Dr. Steve Sjuggerud from Daily Wealth points out some keen insights about the fundamentals of the current housing market. He suggests that supply hasn't been this low is a long time, and yet housing is very affordable. These are some of the reasons that real estate could be one of the best places to put your money right now. Continue reading to learn more.
$800,000.
That's about what the median home in San Francisco sold for at the height of the boom three years ago. Then the bust came, and prices fell 45%, according to the Case-Shiller home price index.
But a funny thing has been happening lately... something people haven't really noticed...
Home prices in San Francisco actually bottomed in March. According to the Case-Shiller Index, they've been up every month since... up nearly 4% in the latest month.
On my side of the country in Florida, the same thing is happening. Again, people are almost refusing to notice... But for 11 consecutive months, home sales in Florida have INCREASED over the same period last year.
Meanwhile, homes in Florida are now ridiculously affordable.
The median home price in Florida is now $147,600. That's a mortgage payment of about $650 a month (at current mortgage rates with 20% down). The median household income in Florida is about $50,000, roughly $4,000 a month before tax. That's about 16% of your household income – way below any rules of thumb about how much to put toward a house.
From coast to coast, housing affordability is better than it's ever been, getting a big boost from two things: the housing bust and super-low mortgage interest rates. The pile of government incentives has helped, too.
As an investor, I'm seeing what I love... It's an ideal situation that's rare, but incredibly important if you can recognize it. It's when people's emotional opinions are clearly at odds with the reality of the numbers.
The numbers for housing are really great right now. But after three years of losses, people are sour on housing. Perfect!
Three years ago, we had the opposite situation... The numbers for housing were terrible. Housing was completely unaffordable, and builders were building at a frantic rate. But people were incredibly enthusiastic.
Today, the value is there. What will cause prices to climb again? When the supply of homes available for sale shrinks. It's Economics 101. And guess what? We're there...
Right now, fewer homes are available for sale than at any time in the last 40 years (adjusting the supply for the growth in the U.S. population). If I hadn't crunched the numbers myself, I wouldn't believe it. Take a look:
Economics 101: When the Supply Is Low, Prices Go Up
Even better, when you do the simplest, dumbest comparison – the price of homes versus the supply of homes – you get exactly what you'd expect: When the supply of homes gets low, home prices rise.
David Dreman agrees... In 1980, he literally wrote the book. It's called Contrarian Investment Strategies. In it, he recommended going heavily into stocks. In the current issue of Forbes magazine, Dreman recommends U.S. residential real estate:
If inflation hits hard, the chief culprit of the bear market – real estate – is likely to be one of the best investments in the years ahead. Buy a home if you don't already have one or a second home if you can afford one.
With prices back to 2003 levels and the general consensus that prices are near bottom, this could be the best time to invest in real estate in years. Real estate investment firms are looking to get back in the US real estate market, which one real estate investment executive calls "the new emerging market". See the following post from Overseas Property Mall.
Property vultures are circling to pick the bones clean of deals as the US property clock has wound prices back to the same levels as they were in 2003, according to financial researchers Standard and Poor’s.
House prices fell 18% in April in S&P’s 10 and 20 city indices.
Commercial property has crashed alongside home prices registering a 20% decline, with market expectations of another good way to go - perhaps another 20%.
“Now that the meltdown has happened, the new emerging market is the United States,” Tom Shapiro, president of real estate investment firm GoldenTree InSite Partners, said at the Reuters Global Real Estate Summit in New York.
“I think there’s going to be the best opportunity to make money in the last 20 years in real estate in the US.”
GoldenTree InSite pulled the plug on US real estate investment in 2006 and focused attention and cash on Brazil instead, with investment in residential and office properties.
The company has a war chest of about a $1 billion to sink in to property, and is ready to return to the US market and take advantage of the right projects that need or will need money when they come up short.
“We are just at the point now where we are seeing some very interesting entry points on certain transactions,” he said.
New York-based GoldenTree InSite invests institutional funds.
Shapiro said his firm likes big cities, such as Los Angeles and New York where struggling commercial real estate markets tend to rebound strong.
“San Francisco right now is a pretty interesting place to think about because San Francisco is a very diversified economy,” he said.
Meanwhile, residential property prices fell - but the rate of decline is beginning to show signs of holding steady fueling hopes that the market will soon hit rock bottom.
“While one month’s data cannot determine if a turnaround has begun; it seems that some stabilization may be appearing in some of the regions,” said David Blitzer, chairman of the committee in charge of S&P’s index. “We are entering the seasonally strong period in the housing market, so it will take some time to determine if a recovery is really here.”
Phoenix posted the largest annual decline of 35.3%, while Las Vegas slipped 32.2% from last year and San Francisco fell 28%. Denver, Dallas and Boston posted the best performance in terms of annual declines, down 4.9%, 5% and 7.7%, respectively. On a month-on-month basis, Dallas saw 1.7% gain from March while Las Vegas lost 3.5%.
As we talked about a couple of days ago, Greenspan's speech for NAR was obviously biased, and no weight whatsoever should be given to what came out of Greenspan's mouth. That being said, it is disturbing to see the depths that NAR has fallen to — as well as Greenspan. This display was so ugly that a writer from the New York Post had to publicly condem it. Tim Iacono looks at this writer's article — and adds some input of his own — in the blog post below.
John Crudele of the New York Post goes off on both the National Association of Realtors and former Fed chairman Alan Greenspan in this commentary from yesterday.
WHO the hell would be stupid enough to pay to hear Alan Greenspan's opinion of anything!
Notice, that isn't a question because I already know the answer. Rather, it's a statement with one of those exclamation points to show that my voice is being raised in a mix of bewilderment and anger.
The National Association of Realtors, which is probably suffering from combat fatigue, asked the former Federal Reserve chairman and the chief suspect in the destruction of the US economy, to address its Washington conference Tuesday and tell real estate people what they want to hear -- that things are getting better.
So Greenspan did just that.
Did anyone see the video clip of this speech that CNBC had up yesterday? I watched about the first minute or so and began feeling nauseous.
Apparently, so did Mr. Crudele...
"We are finally beginning to see the seeds of a bottoming" in the housing industry, Greenspan told the gathering. Adding, according to Bloomberg News, that the US is "at the edge of a major liquidation" in the stock of unsold houses.
Applause, applause. Here's your check, Alan.
I figured it was worth knowing how much Greenspan gets these days for defending his own indefensible actions at the Fed while also trying to pull the wool over the eyes of would-be homeowners.
So I asked someone named Lucien Salvant, managing director of the NAR's public affairs department.
His answer in an e-mail: "None of your business. How much is the NY Post paying you to ask that question?" Whoa! Calm down, Lucien.
It gets a little ugly from there, the NAR rightly accused of "shoveling crap to the press" which gets passed along to unsuspecting potential home buyers all for the greater good of the real estate profession.
And, of course, there's another litany of errant predictions from the Maestro.
This is just sad in so many ways - like two zombies embracing each other.
The National Association of Realtors (NAR) is pushing lawmakers — yet again — to expand the first-time homebuyer tax credit. NAR hopes that lawmakers will make the tax credit available to everyone, rather than just first-time homebuyers — among other things. For more on this, read the following article from HousingWire.
NAR today called for expansion of the $8,000 first-time home buyer tax credit to include all home buyers at all income levels.
The push for a broadened tax credit comes after US Department of Housing and Urban Developmentsecretary Shaun Donovan announced home buyers pursuing Federal Housing Administration-insured mortgages may soon use the tax credit as a down payment at the closing table.
An expanded tax credit, combined with HUD’s initiative to make the credit available at the closing table for down payment purposes — called ‘monetization’ of the tax credit in the industry — would make federal assistance available to anyone pursuing a government-insured mortgage.
NAR, from its legislative summit this week, also urged Congress to make the ‘08 loan limit increase formula and loan limit caps permanent, and to “fortify” mortgage giants Fannie Mae (FNM: 0.7867 +2.17%) and Freddie Mac (FRE: 0.8166 +2.08%) to ensure the continued availability of capital for mortgage lenders.
“Housing is the engine of economic growth, and real estate is the road to economic recovery,” says Charles McMillan, NAR president and Dallas-based broker, in a statement today. “With many of the country’s current problems resting on a wobbly foundation of declining home prices, rampant foreclosures and increasing job loss, our members will be asking Congress to pass further legislation that moves the housing market forward.”
Greenspan opened up his mouth again and told the world that the U.S. is nearing a bottom for the real estate market. Those who remember back to 2006, might remember that Greenspan made another market bottom call, and he turned out to be horribly mistaken. In both accounts his statements were backed by the National Association of Realtors (NAR) who offer up all sorts of real estate data. Investors can't listen to anything that NAR says, for obvious reasons, and history shows us that we should give much more weight to what comes out of the former Fed chief's mouth either. For more on this, read the following blog post from Tim Iacono.
Should anyone be surprised that former Fed chairman Alan Greenspan reaffirmed his "early-2009" housing market bottom call yesterday before the National Association of Realtors?
Former Federal Reserve Chairman Alan Greenspan said that the decline in the U.S. housing market may be bottoming and it’s “very easy to see” financial markets continuing to improve.
“We are finally beginning to see the seeds of a bottoming” in the housing industry, Greenspan said today during a conference of the National Association of Realtors in Washington. The U.S. is “at the edge of a major liquidation” in the stock of unsold properties, which may help to stabilize prices, Greenspan said.
At "the edge of a major liquidation"? What newspapers has he been reading? The headline in my newspaper today says "Foreclosure filings hit record for second month".
Back to the Bloomberg story:
While the housing bottom may not be obvious in prices, it is becoming clear in “significant regional differences,” where some of the hardest-hit areas are starting to show signs of improvement, he said.
While it is certainly true that, in some of the hardest hit areas, home prices just can't go much lower (think Detroit), there are lots of other areas where the descent is ongoing and moving up the socio-economic ladder as Option-ARMs and Alt-A loans sour in record numbers.
Ironically, the realtors' trade group had reported earlier in the day that home prices had just declined by a record amount during the first quarter.
A quick search on housing market predictions during 2008 shows that the former "Maestro" made a few very public calls for a housing market bottom in early-2009, so you'd have to think that, with six weeks left to go, the odds are working against him at the moment.
Despite all the recent cheerleading, it is doubtful that the "seeds" of a bottoming in housing that are now seen will turn into the required "green shoots" in the near-term.
Interestingly, when the NAR joined forces with the former Fed chairman back in November of 2006, this is what they produced: The advice DON'T DELAY was offered two and a half years ago.Wow! Homebuyers who heeded these words back then would be down about 30 percent today, according to the latest data from the Case-Shiller Home Price Index.
You know things are bad when it makes more sense for banks to demolish foreclosed homes than to keep them. In the case of the Texas bank who destroyed 16 homes in Victorville California, the homes were not yet finished, but the loss the bank is taking on these has to be outrageous regardless. For more on this, read the following blog post from Tim Iacono.
The story about a Texas bank deciding to demolishing foreclosed homes in California was everywhere yesterday, but it shouldn't be that surprising - they needed a lot of work.
When they start bulldozing finished houses into the ground because they just can't sell them, then that will be real news.
Some details are provided in this report at the Wall Street Journal:
A Texas bank is about done demolishing 16 new and partially built houses acquired in Southern California through foreclosure, figuring it was better to knock them down than to try selling them in the depressed housing market.
Guaranty Bank of Austin is wrecking the structures to provide a "safe environment" for neighbors of the abandoned housing tract in Victorville, a high-desert city about 85 miles northeast of Los Angeles, a bank spokesman said.
Victorville city officials said the bank told them the cost of finishing the development would exceed what they could sell the homes for.
The bank also faced escalating city fines as vandals and squatters took over the sprawling housing project, leaving behind graffiti and drug paraphernalia, city officials said.
"It's unfortunate," said George Duran, the city's code-enforcement manager. "We would have hoped for these houses to be finished. But it's up to the owner to see what is best for them."
We've driven through that area many times on the way from Southern California to Las Vegas, a few times when the bubble was at its peak, and almost every time we wondered why anyone would ever pay $300,000 or more to live in Victorville.
Real estate prices are still falling across the country, but for the first time in over a year the monthly declined failed to set a new record. This is leading some analysts to believe that the real estate market just might be stabilizing. This is potentially good news, but investors should remember that while prices might be stabilizing, it could still be awhile before prices stop dropping altogether. For more on this, read the following article from HousingWire.
Home prices in major metropolitan areas continued to fall in February; however, for the first time in 16 months, the annual decline did not set a new record, possibly suggesting early signs of market stabilization.
The S&P/Case-Shiller 10-City and 20-City Home Price Indices released Tuesday recorded nationwide, annual declines of 18.8% and 18.6%, respectively. This is a slight improvement from the returns reported for January, which fell by 19.4% and 19.0%.
“While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets,” says David M. Blitzer, chairman of the Index Committee at Standard & Poor’s. “All 20 metro areas recorded a monthly decline in February, but 16 of the 20 metro areas saw an improvement in their monthly returns compared to January.”
Still, the indices show an ongoing, broad-based decline in the prices of existing single family homes across the United States, with 10 of the 20 metro areas studied showing record rates of annual decline, and 15 posting declines in excess of 10%.
In terms of annual declines, the three worst performing cities as of February are once again, located in the Sunbelt, each reporting negative returns in excess of 30%. Phoenix was down 35.2%, Las Vegas declined 31.7% and San Francisco fell 31.0%. Dallas, Denver and Boston faired the best, down a significantly lesser 4.5%, 5.7% and 7.2%, respectively. Dallas also holds the distinction of being the best performer for the month, returning -0.3%, according to the report.
As of February 2009, average home prices across the United States are at levels similar to those seen in third-quarter 2003. And despite the deceleration in home price declines seen in February, from the peak in mid 2006, home prices are still down over 30%.
Standard & Poor’s Blitzer says, “we will certainly need a few more months of data before we can determine if home prices are finally turning around.”
New home sales were down again last month, but people are under appreciating just how bad these numbers are. Once you factor in population growth into the mix — new home sales have fallen off a cliff compared to past economic downturns. Tim Iacono looks closer at this latest report, and offers some insight, in his blog post below.
The Census Bureau reported that new home sales fell 0.6 percent last month, from a seasonally adjusted annual rate of 358,000 in February to 356,000 in March, still at a level that the phrase "historically low" fails to adequately describe. Though the current sales level is up from the January low of 331,000, to put the March sales rate in its proper historical context, consider that the pre-2009 all-time low of 338,000 in September of 1981 works out to a population-adjusted rate of about 460,000.
The March total is still a full 23 percent below this pace!
While a bottom may indeed be forming after the relative stability of the last four months, these are the lowest levels of sales in the 46 years since this data series began and an improvement of some 29 percent from the current level is required just to equal the worst reading since JFK was sitting in the White House.
You can almost see the headlines later this year - New home sales surge 20 percent.
What will most likely be omitted from the story is that sales will have to increase by almost another ten percent just to better the level seen at the depths of the economic downturn in Ronal Reagan's first term.
Lower mortgage rates and tax credits for first time home buyers spurred sales in March helping to reduce builder inventory as the months of supply metric fell from 11.2 months to 10.7 months. This is down from a high of 12.5 months in January but still almost triple what would be considered normal.
Still highly distorted by sales incentives and other give-aways by increasingly desperate homebuilders, the median price fell from $208,700 in February to $201,400 in March, down 12.2 percent on a year-over-year basis, and is now at its lowest level since late-2003.
More and more people are jumping on the housing recovery bandwagon, but the excitement is a little premature. There are many signs pointing to the fact that the bottom is still far off in the distance. For more on this, read the following blog post from Tim Iacono.
This report by Ben Rooney at CNN/Money takes a few rather ambivalent comments by impartial analysts and combines them with more drivel from a National Association of Realtors shill, interpreting it all as a hopeful sign for the housing market.
Despite last month's decline, existing home sales appear to be stabilizing, according to Ian Shepherdson, economist at High Frequency Economics.
"Sales are volatile month-to-month, but the trend appears to be flattening off," Shepherdson said in a research note.
Yes, and they flattened out last year too before falling off a cliff (see chart from previous post), back when distressed sales accounted for a much smaller portion of overall sales.
By the way, what's with the characterization of distressed sales accounting for "just over half of all transactions in March" in the latest report? In the past, the NAR has cited percentages or a range of percentages, last month putting that figure at between 40 and 45 percent.
The phrase "just over half" could be anywhere between 51 and 60 percent, perhaps higher....
Here's the comment from the realtors' trade group:
First-time buyers made up 53% of existing home sales in March. Charles McMillan, NAR's president, said first-time buyers are "crucial" to a recovery in the overall housing market.
"The housing market always heals from the bottom up, and with large numbers of first-time buyers entering the market it will become a little easier for sellers to trade up or down," McMillan said in a statement.
Between this sort of optimism and word of bidding wars on foreclosed properties (discussed here yesterday and reported again in the Wall Street Journal today), this is probably a very good indication that there is much more pain to come in the housing market.
Somewhat surprisingly to many real estate observers, Moscow has become one of the most expensive cities in the world. While Moscow's real estate market held off longer than most, it appears that the gloom is catching up to the city now, and the aftermath isn't going to be pretty. Overseas Property Mall takes a closer look at the situation brewing in Moscow, Russia in their blog post below.
Moscow investors and banks are playing a deadly game of Russian roulette in a stand-off to see who flinches first as the city’s once booming property market falls to ruins around them.
Billions of rubles are tied up in commercial and residential property portfolios.
Homes, offices and shops are standing empty as rents are unaffordable, new build projects are being canceled, investors can’t refinance and the banks are sitting on a pile of yet to be realized toxic debt.
Russia’s fledgling property market has never seen a recession – since democracy and privatization prices have only gone one way – up.
Fueled by oil and gas profits, Russia is lagging a few months behind the rest of the world’s recession problems.
But the property market has the same intrinsic problems as those in the US, UK and other European countries:
Oversupply of commercial and top-end residential accommodation
Rents outstripping earnings
Real estate prices starting to adjust downwards
According to the Moscow News, a professional couple with 75,000 rubles (£1,500) a month to spend on rent can only afford a two-roomed apartment.
Even at that price, which is quite low for a Moscow apartment in a reasonable area, there seems to be plenty of availability and some agents are struggling to move property, or are closing down.
In commercial markets, over the past few months, vacant office space has rocketed from 7.5% to 17.5%, says the Moscow Times .
Prestigious commercial projects have been canceled. Rents have fallen from £1,400 per square foot to £500 per square foot in the same period. Property prices have plummeted by at least 50%.
One Moscow property observer, Andre Bar’yudin says the market adjustment was a disaster waiting to happen because Russians are too naive in property dealing.
Under communism, a worker was allocated a property according to his job.
After the collapse of the Soviet Union, state-owned real estate was given away. Families were given the flats in which they lived. This created a large population of new homeowners with little of no knowledge of how a free market works.
Rather than buying and selling residential property, families swap and offer cash compensation to make up any unfairness in the pricing. About 80% of Russian residential deals are struck this way rather than through estate agent sales like in the UK.
The conclusion is outgoings outstrip yield and incomes, so the market adjustment was inevitable.
The bubble is about to burst as predicted, and this evidenced by Russia’s richest woman, billionairess Yelena Baturina reportedly going cap in hand to the government for cash aid as her property empire starts to disintegrate.
Ms Baturina won contracts worth billions of rubles from the Moscow authorities – coincidentally led by her husband, who is the mayor.
Her construction company has applied for a £570 million loan guarantee to stave off the creditors.
RealtyTrac believes that banks are keeping around 600,000 foreclosure properties nationwide off the market. This number would represent a huge portion of the available housing stock, and it is believed that banks could be strategically withholding these properties in order to prevent the housing market from collapsing even further. For more on this, read the following blog post from Tim Iacono.
If ever there were a "squishy" data set, one that is quite difficult to get a good handle on due to the paucity of reliable, publicly available data, it is the inventory of foreclosed homes that have yet to make it onto the resale market.
A report by Carolyn Said in the San Francisco Chronicle provided the first graphic on the subject that I've seen, an image that was splashed across the front page of yesterday's paper. With bank repossessions and notices of default set to pick up dramatically in some parts of the country as detailed by Mr. Mortgage the other day, all the prognosticators with rosy housing outlooks for 2009 may be in for a wake up call come summer time.
If the Alt-A and Option ARM loans begin to sour in large numbers (as many predict) at about the same time that banks look to unload some of their inventory after all the recent optimism, there could be another big leg down in home prices.
Some details from the SF Gate story:
A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.
Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.
"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."
In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory."
You have to wonder about a bank like BofA, after having acquired Countrywide and their stable of bank owned properties, as to exactly how these properties are being valued in light of changing mark-to-market rules and critical earnings announcements.
Everyone seems to be sooooo anxious for the banking sector to show some stability so we can all get on with our stock investing lives again but, if it is coming via the accounting "sleight of hand" that some believe is the real reason for holding back these properties (i.e., valuing them much higher than today's market would), we may all be in for a big letdown.
Not many Americans have even heard of Bahrain, let alone thought about investing in the country, but while Dubai has been faltering badly, Bahrain is holding up well. Investors interested in the Middle East might want to give Bahrain a closer look, especially if they are considering investing in Dubai. For more on this, read the following article from Overseas Property Mall.
Bahrain has long been the forgotten little brother of glittery Dubai in the housing investment industry. For years we have been told countless stories on why we had to buy property in Dubai and all the while Bahrain has quietly sneaked up in the housing stakes.
Since reports of a falling Dubai have become stronger every month, Bahrain has only suffered “small damage”. After having spent many years in its bigger brothers shadow, Bahrain is ready to raise the stakes and claim back some of its past status as a strong and reliable financial business center in the Arabian world.
“In tough times, people want to be in the most stable place. Of course, nobody is immune to the crisis, but we have certainly shown we are less exposed.”
The CBB (Central Bank of Bahrain) has established itself as one of the better regulators if we are to believe the latest news reports from the Middle East due to the lack of available finance overall. Some even say that Dubai’s loss has resulted into being Bahrain’s gain but clearly it is early days at the moment. Signs are positive though and industry watchers are positive that Bahrain might attract more investors in the next year due to its stable economy despite the global crisis elsewhere.
Ahmed further stated that it wasn’t the banks fault that Bahrain has lacked the attention it supposedly deserves but more so the lack of media attention overall.
The World Bank also helped to establish Bahrain as a strong business center by ranking it 18th in the world for doing business with last year. Another encouraging sign of a stable economy is the number of new lending institutions licensed in 2008. There were a total of 44 new start ups compared to 38 start ups in 2007.
Bahrain’s financial specialty if one could say that is Islamic finance. The launch of the Bahrain Financial Exchange in 2010 will also see the position of this small emirate strengthened overall.
But even so Bahrain’s economy is relative stable, the emirate has experienced plenty of heartache in the banking sector too. Profit margins of banks declined by 17.6 percent in 2008. During the same time, retail banks saw a surge of 112 percent in loan to deposit ratios.
Some financial organizations are also being scrutinized by the Bahrain government. With over 400 institutions in the country, there are too many right now to satisfy the lack of demand while showing healthy growth over time so eventually some of them will take the fall for sure.
To understand why we got into this housing mess, there is no need to look further than the recent findings from the "Future of Finance Initiative." It took awhile for these geniuses to figure it out, but they found that in order to avoid mass foreclosures — lenders to make sure borrowers can actually pay back the loans. Wow, just think, if they could have figured that out sooner we never would have ended up in the situation we have today. I guess we know for next time, right? Tim Iacono looks closer at the report and adds some insight in his blog post below.
There's a special 14-page report in today's Wall Street Journal presenting the findings of last week's Future of Finance Initiative, a gathering of 100 of the "brightest minds in finance" tasked with the job of charting a path forward from our precarious current position.
No, former Fed chief Alan Greenspan was not included.
Astonishingly, not once, not twice, but at least three times, the fixing of one of the most fundamental errors of the last six or seven years is prominently featured in the many recommendation sections, what would have undoubtedly stopped the global credit bubble in its tracks years ago if someone other than "crazy housing bubble bloggers" and a few rogue economists would have brought attention to it and been able to do something about it.
This recommendation appears in Principles for Change, an interview with Peter Fisher of BlackRock Inc., it is a key element of Princeton Economic Professor Alan S. Blinder's recommendations enumerated in The Future of Banking, and it is featured as number one in a list of of almost two dozen "principles for rebuilding the financial system" in a summary section (no link found).
It's pretty simple - borrowers must be able to repay loans from income.
Gussied up a little bit for the paper it looks like this:
Minimum Underwriting Standards. Bank management and bank examiners must enforce the banks' minimum underwriting standards, focused on the borrowers' ability to repay debt from income. The bank supervisors' authority must extend beyond banks to all bank agents, such as mortgage brokers.
Maybe it's just me, but, to some of us who could see this all developing back in the first half of the decade - when Fannie and Freddie first starting having problems in 2002 and 2003, then when Wall Street got involved in a big way in 2004 and 2005, and then in 2006 when everyone laughed about "all you have to do to get a home loan is to fog a mirror" - this is just about the most ridiculous example of how maybe these guys aren't all the bright after all.
