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What’s next for real estate?
For most people, real estate is a significant portion of personal net worth. Despite an improvement in the stock market, the average net worth of an American household has decreased by about 25% due to a decline in real estate values and investment properties.
Overview of Market Trends – Focus on Boston
Despite still suffering from continued turmoil in the key employment sectors of Financial Services, Insurance, Real Estate (FIRE), there are signs of stability in and near major metropolitan areas such as Boston. Although the employment picture remains bleak, the Boston metropolitan statistical area (MSA) showed the strongest gains in property values during 2009, according to a recently released report by Zillow Real Estate Market Reports.
Even with strong benefits from the federal government’s first-time home buyer credit and lower mortgage interest rates, there are about 25% of households that are “upside down” on their outstanding mortgages.
High unemployment persists as companies continue to announce layoffs or delay hiring. And given the expected wave of creative mortgage products such as Alt-A loans, interest-only loans and “pick-a-payment” adjustable-rate mortgages, the reset to higher rates puts pressure on homeowners who have lost their jobs due to layoffs or shortages. Unable to refinance. Of value, the number of foreclosures is likely to increase.
Major US metropolitan areas will not see a real estate boom until after 2020, according to research reported by HousingPredictor.com. More than 7 million people are unemployed and another 20 million are listed as unemployed, be it 2017 or 2020. When these workers are absorbed. And real estate sales depend on people who have jobs.
Real estate booms typically run in seven- to 10-year cycles, with some external trigger causing a crisis that pops the bubble. The current situation is unlikely to be any different.
implications for investors
Apartment vacancy rates are expected to increase by approximately 7% to 10% through 2010. A sustained decline in confidence about jobs hinders household formation as individuals may delay marriage or move back in with parents or relatives or connect with friends.
As foreclosures increase, there will likely be more demand for replacement housing, so the vacancy rate may drop. And as workers try to keep their options open to accommodate leaving for job opportunities, rent demand is likely to increase as well. The caveat is that there will also be a variety of supply options that will put pressure on rents. And as a result of continued poor economic conditions, landlords can expect tenants’ credit quality to decline.
Apartments will have to compete with the growing supply of single family homes. Currently, single-family homes available for rent have increased by nearly 10% compared to the long-term average of 4.5%. And a change in policy by mortgage servicer Fannie Mae will allow renters living in homes or apartments where landlords are in foreclosure not to be evicted. This would mean that the largest landlord of single-family rentals in the US would be a quasi-governmental entity.
Sales volumes in the multi-family market have been low and this is likely to continue. Potential buyers are waiting for the prices to stabilise. Cap rates will continue to increase by 1% to 2%, approaching the 2002 cap rates (8.2%), which will directly contribute to downward pressure on prices in the 10% to 20% range.
And given the more stringent underwriting criteria such as higher down payment requirements, the number of investors able to acquire the property will likely be limited. But there will be opportunities for those investors with capital and debt when prices stabilise.
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