What Should You Do With Real Estate?

| October 20, 2008 | 0 Comments

Every day we’re hearing a few more details about the Government’s $700 billion rescue package for the banks.  Last week, instead of buying up the toxic debt held by banks, Treasury Secretary Paulson did an about-face.  He rounded up the heads of our largest banks in America and forced them to take a Government capital infusion.

Do you know why he changed his view?

Paulson’s terrified of the flow of capital seizing up.  As more and more concern about the economy reaches the markets, investors become wary of lending.  Right now, banks are terrified of lending to each other. All you need to do is look at LIBOR rates to see this.  The higher the LIBOR rate, the more fear of lending there is.

Banks are afraid to lend to each other.  That means it won’t be long before banks are afraid to lend to you and me, and the rest of “Main Street.”  Ask any economist, if lending stops our entire economy will grind to a halt.

By putting more capital into banks it makes them more credit worthy. This will free up bank lending and the flow of capital.  But there’s another problem.

The real estate crisis is still running strong . . . and this package does little to help.

Right now, more Americans than ever are underwater on their homes. That means they owe the banks more than their houses are worth.  It’s estimated 1 in every 6 homeowners across the nation is underwater.

It’s rare to find a part of America where the value of a home hasn’t dropped.  As a matter of fact, some parts of the country like Florida, California, and Arizona have seen property values fall as much as 50%. (This was where aggressive real estate speculation was the worst.)  The last time a real estate crisis of this magnitude hit, homeowners just sent their keys to the bank.

It was called “Jingle Mail.”

Everyday Americans just stopped making their mortgage payments.  The reasoning was simple.  Why pay for a house when the value is substantially lower?  Compounding this problem is the softening economy. Layoffs are starting to take hold and the unemployment rate hit recent highs.

It’s looking bad.

Just today Federal Reserve Chairman Ben Bernanke told Congress we need further economic stimulus.  So, if you’re under water on your house should you stop paying your mortgage?  Should you send your keys to the bank, or hope the government comes to your rescue?

To answer this question I spoke with a friend of mine who owns a handful of investment properties in Arizona.  He has something shocking to say.

“Stop paying your mortgage!”

His reasoning was simple.  The more people who stop paying their mortgage, the bigger the supply of bank owned homes.  This causes the price of real estate to fall even further.  That lets this savvy investor swoop in and buy more homes on the cheap.

That’s right, he’s looking to buy homes people leave to the bank.

For him, now’s a perfect time to invest.  He can pick up homes for practically nothing.  And his competition’s very limited.  That makes his negotiations even easier.  He’s going into the banks and offering them 50 and 60 cents on the dollar for prime real estate.  These are levels where any rental income will more than cover the cost of his mortgage.

Of course he’s happy for people to quit on their homes.  It makes it easier for him to make money.

What does this investor know that others don’t?

He knows the real estate crisis won’t last forever.  In two or three years, things will return to normal.  And a few years later, real estate prices will start going up again.

All those people who quit on their homes during the last crisis, would have been “OK” just a few years later.  All those who quit on their homes now will be missing out on future growth opportunities.  Never mind the damage caused by bad credit and the moral issues of going back on a promise.

Instead of quitting on your home mortgage, now might be the time to buy another home as an investment property.  I know today I’m going to start looking.

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Category: Real Estate

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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