Foreclosures to Eclipse 2 Million This Year

In case you missed the news the other day, Nobel Prize-winning economist Joseph Stiglitz dropped another bombshell on the nation’s real estate industry. He expects an additional 2 million foreclosures to hit the U.S. this year – adding to the whopping 7 million that have occurred since the economic crisis of 2008.

            “U.S Foreclosures are continuing apace,” Stiglitz told a packed news conference near Port Louis, the capital of Mauritius. “A quarter of U.S. homes are underwater.”

            Why the gloomy forecast? Because the number of U.S. homes worth less than their outstanding mortgage jumped in the fourth quarter as prices dipped and lenders seized fewer properties from delinquent borrowers.

            Currently 15.7 million homeowners had negative equity, also known as being underwater, at the end of 2010, according to Seattle-based Zillow Inc. That’s a 13 percent increase over the 13.9 million in the previous three months.

            That total represented 27 percent of the mortgaged single-family homes, the highest in Zillow data dating back to the first quarter of 2009.

            The news on the local front appears just as bleak.  The Orlando Sentinel reported in its February 12th edition that the number of foreclosed homes on, or about to hit Metro Orlando’s resale market has more than doubled in the past year – forcing down the prices of other houses that have already lost more than half of their value since before the recession.

            The four-county metro area of Orange, Seminole, Osceola and Lake counties had 13,712 bank-owned properties in January – up from 5,874 a year earlier, according to figures from California-based RealtyTrac. This has contributed to a record statewide glut of foreclosed properties that now stands at 104,759 and counting.

            “Americans today are worse off than they were 10 to 12 years ago,” Stiglitz said, adding that the U.S. faces “increasing inequality,” with the “upper 1 percent controlling 40 percent of wealth. Instead of trickling down, it has trickled up.”

            There are, however, some significant positives that have come to light.

First, foreclosures did slow down in the fourth quarter. Lenders, including Bank of America Corp. and Ally Financial Inc., halted many home seizures after accusations they used improper documentation and processes. Attorney generals in all 50 states are investigating.

But, more importantly, the wave of foreclosures, especially here in Central Florida, has created a tidal wave of opportunities for both homebuyers and investors alike.

Prospective buyers who previously were priced out of the housing market are using this opportunity and taking advantage of lower property values to purchase their first home and begin a new chapter toward their futures. Lower property values also have been a boon to investors who are adding to their real estate portfolios.

Take Larry and Janelda Minor, for example. They purchased a vacant eight-unit apartment complex in Kissimmee valued at $350K for just $200K. Within a few months all eight units were fully rented – a property lemon was turned into lemonade.

“Our experience with Rajia Ackley with Coldwell Banker Ackley Realty while purchasing the property was very positive,” the Minors said. “Our questions and concerns were answered quickly and completely throughout the entire process. We appreciate her guidance in helping us secure this commercial property during these trying times.”

Despite the gloomy real estate predictions of Joseph Stiglitz, et al, there’s still some happiness to be found. Just ask the Minors.

            We’ll keep you updated.

Fewer Workers, Higher Commercial Vacancies

The demand and supply cycle of commercial real estate properties is not dependent on the national GDP, but it is directly proportional to the U.S. job market. “Absorption” is the key word in commercial real estate. Companies hire and fire based on corporate profits. In a free-market capitalistic system more workers are hired during good economic times, which means more office space is required (and absorbed). Conversely, employers issue pink slips when profits decline which creates a greater supply of commercial space.

In recent times, the commercial real estate industry peaked in 2007, which corresponded with the peak of corporate profits in 2006. At its lowest point in mid-2009, commercial property prices slid an average of 51% from their 2007 peak. In the last three months of 2010 this segment caught everyone off-guard by making a surprising and unexpected come back. In some areas, prices have rebound 33% and are off by about 18% from the peak.

Although prices are up in some markets, rents are sluggish and lag the rate of price increase in most U.S. commercial real estate markets. Experts are concerned about this lethal combination of low rents and high prices because of the threat of rising interest rates. It is unlikely that the interest will fall further. This means unless the rents catch up with rising prices, any small increase in the interest rate would take the air away from this short commercial rally.

The sudden rise in prices and the demand for commercial space is attributed to the massive spending and expansion of the federal government. This perhaps explains why commercial real estate prices have skyrocketed in metro areas such as Washington, D.C. and Manhattan, which are the biggest beneficiaries of the federal largesse. In most other areas of the country, prices continue to be sluggish and supply remains high, which reflects the levels of employment or lack thereof in the region.

While “jobless economic recovery” has become an overused buzz word at water cooler conversations and in the blogosphere, commercial property owners are fully aware that sustained job creation is the only way to decrease vacancies and increase absorption, rents and property values. However, economic data provided by various agencies continue to paint a bleak picture about job growth, at least in the short term.