3rd October 2008 - By Aaron Gadberry
We are approaching a time of change in the United States. The $700 billion dollar bailout passed this morning and is being signed by Bush at the time of writing. For the past few days I have been considering what position this whole situation will leave me in. I’ve been trying to determine the best course of action for myself and my family, and I think I’ve found it.
First let me explain what I expect to occur and why. Predatory lending, naivety and irresponsibility on the part of the home buyer have led us to our current situation. Many people who should not have received mortgages did. Being already squeezed by their mortgage, rising oil and food prices left no way to make ends meet. In combination, a bubble on housing prices burst, leaving many actual responsible homeowners upside-down in debt, with seemingly no hope to recover.
The current result is an overreaction in the other direction. Lenders have all but stopped giving out mortgages. While requirements and qualifications will eventually become reasonable again, it will take time for an average American to be able to get a mortgage. Most importantly, no one will ever give out another sub-prime mortgage. This will reduce demand on housing drastically. With reduced demand comes reduced value. With an estimated 50-65% reduced housing demand I expect to see a 20-40% overall reduced home value. This is on top of any bubble burst experience some have already had.
At the same time there will be an inverse increased demand for rental property. Currently rent prices are just below mortgages, but that relationship will reverse. I expect to see rent prices stabilize around 150% of a standard mortgage payment.
These increased rental revenues will prop up home values, and perhaps even return them to their original position. Investors will pick up massive amounts of real estate for the sole purpose of collecting rent. I expect to see large firms build entire neighborhoods with the intention of renting out 95% of the property.
We will see a massive reduction in the percentage of home owners in the United States. Instead of paying a mortgage and trying to make ends meet while building equity, we will instead see people simply unable to afford rent. This forms a cycle of debt, leaving no way to work up the 20-40% cash soon required to put down on a house. Anyone who doesn’t already have a mortgage is in for a world of hurt.
Somebody wins here, and it can be you. Be ready to buy property when the price drops. Do your best to become a landlord. The more private landlords out there the smaller the impact will be.