Depending upon where you live, it may be time for you to rethink your investment strategy if you're a real estate investor, because many areas of the country appear to be on the verge of a price downturn. The indicators are there, beginning with the fact that it's taking significantly longer to market homes when compared to last year. When coupled with rising interest rates, it's likely that the recent real estate boom may be coming to an end. One of the most startling statistics can be found in Los Angeles, where the median home currently sells for ten times the area's median income. That trend can't continue, regardless of interest rates or the kinds of creative financing options banks come up with. LA's trend isn't unique, however, and home prices will probably continue to fall as 2006 progresses, and will decrease even more dramatically in 2007, especially if interest rates continue to rise. That trend will be more pronounced in areas of the country that have seen dramatic price increases in recent years. Some economists even predict double-digit declines in Miami and Las Vegas, two of America's hotspots during the recent real estate boom. However, those sorts of declines aren't expected to be countrywide. Some areas of the country may actually see real estate values continue to grow, but at more modest rates, including most of the Midwest, parts of Texas, and even some larger cities like Atlanta. As an investor, you'll need to be aware of the trend in your area and invest accordingly. For example, if you're a builder, the combination of higher home prices, higher interest rates, and higher gas prices will make it harder to sell high-end homes that are built some distance away from major cities. Homes are also getting smaller, after increasing in size for the past thirty years (peaking at 2,430 square feet) and the things people want to see in their homes are changing. For example, luxury kitchens and deluxe bathrooms have gained in popularity while the demand for formal dining rooms has decreased. If you're an investor who depends on flipping houses, your profit margins may be shrinking and your flipping time may be increasing. Therefore, you may want to begin thinking in terms of income and not capital gains. Although being a landlord isn't for everyone, if real estate values continue to decline and on-market times continue to increase, you may want to think about renting your homes as you wait for the market to improve. You may also want to look at properties closer to downtown areas, since many renters are attracted by easy proximity to their jobs and to the amenities offered by cities. Rental units near office complexes or near several main highways can be especially attractive investments in a market that is showing signs of slowing down. If you're really not cut out to be a landlord, you can always turn the details over to a property management company, assuming you make enough on the rental to cover their 5-10 percent fee. Regardless of your previous real estate investment strategy, you may want to begin rethinking your options as the real estate boom begins to slow down in most areas of the country. Copyright 2006 Jeanette J. Fisher |
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