Just as rising unemployment rates tend to make us forget that most folks are still gainfully employed, the very real and well-publicized problems of the real estate industry have obscured the fact that residential real estate markets are continuing to function relatively well.
Yes, there are serious problems in commercial real estate. Yes, the banking system is on the ropes due in no small part to heavy lending on real estate projects that have gone bust. Yes, the economic downturn may create more serious repayment problems on first mortgages as well as on home-equity lines of credit.
And, yes, softer values for home prices and changes in interest rates do make the economics of home ownership different. But hundreds of thousands of homes are still being bought and sold each month, by folks who are approaching the process much as they have for years.
For most people, residential real estate is the foundation on which they build their financial futures. Above this foundation, people add on all sorts of wealth-building investment and retirement programs, based on stocks, bonds and other financial instruments. These programs are crucial to financial well-being, but all the care in the world to make the right paper investments may not matter if they are added on to a shaky foundation.
Today, shaky seems especially appropriate to describe real estate markets, not to mention the broader economy, which is widely believed to be in a recession. Homeowners should look hard at their financial outlook and seriously consider adopting a defensive strategy to protect this all-important investment.
Assume the worst. Assume you lose your job. Do you have enough savings to continue making mortgage payments on your home? If youwere forced to sell your home to make ends meet, you could get trounced on the resale value. It's definitely a buyer's market.
Arrange some general lines of credit and, as a famous Marylander has said, "Do it now." If you don't have a home-equity line of credit, get one (but be careful not to expose yourself to fees for closing costs and related expenses).
Consider getting another credit card. I've already praised the new American Telephone & Telegraph MasterCard and Visa credit cards, available with no annual fees, assuming you use the card a couple of times a year. Once you get another card (or increase credit limits on your current cards), you must exercise control and make sure you don't draw on this credit unless you must.
Now, balanced against this defensive strategy are some other realities that help brighten the outlook. First, there's the powerful lesson that with all this bad news out there, smart money says it must be a great time to go bottom-fishing for super real estate bargains. I said this a year ago, and I'm here to say it again.
At the risk of getting sued by some disgruntled investor down the road, I'd have to agree that this contrarian way of viewing the world looks very tempting these days.
Be careful, however. The world has changed. Tax laws don't favor homeownership and real estate investing the way they once did. Banks and savings and loans don't have the spare cash to support a real estate boom. Population growth is not expected to support any major surge in new homebuilding.
These factors tend to reduce real estate values, and you should consider them when deciding whether to plunge into homeownership.
In the short run, there's another powerful player, namely interest rates. Despite the refrain about the three secrets to a great retailing business -- location, location, location -- there's a companion set of three secrets to real estate prosperity: financing, financing, financing.
It was widely predicted that interest rates would decline last year. They did. They are expected to dip further this year. And any material reduction in financing costs, coupled with possible price weakness, could make 1991 a great time to be a homebuyer. Lower financing costs will also help sellers, but they clearly face a much tougher process.
Where does this leave us? Real estate should remain a fundamental part of any individual's long-term investment strategy. But you will have to work harder to make sure you make a wise investment and, probably, to make sure you protect and enhance the value of that investment over time.
There are numerous ways to invest in real estate, some basic and some extremely sophisticated. I'm going to stick to the basics involving ownership, including buying a home, fixing one up and becoming a landlord (that is, buying property you don't occupy).
The good news is that sensible real estate investing is not the sole province of geniuses and real estate experts. But it requires time, especially since real estate values are not so precisely set and readily available as stock prices in the newspaper.