What were they saying five years ago and why did it take them so long to have this epiphany?
Alan Blinder was singing the praises of the former Fed chairman up until the housing bubble had unquestionably burst, and now he's charged with charting the new course for banking?
In just about every interview that I ever did back around the time that the housing bubble was peaking and popping, I'd always say something like the following:
All anyone has to do is spend some time in a mortgage loan office and you'll quickly see that there's no way these people are going to pay this money back. When the median home price is ten times the median income, the only way that money is getting paid back is if they sell the house at a profit and that will only work so long as home prices keep going up.
What does it say about policymakers that they couldn't see this simple truth?
When the former and current Federal Reserve Chairmen - the position that was once considered to be the second most powerful in the world behind only the U.S. president - dismiss out of hand the possibility of home prices ever declining, what hope do we have that they'll not do something equally as stupid next time?
Were they all so deluded by the apparent prosperity of our late, great asset-based economy that these wizards of the financial world were unable to see something so simple, only now realizing just how huge this simple error was?
Yet another piece of good news relating to the housing sector was released this week. This time we learned that housing starts were up considerably last month. Again it is way to soon to call an end to the housing crisis, but the sliver of good news is welcomed by the real estate industry. For more on the report, read the following post from OverseasPropertyMall.com.
Latest reports from the US show a renewed sense of hope in the housing starts department as figures showed a 22 percent rise in February from the month of January. New work on some 583,000 homes is seen to be a positive sign and indication that maybe the worst of the US housing slump is over.
While the warmer weather is partially responsible for the jump in new construction, analysts do not believe this new rate will be sustained in the future. Most of the new housing starts are apartments and condominiums.
Plus, there still are hundreds of thousands of unsold properties on the market, keeping the recession tight. Despite the non shifting property market, economists think that “the worst of the contraction may have passed.”
Another indication that the US decline has come to a slowdown are the increased retail figures for the month of February.
Narimah Behravesh, chief economist at IHS Global Insight was saying: “You get the sense from a lot of the data coming out now that we’re beginning to get to a bottom. We’re not quite there yet.”
However, despite these positive signs, future construction might not be taking off like a rocket as new building permits weren’t increasing as much as the new starts. They rose by 3 percent.
Projected figures indicate that starts are thought to be around the 450,000 houses annually.
The Northeast is Leading the Pack
A powerful 89 percent surge was seen in the US Northeast in new housing starts, giving them the run of the pack for sure. With low interest rates and plans to further reduce mortgage cost to help resurrect the US property market, the Obama administration is working hard on putting systems in place to make this happen in the near future.
As long as US banks can keep the credit flowing there might be hope. Since the recession start there were some 4.4 million job losses in the country.
Obama’s pledge of a $275 billion rescue plan is supposed to help current home owners keep their houses in order to avoid foreclosures.
In February alone foreclosures increased by a whopping 30 percent from the year previous. Since foreclosures are cheap properties to attain by investors, property developers are finding it hard to raise their capital for new development.
There are a lot of people who deserve blame for the housing crisis, but who are these people exactly? Dateline recently took it upon themselves to expose the key individuals that they feel are behind the mess. Some are easy to see, while others are a little more abstract in their involvement. Scott Wilson looks closer at the Dateline piece, and adds some of his own input in his blog post below from Your Mortgage or Your Life.
Sunday March 22, 2009, Dateline NBCaired a piece called “Inside the Financial Fiasco,” in which Chris Hanson finally takes a break from exposing sexual predators to take a closer look at the current housing mess.
NBC attempts to assign blame for the mortgage meltdown, and also tries to make it seem like they have finally identified the handful people who were the “only ones who knew” what lay in store for the economy when Wall Street embarked on the derivatives end-run that fueled the crisis.
So let’s go down the list of people that are prime candidates in the vicious circle of blame, and what their role where in the making of this fiasco.
Let’s start at the top. Back in the mid ‘90’s, The Government loosened credit guidelines and required lenders to make mortgages available to more to minority buyers.
By doing this, they gave the lenders an open check book to write questionable loans, all the while knowing that they would be able to sell them on the secondary market (Wall Street).
This was the creation of the infamous “Subprime” loans which later morphed into Alt-A and Expanded Approval loans.
Next, let’s look at the Product Managers who wrote the underwriting guidelines for the toxic loans known as SISA’s and NINA’s, which required little or no documentation of income and assets. The SISA loans are highlighted in the Dateline piece.
Do you think that these product managers had no idea that these types of loans may be misused, or did they only see the underlying profit that was possible from billions of dollars of loan fees collected by creating millions of loans that were virtually just ticking time bombs?
Yes, there are some cases where these loans were appropriate, such as for the business owner who had a lot of write offs, or the borrower whose spouse may not have the best of credit, but will nonetheless contribute towards the monthly mortgage payments.
But the types of borrowers who where actually put into these loans were completely unqualified, as mentioned in the NBC piece.
People like Delores Parker Jackson, who took out multiple loans on four condos totaling over $1.3 million with a negative (-$6000) shown on her tax returns.
Mrs. Jackson, who claims to have run a profitable daycare, and says that she is not to blame, but is actually the victim of predatory lending.
REALLY? She took out multiple mortgages on four different properties totaling over a million dollars with a payment of more than $10k a month, and she claims she had no idea that she could not afford the terms. Now she wants to pretend that she is not culpable, and that the mortgage company committed fraud?
Come on, do seem we that stupid?
Thirdly, let’s look at another “innocent” party: The CEO’s of all the banks and mortgage companies.
These people should have overseen the product managers and acted as the final line of defense by looking out for the company’s long term interests by saying “Hey, stop! These loans may be too risky.”
But the CEO’s saw only a “pot of gold” in the form of billions in loan fees, and where slaves to the corporate bottom line.
Do you think that Angelo Mozilo, the former CEO of Countrywide who earned over $400 million during his last five years at the company, had absolutely no idea that SISA and NINA loans with zero money down would backfire?
Chris Hansen attempts to talk to Mr. Mozilo, but to no avail.
Since he quit Countrywide and the mortgage mess started to blow up, Mozilo has been hiding out at his palatial estate in Southern California, ala Howard Hughes. Chris tried to get the guard at Mr. Mozilo’s gate outside his house to let him in, but was turned away.
Also to blame are the former CEO’s at places like Bear Stern’s and Lehman Brothers, who ended up driving their companies into the ground by buying up these toxic securities. And none of these guys saw the writing on the wall?
I think they did, but also saw big dollar signs in the racket, and choose to ignore the hazards.
Next up for their heaping of blame are The Borrowers. I was an LO for 15 yrs, and used Countrywide as a purchaser for many of my loans.
I knew that some of my borrowers were “less than qualified,” but the underwriting said to “make the loan.”
Like when I would be working for a builder, and a borrower would come to me and asked what loan amount they qualified for, my reply often was, “How much can you afford?”
I told them that I could tell them all day how much they can and cannot get approved for, but only they could tell me how much they really afford.
I could tell them on paper or with calculator that you could qualify to pay, but only the borrower could tell me if they could actually maintain that payment.
I cannot tell you how many times I was told by borrowers, “Don’t worry about me affording it. You just write that mortgage.”
This is where I move on to include the next culprit in this mess, The Loan Officers.
How many LO’s wrote loans for people that they knew would end up in foreclosure?
Many borrowers who I turned down for a mortgage would come back to me later to say, “See, I knew I could get approved. Thanks for nothing.”
At the height of the bubble, there were so countless mortgage brokers who were willing to do anything to write a loan and collect a fee.
They would falsify the numbers to make them work if they had to.
In the Dateline piece, they showcase a woman who was employed as a personal trainer, and who claimed to of told the LO at People’s Choice that she only made $1600/mo.
She was approved for a $259k loan.
Even after she was told that the payment would be over $2100/mo, she figured that she would just have her sister move in and help with the payment.
Do you think that the LO at People’s Choice had any idea that she may NOT be able to make the payment on this house? When Chris Hansen looked at the original paperwork, it stated that she made $7300/mo, which surprised the woman.
She claims she never provided that figure to the LO.
How many LO’s committed fraud because the commissions that they were going to make on each loan they closed could be well into the tens-of-thousands of dollars?
Even though my job was commissioned based, I only made loans if I had some degree of certainty that the borrower had both the ability to pay the mortgage payment and that they completely understood why I was giving them a SISA or NINA loan product.
I did not want a former borrower hunting me down in the parking lot some night after work because I put them in a loan that that left them flat broke.
Next in line is a major player, one who no one seems to put much blame on or even mention much, The Appraiser’s. I believe these guys had a huge impact on the housing explosion, and no one seems to want to bring them up.
As the appraisers continued to inflate the values of the properties, the mortgage companies continued to write mortgages to cover the obscene appraisals.
I knew that if a borrower told me that they were short on funds to close, I could call the appraiser and ask him to “bump up” the value of the property a bit, so that I could give the borrower the money cover closing costs.
This was considered a legitimate practice because real estate only increases in value, remember? But in reality, the value of that house did not go up $5k in the 2-3 weeks since they had done the actual appraisal.
I also found out the hard way how much of an “opinion” an appraisal really was.
Prior to working for the builder, I worked for a short time as a mortgage broker. I only did one loan at the place. , and it was for a gentleman who was doing some renovations on his house, but did not have enough money to finish the project.
Less than a year earlier, the value of the house came in at $85k. When he wanted to do another cash-out refinance a year later, but the new appraisal came in again at $85k. So when I went to my boss and told him that I did not have the value to support the loan, he handed me a business card and said, “Call him.”
Two weeks later, I had an appraisal for $115k, enough to cover the loan.
Was there that much movement in the values of the house? Did it really go up $20k in three weeks, or did the new appraiser just want more business?
What do you think? I know when I worked for one of the big mortgage companies and did a ton of refi’s, every time I had to put an initial value of a home on an application (which typically came from the borrower) nine times out of ten, the appraisal came back with the exact same value.
Curious.
Another big part of the mess, the people who were supposed to catch any fraud or mistakes, were The Underwriters.
They were the final check points in the mortgage process, and when they were presented with a SISA loan that showed that a “house cleaner” made $12k/mo, they should have sounded the alarm.
Like the appraisers, the underwriters are merely mentioned in the piece on Dateline.
Ilene Lanacano, who worked for “People’s Choice,” says that when she brought up some of these problems with the questionable loans, she was often overruled by the CEO of the company.
She states that she was often offered “incentives” by loan officers (money, jewelry, even a car) to approve loans. Ilene says that she never took any of these incentives.
She also claimed that there was harassment and intimidation if you did not approve loans, such as flattened tires and physical threats.
Ilene finally left “People’s Choice” for a consulting firm whose business was to analyze the loans to be pooled in Mortgage Backed Securities (MBS’s). When she raised some flags, she ended up getting in trouble by management.
Next, let’s look to good old Wall Street. You would think that one of the supposed guru’s of Wall Street could have seen the possibility that at least some of these loans were destine fail. But they too, only saw the bottom line, and they sold these MBS to everyone: investors, pension funds, municipalities and other countries.
And then there is China, who bought up trillions of dollars in MBS in an attempt to control the US. By owning all these MBS, China has a huge stake in our mortgage meltdown.
They were only briefly mentioned in the “Dateline” piece, and no real repsonsibility was levied on them. If China had not been so greedy, there wouldn’t have such a demand for MBS, which would have cut down the toxic loans being written.
And the Chinese are smart, shouldn’t they have seen some of the signs?
Next ones to heap some blame on are the Bond Rating Agencies, such as Standard and Poors, who was also briefly mentioned in NBC’s piece.
As Dateline explained, they were hired to give credit ratings to these MBS, which are supposed to indicate their level of risk to investors. “AAA” was the highest rating that they could give a security, and 80% of MBS received that top stamp of approval.
They suggested that most MBS would perform well, despite the fact that the agencies did not have any historical data to back the ratings up. Richard Gufliota of S&P, stated that they were so over inundated with securities to rate that most were not examined to the extent that they should have been.
It should also be mentioned that they made their money in volume too. More quantity over quality.
Finally, a lesser acknowledged culprit of this financial fiasco is The Media itself.
If it wasn’t for the greed of the media (TV, Radio and Newsprint), rolling out with advertisement after advertisement for these mortgage companies and their products, borrowers would not have been so encouraged to accept some of these toxic loan.
In years leading up to this mess, there wasn’t a commercial break that did not produce a mortgage ad.
Often advertised were the No Closing Cost, Stated Income, No Income Verified, and so forth.
There wasn’t a Radio host in the nation who didn’t have at least one mortgage company in their back pocket paying them to be their spokesperson.
Did any of them look into the products that they were pitching to their listeners? Nope. I think they just laughed all the way to the bank.
And what is strange about the media’s role, is that I have yet to see anyone try to add them into the equation. Now, all you hear out of radio talk show hosts spewed crap about how everyone else is to blame. None have come forward to say, “Hey, I guess I had a hand in it too.”
All in all, it is going to be a vicious circle of blame.
There is plenty of blame to go around, and I think when it comes down to it, we can sum it all up with one little word: “GREED;” the Greed of the Government, the greed of the Product Managers, the greed of the CEO’s, the greed of the borrowers, the greed of the Loan officers, the greed of the Appraisers, the greed of the Underwriters, the greed of Wall Street, the greed of China, the greed of the Bond Raters, and greed of the media.
Existing home sales rose in February giving another possible sign the housing market is nearing bottom. The National Association of Realtors (NAR) has also undertaken an ambitious marketing push to convince Americans that now is the time to buy. Naturally the NAR is going to take this data and use it to further their message, but what can we believe? On one hand the NAR has made some valid points, but then again they are obviously a biased source. Tim Iacono advises us to be weary of what the NAR is telling you, and looks closer at the recent data release in his blog post below.
The National Association of Realtors reported that existing home sales rose from a seasonally adjusted annualized rate of 4.49 million units in January to 4.72 million units in February, almost half of the sales being either foreclosures or short sales. Though not too much should be made of any of the housing data during the winter months since sales are just a fraction of what they are during the summer months, the inventory of unsold homes remains quite high, rising 5.2 percent in February to 3.8 million units, representing 9.7 months of supply at the current sales rate.
This is about double the normal inventory and, excluding distressed sales from the calculation, this would be about four times typical levels.
Lawrence Yun, NAR chief economist, noted the following:
Because entry level buyers are shopping for bargains, distressed sales accounted for 40 to 45 percent of transactions in February. Our analysis shows that distressed homes typically are selling for 20 percent less than the normal market price, and this naturally is drawing down the overall median price.
The median price for an existing home fell to $165,400 in February, down 15.5 percent on a year-over-year basis and Mr.Yun attempts to dismiss this decline:
Given the downward distortion in price comparisons due to distressed sales, it’s important for owners to keep in mind that this doesn’t equate to a similar loss of value for traditional homes in good condition.
The national data in the most recent report(.pdf) on the Case-Shiller Home Price Index showed an annual home price decline of 18.2 percent, so Mr. Yun is probably seeing things through glasses that might be a bit rosy here.
We all know that things have been bad in the Las Vegas real estate market, but just how bad is it? A vast majority of the sales happening now are foreclosures, and the exact numbers might be frightening — even to those who don't own a house there. For a graphic depiction read the the following blog post from Tim Iacono.
This report from the Las Vegas Sun carries one of the better graphics that have crossed my computer screen lately depicting the extent to which distressed sales have impacted the local real estate market in and around "Sin City".
Of course, conditions are much worse in Nevada than in most other parts of the country, but large swaths of California, Florida, and Arizona probably have real estate sale figures that are not too different from these. The report by Chris Morris and Alex Richards contains just the following commentary.
When Nevadans started to realize they were at the epicenter of a full-blown foreclosure crisis in 2007, riding a rising wave of loan defaults that eventually turned into auctions and bank repossessions, they didn't really understand what was in store for the real estate market. In the valley today, foreclosure sales largely outpace regular sales, and they drive the median price of single-family homes down considerably — by roughly $25,000 in February.
Could the real estate market bottom finally be here? A recent report shows that the median sales price in Southern California has stopped falling — at least for one month. In some places values have even started to rise again. Although it is easy to get excited about this report, Tim Iacono does offer some warning in his blog post below.
Dataquick reported February real estate sales data for Southern California earlier today and it looks as though the median price stopped declining for the first time in almost two years.
After dropping to a six-year low last month, the median price across all of Southern California held steady at just $250,000 - that still sounds like a lot of money.
You'd likely agree if you've ever seen a median home in Southern California.
As shown above, prices in all six counties are now down more than forty percent from their peak and San Berdoo looks as though it may crack the minus 60 percent threshold as soon as next month.
Median home prices going back to late 2002 are shown below - note that both San Diego and Orange County posted advances from January to February.
The market is so tilted away from normal mainstream activity that it's impossible to generalize or predict based on the atypical patterns we're seeing. That means that normal demand and supply is building up. The floodgates could open once mortgage credit starts to open up.
Well, maybe if the banks sense that things are stabilizing a bit, we'll see a flood of bank-owned properties on the market, but it's hard to imagine you really need floodgates to hold back demand right about now given the state of the local economy.
Foreclosures were said to account for 56.4 percent of all February sales, unchanged from last month, up from a 36.2 percent share a year ago.
These distressed sales have contributed to year-over-year price declines that now far exceed any of the annual gains a few years back, prices in the Inland Empire continuing to plunge while declines in other areas slow.
Pricing in my old stomping ground of Ventura County have improved dramatically over the last couple months, from an annual decline of 36 percent in December to a drop of just 27 percent in February.
In the words of inimitable groundskeeper Carl Spackler from the 1980 movie classic Caddyshack, "So we got that goin' for us, which is nice".
A lot of people are getting excited about the fact that housing starts are up over 20 percent, but their excitement might be a little premature. Tim Iacono from The Mess That Greenspan Made tells us why these numbers could be a little deceiving in his blog post below.
The Commerce Department reported(.pdf) that housing starts rose for the first time in eight months, up 22.2 percent in February from record lows in January, largely as a result of a rebound in condominium and apartment building. While a 22 percent gain sounds impressive, it is important to recall just how low last month's record low numbers were.
Housing starts rose from an annualized, seasonally adjusted rate of 466,000 in January to a rate of 583,000 last month, but the January totals were a full 42 percent below the previous record low of 798,000 in January of 1991, a rate that is not adjusted for the increase in population.
This data series goes all the way back to 1959 and to see the rate of housing starts averaging well over a million units for five decades gives the February figure of 583,000 a very different connotation than when simply comparing the total to January.
On a year-over-year basis, housing starts fell 47.3 percent.
Building permits, a forward looking indicator for new construction, rose 3.0 percent in February, from a rate of 521,000 to 547,000, and are now down 44.2 percent from a year ago.
Record foreclosures and an increasing number of sales of bank owned properties have undercut builder prices for many months now with almost 300,000 homes entering some stage of foreclosure in February. This adds to the growing inventory of bank owned properties, most of which have remained off of the resale market according to RealtyTrac, a California-based provider of default data.
Yesterday's National Association of Home Builders housing market index remained near record lows, buyer traffic worsening in the latest report, as the near-term outlook for homebuilders remains grim.
As CNN reports, renters are definitely at risk in today's collapsing real estate market. In the event a home goes into foreclosure the lease agreement on said property is typically voided. The good news is that new laws have recently been passed that help renters in situations like this, but so far only Freddie Mac and Fannie Mae loans are required to be part of the program. If your landlord has their mortgage with a different provider, you may be out of luck. With 40 percent of all foreclosures happening to homes with renters in them, sadly there are a lot more people who are going to be in the same situation as the lady in the video. For more on this, read Tim Iacono's blog post below:
Wow! About 40 percent of all foreclosures are for properties that are being rented. We'll have to keep this in mind when looking for a new place - a report the other day said there are ten new foreclosures every day in Deschutes County, Oregon, where we're headed.
According to a recent Federal Reserve report American's are actually worth less today than they were in 2001. Well known economist Paul Krugman blames the American tendency to spend instead of save for limiting our net worth growth, which should be of little surprise. Now it appears that this trend is ready to reverse, which will only exacerbate the economic problems the country is facing. Krugman also makes an interesting comparison to the Great Depression, and how we eventually were able to escape it. At the end of the day, though, he doesn't see the outlook for the economy as very good at all. Economics professor Mark Thoma looks at Krugman's article in his blog post below.
Do we have what it takes "to boot the economy out of a debt trap"?:
Decade at Bernie’s, by Paul Krugman, Commentary, NY Times: By now everyone knows the sad tale of Bernard Madoff’s duped investors. They looked at their statements and thought they were rich. But then, one day, they discovered to their horror that their supposed wealth was a figment of someone else’s imagination.
Unfortunately, that’s a pretty good metaphor for what happened to America as a whole in the first decade of the 21st century.
Last week the Federal Reserve released the ... latest ... report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation ... since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.
At one level this should come as no surprise. For most of the last decade America was a nation of borrowers and spenders, not savers. ... Why should we have expected our net worth to go up?
Yet until very recently Americans believed they were getting richer, because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing. ... Then reality struck... The surge in asset values had been an illusion — but the surge in debt had been all too real.
So now we’re in trouble — deeper trouble, I think, than most people realize... For this is a broad-based mess. Everyone talks about the problems of the banks... But the banks aren’t the only players with too much debt and too few assets; the same description applies to the private sector as a whole.
And as the great American economist Irving Fisher pointed out in the 1930s, the things people ... do when they realize they have too much debt tend to be self-defeating when everyone tries to do them at the same time. Attempts to sell assets and pay off debt deepen the plunge in asset prices, further reducing net worth. Attempts to save more translate into a collapse of consumer demand, deepening the economic slump.
Are policy makers ready to do what it takes to break this vicious circle? In principle, yes. ... In practice, however, the policies ... don’t look adequate to the challenge. The fiscal stimulus plan, while it will certainly help, probably won’t do more than mitigate the economic side effects of debt deflation. And the much-awaited announcement of the bank rescue plan left everyone confused rather than reassured.
There’s hope that the bank rescue will eventually turn into something stronger. ... But even if we eventually do what’s needed on the bank front, that will solve only part of the problem.
If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn’t just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government’s debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom.
Since nothing like that is on the table, or seems likely to get on the table any time soon, it will take years for families and firms to work off the debt they ran up so blithely. The odds are that the legacy of our time of illusion — our decade at Bernie’s — will be a long, painful slump.
[Note: James Kwak has balance sheet calculations based upon the Federal Reserve report showing the severe deterioration in household balance sheets.]
It appears the government is ready and willing to do whatever it takes to fix the housing crisis, but there is one little problem: They can’t. As part of the new stimulus package, there will likely be a $15,000 homebuyer tax credit, and not just for first-time homebuyers, but for all homebuyers purchasing a primary residence. In addition, the government will likely attempt to drive mortgage rates down to around 4.5 percent and work particularly hard to modify troubled loans to keep homeowners out of foreclosure. With these new measures in place the housing market will surely recover…right?
The answer to that question depends on your definition of recovery. Will it be enough to stop prices from falling, and possibly even help them start going up again? It’s definitely possible, but the problem won’t be fixed even if prices do turn around. Artificially inflated prices caused the housing crisis in the first place. Homeownership became an attractive option for more people than ever before through financing options that were cheap and widely available—a little too widely available, we are now discovering. ARMs, interest-only and other creative loan programs kept monthly payments low, and people could suddenly afford a more expensive house—or so it appeared. When interest rates started rising and ARMs reset, housing values stopped climbing and all hell broke loose.
So why would we believe that artificially boosting housing values will be sustainable this time? What do we think will happen when mortgage rates rise again and the tax credits expire? We won’t have to worry about ARMs resetting this time around because they are now shunned by banks for the most part, but the fundamental problem remains that housing is just too expensive compared to income. Interest rates can’t stay this low forever, and the tax credit will expire after the end of the year. Then homebuyers will only have their personal income to rely on to pay for their homes. This is how it has always been (minus government intervention), and it is how it should be. People making $50,000 a year shouldn’t be living in a $400,000 house—It’s that simple. People need to live within their means, but the government doesn’t seem to grasp this and keeps pushing measures to modify home loans. We can try to modify people’s loans all day long, but if they can’t afford their homes, then they can’t afford their homes. According to the Wall Street Journal, over 40 percent of borrowers were at least 60 days past due eight months after their loan was modified. It seems to me that these loan modifications are just delaying the inevitable and costing banks and taxpayers more money.
Before the housing crisis can truly end, housing prices must come into balance with incomes. When this happens, the problem will solve itself. When buying a home starts to make more sense than renting, people will start buying again. It isn’t that hard to figure out. Spending taxpayer money to prop up housing is not only a waste, but an unethical perpetuation of the problem. It is completely unfair to renters as well as our youth. Unfortunately, those groups represent the minority, so their voice isn’t likely to be heard. If these measures are passed, expect to pay handsomely for it and to see another bubble burst a few years from now. At least this time no one should be able to use the excuse that they didn’t see it coming.
