Assessing the Impact of Economic Downturn on Property Prices

Although we are getting brief spells of relief and some signs of recovery, we are fully aware that the worse is far from over. Resiliency seems to be the order of the day, and there is still the high sense of urgency for people to remain guarded and conservative in their dealings. While we have been seeing positive leading indicators for over a year now, the economy cannot seem to summon enough momentum to get over the financial hump.

One clear proof that the good old days are still far down the road is the overall condition in the property market. Prices remain depressed and are still hovering within the 2003-2004 levels. Although, we are no longer seeing sharp dips in prices for several months now, the overall condition is still very volatile. There are short periods of minor rebounds here and there. However, market analysts and industry experts generally attribute this to a few speculators that cash in on financially-distressed and foreclosed properties. At the end of the day, these rallies don't amount to substantial upward push in sales or major cut in the current inventory.

The sales figures in the new homes segment remain low and even a major uptick in the sales of new homes is not expected to have a major effect on the bottom line, especially in the inventory of properties that are currently being held by banks and mortgage companies.

We are no longer seeing alarming rise in the delinquency rates; although the numbers are still "distressing." In a recent report released by the banking sector, the combined percentage of loans in both one-payment-past-due and foreclosures was at a high of 13.16%. The numbers are disturbing. Despite the positive mood being shown by stakeholders, no substantial move is expected from major players anytime soon.

The focus is now on the state of REO inventory. Real estate players and market analysts are in agreement that there has to be a significant development in this segment in order to spur a real rebound in the real estate business. In fact, some quarters believe that the inventory has to be cleared before we can expect things to settle down. There are indications that this may take years to achieve based on the current state of inventory of REOs in most real estate markets.

There are other critical variables that we need to take into account when assessing the overall impact of these lingering financial woes that we are experiencing. These include the number of homeowners who are in negative territory or those who are referred to as homeowners with "underwater" mortgages. For the last 15 years or so, consumer spending was primarily driven by purchases of hard assets. This means that most consumers would not have been able to borrow money against the appreciated value of their home if the increase in value of their home has not been sustained. Obviously, the opposite is what we are witnessing right now.

Further, a mere 2% of the total number of homeowners with mortgage has more than 20 percent equity in their current home. With the prevailing equity requirement of most banks and mortgage companies of at least 20%, it is quite apparent that very few will be lucky enough to get home equity loans.

All these negative forces are putting more pressure on the economy and making the road to recovery quite bumpy. This means that both the government and the private sector need to come up with definitive policy changes and strategic decisions to really put the economy on overdrive. The primary goal is to create the positive regime where solutions go beyond borrowing more money.

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