Back in 2004, foreclosures accounted for a mere 2 percent of real estate transactions nationwide; the fact that that number has now risen to 30 percent in Q1, according to Zillow.com gives a good glimpse into the state of the real estate market. While foreclosures are typically not a good thing, for the savvy investor, they most certainly can be. Some investors are turned off by foreclosures, because they are typically older, lower priced homes in undesirable areas, but this trend is also changing.

New homes are now making up an increasingly larger piece of the foreclosure market. In fact it is estimated by Credit Suisse that new home foreclosures will reach 1.69 million this year, according to an article from Dow Jones Newswire. This surge in foreclosures is of course in part the result of speculators who bought with the hopes of flipping the homes at a quick profit (not a very good strategy with new homes, FYI), as well as the fact that the overall market has tanked, leaving most people who bought recently (including new homes) underwater. With all these new homes coming on the market as foreclosures, investors have an opportunity to pick up some great properties that should be in good condition, assuming the homeowner doesn’t trash the place before they move out.

While the 30 percent nationwide number may seem pretty high, in some areas things are even more pronounced. Foreclosures account for 72 percent of all the real estate transactions in Stockton, Calif., and 45 percent of all the transactions in Las Vegas, according to the Dow Jones Newswire article.

Investors who are interested in going after these foreclosure opportunities should identify at which stage they want to enter the game: when the properties as pre-foreclosures, at the foreclosure auction or as REOs. One advantage to buying them as pre-foreclosures is that investors can potentially avoid much of the damage that angry homeowners tend to inflict on their homes before they take off. In addition, investors will have the opportunity to inspect the property before they buy it, and if they play their cards right, the opportunity to help someone avoid foreclosure while making some money themselves. On the other hand, the pre-foreclosure arena is quickly becoming locked down by many states as they try to protect homeowners from various scams. This is not to say it can’t be done in those states, but there are some potential liabilities and things investors need to be aware of (see our previous article about HB 2791).

Buying at auction typically allows for investors to grab the biggest bargains, but that is largely because of the extra risk they have to take. When buying at auction, buyers typically aren’t able to inspect the home prior to purchasing and there are no refunds. In addition, buyers have to bring cash to the auction, so they aren’t able to utilize leverage in these deals, at least upfront (there are some private lenders out there that will lend at low LTVs for investors to buy at auction, but all the ones I’ve seen charge ridiculous fees and interest rates).

Lastly, buying the property as an REO allows buyers to inspect the property, acquire financing and all that jazz. But in order for a property to make it to REO status it has to get through the first two stages, meaning that it is likely that the best deals have already been scooped up.

Labels: foreclosures, housing bubble, real estate

One of the advantages--also, in fact, a potential disadvantage--of a self-directed IRA is that there are a plethora of investment opportunities to choose from. Today we are specifically going to look at private loans. Private loans are loans made from an individual to another, so no banks are involved. In terms of private loans as an investment vehicle, there are, of course, pros and cons.

Private loans can potentially provide investors with substantial returns. Typically, borrowers turn to private loans--knowing they are going to be more expensive than traditional bank loans--because they can’t qualify or don’t have time to wait for bank loans. Again, this can present both a risk and an opportunity for investors. In addition, private loans can also be secured against assets--including most notably including real estate--helping to minimize risk factors.

Investors considering private loans need to take several factors into account. First off, they need to make sure to judge the adherent risk involved with the particular loan accurately. There is a reason these borrowers are turning to private lenders for money, and investors need to find the balance between risk and return. Secondly, banks make their money by lending money; they have the process and paperwork down to a science. They know exactly what they need to do and what they need to have the borrower sign in order to ensure that they have maximum protection under the law. As a private investor you would be wise to do the same. Make sure your contract is good and that you are taking all necessary steps to validate the contract. If it needs to be recorded at the court house, make sure that gets done, and so on. Lastly, private investors need to understand what to do if the borrower defaults. What process do they need to follow in order to collect? With private loans made to friends or family this part becomes especially hard to swallow, but if investors are truly looking out for their investment, they need to take appropriate action.

Now let’s look at some of the things self-directed IRA investors need to keep in mind when investing in private loans. One of the biggest factors that self-directed IRA investors need to understand is the prohibited party rule. When investing your self-directed IRA funds, there are certain people with whom you are not allowed to deal. According to the IRS the following people are all disqualified:

1. The IRA owner; his or her ancestors (i.e. parents, grandparents); his or her lineal descendents (i.e. children or grandchildren)
2. The spouse of the IRA owner
3. Financial advisors and other fiduciaries
4. Any entity owned 50% or more by a disqualified party (such as a business half-owned or more by the IRA holder’s daughter)

If you deal with any of these people, you are going to be in direct violation of the rules and will be heavily penalized. Outside those mentioned above, you are able to deal with who you wish, however remember this next point: As the person in charge of your IRA’s investments, you have a fiduciary responsibility to the IRA. That means that if you decide you want to lend money to your brother, girlfriend or anyone else with whom you have a relationship, you are required to put the best interest of the IRA ahead of your relationship. If your sister defaults and you don’t send her to collections, the IRS could find that you’ve violated your responsibilities and still hit you with all the penalties. This is not a situation you should take lightly, so as a self-directed IRA lender, you need to make sure that if you lend money to someone you have a relationship with, you are willing to do what is necessary to act in the best interest of your IRA. Make sure they understand this upfront, too, so that if push comes to shove, the will be prepared.

Another thing to keep in mind when investing in private loans with your self-directed IRA is that loans are not always liquid. Make sure you are aware of the mandatory distribution rules (required distributions start at age 70.5) as well as when you might need to access those funds for retirement expenses.

With that in mind, if you take the appropriate precautions, private loans can be a great investment for their IRA. Personally, if I were making private loans in my IRA, I would limit them to secured loans (preferably real estate) at fairly low LTVs. I want to know that the money in my IRA is safe and secure, but I also want to see it grow. Done correctly, private lending can achieve both those goals. Compared to what is going on in the stock market and real estate markets right now, making private loans seems like a pretty good option. If you are making real estate loans right now, though, make sure the LTV is low enough to account for possible value loss.