The December existing home sales report shocked everyone when it showed an increase over 6 percent, however, the new home sales report was not quite as optimistic. The new home sales report showed more of the same, a drop in sales activity and an increase in inventory. Tim Iacono from The Mess That Greenspan Made dives deeper into this report in his blog post below.
The Census Bureau reported(.pdf) new home sales fell to record lows in December and, after revisions to prior months' data (as shown below), inventory has skyrocketed.
New home sales plunged 14.7 percent from November to a seasonally adjusted annualized rate of just 331,000 units and downward revisions to prior months' data totaled another 40,000 pushing the inventory of unsold homes to 12.9 months of supply, also a record.
For the entire year of 2008, new home sales totaled just 482,000 units, a decline of 38 percent from 2007, to the lowest level in 26 years.
The median price for a new home plunged 6.0 percent, from $219,700 in November to $206,500 in December, and is now down 9.3 percent on a year-over-year basis.
Bernanke and the Fed already played their last interest rate card, so if they can't lower rates what else can they do to get the economy back on track? There is a lot of speculation going around right now about what they might do, but we shall find out for ourselves later today. James Picerno from The Capital Spectator talks about the Fed meeting and the economy in general, adding some valuable input in his blog post below.
The press release that follows the Fed's FOMC meeting today may offer clues about how the central bank will proceed now that it's out of conventional monetary policy ammunition. Then again, maybe not. We're all trapped in gray zone of trial and error about what to do next and the Federal Reserve is also now faced with grasping at straws.
Typically, an afternoon FOMC press release attracts interest for an update on where short-term interest rates are headed. Today, and probably for some time to come, everyone already knows the answer. The Fed controls short rates, starting with the all-powerful Fed funds, but with the effective Fed funds at roughly 0.16%, the mystery about what comes next is, like the price of money, virtually nil.
Yet Bernanke and company may yet surprise us by dropping fresh clues about how the Fed plans to practice unconventional monetary policy from here on out—quantitative easing, to use the phrase of the dismal science. The details are a work in progress, although the immediate goal is still clear: stabilize general price levels.
We won't belabor the issue of deflation today, in part because we've discussed it often in recent months, including here and here. Let's just say that the D risk is still very much with us, and so the Fed has a fair amount of work to do in the months ahead.
The market appears to understand this, at least by way of monitoring Fed funds futures. For the year ahead, all the contracts are expecting Fed funds to remain under 60 basis points, and quite a bit lower for the immediate future.
Long rates remain in a holding pattern as well. The yield on the benchmark 10-year Treasury Note is in the 2.5% range and it may go lower yet, depending on what the next round of inflation reports reveal, although those won't arrive for several weeks.
Meantime, there's plenty of guesswork about what the Fed's next move. "With rates going nowhere for some time, the market's focus will be on whether the Fed will be looking to buy government (or corporate) securities in the near future," Sacha Tihanyi, an analyst at Scotia Capital, opines via AFP.
John Authers in today's FT argues that the critical variable is housing prices. What can the central bank do on that front? "The Fed can give details on quantitative easing— the ugly phrase for the art of buying bonds so as to push down the yields they pay, and stimulate the economy with lower rates, especially for mortgages," he writes. "If there is a single key variable to determine when the crisis in the US banking system can be brought under control, it is house prices. The further they fall, the higher the likely default rate on the mortgage-backed securities that banks now hold on their balance sheets."
Unfortunately, the news on housing prices is still discouraging, even after several years of a falling market. One of the latest bits of housing data shows that prices fell again last month even as sales perked up. Existing home sales rose 6.5% in December, albeit driven by distressed sales at bargain prices, the National Association of Realtors reports. Nonetheless, the median national price of existing homes in the U.S. still dropped by a hefty 15.3% last month.
Even if the Fed is successful in fending off deflation, which we expect it will be, that by itself isn't a cure for what ails the economy. "Ben Bernanke is rightly concerned about deflation right now," Desmond Lachman of the American Enterprise Institute explains in The Christian Science Monitor. But that's merely step one in a multi-step recovery program. "Getting inflation back into the system … is not going to be sufficient," Lachman notes.
Convincing banks to lend and consumers and businesses to borrow is arguably the next big step beyond containing the deflation risk. Solving the latter will be easy by comparison. The real challenge will come later this year in trying to promote growth. But first things first, and so we await today's Fed commentary.
There has been a lot of talk this morning about the unexpected rise in existing home sales in December, and specifically whether or not it signals the beginning of the end. Unfortunately, we also saw a less positive statistic released: The median home sale price fell 15.3 percent in 2008—the largest drop on record since 1968, according to the Associated Press (AP). So what exactly are we to make of these statistics?
In my mind, this is positive news overall. First and foremost, property values are still too high and they will continue their decline until they reach equilibrium with income levels. That prices dropped so much means that we are ever closer to that point. Increased home sales in December is also a good sign, but one must wonder how much can be attributed to suppressed mortgage rates.
Most homebuyers do not look at the overall cost of the home, but rather focus on how much money they need to put down and the resulting monthly mortgage payment. When mortgage rates were under 5 percent, that dream home was suddenly within reach, and many people came down off the fence to buy. As rates rise again the opposite will happen.
Let’s also not lose site of the fact that thousands of people are losing their jobs every day, and as long as job losses and layoffs are on the rise, it is hard to imagine that the real estate market or any other sector of the economy will recover any time soon. And let’s keep in mind that although home sales increased in December, overall 2008 saw 13 percent fewer home sales than in 2007 and the lowest total since 1997, according to the AP.
This correction was necessary, and we are closer to recovery every day. I wouldn’t get too excited about it yet, as we should expect to see an over-correction before total recovery in this type of market, but as the chart below further illustrates, we are getting closer to what appears to be an historical equilibrium.
It is no secret that builders are hurting, and some experts predict that upwards of half of them will be out of business before this economic crisis is over. The tough real estate market plagued by indecisive buyers and oversupply, combined with the restrictive lending environment, means that even those builders who manage to stay in business are still going to be hurting. It should be no surprise then that new construction is reaching all time lows. Overall it is a good thing, and something that needs to happen in order to allow the market to recover, but it is painful for builders nonetheless. Tim Iacono from The Mess That Greenspan Made looks closer at the latest new homes report and offers his take in his blog post below.
The Census Bureau reports new home construction reached record lows last month, a fitting end to the worst year in the home building business since record keeping began in 1959. Housing starts fell 15.5 percent in December to a seasonally adjusted, annualized rate of just 550,000, worse than the previous low of 651,000 set in November.
In population-adjusted terms, the previous record monthly lows in the low-700,000 range set in the mid-1970s are about double the current rate of home building, an astonishing statistic.
For example, prior to 2008, the low-water mark was 709,000 in May of 1975 which would be just over one million after adjusting for the growth in the U.S. population.
During all of 2008, housing starts totaled just 904,000, a decline of 33.3 percent from the level of 1.36 million units in 2007. The previous low was in 1991 when 1.01 million units were started, a total that, after adjusting for the increase in population was actually worse than last year.
Building permits, a leading indicator for new home construction, dropped to an annual rate of 549,000 in December, a decline of 10.7 percent from November, and also a record low.
This follows yesterday's dismal report by the National Association of Home Builders that pessimism has reached new all-time lows. The monthly confidence survey dropped to just 8 in January, down from 9 in December. Recall that, not more than two years ago, this index was over 50.
Just in case you needed one more thing to worry about, a recent article published in the New York Times should have you thinking twice about buying a home in a new subdivision. The article is titled, “Banks Foreclose on Builders With Perfect Records.” The article talks about how banks are starting to do such things as call for extra collateral from builders—even if they have never missed a payment—essentially dooming them to failure. If you have purchased or are planning to purchase a home in a new subdivision that has not yet been completed, this could be horrible news for you.
Builders rely heavily on credit to function, and now that credit is being restricted even for the best borrowers, builders are in serious trouble. According to the New York Times article, already we have seen more than 20,000 builders nationwide go out of business. Before the carnage is finished, the total will likely swell to more than 50,000, according to Ivy Zelman, a housing analyst quoted in the article. That total would represent more than half of all U.S. builders. So why exactly should new home buyers be worried?
When you purchase a home in a new subdivision, part of the purchase price is based on community features and factors. The subdivision might have a nice park for the kids, or just great, overall family appeal. These are things that sell people on wanting to move into that particular neighborhood. The problem in new subdivisions is that typically people buy homes before the community is finished. If the builder were to go out of business, it is possible that the community might not be finished for a long time, if ever. Not only is it possible that early homebuyers might not ever see the clubhouse that they were promised, or that neighborhood park, but they may also be forced to look at partially built, rotting homes for a few years. In case you didn’t connect the dots already, that means that resell values of existing homes in those communities are likely to plummet.
The worst part about this is that these buyers could be completely blindsided. It doesn’t even matter if they went so far as to make sure that the builder looked financially sound and was current on payments to the bank. The banks are so scared about the collapsing real estate market—especially in the sun belt region—that they are prematurely foreclosing on these builders right now. If the banks are prepared to go to these dramatic lengths, regardless of payment history, who knows what they will do next? It seems that as a homebuyer, you can only protect yourself by paying for nothing but what you see. Don’t bother looking at the master plan with the salesperson. Just walk outside, look around and ask yourself whether this house is worth its price, even if nothing else gets finished. If it isn’t: Move on.
There is a lot of momentum gaining right now behind the idea to create a so called, "Bad Bank." This bank would be set up by the government and would be used to take toxic debt off of the balance sheet of the banks like Citigroup and Bank of America. Paul Krugman thinks this "Bad bank" is simply a bad idea. Economics Professor Mark Thoma revisits Krugman's article in his blog post below.
Are policymakers about to take another wrong turn?:
Wall Street Voodoo, by Paul Krugman, Commentary, NY Times: Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans.
But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.
To explain..., let me describe ... a hypothetical bank that I’ll call Gothamgroup, or Gotham for short.
On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.
So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope ...[of] a government bailout.
Why would the government bail Gotham out? Because it plays a central role in the financial system. ... Gotham has to be kept functioning. But how can that be done?
Well, the government could simply give Gotham a couple of hundred billion dollars... A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to ... the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.
The current buzz suggests ... policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward ... moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” ... “The aggregator bank would buy the assets at fair value.” But what does “fair value” mean?
In my example, Gothamgroup is insolvent... The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer.
Now, maybe private buyers aren’t willing to pay what toxic waste is really worth... But should the government be in the business of declaring that it knows better than the market what assets are worth? And is ... paying “fair value,” whatever that means,... enough to make Gotham solvent again?
What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense...
Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. ...Gothamgroup and its sister institutions are already ... utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.
Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.
Recently a coalition of homebuilders, real estate agents and other housing stakeholders have come together to formulate a plan to fix the economy. For the purpose of making their plan known, they have even created a website: fixhousingfirst.com. They proclaim that the main reason that the economy is so down right now is because the real estate market is being battered. After all, the problems began when housing values started to fall and foreclosures mounted, which exposed troubled mortgage-backed securities. So naturally, if we hope to fix this financial crisis, then we must address the most glaring problem first and foremost, right?
“So what is their big plan,” you ask? To create another housing bubble of course!
Their plan, as written on the website, is outlined below:
Enhance the initial Home Buyer Tax Credit:
Eligible purchases: Primary residences between April 9, 2008, and December 31, 2009.
Credit amount: 10% of home price capped at 3.5% of FHA loan limits (geographically dependent) — ranging between approximately $10,000 and $22,000.
Eliminate the recapture — a true tax credit [Here they are referring to the repayment of credit described above. In the previous housing bill there was an interest free loan for first time homebuyers of $7,500.]
Monetization: credit available at time of closing.
Available to all home buyers and not just first-time home buyers.
Couple the enhanced tax credit with a below market 30-year fixed-rate mortgage for home purchases
2.99% rate available for contracts closed between now and June 30, 2009.
3.99% rate for contracts closed between June 30, 2009 and December 31, 2009.
Continue foreclosure prevention measures to keep people in their homes, help stabilize home prices and bolster the economy.
Restated, they want taxpayers to pay the down payment for homebuyers and subsidize their mortgage payments as well. What would the net effect of this be? Housing would all suddenly become much more attractive and people would buy, pushing prices up. This is exactly what they say will happen, and is what they are striving for. The trouble is that it is an artificial boost to housing prices, which will inevitably lead to another housing bubble. Housing just isn’t worth what it currently costs. That is the simple truth, and a truth that we all need to grasp. Once the subsidies are gone, housing prices will once again fall until they hit their true value point.
If we are looking for a solution to temporarily get us out of this mess, I think this is certainly one plan that will help with that. However, to me it seems like a waste of time and money when in the end we are ultimately going to return to the same place we were before. This plan is not sustainable in any way shape or form, and should not be seriously considered. Then again what did one expect to see from a plan constructed entirely by home builders, real estate agents and other housing stakeholders?
2008 was a year to be remembered by investors, but certainly not in a good way. While most investors probably lost a substantial amount of money, hopefully they at least learned some powerful lessons. James Picerno from The Capital Spectator looks back at 2008 and some of the things investors should take away from it in his blog post below.
Two-thousand-and-eight is gone—and good riddance. But the blowback will be with us for some time, on a number of fronts. And that starts with reviewing the previous 12 months.
As our first table below shows, red ink was spread far and wide in 2008 in almost everything other than cash and bonds. Otherwise, double-digit losses were the rule last year. But if we look at the monthly tally for December, the view looks decidedly better. REITs, in particular, rebounded sharply last month, surging nearly 18% in December.
Most of the other asset classes followed suit, albeit with lesser although still robust gains for the month. The exceptions are cash and commodities. It's too soon to tell if the worst is over or if the rally is merely a fleeting affair in an ongoing bear market. But given the extent and breadth of the carnage, it's tempting to think that maybe, just maybe, positive returns await in asset classes other than cash.
Speaking of cash, a few words about last month's performance of 3-month Treasury bills (our proxy for cash) is in order. Although our table above lists December's performance for cash as zero, the number's in red because the return is slightly negative for 3-month T-bills if you carry the return out to two digits: -0.02%. In the grand scheme of the universe, no one will lose any sleep over this microscopic loss. But the fact that T-bills—the classic "risk-free" asset—posted a loss of any degree is extraordinary, and so it speaks to the times we live in.
Indeed, monthly losses in T-bills are so rare that it doesn't register in our databases, which admittedly only go back to the 1980s for "cash." That's not to say that it never happens, but you'll have to go back quite a ways to find monthly red ink in this corner of finance.
The source of last month's slight loss is no mystery, at least. The explanation starts by noting that the yield on a 3-month T-bill slipped to just about zero at the end of November—an astonishing state of affairs in and of itself. Then, in December, the T-bill yield rose a bit, albeit to a mere 0.11% by December 31 from roughly zero a month earlier. Slight as that is, it was enough to tip the monthly return to negative in the 3-month T-bill for two reasons. One, for much of December, the 3-month T-bill barely gave investors any yield to speak of, and since yield is the only source of return for these securities the pickings were fated to be slim at the end of November even under the best of circumstances. Add the fact that T-bill yields rose slightly set the stage for an ever-so-slight loss (rising yields translate into lower prices in bondland).
The fact that even cash could post a loss is a sign of the times, of course, although investors had bigger problems than worrying about miniature losses in T-bills. Indeed, as our second table below reminds, 2008 was a horrendous year for most asset classes. Horrendous, but not entirely surprising, at least in terms of how 2008 compared with previous years. Yes, the depth of the losses are shocking. But the reversal of fortune was overdue—long overdue in some cases.
click to enlarge
Consider emerging market stocks, which lost more than 50% last year. Shocking as the loss is, the volatility is not out of character for the asset class. Indeed, as the chart shows, emerging market stocks had been posting gains of 20% to 50% for each and every calendar year during 2003-2007. That extraordinary five-year stretch of price increases had to end eventually, of course, and for anyone who expected otherwise, well, they were living in a dream. Surely if an asset class can post a 50% gain in one year—as emerging markets did in 2003—something similar is possible if not likely on the downside.
A similar lesson applies to the formerly high-flying world of REITs, which also enjoyed an extraordinary bull market run that finally started coming apart in 2007 and continued in 2008.
Yet not everything was about losses in 2008, a year that witnessed potent gains for some corners of the bond world, which once again makes the case for owning a globally diversified portfolio. Foreign government bonds denominated in foreign currencies, for example, was an exceptionally bright light last year and so if you didn't own the asset class (via BWX, for instance), your portfolio probably paid a price.
The point is that cycles endure, even if the details aren't always 100% clear. What goes up in price eventually comes down. Meanwhile, lower prices precede higher prices. Although one must be extremely cautious about applying that view to individual securities, it generally works well over time when it comes to asset classes, which have a habit of surviving, which is more than one can say for some individual companies or certain bonds.
Timing, of course, is always debatable, even with broad asset classes, which is an argument for maintaining some mix of the world's capital and commodity markets through thick and thin. The question, as always, is how to structure the mix and manage the betas through time?
As it happens, that's the focus of a new monthly newsletter (The Beta Investment Report) that your editor will launch later this month (details to follow on CapitalSpectator.com). For the moment, though, we're simply gazing backward, in search of some basic perspective. Knowing where you've been and what history looks like is the foundation for looking into the future and assessing risk as well as opportunity. As always, a surplus of both awaits. The critical challenge is fleshing out the details, which is the mandate of our soon-to-be-launched newsletter.
Home sales are continuing on their downward spiral, but for some reason consumer sentiment is heading up. Maybe it is the holidays inspiring optimizing, or maybe consumers just can't imagine things getting any worse. In light of all the negative news going around about the economy and real estate, it was a little exciting to hear something was heading in the positive direction. The bad news of course is that consumers have been up and down for months, and seem prone to mood swings. For now, though, consumers, possibly high on their cheap gasoline, are feeling better than they did last month. Tim Iacono from The Mess That Greenspan Made looks closer at the latest real estate reports and talks a bit about consumer sentiment in his blog post below.
The bottom that had been forming in the chart of existing home sales over the last year, aided by a growing number of foreclosure sales, developed a rather large hole during the month of November as reported by the National Association of Realtors. It remains to be seen whether sales return to the 4.9 million rate average of the last year, the 8.6 percent tumble from 4.91 million in October to just 4.49 million in November helping to push the inventory level back up to the high for this cycle at 11.2 months of supply.
More importantly, the median sales price dropped a whopping 13.2 percent in November on a year-over-year basis, from $208,000 to just $181,300, the lowest level since early-2004. The AP reports that this is most likely the biggest annual price decline since the Great Depression (NAR records only go back to 1968).
Sales fell most in the Northeast (down 12.0 percent), followed by the South (down 10.9 percent), the Midwest (down 7.4 percent), and the West (down 4.3 percent). Existing home sales in the West were helped by the continuing high level of distressed home sales, the realtors' trade group estimating that 45 percent of all sales nationwide are either foreclosures or short sales.
Homebuilders aren't finding it any easier to sell real estate as the Commerce Department reported(.pdf) that new home sales also tumbled, falling 2.9 percent from an annualized rate of 419,000 in October to 407,000 in November, the slowest pace since 1991. Sales have declined 35.3 percent from year-ago levels, the worst decline since April 1980 when new home sales plunged 50.5 percent. Inventory remains at historically high levels, averaging 11 months of supply over the last year, as builders continue to offer incentives and slash prices.
The median price dropped 11.5 percent on a year-over-year basis, from $249,100 to $220,400, however, these figures continue to be deceptively high due to the many financial incentives available to buyers that do not show up in the sales price.
In one of the few pieces of good economic news this week, the mood of the consumer, as measured by the Reuters/University of Michigan Consumer Sentiment Index, improved during the month of December, rising from the 28-year low seen last month. The index rose to 60.1 from a mid-month reading of 59.1, up from November's historic low of just 55.3 as lower gasoline prices and some stability in financial markets helped to lift spirits.
The inflation expectations associated with this report are now getting very interesting. Survey respondents put the one-year inflation rate at just 1.7 percent, down from 2.9 percent last month, while the five-year rate came in at 2.6 percent as compared to 2.9 percent in November.
More than anything else, inflation expectations are driven by the cost of gasoline since these are the easiest prices for consumers to measure but, with food prices continuing to rise, it bears watching in the period ahead how inflation as reported in the government's consumer price index matches up with consumers' expectations of the same.
I was reading through some blog posts this morning and came across one on housingdoom.com that just reaffirms my anti-bailout position. The blog post is simply a rental listing that was posted on Craigslist in Tampa, and while a rental listing in itself is nothing to rant about, you really need to read this particular one.
Here it is:
I HAVE A 3 BEDROOM HOUSE THAT I AM LETTING GO, IT SHOULD BE ATLEAST ANOTHER YEAR BEFORE THE COURT WANTS THE KEYS, SO I AM RENTING OUT THIS HOUSE WITH NO CREDIT CHECK AND ON A MONTH TO MONTH TERM, SO NO ONE IS LOCKED IN, IT IS A CHEAP WAY FOR YOU TO SAVE MONEY. THE HOUSE HAS NO APPLIANCES BUT YOU CAN GO TO CRAIGS LIST AND GET FREE ONES UNDER THE FREE STUFF. CHECK OUT THE LINKS BELOW. IF YOU ARE INTRESTED PLEASE E-MAIL ME. ALSO THERE IS NO SECURITY DEPOSIT AND THE HOUSE IS ON A 1/4 ARCE. YOU CAN E-MAIL ME DIRECTLY AT JOEYCARLO@******** FIRST COME FIRST SERVE.
This guy Joe is asking $499 a month for this house, which is ridiculously low, so I’m sure that he won’t have a problem finding a tenant to take him up on his offer. Obviously he has no intention of using the rental proceeds to pay his mortgage, and is planning to take full advantage of the system for as long as he can.
This is one of the reasons why I am so adamant that a foreclosure moratorium is a bad idea. Sure a lot of homeowners really want to stay in their homes. However, many have no intention of staying in a house that is thousands underwater, and a majority of those homeowners who do want to stay in their homes probably can’t afford it, so they would just be delaying the inevitable. Then you have guys like this, who plan to milk the system for every dime they can get. He already stole the appliances, and now he plans to take advantage of the lenders some more. Since taxpayers are basically on the hook for many of these lenders, he is also taking advantage of taxpayers.
If we can figure out a way to limit the bailout to only those homeowners who actually want to stay in their homes and who can afford to do so, I might be more inclined to support it. But any bailout, or other measure, that supports guys like this, will never get my backing. This guy may be an extreme example of the potential problems at hand, but I can’t help thinking that there are tens of thousands of people out there doing this exact same thing. They probably just aren’t disclosing the situation outright like Joe here. Just reading this listing makes me angry. If Joe isn’t going to live in the house or at least try to make the payment, then he needs to return the keys to the lender. Anything short of that should be illegal, especially when taxpayers are ultimately on the hook for the bill.
So which city was hit harder by the real estate collapse, Las Vegas or Phoenix? To be sure they both have taken serious hits, but only one will go down as the winner. Tim Iacono from The Mess That Greenspan Made looks at the latest reports and gives the latest update on the markets. If your city is not in the top spot, don't fret because there is still lots of time to play catch up.
The September report(.pdf) for the S&P Case-Shiller Home Price Indices shows the 10-City and 20-City Composite Home Price Indices at new record annual declines of 18.6 percent and 17.4 percent, respectively. Price indices for all 20 cities are shown below. To aid in viewing this graphic, the order of the legend (upper left) reflects the top-to-bottom position of all 20 cities for the current month (far right). As such, the legend order indicates which cities have managed to hold onto the largest real estate price gains since 2000.
Congratulations New York!
You've just surpassed Washington D.C. as the metro area that has held onto home price gains the best in this decade. The bad news is that, with all the recent troubles on Wall Street, this may not last that long.
Not surprisingly, Phoenix and Las Vegas continue to lead the way down, year-over-year home price declines in both areas pushing past 31 percent in September as indicated in red in the table below - the death match continues.
A few other areas are also threatening to crack the 30+ percent annual decline threshold as indicated in blue, notably, San Francisco, an area where the annual price decline worsened to 29.5 percent. Two areas showed month-to-month improvement - Cleveland and Boston - while home prices in Dallas were unchanged from August. Cleveland was the only region where the annual home price decline improved from a year ago, from -6.6 percent in August to -6.4 percent in September.
David M. Blitzer, Chairman of the Index Committee at Standard & Poor's, noted:
The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals.
All three aggregate indices and 13 of the 20 metro areas are reporting new record rates of decline. Looking at the returns of the U.S. National Index, prices are back to where they were in early 2004. As of September 2008, the 10-City Composite is down 23.4% from its peak, the 20-City Composite is down 21.8% and the National Composite is down 21.0%
You'd think that things couldn't get any worse for home prices, but they probably will.
This article has been reposted from The Mess That Greenspan Made. The full post can also be viewed on The Mess That Greenspan Made.
