Difficulties In The Upper End of The Residential Real Estate Market!

We are continuing to see important fluctuations in these markets. The financial markets are moving widely, 10 days ago the Dow Jones index was below 7,000 and yesterday it closed above 8,000. The residential real estate market is stabilizing in some areas and in some other areas it is just starting to experience major decline. In a Bloomberg.com article by Oshrat Carmiel “Hamptons, N.Y. Home Sales plunge 67% in First Quarter”, the author outlines the difficulties that the higher end of the residential real estate market is experiencing. Not only the number of transactions went down significantly, but prices declined by an average of 30% for the first quarter of 2009. The author was using the Hamptons, N.Y. market as an example. On the lower end of the market first hit by pricing decline 24 months ago, we are seeing more mixed results and even an increase in demand.

More and more private / hard money lenders are receiving request for financing for the upper end of the market. It is pretty common today to get request for loans on single family residence and condos for properties with values above $1M, with numerous financing requests for loans above $1M. The difficulty is to fund these loans especially if borrower cannot justify their ability to make monthly payments. Hard money lenders don’t want to have to foreclose on properties that are this expensive and get stuck with them.

Three factors are affecting the upper end of the real estate market. The first factor is the lack of capital available in general in the banking system. The second factor is that banks are making it very difficult for borrowers who need loan above $650k to get a loan. Basically it is very difficult to get a loan unless you don’t really need it. The third factor is that numerous people in the upper income bracket have and are losing their jobs. This means that either they have to put their property on the market, or they can’t upgrade reducing the demand for these properties. The upper end of the market may be affected until 2010. In the following article from Reuters “U.S. recession to end in H2 but unemployment to rise: survey”, economist surveyed are saying that while the economy will improve by the end of 2009, unemployment will continue to increase until mid 2010.

From what I have seen in the past few years in both the financial and real estate markets, hard money lenders are going to continue to see a demand for financing for the upper end of the residential real estate market. This will come in addition, to an increase in demand for financing for commercial real estate and the lower end of the residential market. My advice to real estate professional would be to make sure you have strong file when contacting a private lender. My advice for borrower: be flexible when looking for financing.

In our next post we will consider some of the challenges that hard money lenders are facing with funding loans.