$275 Billion to Stem Foreclosures – Time to buy REITs?

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Photo Source: Bangkok News

President Obama introduced a new $275 billion program to help solve the foreclosure crisis in the United States. Foreclosures have opened up a huge supply in the housing market, ultimately driving down prices. Keeping people in their homes will lower the supply in the real estate market, which is thought to buck the trend of dwindling property values.

Where Will the $275 Billion Go?

For investors, only $75 billion of the total $275 billion should be up for discussion. Through the plan, the Treasury will buy $200 billion worth of Fannie and Freddie loans and stocks, which will have little impact on real estate prices. The other $75 billion is what should grab investors’ attention; this money will be used to help restructure loans that are soon to enter into foreclosure or already have embarked upon the process.

Foreclosure Gravity

Foreclosures put a natural gravity on the real estate market. When banks sell homes, they do not sell for near market value, and many foreclosures go to auction, where the ending price is only a portion of the total loan value. In this instance, the sale goes on the record for likely a considerable discount to the neighborhood, subsequently driving down values across the board. In addition, simply having a foreclosed home just down the street can lower property values overnight.

Property Values Are the Instant Fix

Property values are both the problem and the solution. Higher property values would allow hurting homeowners to sell their homes and re-pay their mortgages. Many homeowners are stuck with homes that have sunk in value to the point they are upside down (owing more than their home is currently worth.)

How REITs Benefit

Many REITs are hurting because much of their properties are larger apartment buildings and other rental units that have had difficulty finding tenants. Plus, selling multi-unit investment properties proves more difficult in a period of falling home prices. Not only do REITs generate revenue through rental fees, but also from appreciation of assets, which is something that hasn't been seen since late 2007.

However, fewer homes on the market due to limited foreclosures will bring prices up across the board and make buying homes less affordable. When homes aren't affordable to the masses, people rent, and renters provide income to REITs.

Let the Bottom Come in

Investing in real estate requires near perfect market timing. It’s important to stay on top of home prices and also the changing times to make better investments. The most critical number for a turnaround is a continued improvement in housing starts; when developers start building homes, it’s apparent that supply is growing slower than demand, and subsequently, prices should soon rise pending that developers do not over-build.

The Bottom will be Long-Lasting

Real estate for an income is a long-lasting investment that takes time to produce profits. In order to ensure the best return, investors should be prepared to stay for the long-term, rather than attempting to swing trade the housing sector. Houses can't be built quickly, nor are they bought and sold quickly, and therefore, it could take years before the eventual turn around comes. The good news is that inflation is on the side of real estate investors, including those eyeing REITs.

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