Detroit automakers recently received the cold shoulder from Congress on their quest for a piece of the $700 billion bailout pie; next in line are the homebuilders. Hopefully they will learn from the automakers and won’t fly to Washington in private jets to beg for these funds, although at this point it appears doubtful that their wishes will be answered anyway. The homebuilders are prepared to request an aid package estimated at $250 billion and aptly called “Fix Housing First”, according to the Wall Street Journal. The homebuilders are trying to convince Congress that the rest of the financial system will continue to deteriorate until home prices stabilize.
The “Fix Housing First” plan calls for two parts, a large tax credit for homebuyers and a government subsidy of mortgage rates. The tax credit that the homebuilders are proposing would equal 10 percent of the home’s purchase or $22,000, whichever is less according to the Wall Street Journal. The mortgage subsidy requested by the homebuilders would aim to bring interest rates on government backed 30 year fix loans down to 3 percent for loans made in the first half of 2009, and 4 percent for loans made in the second half of the year, according to the Wall Street Journal. The Wall Street Journal also notes that Realtors are pushing a 4.5 percent interest rate buy down for new mortgage loans. It is their estimation that for each 1 percent that rates fall, 500,000 to 800,000 additional homes could be sold.
It seems very unlikely that any variation of the “Fix Housing First” plan will get passed before Obama takes office, but once he does all bets are off. I seriously doubt that the plan would remain intact as is, but some variation of the proposal could be possible. There is a lot of support for the idea that the housing crisis is the underlying cause of the greater financial crisis, and most Americans are more likely to approve of measures that will aid the housing and mortgage markets before aiding banks and other financial institutions. We have been trying to prop up the financial industry for a long time, without much avail. Why not give housing a try?
Of course the problem is that this will simply artificially inflate housing prices yet again. We did that before and look where that has left us. If we are able to inflate housing prices, that will alleviate many of the problems plaguing the financial industry and homeowners alike, but it is not sustainable. Housing simply became too expensive, and it will become too expensive again if we inflate it, and the next time it will cost us even more to fix the fallout. Housing prices need to rise in correlation with a rise in income, which is the only sustainable way. I hope that Congress and the next administration know better than to rely on biased research when looking to spend hundreds of billions in taxpayer money.
In an attempt to stop the flow of foreclosures that is ravaging the companies, Freddie Mac and Fannie Mae have decided to put a temporary hold on new foreclosures and evictions. This hold will last till early 2009 and is meant to give homeowners the chance to work out loan modifications, hopefully allowing them to stay in their homes. Between the two companies this move is expected to affect around 16,000 homeowners facing foreclosure, according to the Wall Street Journal. So it seems that these 16,000 homeowners are getting a nice little Christmas present from Freddie and Fannie, as well as from taxpayers I presume.
If nothing else, it will be interesting to see how this idea works. I was skeptical at best when the foreclosure moratorium was discussed during the presidential debates, and I still don’t think this will work as well as they are hoping. Nevertheless, this shall give us an opportunity to test the program on a smaller scale, which it could open up the door for similar action by other lenders if it works.
My problem with this strategy: I predict that ultimately the homeowners will still be foreclosed on, but they will enjoy some free time in their homes. If the homeowner doesn’t stay in the home, or somehow sell it, then the delay will just put the lender in even worse shape than before. Because in the case of Freddie and Fannie this equates to taxpayers taking on the burden, I’m not too fond of the idea. It will work out better if the companies are selective about who qualifies for a foreclosure delay, but if they offer it to all owner occupants it is doomed to failure. The problem is most people are in foreclosure for a serious reason: Some people lost their jobs, some can’t afford the payment (with or without loan modification) and some people are choosing to enter into foreclosure because they are so far underwater on the house. The last reason is becoming a huge problem, and really should be the one most feared in this scenario. At least I can feel bad for the people who lost their jobs, or possibly even the poor sucker who got an interest only ARM sold to them that they couldn’t afford, but it is hard to feel bad for someone who can afford the payment and just wants out of their contract. Why on earth would we want to give these people another month, two or three of free housing? If they aren’t going to pay their mortgage and just plan on working the system, why should taxpayers be stuck with the bill? We already have to deal with the fact that we are going to lose money on the foreclosure, so why add anything else?
It will be interesting to see how this all plays out. I have my doubts, and I hope that I’m proven wrong and that this plan saves taxpayers a bunch of money. But unless we are able to create a method to accurately identify the homeowners who want help and can be helped, this is doomed to fail.
As part of the latest directional shift in the allocation of the bailout funds being managed by Hank Paulson, it seems homeowners have once again been overlooked. The bailout funds which were originally intended to boost the lending markets have now been earmarked to boost bank balance sheets. Paulson and Bernanke seem much more concerned with propping up failing banks than homeowners at this point. Anthony Freed from Your Mortgage or Your Life even goes so far as to call them liars. You can read more about this in his blog post below.
Two months ago, in late September, I penned a piece titled Liars, and the Lying Lies They Are Telling You, which examined just one single publicly available FDIC document from 2002 which shows beyond any doubt that the Feds were not only aware of the problems in the finance industry that have led to near economic collapse today, they were already convinced that there would soon be dire repercussions.
Yet, today we have Treasury Secretary Hank Paulson and his mini-me Neel Kashkari, as well as a host of other top Federal officials, testifying under oath that the threats to our economic security were not immediately apparent until just months ago - hence the gun-to-the-head threats that produced the biggest bailout of private industry in history, while prescribing less governance on the application of those funds than is required to redeem a typical twenty-cent manufacturers coupon for kitty-litter.
Now we will see Barney Frank and others on the Hill posture and shuffle, as they feign attempts to look like they are in control of anything whatsoever, and they will act surprised that they had handed Paulson and his boy a blank check, and they is spending it as they sees fit.
Well, there should be no surprise there if they actually took the time to read the legislation they passed.
Paulson, who is overseeing the bailout program for the Bush administration, changed course and announced last week that the government would not use any of the money to buy rotten mortgages and other bad assets from banks. That had been the centerpiece of the plan when Paulson and Bernanke originally pitched it to lawmakers.
“Our assessment … is that this is not the most effective way” to use the bailout money, Paulson said at that time.
Instead, Paulson said the department would focus on rolling out a capital injection program to pour $250 billion into banks in return for partial ownership stakes in them.
The idea behind the capital injection program is for banks to use the money to rebuild reserves and lend more freely to customers. However, banks do have the leeway to use the money for other things, such as buying other banks or paying dividends to investors. That has touched a nerve with some lawmakers. Locked-up lending is a prime reason why the U.S. is suffering through the worst financial crisis since the 1930s. All the fallout from the housing, credit and financial crises have badly hurt the economy, which is almost certainly in recession, analysts say.
FDIC chief Sheila Bair continues to be the loan voice - I mean lone voice - advocating that some of the crumbs of the Bailout Cake be scattered in the direction of distressed borrowers who are, or will soon be, facing foreclosure.
In a break with the administration stance, Sheila Bair, chairman of the Federal Deposit Insurance Corp., who also will testify Tuesday, recently proposed using $24 billion of the bailout money to help some American households avoid foreclosure. So far, the Treasury Department has pledged $250 billion for banks and has agreed to devote $40 billion to troubled insurer American International Group(AIG Quote - Cramer on AIG - Stock Picks) — its first slice of funds going to a company other than a bank. That leaves just $60 billion available from Congress’ first bailout installment of $350 billion.
As much as I appreciate that there is at least one person in the Federal Government’s ivory tower who has some sense of the pain and heartache that the American Homeowner is facing, even if her advocacy basically ends with the gavel and the conclusion of the hearings.
The hearings may address a lot of things today, but the most important thing they will not address is who is responsible for letting us get into this terrible position in the first place? Are we and the now completely vegetative national press, really expected to believe that no one saw this entire catastrophe heading our way, when a simple Google search will produce hundreds of documents that show that version of the truth is ridiculously false?
In the article Liars, and the Lying Lies They Are Telling You, I featured testimony by Karen Shaw Petrou and others who were sounding the alarm repeatedly, exposing the vulnerabilities to the system posed by the nearly industry-wide use of risk-abatement models that only work in a market that never contracts.
That was a fatal strategy on the part of the financial industry. The notion that Federal Regulatory agencies were not aware of the risks is patently false. From 2002:
“The next panelist, Karen Shaw Petrou, Managing Partner of Federal Financial Analytics, had a considerably different take on the appropriateness of the Basel initiative. Ms. Petrou said that she has significant concern with Basel II, not because the individual pieces of it are necessarily wrong but because “nobody understands how it all works together.”
Ms. Petroustressed that reliance on models on which the Basel rules are based must be evaluated with tremendous caution and a careful look at the bottom line. She also highlighted problems with the operational risk rule. Reputation risk is not included in the Basel definition of operational risk for purposes of determining a capital requirement. As another weakness of the Basel II proposal, Ms. Petrou stressed the difficulty with relying on models.
She suggested that the Basel Committee move forward only with the provisions of the rule on which there is widespread agreement and considerable evidence of immediate need.”
In the article, I half-jokingly asked if any readers happened to know where Karen Shaw Petrou was today, and wheter or not she was available to take either Paulson’s or Bernake’s jobs. Well, a friend from OpenSalon.com - Tom Cordle - was curious enough to follow through, and what he found is gold: More proof that the Federal Regulatory Agencies charged with protecting the economy, the nation, and the American taxpayer from the reckless profiteering that is the nature of capitalism were at best asleep on the job - at worst they were completely complicit in the manufacturing of this crisis.
The long and short of it is - WE ARE BEING LIED TO REPEATEDLY, AND THE PROOF IS AVAILABLE TO EVERYONE - CONGRESS, THE PRESS, AND ALL OF US…
Trillions of dollars of our tax money to bailout foreign investors, and nothing for distressed homeowners but failed programs and broken promises. The bailout money is now being directed to the Credit Card companies and foreign investors, and the icing is that they want us to believe that they never imagined this could happen.
That is a bald-faced lie. The following is subsequent Congressional testimony from Karen Shaw Petrou, this time the pudding is from 2006:
Testimony Of Karen Shaw Petrou
Managing Partner
Federal Financial Analytics, Inc.
Before the Subcommittee on Financial Institutions and Consumer Credit
Committee on Financial Services
U.S. House of Representatives
September 14, 2006
This panel has led the way in recognizing the critical importance of the Basel risk-based capital rules, starting the policy debate in early 2002 with the first Congressional hearings on the rules long before many in the industry realized their critical importance. I was honored to testify then to offer views on the rules at that early stage and am grateful again now to outline ways to modernize the regulatory-capital requirements governing U.S. financial-services firms.
Sad to say, much of what I will say today is what I said in 2002 and at several later hearings on the proposal in the House and Senate. For example, in 2002, I urged the regulators carefully to consider the competitive implications of their rules. The House Financial Services Committee has pressed hard on this point and the agencies are now paying heed to it, but I fear that many aspects of the most recent proposal still do not address ongoing problems raised by the unique nature of the U.S. industry. It is different in many key respects from other national financial-services regimes, and U.S. rules must thus be carefully tailored to reflect U.S. reality.
There is, though, one key difference between 2002 and now: the Basel risk-based capital rules - for better or worse - are final everywhere else but here. Thus, we no longer have the luxury of pushing for a better international Accord. That is now final, and banks around the world will start to operate under it in January of 2007. This means not only that internationally-active U.S. banks will operate under anachronistic capital rules that place them at a disadvantage and that put the banking system at risk - that would be bad enough. However, it also means that foreign firms may have an undue capital advantage with which to enter the U.S. and acquire banks and other financial-services firms. As I said before this panel in May of 2005, M&A by global firms here is fine if it’s a fair fight. It isn’t fine, though, if our domestic institutions are gobbled up by foreign competitors able to engage in “regulatory arbitrage” solely because we can’t make up our minds on our capital standards.
What are the key U.S. financial-system realities that must be kept carefully in mind as new capital rules are finalized? Put very simply, they are:
We are facing emerging financial risks, most notably in housing and mortgage markets. We can debate all day long if the housing “bubble” will burst or fizzle, but we know for sure that U.S. consumers are highly leveraged and are making use in unparalleled fashion of high-risk mortgage products. The current Basel I rules applicable to all U.S. institutions woefully under-capitalize high-risk assets, creating a regulatory incentive for banks to hold them. Getting the risk right in risk-based capital is not just an issue for model builders. It’s a critical challenge to protect the FDIC and the economy more generally.
In the U.S. bank regulatory capital rules cover only insured depositories and a subset of parent holding companies. We have a wide range of charter options, the consolidated supervised entity (CSE) importantly among them, that permit astute companies to pick and choose among the charters. Outside the U.S., almost all firms fall under the Basel rules, eliminating much of the competitiveness concerns critical in the U.S. The Basel rules as now finalized may be good, bad or indifferent, but they will apply with few distinctions outside the U.S., ensuring the proverbial “level playing field.” We will have a most uneven one - with dangerous systemic-risk ramifications - if the final U.S. bank capital rules do not reflect our charter and supervisory diversity. The proposed operational risk capital standard is particularly problematic in our competitive and legal reality.
We have a unique capital requirement, the “leverage” standard proposed now to continue under the Basel IA and II regimes. Advocates of leverage argue that it will counteract possibly risky drops in regulatory capital. However, the leverage standard, while providing false comfort, exacerbates the charter disparities noted above because it applies only to some financial-services players, not to all of them. It is, further, no panacea for the problems in Basel. This panel will well remember the thousands of banks and S&Ls that failed in the 1980s and early 1990s even as the leverage standard applied to each and every one of them.
We have thousands of banks, savings associations and credit unions - not just the four or five big players that dominate most other markets. Initial plans simply to ignore all but the biggest U.S. banks in the Basel rules have rightly been shelved, but the current proposal still has unnecessary restraints on what size institution may choose which capital regime. Each insured depository and, when applicable, holding company should choose the rules it thinks are right for it, not have that choice defined by its regulators. Supervisors have full powers - actually expanded under the Basel proposals - to intervene and add more capital if they think an institution’s choice is risky.
With these thoughts in mind, I offer and urge the following recommendations related to the Basel rules in the U.S.:
First, we need to get our rules in place as fast as possible. If we can’t make up our minds on the more complex issues, leave them aside and finalize at least the simpler, “standardized” sections of the rules (revised for U.S. mortgage and other issues as necessary) and the Basel IA requirements. As noted, the current Basel I rules encourage risk-taking because there is no regulatory capital penalty for it. A simple rewrite that better equates risk-based capital to risk is urgently needed, and debate over the fine points of these highly-complex rules should not deter action on their key points on which there is, in fact, broad general agreement.
Second, we should not cling to the leverage standard in hopes that it will protect us from “undue” capital drops. I very much doubt that risk-based capital under Basel II would drop here in anywhere near the amounts suggested by the fourth quantitative impact study, which was based on top-of-the-cycle numbers and back-of-the-envelope estimates. Putting banks and their holding companies through all of the hoops and all the added expense of the Basel rules and then slapping the leverage standard atop them undermines the entire point and purpose of the Basel standards and - importantly - is far from the guarantee of safety and soundness hoped by those now pushing for retaining the leverage standard. It should be discarded - especially for holding companies - and regulators should rely on their own powers and market discipline to press banks that might consider unwise capital reductions to think again.
Third, the U.S. rules should not include an operational risk-based capital (ORBC) standard. The Basel IA proposal rightly does not include this and it should similarly be omitted from the Basel II rules. While this will put the U.S. Basel II rules at still more variance with the international Accord, it is necessary because of the lack of any agreed-upon methodology or measurement systems for operational risk. Worse still, a focus on ORBC will distract both banks and supervisors from urgently-needed disaster preparedness and contingency planning - capital is no substitute for back-up systems and advance planning as was made all too clear after September 11 and Hurricane Katrina.
Finally, we must make up our mind and move forward. All of the benchmarks, caveats, limits and questions in the Basel II rules create wholesale uncertainty about what capital rules will apply when to whom. As noted, U.S. banks operate in the real world of aggressive competitors at home and abroad. We have proposed imposing not only new risk-based capital standards, but also new powers for regulators to buttress these - Pillar 2 - and new disclosure standards - Pillar 3 - to enhance market discipline. Far too little attention has been paid in the current debate to these critical elements of the overall Basel framework - indeed, they are almost unmentioned in the current notice of proposed rulemaking. Rightly structured, however, these two additional pillars will give U.S. regulators all the tools they need to ensure that capital is right for each bank under their purview without forcing institutions into the one-size-fits-all leverage standard, benchmarks, and other constraints on Basel now under consideration.
In conclusion, Basel critics might wish none of this had started and the U.S. could just get back to Basel I as is. This is understandable given all the flaws in the initial proposal and all the problems to which regulators turned a deaf ear for so long. However, it is critical to remember that Basel I as is rewards risk-taking and the leverage standard as is will do nothing to constrain this. It is also vital to remember that major competitors at home and abroad are now or will soon come under a more risk-sensitive capital regime with no leverage standard. Each and every one of these firms is a major force to be reckoned with in the U.S. whether or not it chooses to become a bank under the Federal Reserve’s domain or headquarter itself here.
Thus, Basel II is here like it or not. Charters will be selected and deals done based on it, like it or not. The longer U.S. banks are kept under Basel wraps, the fewer of them there will be under our traditional regulatory framework. The longer Basel I is in place, the riskier our banking system will be - leverage standards now have no meaningful impact on risk other than to encourage taking it. Unless Congress is prepared to rewrite our rules and force all banks - big and small - and all competitors under the same capital regime - a major challenge that would keep Congresses busy for years to come - U.S. banks cannot be the last ones allowed to come under modern, risk-sensitive regulatory capital standards.
October brought us, among other things, record lows for housing starts and permits, according to a U.S. Census Bureau news release. Housing starts reached an annual rate of 791,000 in October, the lowest level since the department began tracking starts in 1959, according to a CNNMoney article. Building permits also fell 12 percent to an annual rate of 708,000 in October, breaking the previous low of 709,000 in March 1975, according to the same article. While this is certainly bad news for homebuilders and the economy, it is just what the real estate market needs to eventually recover.
Most people are stuck on how these numbers are horrible things, unable to see past the initial job losses and financial stresses on homebuilders. The truth is that this is 100 percent necessary right now, and the market is doing exactly what it needs to do. There are way too many homes for sale right now and the last thing we need at this time is more homes to add to that bloated tally. We need to cut the amount of new homes being brought onto the market and allow the existing inventory to move. Once the existing inventory gets back to normal ratios, then we might actually begin to see a recovery in the real estate market.
The bad part is that homebuilders are always behind the curve. They stop building too late and they start building too late. This means that, in all likelihood, homebuilders are going to be slow to respond once the need for new housing is already upon us. When that time comes, we are likely to see a run-up in prices on existing housing as buyers are forced into competition for available housing. There is no need to panic, though, if you are in the market for housing, because we aren’t going to hit that point for a long time.
According to a study commissioned by the Center for Automotive Research, a failure in the U.S. auto industry could cut up to 2.5 million jobs and reduce personal income in the U.S. by $125 billion. Obviously if this were to happen, Detroit and the rest of the cities in the U.S. which depend on automakers would be devastated. Too often people focus only on the job losses that would come directly from the automakers; in reality, it is much bigger than that. What about the vendors, car dealerships, truck drivers and so on? When you start to think about all the companies that are dependent on automakers, you can see how the potential job losses could rack up quickly. So what would happen to cities like Detroit if this were to happen, and what are the chances of it actually happening?
First off, I’ll start by saying the automakers have been pushing hard for some of the bailout funds being thrown around by the government right now and have been rejected so far. If anything is going to get the government to change their minds, it is the doomsday scenario that is being painted by this study. There is no way that the government is going to sit back and let 2.5 million people lose their jobs. The real question is, how realistic are the projections being made in this study?
It should also be noted that the study does predict that, by 2011, around 1.5 million of those workers would be hired back as the industry reorganizes and rebounds. So when all is said and done, only about a million workers would be out of work, but that doesn’t change the fact that for a period of time there would be an additional 2.5 million workers added to the ranks of the unemployed. These projected numbers are also worst-case. Pretty much if everything goes wrong that could go wrong, this is what we could be faced with. Realistically, we would likely see something much mellower than what is detailed in this study. While in all likelihood Armageddon will be avoided for automakers, that doesn’t mean they are in the clear, and neither are the towns dependent on them.
2.5 million workers out of a job is a bit of a stretch, but we very well could see hundreds of thousands as this recession rolls along. This does not sit well with local economies that are already struggling. Some of these cities are trying to establish themselves in other industries, such as Detroit with the casino and convention industry, but in an economy like we have now this will be extremely difficult. In addition, if they haven't already done so, there is no way they are going to be able to properly diversify their industry base in time to save their local economies, as the automakers are unlikely to last much longer as is. There is always the wildcard that the new president-elect Barack Obama could come riding in on his white horse and bail the auto industry out. However, that is assuming that he would be able to act in time to save them, and that he would even want to, considering all the other obligations we are faced with.
All in all, I would be cautious as an investor in markets that rely on the auto industry. Sure, the real estate looks like an incredible deal, but how much is a house really worth if you are as likely to get your house cleaned out of everything valuable by thieves as you are to find a tenant? Who wants to live in an area full of vacant, decaying homes? Many streets in these areas are already like this, and if more mass layoffs happen, you can bet this epidemic will continue to spread. Unless you are a gambling person willing to make a bet that Obama is going to come in and save the day, I would suggest that you look elsewhere for your investments, because without serious help (and quick), the U.S. auto industry is going to go downhill fast and will take these auto towns with them.
Most of the country is ecstatic that gas prices are falling. Just the other day I was able to fill up my car for less than $50--I know I certainly was ecstatic. But while most of the country is happy to see gas prices fall, there are certain pockets that are going to suffer for it. Texas is the energy capital of the country, and when gas prices are up, cities such as Houston and Fort Worth boom. This was certainly the case of late. These energy hubs continued to boom despite the rest of the country suffering from the credit crisis; it seemed as if they were immune. But now that gas prices are falling, these places are starting to feel the pinch--and it is likely to get worse.
Unemployment is rising in these areas as energy companies start to cut back. Projects that made since when oil was at $140 a barrel just don’t look as good now that it is less than $70 per barrel. It isn’t just unemployment either; many residents in these areas lease their land out to energy companies and depend on these payments to support their lifestyles. You can bet that as these energy companies continue to cut back, businesses in the area--along with the local real estate markets--will suffer. While many of these places avoided the big run-ups in housing prices that were so prevalent throughout the rest of the country during the housing boom, the real estate prices here never really experienced the falls, either. I would suspect that they will begin to fall a bit now, although not nearly as heavily as in most other places in the country.
As jobs dry up and the real estate and business markets contract, investors need to be extra careful when dealing in these areas. The numbers may look attractive right now thanks to low unemployment, low vacancy and real estate prices that have stayed study despite the economic turmoil, investors need to look beyond past performance and into the future. Now that Obama is president-elect, things could get even worse for some of these energy hubs. He wants to make a huge push for alternative energy, which could very well push the price of oil down even further. While some of these places are focused entirely on oil and gas, others are diversified into alternative energy, which would obviously be a preferable place to invest at this point. If you want to invest in these areas, look hard at diversification. Are there many jobs outside the oil industry? If the area is completely dependent on oil and gas, I would suggest you move on (think Fort McMurray in Alberta, Canada).
The housing crisis that is plaguing the United States seems only to be getting worse. Does Bernanke, or any other government official for that matter, have the answer? Toni Straka at The Prudent Investor looks more closely at the situation in his post below.
Halloween started early this year with a televised speech by the Fed's bearded chairmen Ben Bernanke. Recognizing that the problems in the biggest debt bubble of all times are far from over, Bernanke appeared helpless when offering several options for the future of the government sponsored entities (GSE) Fannie Mae and Freddie Mac.
The reorganization of the two mortgage giants, saddled with so many debts in default that no one can quantify reliably due to a lack of proper accounting, can take several ways.
Obviously addressing US policymakers, Bernanke presented four possibilities for the future role and organization of Frannie. The first one is rather wishful thinking: Returning the two GSEs to their pre-conservatorship status quo.
According to a Reuters dispatch from Friday, one in five homeowners sits on negative equity and it is going to get worse:
Nearly one in five U.S. mortgage borrowers owe more to lenders than their homes are worth, and the rate may soon approach one in four as housing prices fall and the economy weakens, a report on Friday shows.
About 7.63 million properties, or 18 percent, had negative equity in September, and another 2.1 million will follow if home prices fall another 5 percent, according to a report by First American CoreLogic.
The data, covering 43 states and Washington, D.C., includes borrowers nationwide, even those who took out mortgages before housing prices began to soar early this decade.
Seven hard-hit states -- Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio -- had 64 percent of all "underwater" borrowers, but just 41 percent of U.S. mortgages.
As if this was not enough, Marketwatch raised concerns that nothing influences people's investments more than the change of value of their house.
Consumers react more to changes in their home values than changes in their investment portfolios, according to a recent study.
In fact, real estate economists at UCLA and the University of Southern California found that a 10% decline in housing wealth from the 2005 highs would result in a $105 billion, or 1.2%, drop in personal consumption expenditures. That 10% decline in home values translates to roughly a 1 percentage-point reduction in real GDP growth, researchers said. Read the report.
