Real Estate Journal Online

All over the country, residential property vacancy rates are on the rise[1]. Of course, there are some areas that are booming – e.g. New York City and Washington D.C. – but in most areas more and more homeowners are going into foreclosure or simply opting to walk away even as lenders slow their eviction processes or even suspend them all together while the entire country waits to see how the robo-signer debacle and settlement will ultimately resolve. Interestingly, however, the risk of loan defaults is plateauing due, in part, to an economic recovery but also thanks to the threat of inflation that has been hovering on the economic horizon[2]. Sure, loans originated today are still 41 percent more likely to go through a default than those originated in the 1990s, but that is actually “much less than the worst vintages of this [real estate] cycle,” points out the University Financial Associates LLC (UFA), who developed the mortgage default risk index. Loans originated between 2006 and 2008 are more than twice as likely to default as loans originated in the baseline of the 1990s. Based on this information, the firm concluded, “mortgage originators need not be as apprehensive about new originations.” And that number could improve significantly if inflation really kicks in.

Dennis Capozza, UFA’s founding principal, believes that if “inflation rates keep on rising, default risks will drop more quickly, and this will bring about a faster recovery in mortgage and housing markets.” Many analysts promote the idea that real estate is one of the “inflation-proof” methods of investing out there because mortgage rates, unlike rental rates, can be fixed in place. As a result, an investor who purchases a property today can rent it out in the future for an inflated value while continuing to pay today’s low monthly payment. Strategic defaults are also likely to make less sense in the face of inflation because homeowners who walk away and opt to rent might not really be getting such a good deal if rental rates climb according to projections. Some investors are already reporting 12 percent returns on rental property investments, and many analysts believe that this is only the beginning[3]. Thanks to a much larger renting population, a dearth of new construction and rock-bottom property prices, home-buying and real estate investing – for those who can do it – is likely to continue to make a lot of sense. And for those who have purchased a home, walking away is going to look a lot less attractive in the future as rental rates skyrocket. As a result, the number of defaults could decrease and hungry investors could start finally snapping up properties as lenders loosen lending restrictions thanks to lower default risks.

Do you think, as some experts claim, that inflation could actually save the housing market?

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[1] http://money.cnn.com/2011/03/28/real_estate/us_housing_vacancy_rates/

[2] http://www.dsnews.com/articles/ufas-default-risk-index-finds-plateau-lower-expected-as-inflation-rises-2011-03-25

[3] http://finance.fortune.cnn.com/2011/03/28/real-estate-its-time-to-buy-again/