US Real Estate Market Outlook for 2009

United States Real Estate Prospects for 2009

Overview

Despite all the bad press in 2008, the United States real estate market is expected to be a mixed bag in 2009, with new bubbles bursting for the first time, old bubbles continuing to burst, an increase in foreclosures, and a few pockets of actual growth. With crisis comes opportunity, and the U.S. housing crisis is still creating plenty of opportunities for international investors who know what their way around the market to snap up some great buys.

As usual the key variable is location. (Location, location, location!) Some parts of the United States are likely to remain depressed for years to come, so a long range plan is definitely in order for investors looking for a healthy return from investing in those areas. This applies to both personal and commercial U.S. properties, and will likely remain true for the next five years if not longer. Careful research and planning are in order for anyone planning to cash in on the U.S. housing crisis.

Personal real estate markets in the U.S. are heavily dependent on local conditions and will continue to vary wildly in the coming years, with New York City real estate continuing to appreciate (although much more slowly than in previous years), and real estate in other parts of the country (for instance, the industrial Midwest, California, and Florida) becoming distressed to the point of being almost worthless.

Best U.S. Housing Markets For 2009

Although most U.S. real estate will continue to depreciate in 2009 before stabilizing at some unknown future date, a few areas are expected to increase in value by as much as 1.8% to 3.6%. Housingpredictor.com recently released their annual list of best and worst U.S housing markets, with seventeen of the top 25 markets showing a likelihood of actual appreciation throughout 2009.

Topping the list of areas showing positive growth are Montana (with the cities of Billings, Bozeman, Great Falls, Livingston, and Missoula all making it into the appreciating top 17) and North Dakota (with Fargo, Minot, Bismarck, and Grand Forks on the list of positive growth ND cities). Both Montana and North Dakota are sparsely populated uncomfortably cold places that are currently experiencing major job growth in the energy sector because of rich coal and oil deposits.

North Dakota is experiencing such a severe shortage of viable employees (it seems few Americans want to live in North Dakota no matter how many jobs are up there), that the state has been forced to aggressively court unemployed workers in other states by offering incentives to accept employment and move there. Winter temperatures of 20 below zero with stiff winds and four to five feet of snow at a pop are common in these areas, but the area takes in a fair amount of money from tourism during better weather, and is an especially popular destination for hunters and fisherman. More information on tourism and other unique aspects of  the state is available at www.ndtourism.com.

Bloomington Illinois took the number one spot on the housingpredictor.com U.S. housing market list, a surprise winner given its location on a U.S. map. Bloomington can be found on the southwestern edge of the withering rust belt section of the formerly industrial midwest, however, the corporate offices of property and casualty insurance giant State Farm are located there, as are the claims departments of numerous other major multinational insurance companies. Also home to Illinois State University and all of its home offices, Bloomington real estate is expected to see a 3.6% appreciation in the coming year—pretty good considering the sorry state of much of the rest of the country. Homes there are selling more slowly than they did in the bubble days, but growth is still brisk.

Worst U.S. Housing Markets for 2009

California, Michigan, and Florida top the list of states where investing in real estate might not be a great idea this year. On the up side, some very, very low prices can be found. Detroit, which tops the list as the number one worst housing market in the United States in the coming year (no surprises there), is witnessing a mass exodus out of the city that worsens week by week.

Stately homes in formerly prestigious Detroit suburbs like Grosse Pointe and West Bloomfield Township have been vacated by redundant auto executives and are now unwanted at any price, their former hones languishing on a glutted market on the edge of a fallen empire that gets smaller with every passing day. Yes, homes can be had at a fraction of their actual value here, but the long term outlook for Detroit is so uncertain (and trending ever downward) that it could be decades before a foreign investor might see a turnaround.

Real estate across the rest of Michigan (and the surrounding states of Indiana, northern Illinois, and Ohio) suffers according to how dependent the closest metropolitan areas were on the now-failing auto industry. Most of this part of the country is severely depressed economically with even resort areas on Lake Michigan and Lake Superior see a loss in value due to the general economic downturn. Again, investors with a longer view have the potential off significant earnings should the area come back.

The central valley of California and the city of Miami Florida and its surrounding suburbs and satellites saw some of the worst excesses of overdevelopment and real estate speculation during the sub-prime boom years, and these areas now continue to see dizzying depreciation, with total deflation expected to hit as much as 70% before the housing crisis is finished.

Even in discouraging markets such as CA and FL however, opportunities do exist in niche segments, but these opportunities are difficult for foreign investors to exploit due to the extremely risky nature of investment right now. For instance, in the state of Florida, in many areas where real estate prices are artificially low and banks are eager to unload the homes and commercial properties on their books, property insurance cannot be obtained at any price and serious tax liens exist that must be cleared before a sale can occur. Plan to spend months negotiating short sales and the legal problems of attachment in these parts of the country. If you do find a deal, expect to be immediately faced with other major expenses for repair and rehabilitation once the sale is closed.