One telling sign as to the validity of private loans within self-directed IRAs can be found in a client survey done by Guidant Financial Group recently, in this survey they found that private lending within self-directed IRAs had increased 131 percent since 2005. That’s a huge increase in self-directed IRA private loan activity, and in today’s market I certainly can’t say I blame them.

Labels: investments, retirement, self-directed IRA

In the latest of what seems like bad report after bad report for Countrywide, now Governor Chris Gregoire of Washington state is looking to revoke Countrywide’s lending license in the state. Charges were filed June 23 by the DFI accusing Countrywide of unfair dealings with minorities in addition to $5 million of assessments the state says the company short-changed them. Countrywide now has 20 days to respond to the charges and request a hearing, according to a blog post from the Seattle Post-Intelligencer.

This matter is increasingly complicated considering that Countrywide is set to be acquired by Bank of America. However, according to the blog post from the Seattle PI, Gregoire is planning to see these charges through regardless of the takeover. Considering that other states, such as California and Illinois, are also working on lawsuits against Countrywide, if I were Bank of America, I certainly would not be feeling too good about the acquisition right now, and would be looking for an out.

Beyond the Bank of America ordeal, the larger underlying factor that needs to be considered is whether or not these states are looking at serious unintended consequences by revoking Countrywide’s license since Countrywide is one of the largest home lenders in the nation, and in fact largest lender in some markets. With today’s tightening credit markets, acquiring a loan to buy a home is getting harder and harder--now take out the top lender and just think how things may become.

Last August I put one of my houses, which happened to be a prime candidate for a knock-down and rebuild, on the market in Bellevue, Wash. During the process of selling the home, I had three different deals fall through because of financing, specifically the inability of the buyers to acquire the necessary construction financing. It turns out that the lenders they were working with kept closing up shop (or at least closing the construction lending side of their business) in the middle of their loans; in the end the only lender left doing construction loans in the area was Countrywide. Needless to say, they were pretty busy--so busy in fact that the last buyer’s loan rep said they would be lucky to get into underwriting within 30 days after submission, even with a full package. In the end I decided to sell the house to an investor who wanted to keep the home as a rental. I lost a few grand off what the builders were willing to pay, but the deal got done. I’m not sure if it would have got done through Countrywide or not, but I do know that without Countrywide, there wouldn’t have been anyone even willing to do the construction loan (at least according to these loan reps I spoke with). So that is one example of how Washington real estate may be impacted by the loss of Countrywide as a lender, and of course construction loans are just one of the loan types they offer.

Labels: mortgages, real estate

There has been a lot of talk recently about down payment assistance programs, and specifically whether or not they should be banned. Politicians and these down payment assistance companies have been fighting for some time on the subject, and so far the down payment assistance companies have won. Many believe that these programs are simply taking advantage of a loop hole in the FHA system and contributing to a huge number of foreclosures, while supporters proclaim that the companies are providing a vital service that is allowing low income and minorities the opportunity to enjoy homeownership for the first time. But what are we to believe? Are these programs really good or bad?

Ultimately, proclaiming whether these programs are good or bad is tough because in the end, it is subjective. On one hand, they are providing a way for people to own their own home; on the other, we have to ask ourselves, first off, whether or not owning a home is really the best thing for these people if they have no money? Are they, and are we as a country, better off with these individuals as homeowners? A tough question, but let’s take a stab at it.

The main objections to down payment assistance programs are that they have an unusually high default rate and put undue pressure on the homeowners and the FHA; they really aren’t non-profits; and they violate the intent of FHA regulations.

The unusually high default rate is most certainly a valid point. According to data on FHA loans, the down payment assistance loans result in around 3 times the normal level of default. In addition, I used a quote from FHA commissioner Brian Montgomery in a previous post in which he said, “…no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.” This quote was directly aimed at increased losses stemming from down payment assistance programs which now comprise around 35 percent of FHA loans. Supporters of the down payment assistance programs prefer to take the glass is half full approach and focus on the fact that 94 percent of these homeowners pay their mortgages with no problem, but it is hard to argue that the default is a serious problem when the FHA chief is on record saying that it could be the FHA’s downfall if they are not stopped.

The next complaint against these companies is that they aren’t really non-profits. In fact, the IRS has a big beef with the way many of these companies have been operating, and has revoked the charitable status of a number of these companies. That being said, as you can see the big players in the field have yet to be shut down and appear (at least in the IRS’s mind) to be operating within the guidelines set for charities.

The last point is the big one in my book: These companies are clearly violating the intent of the FHA’s guidelines. To qualify for an FHA loan, buyers have to be able to provide at least a 3 percent down payment--the catch is they do allow for gift funds to cover the 3 percent. However, it is expressly forbidden for those funds to come from the seller. In a typical down payment assistance arrangement, that is precisely what happens, only the down payment money is “cleaned” by passing through the non-profit (sounds kind of like money laundering, huh).

These deal work like this: The buyer and seller come to an agreement on price (typically bumped up enough to account for the following contribution), the seller donates 3 percent of the purchase price to XYZ non-profit and the non-profit issues a grant to the buyer for the 3 percent they need to buy the home--minus a handling fee, of course. Now how doesn’t that violate the intent of the FHA guidelines? The down payment assistance companies can spin this all sorts of ways, but at the end of the day they need to be able to answer this question: If the seller didn’t donate that 3 percent, would you still make that grant to the buyer? If they can truthfully answer that question, yes, then so be it; however, I’m pretty sure that is not usually the case. So it doesn't matter whether one seller’s funds are technically supporting some other buyer, and this buyer is being supported by some other seller. If the only way the deal is getting done is by the seller making the 3 percent donation, then it is a violation of the true intent of the guideline.

I’m not going to argue that these programs provide zero benefit, because I think in certain circumstances they can prove to be a valuable resource for people. But these programs are a blatant attempt to circumvent established FHA guidelines and should be put to an end. If we want to legitimize these programs then we need to change the guidelines to allow for them, and in my mind if we are going to do it, we need to create a box around it as well. I don’t think people should ever be buying a home if they have no money. What happens if the roof fails, or if they are out of work for a couple months? Everyone should have some savings, but homeowners need to have a substantial amount. Now if these people have some money, but want to keep it in reserve instead of putting it as a down payment on a house, then that is where I see down payment assistance programs as useful. Maybe the new guideline should be that buyers have at least 3 percent of the homes’ value in savings.

