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Tuesday, October 03, 2006

Real Estate Recovery and Job Growth

By Allen Goldstone

The Dow Jones Industrial average is flirting with record highs, yet there is a noticeable lack of euphoria across the U.S. When citizens are asked why, the answer is often tied to real estate. A brief review of how our population reacts with herd like behavior may provide some answers.

Throughout the 90’s anyone that invested in the stock market was a genius. By the time the new millennium rolled around we were hard-pressed to find anyone with money that was not caught up in this jubilation. In 2001 the bubble burst and all the kings’ men and women’s net worth came tumbling down.

After a relatively brief period of reflection, we began to seek the next great bandwagon to jump on. The answer for many of us was real estate. Once again all one had to do to be known as a financial mastermind was to be in the game. Fueled by low interest rates and the herd’s mentality that what goes up must stay up, speculators bought property with reckless abandon. Aggressive mortgage loans that allowed owners to borrow more while paying less was the gasoline on the fire that burned many savings accounts. To say that mortgage money was easy to come by would be an understatement.

Now many are left with a monetary hangover from this self abusive financial behavior. Foreclosures are at record highs. More consumers are facing loan payment adjustments everyday that they cannot afford.

According to Dr. David Seiders, the chief economist for the National Association of Home Builders
"We are in the midst of an inevitable adjustment following boom years when housing market activity soared to unsustainable levels. The market that emerges from the current correction will display good balance between supply and demand, and move to a sustainable trend based on solid underlying fundamentals."
How soon might the turnaround begin? Well, nobody can answer that for certain, but based on his research, Dr. Seiders believes that the end of the down cycle may be sooner than many believe.

The key to knowing if this recovery is coming to a place near you is sustainable job growth. According to the Milken Institute’s 2004 Best Performing Cities Index some of the likely candidates are:

1. Fort Myers-Cape Coral, FL
2. Las Vegas, NV
3. Phoenix-Mesa, AZ
4. West Palm Beach-Boca Raton, FL
5. Daytona Beach, FL
6. Sarasota-Bradenton, FL
7. Fayetteville-Springdale-Rogers, Ark.
8. Riverside-San Bernardino, CA
9. Fort Lauderdale, FL
10. Monmouth-Ocean, NJ

In past years, technology-oriented metro areas dominated the top of the rankings. More recently, however, after the decline of America’s high-tech sector, the top-ranked cities were those with low costs, growing populations, and stable sectors such as health care and government.

Unlike some earlier cyclical downturns, such as the early 1990s recession years, the slump this time around may not be as severe - as long as mortgage rates stay where they are, about a point above historic lows.
For individuals, immediate solutions include refinancing with fixed rate loans, renting illiquid properties until things improve or moving to a market with better job prospects.

For the rest of us we should remember the following proverb:
During prosperity be prudent, during adversity be patient

Allen Goldstone is a Colorado based consultant that specializes in mergers/ acquisitions and corporate turnarounds.

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