Foreclosures Primer
Foreclosures Primer
Now that the housing boom has slowed, the amount of time houses are staying on the market has increased, which means there is a lot less velocity in the market, and not so many speculators turning and flipping houses for a profit. Interest rates have also risen, which pushes people who financed with adjustable rate mortgages (ARMs) into higher payments, and more and more people are on the edge financially.
This is actually good news for those interested in investing in foreclosure real estate because the more homes that fall into foreclosure, the more opportunity there will be to find a bargain. According to a recent RealtyTrac report in June of 2006, US foreclosures are up 28% over last year.
In the past few years, it’s been hard to find a bargain, even on the foreclosure side, because the real estate market has been so hot. Now that the market is cooling, investors are less eager to jump in. Does this represent an opportunity for you?
At this point we have to remind everyone that the opinions rendered in this tutorial are merely opinions and do not constitute investment advice. We cannot guarantee investment results and while we express opinions, we cannot accurately predict the future of the real estate market. Investing in real estate involves considerable risk and should not be undertaken before the buyer does full due diligence on both the prospective properties they are interested in purchasing and on the real estate market itself to find comparable values and trends in the overall market. We recommend that your research include talking to licensed Realtors, talking to residents in any area you wish to invest in, and reading books on real estate investing, which are readily found at your local Barnes and Noble bookstores or online at Amazon.com.
Interest rates play a huge role, as we’ve seen in the last few years, in determining the health of real estate markets. When rates dropped to historic lows in 2001, the market took off like a rocket, and as of 2006, is still strong, but finally starting to cool. You don’t have to be a hundred years old to remember when interest rates were commonly at over 10%, so from a historical standpoint, anything under 7% still seems like a great rate.
One central question to the market is how high will rates go and where will they level off? The answer is dependent on the Fed Chairman, currently Benard Bernake, who like his predecessor Alan Greenspan, doesn’t seem to be willing to let anyone in on that little nugget of information. The truth is the Fed itself probably doesn’t know because economic conditions are always changing and they want to keep their options open. Because of that, they do not define a “normal” interest rate, which makes real estate investing a bit of a guessing game.
General perception plays a big role in any investment market, and at the moment, the general perception of the real estate market is that it’s going soft. This of course is a blanket statement, and one of the interesting things about real estate is that not all markets are created equal. You can have prices falling in one California city, like San Diego, and just ninety miles away in Orange County California be seeing a modest increase in prices. These counter currents can be more dramatic when comparing different geographic regions in the US, so as we said before, it is incumbent upon you to gain a firm understanding of the real estate investment climate in your area before jumping in.
Having said all that, we have formed some opinions based on what we have seen in the last four years of the market, and also taking into consideration the last twenty years of activity.
It's unlikely a market collapse is imminent. While we may see short-term gyrations in the market in terms of pricing and available inventory, nothing indicates that the bottom is about to drop out. One reason for this is that real estate will always retain value, unless it is sitting under a toxic waste site or some other ecological disaster. On the other hand, shares of stock in a company can lose 100% of their value. That almost never happens in real estate.
Historically, any quality real estate location has increased in value over time, so even if you don’t time it perfectly, the investment is sound, unless you are playing with money you don’t have. A common problem is that people commit to making payments they can’t sustain, and that is of course how houses and other properties fall into foreclosure, which can lead to significant discounts in the current market.