Labels: mortgages, real estate

With the popping of the housing bubble, the credit bubble and various other bubbles recently, it may be hard to believe, but some argue that these bubbles are in fact good for us. I know that is hard to believe, especially considering that we typically condemn them and governments strive to prevent them, but let’s take a look at some of these arguments and see what pro-bubblers have to say.

“…in bubbles, investors' money is used to build infrastructure that can't possibly repay its upfront costs, but ends up being beneficial for companies and consumers in the long run - particularly after more-efficient companies have picked up the pieces on the cheap,” according to Daniel Gross, author of Pop! Why Bubbles are Great for the Economy, as reported in New Scientist. The same New Scientist article goes on to give several examples of this phenomenon, including the recent dot-com bubble which paved the way for today’s Internet. For a more historical example, they offer the railroad bubble of the 1840s which later, even though the original investors lost everything, proved to be quite beneficial for Britain because it laid the infrastructure for the best railroad system in the world at the time.

Here is another quote from the article: “Didier Sornette, a physicist who is now a risk specialist at the Swiss Federal Institute of Technology in Zurich, argues in a paper in press at Journal of Economic Interaction and Coordination that it is only during the reckless abandon of bubbles that individuals and companies take the foolhardy risks needed to develop technologies with large social impacts but low financial returns.”

The author of the New Scientist article argues that today's bubbles could also prove to be beneficial in the long run. The housing bubble has created a huge inventory of housing that is now available at a discount for buyers; borrowing money will be easier after the bubble than it was before because it fostered the creation of sophisticated risk analysis techniques; and even the oil bubble could be good because it will likely lead us to explore alternative energy.

Overall, I thought the author made some excellent points, and I can see how some bubbles--while hard to swallow in the short term--can prove to be beneficial in the long term. One thing missing from his article, though, is a comparison with bubbles that didn’t turn out to have any great lasting benefit. Sure, we can see that a few bubbles throughout history have turned out well, but have there ultimately been more bubbles that resulted in good outcomes or bad outcomes? Because if most bubbles still turn out bad when all is said and done, it is hard to say that we don’t need to worry about them.

Just looking at today’s bubbles, I can see how the oil bubble can potentially turn out to be beneficial, but I’m having a much harder time with the housing and credit bubbles. Sure, people can seemingly buy houses at a discount, but in reality housing prices still haven’t reached as low as they were prior to the bubble in many markets. Housing prices are still falling, so we may end up in better shape price-wise, but we also have to consider that around 67 percent of Americans are homeowners. With that in mind are we really better off in general, or are the 33 percent of population comprising renters the only ones better off? A case could be made either way I suppose, but I doubt that if we had the chance to do it all over again we would choose the bubble over nice steady growth. As far as the credit bubble, we can look at the infrastructure, businesses and so on that we were able create thanks to cheap credit, but again I’m not sure that those benefits are going to outweigh the costs either. I guess ultimately only time will tell.

In the end of the article, though, the author makes a great point: Ever since the tulip bubble of the 1630s we have been trying to prevent bubbles, but ultimately, we have proved unsuccessful. It seems that no matter how hard we try, human nature will fuel this bubble behavior, and thus perhaps we would do better to spend our time trying to make the best of the bust rather than trying to prevent the boom.

Labels: economy, housing bubble, real estate

Argentina became infamous earlier this decade for defaulting on their debt during a major financial crisis, and now it appears they have defaulted once again. This time around, things aren’t quite as bad in the country, and the default is a little different, but their actions still qualify as default, according to an article written by a couple economics professors for the Wall Street Journal. Carmen Reinhart from the University of Maryland and Kenneth Rogoff from Harvard claim in their article that Argentina has manipulated their inflation data in order to pay out less on their inflation indexed debt, thus putting them in default.

The professors say that the government’s scheme began with the firing of their top statisticians. Now the inflation measurements that are being “officially” reported are drastically understated. According to the article, Argentina is reporting an inflation rate of less than 10 percent when by most external measurements, the real rate should be closer to 30 percent. The Argentine government owes around $30 billion in inflation indexed debt, according to the article.

Investors should know that circumstances such as this are always a risk when investing, especially in developing countries. Argentina isn’t alone in these types of actions, either. Across the world, countries manipulate their statistics to be in their favor. Sometimes they are minor “adjustments” and sometimes that are major and pretty blatant, like in this case.

I want to also point out that, while these types of things are more pronounced in developing countries, they happen here at home, too. The U.S. has adjusted things in their favor before (such as the gold price in the '30s) and still do it today (such as the CPI and GDP). So don’t be naïve and think this will never impact you because you don’t invest abroad; government manipulations of economic data happen here, too. Inflation indexed bonds just happen to be one of the easiest debts to influence, so invest in them with your eyes wide open.

Labels: economy, inflation, international, investments

Labels: fuel prices, inflation, Oil, recession

In an interview with Fortune, Republican presidential candidate John McCain was asked what the single gravest long term threat to the U.S. economy was. This is not an easy question, with so many choices and all. Is it the housing crisis or the credit crisis? What about the huge deficit the country is running, or the rising cost of energy? How about Social Security? McCain didn’t select any of those options; instead, he said that radical Islam was the single biggest threat to the U.S. economy. Pardon me a moment while I let this sink in a bit…nope, still don’t see it…oh well, maybe it’s beyond me. Why don’t we analyze it a little more and see if that helps?

Okay, so 9/11 did a number on our economy, I give him that. I can also understand the argument that terrorist attacks, or even the threat of them, can upset consumers, thus affecting the economy. So radical Islam can have an impact on the economy, but is it really the biggest threat? Wait…I think I get what he is trying to say--maybe McCain is telling us that radical Islam is the biggest economic issue because it is forcing us into war and costing us not only billions of dollars each year to fight abroad, but also billions to fight here at home. Oh, and it is also a problem because the movement keeps growing stronger the more we fight it--kind of like using fire to put out fire. Wow, I totally understand now, this fight is going to go on forever--man, that is going to be a downer for our economy. Okay, so now I see why it is such a huge problem…

In all seriousness, I could go on for awhile about why radical Islam is, and has, been fueled by our actions, but for the sake of brevity I will not (for more information here is a good write up). Based on the fact that we in essence created (in many cases) and have fueled radical Islam, maybe the biggest long- term threat to the U.S. economy is not radical Islam, but rather poor foreign policy. That might not be such a bad selection after all. We could look at the national debt as a big one, but we can also say that a lot of that debt was created because of poor foreign policy decisions. We could make the same case for several other problems as well.

