| Things to Watch For - III |
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Things to Watch for in 2011 - III
Real Estate
Real estate, both residential and commercial, has been at the epicenter of the financial bubble that started rolling through the global economy in 2005, reached its peak in 2008 and is still serving as the primary drag on the economy in 2011. However, real estate, especially residential real estate, is 20%+ of Gross Domestic Product (GDP) so no true recovery can occur until residential real estate gets rolling again.
Not only does building 1 new home create the equivalent of 3 full time new jobs for a year but drives the sale of new appliances, flooring, window treatments, landscaping and a hundred other products and services. In addition, an increase in the value of one's home creates a sense of security and long-term value which makes it easier for consumers to think about other long-term purchases including cars. Such feelings of financial well being and security have been totally absent from the scene for the last 6 years. The things to watch for as outlined as follows:
New Construction
After an almost 2 year lack of any new residential housing construction my town has the sound of hammer and saws once again. For about 6 months my town, about 75,000 people, had all of 6 new homes for sale or about 5% of a normal market. At least a dozen new homes are now under construction including 5 in my development. The inventory of unsold new homes was about 190,000 nationally last month or a 45 year low and a driver for new building. New construction should continue to pickup throughout 2011 and the sound of hammers and saws will be evidence of the turnaround.
Equity Only Deals
Many of the short sale, bank owned and abandoned homes in the national inventory are not candidates for mortgages. Period! They have often been so badly abused by their former owners that the homes won?t pass FHA inspections and are, therefore, not financeable with debt. These homes need 100% equity and they are getting it from investors. Normally, about 1 in 12 homes are bought for cash while today 2 in 5 are all cash deals. These investors are buying cheap (or so they hope), they will invest more money to rehab the homes and then seek to sell them through normal channels. This represents a major recapitalization of the residential real estate market and will quickly eliminate the glut of inventory in that segment of the market. All equity deals should continue to be about 405 of the market for the rest of 2011.
Bank Lending
This is the most problematic variable to predict since only 4 major banks now represent over 50% of U. S. retail banking. These banks have the money and distribution system to make a real impact on mortgage lending in 2011. Whether they will or not is partially a function of their need for revenue growth (all major banks have seen revenues drop from a systemic lack of lending), fee income (banks get a lot of very profitable fees from mortgage lending) and government pressure. The war of words has already started between Congress and the major banks and eventually they will have to begin lending or face punitive new legislation form Congress. The banks will lend rather than fight and you?ll know the tide has turned by the commercials you see on television.
Beware of What You Read
The same coterie of tracking services, news outlets and experts which screamed headline after headline about how good things were in 2006 - 2008, and were dead wrong in the process, are doing it again today. Headline after headline looks back at old data and is just as misleading in 2011 as it was in 2007. Don't be fooled twice!
Real estate, residential and commercial, will be a slow turnaround and actually provide a lift to the economy late in the current expansion rather than early as with past growth cycles.
CLICK HERE to see the article on the Educator's Institute blog.
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