Traditionally, economic slowdowns meant an increase in real estate investing - especially foreclosures. Real estate offered investors one of the most reliable assets for return on capital. With real estate prices at the lowest prices since the peak of 2005, two key components to stimulate demand are in place. Unfortunately, an anemic economy continues to stifle any semblance of a prolonged up turn in the housing industry.
High unemployment coupled with the uncertainties people have about job security have many potential homebuyers waiting on the sidelines. In addition, weak housing demand continues to put downward pressure on home values in many areas of the country. In some markets, real estate prices have declined as much as 50 percent off peak values obtained in 2005.
Shadow Inventory: The Other Supply
The National Association of Realtors reports an inventory backlog of about 3.9 million homes on the market in October 2010. In a convention real estate market, it usually takes six to seven months to deplete the supply of available homes. Besides the huge inventory of homes currently on the market, waiting in the wings exist another 2.1 millions of homes or the “shadow inventory,” which includes:
- Delinquent home mortgage loans not in the foreclosure pipeline
- Real Estate Owned (REO) by banks that are not on the market
- Baby boomers waiting for the market to improve before listing their homes
- Vacant high-rise condominium units not accounted for in many reports
The fallout over “Foreclosure Gate” caused some mortgage companies to undertake a review of their processes to ensure procedures met regulatory requirements. In addition, many institutions have a huge surplus of properties on hand. These factors led to a voluntary moratorium on new foreclosures by some mortgage lenders. Some analysts believe this only prolongs the recovery. The current market supply and the shadow inventory have some industry analysts predicting two or three years before depletion of the existing supply.
Falling Prices and Skyrocketing Foreclosures: Who Will Gain?
Two schools of thought prevail when it comes to addressing declining home values and the foreclosure crisis: One approach advocates a more widespread emphasis on mortgage calls for the foreclosure process to move forward without delays because consumers need the debt relief. Once freed of burdensome debt service, they gain the income to income to spend on other goods and services. In addition, getting the backlog of foreclosures on the market will help real estate prices to bottom out; and, the housing industry can began its recovery.
Unless Uncle Sam and mortgage companies make a more concerted effort to provide extensive assistance to distressed homeowners, foreclosure investors and small businesses, such as property maintenance, property management, board-ups firms, debris removal companies and law firms will benefit the most from rising foreclosures.
Making Foreclosures Attractive
A recent Fannie Mae survey revealed the majority of Americans do not believe the real estate market has reached a bottom. Some industry insiders predict a further drop of as much as 20 percent once the supply shadow inventory hits the market. The best advice for anyone planning to purchase foreclosed property - low real estate values do not make purchasing foreclosures a “no brainer.” Buyers still need to conduct due diligence on the market and the property in order to make informed decisions. Foreclosures make good investments only when buyers complete deals properly. Stick with proven rules for buying foreclosed property, such as:
- Determine your bid price stick to it
- Buy homes in good locations
- Rental properties provide the most tax deductions
- Take into account repairs that may be required
- Paying cash may provide an edge in bidding process
Low real estate prices, inexpensive mortgage rates and a better employment picture constitute important elements needed to obtain some measure of stability in the total real estate market. Buyers should pay particular attention to how these factors play out in their local markets before buying foreclosed properties.