At the end of the day, we know exactly why McCain chose radical Islam as the biggest problem, and that is because he is riding the “national security” ticket. If any voter has serious doubts about our national security, McCain is their man. The politics of fear, as it is called, is probably the biggest thing McCain has going for him right now, and he wants to milk it for all he can. The more American voters he can convince that national security is an issue, the better chance he has to win. It also doesn’t hurt that Barack Obama, the Democratic candidate for president has family ties to Islam, a point which has unfairly caused accusations that he is supporting terrorists--despite the fact that Obama himself is a Christian, not a Muslim. Long story short, McCain chose this reason for political purposes, yet he might not be too far off in actuality--only he needs to focus less on the effect and more on the cause.

Labels: Barack Obama, economy, John McCain, politics

To help stop the surging tide of foreclosures some cities have decided to take matters into their own hands, or in the case of Trenton N.J., place it in God’s hands. These cities have put their creative energy to work and are seemingly willing to do whatever it takes to keep residents in their homes. A recent Associated Press article talked about several creative measures being taken by cities:

In Philadelphia, the court decided to make it mandatory for lenders and homeowners to get together to try to work a deal out before they would proceed with a Sheriff sale. In addition, the court assigned homeowners volunteer attorneys and housing counselors.

In Cleveland, the city decided to sue lenders for hundreds of millions of dollars in damages stemming from loans they deemed to be predatory. Minneapolis and Buffalo are undertaking similar lawsuits. The lenders, of course, say that these lawsuits have zero merit and that they are simply an act of desperation on behalf of the cities.

In Jacksonville, Fla., residents in distress can apply for interest free loans of $5,000 which will be forgiven if they remain in their homes for at least five years. Louisville, Ky., has a similar program but they require residents to remain in their homes for 10 years.

Los Angeles is staffing foreclosure counselors in neighborhood centers for jobs and city services in addition to working with neighborhood councils.

Perhaps the most creative and useful--or most desperate, depending on one’s beliefs--comes from Trenton, N.J. Trenton’s mayor, Douglas H. Palmer, has requested all preachers in the city to preach at least one sermon on foreclosure in June. In addition, he has asked churches to distribute to their congregations materials meant to help people facing foreclosure. Many people from the churches are even wearing T-shirts that say “Save Trenton Homes!” with numbers for a help hotline on the back.

The number of foreclosures continue to rise, and it doesn’t appear that it is about to stop any time soon. As time goes on I would expect to see continued acts such as these from desperate people. I certainly don’t blame the cities for trying--at the very least, it shows their residents that they care about them and are willing to put up a fight. However, in the end, most of these desperate measures will fail to help. Trying to keep someone in a home they can’t afford is futile. We will have to accept that the market needs to correct itself, and next time around we as homeowners need to ensure that we don’t get ourselves into homes and mortgages that are more than we can handle. This housing crisis is one big learning experience for Americans: Don’t spend money you don’t have, or in the case of lenders, don't lend money to people who can’t pay it back. I just hope the federal government doesn’t pass the big bail out deal that changes the lesson around to don’t be afraid to spend more money than you have, or be careless with your lending, because the government will bail you out if it comes to it.

Labels: economy, foreclosures

One such institutional investor is Strategic Real Estate Advisors. They believe that now is the time to get back in the market. They have created a fund called the Florida Prime Residential Opportunity Fund, which plans to raise $1 billion to invest in oceanfront condominiums and undeveloped land approved for housing, according to an article from Bloomberg. It appears most of their investments will be located in the Miami area, but they are also willing to look at Orlando and Tampa, according to the article.

The Florida Prime Residential Opportunity Fund isn’t planning to just jump head first into the market, though. They have targeted a price point of around $400 per square foot which they are willing to pay for these properties, and they will wait it out until the right deals to come their way. Properties are now selling for around $500 per square foot; at the height of the housing boom, prices were around $1000, according to Bloomberg. The fund says they expect to see annual returns of 20 percent and have set a holding time frame for the properties of 7 to 10 years.

Are these institutional investors smart, or are they setting themselves up for a miserable failure? That is the question many people are asking themselves. Personally, I think they should do quite well, but I think their 20 percent per annum projected returns might be a little unrealistic. Here is why I think they will do well:

• They set a clear goal for what they are willing to pay for property, and it represents a great value

• They have a large sum of money to work with, which mean they can get preferred pricing

• They have set a long term time frame which will allow time for the markets to recover

• They selected a market that has eternal appeal

Again, while I do think that in the end they will turn a decent profit, 20 percent seems a little high, especially considering that they plan to buy the properties with all cash. When the market finally does recover I just don’t see it jumping as dramatically as it did during the bubble. Instead, I see a 4 to 6 percent yearly appreciation as a more likely scenario once the market turns the corner. I’m assuming they plan to use the condos as rental units while they hold them, but again, the income they can expect to generate might not be as high as they are hoping. One of the problems with renting high end property is that first off, you typically aren’t able to get a high rent in proportion to the properties’ value, and secondly, you have a much higher maintenance cost. The maintenance will be an ongoing experience during the entire holding period, and then when they look to resell the property in 7 to 10 years, they will also likely incur a large remodeling expense to bring the property back up to top condition after several years of being rented. Of the two strategies, I think the land one offers higher return potential, but I still just don’t see 20 percent per year.

For investors, after you take out the funds fees and so on, you can probably expect to be left with a return that isn’t all that exciting. So while I do think that their plan is solid, and that they should be able to make some money, it won’t be as much as they are expecting. Individual investors, though, should be able to do even better utilizing a little leverage and some market savvy. If you plan to go it on your own in a volatile market like this, though, just make sure to keep your cash flow positive. Don’t bank on appreciation--let it be the icing on the cake, not the cake itself.

