Investors have clearly felt the pinch of a capital crunch and slumping U.S. economy. In fact, 60% of real estate investors cite availability of financing as their top concern in 2009 – according to a recent study conducted by Marcus & Millichap and National Real Estate Investor.
The cost and availability of capital remain top concerns for investors as illiquidity in capital markets continues to drag down investment real estate sales. Most respondents are not optimistic that access to capital will improve anytime soon. Nearly 40% of respondents expect debt financing to be more difficult to obtain a year from now, while 37% expect financing to be about the same, and 23% expect it to be easier to obtain.
Refinancing could pose some added challenges to an already cash-strapped market.
Nearly 40% of respondents say they need to refinance at least a portion of their portfolio in the coming year. The greatest hurdles to refinancing cited by respondents are underwriting terms (45%), economic factors (44%), and higher cost of capital (36%).
Slow Economic Recovery
Although much of the economic news of late has been bleak, respondents appear split on where the economy is headed. One-third of respondents (33%) believe the economy will be stronger a year from now, 30% predict a weaker economy, and 30% expect things to be about the same.
The decline in the residential housing market has been one of the main culprits behind the economic downturn. Mounting job losses also are a concern. The U.S. unemployment rate hit 6.5% at the end of October—the highest level in 14 years. That number excludes those unemployed for over 12 months, likely pushing the real unemployment rate to over 12%.
The upcoming change in presidential leadership will add another dynamic to the short-term outlook for the real estate market. Some 60% of respondents expect the change to result in increases to capital gains tax rates, while half expect the change to result in increased oversight of financial markets, and 37% anticipate changes in tax laws pertaining to private equity.
The Housing Market
A recovery in the residential market will be the key to restoring consumer confidence and pulling the U.S. economy out of the doldrums. Although home values are still depressed, the housing market is likely near the bottom with respect to new home permits and job losses in residential construction.
A reversal of fortune in the housing market is not likely to occur until mid- or late 2010, but the worst of the slump is probably over, notes Arthur Jones, a senior economist with CBRE Torto Wheaton Research in Boston.
Respondents clearly believe that more than one fix is in order for the market to return to more “normalized” sales activity. Although the majority of respondents (68%) say that financing needs to become more readily available in order for normalcy to return, another 48% also say that sellers need to discount properties more, and 36% say buyers need to realize that prices are adjusting, but are unlikely to crash.
More than half of respondents (52%) expect the housing market to stabilize in one to two years, while an additional 21% predict that it will take longer than two years to stabilize.
What is clear today is that in order for investment activity to rebound, debt markets need to open back up, and there needs to be a further adjustment in overall sale prices.
Your 2009 Investment Strategy
You will find some of your best real estate buying opportunities over the next 12 months.
U.S. house prices in November were down 18.0% annualized compared to a year ago according to the Case-Shiller 20-city home price index. Prices are expected to continue dropping in many markets although the rate will likely flatten out. As part of that decline, home owners, banks, builders and developers will continue to lower prices in an effort to sell their properties and reduce inventory.
Interest rates continue to float near historic lows. This is a great opportunity to take advantage of these low rates. The key will be good personal credit as credit markets remain tight and are expected to stay that way into the new year. However, don’t let poor credit stop you if you are able to partner with other like-minded real estate investors. 50% of a good deal is always better than 100% of no deal.
Work with a trusted agent or real estate investment firm to help you find well researched investment property in growth markets. Your primary investment strategy in 2009 should be the acquisition of cash flow investment property with a holding period of three years or more.
Run your numbers to ensure you have a solid investment providing you a positive cash flow and strong appreciation potential. Once you’ve satisfied your investment criteria, move forward and make your offer.