Recession And Bleading

When recession comes jobs disappear. When jobs disappear people cannot pay their mortgages then real estate prices go down. Now people cannot borrow against their homes as home values have gone down. Some of the big towns which were dependent on some industry like auto and when auto plants shut down and thousands of people lost their jobs it was like a bleeding in the communities.

In the regions where we see high unemployment and their are no early future signs of new job creations real estate prices will fall dramatically and will stay like that for ever till the time new good permanent jobs are created. When there is a national recession prices will go down every where. Some regions where there was too much growth and prices had increased too much will get affected worst. Areas where lot of jobs got lost because of recession will also see a deeper effect of loosing home values and foreclosures. If banks are liberal in lending and interest rates stay lower then real estate stays stable or goes up. On the other hand when banks stop lending and interest rates go higher then prices go down. To me, it was the greed of financial institutions, home builders, real estate and mortgage brokers and individuals who had no idea of how real estate and financing works. Individuals became greedy because they could buy a home without putting any down payments. Some of their homes were sold with lesser interest rates, which meant no interest payments now, pay it later after a year or two. The government made money very cheap and easy to borrow. Not only that people were allowed to buy without any down payments, but people were further lent money against their homes and against their home equity lines of credit. People had a great time. All the home furnishing and home improvement stores and basically all the businesses flourished because people were able to borrow money against their houses.

Then in 2006, the government started to get worried. The government before was sleeping. Mr. Greenspan had retired after 9/11 when the economy was getting into recession. He kept on bringing interest rates down so that the economy can take a turnaround. Housing books started. Builders whose profit markups were only 5% to 10% were now marking 20% to 40%. They could sell those homes because people could buy them without putting any down payments. Mortgage frauds and easy borrowing helped people to live for free. It did not even help them in living free but some people borrowed money against their home equity lines and from SUB-PRIME lenders and spent that money to have fun and buy lavish things for their homes.

I, as a small investor who had been investing in the real estate for the last 30 years, had already seen interest rates go up to 18% plus mild recessions when everything after a boom looks worthless. I was scared how the government had no policy and could not let the people borrow and banks and other institutions lend money on housing.

One time I had a friend of mine that was in the year 2004 who was trying to sell a house to another friend of mine at an inflated price plus was trying to convince him that his house will appreciate in value in the immediate future and he was making it sound very easy. I told him 3 years before that the bubble in housing prices in Orlando and Miami will burst. Prices in both cities which I understand had a double digit growth for the last many years and builders were building lots of houses and condos as if they were baking the bread which will be sold within the same day or next day.

People before buying should also very seriously look into their payment plans, how they are going to pay their interest and capitals, which they have borrowed if interest rates go up which on average stay at 6% to 8%. If you look into the history of the last 30 to 40 years, this is an average cost of borrowing for an average person with no credit and savings.

My logic was simple when I predicted that this real estate bubble will burst. It was based on the fact that people are buying houses with zero or very little interest rates and if interest rates go up, which they will eventually, how are they going to pay mortgage payments on their houses?

A lot of speculators from around the world were also allowed to buy their houses for speculation purposes. They thought prices had gone up in New York and Los Angeles and some other cosmopolitan cities. Europeans who could not afford to buy any properties in Europe because they could not borrow money as easily as here decided to take advantage of our cheap dollar. Before, you needed EU1.30 to buy a dollar. Now it has reversed. You need only EU0.65 to buy a dollar. For Europeans, our properties in Florida and many other parts of USA was a steal.

Foreigners who had bought most of their properties for speculation purposes did good for a few years and were selling, taking their profits, and holding them with the hope that their properties will keep on going up and up. Now, these foreigners, when they found out that that their properties in the last 3 years had gone down in value, had to put their properties on sale. A lot of people in Miami and Orlando who had 10% to 30% down payment when the developers were building high-rise condos decided to lose that money and did not take possession of homes and condos when they were ready to occupy. At least 50% of the Miami downtown condos are in trouble and have no one living in them.

When people have not saved money and try to speculate, then they lose. Real estate will come back in value and will again go up, but you have to have money to hold it if you bought it for speculation purposes. But if you bought it for speculation purposes, then if you borrowed 80% of the money to buy it, then your mortgage payment to the bank is basically your savings, as if you were paying rent to yourself.

A lot of people from the year 2002 to 2005 bought homes. This is the biggest fraud that ever happened in the mortgage industry. A lot of people had no idea about real estate, financing or savings, and they lost every penny they had. People lost their families when they lost their homes, and were thrown out on the street and were burdened with debt.

Regional ups and downs:

Prices of houses go up or down in the different regions of the country at different times. In the recession of 2007 states like Florida, California, Nevada got hit first and most. North and some other states did not get hit so badly. Lot of these regions where prices went down they had over built compared to what they could really afford. When sub prime loans came into effect and interest rates started going up then the bubble bursted and people could not afford homes. When people loose jobs and interest rates go up then Housing Affordability index of these regions was very low. People could not support payment of house mortgages with the income levels they had so prices crashed as there was overbuilt supply and no demand. Areas like Miami where so many condominiums were overbuilt because of speculation and people don’t have the income levels to support interest payments as well as high condominium fees so prices just crashed and so much inventory of condos was available in2008 and 2009.

Now, let us look at the bright side of it. If you are a buyer and living in Miami and you can afford one or more condos, now is the right time to steal it. You can buy it at 30% to 70% below the 2005 prices. Make a really low offer on these properties to the bank and see who takes it. Lot of banks and developers are unloading those properties. Always wait a little further and keep on talking to some real estate brokers too feel up the market trend. If you feel it is still going down and you cannot steal a property, then do not buy it. Once prices become stable and supply starts going down that is the time to steal some nice property. But buy it before it gets too late and prices go back to their original evaluations.
Florida real estate has been hit hard in the recession of 2007, but Florida has some of the most prime real estate in the country. Florida has twelve month round beaches and golf courses to enjoy and real estate is very affordable compared to West and up North real estate.

Michigan after failure of auto industry has real estate at basement bargain prices. Investors who have a foresight and resources are now investing and will make their fortunes once the dust settles over.

By Ashok of http://becomerichinfiveyears.blogspot.com

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