Who Benefits from Weakness in Real Estate?

Real Estate = Big MoneyImage by thinkpanama via Flickr

Since it is now official that the US economic outlook has been downgraded and will be soft for the next 2 to 3 years who could be the beneficiaries? In volatile economic environments all assets are open game to a potential downfall.  Speculators of real estate are poised to benefit from these bad economic times in several ways:

If you currently own real estate
Given that macro-economic conditions will remain soft with employment, consumer and business spending at terminal ebbs current homeowners can benefit in refinancing their existing mortgage to historical low interest rates. Government stimulus will continue to keep interest rates low. This will offer the homeowner lower monthly mortgage payments to help cushion household cash flow challenges given the downturn in the job market. If you own rental property refinancing to a lower rate will help drive down mortgage payments as well and improve rental income. A softer economy means fewer speculators will enter the home buying market and should keep rental occupancy rates high. Though his all sounds good on paper, banks underwriting criteria has never been tougher. An equity position of  less than 25% (75% loan-to-value) may disqualify many wanting to refinance. If you purchased your home between 2004 to 2008 chances are near certain that your home has devalued 30% or more. This reduced equity position may not allow you to share in the benefits of lower rates.  A good resource to check current value of you home is http://www.zillow.com/.

If you are looking to purchase real estate:
A perfect storm is when two powerful forces converge to create a miraculous event. Due to a Clinton Administration mandate to increase home ownership and an over abundance of bank liquidity, the years 2002-2007 created an unprecedented surplus of real estate transactions. When the clouds cleared and the bubble burst in August 2007 home values plummeted creating a landslide of foreclosures. In the newly downgraded economy banks will try to maintain a “normal” market by not flooding the pipeline with foreclosed inventory. This will be hard to maintain given how much REO inventory bank’s are holding on their balance sheets. As the economy slowly improves the real estate market will improve accordingly. During this time of overabundance of inventory good deals on real estate will be found. Brave buyers will find low purchase prices, bank owned purchase transactions taking up to 90 days to close and seller incentives. I have heard from wealthy people that the only time they buy is when everyone is selling. Now is that time..

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