments.
On the commercial investment side, mortgage rates and CAP rates dropped to serious low points inducing a flood of investment including condo conversions of former apartment buildings and other facilities. 55 and over housing projects boomed. As the subprime issue began to surface and reality struck, condo conversions stopped and people planning to sell their family home and move into the 55 and over planned communities found they had to delay or change their plans.
Now, how about adding your educated guess as to where the real estate economy is heading, when you feel we'll begin to seriously improve and when will it again be "robust". And also, are there steps that you feel private parties and the government can take to ease the pain being felt by so many today?