What’s next for real estate?
For most people, real estate remains a critical part of personal net worth. Despite the stock market rally, the average American family net worth is down 25% due to declines in real estate values and investment assets.
Market Trends Overview: Focus on Boston
While it continues to suffer due to continued turmoil in major Financial Services, Insurance, Real Estate (FIRE) employment areas, there have been signs of stability in and near major metropolitan areas like Boston. Although the employment outlook remains bleak, the Boston Metropolitan Statistical Area (MSA) posted the largest gains in property values during 2009 according to a recently released report by Zillow Real Estate Market Reports.
Even with strong gains helped by the federal government’s first-time homebuyer credit and continued low mortgage interest rates, nearly 25% of homes remain “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 “payment choice” adjustable-rate mortgages that reset to higher rates, putting pressure on homeowners who can’t refinance due to to lack of employment or lack of value, there will likely be an increase in the number of foreclosures.
According to research reported by HousingPredictor.com, major US metropolitan areas are not likely to experience a housing boom until after 2020. With more than 7 million people unemployed and another 20 million listed as underemployed, it may be 2017. or 2020 when these workers are absorbed. And real estate sales depend on those who have jobs.
Housing booms have typically occurred in cycles of seven to 10 years with some external trigger precipitating a crisis that burst the bubble. The current situation is unlikely to be any different.
Implications for investors
Apartment vacancy rates are expected to increase through 2010 by between 7% and 10%. The continued collapse of trust in jobs makes it difficult to form households, as people may delay marriage or move back in with their parents or relatives or double up with friends.
As foreclosures increase, there will likely be greater demand for replacement housing, so vacancy rates may decline. And as workers try to keep their options open to accommodate moving job opportunities, demand for rentals is likely to increase as well. The caveat is that there will likely also be a variety of supply options putting pressure on rents. And as a result of continued poor economic conditions, landlords can expect the credit quality of tenants to deteriorate.
Apartments will have to compete with a growing supply of single-family homes. Currently, single-family homes available for rent have skyrocketed 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 foreclosed on to no longer be evicted. This will likely mean that the largest single-family rental owner in the US will be a quasi-government entity.
Sales volume in the multi-family market is a long way off and likely to continue. Potential buyers continue to wait for prices to stabilize. There will continue to be an upward shift in cap rates from 1% to 2% approaching 2002 cap rates (8.2%), which will directly contribute to downward price pressure in the range of another 10 % to 20%.
And given the stricter underwriting criteria, such as higher down payment requirements, the number of investors able to purchase a property is likely to be limited. But there will be opportunities for investors with the capital and credit to buy when prices stabilize.