Outlook and prospects for real estate investment 2010
What’s next for the real estate sector?
For most people, real estate remains a critical part of personal net worth. Despite the recovery in the stock market, the average net worth of an American family is down approximately 25% due to declines in real estate values and investment assets.
Market Trends Overview – Focus on Boston
While still suffering from continued turmoil in the Financial Services, Insurance, Real Estate (FIRE) anchor employment areas, there have been signs of stability in and near major metropolitan areas such as Boston. Although the employment outlook remains bleak, the Boston Metropolitan Statistical Area (MSA) showed the largest gains in property values during 2009, according to a report recently released by Zillow Real Estate Market Reports.
Even with strong gains aided by the federal government’s first-time homebuyer credit and continued low mortgage interest rates, there are still nearly 25% of homes 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 like Alt-A loans, interest-only loans, and pick-a-payment adjustable-rate mortgages, which are resetting at higher rates, putting pressure on homeowners who can’t. Refinancing due to lack of employment or value, there will likely be an increase in the number of foreclosures.
According to research reported by HousingPredictor.com, major metropolitan areas in the US are not likely to experience a real estate boom until after 2020. With more than 7 million people unemployed and another 20 million on the list of underemployed, it could be 2017 or 2020 when these workers are absorbed. And real estate sales depend on who has a job.
Real estate booms have typically unfolded in seven to ten year cycles with some external trigger that precipitated a crisis that blew up the bubble. The current situation is unlikely to be different.
Implications for investors
Apartment availability rates are expected to increase throughout 2010 to around 7-10%. The continuing collapse of trust at work hampers the formation of homes, as people may delay marriage or return to live with their parents or relatives or reunite with friends.
As foreclosures rise, there is likely to be a greater demand for replacement homes, so vacancy rates may decline. And as workers try to keep their options open to adjust to the move in search of job opportunities, the demand for rentals is likely to increase as well. The caveat is that there will also be a variety of supply options that will put pressure on rentals. And as a result of continued poor economic conditions, landlords can expect tenants’ creditworthiness to erode.
Apartments will have to compete with a growing supply of single-family homes. Currently, single-family homes available for rent have soared to nearly 10% compared to the long-term average of 4.5%. And a policy change by mortgage servicer Fannie Mae will allow tenants who live in houses or apartments where the owners have been repossessed no longer be evicted. This likely means that the largest single-family home owner in the US will be a quasi-governmental entity.
Sales volume in the multi-family market is a long way off and is likely to continue. Potential buyers continue to wait for prices to stabilize. There will continue to be an upward shift in capitalization rates between 1% and 2%, approaching the 2002 capitalization rates (8.2%), which will directly contribute to downward pressure on prices in the range from another 10% to 20%.
And given the stricter underwriting criteria, such as higher down payment requirements, the number of investors capable of acquiring a property is likely to be limited. But there will be opportunities for investors with equity and credit to buy when prices stabilize.