Wednesday, October 29, 2008

Unemployment Will Be The Next Blow To Real Estate

unemployment signEvery day we are hearing about a new round of layoffs from some business, and that trend is unlikely to change anytime soon. Unemployment rose from 4.5 percent in 2006 to 6.1 percent last month, according to Inman News, and it continues to trend up. The financial crisis is forcing businesses to cut expenses and in some cases even merge with competitors in order to survive. Either way, the end result is layoffs and the prospects for new job hunters are grim. Once the money from their severance packages run out, which should be happening soon, these people are going to be in a world of hurt. During a recession the most painful thing is the high unemployment that typically accompanies it. Since this recession is geared up to be a big one, we should expect nothing less than a high level of unemployment to come with it. What does this mean for the real estate market? It means that things could get even worse.

People who are unemployed cannot buy homes, and people who are scared that they could join the unemployed ranks are unlikely to make big purchases--especially a new home. As unemployment continues to rise, we can also expect foreclosures to mount, which brings about a bad combo: more houses added to the market and fewer people able to buy them.

Some industries are being hit harder than others, but for the most part, businesses are going to struggle in the near future. Consumers lack confidence right now, as evidenced by the lowest-ever consumer confidence rating of 38 percent collected in a poll by The Conference Board this month. Consumers aren’t buying, which is going to hurt businesses that sell directly to consumers (B2C), and businesses that sell to businesses (B2B) are going to feel the pain next as the B2C businesses cut back their orders from the B2B businesses. This recession is going to hurt all over, and you can bet that we haven’t seen the worst of it yet.

The moral of the story is to be cautious if you are in the market to buy a new home. Realistically, your best bet is probably to wait it out a little longer, but if you absolutely need a new home now, just understand what could be looming. Only buy what you can comfortably afford. That should go without saying, but you would be surprised at what people can still get in terms of new loans, and what they are willing to sign on for. Also, pay close attention to what rents are going for in relation to what you would have to pay for a mortgage. If buying a home is considerably more expensive than renting in your area, then hopefully big red flags are going up in your head. Investors need to pay close attention to that comparison because there could be opportunity in those few areas which actually offer affordable homeownership. In that case, pay really close attention to the employment prospects in the area, because no matter how affordable homes look, you still are going to need a tenant base to rent to, and tenants with jobs are always preferable.

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