Real Estate Market and Investment - Essay Example

Real Estate Market and Investment Table of Contents Introduction……………………………………………….. 3 Prospective market value………………………………...4 Statistics……………………………………………………6 Invest wisely……………………………………………….8 Conclusion…………………………………………………10 Sources…………………………………………………….11 Introduction The real estate market may be down but people are still buying and selling houses. The need to buy and sell is inherently influenced by reasons such as job transfers, decision to buy bigger property, inability to pay mortgages, etc. The reasons may not be for business all the time. Real estate prices are factored on the premise of land demand. There is so much property that can be created in a particular location and it is not possible to construct more. The rise or fall in property prices are then influenced by market contingencies such as the economic recession being faced the world over now. Very recently, Sam purchased a 2-BDRM 825-sqare feet second-hand flat, about 10 years old, in California for about US$ 200,000 (California May Home Sales). The sum appears quite intimidating for a middle class citizen. However, the deal was easy for Sam as all he had to do was sell his own smaller 2-BDRM 600 square feet flat for US$135,000 and make up for the difference with the help of mortgage loan. When he had purchased it, the price amounted to US$70,000 which he had raised with the help of mortgage loan and paid up a couple of years ago. Fortunately for Sam, the person who purchased his old flat was foreigner who paid up the amount Sam was looking at without a murmur. Coincidentally, the one from whom Sam had purchased the flat he is now living in was also a foreigner who was in a hurry to sell as he was moving out of the United States. Thus, the principles in buying and selling of properties are intact although they may have slowed down a bit due to the current recession. In Sam’s case, he saved a significant amount having purchased a second-hand flat in a premium location. A brand new flat in the same location would have cost him at least 25% more. One may have to pay the agent some commission. However, despite the commission, the overall saving is quite high when compared to purchasing a brand new flat. Prospective market value Normally, when someone purchases realty, he or she has long time plans in mind. Except for housing agents, few may opt for purchasing properties for business purposes. The normal consideration for purchase of property is residential or business. Then the property may remain in the hands of the owner for decades unless he or she plans to sell it earlier for some reason. Again, normally nobody thinks much about the market value of the flat because, as residents, they do not want to dispose the flat. They need the flat for their residential or business purpose. They cannot do without the flat as it fits their lifestyle. Thus, the market value only serves as a prestige issue rather than any profit or loss in business terms. Likewise, properties purchased for business too are not overtly influenced by market trends since the purchase is based on long term requirements. If a firm desires to purchase property for commercial use, it will by all means go by the trends of its balance sheet rather than bemoan the market trends. Chain retailers and eateries such as MacDonald have powered their presence through prudent use of real estate. Real estate is a magnificent method for conserving wealth for those who have the means to purchase property and develop and décor it. So if you are very rich, investments in properties will most probably make you richer. This is because when you are rich, you will invest in doing up the property and the environments and this will naturally add to the property’s worth. Secondly, as people realize that you have purchased certain property in a certain location, they will readily buy adjacent properties pushing property prices in the process. For instance, if there is the news that Brad Pitt and Angelina Jolie have purchased property in some distant island in the pacific, there will be a beeline of prospective buyers to purchase a piece of land in the same island. For that matter, any place where Brad Pitt and Angelina Jolie buy property becomes a tourist attraction. Nonetheless, in recessionary periods, low property prices do cause concerns for the average citizen. Recessionary periods also see maximum defaults in loan repayments since companies lay off workers and people without jobs find it difficult to continue paying loan installments. Loss of homes due to foreclosure in the Californian region is high in the current times as could be seen in the following figure for the second quarters of 2008 and 2009: County/Region            2008Q2       2009Q2      Yr/Yr%         Los Angeles           21,632 24,622 13.8% Orange                7,564 8,261 9.2% San Diego             9,519 9,866 3.6% Riverside             14,974 14,302 -4.5% San Bernardino        11,817 10,852 -8.2% Ventura               2,303 2,431 5.6% Imperial              635 721 13.5% SoCal                 68,444 71,055 3.8% (California Second Quarter Mortgage Defaults Edge Down) Banks and financial institutions that lend mortgage loans normally agree to restructure installments in the event it becomes difficult to make payments. There are also advocacy firms engaged in advising people on how to restructure loans (House Payment Rescue). However, it is advisable to do some good thinking and plan beforehand on managing repayments. One may even opt to voluntarily sell the house and pay back the entire loan and go for a cheaper house. Statistics The study of real estate statistics has thrown up some interesting facts. In the United States, there are more female housing agents than male ones. On an average, realtors work 40 hours a week and earn an income of US$63,000 annually for median 40-59 hours of work weekly. Most of the agents were well educated. 