Labels: housing bubble, investments, real estate

I read an interesting article in the Washington Post that I wanted to share. The article talks about some of the reasons why people may be amplifying the economic carnage. Here are some quotes I pulled from the article, along with some key points the author didn’t mention:

“…so far, the economy is holding up better than it did during the last two recessions in 1990 and 2001. Employers haven't shed as many jobs, the unemployment rate is still relatively low, and gross domestic product has kept rising. Things are nowhere near as bad as they were in the Great Depression, or even during the severe recession of 1982-83. The last time consumers were this miserable, in May 1980, the jobless rate was 7.5 percent and inflation was 14.4 percent. Now those numbers are 5.5 percent and 4.2 percent respectively.”

“’We're saying that we feel a lot worse than we did at the depths of the last recession, when we had had 2 or 3 million job losses, that we feel worse than we did after 9/11,’ said William Cheney, chief economist of John Hancock Financial Services. ‘At some level, that just doesn't make a whole lot of sense.’”

“The run-up in gasoline and food prices, for example, appears to affect people's perception of how they're doing more than a similar price rise in other goods.”

“’Things that you buy more frequently and that have large percentage increases will weigh more in people's perception of inflation,’ Eric Johnson, who studies behavioral economics at Columbia Business School, said.

“‘If the unemployment rate goes from 5 to 7 percent, that affects 2 percent of the population,’ said Michael Feroli, an economist at J.P. Morgan Chase. ‘If gas prices go up, almost 100 percent of the population feels terrible.’”

“Americans have been unnerved by the financial crisis that was a major cause of this broader economic slowdown. The credit crisis has spilled from one part of the financial markets to another. At times, the wheels of global capitalism have appeared to be at risk of coming off.”

“Another factor is that homes are losing value -- and this reduces the wealth of more people than a plummeting stock market like that of 2001. Currently, 68 percent of Americans own their home. In 2001, only 21 percent owned stocks directly.”

“When home prices are rising, people spend more money. When they are dropping, they don't spend less money. With stocks and other assets, by contrast, spending both rises and falls with prices,” Wellesley College economist Karl E. Case found.

“Some analysts attribute Americans' negative views on the economy to media coverage, which tends to play bad news more prominently than good news.”

“The biggest reason for people's gloom might be because of what they're used to. In the 1980s and '90s, memories of the double-digit unemployment and double-digit inflation from the 1970s were still fresh.”

In my mind, many of these points are valid. However, I do want to point out a couple things the author doesn’t mention in his article. For one, it is hard to compare our current inflation numbers to those reported back in the '70s and '80s. While our current inflation might be reported at 4.2 percent, if we actually calculated our inflation the way we did prior to the Clinton administration, it would actually be more than 7 percent, according to Shadowstats.com (visit their site if you want the full background on changes to the CPI). On the same note, John Williams from Shawstats.com thinks the unemployment numbers are significantly understated as well. Again, on his site he talks about the various changes made to how they are reported during the Clinton administration. The point is that it is hard to really compare these statistics since the way they have been calculated has changed over the years.

In addition, the author fails to mention anything about the nation’s debt load. The U.S. has more debt on the books now than ever before and much of our financial growth over the years can be directly contributed to that. We have in essence financed our luxurious lifestyle, and we keep thinking we are never going to have to worry about paying it back. I’ve harped on this in past posts time and time again, but there will come a point when we will be forced to address the issue. At that point we will have two choices (I’m eliminating the third choice of systematically paying off the debt with budgetary surpluses, because I know that is never going to happen): Either we default on the debt or we print more money. Of the two, the likely winner is printing more money, which will of course lead to increased inflation. In my mind this is a big and scary variable that not many people seem to give much weight to.

All in all, I agree that things are probably being a little overblown in the press, and I’m probably guilty of it as well. However, things certainly aren’t all roses either. While we might not be facing another Great Depression, we are heading for some serious hardship. It may not be fully realized this year, or the next, but it is coming. We cannot maintain our current lifestyles forever on borrowed money; changes will have to be made at some point.

Warning: This post contains the words ‘Vegas’ and ‘Bush’ and should probably not be read by children.

As the recession worsens and belts tighten, it seems that some people’s pants are staying up for once, so to speak: Vegas Brothels are being pounded by the recession, with some locations reporting revenue losses as high as 45 percent, according to an article in Newsweek. Lust may be one of the seven deadly sins, but it is apparently not recession-proof.

It seems that when it comes to what people want on their tables, some people still think food is more important than strippers. My faith in humanity is restored. But how are Vegas' other tables faring? Vegas casinos, too, are on a losing streak and Wall Street doesn’t expect a turnaround in the near future. Though a major tourist draw, casinos are viewed as competitors by brothels in Vegas, so if the casinos aren’t performing either, just where is the money going? From the Newsweek article:

"Some of these brothels are out in the middle of nowhere so fuel prices have an effect,” says Dennis Hof, owner of the infamous Moonlite Bunny Ranch. According to the U.S. Energy Information Administration, diesel on the West Coast now costs $4.87 per gallon. That means truckers could easily spend $1,000 to fill up their tanks, leaving them with little extra cash and less likely to take a detour.

A quickie courtesy of the government is not going to help the sex industry very much, and though it may be hard to swallow, brothel owners may need to relocate entirely. Nevada law prohibits brothels from operating in towns of more than 400,000 people, so options are limited. If this Strip is out of the question, the Belt may be a better option: The Capital Beltway, that is. After all, the only whores making money these days all work in D.C.

As I’m no fan of the sex-industry, I probably shouldn’t be giving them any more ideas, but here’s another one all the same. As gas prices increase, more Americans may begin to rely on mass transit. Perhaps brothels should work out a shuttle system to bring in their Johns (and their Benjamins). Earlier this year, Seattle opened a streetcar referred to as the South Lake Union Trolley (the S.L.U.T.). If there’s any place in this country where people are shameless enough to be seen entering a bus bound exclusively for houses of ill-repute, it’s Vegas. They can run a service from the Airport to the Brothel and call it the A to B Shuttle, or any number of fun names:

• The Busty Bus
• A Streetcar of Desire
• Las Vegas Park and Ride and Ride
• The Meat Wagon
• or Chitty Chitty Bang Bang: The Magical Car

Senators Christopher Dodd (D-Conn.) and Kent Conrad (D-N.D.) have been implicated in a mortgage scandal involving Countrywide bank. This is obviously a touchy issue considering that Dodd is the chairman of the Senate banking committee, it is an election year and a $300 billion lender bailout is supposed to be voted on today in the Senate.

