What does 10.2 Unemployment mean for Real Estate Investors?

All I can say is this is interesting times we live and invest in. The first thing that jumps out at me is that cheap money is here to stay. Several articles I reviewed today talked about the Fed being on hold until the middle of 2010. I suspect the Fed will stay very accommodating through out 2010 and I suspect there is a fair chance they do not raise rates above 1% until 2012. I haven’t heard any talking head on TV thinking this far out.

The headline number for unemployment is going to get worse over the next 6-9 months with unemployment peeking above 11%. Then it will take a year or so for the country to build a base we can grow from. The unfortunate truth is we can not pay for all the sins of the last 10 years in only a year or two. We are probably in the fourth of fifth inning. Note I suspect the steepest part of the drop has already been felt but we are not done with the pain.

Another area that is certain is the move up and high end home markets are going to continue to crack under the stress of job losses. It would not shock me to see homes that went for 600-800 in various markets to go for under 300K as the market begins to show maximum stress.

However, the low end market is likely to get health quickly because cash is paying next to nothing in the bank and people will need to chase return with controlled risk. Given the low end of the housing market is selling for 60-70% of replacement cost with fairly stable rents I suspect investors will continue to jump in with both feet. We have already seen a tremendous change in the low end market.

Given the long road a head I suspect we will see more public homebuilders consolidate to remove capacity from the system. I don’t see how building homes on any type of scale is going to be profitable until at least 2012-2013. However, if the builders would just change their business model slightly I suspect they could continue to churn out profits while waiting for the building wave to build again. I propose that builders should focus on buying foreclosed homes in large tracks built over the last 5 years. They could pick up 10-20 homes and rehab them and put in some special touches and really help save neighborhoods. Talk about good karma!!!

Another item I suspect that will come to pass in the next 6-9 months given all the bad news is a big bank that is currently perceived as rock solid will be owned at least partially by us the US tax payer. We will need to send them 20-40B to maintain capital ratios. The bank will be so large that FDIC will NOT be able to let it fail. So we the tax payers will buy some preferred stock or convertible to inject the required capital. My fear is it may be worse than expected and require 2-3 extra injections at which point we may own more than 50% of the bank. (Just a hint when this happens we will be very close to the bottom and ready to grow again).

Buy and Hold will still be the preferred long term investment but their will be some very busy flippers taking beaten down foreclosures and turn them in to FHA approved homes. If you could flip 4 homes a year and make 20K that is an extra 80K of income before taxes. I suspect this type of activity has at least 2 more years to play out.

Good Investing