By Steven E. Scheinberg
During the past seven years, real estate has been one of the best markets in which to invest. This is especially true in the residential home segment, where dramatic price increases and relentless demand drove the market to new highs. Now, the mighty has fallen.
Today’s real estate market is characterized by falling prices, fewer sales, decreased demand, increasing foreclosures and an oversupply of product that portends even more turmoil. In fact, by some standards, today’s real estate market is considered the worst since the S&L crisis 15 years ago, and many pundits and analysts are asking if any good will come of it.
The reality of the market is highlighted by the recent report from the National Association of Realtors, which estimated that in the second quarter of 2007, sales of existing homes were down approximately 11 percent from 2006 and sales fell in 41 states. Not only did the volume of sales appreciably decline, the sale prices of homes decreased as well. While nationally prices are down an average of 5 percent, in many regional markets including Michigan, Indiana and Ohio, prices in some areas have fallen by 25 percent or more.
If the decline in prices and the volume of sales weren’t bad enough, the Mortgage Bankers Association calculated that in the second quarter of 2007 foreclosures also hit an all-time record high, at .65 percent of all outstanding mortgages. And, if you thought things couldn’t get worse, the number of delinquencies, or borrowers who are behind on their mortgages but have not yet gone into foreclosure, also reached a record high, at 5.12 percent of all outstanding loans. Clearly, the days of easy money are over, and the piper has come for his due.
How did we get here?
The current market cycle started in the second quarter of 2001 when condo prices, especially those of to-be-built buildings on the water, rose by more than 10 percent. That level of increase was simply unbelievable when compared to the historical average of 4 percent per year. With the stock market reeling from the dotcom bubble and plenty of accessible easy money, yesterday’s day trader became today’s real estate investor. With the surge in demand from investors, condo prices started inflating day-by-day.
Money flowed from stocks into real estate, which was heralded as the next big opportunity with residential real estate, especially condominiums, the favored form of investment. Facing unprecedented demand, developers raced to deliver new buildings with thousands of new units that vastly exceeded historical levels of absorption. Condos simply became another commodity to be bought and sold at a profit or loss.
What’s the good news?
Subprime mortgages only represent between 10 percent and 15 percent of the overall mortgage market, and of that amount, about 10 percent to 15 percent are expected to foreclose. While that number is large enough to disrupt the market and create a lender backlash that has resulted in tightening the requirements for getting a new mortgage, overall it is not large enough to trigger a market collapse.
On the plus side, if 15 percent of subprime borrowers are being foreclosed, then 85 percent of the subprime borrowers are keeping their new homes and fulfilling the American Dream. In fact, home ownership is still at an all-time high in the United States, thanks in large part to the recent availability of capital. At the end of the current cycle, by present estimates, about seven-times as many subprime borrowers will be living in their new homes compared to those who have lost them.
Another silver lining in the current market is that the prices of single-family homes and condominiums will continue to decrease during the next 12 to 24 months, making them more affordable and, thereby, encouraging sales. Still another benefit is that many of the novices who flocked to become real estate agents and mortgage brokers when anyone could make a sale are now looking for new careers. In fact, an estimated 65,000 mortgage brokers have lost their jobs since the first of the year, and the number of real estate agents has also decreased substantially. Call it the natural pruning of the industry, but going forward, only real professionals — those with a track record of success and a book of business — will survive this market. And the client will be better off for it, too.
To sort through this mess, it might be best to take a macro view and simply think of the current market as you would a forest fire: Going through it is hell, and it leaves a wake of destruction in its path, but, eventually, the forest comes back bigger and stronger. And that’s good news.
Steven E. Scheinberg spent 12 years on Wall Street, where he managed two research departments and specialized in providing corporate and real estate investment banking services to institutions and high net worth individuals. Now in private practice in Miami, Scheinberg works with real estate investors.
Copyright© 2007 Agent Publishing LLC