In Dodd's case, the accusations basically boil down to whether or not he was given special pricing in relation to a couple refinance loans he got from Countrywide in 2003. Dodd denies receiving any special rates and adamantly claims that the rates were at market, but he does admit that he was likely on Countrywide’s VIP list.

Dodd's accusers have e-mail evidence apparently showing that Countrywide did, in fact, give Dodd preferential treatment. Countrywide sent an internal e-mail message that said to give Dodd a 0.5 discount on his rates because he was a U.S. senator, according to Portfolio.com.

Dodd denies any wrongdoing and is prepared to fight all allegations against him. Considering the facts that I have read, I don’t think they will ultimately find him guilty, yet the effects could be hard-felt nevertheless. The major $300 billion mortgage bailout bill has already been delayed while this investigation is underway, according to the New York Times. In a time when Democrats are trying to support their presidential candidate, Barack Obama, any bad press for the party certainly affects him. Dodd is a high-ranking Democrat who was a candidate in the 2008 presidential election himself, and whether or not Obama has anything to do with Dodd, it won’t change how the Democratic party in general is perceived by some.

Personally, I’m all for the investigation. If Dodd did, in fact, take advantage of his position, then he should have to pay the consequences. More importantly, this has held up the $300 billion bailout bill. Since I am adamantly opposed to a mortgage bailout, I hope that this bill gets delayed permanently.

Labels: Barack Obama, mortgages, politics

Foreclosure rescue scams have been rampant since the burst of the bubble, as homeowners sunk by predatory lenders reached out for help. Many legitimate foreclosure rescue investors sailed in, offering to help distressed homeowners keep their homes and some of their equity, but with them came a swarm of sharks promising the same and leaving these homeowners worse than before. These foreclosure scam artists prey on the good faith and desperation of people already stung by human greed. Putting it politely, their human worth ranks somewhere between “the scum behind a prison toilet” and “depleted uranium”.

It is thus with good reason that Washington state Attorney General Rob McKenna and other bill sponsors first brought HB 2791 to the table: to protect desperate homeowners who had already demonstrated a lack of understanding about the real estate market. Unfortunately, in its final form, the bill doesn’t make the process more transparent for homeowners. Instead, it makes the buying process so opaque and perilous that no sane investor, no matter how well-meaning, would dare attempt even a short-sale, lest they become the victim of a zealous seller.

Some honchos in the industry believe that ethical investors will not be affected by the bill, but I am not so optimistic. Says Dugald Allen, vice president and legislative committee chair for the Real Estate Association of Puget Sound:

“Ethical investors should have no concerns about this law at all. All it does is put...you in the spotlight to tell the truth, and if you are an ethical investor you’ve always been doing that. It focuses people back into win-win scenarios where sellers can, in fact, be assisted...and [buyers] can make a reasonable profit doing it.”

Given the difficulties and dangers posed by the bill, Allen is either extremely optimistic about investors’ ability to adapt to the new regulations, or he just believes there’s no such thing as an ethical investor involved with foreclosure rescue. I can’t really agree on either count.

Under this new legislation, the risk squarely falls more on the buyer, and now that even short-sales are included in the bill, options are further limited. Some distressed homeowners have demonstrated the belief that “the world owes them one” in the way they have extorted money from lenders by threatening to destroy and deface the property before abandoning it. Human greed is what compelled these scam artists to approach distressed homeowners, but with HB 2791 now putting fiduciary duty on the BUYER (or “home consultant”), the question is who will protect them from the sellers?

This bill may have started with good intentions, but by penning these drowning homeowners off from the sharks, this legislature has penned them off from their only lifeboats, too. With the foment we’ve already seen surrounding this new bill, some political careers may be dragged under if reasonable changes aren’t made...and soon.

Labels: foreclosures, HB 2791, real estate

While it might be hard to predict when, exactly, the housing market will recover, UBS seems confident that they at least know which markets will lead the way to recovery. UBS issued a report highlighting five markets they believe will be on the forefront of the housing market's recovery. They selected these markets based on demographics, economic growth, affordability and inventory, according to an article in Big Builder News. The markets selected were Atlanta, Houston, Austin, Charlotte and Dallas/Fort Worth.

None of the five markets selected are much of a surprise. These are all quality, affordable markets that have great job and population growth. If anything, investors looking at these cities might want to be a little worried about Atlanta’s oversupply of housing, but even with that hurdle, Atlanta still has a lot going for it. Overall, I agree with UBS in their assessment that these markets are likely to recover ahead of many other markets. One other thing to keep in mind is that these markets weren’t affected nearly as much by the housing crisis as most other markets. This is mainly because they did not see the type of growth that was experienced in the other markets, so they didn't have as far to fall.

For those who are wondering which markets were on the bottom, according to UBS, those housing markets were Orlando, Las Vegas, Phoenix, Riverside and Tampa. These are also not much of a surprise. These five markets have been hit hard by the housing crisis and there has been a lot of press about their plight. All of these markets are still seeing pretty significant growth, however; during the bubble, their housing prices inflated way too much and now they are correcting back to where they should be. In the long term these markets still present good opportunities, but not at present and certainly not at 2005 pricing.

We don’t know when the housing market will start its recovery, but we can be certain it will eventually happen. The best gauge I can offer is to look at the affordability index and cash flow as an investor. Cash flow is something that you can account for and that you can control; appreciation (at least natural) is not something you can control, so you shouldn’t account for it in your profit projections. Areas that offer cash-flowing properties are unlikely to depreciate much because there is little incentive for owners to sell out at lower prices. In addition, while there are always investors looking for steady cash flow, the same cannot be said for appreciation--at least not anymore. So it is little surprise that UBS believes the housing market recovery will begin in affordable and cash-flow-producing cities.

This just in: Inflation is real and the Fed may not be able to stop it. That’s the reality for small businesses as they are forced to deal with the strain caused by rising food and energy costs.

