Bankruptcy & Foreclosures

Here’s a good one- construction of single family homes toppled to a 17-year low as of this week and yet real estate investments are at an all time high.  The initial news isn’t too shocking considering the recent market instability but the fact that investors are putting their money into real estate investment trusts is pretty wild.  Would you have to be crazy to invest money in an area so clearly troubled? Maybe not. Recent Fed rate cuts have led to lower bond yields and relatively low rates on savings accounts but real estate investment trusts are unique in that they are required to pay a large chunk of their earnings back to investors in the form of dividends. 

Sounds good but let’s be honest- who can say for sure if the housing market has in fact hit rock bottom yet?  Assuming things are going to improve soon makes real estate investing an attractive option for investors looking for a large return but if things continue to slide, these returns may be little more than wishful thinking. 

So where then does the risk factor in? It’s common knowledge that demand for new homes collapsed last year and experts predict a similar drop in the rest of the construction market.  A combination economic slowdown, rapid inflation and tighter credit appears to be throwing the proverbial monkey wrench on nonresidential construction projects.  

We realize of course that tough times have a near immediate effect on the residential market (it’s tough to build a new house when you cannot secure a mortgage/ also difficult to make existing mortgage payments when the economy’s crumbling- foreclosures up 65%) we’re finally hitting levels where even gigantic commercial projects are feeling the crunch. Nonresidential construction, which includes office buildings stores, hotels, schools, hospitals, etc. remained strong through much of 2007 but lately the gears have been grinding to a halt.  It makes sense too, after all apartment builders are rightly nervous about collecting their rent in these tough times.  Similarly construction on public projects, such as highways, lots, and sewers, are being put on hold or slowed down as local governments struggle with declining tax revenue and tight budgets.

What it boils down to is the simple fact that gutsy investors are willing to take their chances by sinking money into what is clearly an unstable market.  The market will certainly benefit from the boost but whether or not investors will get what their after is yet to be seen.