Yesterday, I was commenting how there is anecodotal evidence of the difficulty of getting mortgages. On November 13th, Citigroup announced it was placing a moratorium on most new mortgages and was working on saving its current portfolio of loans. Forbes who reported this article that what has stimulated many foreclosures was a a negative equity position.
How does negative equity happen? It comes down to people violating the basic tenet of paying what a property what it is worth. The entire market was based on this one sided assumption of a always liquid and ever increasing market. In many markets, the price of a property often far exceeds its rental value. Often, when we deal with investors who request our property management, we find out that their break even point is often in excess of the rent that they can obtain.
Often, the expected price is often far in excess of what market demands dictate. In certain markets, where there was a expectation of commuting and space to build outwards; people could find substitute homes which keeps the price of rentals down. These dynamics were often overlooked by California or New York investors whose expectations were different then those of local Texas investors. By not realizing the different assumptions, they often bought property in excess of our local rental market expectations.
One of the most common indicators of price of a property is to determine it is based on a multiple of income derived. This analysis is often a crude method, but if this ratio is skewed way beyond market prices, then this should cause some measure of reflection by investors. If the income does not justify the property, then what does? Most investors do not have the capacity to absorb cash flow losses for very long, so it is something that I wondering about when investors bring in these kind of deals for me to manage.
Hopefully, the investors learning in this environment try to find properties that they can afford and the price as a multiple of income ratio is not as dramatically skewed as it has been in past few years. Hopefully, common sense will prevail, and people will buy properties that they can afford.
Posted by ashokalion 
