Understanding the fundamentals of the Economic Downturn and the Opportunities it Presents

Real Estate Broker/Owner with Deborah Ball Realty, LLC

Abnormal activity in markets usually signals impending correction or collapse. Take for instance the current financial crisis facing the United States and most of the world economies which started with the abnormalities in the housing markets. When a product or commodity is adjusted beyond what reasonable supply and demand dictates to abnormally high profits in short periods of time - it is a sure sign that something is amiss.  

A good example of this is the flipping of houses in short periods of time in recent years for abnormally high profits. When average GDP is at 4%, how does it make sense that you can buy a house for $500,000.00, hold it a year, and sell it for $600,000.00 (a 17% profit)? Such opportunities usually do not last for very long, as whatever is causing the abnormal profits usually runs it course and corrects itself.

Unlike other so called "bubbles" such as the Internet Bubble where entrepreneurs solicited investment money to gamble on their untested ideas in a new industry, thus simply redistributing money from one person's hands to another, the housing market collapse has farther reaching implications for the economy as a whole.

Most banks and creditors have historically regarded real estate as essentially the same thing as cash for valuation purposes. Financial institutions have relied on loans against real estate for income from interest charged and to bolster the net worth of their holdings.

The loans that were made to people that didn't have the means to pay them, essentially when the market collapsed made this "real property", that was the equivalent to cash, devalue. There is so much of this junk loan activity that when it collapsed it caused many major financial institutions and even giant insurance companies that never thought they would have to come through on their backing of these loans if they defaulted, to collapse, be subsidized or be purchased by the government.

What is the essential thing to realize is that much of the economic progress we have made over the last 5 or so years was based on false financial information originating from the individual borrower and lender and passed on throughout the financial markets by inflated profit, loss, and asset reports that everyone, financial institutions to the government, relied upon.  

The good news is that the correction has swung too far to the negative. When you see houses being sold for $1.00 in Michigan, and homes selling for lower than what the materials and labor in them would cost to rebuild, then there are great values to be had. Regardless of market conditions all things have an inherent value.

Taking advantage of that fact is the problem. The correction in the financial markets has tightened credit so much that unless you have cash reserves you may not have the ability to take advantage of the situation. Credit is so tight that even the auto companies have had trouble approving credit worthy people for car loans. With the stock market teetering on collapse at the all too critical 7500 point level (and as of 11-20-2008 it was only 56 points above that critical level) most people cannot rely on the market for other types of funding. The good news is that the markets will correct themselves, and eventually the financial markets will be healthier and stronger as a result. The question is will they learn from their past mistakes and hold the line on the greed that pushed these companies to fail in the first place? If history is any indicator, the memory of this will fade and the cycle will once again repeat itself.  

What does this mean for you today? As a buyer it means it's harder to get the credit you need to purchase a house, but you can buy much more house for the money and you have a much larger selection of homes to choose from. As a seller if you have owned your house for some time, it may not mean much more than it will take longer to sell your home. If you bought your home at the height of the housing market boom when it may have been grossly overvalued, you may have to take a substantial loss to move your house, and you may actually find yourself with a house that you are - to take a term from automobile sales - upside down on. You owe more than the home is worth making it more difficult to get out from under the difference in your loan’s payoff amount and what the home is worth in the current market.  

Now more than ever you need savvy real estate agents, brokers, and companies to help you when you are going to buy or sell a house in these turbulent and correcting markets.  

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