While those of us working in the real estate industry would love to believe otherwise, there are many reasons why the real estate market will not make a rebound any time soon. The following lists the four major predictions facing the 2011 real estate market:
Interest rates must go up
Interest rates have been historically low for some time now and will have to rise. The price of real estate and interest rates sit on opposite sides of a seesaw and when rates rise, the price of real estate falls. The financial institutions will still make out regardless, for instance, the interest paid back on a $200,000 mortgage at 5% is the same on a $161,000 mortgage at 6%. On both loans the banks make $186,500 on interest off their customer. The real winners here will be the cash investors who have been standing by patiently waiting for prices to hit rock bottom.
A Sea of Foreclosures Awaits
In the year 2011, there will be more waves of adjustable rate mortgages (ARMs) whose interest rates are set to adjust upwards from their low teaser rates. They are the ten year ARMs from 2001, the seven year ARMs from 2004, the five year ARMs from 2006, and a few three year ARMs from 2008. This will be in addition to the four waves of arms that reset in the year 2010 and many other types of creative financing better known today as toxic mortgages. As these loans all go delinquent and sell as foreclosed homes it will continuously pull down the value of real estate no matter what.
Introducing Strategic Default
As if there were not enough problems facing the real estate market, here comes something nobody predicted; strategic default. This new emerging technique has the power to literally bring the economy to its knees. What makes this method so dangerous is that it appeals to all homeowners who owe more than what the house is worth, whether they are delinquent or not. There is two ways to perform this trick, in the first example, a homeowner who owes $250,000 or more on their house in a neighborhood where all the homes are now worth $200,000 or less purchases a similar or an even better home at the cheaper price, and then lets the bank foreclose on the one they owed $250,000. Example two, if they do not qualify for the mortgage to purchase the new home first, they will find a place to rent, let their current house get foreclosed on, and after they rebuild credit in about two years or less, they will purchase a new house at the discounted price. Where renting had once been seen as throwing money out the window, it can now be viewed as a wash or even an investment, for example, $1,000 a month in rent for two years comes to $24,000, however by swapping property through strategic default, they may be able to save upwards of a $100,000 depending on how much prices decline in their area.
Tighter Lending Standards
As more and more homes go into foreclosure, the financial institutions will have no choice but to continue tightening their lending standards. This means they will require even higher credit scores, better credit reports, bigger down payments, higher fees, higher insurance premiums and much more in order to qualify for a mortgage. This is going to further limit the pool of potential homebuyers eliminating any chance for a recovery whatsoever. To make matters worse, all the aforementioned problems facing the real estate market feed off each other and as each individual problem begins to escalate it compounds with the next, creating the potential for a perfect storm, a viscous downward spiral of real estate values.
The Good News
The good news is real estate will once again become affordable, which is key to keeping the American dream from becoming the American nightmare it is today. It will be great to once again see people purchase homes that will not emotionally or financially drain them and their families. People will again be able to afford homes that are large enough to accommodate the size of their families, save for their futures, and start putting money away for retirement again.