One of Bernanke's other options looks DOA when checking the state of markets. A true privatization is simply not in the cards after a 99% decline in the share price of Fannie and Freddie.
Elaborations about copycatting the European system of covered mortgage bonds may bring its problems too at a time when trust between lenders has reached an all-time low as it is demonstrated by the essential seize-up of interbank markets for more than a year by now.
This leaves Bernanke's last option: Bringing the GSEs under Uncle Sams rule, with or without additional shareholders. Taking it from the recent past where the former champion of free market ideology has made a bizarre U-turn with several acts of Fedization I would not wonder if this will also be the future of Frannie.
Seeing that Bernanke offers options without favoring one of them I am afraid that it is not Bernanke who will solve the mess that Greenspan made. Thinking about Treasury secretary Hank Paulson's recent moves that cost the taxpayers basically another $70 billion in bonuses for his friends on Wall Street and had them pay almost double the price for some bank shares it is most likely we will see another round of more government in everything.
Somehow the American economy reminds me of the twists in the life of Joseph A. Schumpeter, an economist who coined the term "creative destruction" 90 years ago, favoring a laissez-faire capitalism over any government intervention. Schumpeter did not fail to recognize the signs of his times. In a speech held in Tokyo in 1932 Schumpeter had already shifted his perception towards permissible protectionism.
10 years later, in 1942, Schumpeter had morphed into a socialist. In his late work "Capitalism, Socialism and Democracy" Schumpeter declared that capitalism had no chance of survival, praising Karl Marx' theory on socialism which offered a more flexible approach to the headwinds any system will encounter. Will the same happen to the USA?
This article has been reposted from The Prudent Investor. The full post can also be viewed on The Prudent Investor.
Every day we are hearing about a new round of layoffs from some business, and that trend is unlikely to change anytime soon. Unemployment rose from 4.5 percent in 2006 to 6.1 percent last month, according to Inman News, and it continues to trend up. The financial crisis is forcing businesses to cut expenses and in some cases even merge with competitors in order to survive. Either way, the end result is layoffs and the prospects for new job hunters are grim. Once the money from their severance packages run out, which should be happening soon, these people are going to be in a world of hurt. During a recession the most painful thing is the high unemployment that typically accompanies it. Since this recession is geared up to be a big one, we should expect nothing less than a high level of unemployment to come with it. What does this mean for the real estate market? It means that things could get even worse.
People who are unemployed cannot buy homes, and people who are scared that they could join the unemployed ranks are unlikely to make big purchases--especially a new home. As unemployment continues to rise, we can also expect foreclosures to mount, which brings about a bad combo: more houses added to the market and fewer people able to buy them.
Some industries are being hit harder than others, but for the most part, businesses are going to struggle in the near future. Consumers lack confidence right now, as evidenced by the lowest-ever consumer confidence rating of 38 percent collected in a poll by The Conference Board this month. Consumers aren’t buying, which is going to hurt businesses that sell directly to consumers (B2C), and businesses that sell to businesses (B2B) are going to feel the pain next as the B2C businesses cut back their orders from the B2B businesses. This recession is going to hurt all over, and you can bet that we haven’t seen the worst of it yet.
The moral of the story is to be cautious if you are in the market to buy a new home. Realistically, your best bet is probably to wait it out a little longer, but if you absolutely need a new home now, just understand what could be looming. Only buy what you can comfortably afford. That should go without saying, but you would be surprised at what people can still get in terms of new loans, and what they are willing to sign on for. Also, pay close attention to what rents are going for in relation to what you would have to pay for a mortgage. If buying a home is considerably more expensive than renting in your area, then hopefully big red flags are going up in your head. Investors need to pay close attention to that comparison because there could be opportunity in those few areas which actually offer affordable homeownership. In that case, pay really close attention to the employment prospects in the area, because no matter how affordable homes look, you still are going to need a tenant base to rent to, and tenants with jobs are always preferable.
Many people were excited about the Hope for Homeowners program that was recently rolled out to help curb the growing number of foreclosures, and keep people in their homes. Unfortunately, as Anthony Freed points out in his blog post on Your Mortgage or Your Life, things did not quite turn out as planned.
It’s reassuring to know that our dedicated civil servants are willing to put in the long hours required, on nights and weekends, to make sure their banking buddies and colleagues don’t have to suffer the same fate as many banking executives of late, having to retire with hundreds of millions of dollars that were fraudulently paid out as options and bonuses as reward for investing long and naked, and exposing their companies to tremendous risks.
By the way - none of those profits from the ‘boom’ are being appropriated in order to reimburse those now failing companies, and none of that money is going to be recovered in order to soften the blow to taxpayers.
That money is considered to be lawful compensation for a job poorly done. What is on the table is just exactly how much more bonuses they should get before their companies are declared illiquid then subsequently sold off to the lone bidder for pennies on the dollar, and how much of the bailout money they will use to buy up competitors instead of lending it out as promised.
And for the lowly taxpayer on whose backs both the illicit corporate profits as well as the cost of the bailout are borne? What has this unprecedented dash to action by the bureaucrats, political appointees, and elected representatives of the people wrought in the way of sanctuary from the economic tempest that has engulfed their citizenry?
How about the dandy “Hope for Homeowners” program, designed to help more than 400,000 homeowners avoid foreclosure by making as much as $300 billion dollars available for the effort. What a fantastic idea, it would seem at first glance. Of course, the Devil really is in the details.
As of today, October 27, 2008 - nearly four weeks since the program was unveiled - a remarkable 79 people have applied for the program (Fox News 8-27-08).
Yes, 79 homeowners have been accepted (Fox News 8-27-08).
There are at least 77 banks participating in the program. I am not going to try to do that math in my head, but my best guess is that each of those banks has only helped about one homeowner avoid foreclosure on average in that 27 day period.
With all of the poorly underwritten loans Countrywide booked - and the tens of billions of dollars in profits they made in the process - one would think they might be on the list of participating lenders. Not surprisingly, they are not. Although a unit of Bank of America now, there has been no indication they will assume the responsibility for modification of existing Countrywide loans.
My first impression was that this had to be due to a simple lack of awareness by the public that such a program was available to them. Not the case at all I have found. The program has generated a great deal of interest from distressed homeowners since it was unveiled.
Lenders have been deluged with inquiries from interested borrowers, and the Congressional Budget Office has estimated that this program could help as many as 400,000 homeowners through September 2011, when the program ends.
“Our phones have been going crazy,” said Anthony Logan, president of Group Capital Mortgage in Cerritos, Calif, a participating lender.
What’s the hold up? Why, it’s the program itself, which was designed almost certainly to fail. First of all, the program is completely voluntary for both the lenders and the participating banks. It also requires the lenders to forgive a portion of the original loan balance in an effort to bring the mortgage in line with the market and affordability for the borrower to enter a long term fixed mortgage.
It allows certain borrowers at risk of foreclosure to refinance into a 30- year fixed-rate loan insured by the Federal Housing Administration (FHA) if the current lender agrees to write down the existing loan to 90% of the home’s market value today. In plummeting areas such as California, if a lender holds a $500,000 mortgage and the home’s current appraisal comes in at $400,000, the lender would forgive $140,000 in all. Even before the program launched, lenders expressed concerns about the potentially enormous write downs they would face.
Incredibly, in the face of receiving the largest publicly funded bailout of private industry in history, supposedly caused by nonperforming securities backed by rapidly foreclosing mortgages, the banks themselves are refusing to use a portion of that bailout money to help alleviate the very circumstances that had predicated the public bailout in the first place.
“Refinancinginto the new government-backed program requires your current lender’s approval. If the home’s value is less than the mortgage — which real estate data provider Zillow.com estimates applies to nearly one-third of American borrowers who bought in the last five years — the note’s owner must also agree to reduce the amount owed on the house to 90 percent of its current appraised value. If you owe $190,000 on a house that’s only worth that much, the bank would have to agree to reduce the loan to $171,000, giving up $19,000 in principal, plus interest.”
Meanwhile, two million families are expected to lose their homes to foreclosure in the next two years.
There is a serious leadership vacuum in this country, especially at the upper echelons of both government and business. Their priorities and policies are bankrupting our nation, and the close relationship between these private industries and our government regulatory agencies should be rigorously examined.
Heavy deregulation and the elimination of the safety barriers that had existed between the retail banks and investment banks, as well as the experimental distribution of risk to world-wide markets through untested financial vehicles, led to the erosion of the credit markets.
This system, partially conceived and enthusiastically advocated by Paulson, directly led to the current financial crisis that threatens the first worldwide depression since the 1930’s.
Now, for better or worse, we have handed the job of fixing this mess to the very people most instrumental in it’s cause, namely Paulson.
Is it any wonder that the phones are ringing off the hooks as desperate homeowners look for help and scramble to avert financial ruin by refinancing out of predatory loans, and yet only 79 loans being made to save them nationwide?
If it is not for lack of a program, and if it is not for a lack of interest on the borrowers part, that only leaves the failure of the program to the usual culprits - the banks.
“We know the interest from the public is there, and the next question that can’t be answered yet is are the lenders going to do this?” says Bill Glavin, special assistant to the FHA commissioner, who notes that it generally takes at least 45 to 60 days to complete the process for a regular FHA loan.”
Well Bill, here is your answer from them banks: “No.”
This article has been reposted from Your Mortgage or Your Life. The full post can also be viewed on Your Mortgage or Your Life.
Every month now, the Case-Shiller home price index is setting a new record for the largest price drop, but some are seeing a silver lining in that cloud. There are a couple cities tracked by the index that appear to be heading in a positive direction. Cleveland and Boston both showed a price increase over the previous month. Cleveland lead the way with a 1.1 percent month-over-month price increase, while Boston barely held positive ground, with a 0.1 percent month-over-month increase. This came on the heels of some other positive news regarding the housing market, which is leading some to say the market rebound is coming.
The other positive news regarding the housing market was that new home sales rose by 2.7 percent in September, beating expectations. In addition, it looks like the Fed is preparing to lower interest rates, and the $700 billion bailout money is starting to get circulated, which many hope will soon jump start lending. Will this all be enough to fix the mess that is the housing market right now? I doubt it.
The real determinate in all of this is whether or not you feel that the U.S. economy is on the right track. If you think that all these fancy bailout measures are going to fix the problems we are facing, then you can probably figure that the housing market is going to rebound as well. On the other hand, if you don’t think that the economy is heading in the right direction, then calling a real estate market rebound is very premature. There is a lot of hope that the measures already in place--along with the fact that the election is next week--will bring stability to the markets. While I certainly think it might, at least for a brief period of time, I just don’t see how it will last. The fundamentals that brought the economy to its knees are still in place, and in some cases are even worse than before. So how can we say that a new president is going to magically make everything better? The answer is that he won’t, but he might make people forget about all the underlying problem--at least for a little bit.
The latest consumer confidence poll from The Conference Board fell to an all-time low of 38 percent, according to the Wall Street Journal; this is down from more 64 percent in last month’s poll. People are extremely fearful and cautious right now, and any glimpse of stability is likely to help somewhat. The election will certainly bring that, but again, the new leader is going to come into an exceptionally difficult situation. Layoffs keep coming and the credit markets still haven’t been opened. The government has written a lot of checks, but so far the only thing they have accomplished is adding to the already astronomical national debt tally. I certainly do not envy the position the new president is going to be put in, and no matter how good they are, I just don’t see how they are going to be able to fix all these problems. It is going to take a lot of time and heartache to get this ship righted. I certainly wish the new president the best, and I hope he does an amazing job, but I’m not holding my breath that he is going to be a miracle worker. It is likely that we will see the markets rally after the election, but investors beware.
The King of Foreclosures is advising everyone to wait until 2010 to buy, and unless you don't have a choice avoid selling right now. With the real estate market in perpetual tailspin, you just might want to listen to this King who has a proven track record of correctly timing the real estate market. Read on as Tim Iacono, over at The Mess That Greenspan Made, recounts the story for us.
The LA Times has a nice story about Leo Nordine, a 45-year old Hermosa Beach real estate broker who specializes in foreclosure sales and must be about the only realtor in the world who doesn't own a cell phone. Really!
He drives an eight-year old car too! Amazing.
It's as if frugal is cool now. Our two six year old cars and a shared cell phone (it's a Pay As You Go and rarely gets turned on) look downright wimpy by comparison.
Can we really make the transformation back to a society of modest savers?
It looks like we're about to find out...
Sorry, this was supposed to be about Mr. Nordine, but I can't help but stop and gawk at this wave of thriftiness that is sweeping the country.
Anyway, back to the Foreclosure King...
As might be expected, business is booming these days and he has some important advice for renters who are now chomping at the bit, anxious to become homeowners.
From the Los Angeles Times:
Nordine, a 45-year-old native son and surfer didn't just catch the current foreclosure tidal wave, he has sold 3,500 bank-owned homes during the last two decades. He credits his uncanny ability to time the real estate market's cycles and position himself to reap its rewards as the key to his extraordinary success. And he does it all from the comfort of his home overlooking the Strand in Hermosa Beach. ... Nordine has made his own fortune not only by selling homes but also by investing shrewdly. In the 1980s, he bought about 20 properties, most of them single-family homes in Torrance. He sold them off in 1990 and '91 when he anticipated a bust was coming. He dived back into the market in the mid-1990s -- this time apartments in Santa Monica -- and sold off most of them in 2005.
Today, he and his second wife own a 22-unit complex and a 12-unit complex in Santa Monica; a single-family home and a four-plex in El Segundo; nine bungalows and a four-plex in Torrance; a five-plex in Redondo Beach; and the house-office in Hermosa Beach.
But being a dad and husband is what it's all about for Nordine. His is the first face his son Nate sees every morning when he wakes and the last one he sees at bedtime.
So what advice does Nordine offer those concerned about the real estate market?
Don't sell unless you absolutely have to. Don't buy until 2010, when prices should be at 2000 levels. And apply every spare nickel to paying off your debt, including mortgages.
Take heart aspiring homeowners (like us) 2010 isn't much more than a year away...
This article has been reposted from The Mess That Greenspan Made. The full post can also be viewed on The Mess That Greenspan Made.
Realtors and mortgage brokers are being hit hard in their pocket books thanks to this financial crisis, but when they each met at their respective conventions they were in store for things they had never seen before. In the case of the mortgage brokers' convention, they were forced to deal with unwanted distractions, while on the other end, Realtors were surrounded with fun distractions.
The mortgage brokers' convention was met by herds of protestors and at one point a vigilante ran up on stage and attempted to arrest Karl Rove, a former advisor of President Bush, according to the New York Times. That was in addition to the constant heckling from protestors during the convention. Typically, after the convention, attendees will go to a local bar and network, but according to one attendee interviewed by the New York Times, “…there wasn’t anybody there last night.” This had the attendee longing for the old days when the most distracting thing might be streakers running across the stage.
At the Realtor convention there were definite signs of distress among the participants, but the atmosphere was much more upbeat. Venders at the convention attempted to distract the attendees from the downbeat market by keeping things lively and fun. According to the Los Angeles Times, vendors did things from handing out life vests to setting up skee-ball and other games for attendees to play.
While these two professions have both been devastated by the crisis, it is apparent that one in particular is bearing the brunt of the blame for creating it. I think a case could be made that Realtors had just as much--if not more--to do with creating the crisis than mortgage brokers, though. But the truth is that, while they both had a part, neither should bear the blame. The government and homeowners played critical parts as well, so in my mind, no one is exempt from blame. Heckling mortgage brokers and blaming them for the crisis we face today is ludicrous. Instead, why don’t some of these homeowners look in the mirror and start asking themselves some tough questions.
CBS News did a piece this weekend titled, “Is Renting The New American Dream?” In the piece, they talked about the surge in the number of people looking to rent, and how the number of people buying homes is plummeting. The people they interviewed for the story talked about how they prefer to rent, especially in an economic climate like today's. So, has the American dream changed?
Personally I tend to agree with a comment on the story left by OneWorldUSA: “More people are renting because they have no downpayment (sic) and credit has been cut off to them. Renting is not the New American Dream, CBS, its (sic) the New American Reality for many.”
I couldn’t say it better myself. I think this story is missing the point that many Americans can’t buy even if they want to anymore. During the housing bubble, we saw record numbers of people buying homes, but that was in part because of the loose lending standards. It seemed like anyone with a pulse could buy a house, and of course we have seen that lending model fail. We are now looking at much stricter requirements for borrowers to get loans, and there just are not that many people who can qualify. To say that these people don’t want to own their own homes, though, might be a bit of a stretch.
The other piece to consider, of course, is that many people would like to own a home, but are choosing to wait on the sidelines, renting, until the market hits bottom. Buying a home is a huge deal, and a lot of people right now are nervous about making a bad investment. That being said, I think the American dream still involves people owning their own home. So while the American dream hasn’t necessarily changed, it most certainly is harder to achieve. Many people are choosing to postpone the dream for a while, just to be safe. Simply put, there is a new reality, not a new dream.
For everyone else who is sick of hearing the phrase, “What happens in Vegas, stays in Vegas,” here’s a new one: “Whatever happens in Dubai, might make you stay in Dubai...for a long, long time...against your will.”
Dubai has certainly arrived as the next big thing in the minds of some, but even they might agree that it’s only the next big thing for now. Billions have been spent in an attempt to make the city a cosmopolitan metropolis with every amenity and frivolity imaginable. But even genuine marvels like the Palm Jumeirah have already become a bit gimmicky, and the Babel-like towers seem to be only the issue of an international “You show me mine, I’ll show you yours” game that will rouse not awe but giggles from future generations. Then there is Lyon-Dubai City: a scaled down replica of Lyon, France...in the middle of the desert. I think we’ve officially lost the substance by grasping at the shadow, to take a line from Aesop.
Ultimately, the spectacle remains a veneer for a traditional culture that has not much changed...and that’s just dandy. No one has the right to insist that Dubai abolish its repressive, extravagant, theocratic oligarchy—heaven, forfend!—but the leaders need to realize that there are consequences to being culturally obdurate when at the same time pushing to be an international hub. It’s lovely that they feel so compelled to maintain the decency and dignity of their own citizens—simply lovely!—but it’s a shame that the same can’t be said for the decency and dignity of the thousands of immigrant workers who have died in inhuman conditions during construction of the city’s architectural wonders.
I should add that the scandalous reputation of Western tourists (particularly those of countries who have colonized other countries) is frequently valid, and I applaud when one nation resists becoming the outhouse/brothel of another. We do not need another Vegas or Bangkok or Cancun or Amsterdam or Macau where anything and everything goes. But then, neither do we need an indoor ski slope, underwater hotel, nor islands shaped like the continents , especially if the phrase “anything goes” in Dubai is best applied in a sentence that also contains “justice” and “out the window.” So what does Dubai have to offer to keep investors interested and what are they doing to keep people coming back?
If some of the recent press that the city has received is any indication, the powers that be are either not committed to keeping people interested, or they think we’ll all just convert to their method of doing things. That would be a tad hubristic on their part (but these guys aren’t exactly known for their humility), and in order for Dubai’s reputation as a cosmopolitan and commercial Mecca to last, they need to keep negative PR to a minimum. So it boggles the mind that the city is actually trying to bill itself as a place for romantic resorts when one reads stories like this one from the BBC about a pair of Britons given a “light sentence” of three months jail time for getting a little too snuggly on the beach. Here is what the article says about their case:
“The pair were arrested on Jumeirah Beach hours after meeting at a champagne brunch at Dubai's five-star Le Meridien hotel.
A police officer told the court he had warned the pair about their inappropriate behaviour, but returned later to find them having sex on a sun lounger.
Palmer, who was sacked from her job in Dubai as a publishing executive after her arrest, said in a statement she and Acors had been "just kissing and hugging".
Mr Matter said witness statements, including one from the police officer, were "wrong" and medical examinations had proved Palmer had not had sex on the beach.”
Let’s see here...salacious, witch-hunt style witness reports or hard medical evidence. Pardon me for seeming biased, but I think I’ll side with the Britons on this matter, even though I agree that such gauche public displays of affection are deserving of some sort of punishment.
Of course, this is hardly the worst case we’ve seen from Dubai; last July we saw the case of 15-year old French-Swiss citizen Alexandre Robert, who was kidnapped and raped at knifepoint in Dubai by three Emirati men (one of whom is HIV positive). When he didn’t smother the story, as perhaps some authorities had wished, he was threatened with a jail term of his own for engaging in homosexual activity—that is, the rape itself. After a major legal battle, Alexandre was not charged and his attackers were convicted, but not before French president Nicolas Sarkozy himself became involved. For the ghastly details, read this archived Time article.
Dare I draw a comparison between Dubai and the Neverland Ranch? Isn’t Dubai where Jacko is holing up currently?* Dubai may not be positioning itself as the next resort town or even the world’s next commercial capital. Nay, it almost seems to be a new utopia for people with wealth enough to live above the law while others are crushed beneath it, which is not the image one wants in this capricious world where entire cities can fade from relevance almost overnight, no matter how many water slides they have. And with increasing reports of corruption in the Dubai real estate market coming to the forefront, investors may not even feel that their money is safe there, let alone their physical person.
*(Update: Jacko has recently been spotted in Vegas...in a mansion...across from an elementary school. So we can all relax, now...)
So in the end, what shall Dubai become? A megalopolis-sized Neverland Ranch? A more innocuous Anti-Cancun? Or the global pinnacle of commerce and technology, as its leaders have hoped? No one can say, but I will venture a guess that if the Rat Pack were around today, they would not be crooning immortalizing tunes in Dubai’s honor. However, I’ll send you off with what they might have written, were they still around, sung to the tune of Arriverderci, Roma:
Arriverderci, Dubai Goodbye, goodbye Dubai City of a million condo towers, City of a million wilted flowers, Where I was detained by the ruling powers Far from home.
Arriverderci, Dubai— my regards to the Sheikh: the one who bludgeoned me for my rejection of his amorous advances without protection. Please let there be some form of extradition on the books. (Arriverderci, Dubai. It’s time I made a break...Stuff the wedding bells; I shan’t be returning. Keep your handcuffed arms outstretched and yearning. Please be sure the flame of love keeps burning at the stake.
Fresh off our $700 billion bailout of the financial industry, the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB) are calling for another stimulus package, this time aimed at the housing industry, according to Inman News. One of NAR's suggestions is for the government to eliminate the need for homeowners to pay back the $7,500 first-time homebuyer loan that was part of one of the previous bailout packages; in addition, they would like to see the $7,500 offered to everyone, rather than just people who haven’t owned a home in the last three years.
"Housing has always lifted the economy out of downturns, and it is imperative to get the housing market moving forward as quickly as possible," NAR President Richard F. Gaylord said in a press statement, according to Inman News. Translation: We need to inflate the price of real estate so people start buying property again and our members don’t go broke. What do you expect the president of NAR to say? Of course he is going to do whatever it takes to ensure the livelihood of his members; after all, without them, he is out of a job. Take what anyone at NAR, or NAHB for that matter, says with a grain of salt. Just for fun, though, let’s talk about his proposal.
The first questions that come to my mind here are, what are the benefits, and how much is it going to cost? I suppose the ultimate benefit here is that somehow lighting a fire under the real estate market jumpstarts the economy and everything is back to roses and sunshine. Reality, though, is that even if this measure were to invigorate the market, we will simply be repeating the same mistakes that got us into this whole mess in the first place. This time, instead of keeping rates too low and allowing the market to take off, we will be one-upping ourselves by actually paying people to buy houses. So what would stop this from blowing up in our faces again in the future?I think you can see the point I’m trying to make here, so let’s move on to the cost.
NAR, of course, didn’t give any mention of how much this wonderful plan might cost, but let’s hypothesize here. Say 8 million homes are purchased across the country next year; with each buyer getting $7,500, that would end up costing taxpayers $60 billion. Sure, that seems like chump change compared to the $700 billion bailout plan, but let’s not lose sight of the fact that $60 billion is a lot of money. And considering that we would have to borrow this money to pay it out, the real cost is only going to increase from there. No matter how you spin it, I feel that we would be absolutely crazy to pass something like this, but I’ve felt that way before as well and the government didn’t listen.
In the first eight months of the year we saw 605,000 jobs cut nationwide, and we could be looking at another 105,000 from September alone, according to a Bloomberg survey of economists. And the rest of the year could be even worse. With the sales of Washington Mutual and Wachovia, the bankruptcy of Lehman Brothers, the merger of Merril Lynch and more, we can expect many more job cuts stemming from the financial industry. In addition, the big American car manufactures are feeling the pinch and are laying off workers. Chrysler, for one, has plans to layoff 1,000 salaried workers, according to Bloomberg. And that is just the start, because small businesses across the country are hurting as consumers cut back on spending. Many of these businesses will likely end up trimming their payrolls in order to stay afloat, or just go under.
The bailout that was passed yesterday in the Senate is now heading to the House for approval. If that goes through, businesses are likely to see some help, as it will go a long way towards calming consumer fears and also help curb the potential short-term damage to the financial system. Stabilizing the job market is actually one of the biggest reasons that many people are supporting the bailout plan. If it doesn’t go through, we can expect to see some serious repercussions as consumers and business owners alike panic. This, of course, will lead to a self-fulfilling prophecy of sorts. If business owners panic and lay off workers, there will be fewer people able to buy products, which will lead to more layoffs and continue the cycle.
