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RISMEDIA, August 5, 2011—Jason Hartman, creator of the Complete Solution for Real Estate Investors™, discusses current trends in real estate and economist forecast in his “The Investment Real Estate Forecast” report. With the first half of 2011 in the rear view, Hartman’s forecast explains in detail that current government policy is tilted in exactly the opposite direction of factors needed—as monetary expansion and skyrocketing debt continue to finance spending initiatives having little to no impact on the fundamental tenants of innovation and productivity driving long-term economic growth.

For the remainder of 2011 and beyond, the prospect of future inflation and higher interest rates does not bode well for most forms of business or investment. However, there is a bright sliver of opportunity for investment vehicles capitalizing on fixed-rate debt to leverage income producing tangible assets that will have their nominal value increased and their debt debased by inflation.

“The most obvious remedy for this problem is income producing real estate,” says Hartman. “Since most income producing properties are financed with fixed-rate mortgages, they will provide an excellent hedge against inflation for investors.”

“Rental income will be directly impacted by the expected increases in interest rates as more people are pushed out of the homeownership pool into the renter pool,” adds Hartman. “This will have the net effect of strengthening market rents.”

Trends in Real Estate

Heading into 2011, one of the most impactful news items was the announcement by Bank of America suspending foreclosure activity and the decision by government agencies to increase scrutiny on the foreclosure process. Halfway through 2011, nobody completely knows how long this increased scrutiny will last, how intense it will be or the long-term impact on market activity.

Hartman predicts prices will be temporarily strengthened as the inventory of foreclosures is artificially constrained. Currently, people are being held out of the rental pool while living in their house (without paying a mortgage) as the foreclosure process proceeds at a snail’s pace. The impetus behind this is quite clear since the politicians in charge of government policy are attempting to curry favor with their constituents by helping them stay in houses they cannot afford.

Over time, this decision will continue playing out and the market will regress back to equilibrium. In many markets, this will take the form of short-term price stabilization or increase, followed by softening of market prices as foreclosure inventory that had been held off the market comes back on. In conjunction with this, people will be moving out of the “owner” population and into the renter pool. Rents will only strengthen as the population of renters increases faster than the supply of rental properties. This will remain true even if investors purchase some of the foreclosed properties because the displaced owners become renters.

In some markets with low land values, the wave of foreclosures is pushing market prices far below the cost of construction. Fundamentally, this means that buyers will have “built-in” equity since the low prices have ground new construction to a halt and future demand increases will push market prices up toward replacement cost before new construction begins.

This Regression to Replacement Cost™ is expected to be an upward force on future market values in some areas—notably Atlanta, Dallas, Indianapolis and Phoenix. Conversely, in markets such as California and New York with high land costs, there is considerable room for price compression since the values exceed replacement cost by a very large margin. It is not likely that land value in these markets will compress to zero, but whenever land value makes up a high percentage of total market value, there is more downside risk exposure.

In the end, the only situation that can create a fundamental market recovery in real estate is an increased number of people paying their bills. With national unemployment at 9.2% at the end of June according to the Bureau of Labor Statistics, there is considerable slack in the labor markets that stands in the way of a fundamental recovery. It is likely that real estate will lag the overall market recovery, as there need to be more people who are employed and paying their bills before a sustainable increase in the number of people purchasing homes appears. For astute investors, there are tremendous opportunities available to purchase properties in healthy economic areas for prices far below the cost of construction.

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