Residential Investment Property

2010 is the Best Buying and Rental Home Investment Season

Investors have been active in the foreclosure market for sometime. However, with the new assistance programs going in place, expiration of the first time home buy tax credit, and other macro economic factors, the investors should look closely at underlying factors and consider their residential rental investment strategies. Rental homes may be the place to be.

The home foreclosure rate is heating up as banks move to get these spoiled assets through the process. Combined with new federal efforts to save homes for home owners, legislation (HAFA went into effect in April) preventing deficiency notes on short sales, and other activities, the big question is what will the market effect be over the course of 2010.

I see several key economic points to consider:

• If the banks move to push homes through foreclosure (and there are 1,000,000 homes or more in this pipeline), the inventory of for sale homes must rise. As it stands, this rise could be pretty strong. Additionally, the banks holding this real estate have little motivation to "hold out" for a better price.
• Perhaps the federal programs will work to some extent so some foreclosures will be prevented. However, fairness is an issue as many owners continuing to pay their mortgages won't receive principal deductions. Too bad for many and good news for a relative few. This however is really not such an unusual economic consequence.
• Signs are that employment is picking up and along with this, the economic position of the U.S. consumer and economy as a whole is improving.
• The foreclosures taking place are already largely written off the bank portfolios, for the institutions that are cleaning them out. Therefore their economic effect is probably largely positive as banks realize some income and consumers move on to other housing solutions. In both cases, the event results in greater economic activity.
• Most of these foreclosures will occur after the expiration of the new home buyer credit and the credit will at most probably be reduced if it is extended. I don't believe it will be extended as we have to clean house anyway.

 

From a basic application of economic factors, I would expect the major results to be several:

1. Home prices will fall at least in the markets where the heaviest volumes are being written off and possibly broadly but modestly at this point - perhaps 5%.
2. Home purchasing will strengthen as conditions favor investor purchases.
3. Rent rates will stabilize and rental demand will strengthen.
4. Home improvement spending and contractor work focusing on fix up work should be stable and likely will enjoy modest growth as foreclosed homes change hands and the new owners move to make them rent ready.

 

I believe that by summer investors should expect they are seeing the bottom of residential housing prices even though the workout of the glut of foreclosed homes will extend through 2010, 2011, and into 2012. Now is the time to sharpen your pencils, determine your market, and get started acquiring assets.

Blake Ratcliff invests in, owns, and operates residential property. Blake founded the International Residential Real Estate Investors Asso
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