But, in most areas and situations, the reaction to bad economic news can be an over-reaction. Prices drop with forced or panic selling, creating opportunity for some. Real estate investors who know their markets can put the immediate situation into perspective and take advantage of low prices to add to their real estate investment portfolios. Of course, a firm conviction that the current situation will correct for the better is required, which is why the investor must know their market. Some of the reactionary factors create opportunity that doesn't normally exist for real estate investors:
Local areas can experience the loss of a major employer or industry. Panic selling ensues, and there's a decided reduction of home prices for a while. Mortgage lenders in that area tighten up in order to adjust for risk from economic fallout in other employment related to the major event. The story never changes, and every time it happens, there's opportunity for real estate investors who understand the cyclic nature of real estate, and know their local markets intimately. That last part is important. If it's a situation like Detroit with closing auto plants all around the city, then it may be decades before a return to prosperity, if ever.
- Increased Rental Demand - If people are moving away, this wouldn't be probable. But, if the negative economic factors are stable employment but wage cuts, there could be people who lose their homes but remain in the area with a need for rental housing. There can be a variety of reasons for an area to fall on hard economic times that do not necessarily force people to move away.
- Foreclosures/Short Sales - If the economic damage is significant, people will be losing jobs, and probably quite a few homes will be in mortgage trouble. This creates downward pressure on prices, and an opportunity to buy properties well below previous market pricing. This can create an opportunity that didn't exist previously for positive rental cash flows.
- Mortgage Interest Rates Fall - When low mortgage interest rates are in play at the same time as low prices, it's a really lucrative environment for real estate investment. Investors who can make required down payments can get financing at low rates, which lowers payments to increase positive cash flow.
