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10 Challenges Awaiting Obama in the Real Estate Sector

cautious ObamaThe president-elect is ushered in during the housing market mayhem.

President-elect Barrack Obama has made the headlines both here and abroad with a landslide victory on Tuesday. Yet we know that the party stops there. He’s inherited a financial crisis, forcing him to get his act straight in the hopes of fixing the economic woes.

Obama has taken the challenge, and what a challenge it will be. In the next few months, here are 10 things in the real estate sector that he has to work on to bring the changes that he promised during his campaign.

1. The best candidate for the Treasury Department

After installing Rep. Rahm Emanuel as the White House Chief of Staff, all eyes are on the nominees who will be tapped for the Treasury Department. A good amount of experience is needed with no conflict of interest. We favor New York Federal Reserve Bank President Timothy Geithner to assume the Treasury Secretary post after his solid work on resuscitating Fannie Mae and Freddie Mac and on bailing out several investment banks. The Wall Street Journal has listed other possible candidates for the job.

2. A long-awaited oversight committee for the bailout program

Having supported the $700 billion rescue plan, Obama promised to have stronger oversight of the program. According to Henry Blodget in Newsmakers, we must realize the government cannot bail out every bank since it doesn’t have the authority to do so. By ensuring that no taxpayer money will go to executive pay and benefits, stricter regulation from the committee can assure the public that the funds will be earmarked for subprime mortgage solutions.

3. Unregulated mergers from federal rescue recipients

Financial firms that were rescued by the government and then acquired smaller institutions are under scrutiny by critics of the bailout plan. There have been accusations the firms misused the funds to merge with small banks instead of purchasing bad mortgages. More so, small banks applying for federal backing are often turned down in favor of their larger counterparts. House Financial Services Chairman Barney Frank should consider stricter guidelines for use of the bailout fund.

4. Lower consumer spending confidence

The Conference Board Consumer Confidence Index has fallen to an all-time low of 38.0 in October from 61.4 the previous month. It may take some time to ease the pessimism following months of dire business headlines. The White House transition may push back the index to higher levels, but its vulnerability to the effectiveness of Obama’s proposals remains critical. Though it’s impossible to fine-tune the property sector as early as the second quarter, we can’t deny that the public is weary and needs a plan they can embrace and feel good about.

5. Downbeat home construction

As one of the many casualties in the mortgage meltdown, home builders should start recovering from construction’s collapse by next year or more firms will be forced to shut down their operations and slash more jobs. Workers can easily shift to highway and other transportation construction firms like Vulcan Materials, which can rake in millions from Obama’s infrastructure building program. What then would be the future of this billion-dollar industry?

6. Tighter credits

If commercial lending has taken a back seat for the obvious fear of losses during a weathered economic climate, mortgage applications are even more affected with average income earners losing hope of owning a house. The bailout fund should stir the credit market, but if the doled-out budget is hoarded by banks for increased capitalization and finance expansion, then no credit will be available.

7. Rising wave of foreclosures

Last September, the country recorded more than 107,000 foreclosed houses. The crisis is far from over and home prices continue to dip in debilitated states like Nevada and Arizona.

Obama has expressed his intention to alter bankruptcy laws to allow bankruptcy judges to consider mortgage debt. If this is pushed through, more sour loans can be reduced, resulting in fewer foreclosures on the market. However, this won’t be a breeze with the strong opposition from banks who are on the losing side, according to BusinessWeek.

8. Business taxes levied on larger firms

Commercial real estate companies with earnings above $250,000 will now be hit by Obama’s fiscal policy as part of his proposed “transfer of wealth” program. If conditions still fail to improve in the housing sector, expect corporate downsizing through reduced operations and manpower in order to sustain their businesses. The president-elect has brushed aside heavy criticisms of his tax plan and believes the middle class will benefit the most from his policies.

9. Growing Option ARMs

Not all banks have cancelled optional payment ARMs as JPMorgan Chase did a week ago. The California housing market has been severely troubled by Option ARMs since it gained popularity in 2004 (and notoriety several years after). Prashant Gopal predicts that by next year, these dangerous mortgages will reset and haul in thousands of foreclosures.

Obama can lay down choices for homeowners with the existing Federal Housing Administration loan modification program and provide federal regulation to Option ARMs that are still not eliminated in banks’ portfolios. An effective mortgage modification that can reduce the interest is needed to convert high-interest payments.

10. Rising vacancy rates in commercial properties

Rising unemployment has caused vacancy rates to spike in commercial real estate, especially in California, according to David Wyss of Standard & Poor’s Equity Research. Wall Street continues to suffer from job losses and office spaces may remain unused for an even longer period since the crisis can’t be tamed yet.

Job creation is an often-repeated advocacy of Obama during the campaign, though many programs are geared toward blue-collar services. Once the fundamentals are in place, businesses should be optimistic in reabsorbing lost human resources to jumpstart their operations again.

Obama knows that his rhetoric should now be translated into action. America should begin its extrication from an economic slump that began in the property market. These are just 10 challenges for the government, but there will be more to come.

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