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Real Estate Recovery? Assess before you Execute.
This is my site Written by Neil Palmquist on March 7, 2013 – 6:19 am

It sounds like new housing is up, that at least five major real estate markets are showing signs of improving and that the worst is past…  This I find in the media.  However, I also hear that foreclosures are still excessive, that the top 4 banks’ portfolios are disasters, that first-time home buyers are MIA, and that the few mortgage loans that are being granted are only being done so with government guarantees (i.e.  Fannie Mae).  This I hear from my banking colleagues.  With such mixed signals, how to read the market?

Knowing that small business tends to rely on their owned real estate to secure and finance their growth and operations, I am hopeful that these glimmers of revival are exactly that and better times are on the horizon.  However, mortgage activity isn’t corresponding with the activity being touted and that tells me that the vast majority of the activity we are seeing is from investors and developers.  While still good, it does lessen the recovery fundamentals a bit.  So, be wary before you rely on all the RE good news as a foundation to investment and decision-making.  The key relationship to stay wary of is the one between Fed controlled interest rates and our Real Estate and Equities Markets.

The Equities Market recovery has been largely fueled by the Feds holding our interest rates low for so long; giving Big Business access to nearly free cash.  More recently, the market has gained a bump by the fledgling signs of life in the Real Estate Market, which usually means a return of financing options for Small Business (property as loan security), as well as, a growing number of financially healthy buyers. Obviously, the mere fact that the RE market may not be as strong as reported and that the Equities Market is already near record highs shows that it may be due for a correction.  With that in mind, I again suggest that the lynch pin to watch in this relationship is that of the interest rates.

Interest rates represent the cost of money… and they quite simply cannot stay low forever.  When they rise, the cost of money and doing business will rise, hurting both the Equities and Real Estate Markets in the process.  With the Feds pumping money out of the printing presses with reckless abandon, inflation and interest rates going up are a certainty.  Thus the when and how much interest rates will rise is the biggest question that should be on your mind when you ponder the fundamental health of the Real Estate and/or even the Equities Markets.

My opinion?  Our (Federal Reserve Bank) low interest rate and money printing policy has been held too long; resulting in a bubble in both our Treasuries Market and… yet again, in segments of our Real Estate Market.  Let’s hope I’m wrong.

Play it safe and assess for yourselves before making any costly strategic decisions in the near term.  A correction is due, but whether it will be a 10, 20, 50, or even a 90% correction is unknown and the timing of it is difficult to speculate.  Again, assess and play it safe.  At the very least, it should help you weigh any near term risks, plan with a buffer, and time your execution more appropriately.

…and if your own assessment leads you to some new found revelations, please share.

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