How Rising Unemployment Affects Property Values
Property values are falling. If you read my blog regularly you know that I see this as an opportunity for investors and I encourage them to make a move now before they miss out on a golden opportunity. For those of you familiar with my views this article may come as a surprise because I am going to encourage caution, not too much, but enough to recognize a potential pitfall and plan accordingly. I am talking of course about unemployment and how it affects property values.
As a real investor myself, I see two things happening right now:
- Foreclosures are on the rise
- Buyers are lining up to buy these foreclosed properties
I also know the following from doing a little bit of research:
- Between January 2008 and February 2009 the state of California lost 637,400 jobs
- The national unemployment rate is currently 8.5%
- The national commercial office vacancy rate is 15.2%
- 43% of all jobs created since 2001 are connected to the building and housing industries
How is it possible that statement number two in my first list can be accurate while all of the statistics in my second list are true also? The answer is government intervention. The Obama administration put a moratorium on foreclosures from Freddie Mac and Fannie Mae and they are keeping interest rates artificially low to give everyone a chance at the “American Dream” of owning their own home. The only problem is that with rising unemployment homeowners will still not be able to pay their mortgages and the foreclosure rates will go up even further.
Unemployment in the state of California in the month of March was a staggering 10.1%, and that wasn’t even the highest in the country. That distinction belongs to the state of Michigan, coming in with a mind-boggling 11.6% unemployment rate. The top four is rounded out by South Carolina at 10.4% and Rhode Island at 10.3%. Puerto Rico, an American territory, has a 13% unemployment rate. In the month of February alone the United States lost almost 700,000 jobs. Those numbers are leaving thousands of homeowners without the financial means to pay their mortgages. As the trend continues, and it appears that it will for a while, properties go into foreclosure or are abandoned and property values go down even further.
All of this makes it currently a great time to buy real estate because of extremely low prices, tax credits and record low interest rates but erosion of jobs and rising unemployment rates will make those property values continue to plummet. The good news is that it will turn around, but it will most likely take a lot longer than any of us imagined. Vice President Joe Biden recently told Americans while being interviewed on Sixty Minutes to not expect economic recovery until 2011.
From 2001 up until the crash in 2008 there was a building boom in the United States unlike any we have seen since immediately after World War II. The result of it was the creation of thousands of jobs in the construction and real estate industries that are now becoming statistics not unlike the positions being lost in the auto industry. A good portion of the jobs lost in California are the result of the building boom coming to a crashing halt. Much of the commercial office vacancy rate can be attributed to this also.
The Obama administration has taken some steps to create new jobs and stem the tide of foreclosures but it is too little too late for many homeowners. Even with the moratorium on foreclosures by lenders like Fannie Mae and Freddie Mac debt to credit ratios and the inability by unemployed property owners to pay their mortgages will lead to more foreclosures and lower property values before we start to see any type of economic revival. When the moratoriums are lifted there will be a surplus of properties up for sale. The sale prices and the value of these properties will be extremely low, making them prime investments for those who can withstand the lean years ahead.
If you are an investor then my advice to you is the same as always, take action now but proceed cautiously and be patient. There is a lot of real estate coming back and even though things look bleak now, they will eventually turn around. If you are out there buying real estate make sure you have adequate funds-reserves because unemployment can affect you like the rest of Americans.
