A glut of new construction combined with higher than normal resale inventory, plus a sharp increase in foreclosures is leading to massive oversupplies of single family housing in most areas of the country.
Fundamentally this indicates a severe weakening of the single family home market. Sagging prices along with erosion of market value could have a ripple effect throughout the economy. Several major builders are currently suffering losses, and some 2.1 million homes are on the market. This is a 34% increase in inventory nationally from one year ago.
Factor one in the oversupply scenario is the number of speculative investors buying single family houses then putting those houses on the market to generate a "quick" cash profit. Investor speculation has reached all time highs.
Factor Two is rising foreclosures in the sub prime loan sector. These are loans that were made to low income and marginal credit buyers, some investors, and millions of regular home buyers who wanted a bigger house but with a smaller house payment.
Sub prime lenders allowed buyers to qualify with income that could barely cover the interest payment, let alone the principal. This includes many of the "interest only" and "graduated payment" mortgage programs that have been very popular in recent years. But payments are now beginning to graduate upward to include both principal and interest, and many owners can't keep up. To add insult to injury, making interest only payments during a time when values are going down will result in negative amortization. This is leaving some owners owing more for their home than it is now worth.
The early results of these risky lending and borrowing practices are already visible, with two dozen sub prime lender failures in the first two months of 2007. It appears that many of the largest lenders in the sub prime category will fail during 2007. Other more main-stream lenders are feeling the pinch too.
All that would be enough for concern, but you can also throw in Factor number three-- new home construction. In many areas, thousands of new homes are being built along side growing inventories of resale homes. Common sense would seem to indicate that there is real potential for a huge price drop in single family housing.
Simply put, the single-family home market seems to be on the verge of a downward spiral that could erase 50% of value in some areas. Even suburban markets in better areas are averaging fifteen percent decreases in selling prices since the 2005 market peak.
I also want to point out that those markets that are enjoying a steady or growing job base will continue to see modest price gains. They will still suffer from the drag on selling prices caused by increasing foreclosures but good jobs make for good home markets and help to soften the effects of too much inventory.
By the time we see the tightening of credit that may result from banking failures in the sub prime market, investors could find the single-family home market to be extremely tight or unprofitable.
Selling single family houses for quick cash is a risky strategy for the time being unless you are in areas where job growth and consistent demand will soften the effects of the oversupply.
Over supply in some areas heavily worked by investors is significant and is going to lead to falling prices in those areas due to excessive inventory aggravated by increasing foreclosures.
Older inner city neighborhoods heavily worked by investors are most likely to suffer the biggest losses. At present investors simply should not be buying single-family properties for a quick cash sale in these areas unless they are absolutely sure that the location has adequate buyer demand.
Suburban markets are more likely to be affected by increasing foreclosure rates among homeowners with adjustable rate mortgages and in particular those who have been making interest only payments. These are foreclosures that are escalating among middle-class homeowners.
The good news is that all of this means that there will likely be fantastic buying opportunities in the not too distant future for those who are well positioned to take advantage of the situation.
We could see something reminiscent of the savings and loan collapse of the late 1980's. That event resulted in buying opportunities for investors that were unprecedented up to that time. I believe it is likely that the same thing could happen again. We could be on the verge of the best buyers market in 15 years. Patience is key. Time is currently on the side of the smart investor.
Now that the media coverage has hit the mainstream it's just a matter of time before the full extent of the problem becomes exposed. In about six to nine months it could become apparent that the problem was much more widespread and will affect a much broader segment of the economy than was first thought.
Investors who are not entangled in bad debt but are well positioned to take advantage of the coming opportunities will profit greatly and a new generation of real estate gurus will be born.
This is why it is so important to understand that fundamentals dictate strategy for real estate investors who are smart and know how to buy right. When you understand how to take advantage of market fundamentals whether good or bad then you will understand how to make money with real estate no matter what the market is doing. This is the definition of a professional investor and is also the requirement for long term profitability.
Copyright: Copyright © 2007-2008 Donna Robinson
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