Thoughts about the next 3-5 years

October 18, 2009

I was recently asked to comment on these three questions. Here are my thoughts.

• What are the differences in real estate between 3-5 years ago and now?

Real estate 3-5 years ago meant being more of an "order-taker" where clients came to you, told you what they wanted, you negotiated the deal and walked it through a relatively smooth transaction. The key then was being the "winning" buyer. Buyers were offering several thousand dollars over asking price, removing contingencies (inspections, loans, etc.) just to be the one picked by the seller. The odds of closing escrow once your buyer was seemed to be 95%+. Today, many sellers are upside down in the homes (they owe more than the home is worth), and unless an agent is a specialist in Distressed property sales, they will cause more harm than good to the seller. Many sellers can't sell now because of their loan balances and won't qualify for a short sale (where their lender takes any loss on the value of the property vs. the actual net proceeds) because the owner doesn't have any kind of financial hardship. Today, agents can't just take any listing, throw a sign in front of it and wait for the offers to flow in. Homeowners need to be pre-qualified to see if they can even sell their home. For those properties that are listed and can be sold, it's another big can of worms. There is a lot of more marketing that needs to go into selling property now because buyers are very skittish about making a purchase. Once a buyer is found, then it takes a lot of work, skill and finesse to get the deal to actually close escrow. Buyers need to actually make enough money today to make their house payment! Lenders are very tight with their money, they make buyers prove everything on their loan application. Very few escrows are able to close in 30 days right now due to the loan requirements that weren't there 3-5 years ago.

• Predict what you think will be happening in real estate 3-5 years from now ... worst case scenario.

Worst case scenario, real estate in 3-5 years will be stagnant to today's market. Lenders will still be very tight with their money, but interest rates will be much higher due to inflation. We will likely see a pretty high amount of inflation due to the trillions of dollars the Federal Government has printed in order to pay for the stimulus packages over the past year. Once the Fed concludes that we are headed back out of the recession, short term interest rates will be increased in order to try to limit the amount of Inflation. Mortgage lenders & the secondary market that buys mortgages will begin to demand a higher rate of return on their investments, thereby forcing mortgage rates to go higher and we will see both the cost of 1st trust deed loans and 2nd trust deed loans (lines of equity, etc.) increase rates. With inflation, (food & clothing start costing more, credit cards tied to the Fed rate increasing their interest rate, and the increase in mortgage interest rates) the cost to buy a home will increase because the monthly payment will increase dramatically. This will further slow any significant price increases for real estate. Our worst case is that real estate values don't move up much, if any, over the next 3-5 years.

• Predict what you think will be happening in real estate 3-5 years from now ... best case scenario.

Best case scenario for the next 3-5 years will give us low inflation due to some miracle that the Fed does. If inflation stays low, the overall cost of living will remain stable, interest rates will remain relatively stable, and buyers that are on the fence now, or buyers that are able to get the new job they want in the next 3 years will then be able to buy a new. As more and more of the 'first-time buyers' or buyers under the $500,000 market come out of the wood work, buy a home, that will free up those sellers to make the move up and the domino effect takes place, with more and more real estate sales in the higher-end market. Another best case scenario is that banks begin to loosen their credit standards a bit, allowing a renter who is paying $2500/month in rent to now buy a home with a payment of $3000/month, because after their tax benefit, their payment will actually be less than their rent was at $2500/month. There is a good chance that we will be in the middle somewhere, where inflation is radically high, mortgage rates don't double, and banks get back into the business they truly make money from, lending on home purchases.