ARE WE AT THE BOTTOM YET?

Mark Buonincontro 6-24-2009

“Are we at the bottom yet?”

In today’s volatile real estate market, this is the million dollar question.  If I or anyone else could pinpoint the bottom of this real estate market you potentially could become an instant millionaire.  Some believe we have reached the bottom and others that we are dragging along the bottom, but I believe we are far from the lowest point of this real estate roller coaster ride. 

In my opinion, it’s too early to tell if hit the bottom or not.  Many people are jumping to conclusions and rejoicing that the market has hit its lowest point, but beware there are still many obstacles in this treacherous and very unpredictable economy. The real estate industry has declined so much over the last three years that people are understandably anxious to believe that the bottom is here; they are looking for any positive sign in the market to mark the beginning to an end.

Here are five reasons why I believe that we are still 12 to 18 months from the bottom of the worse economic downturn since the great depression:

1.      Fannie Mae and Freddie Mac have predicted a record number of foreclosure filings in 2009. The number of mortgages in trouble throughout the United States—including foreclosure filings and late notices—has reached almost 12% nationwide.  At this rate it could take a number of years to sell the foreclosed properties and return to a normal foreclosure of 4 %.  With this record number of foreclosure still in the works, how can we be even close to a bottom of this market?

2.      The unemployment rate is still increasing throughout the country. The unemployment rate as of May 2009 was a shocking 9.4 %, that being the highest unemployment rate since October of 1983, and at this rate we may see unemployment rise as high as 11 to 12% nationwide before this recession is over.  With rising unemployment rates there are less people that can pay their mortgage, which only compounds the foreclosure rate.  There’s also the “X” factor that stands for people still employed but making significantly less than they have been over the last several years—their paycheck not being enough to pay their bills. I personally know a number of people in this situation that have to sacrifice their lifestyle and reduce their overall bills in order to survive. Unfortunately, these “X” factor people will contribute to the growing number of Americans that cannot pay their mortgage.  Some of these people will be helped by loan modifications but a majority of them will not receive assistance and become victims of the real estate meltdown.

3.      Declining property values.  With declining property values people are less likely to fight to save their homes.  In some areas property values have decline some 40 to 50%.  When the homeowner owes hundreds of thousands of dollars more than their home is worth, it becomes a business decision to move on.  The rational in this decision is why continue to pay on a $500,000 mortgage when the home is only worth $250,000.  With property values declining almost on a daily basis, most people in this situation will walk away from their homes and wait until housing prices stabilize.

4.      The United States banking system is severely broken.  Over and over again I hear people say, “I’ll just wait for things to get better.” Well, you might be waiting a long time. Over the last three years our country’s banking system and real estate market have collapsed.  It will take years for the banks as well as local real estate markets to recover.  Don’t get me wrong, I truly believe that our banking industry and real estate markets will recover—but it won’t happen overnight.  The days of lax lending practices and sky rocketing real estate prices are over.  We will not see the glory days of easy financing and easy money for years to come.

5.      An oversupply of homes.  In many areas throughout the country, especially the Sunbelt, builders constructed as many home as possible.  Many of these homes were built in speculation that the builder would find an immediate buyer or sold to investors speculating on the values on these homes.  In some areas there were waiting lists or lotteries to purchase homes from the builders.  Many of the buyers bought with no intention of ever living in the home but strictly as an investment.  With the combination of easy financing and sky rocketing real estate values, some investors bought several homes at a time with the intention of making easy money by a quick turnaround sell. The common mindset was if you were not buying real estate as an investment you were missing out on the gold rush.  People were cashing out the equity in their primary residents to purchase investment property because the lure of easy money in real estate could not be ignored.  Much like the tech boom and bust of the late 1990’s, it all came crashing down.  Now we are left with thousands of homes throughout the country that have been abandoned because the money from banks and investors is gone and the values of these home are a fraction of what people originally paid for them. 

Overall, as we watch the dusts settle from the real estate crash of 2006-20??, be very cautious on declaring an end to the madness because it may take several years to repair and restore a mess of this magnitude.