Real Estate Investment Perspectives and Outlook 2010

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 US family’s net worth is down 25% due to declines in real estate values ​​and investment assets.

Market Trends Overview – Focus on Boston

While still suffering from ongoing turmoil in the 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) showed the biggest gains in property values ​​during 2009 according to a report recently released by Zillow Real Estate Market Reports.

Even with strong gains aided by the federal government’s first-time homebuyer credit and continued low mortgage interest rates, there remains nearly 25% of households that are “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 “pick a payment” adjustable-rate mortgages that reset at higher rates, putting pressure on homeowners who can’t refinance due 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 seven- to 10-year cycles 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 to between 7% and 10%. The continuing collapse of trust in jobs makes it difficult to form households, as people may delay marriage or move back in with parents or relatives or double up with friends.

As foreclosures rise, there is likely to be more demand for replacement housing, so vacancy rates may decline. And as workers try to keep their options open to accommodate relocating job opportunities, demand for rentals is likely to rise as well. The caveat is that there will also likely be a variety of supply options that will put 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 ballooned to almost 10% compared to the long-term average of 4.5%. And a policy change by mortgage servicer Fannie Mae will allow renters 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 owner of single-family rentals in the US will be a quasi-government entity.

Sales volume in the multifamily 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 of 1% to 2% approaching 2002 cap rates (8.2%), which will directly contribute to downward pressure on prices in the range of another 10% to 20%.

And given 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 capital and credit to buy when prices stabilize.