While it might sound like I’m in support of the bill, I’m not going that far; I see way too many problems with the bailout plan as it sits right now to even begin to support it. I don’t like the idea of bailouts in general, but in my book, this proposal is crazy. I don’t think it is going to have the desired affect and it will definitely not be worth the $800 billion investment. I do think something needs to be done, but I think we need to focus more on how to make sure this doesn’t happen again, and do our best to limit the damage without mortgaging our children’s futures.
I read a great piece this morning by Shah Gilani over at Money Morning which does an excellent job of pointing out the various pitfalls in the current proposal and suggests a plan of attack for what an effective bailout plan would cover. I suggest you read it, if you haven’t already.
Back to the job report: Things are looking grim, there is no doubt about that. Bailout or no bailout, I don’t foresee things looking all that rosy anytime soon (although without a bailout, things are definitely going to be worse in the near term). If you haven’t been making proper preparations (i.e., saving more) for the chance that you might lose your job, you might want to start now. Granted, most people are going to be okay, but you just never know. Almost everyone is hurting right now and even if you think your company is doing great, it might not be doing as well as you think. This is especially true if your company relies on the business of a few big customers. If anything happens to one of those companies, where does that leave your company? Nothing is certain right now, and it's better to be safe than sorry: Plan for the worst and hope that you are pleasantly surprised.
With Wall Street in tatters and financial institutions going under or merging left and right, real estate investors would be wise to take a closer look at the cities which are going to be hit hardest by the aftermath of the financial crisis. Which cities are most reliant on the financial industries? Knowing this can give you a great insight into how the local real estate market may react. BusinessWeek compiled a list of the top towns which are likely to be hit hardest by the financial crisis. According to BusinessWeek, the cities are ranked by percentage of people employed in finance, insurance, real estate and leasing in 2007, as estimated by Claritas (these numbers are represented below in parentheses). All cities have a population of at least 20,000 people.
Darien, Conn. – (27.23)
Bloomington, Ill. – (26.31)
Hoboken, N.J. - (23.33)
West Des Moines, Io. - (22.15)
Garden City, N.Y. – (20.22)
Summit, N.J. – (19.74)
Westport, Conn. – (19.39)
University Park, Tex. – (18.83)
Wethersfield, Conn. – (18.73)
Mountain Brook, Ala. – (18.66)
Lake Forest, Ill. – (18.60)
Urbandale, Io. – (18.52)
Normal, Ill. – (17.28)
West Hartford, Conn. – (16.67)
Newport Beach, Calif. – (16.56)
Westchase, Fla. – (16.45)
Rockville Centre, N.Y. – (16.29)
Naples, Fla. – (16.10)
Ridgewood, N.J. – (15.94)
I don’t think it should be a surprise to anyone to see a heavy dose of east coast cities on this list, especially ones that were commuter cities for Wall Street people heading into Manhattan. The author of the BusinessWeek story made the case that while Manhattan is home to Wall Street, the real estate market there won’t be hurt nearly as bad as these bedroom communities. There is just not enough supply in Manhattan itself to justify such a drop, and the market is also grounded by incredible foreign interest.
Another city that investors should keep an eye on is Charlotte, N.C. The city has become one of the biggest centers of finance in the country and while it might not be struggling right now, it is certainly a possibility as we move forward. Charlotte has become something of an investor darling in the past couple years. With its reasonable prices, job growth, appreciation and stability throughout the housing downtown, many investors have entered the Charlotte market. While I’m not suggesting you necessarily jump ship, necessarily, if you own investment property there, you want to fully understand the risks. The same goes for just about every other place out there. As an investor, take some extra time and consider the job market in your area. Where do the people in your community work? Are these institutions at risk?
If layoffs start happening in bunches, as they certainly could soon, you can bet certain communities are going to be devastated. Communities that are over-reliant on shaky financial companies should be avoided. If these companies go under, or merge and relocate operations, it will lead to a drop in real estate prices and likely a substantially depleted tenant base as well.
Most of the focus in relation to the popping of the real estate bubble is centered on the U.S., but the U.S. is far from the only country in the world experiencing a property bust. Global Property Guide recently published a list of housing price changes across the world for quarter two of this year, and a vast majority of these countries experienced a fall. The U.S. had one of the worst price drops, with a drop of 18.93 percent; if you think that is bad, compare it to Latvia, which saw a fall of 33.08 percent. Overall, 21 of the 33 markets tracked saw a drop last quarter, but those numbers are likely underestimating the problem, according to the report.
Not only are some of the official statistics understating the problem, but these numbers don’t take into account the severe drop in transaction volume that is occurring in some places. For example, the country which saw the biggest gain in quarter two was China, yet the report states that “transaction volumes [in China] have fallen sharply, suggesting that buyers are now nervous.” Falling transaction volume is a precursor to falling property prices, so it looks like things are going to be getting worse even in the best of markets.
One thing to note, which really isn’t discussed in the report, is the relationship between mortgage availability and property prices. Markets which saw high leverage use, such as the U.S., are more vulnerable to severe price drops. This is especially true if extremely high-risk or subprime loans were used. Markets which stuck with traditional lending practices likely won’t experience as severe a drop, and likely did not see as high a price climb, either.
A lot of the run-up in prices in these emerging markets was caused by speculation, and while lending wasn’t really a huge concern in these markets, you need to pay attention to end use. If there is no immediate use for the property, it is likely that you are going to see the value drop now that investors aren’t willing to throw money around on a whim. Speculative investors are the ones being hurt the most right now; you can bet that they are going to be in need of cash soon, if they aren’t already, and willing to drop prices substantially. When buying property in an emerging market, pay attention to who the buyers are. If investors are buying from investors, that is not a good sign. At some point an actual end user needs to be the one buying, or else it is unsustainable.
Smart investors are going to remember this pattern--and it is a pattern rather than a new phenomemon--next time around. The boom and bust cycle will be back in the future--you can bet on that--so next time make sure you are prepared and watching for the signs.
As most people know by now, the government has seized control of Fannie Mae and Freddie Mac. While seizing any company comes as a bit of a shocker, in this instance it was not completely without warrant. One of the nice ramifications of the government seizure for homebuyers is that interest rates have fallen substantially, down around 0.5 percent so far. This translates into almost $100 a month in savings on a $300,000 loan. Savings like this could have an obvious impact on the real estate market.
The fact that people can now buy more house for the same monthly payment is definitely helpful for the market. As we learned in the housing boom, people don’t pay attention to the price they are paying for the house, but rather their monthly payment. This dynamic has likely changed some as people have become more cognizant of the fact that housing prices don’t always go up, but I would still venture to say that the monthly payment is still the primary focus for most residential home buyers.
The tricky thing with this new lower conforming rate is that a good portion of the population isn’t going to qualify. The new lending environment has changed greatly from a few years ago. It used to be that practically anyone could get a mortgage, but that just isn’t the case anymore. Credit score requirements are higher and income qualifications tighter. The net effect in all this is that fewer people can buy homes. Let’s now take into account the record levels of debt and late payments; one could venture to say that credit scores across the population are not as good as they could be. Again, this is a bad sign and it appears to only be getting worse.
The government appears to be pulling out all the stops to fix this housing problem. The new Housing Bill initiatives will become effective October 1, and they include several measures which should provide assistance to the market. Will lower mortgage rates and the Housing Bill be enough to right this failing market? Will job losses continue to increase and economic hardships make matters worse?
I don’t have the answers, and I don’t think anyone truthfully does. There are so many variables at play here that the best predictions are sure to be wrong. We will have to wait and see how this all plays out. As an investor, my advice to you is to stay diversified and keep a good portion of your funds in cash equivalents. This will allow you the flexibility to pounce on great opportunities when they present themselves.
The Wall Street Journal just published an article titled, “Don’t Bet Against Your House.” The article talked about how the problem with real estate is that diversification is impossible, and while there are ways to hedge losses, they are only realistic for big players. I wanted to correct them on these statements and open some eyes to a few products on the market right now that can help homeowners defer some of this risk.
First off, there is a reason why these products are in existence: the owners and investors of these companies believe that the chances of home values crashing further is less than the chances of home prices regaining their historic levels. While purchasing one of these products can potentially limit your losses, it is essentially a bet against these companies.
The first product is offered from EquityLock Financial. This company provides homeowners with a hedge against falling home prices through use of price protection contracts. Basically, they use a housing index for a given area and if the index has dropped when you sell, then EquityLock Financial pays out that difference. If the index fell 10 percent between the beginning of the contract and the time of sale, assuming a home price of $200,000, you would get a $20,000 check from EquityLock. Since this is tied to an area index, and therefore is not neighborhood specific, it is also possible to sell for a gain and still get paid out, or sell for a loss and get nothing. For more information check out our article: EquityLock Financial Allows Homeowners to Hedge Their Home Equity.
Another creative product that allows homeowners some level of protection is the debt-free home equity plan, also known as the REX Agreement. What this does is allow homeowners to get a lump sum payment upfront (up to 13 percent) in exchange for giving up a portion of the home’s future appreciation. It is not a loan, so there are no payments. When you sell your home, a portion of the proceeds, above and beyond the initial contract valuation of your home, goes to the company as payment. If your home loses value, they get nothing and you get to keep your lump payment. They only get paid if your home appreciates. This option gives homeowners an opportunity to diversify a bit. They can take this money and invest it elsewhere, thereby spreading risk around. The downside to this plan is that if home prices start seeing improvement, you will be giving up a sizeable amount of that gain. In addition, there are certain rules that must be followed. For example, the home must remain a primary residence and must be properly maintained. This agreement also includes a clause that requires you to stay in the home for a minimum of five years before selling. If you sell prior to that time, you have to pay an early exit fee. For the right person in the right situation, this tool could offer a great opportunity to spread risks without immediate cost.
I want to stress again that these programs are not for everyone, but for the right person in the right situation, they might make sense.I wanted to show that there are creative solutions out there for people who are scared about declining home values. If you fall into that category, it might make sense to look at them a little closer, but know that it is possible to hedge and diversify out of real estate without being one of the “big players.”
Probably the biggest news this weekend--alongside Tom Brady’s injury, if you are a football fan--was the report that the U.S. government is seizing control of Fannie Mae and Freddie Mac. There has been a lot of talk about this possibility over the past couple months, but I think the move was still a little shocking to most people. When we think of the U.S., we think free markets, and the seizure of companies definitely goes against that principle. While this might have come as a surprise to some, considering the bind we put ourselves in, this was the right move.
Typically I would be the last one to support the seizure of a company, but in this instance things are a little different. Obviously, the biggest difference is that in the case of Fannie and Freddie, taxpayers are potentially on the hook for trillions of dollars, with or without a government seizure. With this in mind, we needed to better align the goals of the company with the goals of the taxpayers. Since the taxpayers had little to gain from company profits, their only goal was that the companies don’t cost them any money. For too long, these companies had been profiting from an implicit guarantee from the government, allowing them to take on excessive risk.
How the current deal is set up with the companies is that the government has been issued preferred shares that are senior to all existing shares. This means that, in the event of liquidation, the government gets paid first. In addition, these shares pay out a 10 percent dividend yield, while at the same time the government cut the dividends for most other shareholders. This initial move did not require an injection of capital from the government, but the government has pledged to provide as much as $200 billion to the companies, according to the Wall Street Journal. The government also has acquired warrants which would allow then to acquire 79.9 percent of the companies for a nominal sum, according to the Wall Street Journal. Obviously, if the government were to exercise their warrants, the remaining shares would be so diluted that they practically worthless. The government has also ousted the companies’ leadership and placed the responsibility on the companies’ regulatory commission, the Federal Housing Finance Agency.
While my personal preference would have been to not offer the implied guarantee, followed by the actual guarantee in the first place, given our current circumstances, this move was in the best interest of taxpayers. Sure, it is going to cost us several billion dollars when all is said and done; whatever the number ends up being, though, it is likely to be less than we would have paid if we didn’t take over the company. At least in this scenario the government has some potential reward rather than only shouldered risk. The government hasn’t really put together a plan for how to deal with these companies over the long term, but I’d imagine it would involve some serious restructuring, which is definitely a good thing. Stay tuned for more information as things develop.
So what do you get when you start adding to, and then increasing, an investment component in houses? A recipe for a real estate crash, according to well-known investor Peter Schiff. In an article this week, Schiff talked about how during the housing run up people paid increasing prices for homes not because of the shelter piece that they offered, but rather for investment purposes. He offered a rough estimate that during the peak, a $500,000 house might have offered a $250,000 shelter component and a $250,000 investment component. According to Schiff, the shelter portion represented the utility and desirability of the house and the investment side represented the future appreciation. Needless to say, the investment portion is in serious question right now, and since houses still offer the same utility, the investment side is the one that is losing value.
Without the prospects of enormous appreciation like we saw during the bubble expansion, home values still have a ways to fall. If we figure that Schiff’s estimates are accurate, and that at the height of the bubble half the value was shelter and half was investment, then prices could fall as much as 50 percent. Right now they have fallen around 20 percent, which would mean we could be facing up to another 30 percent in declines. Granted, I seriously doubt we will remove the investment piece entirely, so at least in my mind, another 30 percent in declines is probably unrealistic; another 15 to 20 percent, though, wouldn’t be out of the question.
If you want get the full scoop on the other reasons why Schiff says real estate is still not ready to recover, read his article: It’s Time to Get Real about Real Estate. But I do want to point out one other point he makes at the end of the article. Many people think that this housing correction is just one big doom and gloom scenario, and that the people writing about it are simply pessimists. In reality, however, this news isn’t bad for everyone. The fact that housing is becoming more affordable is great news for the millions of people who were stuck renting because they didn’t want to take on an outrageous mortgage payment. It is also great news for all the young people out there who are trying to buy their first homes. If this correction did not happen, it would be nearly impossible for many of these people to ever buy a home, so the fact that homeownership is now a possibility for them has to feel good. Sure, for existing homeowners who are seeing their values decline this news is hard to swallow, especially considering that most of them mortgaged their properties to the hilt, but it most certainly is not bad news for everyone.
New York Times columnist Andrew Ross Sorkin proposed that Fannie Mae and Freddie Mac should merge in an article titled, "And They Could Call it Frannie." He stated that by merging, the new company could save billions each year on overhead, among other advantages. The article started by saying this is a “bold” idea, and I would certainly agree with that statement. I for one am certainly not a proponent of a Fannie and Freddie merger, but let’s take a little closer look at Sorkin’s arguments.
Sorkin estimated that “Frannie,” as he calls it, could save around $1.2 billion annually on overhead costs. That savings, in turn, would add about $18 to $19 billion in market cap to the new company overnight. The next savings opportunity comes with foreclosure servicing, where Sorkin estimated that the company could save an additional $300 million annually thanks to economies of scale. Of course, as Sorkin pointed out, one of the results of a merger would be the loss of hundreds--if not thousands--of jobs, but he also claimed that these job cuts are coming one way or another, as Fannie and Freddie look to cut expenses. The biggest benefit, in Sorkin’s mind, is that this merger would lower the likelihood of a government bailout and would cost taxpayers nothing.
Now here is the problem with Sorkin’s plan as I see it: Current circumstances have already shown us that these companies are too big and too powerful. The government has no choice but to back their debt; if they don’t, they know that the mortgage market will collapse, taking the real estate market and economy with it. Fannie and Freddie have repeatedly demonstrated that they operate knowing this government guarantee is there, which leads them to take excessive risks. In addition, both companies have suffered from leadership issues over the years. By combining these companies into one giant company, some risks would be increased. If the two companies individually already had too much power, how much power will they as a merged company have? How much increased leverage will this mega company have over the government of our country? The leader of this new company would instantly become one of the most powerful people in America. What happens if this leader turns out to be bad? If this company failed, it would most likely be a death blow to the economy and would pose a serious threat to our political stability.
We don’t need one mega company; instead we need to split these companies up. Just as it is good to diversify investments in order to spread risks, we need to think in the same way about these companies. We need to make it so that if any one of the companies fails, it doesn’t have as much impact on the country as a whole. We need to spread out our risk. Sure, this plan would likely lead to increased mortgage rates, as the smaller companies would lose the government guarantee, leading investors to demand somewhat of a premium on the debt, but the government shouldn’t be guaranteeing this debt anyway. In the short term this plan would require some adjustments, but considering the long term, it is the best solution.
In a bit of bright news for the ever-gloomy housing market, Freddie Mac’s debt sale yesterday went better than planned. Freddie was able to sell $1 billion of 3 month bills and $1 billion of 6 month bills with relative ease, according to Reuters. This debt sale went over much better than the company’s last offering earlier this month, despite all the talk about a possible nationalization. This is great news for the real estate market because a poor showing at this debt offering would have led to higher mortgage rates for borrowers, which would have led to even more pressure on the floundering market. Fannie Mae’s debt offering is scheduled for tomorrow, so we shall see soon if they share a similar success.
Personally I have not been very high on Freddie Mac or Fannie Mae, and while it is a good sign for the companies that their debt offerings are still attractive, It does not cure the bigger problems plaguing the companies. The own a lot of mortgages on properties that are losing value. If values don’t correct soon, then they are going to face a huge number of defaults. I think we’ve seen pretty clearly that when people are upside down on their houses, they lose the incentive to pay their mortgages. The trend of how many people are going under is alarming, as evidenced in yesterday’s post about underwater homebuyers.
As long as the companies can continue to sell their debt at cheap rates, they should be able to weather the storm. The question is, how much longer will investors be willing to buy their debt? It is certainly encouraging for the companies that investors seem as confident in the debt offerings as they are despite the negative publicity, as this latest offering has shown. Investors must be under the assumption that the government will step in and save the companies if need be while still honoring each company’s debt obligations. The majority consensus about financial minds seems to be that if the government ends up nationalizing the companies it will indeed honor the debt, but would probably wipe out shareholders.
The result of this latest debt offering was definitely a positive for the housing market, but we will have to see if investor sentiment remains strong through the next wave of bad news.
Mortgage rates have been low for many years, but if things continue at their current pace, that isn’t going to last much longer. The biggest factor controlling the rates charged for standard 30-year mortgages is the price of bonds (called mortgage-backed securities) sold by Fannie Mae and Freddie Mac. Over the past few years, these bonds have been selling with an interest rate just a little higher than U.S. treasuries. Now, with all the problems being talked about surrounding Fannie and Freddie, investors are becoming more cautious. In case you need help connecting the dots, that means investors are requiring a higher spread on these notes.The more Fannie and Freddie have to pay to secure funds, the more they are going to have to charge to their borrowers; it’s that simple. The bigger question to think about is how these higher mortgage rates will affect an already suffering real estate market.
Probably the biggest single factor behind the housing bubble was the abundant access to cheap credit. More people than ever were buying homes because more people than ever could qualify for loans. This was in part because of law borrower credit standards required by lenders, but it was also in part because of the low interest rates offered. Homebuyers tend to focus more on the monthly payment than the actual purchase price of a home. If they know they can afford $2,000 a month, then they are willing to buy a home for up to that payment, whether it costs $250,000 or $400,000. With all these new buyers entering the market, and people now able to afford more home than ever before, this scenario created the perfect atmosphere for a run-up in housing prices. Now let’s look at present circumstances.
On a historical scale interest rates are still low, but compared to the interest rates during the height of the bubble, they are substantially higher. While interest rates are low compared to historical averages, housing prices are high compared to historical averages. With mortgage rates rising, along with the credit standards of lenders, we are getting the opposite effect of what we had during the bubble run-up. This means that we are decreasing the number of people who can buy homes in addition to decreasing the amount of home for which people can qualify. Obviously this is going to negatively affect the housing market. While we certainly have seen a sharp contraction in the housing market compared to what existed during the bubble’s peak, if mortgage rates continue to rise, you can bet that the contraction will continue and become even sharper.
Keep an eye on the investor confidence in Fannie Mae and Freddie Mac. If somehow the companies can regain this confidence, then mortgage rates could stabilize, but at this point that doesn’t appear likely to happen anytime soon.
So exactly how bad have things gotten in places like Detroit? Banks are having a hard time giving homes away. The Detroit News published a story last week which highlighted a recent transaction where a bank which had foreclosed on a property basically paid a buyer to take the property off their hands. The property was listed on the MLS for $1, but really that was only because, in order to make the sale legal, there has to be some transfer of wealth. In actuality, once you take into the account that the bank paid $500 toward the buyer's closing costs, they actually paid the buyer to take over the property. When all was said and done it was estimated in the Detroit News article that the bank paid around $10,000 to sell the home. This figure included approximately $3,500 in real estate commissions plus back taxes and water bills. For those who might be thinking this buyer got an amazing deal, though, let’s take a look at how this home got to the point it is at now.
According to the article, the home sold back in November 2006 for $65,000. At that time it was one of the nicest homes on the block. Last summer the home was foreclosed on by the bank; vandals broke into the home and stole everything of value, including the doors, plumbing, wiring, even the siding--everything, including the kitchen sink. One day, the real estate agency boarded up the home only to find the boards stolen the next day, used to board up another nearby home. You probably get the idea by now that this is not exactly the best neighborhood around. In addition, there is also the fact that taxes on this property run $3,900 a year. This new owner better run, not walk, to the court house and put in a request to challenge the property assessment or else this home may soon start eating away at their savings. Hopefully, too, they have some sort of understanding with the locals so that as they fix up the property the improvements aren’t immediately stolen. There is definitely a reason why it took 19 days to find a buyer even willing to take the property.
While Detroit happens to be one glaring example of the economic problems faced by some in our country, they are not alone. These $1 sales are common in other cities as well, including Cleveland. "And in some cities like Cleveland, judges aren't letting them [lenders] sit on the properties -- they're ordering them to tear them down or sell them,” Anthony Viola of Realty Corp. of America in Cleveland was quoted as saying in the Detroit News article.
Since it only costs around $5,000 to demolish a property, and that it cost the bank--at least for this transaction--around $10,000 to sell the home, it might make more financial sense to just demolish the home and hold onto the lot as an asset, which will hopefully be worth more someday in the future. Obviously, for this strategy to work, they would need to challenge the property tax assessment and get it lowered closer to the real value, which would be nothing. Once they did that they could sit on the property forever if they wanted (considering that they will be able to generate more income on the $5,000 savings then any expenses the vacant property might require), or they could even donate the property to charity, if they could find one to take it. Ultimately I wonder how much longer banks are even going to be willing to lend in neighborhoods like these. Something tells me it won’t be for much longer. Oh, that is unless of course the government is willing to guarantee the loans, which will probably happen. So next time it will probably be taxpayers who have the privilege to foot the bill on this. I don’t know about you, but I’m not excited about that prospect.
*For more information on this particular $1 house in Detroit see Zillow's excellent write up. They have a bunch more pictures as well.
*Photo courtesy of Bearing Group (MLS photo for 8111 Traverse St, the property mentioned in the article)
In what shouldn’t come as a shocker to legislators in New York state, but probably does, Freddie Mac has announced that they will no longer purchase subprime mortgages in New York state dated after September 1st, according to theWall Street Journal. New York passed a law that will go into effect on that date that is meant to curb abusive lending practices, but which could also increase risks for lenders. Freddie Mac saw enough problems with the law that they said enough is enough, and decided they aren’t going to bother with it.
I’ve been saying for some time that many of these laws being passed are ultimately going to hurt the consumer, and this is just the first step. Freddie Mac is the second largest mortgage buyer in the country, and without them in the equation, bottom line lending costs for consumers will go up. Now, we can debate all day whether or not people should even be buying homes if they have to use subprime loans, but that is not the point. If the goal was to eliminate subprime loans, then they just should have done that; by passing legislation such as this, though, they are just going to increase the cost of the loans for those borrowers who do use them.
We will have to wait and see how this ends up affecting the real estate market in New York, but it certainly isn’t going to help it. I don’t know how popular subprime loans are there in the first place, but it is likely that low income areas will be hurt the most. Typically that is where subprime loans are most widely used. Investors who are looking to buy property in these low income areas should look carefully at the borrowing possibilities for potential buyers. If subprimes are out of the question, then you had better make sure that people can get a FHA loan, or that you are offering some sort of owner financing. New York may also not be the last state to take such steps as these, and it is possible that Freddie and possibly even Fannie Mae could take a similar stance to the new rules in the other states.
Jim Cramer, host of the widely acclaimed show “Mad Money,” recently said on one of his shows that you need to buy a home in the next six months. He is basing this argument on the fact that banks are calling the bottom on the housing market, along with the new housing bill which was just passed. So this begs the question: Is Jim Cramer some sort of financial mastermind, or is he just plain mad?