The dramatic growth of the suburbs, as a result of rising home prices, combined with $4 per gallon gasoline is creating significant pressure for businesses with employees who commute. “Emerging suburbs and exurbs -- commuter towns that lie beyond cities and their traditional suburbs -- grew about 15% from 2000 to 2006, nearly three times as fast as the U.S. population,” according to the Detroit Free-Press.

This hits small businesses the hardest, since they tend to employ a greater percentage of employees at entry level salaries, and thus may have more employees who have moved further away to find affordable housing. This leaves many small employees in a bind when combined with an economy that may not support price hikes to consumers.

Some business, however, are finding creative ways to deal with the problem:

Virginia Commonwealth University Health Systems gave away $1 million to its 7,200 employees as a one-time bonus to help ease the burden of rising commuter costs, according to the Richmond Times Dispatch.

Du-West Foundation Repair recently moved 90 workers to a 10-hour, four-day workweek, according to the Dallas Morning News. Du-West is not alone. The city of Birmingham, Alabama will move to a four-day workweek for more than 4,000 employees July 1, according to Inc. magazine

Other solutions have been adopted by various businesses, including:

• Offering incentives for riding mass transit, including purchasing bus or train passes for employees.

• Offering carpool incentives, such as prime parking spaces or cash incentives for carpool riders/drivers.

• Offering additional work from home days for employees capable of telecommuting.

At NuWire, we’ve decided to explore the possibility of transitioning many of our positions so employees can telecommute. This creates a unique set of challenges but also offers the potential of a win-win for employer and employee. Having fewer employees in the office would allow us to reduce office space and some office costs. Employees would save money on gasoline, car maintenance and insurance and time lost commuting.

Although it remains to be seen whether we can create a telecommuting plan that will work for all involved, it is clear that we are not the only small business looking to retain good talent by finding creative (and proactive) ways to tackle inflation without raising prices (or in addition to raising prices).

Labels: business, inflation

The buy-and-bail is a rapidly growing real estate strategy in which homeowners who are underwater on their home quickly buy a new home at today’s low prices and allow the old home, with the inflated mortgage, to go into foreclosure. For example, say a pair of homeowners bought their home two years ago for $400,000 and now it is worth $200,000. So rather than keep the existing home and its inflated mortgage, before their credit gets damaged they go buy a new home for today’s price of $200,000 and let the old home go to foreclosure. Works great for them, right? Sure, their credit will be bad for a few years, but surely they find that is worth $200,000.

A debate has emerged in the real estate industry about whether this is a legitimate strategy or simply mortgage fraud. Nevertheless the practice is growing and there are even real estate agents out there who are coaching homeowners on how to do it.

I will start off by saying that the buy-and-bail strategy, as it is most widely used, is most definitely mortgage fraud. The main reason I can say this without a doubt is that in practice, homeowners typically lie to the lender when they apply for their new loan. The homeowner will tell the lender that they are planning to rent the home out and give an inflated value for what they expect to get in rent. Since the homeowners' intention is in fact to let the home go into foreclosure (and they may or may not even attempt to actually rent it out), they are deliberately deceiving the lender. Any time a borrower deceives a lender, you can bet they are committing fraud.

Lenders are starting to wake up to this scam, though. Fannie Mae recently upped the waiting period for borrowers with a foreclosure on their credit to get a loan from four years to five. In addition, they also will require a minimum down payment of 10 percent for these borrowers, according to The Wall Street Journal. They are hoping that borrowers will see how a foreclosure can ruin their future prospects and think twice about going through with strategies such as the buy-and-bail.

Lenders also have the ability to sue borrowers if they find that fraud has been committed. And while it is questionable whether or not they will actually start suing borrowers for damage, it is an option they have available to them. The most successful defense lenders have is the one that many lenders are beginning to turn to. Basically, they are changing the loan guidelines to require homeowners who claim they are going to rent out their old home to provide a fully executed lease agreement. In addition, borrowers are also required to have sufficient income to cover both mortgages, unless they have at least 30 percent equity in the home. IndyMac has already changed to these guidelines and Fannie Mae is planning to make the switch as well, according to The Wall Street Journal.

I think this last strategy will go a long way toward solving the buy-and-bail problem. People who have enough income to cover both mortgages are probably unlikely to default, and those who have 30 percent equity in their home would likely sell before losing their home and equity to foreclosure. The disturbing part to all of this is that there are real estate agents out there who think that this buy-and-bail practice is completely okay--and who are even promoting and coaching the practice. This is a scam that is costing lenders a lot of money, and whether or not you feel sorry for the lenders, it is still wrong. It is also my belief that these real estate agents and other promoters need to be punished right alongside the homeowners--and probably even more severely. The agents know, or should know, it is wrong, and the fact they are helping homeowners to do this is inexcusable.

Labels: housing bubble, real estate

The first quarter of 2008 saw commercial real estate sales of $39.2 billion in the U.S., a 69 percent drop from 2007, according to a report by Jones Lang LaSalle as reported by National Real Estate Investor. According to the same report, commercial real estate sales worldwide declined 46 percent.

These significant drops vividly indicate the impact that the many and various economic crises have had on the commercial sector. The biggest hits have come from tighter lending standards, a substantially smaller and more narrowly focused conduit lending market and sharply higher lending spreads according to Earl Webb, CEO of capital markets at Jones Lang LaSalle as reported by National Real Estate Investor.

Analysts at Jones Lang LaSalle estimate that the markets won’t return to normal until sometime in 2009, but even that estimate might be a tad optimistic. Just as with residential real estate, many of these commercial real estate transactions just didn’t make sense financially during the bubble. We saw record sale after record sale, especially in markets like New York. Investors were paying way too much for property that offered measly returns. In the past, they wouldn’t have even been able to buy those buildings at the debt coverage ratios they were, but during the real estate bubble investors had lenders throwing money at their feet. All these property funds had to buy something in order to appease their investors, so they bought whatever they could for whatever price. Some of these investors had grand plans to increase revenue, many of which included raising rents in the building. However, with many businesses suffering at the hands of the economy, it is doubtful that these investors will be able to raise rents as planned.

In the end, I foresee many of these investors stuck with assets producing negative cash flow. An even bigger potential problem is that many of these investors originally secured loans which were only meant to be only short-term solutions. The investors had planned to use these higher-interest short-term loans as temporary financing until they could increase revenues and refinance with more traditional loans, but unable to raise revenue in many cases, and with the refinance market dried up, these lenders are stuck with bad loans and negative cash flow properties.

