Tuesday, June 5, 2007

How Bad Could Bad Get?

Irvine Housing Blog -- Home ownership rates will decline as homeowners lose their homes in foreclosure. With foreclosure comes bad credit; those with bad credit just got eliminated from the buyer pool. Therefore, people who lose their house to
foreclosure will move into a
rental, and the previously owner-occupied home will likely enter the rental pool. (A popular misconception is that rents will go up. The number of rentals will increase along with the number of renters.)

There will be some new buyers (like many on this board) who have cash and good credit; however, this group is small in number, far smaller than the number of foreclosures about to hit the market (if you don’t believe me, ask yourself how many potential buyers you know with cash and good credit.) This means a significant number, perhaps a majority, of the houses due to hit the market due to foreclosure will be purchased as
rentals.


If the bulk of the houses going through foreclosure are going to be purchased as rentals, prices will have to decline to the point where a rental generates a positive cashflow. Prices are double that today! Home prices will have to decline at least 50% for properties to make financial sense as rentals, so if this is the fate of the bulk of the upcoming foreclosure inventory, prices
will decline at least 50% before buyers will enter the market and adsorb this inventory.






This was an excerpt from an article by IrvineRenter. Thanks I.V., this pencils out nicely.



As a former owner of income properties myself, I would have to agree with these numbers. A key factor is the bottom end of the buyer pyramid is now gone, sub-prime bowers have been iced out and builders have been busy putting up way too much capacity. That capacity won’t go away, but the buyers will. What’s left for those properties? A painful decent into rentalhood.

Vern

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