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It seems that less bad news is good news in the media. You hear that real estate has possibly reached a bottom and things are turning up, but is it really coming back? This week the U.S. saw the biggest real estate bankruptcy in history and this was just the first commercial real estate developer to do so. Will commercial real estate be coming back anytime soon? Well, it will rely on people spending money at the malls. People are losing their jobs and not flocking to the malls to spend money frivolously. The U.S. is experiencing a period of deflation where all asset classes are falling. (NEWS proof) Real estate of all types is not close to turning around. In fact, real estate prices will continue falling as much as 20-30% depending on where you live. As prices fall mortgage holders will find themselves upside down on their homes. They will owe more on the house than it is worth. So, how can you refinance a loan that is upside down? 30% of all mortgages will be upside down within a year.
We said in this news report a few months ago that the banks would become the biggest seller of real estate. The banks now sell over 50% of all homes but have less than 30% of the listings. This means that banks now set the comp prices for all sales. Most of the other sales of homes are short sales. These are also setting lower comp pricing. Therefore, people who have been foreclosed on or who can’t come up with enough short sale money have their credit ruined. These people will not be getting another mortgage anytime soon and this will also negatively affect the housing market. The banks’ customers are no longer credit-worthy. Already sub-prime loans and other edgy loans have foreclosed. Next, you will see the regular loans start to default. These are the adjustable rate loans and others that maybe had a balloon payment come due that couldn’t be met. These regular loans and jumbo loans are the largest group of mortgages. You will see this group’s foreclosures and defaults double. Also, commercial real estate defaults have only just begun and will also double. These mortgages, both commercial and residential will bring down many banks. More than 500 to 800 banks will fail because of these underperforming mortgages. On top of all the mortgage defaults, you will also see credit card defaults accelerating. While we are only about 50% of the way down on mortgage defaults credit card defaults are only just starting to gain speed. We would estimate that only about 25-30% of the credit cards defaults have happened. So, when you hear the pundits on TV say we have reached a bottom in the real estate market they do not realize where we are exactly in the downward spiral..
QUESTION: Historically in a recession residential real estate is the first to go down followed by commercial real estate, how is this recession different?
ANSWER: In this recession, residential properties have gone back to the banks in greater numbers. These same banks are now setting the prices for all sellers. Your $1,000,000 home is now worth $500,000. Soon it could be worth $300,000 and if unemployment doesn’t get resolved you could buy a home like yours for $200,000 or less.
QUESTION: What could cause real estate prices to drop another 20-30%?
ANSWER: An increase in the amount of inventory owned by the banks. Although the banks only have about 1/3 of the listings now they sell more than 50% of the completed sales. The sales left are mostly short sales. As the economy weakens and more people lose their jobs more homes will go back to the bank and their inventory will swell. The banks could end up with several years of inventory to sell at bargain basement prices.
QUESTION: How will sellers gain leverage over banks?
ANSWER: Normal sellers will need to find cash buyers or provide seller financing in order to sell their homes.
QUESTION: Who would be willing to be a cash buyer in this marketplace?
ANSWER: Someone who owns several houses and just happens to like yours.
QUESTION: Why would a buyer do this in this marketplace?
ANSWER: Some buyers look for real estate in several desirable locations and would never think about selling any of them. For example; the person who likes to ski in the winter may have a home in Aspen and who wants to spend summers at the beach may buy a condo in Hawaii. These types of buyers will always be around.
QUESTION: Are they the same kind of buyers that don’t trust their money in the banks, CD’s, money market accounts, stock market, etc?
ANSWER: These types of people have plenty of money they have either inherited or have made in a variety of ways and have professionals who manage their investments including real estate.
QUESTION: You said that 500-800 banks would fail as a result of underperforming mortgages, expand on that?
ANSWER: If you still have any faith in banks you should take your money out of the major banks and find a smaller local bank with a strong balance sheet.
QUESTION: What will happen to these larger banks?
ANSWER: The largest banks have yet to be forced to declare the exact value of their assets. Most of the assets they are holding are worth 20 % of their face value.
QUESTION: How will the banks’ mark-to-market value that has been changed recently to mark-to-fantasy value change how this actually plays out?
ANSWER: Although the new accounting rules allow banks to show fictitious profits like bailout money received, they are still asking for more federal help. If they are making several billions in profit in a quarter why do they need more money?