70% of the agents were degree holders (Field Guide to Quick Real Estate Statistics). Going by the same dictum of recessionary and normal times, one can get the feel of the quietness and the upheavals in the property market during normal and recessionary times. Statistics absorb facts and figures and continue to show the market trends over weeks, months and years. In the hands of experienced professionals, they reveal the sources of prosperity and the anomalies when situations are recessionary and difficult. Statistics are like thermostats that control environmental factors in the business and provide stability in times of prosperity as well as adversity. Statistics play a vital role in the administration of real estate. They can show business which way to turn in lean periods and they can educate the common man on the course to follow in difficult times. For instance, the statistics presented in Golden State in California does not provide for encouragement to buyers to purchase properties in this region. The statistics of the real estate trend in the Golden State are given in the following figure: (Million dollar home sales plummet in Golden State) The above figure shows the pattern of real estate movement from 1988 to 2008. The prices have been rather stagnant between the years from 1988 to 1997. From 1998, prices began to move up till 2006. The prices begin to show a downward trend from 2007 onwards. This is the beginning of the recessionary period. Those who had purchased property in Golden State in 2007 must rue their stars. They are between the devil and the deep sea. They are damned if they sell and they are damned if they do not sell. If they are continuing to receive adequate income to continue paying their mortgage loans, common sense shows that it is prudent to continue paying the loan installments. However, if they are not in position to pay the loan installments, they have the option to rent out the property and move into smaller houses until better times arrive or they must surrender the property to the lenders. They have the option to sell off their property after disclosing their intention to sell to the lender. However, this is not a wise decision as at the current rates the owner will hardly be left with any monies after repaying the balance loan amount. Invest wisely Investments in real estate must be done with due care and wisdom. In India, the owners of a very large IT firm, lost in billions after investing in realty without due care. The owners ultimately threw up their hands and declared their ill-advised investments had caused them to use fraudulent means to siphon corporate funds on property deals, and landed in jail. The Indian government had to intervene to keep the company afloat and protect its employees and shareholders. There is no problem in investing in real estate as long as the title is clear and one gets physical possession of the premises. Also, make sure that the funds are your own and borrowings, if any, are limited to the bare minimum. Property prices do not always go up. What goes up must come down. Sir Isaac Newton’s gravitational theory works wonders in the realm of real estate. In many countries, the law curbs unlimited purchase of land and properties. So it is advisable to study the law of the land to understand the legal implications in property purchase. Do not put all your eggs in one basket. You must not invest all your funds in properties alone. There are other investments such as mutual fund, government bonds, and insurance. Consider all aspects when investing. Suppose you have US$10,000 and wish to purchase property worth US$50,000, you may do well to borrow another US$5,000 from friends and relatives, and borrow US$35,000 from the bank. This way, you would be in a better position in a few years as the property would have appreciated by then and also you would have paid back substantial portion of your loan amount. On the other hand, if you have US$10,000 and plan to purchase property worth US$100,000, the associated risks are greater due to the high amount of installments repayment and the added headache should property prices fall. Conclusion If you are a television buff, it is worth every cent to watch channels where they beam daily quota of real estate information. I am quite enamored of a Star channel where they showcase the latest trends on home furniture, furnishings and the huge upmarket shops and ethnic stores around the world such as in Finland, Rome, Paris, Berne, etc. They not only beam bona fide information, they also interview well known architects, interior and fashion designers, and others with a feel and taste for good living. They show owners of ancestral homes, family heirlooms, antiques, and define the essence of owning properties. Of all the homes featured on the show, if I am asked to pick the best, my vote will be for Shilpa Shetty, the well known Indian actress. Her stunning home is adorned with the best of finely-chiseled icons, artifacts and carvings of master craftsmen from around the world and all displayed at the right places without clutter.  Her home exudes an indefinable divine aura. It's a visual treat.  Honestly, not everyone can afford such luxuries in one's home.  But then you don't have to shell out a single penny for gazing at things of beauty that could be a joy forever for the owners.  Sources: California May Home Sales, 19 June 2009, http://www.dqnews.com/Articles/2009/News/California/RRCA090619.aspx California Second Quarter Mortgage Defaults Edge Down, 22 July 2009, http://www.dqnews.com/Articles/2009/News/California/CA-Foreclosures/RRFor090722.aspx Field Guide to Quick Real Estate Statistics, National Association of Realtors, http://www.realtor.org/library/library/fg006#topica NBS statistics show real estate market uncertainties remain, The Global Times, 21 May 2009, http://business.globaltimes.cn/top-photo/2009-05/431909.html House Payment Rescue, http://www.housepaymentrescue.com/ Million dollar home sales plummet in Golden State, 11 August 2009, http://www.dqnews.com/ Stats about all US Cities – real estate, relocation info, house prices, home value estimator; http://www.city-data.com/ Read More