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Will real estate come out of the doldrums?

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By The Staff

Millions of homeowners and commercial property owners are asking when will real estate make its comeback? The evidence points to another disappointing year in 2009. Speculative real estate investing purchases and lax lending standards by many banks and mortgage companies led to a runaway real estate market that came crashing down when buyers were unable to afford their mortgages.

Ocala was especially attractive to homebuilders as one of the fastest growing metro areas in the nation, benefiting from an influx of retirees who favored the low cost of living and lack of congestion compared to areas to the South. When the housing market crashed, it did so with a vengeance. Housing permits in Marion County fell from 6,753 in 2006 to 2,536 last year and are forecast to bottom out at 1,088 next year, according to Moody’s.

Construction lost 1,000 jobs from a year ago in September, according to the Florida Agency for Workforce Innovation. Manufacturing lost 600 jobs in that time, including more than 350 over the year as cabinetmaker Merillat had layoffs and later shut down, and fire truck maker E-One laid off 200 workers. That had a ripple effect on retail, which shed 500 jobs.

In all, 1,900 jobs were lost over the year as the Marion County unemployment rate ballooned from 5 percent to 8.5 percent and now to 10 percent, among the highest in the state.

Despite government intervention and despite cutbacks in new construction nationwide, the fact remains that supply far exceeds demand. The Treasury Department and the Federal Reserve are doing all they can to lower mortgage rates and stem foreclosures. There’s just one problem: All the government money and manipulation in the world can’t repeal the law of supply and demand.

The overall housing market remains dramatically oversupplied, despite very sharp cutbacks in new home construction. Moreover, demand remains weak due to slumping consumer confidence, tighter lending standards, and rising unemployment.

Anyone looking to Washington for a quick answer to this downturn is going to be disappointed. New home sales nationwide dropped 2.9 percent in November. That was the worst sales rate since January 1991. Existing home sales plunged 8.6 percent for the month, with single-family sales hitting the lowest level in more than 11 years.

While dramatic cutbacks in housing starts have led to a decline in the new number of new homes on the market, sales have dropped so much that we are seeing little progress overall. As for prices on new homes, they were down 11.5 percent from a year earlier, the second biggest decline ever. Existing home prices dropped 13.2 percent, the most on record.

How prices of new homes have risen is shown that in 1963 the average price of a new home was $17,200. As of November 2008 that price is now $220,000. As for used homes, the average price is around $181,300 and continuing to drop,

As for commercial real estate, in 2009 it will likely be even worse for landlords and investors in warehouse, office, or retail property. In 2009 it will start to catch up with the housing market.

Construction activity will be nil as commercial mortgage credit dries up and the economy slumps. Sublease space is flooding the office market as companies fire workers. Mall vacancies are surging due to excessive building, and retailers like Circuit City and Linens ‘n Things go broke.

The only shining light in all this gloom is that falling prices will eventually restore a true inherent value to real estate. This decline will get home prices back to levels that make sense when compared against incomes and rents.

It will eventually enable homebuyers to purchase affordable homes at a reasonable price using traditional 30-year mortgages instead of the past deceiving junk loans at extremely high interest rates. It will make it so you can invest in rental property, or strip malls, or an office building and receive an attractive return again, without relying on pie-in-the-sky projections about future growth. Most of all, this painful decline will remind us all that we can’t build an economy based on false pretenses with inflated prices.

What our country will need before homes start selling again are getting the unemployed back to work with steady, decent paying jobs along with low interest 30-year fixed mortgages and tax credits, so the average person can again afford a home at a price they can afford.

Bill Marder

Oak Run