New U.S. Real Estate Bubbles for 2009

Two waves of new foreclosures are expected to hit the United States in 2009. The first will occur when a wave of interest-only nonconforming loans reset to include principle and (even higher) interest rates in early February. Most of these loans were sub-prime and alt-A mortgage vehicles offered to buyers who wanted to get into the housing market in the red hot areas of California and Florida and could only do so by taking advantage of a ‘creative’ loan.

These creative interest-only loans were underwritten on the premise that the home would appreciate at the same rate for the first five years, making it possible for the buyer to cash out and refinance before any principal actually had to be paid. Yes, that was crazy. But lots of buyers jumped at the chance to get in, and most of them will lose their (now severely depreciated) homes. Some already can no longer afford even the interest –only payments. Expect really good short sale terms when these foreclosures come on the market. When considering a short sale, banks generally look for 75% of the amount owed on a property, but things are so bad in the areas where these homes are located, you can safely just make an offer, any offer, and still have a chance.

Another big wave of defaults expected to occur in the coming year is in commercial real estate. The U.S. commercial real estate market is suffering badly in 2009 due to the credit crunch and the general downturn in the U.S. economy. By late February approximately 20% of the retailers located in U.S. malls are expected to vacate, with many big name big box stores, restaurants, small manufacturers, auto dealerships, boat dealerships, RV dealerships, and builders also expected to go belly up in the early part of the year, leaving prime commercial lots in major U.S. metropolitan areas open for tear-down and redevelopment by foreign investors.

Even in commercial real estate, however, there is reason for foreign investors to proceed with caution. In an article published in Harper’s in February of 2008, venture capitalist Eric Janszen speculated that the next big Wall Street bubble will most likely come from the alternative energy sector, one of the few (if small) American industries left with enough strength and promise to make hyperinflation possible. Keeping an eye on these industries and on where within the U.S. they choose to expand might be one good way to make decisions about which commercial properties are likely to appreciate and which will take years of patient waiting (and expenditure) to show a return.

How to Find and Buy U.S. Real Estate

Many easy to navigate websites will allow potential investors to search for properties and find realtors across the United States. One of the most extensive is www.realtor.com, but full Multiple Listing searches can also be done at the websites of separate real estate firms, such as www.century21.com, or through popular search engines such as Yahoo atwww.realestate.yahoo.com. Zillow maintains a website that provides lots of good general information about U.S. real estate and also has an MLS search feature. Finally, you can shop for commercial real estate, government surplus land, government foreclosures, and lots more at the federal website www.usa.gov/shopping/realestate.

To purchase real estate in the United States you will need to work with either a real estate agent or a real estate broker who is licensed in the state in which the property is located or an attorney. Considering the number of U.S. properties that are currently in foreclosure and the legal baggage that can be attached to foreclosure sales (fights over tax liens, clear title, insurance problems, etc.) it is probably a good idea for foreign investors to work with both groups of professionals: both an attorney and licensed real estate personnel.

Expect foreclosure sales to take up to six months or more to close (as opposed to about 30 days for other properties with no issues attached), and expect the property to be in substandard condition when you take possession. Even if a foreclosed property is in decent shape during a showing, it is not unusual for former owners or tenants to come back and vandalize it, and banks are notoriously reluctant to negotiate anything except price—In other words, the bank holding the property is not likely to make any repairs or upgrades for you. You will have to accept the property as is.

Make sure all documents are reviewed carefully by your attorney before signing, and do not rely on whatever financing arm you are using to protect you from complications or undesirable mortgage terms.

Summary

The United States is still, in many ways, the land of opportunity, even in this depressed and somewhat scary market. 2009 will bring enormous bargains for the savvy foreign investor, but as in all things concerning real estate in general, great care and careful research will be required to come out with the best deal and the fewest headaches.

Investors looking to buy and hold rental properties would be well-advised to fully understand the economic prospects of the city in which a property is located. For example, homes can be purchased in certain Detroit neighborhoods for four figures—some the U.S. will even sell at auction for as little as a dollar—but renting these properties quickly turns into a nightmare, especially for anyone living out of the U.S., because of the level of crime, vandalism, and poverty. Renters are scarce, problems are many, insurance rates are off the chart (for example, insuring an older auto to be garaged within the city of Detroit can run over $4,000 a year, and that’s for a person with good driving record), and liability issues are a nightmare. For this reason, price alone is not a good guide to determining what might be a real estate bargain and what might not.

A more measured approach for the foreign investor may be to watch for areas in the U.S. likely to experience gradual economic recovery first. This requires some research and more than a little luck, but for the investor willing to put in the time, the payoff potential is still huge.