Why 2010 Will Be an Even Worse Year for U.S. Real Estate

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

I just don’t understand my friends anymore.

Hardly a day goes by when I hear that someone in our circle has purchased a vacation condo in Florida, because, “Prices are so good, you can’t pass on them.” I believe this is a big mistake.

In my opinion, property prices in the U.S. will likely be depressed for another decade.

While foreclosures by lenders on residential real estate continue to rise, record high inventories of unsold homes, higher interest rates ahead and a falling commercial property prices are just some of the forces working against a general rise in property prices.

Depending on which report you read, commercial property prices in the U.S. are down anywhere from 30% to 40% from their 2007 high. The weak U.S. economy has cut demand for commercial properties. Vacancies are rising, property prices are falling. Office vacancy rates are headed towards the 20% rate — very devastating.

I’ve heard stories from commercial building owners who have received letters from their mortgage companies advising that they will not be able to refinance the buildings’ mortgages when they come due. Why? Simply because the lenders need the money back.

Personally, I have walked through factories of 20,000 to 40,000 square feet in the Miami area where the landlords will be happy to get tenants into buildings to simply cover the property taxes and operating expenses. There is a tremendous amount of commercial space coming onto the market and this places pressure on both commercial and residential property prices.

According to Realtytrac.com, a record 2.8 million homeowners in the U.S. received foreclosure notices in 2009.If you want to get into the real estate market now, either for investment purposes or for that vacation home you’ve always wanted, know that better prices and even more selection lie ahead.

Michael’s Personal Notes:

The bellwether U.S. 30-year fixed mortgage hit 5.23% yesterday — up from 4.99% only three months ago. Yes, rates for mortgages have gone up a quarter-point in the past 12 weeks.

Rising long-term interest rates bode well for my prediction that interest rates in general are headed higher. With our real estate market so fragile, rising interest rates will place further pressure on homeowners to meet their monthly obligations. More bad news for the housing market.

Where the Market Stands:

This is starting to get boring.

Yesterday, another new high by the Dow Jones Industrial Average. It’s hard to believe the Dow Jones is only 320 points away from Dow 11,000.

The strength of the market was confirmed this week when Alcoa Inc. (NYSE/AA), the first major Dow Jones stock to report earnings this year, posted a smaller profit than the Street expected, and the market yawned. According to the market, it was no big deal. This displays the strength of this market. If the market was more fragile, and not in such a strong uptrend, sellers would have rushed in on the Alcoa news.

The Dow Jones starts this morning up 2.4% for the year.

What He Said:

“I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that, when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.