STORM CLOUDS ON THE HORIZON:  REAL ESTATE MARKET CLEARLY A HARBINGER FOR UPCOMING RECESSION

While I would be the last person to want to be called “Chicken Little,” it is still important that I continue to serve as a messenger for the disparate factual analysis that indicates that the real estate market is clearly slowing and that may well be a harbinger for the entire economy.  In fact, just yesterday, the Federal Reserve announced that they will not be raising interest rates (and likely not be raising interest rates for the duration of the year) because they, too, are perceiving a precipitous decline in economic activity and today as I edit this blog, Wall Street too is now predicting a recession based on the bond and stock market.

We see numerous factors that would suggest that the real estate market will be in decline and that foreclosures will once again be on the rise, unfortunately. These factors include:

1. Bankruptcy rates have started to increase in Delaware, and my bankruptcy colleagues are indicating that they are very busy with, typically, large entities going into bankruptcy first. Many of these entities are in the construction business, which will affect an entire slew of smaller companies and individuals. Lots of subcontractors will not get paid, and many of these subcontractors will have difficulty with continuing to pay their employees. Many of these employees will obviously rely on their salaries and continued income to be able to pay for their mortgages. In addition, with interest rates having an increase over the past year, that has created a serious problem for individuals being able to obtain mortgages. The good news is, however, that with the Federal Reserve announcement, we anticipate that interest rates will either stabilize or start to creep downward in the months to come.

2. With China restricting cash from leaving its county with huge restrictions, many individuals are no longer capable of buying investment properties in the United States and particularly in Florida. The same holds true for the folks in Central and South America where many of those economies are doing rather poorly and individuals there are no longer able to purchase real estate. In fact, many of those individuals will have difficulty fulfilling their commitments for condominiums that they have purchased over the past 3 years because they may well not be able finance their closing obligations.

3. The tax law, on the other hand, has provided both a good and bad situation for the real estate market in some regions. Northeasterners are coming down to Florida because it is a more tax‑favorable environment because local state income taxes are no longer deductible from tax returns. At the same time, with only $10,000.00 being allowed to be deductible from real estates taxes, individuals, who were accustomed to deducting more than $10,000.00 from their real property taxes, may think twice about purchasing real estate.

4. Finally, of course, the gorilla that is in the room is salaries and incomes. For real estate volume and values to continue to increase and to be affordable, people must be able to have wages that support the cost of maintaining such homes. Unfortunately, in Florida, this wage issue is at issue, causing  dysfunction in the real estate marketplace. The likelihood is that real estate prices will have to come down rather than incomes going up since there are not enough industries to support major increases in wages in the State of Florida.

The final question… is how will this affect foreclosures? And the answer is simple. If people cannot afford to pay their mortgages or if they perceive that their home values are once again underwater, the likelihood is that people will once again walk away from their homes and foreclosures will increase. Most people believe that this time around the foreclosure situation should not be as severe, but it is anyone’s guess how bad and how long this next downturn will be.

The only silver lining might be that as long term interest rates drop so will the mortgage rates and folks may find it an appropriate time to refinance their home mortgage. So hold on to your hats, we are in for quite a ride!

From the trenches,

Roy Oppenheim