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Foreclosures Rentals Drive Rents Down

Aug 31, 2008
The U.S. housing market is in a world of hurt. Bank owned homes (REOs) exploded to three-quarter of a million in the month of July, 2008.

For real estate investors, watching the number of foreclosures grow generates emotions much like those experienced while attending a slasher movie. The number of homes taken through bank foreclosures is up 184% from a year ago. Yes, a higher proportion of properties that enter the foreclosure process are ending up repossessed by lenders.

If anyone tries to tell you that the worst of the housing crisis is over point out that default notices are up 53% and notices of foreclosure auctions is up 11%.

Lenders now own over 750,000 homes and the number is climbing. They don't want those homes, they want to sell them. What happens when there is a surplus of anything? Prices go down and that holds true for foreclosed homes. Some lenders are cutting prices as often as every 20 days on their REOs.

The book value of one to four-family homes owned by lenders whose deposits are insured by the Federal Deposit Insurance Corp. more than doubled to $8.56 billion at the end of the first quarter from $3.59 billion a year earlier.

Investor should understand that this ocean of vacant homes is driving down prices in many areas. Banks tend to cut prices faster than other sellers. That undercuts the value of every home in the area. What you buy today may seem like a bargain, but remember lenders will continue dumping tens of thousands of homes for months to come. That will reduce the value of your bargain home.

Those owning homes today are also suffering. Many bought at the peak of the real estate price bubble and have been underwater every since. With falling home values their situation grows worse every day. What little equity they had vanished some time ago. That will result in more owners walking away from there homes and another increase in foreclosures and REOs.

Rents Crash

The bad news continues. With hundreds of thousands of homeowners losing their homes through foreclosure the rental market has been flooded with potential tenants. That should be good for apartment owners, right? That seems logical until you remember the tens of thousands of vacant homes that can't find buyers.

Landlords are desperate to rent their homes to raise cash that can be applied to mortgage payments. With so many homes offered for rent they are asking for almost anything they can get. For apartments rent growth has flattened, vacancies in many areas are at record highs and rent concessions are near record highs.

Renters can lease a home for the same price as a 990 sq ft apartment. That's tough competition for apartment owners.

To make matters worse is the number of condo conversions that have been converting back into rentals. More rental units coming on a distressed markets means continued downward pressure on residential rents.

Oh sure, all of these problems will be overcome with time. If you are a real estate investor there are big profits ahead, but keep a tight hold on your buying power until there is not the slightest doubt that the housing market has hit a real bottom and is starting up the other side.

Keep This In Mind...

In November of 2002 an event was held to honor economist Milton Friedman on his ninetieth birthday.

Then Federal Reserve Governor Ben S. Bernanke (now Fed head) gave a talk. Here are the last lines of that speech...

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again".
About the Author
Mark Walters is a third generation real estate investor and founder of CreatingWealthClub.com. For a limited time Mark is offering his big guide to finding hard money loans for real estate investing free. Free guide to private money loans.  http://www.FindPrivateMoney.info
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