Prospects and Prospects for Real Estate Investments 2010

What’s next for real estate?

For most people, real estate remains a crucial part of their personal net worth. Despite the stock market recovery, the average net worth of an American family has fallen by about 25% due to declining real estate values ​​and investment assets.

Overview of market trends – Focus on Boston

While there is still ongoing turmoil in the major employment areas of financial services, insurance and real estate (FIRE), there are signs of stability in and near major metropolitan areas such as Boston. While the employment picture remains bleak, the Boston Metropolitan Statistics Area (MSA) showed the strongest increases in real estate values ​​in 2009, according to a recently released report from Zillow Real Estate Market Reports.

Even with the strong profits, aided by the federal government’s first home buyer credit and continued low mortgage rates, nearly 25% of homes remain “upside down” with 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-pay” adjustable-rate mortgages, which are reset to higher rates, putting pressure on homeowners who can’t refinance due to lack of jobs or lack of value, there will likely be an increase in foreclosures.

According to research reported by HousingPredictor.com, metropolitan areas in the US are unlikely to see a real estate boom until after 2020. With more than 7 million people unemployed and another 20 million listed as underemployed, it could be 2017 or 2020 when these workers are absorbed. And real estate sales depend on those who have jobs.

Real estate booms typically run in cycles of seven to ten years, with an external trigger triggering a crisis that bursts the bubble. The current situation is likely to be no different.

Implications for investors

The vacancy rate of apartments is expected to rise in 2010 to approximately 7% to 10%. The ongoing collapse in job confidence hinders household formation as individuals may postpone marriage or move back in with their parents or relatives or live with friends.

As the number of foreclosures increases, there is likely to be more demand for replacement homes, which could reduce vacancy rates. And as workers try to keep their options open to move for job openings, demand for rental housing is likely to increase as well. The caveat is that there will likely also be a range of supply options that will put pressure on rents. And due to continued poor economic conditions, landlords can expect the credit quality of tenants to deteriorate.

Apartments will have to compete with an increasing supply of single-family homes. Currently, the number of single-family homes for rent has exploded to almost 10% compared to the long-term average of 4.5%. And a policy change by mortgage manager Fannie Mae will allow tenants living in homes or apartments whose landlords are foreclosed to no longer be able to be evicted. This will likely mean that the largest landlord of single-family homes in the US will be a quasi-government entity.

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Sales volume in the multi-family market is way off and likely to continue. Potential buyers continue to wait for prices to stabilize. There will continue to be an upward shift in cap rates of 1% to 2% close to 2002 cap rates (8.2%), directly contributing to downward pressure on prices of another 10% to 20%.

And given stricter underwriting criteria, such as increased 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 with the capital and credit to buy when prices stabilize.