Beyond the fact that calling the bottom of any cycle is nowhere near an exact science, the most recent financial data is not looking good for the housing market. Job losses are increasing, foreclosures are continuing to mount and mortgage delinquencies are spreading beyond subprime debt. In my blog post yesterday I quoted the head of one of the biggest banks in the country as saying the outlook for their mortgage debt is “terrible.” Even if Cramer is correct, and right now marks the bottom of the housing bubble, it probably still isn’t the best time to buy. Housing prices are not just going to stop falling all at once; when they do turn around it is likely to be gradual. Saying that the time to buy is right now is a pretty far reach in my mind.
He is basing his prediction mainly, it seems, on banks and the housing bill. I see a couple problems with that. First off, the banks have not shown at all that they have a strong grasp of the housing market. How much money have they lost so far, after all? Saying they have predicted the housing bottom, so therefore it must be the bottom, seems pretty dumb. If anything, knowing that they have predicted the housing bottom would make me even more scared than I already am. Secondly, he thinks that the housing bill is going to aid the market. Looking at the housing bill, it doesn’t appear that it is going to have the impact that he thinks. There is a $300 billion FHA measure, a tax credit for certain home buyers and the Fannie Mae and Freddie Mac aid. Those are the main provisions meant to save the housing market. I look at those and just think, “Oh man, I wonder how much this is going to cost me.” The FHA measure is going to help people refinance out of loans, however, as I mentioned in a post about the prior FHA loan aid, it didn’t turn out to have the impact that was hoped for. The loans ended up going to people who probably would have been fine without them, so basically these homeowners got a nice taxpayer subsidy, but it really didn’t help stabilize the housing market much. Obviously this new aid is on a larger scale, but I think the same thing will happen--in the end, we are likely to be disappointed. The Fannie and Freddie aid just makes official what we already knew--that the government was going to bail these companies out no matter the cost. So this might have relaxed the nerves of some Fannie and Freddie debt investors, but the move isn’t going to change all that much. The tax incentive may have some impact--that remains to be seen--but again I don’t see it as a market changer. It is possible that Cramer is right on this, but I’m not sold quite yet.
Also, Cramer didn’t really differentiate between buying a house that you plan to live in or an investment property. If you are in the market for a home to live in, then I revert back to the “you’ve got to live somewhere” rule. Trying to time the market is futile and not worth the happiness and comfort of your family, so if you are looking to buy a home to live in, do it--but make sure to buy within your means. If housing prices are beyond your means, then you shouldn’t be buying. End of story. If you are looking at investment property, on the other hand, then depending on the area and your strategy, it may make sense to wait for a better deal. I’m a big proponent of cash flow real estate, and either the numbers work or they don’t. I don’t factor in appreciation, so as long as the property is cash flowing now, and I can safely presume that it will cash flow well into the future, then ultimately I know I’m going to make money on the deal regardless of the real estate market fluctuations.
Last Friday the Orange County Register published an article that uncovered the details of a recent real estate transaction which was blatant mortgage fraud and will likely be left on taxpayer’s plates. Reading this article just made me shake my head because it is apparent that banks have learned nothing from the mortgage mess we are in today. If you haven’t read the article I suggest you do so, but I will attempt to summarize it below.
An investor purchased the home on Camile St. in Santa Ana at a foreclosure auction for $304,500, about half of what the home had sold for in 2006. This investor then fixed the home up and flipped it to a Hispanic family for $625,000. On a street where homes are selling in the mid $300,000s, this sales price should be an immediate red flag. However, Wells Fargo which issued a $500,000 loan on the property, didn’t bother looking deeper into the deal. The investor sold the home as a for sale by owner and had a plan in place where he could offer a potential home buyer 100 percent financing, even though that is all but unheard of right now. As part of the sale, the seller paid the $125,000 down payment for the buyer, but that’s not all. The seller also agreed to pay the buyer $30,000 in cash, pay the first 3 months of the mortgage and buy them a 52-inch LCD TV. So the real sales price was around $460,000 once the seller concessions are taken into account.
The author of this article went so far as to call up the mortgage broker, escrow officer, appraiser and even Wells Fargo to get their reaction to the deal; it's no surprise, though, that they all brushed it off, saying the details weren’t their business and that it was between the buyer and seller. Wells Fargo declined to commit on this loan in particular because of privacy issues, but beyond that, the best they could come up with was that they have tightened their lending standards. I don’t know about you, but if this is their idea of tightened lending standards, then they have some problems. I sure hope that Wells Fargo uses this information to take some action against this sort of practice, but I’m not holding my breath.
It gets better though, the Hispanic couple who bought the home claim they were lied to. They said that they were told they were buying the home for $500,000 and that they were going to get 100 percent financing. They didn’t know about the $625,000 sales price till the end when they signed the papers. Translation: Either this couple didn’t bother to read the purchase and sale agreement when they signed it, or else they are lying in order to protect themselves now that this information is on the public radar. My take is it is probably option #2. This couple already owns another home on the same street, so this is not their first time buying a property. In addition, they admitted to noticing the price at closing, but agreed to sign anyway. I think an honest person would have questioned that then and there.
If you ask me, these buyers were in on the deal, along with the seller, mortgage broker, appraiser and escrow officer. They were wooed by the prospects of $30,000 in cash. All they had to do was sacrifice their credit. The investor would pay the mortgage for 3 months, taking away the chance of the bank red flagging the deal for further investigation if the loan goes non-performing right away. After that, the buyers don’t even need to bother paying the mortgage, they can just let it fall back into foreclosure and get lost in the crowd. After all, Camile St. is already a foreclosure haven; what's one more?
So the next question is, who is going to be stuck with the final bill when all is said and done? The buyer? The lender? That would be a no and a no. The buyer has nothing at stake in this deal; in fact, they were paid to buy the home. If you thought the lender, you are also mistaken, because guess what? This was likely a conforming loan. That means it is going to be guaranteed by Fannie Mae or Freddie Mac. Thanks to the new housing bill that President Bush signed into law yesterday, taxpayers are likely going to be the ones to take the hit on this one, as well as for other mortgage frauds out there. It is disheartening to see that obvious cases of mortgage fraud are still occurring. But now that we as taxpayers are ultimately responsible for the bill, this just makes me mad.
People looking for a glimmer of hope that declines in housing prices might someday drop can now revel in the fact that housing inventory is finally beginning to shrink. While this certainly does not mean we are out of the woods yet, it is a positive sign that thing are starting to head in the right direction. One of the reasons prices fell so much was because there was too much supply; the quicker the supply goes down, the sooner we can expect a balance between supply and demand and find that equilibrium for housing prices.
I’m not going to predict when the housing market will begin to turn around, or prophesy the date people need to start buying homes, but I do know that until the supply falls (and by a lot), we will continue to see declines in housing prices. Demand is being squeezed by several factors, including tightened lending standards, consumer fear and the fact that people are stuck in their homes (or they owe more on them than they are worth and can’t sell them because they don’t have the cash to pay off the balance). There are still people ready and willing to buy homes, but that number pales in comparison to the supply, and as long as there are a lot of options, buyers are going to be demanding of sellers and prices should be expected to drop.
The Wall Street Journal just published a helpful chart that covers most of the large metro areas across the country. It shows the change in the market’s housing stock along with how many months' supply is available and even the employment outlook for the area. Obviously areas seeing increased employment can expect a stronger and faster recovery, as new jobs will increase demand for housing. According to the numbers on their chart, one market I would be concerned about is Portland, Oregon. They have seen a huge increase in inventory (27.8 percent)and have almost a 10-month supply of housing, but only average job growth.
The drop in supply that we have seen thus far is really pretty minor, but it marks the start of the process that needs to take place in order for a recovery to occur. As long as the supply continues to shrink, and demand doesn’t shrink with it, we should slowly start to see signs of recovery in the housing market. Keep in mind, though, that it is going to take a while; as for how long it will take, your guess is as good as mine.
We’ve seen politicians proclaim the injustices of foreclosures, and now judges seem to be rallying around those ideas as well. The housing crisis has created two camps: one side which supports the homeowners, saying they were manipulated by the greedy lenders, and the other side which supports the lenders and their resolve to make a profit. The most popular side has obviously been the one supporting the homeowners; after all, it is much easier to feel for a family losing their home than a big multinational bank losing some money. Judges, though, are supposed to be impartial regardless of any personal feelings they may have.
The Wall Street Journal recently published an article about how a few judges from across the country have taken up the fight against foreclosures. They recount several cases where the judges seemingly go above and beyond in order to deny foreclosures. Here is one example as written in the article: “In June, the judge dismissed with prejudice two cases filed by a unit of Wells Fargo & Co. By doing online public-records research himself, the judge found that Wells Fargo didn't own the two loans, and his dismissals mean that even if Wells Fargo eventually obtained legal ownership, it could take up to another year to obtain foreclosure.” Wells Fargo said that they were acting as the trustee for a loan securitization trust which holds the mortgage, an arrangement which is pretty standard in the industry. This judge definitely went above and beyond in order to find a loophole which he could use to stop the foreclosure. And now, thanks to this judge, the homeowner gets to live in the home for another year on Wells Fargo’s dime. What the judge was trying to accomplish other than allowing the homeowner to mooch off the system for a while longer is not certain.
Wall Street Journal’s law blog author Amir Efrati tells another story of a judge named Arthur M. Schack. “In one of his foreclosure dismissals, Schack (Indiana, NYU Law) cited the film 'It’s a Wonderful Life' to make the point that homeowners now deal with 'large financial organizations, national and international in scope, motivated primarily by their interest in maximizing profit, and not necessarily by helping people.'” My question is, how does the fact the bank is trying to maximize profits have anything at all to do with the case? These major banks are all publicly traded and their main responsibility is to their shareholders and turning a profit, not helping people. I think Mr. Schack might be confusing these publicly traded banks with non-profit microfinance institutions.
Don’t get me wrong--I feel horrible that these people are losing their homes and having to go through the misery of foreclosure, but at the same time, I know that milking the financial system is not for the greater good. These judges can try all they want to delay the inevitable, but in the end these people are going to lose their homes. That’s the normal course of action when someone stops paying their mortgage payment. All that they are doing now is making life miserable for lenders and costing them more money in legal fees and lost interest. In case you didn’t guess it already, we can bet that those increased costs are going to find their way back to borrowers one way or another. So because these judges are making a stand and helping a few people, all the other borrowers out there can expect to pay the price. This isn’t exactly my idea of justice.
Every time we hear bad news about the housing market someone out there says this is now the bottom, and that housing prices are only going to get better from here. At least so far, those predictions have proven to be poor. This week there have been several new reports issued detailing the turmoil the housing market is in, and it does not look pretty.
CNN Money even created a special report section called the “Mortgage Meltdown.” In this section they highlight the various gloomy reports that have recently come out. These include: “Foreclosure Filings up 120%,” “2.2 million vacant homes for sale” and “Home sales at 10 year low.” Those headlines pretty much sum things up; foreclosures are mounting, there are a ton of homes on the market and no one is buying them.
Ultimately homeowners and investors alike shouldn’t concern themselves with trying to time the market bottom. Trying to time such things is an inexact science, and if you are banking on timing the market in order to secure the quality of your investment, then chances are you shouldn’t be making the investment.
It appears that the government is going to pass the huge housing bill soon, and many politicians, at least, believe that it will be just what the doctor ordered for the housing market--that it will right all the problems. I’m not sure if they are completely oblivious to the problems, or if they are just putting on a show to appease their constituents, but it will hardly fix the problems of the housing market. That being said, there are going to be a lot of people calling the market bottom now--the news is bad and there is favorable legislation on its way. Don’t fall for these soothsayers' words, though; they are merely guessing, nothing more and nothing less. Anyone who says they know for sure is lying. If you are looking for a home to live in, you have to live somewhere right? If you are looking for an investment home, that’s okay too, but just don’t plan on appreciation, make sure the numbers work regardless of which direction the market goes. Don’t get caught up in market predictions: Use your own brain and do what is best for you and your family.
In the latest attempt at the city level to curb foreclosures, San Diego city attorney Michael Aguirre filed suit yesterday against Bank of America and Countrywide, and is planning to file similar suits against Washington Mutual, Wachovia and Wells Fargo, to prevent the lenders from foreclosing on homes in the city, according to Reuters. “We would like to see San Diego become a foreclosure sanctuary,” Reuters quoted Aguirre as saying. This of course begs the question of whether San Diego will turn into a “foreclosure sanctuary” or a lender hell.
Aguirre’s intentions may be good at heart, but how can you justify something like this? Telling a business that they cannot collect on debts owed to them is ludicrous. Here are a couple quotes from Aguirre that appeared in the Reuters article that speak to his reasoning:
"The Countrywide executives who originated these subprime loans were engaged in a massive fraud on homeowners, borrowers and investors. They enriched themselves by over $1 billion."
"We have the big stick of being found in violation of the law and the carrot of taking something that is a nonperforming asset, that all these houses are, and making it a performing asset by keeping the families in it."
Sure, some Countrywide executives may have cut some corners and performed some questionable acts, but surely he doesn’t think that all the executives at all those major banks did the same thing? Furthermore, the Reuters article states that Aguirre's lawsuit, brought in the name of the people of California, names four current and former Countrywide officers, including former CEO Angelo Mozilo, and alleges they personally profited from selling shares of the lender's stock while knowing its subprime loans did not comply with company policies. My question is, what does this have to with the homeowners in foreclosure? This sounds like an issue between Countrywide, the aforementioned executives and the investors. As long as homeowners were getting the loans they thought they were getting, this has little to do with them. If a bank wants to break their own rules in order to fund some loans, that is their prerogative. They were not breaking federal or local laws with these loans, but company rules and guidelines.
The bigger issue here is if Aguirre is successful in his suit, and with the information I have seen I can’t imagine he will be, how will banks react to future mortgage lending in the city? If a bank knows that they are going to have to put up with people like Aguirre, who strongly favor homeowners over businesses, is it really worth the trouble to even lend in the city? I know if I were a bank in this situation, I would wash my hands of San Diego and focus my efforts elsewhere. If the city is telling me I can’t go after debtors who don’t pay me back, then I would have to think long and hard before I lent there.
There is no denying that homebuilders have been battered lately, but it appears that some of them think now is the time to get back in the game. For the past couple years, builders have been dumping land left and right, trying to stay afloat amidst the housing collapse. Buying more land was certainly the furthest thing from their minds. Now several large builders are preparing to buy up several hundred millions of dollars of new land. They are looking at the market and seeing opportunity. It should be noted, though, that not everyone shares that same view.
According to Reuters Lennar spent $162 million on new land in the second quarter and will spend at least $200 million more by the end of the fourth quarter. KB Home is expected to spend $300 million on land and $400 million on land development, according to JP Morgan analyst Michael Rehaut, as reported by Reuters. In addition, Hovnanian and Meritage are also working on large land purchases, according to Reuters.
In a new development, private equity funds are now teaming up with homebuilders to capitalize on some of these perceived opportunities. The private equity funds provide the money and the homebuilders step in with their expertise in the industry. The areas that are mainly being targeted are the same ones which saw the biggest hits from the housing crash. This of course begs the question of whether this is a smart move on the part of the companies, or whether they are just digging themselves a bigger hole. Thanks to the huge value losses these companies experienced during the downturn they don’t have nearly as much room for failure, but they seem ready and willing to take on this new risk.
The following are some views from industry analysts, as presented by Reuters:
“’No one should be buying land just yet,’ Raymond James analyst Buck Horne said. ‘They should be building cash until the full extent of the available land supply is revealed.’”
“Yet buying remains risky as long as the slump lasts. Even new assets bought at attractive prices might lose value, Rehaut pointed out in regards to Lennar's and KB's land buys.
The bottom line is land purchases could compromise the very cash generation efforts companies touted as downturn survival strategies.”
“A 50 percent cut in land spending was key to their meeting cash generation goals in 2007, according to Rehaut. But many large builders will be spending in the range of $500 million to $1 billion on land this year, jeopardizing those goals.”
On the other hand:
“In theory, buying land now is a smart move, said Todd Lowenstein of HighMark Value Momentum Fund, which owns 187,000 shares of Pulte Homes Inc.
"You have to be a predator in these down markets to position yourself for the upturn," he said.
“…builders need some land to maintain their presence in key markets,” JP Morgan's Rehaut said.
It is hard to say whether these land buys will turn out to be a wise move or not, but I think it says a lot, considering the circumstances, that these companies feel now is a good time to get back into the market. I don’t know that I’d have the stomach to buy up the amount of land that they are, however, I can certainly see the potential opportunity. My personal view is that the real estate market is going to start to flatten out. I don’t think that we are done falling quite yet, but the declines are slowing and probably sometime next year, they should start to flatten out. Give it another year or so after that and we should start seeing some moderate gains again. Considering the uncertainty in the markets, though, there might never be a better time to buy than right now. Most of these properties they are getting straight from lenders, so I’m sure they are getting some pretty good deals. There are a lot of uncertainties right now: what about a Freddie and Fannie bailout? Will the market continue to fall? Is anyone even going to be able to get a mortgage? These are all questions that no one really knows the answer to, and any one of them could ruin these homebuilders' plans.
The Fed approved some new measures Monday meant to crack down on what they deem to be deceptive lending practices. Because most of these problems have already worked themselves out, thanks to the whole credit crisis thing going on, these measures likely will have little impact. But just for fun, let’s take a look at what the changes are.
The following summary was collected from the San Francisco Chronicle:
Rules for all mortgages
- Prohibit creditors and mortgage brokers from coercing appraisers into misstating a home's value.
- Require additional information about rates, monthly payments and other loan features in all advertising.
- Ban seven deceptive or misleading advertising practices, including calling a rate or payment "fixed" when it can change.
New lending rules
- Force lenders to consider a borrower's ability to repay loans from income and assets other than the home's value.
- Require lenders to document a borrower's income and assets.
- Ban penalties for borrowers who pay off loans early if the payment can change in the first four years. In certain cases, a prepayment penalty period can't exceed two years.
- Mandate that creditors ensure certain borrowers set aside money to pay for property taxes and insurance by establishing escrow accounts.
The “new” rules for all mortgages are welcome additions, I guess, and really should be no brainers. I’m pretty sure coercing appraisers into misstating home value was already a no-no, but now it is “official,” for whatever that’s worth.
The new subprime lending rules are, for the most part, already being followed. At this point in time a borrower is going to be hard-pressed to get a loan if they can’t document their income (unless they are putting down a large down payment). Also, on almost all loans now--and in recent memory--lenders have required escrow accounts to pay for taxes and insurance. Since this was the norm even during the subprime heyday, I’m not sure exactly what they were trying to accomplish, but I guess we can now use that “official” word again. The biggest change that I can see is with the pre-payment penalties. In the past, having a two year pre-payment penalty was pretty much the norm, and borrowers who wanted to get that waived had to buy it off. From the lender's perspective it made complete sense: They wanted to ensure that they were able to make at least X dollars on the loan even if the borrower sold the house the next day. This is one that I think could backfire for borrowers. Now that lenders are not going to be able to add a pre-payment penalty, they are going to make the loan more expensive because they have to ensure that they are able to make their profit no matter what the borrowing time frame. So we can expect that buy-down pricing will now be included in every loan--whether the borrower wants it or not. The borrower who knows that they are going to be in the property for at least two years will now have to pay a little more on their loan. I think a better solution might have been to make the pre-payment penalty opt in rather than opt out--that way people who do want it can still have it.
All in all, I think these new regulations were more for show than for function. The government needed to appear like they were trying to do something about the problem, so they put together a list of things that look good on paper, but in practice are pretty much useless.
Yesterday, former St. Louis Federal Reserve President William Poole was quoted by Bloomberg as saying Freddie Mac and Fannie Mae were insolvent, followed by reports that the Bush administration was working on a possible bailout—the culmination of a very bad day for the two companies. Freddie saw their shares fall 23.2 percent, and Fannie’s shares shed 15.4 percent. The government will certainly come to the aid of the two companies if push comes to shove, but there is speculation that a government bailout could leave shareholders with little to nothing according to the Associated Press.
I’ve been harping the potential fallout of a Freddie and Fannie failure for some time, and it is a scary to contemplate. A failure of one or both of these companies would have serious consequences in the real estate market, the economy and of course tax payers. Some estimates have put the price tag on a potential bailout at over $1 trillion. With the current state of the economy as well as the national debt (over $9.5 trillion) this is a number that could cripple us.
Now that I have painted this doom and gloom picture, you should know that most people still think a bailout is unlikely. Here is a quote from a Wall Street Journal article this morning: “The government doesn't expect the entities to fail and no rescue plan is imminent. Government officials and market analysts expect both companies will be able to raise large amounts of capital relatively easily.” The two companies have been raising billions of dollars in additional capital to shore up their balance sheets, and analysts believe that they will continue to do just that if necessary. This strategy will dilute the holdings of existing owners of the company, but it appears to be the best strategy at this time.
I’m certainly not daring enough at this stage to invest in Freddie Mac or Fannie Mae, and though I do think the chances of a government bailout are increasing I don’t think it is the most likely scenario. Readers of this blog know that I like to plan for the worst and hope for the best, and I think this falls right in line with that. I’m starting to consider what might happen if the two giants were to fall, and specifically how it would affect my investments. I wouldn’t take any drastic measures at this point, but it doesn’t hurt to have a plan, just in case.
Yesterday the National Association of Realtors (NAR) issued their latest real estate market forecast and it contained both negative and somewhat positive news about the market. The Pending Home Sales Index (PHSI) fell by 4.7 percent in May and existing home prices are projected to fall 6.2 percent this year; however, NAR also projects a recovery in 2009 with a gain of 4.3 percent on existing home prices.
This optimism about the real estate market in 2009 could have a lot to do with the $300 billion housing stimulus bill on the table right now. “The overall decline in contract signings suggests we are not out of the woods by any means. The housing stimulus bill that is still being considered in the Senate is critical to assure a healthy recovery in the housing market, jobs and the economy,” Lawrence Yun, NAR chief economist said in the NAR news release.
As far as regions go, the West appears to be the strongest right now. The PHSI for the West only dropped 1.3 percent in May and is at 97.5. The Northeast, which saw a decline of 2.9 percent in May, is sitting at 77.0. The Midwest decreased by 6.0 in May and is now at 78.6, while the South, which fell 7.1 percent in May, sits at 84.5.
According to this report, it would seem that we are nearing the bottom of the housing market troubles, yet I would advise caution on that front. We must remember that while NAR is a respected organization, they are biased. They want to see the real estate market rebound because their business is assisting real estate agents, and real estate agents obviously want--and need--a healthy real estate market. That being said, I would look at these numbers as an optimistic projection. In reality, things are likely to be a little worse than NAR is projecting, and that is likely especially true with the 4.3 percent housing price gain they are forecasting in 2009.
While I believe that the market is likely to start turning around sometime in 2009, I more imagine something more like a leveling out than a gain. So rather than seeing the sharp price drops, the market will find its equilibrium, where it will probably sit for most of 2009. In 2010, I think we may start to see some modest price gains, but nothing like before the real estate market crashed. When I do my investment projections, I don’t like to even include appreciation in the numbers, but if you do, I wouldn’t go above 1 to 3 percent. In my mind, if you can’t make the deal work without adding in appreciation, then you shouldn’t do the deal.
Though some sectors of commercial real estate remain stable and profitable, many retail and hospitality spaces are sitting vacant as poorly-performing tenants shut their doors. Beyond the lack of cash flow, commercial real estate investors with vacant spaces face a vicious cycle much like the Broken Windows effect in foreclosure-struck neighborhoods, wherein the vacant space may attract crime, loiterers and vandalism, which further decreases traffic and eventually compels existing tenants to move when the lease is up. However, some commercial real estate investors are overcoming this problem by turning to unconventional tenants to fill these spaces.
A recent AP article highlights some interesting examples of this trend. My favorite:
“In November, mall owner Pennsylvania Real Estate Investment Trust snagged New River Community College as a tenant for a former theater space in its New River Valley Mall in Christianburg, Va. The satellite location features seven classrooms, four computer labs, a science lab, two auditoriums, testing and conference rooms and office space."
A cinema complex seems difficult to convert successfully, but using theatres as auditoriums with plenty of study space just outside in the lobby and a concession stand is honestly quite brilliant. I like it much better than my idea to convert an abandoned Chuck E. Cheese into a funeral home (though I still insist that a ball-pit and an animatronic band would improve any wake).
Shopping malls and strip malls especially are facing high vacancy rates as larger chains begin to falter in leaner economic times. Levitz, Zales, Ann Taylor, PacSun and Foot Locker are closing hundreds of stores this year. Linens 'N Things and Sharper Image have already filed for bankruptcy protection. I guess radio-controlled backscratchers and self-cleaning plungers aren’t quite recession proof.
To generate income from vacant stores, larger malls are leasing empty storefronts as billboards while they search for new tenants. Malls large and small are also courting first-time and independent business owners by offering short-term leases with attractive rates, according to the AP article.
This may be bad news for many corporate retailers and their employees, but it isn’t necessarily bad news for commercial real estate investors in the long term and it is certainly good news for small business owners. Larger companies with more overhead will continue to suffer in a recession, but savvy entrepreneurs in control of their own expenses can still come out on top. Meanwhile, their landlords will still enjoy a regular income and a more diverse use of their property, which could guard against future fallout like that of Sharper Image.
