The new year is upon us, and the mood in the financial markets is one of cautious optimism. Unfortunately for homeowners, the outlook in the real estate market remains bleak. Would-be homeowners face a slightly better scenario - particularly of they have cash to spend and don't need a mortgage. (From REITs to owning your own home, find out how to diversify your portfolio with real estate assets, in Add Some Real Estate To Your Portfolio.)

If You Already Own
Home prices are expected to keep falling as foreclosures continue, and high unemployment will keep demand low. This is bad news on several fronts.

First and foremost, a home is generally the most expensive item you will purchase in your lifetime. To see it lose value hurts.

Second, a significant number of homeowners are already underwater, meaning that they owe more on their homes than the homes are worth. Financially, that's a terrible situation to face. Psychologically, nobody wants to knowingly overpay for anything, particularly when the bill can last for 30 years.

Third, many people fell into the trap of using their homes a ATMs, refinancing every few years to take cash out. This bad idea was touted by financial gurus as a great way to get money to invest, since homeowners were only paying 6% interest and could theoretically earn much greater returns in the equity market. When the equity market tumbled 40% and interest rates fell way below 6%, the folly of this advice was revealed. In the year ahead, the only choice homeowners are likely to face is whether or not they wish to continue making payments on a house that is no longer worth what they'd paid for it.
Those who own their homes free and clear are in much better positions. The real estate market will eventually recover. In the meantime, these folks get to live rent free. The story is a little less happy if for those who need to sell, as prices are expected to remain depressed.

If You Want to Own
Would-be homeowners are in a good position. Foreclosure rates are up, home prices and down, and interest rates are still reasonable. True, rates are expected to begin to climb as government programs designed to keep rates low are removed, but that climb will be gradual. While the continued decline in real estate prices is a potential concern, the magnitude of the declines is likely to be minor, when compared to what we have already seen. The only challenge buyers face involves getting approved for a loan. Tighter lending standards and overly cautious banks are making it tough for some buyers to qualify for credit.

The Bottom Line
If you've got cash and don't need to worry about interest rates, it's a buyer's market. Supply is up, demand is down, and cash offers are a seller's dream come true. This is particularly true in the condominium market, where careful shoppers can pick up a real bargain.

The bleak outlook for housing is forecast to continue at least through the first half of 2010. Barring a miracle, it could persist for even longer. (The instruments found in A Guide To Real Estate Derivatives provide exposure to the real estate market without having to buy and sell property.)

Related Articles
  1. Investing News

    Canada in Recession

    On September 1, 2015, Statistics Canada reported that the economy has contracted by 0.5% in Q2 2015, after falling 0.8% in previous quarter.
  2. Credit & Loans

    Understanding Home-Equity Loan Rates

    Shopping is the most important part of getting a home-equity loan. You're going to have to live with the terms for a long time.
  3. Economics

    Is a Recession Coming?

    In the space of a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.
  4. Credit & Loans

    5 Signs a Reverse Mortgage Is a Bad Idea

    Here are the key situations when you should probably pass on this type of home loan.
  5. Credit & Loans

    5 Signs a Reverse Mortgage Is a Good Idea

    If these five criteria describe your situation, a reverse mortgage might be a good idea for you.
  6. Credit & Loans

    Guidelines for FHA Reverse Mortgages

    FHA guidelines protect borrowers from major mistakes, prevent lenders from taking advantage of borrowers and encourage lenders to offer reverse mortgages.
  7. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  8. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  9. Investing

    Finding Value in the Selloff Rubble

    Globally and in the United States, stocks are now in correction mode, with the recent erosion in equities in emerging markets and Europe in a bear market.
  10. Economics

    How Do Asset Bubbles Cause Recessions?

    Understand how asset bubbles often lead to deep, protracted recessions. Read about historical examples of recessions preceded by asset bubbles.
RELATED TERMS
  1. The New Deal

    A series of domestic programs designed to help the United States ...
  2. Accessory Dwelling Unit (ADU)

    A legal and regulatory term for a secondary house or apartment ...
  3. No-Appraisal Refinancing

    A type of mortgage for which the lender does not require an independent, ...
  4. No-Appraisal Loan

    A mortgage that does not require an appraisal of the property’s ...
  5. FHA Streamline Refinance

    A mortgage-refinancing option offered by the Federal Housing ...
  6. USDA Rural Refinance Pilot Program

    A mortgage-refinancing option offered in some states and territories ...
RELATED FAQS
  1. How does the risk of investing in the industrial sector compare to the broader market?

    There is increased risk when investing in the industrial sector compared to the broader market due to high debt loads and ... Read Full Answer >>
  2. How can I hedge my portfolio to protect from a decline in the retail sector?

    The retail sector provides growth investors with a great opportunity for better-than-average gains during periods of market ... Read Full Answer >>
  3. What is the correlation between term structure of interest rates and recessions?

    There is no question that interest rates have enormous macroeconomic importance. Many economists and analysts believe the ... Read Full Answer >>
  4. Why should an investor in the retail sector consider the Consumer Confidence Index?

    Investors in the retail sector should consider the Consumer Confidence Index, or CCI, because it measures how consumers feel ... Read Full Answer >>
  5. Which type of retailers tend to perform best during weak periods in the economy?

    Retail is a broad investment sector comprising many different market segments, such as automotive, building supply, grocery ... Read Full Answer >>
  6. What category of retailers will perform most strongly when the economy is doing well?

    When the economy is doing well, the market segments that perform best are volatile segments with products and services that ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!