This situation has not been overlooked by opportunistic investors who are patiently awaiting desperate sellers to come calling. “In anticipation of that seller distress, a number of investment groups are building funds to buy up distressed properties and distressed commercial real estate debt. For now, those funds are still waiting for opportunities to appear,” according to Josh Scoville, director of strategic research at Property & Portfolio Research as reported by National Real Estate Investor.

Labels: housing bubble, mortgages, real estate

Does Barack Obama or John McCain offer the best hope for the U.S. economy? This, of course, is the number one issue on everyone’s mind for the upcoming presidential election. The candidate who is able to best answer this question, and do so in a way that Americans can understand, stands a great chance of becoming our next president. So which candidate does offer the best hope for our economy anyway? Well, it depends on who you ask.

Yesterday in Raleigh, Obama attacked McCain’s economic policy, calling it a repeat of Bush’s miserable failure. Obama’s own plans for the economy include an expansion of unemployment benefits, another economic stimulus package of $50 billion, tax cuts for the middle and lower classes and relief for homeowners facing foreclosure, according to the International Herald Tribune. Obama was quoted in the article as saying, "We were promised a fiscal conservative. Instead, we got the most fiscally irresponsible administration in history. And now John McCain wants to give us another. Well, we've been there once. We're not going back."

The McCain campaign didn’t take the attacks sitting down, though. "While hardworking families are hurting and employers are vulnerable, Barack Obama has promised higher income taxes, Social Security taxes, capital gains taxes, dividend taxes and tax hikes on job-creating businesses," McCain spokesman Tucker Bounds said in a statement issued before Obama's remarks, according to the International Herald Tribune. "Barack Obama doesn't understand the American economy, and that's change we just can't afford.” McCain’s plans for the economy include keeping the Bush tax cuts in place as well as tax cuts for businesses.

In the end it comes down to two schools of economic thought. Obama believes that government spending and policies can help us get out of the economic rut. His policies are going to increase government spending, and overall government involvement in the economy. McCain, on the other hand, belongs to the school of thought that says the economy revolves around businesses. In his mind, the best way to stimulate the economy is to put money into the hands of businesses, who will then be able to add more workers and so on, which ultimately will lead to improvement in the economy.

One thing I haven’t talked about yet is the Iraq war. Obama, of course, wants to start drawing troops out of Iraq, potentially saving us a lot of money (money he wants to put back into our economy). On the other hand, McCain plans to keep troops there for a long time, continuing to add to our government spending on the war (much of this spending is not directly aiding America's economy). That being said, Obama’s overall plans for government spending far exceed McCain's. For the most part I tend to agree more with McCain’s policies than Obama’s, but I do side with Obama in relation to the Iraq war. While I don’t agree with pulling out altogether at this point (because it would hang those Iraqis who trusted us with their lives out to dry), I do think we need to figure out a better plan. The plan to occupy Iraq indefinitely is not a good plan. We never should have gone there in the first place, in my mind. It has cost us billions of dollars and many American lives, but that is another post for another day.

The bottom line is these two candidates differ greatly in their policies: One thinks the government can get us out of this mess, and the other is going to rely on business and the markets to turn things around. Which one is correct? We will have to wait and see. Either way, though, the new president is going to have their hands full, and I seriously doubt either one is going to be able to come up with the magic elixir that rights this thing over night. Turning this ship around is going to take some time and diligence.

Labels: Barack Obama, economy, John McCain, politics

With all the talk coming from politicians about how they plan to use the FHA to save the housing market and the economy, it may be a shocker to know that the FHA is struggling mightily right now. The FHA had to withdraw $4.6 billion from its $21 billion capital reserve fund in May to cover losses, according to the New York Times.

“Let me repeat: F.H.A. is solvent,” FHA commissioner Brian Montgomery said Monday in a speech at the National Press Club, according to the New York Times. “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.”

Something has to change or else the FHA will soon be under water. This is a bit scary to think about because right now, FHA loans make up a good portion of the mortgage market, and an even larger portion in many low income areas. If the FHA were shut down, the real estate market would be in for a huge blow. In reality, though, it is unlikely the FHA will actually shut down even if they become insolvent. Instead, the government would float them the money they needed to continue operations until such a time as they could stand on their own two feet again. As you probably guessed that means taxpayers would ultimately be subsidizing the FHA.

There is one glaring reason why the FHA is struggling right now, according to Montgomery. He blames the seller financed down payment program, otherwise known as down payment assistance. In this program the seller donates the required down payment (typically 3 percent) to a non-profit corporation which then gives the money (minus a fee, of course) to the buyer, who uses it as the necessary down payment. Sound a little sketchy to you? I can assure you I feel the exact same way. Nonetheless, this program has been around for years--and it has been a problem for years as well. 60 percent of the FHA losses can be directly attributed to this program, according to the New York Times, even though these loans only make up around 35 percent of the FHA’s portfolio.

The FHA has been trying to get rid of this program for years, but has met strong resistance and been unsuccessful. Backers of the program say it provides much-needed assistance to low income and minority families who would otherwise be unable to buy homes, according to the New York Times. Naturally, the FHA is continuing its fight against the program, but based on their past experience, it doesn’t appear they are likely to be successful.

“If there’s any justice in this country, they will fail yet again,” Scott Syphax, president of Nehemiah Corporation of America, which provides such loans, said in the New York Times. Wow, you’ve got to love that mentality--if there is any justice in America, we should continue putting people in houses they can’t afford and potentially break the FHA, which would cost taxpayers billions upon billions of dollars. Is it just me or is this guy’s idea of “justice” a little skewed?

Ultimately, whether the down payment assistance programs stay or go, the housing market will likely suffer. If they stay, the FHA will probably need taxpayer support; if they go, then we are losing 35 percent of the FHA loans out there which means we would have even fewer people buying homes. In my mind, though, the right way to go is to ban these programs. The statistics show beyond a doubt that these loans result in an extremely high default rate (about 3 times the FHA norm) and it is not fair to pass this burden on to taxpayers.

Labels: economy, housing bubble, politics