2010 Real estate investment prospects and perspective

What’s next for real estate?

For most people, real estate remains a significant part of personal net worth. Despite the stock market recovery, the average American household’s net worth has fallen by about 25% due to declining real estate and investment asset values.

Market Trends Overview – Focus on Boston

While still reeling from ongoing disruptions in the major areas of employment for financial services, insurance, and real estate (FIRE), there have been signs of stabilization 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 real estate value during 2009 according to a recent report by Zillow Real Estate Market Reports.

Even with strong federally aided gains in first-time homebuyers credit and continued low mortgage interest rates, roughly 25% of homes are still “upside down” on outstanding mortgages.

High unemployment rates continued as companies continued to announce layoffs or delay hiring. And given the expected wave of innovative mortgage products such as Alt-A loans, interest-only loans, and “pay pick” adjustable-rate mortgages that reset their rates to higher rates is putting pressure on homeowners unable to refinance due to a lack of jobs. or lack of value, there is likely to be an increase in the number of foreclosures.

According to research published by HousingPredictor.com, major US metropolitan areas likely won’t experience a real estate boom until after 2020. With more than 7 million people unemployed and another 20 million listed as underemployed, it could be In 2017 or 2020 when these workers will be absorbed. Real estate sales depend on who has jobs.

Real estate booms usually last in cycles of seven to ten years with some external trigger leading to a crisis that burst the bubble. The current situation is unlikely to be different.

Implications for investors

Apartment vacancy rates are expected to rise during 2010 to around 7% to 10%. The constant breakdown in trust about jobs impedes family formation as individuals may delay marriage, move back in with parents or relatives, or double up with friends.

With foreclosures rising, there will likely be more demand for alternative housing, so vacancy rates may decrease. As workers try to keep their options open to accommodate the transition to employment opportunities, rental demand is likely to increase as well. The caveat is that there will also likely be a host of supply options that will put pressure on rents. As a result of continued poor economic conditions, landlords can expect the credit quality of their tenants to erode.

Apartments must compete with the growing supply of single-family homes. Currently, single-family homes available for rent have ballooned to nearly 10% compared to the long-term average of 4.5%. The policy change by the mortgage maid, Fannie Mae, would allow renters living in homes or apartments where landlords have been prohibited from eviction. This will likely mean that the largest owner of single-family rentals in the United States will be a quasi-government entity.

Sales volume in the multi-family market is elusive and likely to continue. Potential buyers continue to wait for prices to stabilize. An upward shift in cap rates of 1% to 2% will continue with the approach of 2002 cap rates (8.2%) which will directly contribute to downward pressure on rates in the range of another 10% to 20%.

And due to stricter underwriting criteria such as higher down payment requirements, the number of investors able to acquire a property is likely to be limited. But there will be opportunities for those investors who have the capital and credit to buy when prices stabilize.

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