Avatar's Blog

I've been hearing variations on a theme from the brokers I chat with each day.... the recent hikes in interest rates coupled with the noticeable tightening of the reigns on lending criteria among commercial banks is changing the investment residential landscape in the US.

Across the country, I am hearing brokers talk about record numbers of inquiries at the close of 2005 and early 2006. Brace yourself - if these brokers are correct, next week is going see an increase in that onslaught. The largest increase in hard money loan inquiries is among homeowners. They are the canaries in the coal mines*. When homeowners who financed with short term ARMs during the low interest rate window a few years back find themselves unable to meet the continually increasing monthly mortgage payments, they begin to default. We are seeing this phenomenon in single family dwellings and condos/coops, alike. When condo owners can't keep up, prices start dropping - good deals will be out there, courtesy of desperate sellers or the banks that foreclose on them. With an increasing number of such properties (I hesitate to call it a glut, but there will be some and they will increase through the winter/spring), the condo conversion craze will cool.

We saw plenty of investors grabbing up apartment complexes around the country and converting them to condos, reselling the individual apartments for many times more than the amount they paid for the total property. What was a good game plan last year, may not work so well this year. With more people losing condos and SFDs to foreclosure and incresasing interest rates, there will be more folks looking to rent their homes rather than buy one.

I'll be watching to see how the story unfolds this winter. But today, put me down as being 'bearish' on condo conversions and 'bullish' on apartment complex ownership and construction - especiallly in the Southeast.

* Miners used to take canaries into the mines with them. Keeping them close at hand, it wassomeone's job to keep an eye on the birds to be sure they were breathing and well. Canaries are extremely sensitive to carbon monoxide and will die well before adults humans suffer the same fate. If the birds died, the miners had a short window of oppotunity to get out of the mine before suffering carbon monoxide poisoning. Watch the homeowners - they are investors' canaries.