Is the National Residential Real Estate Market Headed for a Depression in 2007?

At the beginning of 2006, the so named real estate “bubble” across the nation was leaking air. We read opposing views by economists, whose opinions graced the pages of national media and were dependent upon which economic theory they followed. It was difficult to know whom to believe. It is now 2007, and we know in most areas the real estate market is considered to be in a recession.

A national economic recession occurs when the gross national product declines by five-to-ten percent over a six-month period. Residential real estate prices have dropped double digit percent points since the beginning of 2006 and inventories of used homes listed for sale doubled between 2004 and 2005, then again between 2005 and 2006.


The News Isn’t All Bad
Real estate is only a part of the gross national product, and the Federal Reserve helped curb inflation by raising the interest rate in 2006. Overall National business activity has increased in the past year, and unemployment is fairing well, remaining at 4.5 percent. New jobs totaling 167,000 were added in December 2006. The gross national product has not declined and the national economy is in very good shape.

So, what does this mean to the sellers and buyers of residential real estate? It means business is back to normal, before the real estate “bubble” inflated so to speak — with some roadblocks to navigate.

Less Available Money
First, all the money that was being invested into real estate during the boom has been diverted into other non-real estate investment opportunities. This means that money once invested in mortgage-backed securities is diminishing.

Additionally, large mortgage lenders are receiving more federal oversight scrutiny for lending practices used during the latest real estate boom. They continually raised the lending limits to control the market (or so a few of these lenders are accused), making mortgage access much too easy. Many of those, who took loans at only 20 percent-to-nothing down (called leveraging), now are losing their homes and defaulting on their mortgages. Even if these owners could sell their homes, afterwards, they would still owe much on the balance of the mortgage. They are being hit the hardest with default rates doubling in both 2005 and 2006, and expected to continue throughout 2007. This, too, has hit the mortgage lending industry where it hurts the most — profits.

Buyers will have a more difficult time securing a mortgage than during the real estate boom, when just about anyone with any type of credit rating was approved. Less mortgage availability means less potential buyers for the home sellers, too.

Before looking for new residential real estate, secure your financing first. Not only are you then confident in looking at property, but also you know exactly what you can afford.

For sellers, ensure your realtor asks potential buyers if they have secured financing. Those that have, even if their offer is a bit lower, may be more attractive buyers than those who have not. You decide which offer to accept. This is especially important, if you are in a hurry to close.


Prices at Practical Levels
During the real estate boom, home values rose by almost 500 percent between 1990 and 2005. Now, they are back to practical levels.

For sellers, who purchased their homes by leveraging, they may have to take a loss or wait out the current market for better times. All sellers face a lot of competition from other homeowners wishing to sell. Some creative staging of their property (inside and out), as well as adding incentives to buyers, can make their residential real estate for sale stand out among the rest. Some Realtors have found success placing the asking price right on the “for sale” sign. Others have taken advertising and marketing into the 21st century by creating specific web sites with a gallery of interior and exterior photos of the home1 . Many Realtors believe in promoting the home for sale through the media by giving the asking price (especially when it is a great deal) — buyers are more apt to be interested, when they know they can afford it. Sellers were in the lead negotiating seat during the real estate boom. They must accept that, though they still have negotiation power, they have relinquished the lead seat to the buyers. This makes a realtor invaluable to both sellers and buyers, alike.

For the buyers, you will get much better real estate deals now. You can take more time to decide and make an offer than during the boom. Secure your financing first, hire a realtor and enjoy the hunt.

1 Ensure no valuables are in the photos. You wish to attract potential buyers — not thieves.

For more information on San Diego real estate visit www.twtrealestate.com

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