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Outlook for the 2012 Real Estate Market

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Trends & Current Events

I just read an article that discussed some of the macro-level trends that are currently negatively impacting the level of demand within the real estate market. Based on the tone of the article, it seems pretty bleak, that’s for sure. Hopefully you aren’t planning on selling any rental property in 2012! What follows is a summary of the trends highlighted within the article.

One of the most impactful trends, according to the article, is tightening lending standards. Generally speaking, ever since the housing bubble burst, banks have pushed for larger down payment requirements and have raised their own credit score criteria for granting loans. This makes it more difficult for people to get mortgage financing, which in turn has put a damper on overall demand.

Banks are now requiring larger down payments and higher credit scores because they believe this will help reduce the propensity of home owners to default. People with better credit scores can be expected to default less frequently, and the larger down payment will minimize abandonment because, simply put, they will have more skin in the game. Plus, raising the down payment amount will result in lower monthly mortgage payments, which should also help to reduce the risk of default.

Although the increased difficulty of getting a mortgage is probably the key driver of weak housing demand, there are a couple other macro-economic trends that are creating stagnation within the market as well. One obvious trend is the horrible job market. So many people are unemployed or underemployed that a large number of potentially willing home buyers are unable to meet the financial requirements needed to do so. Similarly, the cost of living is very high at the moment; between rising food, utility, and gas prices, there is less money available for the down payment obligation on a new home. Finally, there is a push to eliminate the mortgage interest deduction, which would result in smaller tax refunds and an inability to buy a property as a tax shelter.

As you can see, the short term outlook for the real estate market is not good. Tightening lending standards, high unemployment rates, high cost of living rates, and a reduction in the tax advantages of home ownership are conspiring to crush demand for the next 1-2 years. But don’t worry, the housing market is cyclical and will definitely come back in a few years. So if you can hold your property portfolio and be a landlord for the next several years until the market turns around, you’ll be just fine.

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