Beyond all of that, this sea-change could even benefit the consumer, as erstwhile interchangeable chain shops become inoculated with local talent and independent ventures. In years to come, some malls may have a local flavor beyond the bland corporate spumoni that one customarily finds. The times may be sour for some retailers, but as in all upheavals, there could be sweet results for those who can adapt—most of all, investors and entrepreneurs.
In the age of globalization, the world's markets are becoming ever more available to foreign investors, and while real estate has traditionally been one of the tougher markets to enter and navigate in foreign countries, it is getting ever easier. Nearly 50 percent of all countries improved their real estate transparency, according to the Jones Lang LaSalle Index from 2006 to 2008, with eight of those countries moving up a full tier. The only country to fall in the index was Venezuela. The Jones Lang LaSalle index ranks the transparency of countries based on five items: performance measurement, market fundamentals, listed vehicles, legal and regulatory environment and the transaction process.
While many countries still have a ways to go before investors can truly feel confident about investing there, this is a great sign that the world is recognizing the need for foreign investment. For investors, it is also great to see the number of investment opportunities continue to rise. Many people are fearful about investing in foreign markets, so out of fear they neglect them. Investors who take this stance are missing out on literally a world of opportunity. Know that while there are additional risks involved with foreign investment, there is also a significant reward variable to consider in addition to the main factor which should compel investors: diversification. Those investors who have 100 percent of their investments in U.S. funds, companies and other U.S. vehicles should seriously re-evaluate their portfolio.
Buying physical property in a foreign country can be rewarding, but it is not for everyone. That being said, if foreign real estate isn’t your cup of tea, then consider at minimum investing into some foreign funds, which could even include a foreign REIT (real estate investment trust). For the more adventurous, though, buying property in an emerging market, or even a developed foreign market, can be exciting and profitable.
If you are considering buying property abroad, the best piece of advice I can give you is to do your homework. Fully evaluate all the potential risk factors and then weigh them against the potential rewards; if an investment makes sense, then do it. Depending on the market you are entering you may also need to take additional precautions. If you are investing in an emerging market, I would recommend that you don’t invest more money than you can lose. Emerging markets and their governments and markets are not always stable, so things can go south quickly--but they also can get better quickly as well. To be safe, though, take extra precaution, especially if you are a new investor. Also, I always recommend seeking trusted local legal counsel (make sure to get referrals from other investors who have been successful), regardless of whether or not your agent tells you that you need one. Things don’t work in other countries like they do in the U.S., so be open-minded and patient (especially in Latin American countries), but that doesn’t mean let people walk all over you. Just realize that things are going to work differently and take a little longer in most places compared to the U.S.
Lastly, I want to point out that, especially in emerging markets, it is easy to get excited by promises of incredible returns and other such things, but there is a reason the developers are offering these returns: There is a lot of risk. Many developments that start never see completion for various reasons. Until you fully understand the market and how things work there, it is wise to only buy what you can see and touch.
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.
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.
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.
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.
Predicting the bottom of the real estate market, or any market for that matter, is anything but an exact science. With the state of our real estate market today, especially in the most troubled areas, many people are scared to even think about investing. In the midst of this uncertainty lies opportunity--at least that is the thought of some institutional real estate investors.
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.
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.
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.
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.
Everyone knows that home prices have been taking a beating, but one thing that people might not realize is that the balance between new and resale home prices is out of whack. As one might suspect, new homes typically sell at a premium to resale homes, but in many areas today new home values have dropped so much that they are actually selling for a steep discount compared to resale homes.
The following is an excerpt pulled from an article on Minyanville
“Richard Dugas, PHM [Pulte Homes] CEO, said he believes it is a mistake to believe the new housing market can correct without the resale market also correcting. This is an important point of distinction. New homes are now selling at a 10% to 15% discount to resale in most areas of the country. Historically, that ratio has been reversed.
‘We clearly need resale pricing to correct, and correct dramatically,' Dugas said. He cited the most recent data from the S&P/Case-Shiller index showing a 14% decline in prices year-over-year, by far the largest on record, but noted that even that kind of decline is not enough.
‘We view that [price decline] as a good thing,’ Dugas said, ‘and frankly we think resale pricing needs to continue to move down, because existing buyers are telling us they would like to buy our homes, but need to sell their existing homes, but they've obviously got to get realistic about price before they have a chance to sell those homes.’”
What Dugas is saying is that the builders have responded to market conditions by dropping their prices, but that isn’t enough. Homeowners looking to sell their homes also need a dose of reality in many cases as well. Assuming homebuilders are pricing their homes at the true market prices now, then resale homes would need to drop another 20 to 30 percent in order to regain the balance.
The article also points out that if this adjustment were to happen, Fannie Mae and Freddie Mac would have greatly underestimated the remaining correction due in the housing market. This obviously could have major implications not only to Fannie Mae and Freddie Mac, but also for the entire economy. Fannie and Freddie have a much larger stake in the housing game now than they did a few years back and any disruptions to these two companies would pretty much kill what’s left of the mortgage market and/or create a huge burden on the government and the taxpayers. For more information on what would happen and the costs involved in a Fannie and Freddie bailout, read my previous post: Fannie Mae and Freddie Mac: Will they need a Bailout, and at What Cost?
Disclaimer: This post is a departure from our usual material, in which we discuss “facts” and “figures” and all that nonsense. Today we’re sticking with black-hearted pessimism, which generally makes whatever one says more accurate than “facts” and “figures” ever could.
The Case-Shiller indices showed a decrease in home prices greater than 2 percent for the fifth consecutive month—14 percent since this time last year. On the upside—in terms of percentages—if it keeps this pace one can view the drop in prices as logarithmic: never quite reaching zero, but still abysmally bad. On the downside...well, that is the downside.
But on the down-downside—to coin a phrase, on the abyssal-side—tax and insurance costs are rising, offsetting further any deceleration in our decline. To anyone who purchased a home in the last six months: Pray for rain. You may soon need do without indoor plumbing.
But all is not lost. In this land of opportunity and innovation and class rule there is always a modest proposal to be found to address our woes, and I have stumbled upon one: Teepees!
Yes, teepees. I would say ‘yurts’, which are more stable, but this is America, former home of the teepee, and I’m pretty sure that we’re at war with the Mongols (or soon will be, given our record). But where, you must be asking, shall we find sufficient hides to create enough teepees for all the displaced homeowners who cannot even afford rent as those prices, too, have risen? We have wiped out most of the larger animals on this continent, and plastic tarps (being petroleum products) will soon be out of most people’s price range. Whence shall the raw materials come?
It is common knowledge that we are the most obese nation on the planet, though this will not be the case for much longer as we all begin to starve. As inflation and unemployment rise and wages stagnate, we shall all soon be The Biggest Losers. But as you also know, the excess skin from our deflated bodies will remain on our newly chic and slender frames. Tanned by days and nights exposed to the elements, this excess skin will make ideal hides for the creation of teepees.
Am I suggesting that we slay and eat the fat? No, no, a thousand times no! We’re at least six months away from that sort of desperation. But do consider how our multi-billion dollar cosmetic surgery industry—which is also on the slide thanks to a 16-year low in consumer confidence—might benefit from a boom of tummy tucks, and consider how Green and eco-friendly it would be to recycle our own skin to create a roof over our heads. To coin another phrase: “Home is where the abdominoplasty is.”
So on the abyssal-side, we can expect home prices to fall, inflation to rise, waistlines to shrink and national debt to grow (but for the banks, who at least are being paid back in depreciated dollars). My advice: Keep your economic stimulus wampum close to your chest and sharpen your scalpels. My crystal ball says the Case-Shiller index next month will show more of the same—with an added return to new-home prices decline (up this month!). See you at the pow-wow.
The fallout from the housing crisis has led to yet another worry for potential homebuyers: homeowners associations. Depending on the housing or condo development, homeowners associations can range from fairly minimal importance to extremely important. The more things the homeowners association is required to take care of, the more important they are. Typically condo homeowner associations take on more responsibilities because they are responsible for all the common areas, but many new home developments have been piling on added duties for their homeowners associations. Now, thanks to fallout from the housing crisis, many homeowners associations are in shambles and homeowners are feeling the pain.
In one development in Arizona, more than 40 percent of homeowners are not paying their homeowners association fees, and in others across the country, it is even worse according to USA Today. Typically, a homeowners association’s retaliation for non-payment is that they are able to place a lien on the delinquent homeowner’s home, but because property values of dropped so much and there is no equity in most of the homes, it isn’t doing any good. With the collection of unpaid dues appearing unlikely, the burden to maintain the homeowners association falls on the remaining homeowners who have paid their dues. If they fail to cover the excess, they will be faced with decreased services. Some of the problematic associations have even tried to put together volunteer days where homeowners can help provide some services themselves, such as landscaping, and save money.
Investors and homeowners alike should take note of this problem. The last thing (OK, one of the last things) an investor wants is to buy a house and then find out that the homeowners association is out of money so they can’t afford to keep up the grounds anymore, or they are going to have to cut insurance coverage. At that point, either the investor is going to have to pony up some more money or else watch the neighborhood go to waste along with the value of their investment, which might just happen anyway. Neighborhoods which are having trouble collecting on homeowners association dues are probably a safe bet to suffer from foreclosure and homeowner neglect: If people can’t afford to pay their homeowners association dues, they probably can’t afford the mortgage either or they could be investors who are simply walking away from a bad investment. Either way this is a bad sign for incoming homeowners.
That being said, investors and homeowners who are looking to buy a home in a development or condo with a homeowners association would be wise to take the extra step to examine the homeowners association’s books and responsibilities. If they see that an increasing number of homeowners are late or not paying, that could be a sign to move on, especially if the homeowners association has a lot of responsibilities. Even if you think you are getting a great deal on the property if the neighborhood’s upkeep goes, so goes the appeal and value of the neighborhood. In today’s market investors can be picky, so take the extra couple minutes to look at the books. It may just save you a big headache and hit to your pocketbook.
23 percent of Americans cut back, or abandoned altogether, their weekend travel plans because of gas prices, a survey by consulting firm Deloitte & Touche found, according to Bloomberg. High gas prices coupled with worries about the economy will likely have a big impact on this year’s travel season and beyond. Investors should consider the implications of such changes.
People are always going to need vacations and time off, so one way or another they are going to get it. The question is, where are they going to go? Obviously with gas prices so high traveling long distances, either by car or plane, becomes more expensive. Thus we can conclude that people are going to be taking their vacations closer to home than they normally would. Instead of driving 400 miles to a lake resort in a neighboring state, maybe families will settle for the one 50 miles away, whether or not it is as nice. Resorts, camp grounds and other recreational and vacation-type places close to urban centers will in all likelihood see increased business. These naturally will become the places people from the city turn to instead of further out locations. Owners of vacation and recreational properties that are far out but get most of their business from in-city travelers could be in for some rough times.
While the above scenarios focus mainly on weekend-type vacation, there will also be impact on international travel. Vacationing in Europe was already becoming prohibitively expensive thanks to the falling dollar, but now with airlines raising ticket prices to cover the cost of fuel, the dream of a European vacation is now out of reach for most people. Instead of traveling to Europe those vacationers looking for a more exotic local might turn to Mexico or a Central American country. The flights to Mexico and Central America are still affordable, and the cost of goods and services in Latin America are cheap.
High gas prices are changing more than just the thickness of our wallets, they are changing our lifestyles. It used to be that gas was an afterthought; now it is on the forefront of everyone’s mind. Instead of the big SUV, more people are opting for the fuel efficient sedan; instead of buying a home in a far out suburb, people are opting for the close in condo or smaller home; instead of traveling long distances for our vacations, we are now staying closer to home. High gas prices are changing the way we live, and since they are unlikely to go away any time soon investors should take note of these trends and act accordingly.
The foreclosure bailout plans that seem to be on the tongues of everyone in Washington these days are doomed to failure. I read an interesting piece by Holman W. Jenkins, Jr. in the Wall Street Journal that I thought I’d share. He points out the number one reason why these foreclosure bailout plans won’t work is that many people don’t even want the houses anymore.
He points out that the bulk of the foreclosure problems across the country are concentrated in a few areas such as Las Vegas, Sacramento, Phoenix and southern Florida. He contends that the people who bought homes in the outlying areas of these locations were making bets on demographic trends and commute patterns that proved to be incorrect. Many of these homes are in areas that no one wants to live right now, especially considering the high price of gas. A family that may have been willing to commute 50 or 60 miles in 2004 to get to work so that they could own their own home now isn’t so willing to take on a commute like that.
In the article Jenkins, Jr. also touches on the normal issues, such as people buying more home than they could afford in the first place, and falling home prices. The arguments here are that a foreclosure bailout is going to be hard-pressed to help someone stay in a home that they couldn’t ever afford--not then and not now. With falling home prices it brings to question again why the people would want to stay in the house if they are upside-down? If their home has depreciated by 20 percent, and they put down nothing when they bought the home, where is the incentive? These people would be better served by walking away from the home renting for 7 years, saving their money, then buying another home, but this time within their means.
Then Jenkins, Jr. talks about how even if homeowners wanted to participate in the foreclosure bailout plan, it is still a losing proposition for American taxpayers. “…the government plan, which would pay 85 cents on the dollar for mortgages now selling for 50 cents or less. True, the House bill gamely seeks to exclude speculators and homeowners who lied about their incomes. But an ill-equipped FHA would be a sitting duck for lenders who tacitly permit nonpayers to remain in homes just long enough to pass the bag to government” Jenkins, Jr. Wrote.
In conclusion Jenkins, Jr. says that that the housing problems going on right now aren’t the end of the world; we will survive. Most importantly he ends his article by saying, “One sure way to guarantee bubbles without end is to institutionalize that one-way bet. That's what a bailout would end up doing for those ultimately responsible for directing a large chunk of the nation's savings into unwanted, uneconomic housing.”
Personally, I couldn’t agree more. If we always come to the rescue of people who do dumb things, they will never learn. I think it is time to make the people who made poor decisions pay for their mistakes, learn from them and become better for it. In business and in life, this is how you improve: You try something and if it doesn’t work, you do it differently next time. The only lesson we are teaching people now is that if you screw up, no biggie--the government will bail you out, so feel free to take some extra risks. But if people suffer no consequences from their poor choices, they will never learn.
Canton, Ohio, in an effort to crack down on the number of unkempt yards, is preparing to put violating homeowners behind bars. As the number of foreclosures has risen, so too have the number of homes with what the city deems excessively high grass. The city considers anything higher than eight inches to be too high, according to the Canton Repository.
The first high grass offense carries a $150 fine, but a second violation can warrant a $250 fine and up to 30 days in jail. The city complains that they are spending too much valuable time and money on this problem and thinks that this measure will get the message across. They are even prepared to go after banks and other corporate homeowners if they violate the city code, according to the Canton Repository.
I don’t really see the city sending anyone to jail over this; rather, I see it simply as a threatening maneuver on their part to frighten homeowners into action. I know if I was a homeowner in Canton I would make sure my lawn was always immaculate.
It is my belief that out-of-area investors should be, without question, outsourcing lawn care properties--and even in area investors might want to consider it. Tenants just aren’t going to have the same appreciation for the property, and in particular the lawn maintenance, as you will as the homeowner. Sure, you can probably find tenants that will mow the lawn on a regular basis, but finding ones who will water the grass and other flowers, along with pruning and hedging and all the other landscaping needs that are required, is going to be pretty difficult.
I’ve tried in the past to write into the contract all the landscaping items which were to be required of the tenants, but it didn’t work out quite as I hoped. I even had one couple that really tried to keep the yard up, but they just didn’t know what they were doing and soon the lawn was completely overtaken with moss. I won’t even tell you about the horror stories of some of my first tenants (before the contract changes) and what they did to the landscaping. Let’s just say that from experience I can say that out-of-area investors need to outsource lawn care. If you are worried about the added cost, you can either add it on top of the rent and advertise it as full lawn service included, or keep the price as is and require them to pay an additional lawn service fee. Even if you have to cover some of the cost, though, it is more than worth it in my book.
Several months ago the Bush administration came up with a great plan to fix the foreclosure problems plaguing the U.S.: The FHA Secure Loan. This loan was to be made available to homeowners who were having, or had, their variable interest rates adjusted and needed to refinance in order to keep making payments. So just how many people has the FHA Secure program helped avoid foreclosure since its inception?Try 3,000, according to an article from CNNMoney.
Though only 3,000 people have been saved from foreclosure, the FHA Secure program has become widely popular, with over 200,000 loans issued to date according to CNNMoney. While the program was meant to help people avoid foreclosure it has turned out to be a great program for people looking to refinance. The average homeowner refinancing with an FHA Secure loan is saving approximately $400 a month, according to the article.
Many of the people using the FHA Secure program could continue to make their payments without a problem, and additionally many of them even had other options for refinancing out of their existing mortgages. For a program that was meant to help prevent foreclosure, I’m just not sure how effective it is. It is certainly helping people save money, but when the time comes that the government has to start coming good on these guarantees, taxpayers are going to have to foot the bill. Lending out at high LTVs to high risk homeowners is not appealing to banks for a reason, so if we think we are going to avoid having to pay up when all is said and done, we are sadly mistaken.
In my mind if the government is trying to help those who are on the ropes (which I didn’t agree with in the first place), then they can do that, but they shouldn't also offer up resources to those who have other options. This program should be reserved for those who have nowhere else to turn, not those who are just looking to save 0.25 points over what the bank’s other loan program will offer them. Taxpayers shouldn’t have to front the bill when there are others willing and able to do so.
Starts of single-family homes have declined for 12 straight months, most recently falling 1.7 percent to a seasonally adjusted annual rate of 692,000, the lowest since January 1991 according to MarketWatch. Normally it is bad news to hear that housing starts are falling so rapidly, but as a real estate investor, I think it is great news. Yet, while single family housing starts decreased, there was a surprise increase in multi-family starts.
One of the biggest problems with the housing market, besides that it had gotten too expensive, was the massive oversupply of housing. Builders haven’t been able to move their homes and that, coupled with the huge number of foreclosures on the market, has led to an overall supply glut of vacant homes. The higher the supply of homes, especially vacant ones, the lower prices will fall. Therefore by cutting back on the number of new homes entering the market, supply should tighten, helping to restore balance to the housing market.
The other piece of this report was that multi-family starts increased a whopping 36 percent. While experts were expecting something of an increase, this number surprised most. Considering how many people are being forced back into renting, the fact that much of the apartment supply was converted to condos and how rents are increasing, I guess it shouldn’t be that much of a shocker. Developers love to overdo things, so when they spot a trend, they go after it without hesitation. Naturally what will probably happen is they will build way too many new multi-family units, thus overloading the market with supply, leading to a drop in rents as well as the value of multi-families. You would have thought that people would learn their lesson and be a little more cautious this time around.
What this information tells me is that we are heading in the right direction on the single-family front; cutting supply is the way to go and a positive sign. On the multi-family front, though, I’m starting to get a little worried about the future. Apartment owners have been doing well for themselves lately, but if developers start throwing up a bunch of new apartments, that is going to have a devastating effect on the existing inventory. The homeownership rate should continue to drop at least for the foreseeable future, so the supply of renters is increasing. The question is which one will increase faster--the number of renters or the number or rental units? The good news for multi-family investors is that it will take some time to get these new units on line, so the gravy train will continue for a while longer.
By the time the new multi-family inventory is ready, the single-family market will probably be stabilized and start to regain some momentum. At this point (or ideally a little before) investors may want to consider hopping trains.
Forbes recently published an article titled "America’s Recession Proof Cities." I read the article and thought that for the most part, the cities they chose were good ones, although there were a couple I have my doubts about.
For those who are too lazy or busy to read the article, I’ll summarize it here for you. The top 10 cities in order are: Oklahoma City, Oklahoma; San Antonio, Texas, Austin, Texas; Houston, Texas; Charlotte, North Carolina; Dallas, Texas; San Jose, California; Raleigh, North Carolina; Salt Lake City, Utah; and Seattle, Washington. Forbes ranked the cities based on factors such as how housing values have held up during the past year, unemployment and the overall job and economic outlook of the cities.
The point of this article was to highlight those cities which have real estate markets that are less likely to fall prey to the housing trouble being experienced elsewhere in the U.S. If you look at the list I’m sure you will see a pattern, minus Seattle and San Jose, and that is that housing values are relatively affordable. It is no surprise to me, and shouldn’t be to you either, that the more stable markets are those that have real estate prices that are within reach for the average home buyer. The more people in an area that can afford to buy a home, the more chance there is that people may actually buy one. Most sane people don’t try to buy a house that is 9 or 10 times their income. In most of the featured markets, the home price range falls between 2 and 4 times the income level, which is much more reasonable and realistic ratio.
In addition, these markets haven’t experienced much of the widespread speculation seen in places such as Las Vegas or the Southern Florida and California markets. Investors who bought into these markets did so because they understood cash flow principals, and since they are seeing cash flow from their investments, there is little need to sell off their properties in desperation sales.
Lastly, I want to touch on the outcasts of the group, Seattle and San Jose. These markets aren’t exactly affordable, but so far have avoided the worst of the housing crisis. Living in the Seattle market, I can say that while things aren’t nearly as bad as elsewhere in the country, they aren’t all roses here either. The housing market is slow and basically prices haven’t fallen much--if at all--because sellers aren’t choosing to drop them, so houses are just sitting on the market. The main reason this happened in Seattle is that it didn’t have the widespread speculation, or subprime loans like much of the rest of the country, so sellers here had this luxury. That being said, recently prices have begun to drop and probably will continue to do so for a while longer until an equilibrium is reached. San Jose seems to be in a similar boat, but they seem to have further to fall than Seattle. Their housing prices are even more out of balance, and even though their job market is good, I certainly wouldn’t say they are “recession proof,” or that they are going to avoid a downturn altogether. The median housing prices in San Jose are 7.1 times the median salary, compared to 6.5 times in Seattle, according to data from CNNMoney.
Thanks to the commodities boom, Brazil has emerged on the world scene as a new economic powerhouse. This has not gone unnoticed by foreign investors who have been pouring billions of dollars into Brazil in an effort to capture some of the vast potential for profit. While it has only been a few years since Brazil was on the verge on economic disaster, it appears they have been able to turn things around in the country--and this time change may be for good.
I read a great article from The Wall street Journal this morning about Brazil that is definitely worth your time to read. The article talks about Brazil’s past problems, how they are overcoming them, some current investments happening in the country and even a little about the future prospects for Brazil.
In my opinion Brazil is here to stay. They are one of the few energy-independent countries in the world, they have the largest supply of fresh water in the world (Some think that water resources will soon be in higher demand than oil), they are packed full of just about every other natural resource you can think of, their currency has strengthened and stabilized and their government--while not perfect--has shown remarkable growth. As the government continues to grow and strengthen, and as they continue to combat the corruption and bureaucracy that is still holding them down, the sky is truly the limit for this country.
If you are interested in finding out more about physically investing in Brazil make sure to read NuWire’s article on Brazil Property Investment.
At this point probably everyone is aware that Detroit’s auto industry has been struggling, and as the auto industry goes, so goes Detroit’s economy. During the past few years, consumers have left the American car manufacturers for their smaller and more fuel efficient foreign counterparts. Recently the American car manufacturers have begun to embrace the consumer’s desire for fuel efficiency, but they are still behind the competition, and now it appears that the entire auto industry might be in for a new shock.
As the price of oil continues to skyrocket, many consumers aren’t satisfied, or will eventually become unsatisfied, with the current level of fuel efficiency and are simply deciding to pass on the new car altogether in favor of public transportation. Many people have already been priced out of buying a new car with the added cost of fuel, but if $200 oil becomes a reality, as Goldman predicts, then you can bet the number of people being forced to public transportation will increase. This obviously is bad news for the Detroit auto industry.
I would love to see more people take public transportation. It is much more environmentally friendly and cost effective, yet there is a major problem: Many major cities in the U.S. have poor public transportation systems, and at their current levels, they are just not realistic for many professionals. I would love to take public transportation into work each day, but if I took the bus to work, it would take me about an hour and 15 minutes instead of the 10 to 15 minutes it takes me now. When you factor in the trip there and back I would have lost 2 hours of my day--not something that I’m willing to give up. It seems rather silly to me that a 7-mile journey would require three bus transfers and take more than an hour. Because of these many inefficiencies, and the increasing demand for public transportation, I see some changes in the future--and, of course, an investment opportunity.
First off, as more patrons are forced to public transportation, you can be sure that the government will be hearing their outcries about the inefficiency. As a result, I foresee an increase in public transportation investments, and possibly even upgrades. I love the light rail system they have going in Portland, and although I probably shouldn’t even mention the word "monorail" in Seattle (we’ve had quite the costly experience in the past with this one), I’m starting to think it’s not such a bad idea--assuming we actually do it right this time.
Lastly, I see access to public transportation becoming an important part of a person’s home buying decision. As you can probably tell, when I chose my home I wanted something close to work so I didn’t have to commute far, but I didn’t take into account whether it would work for public transportation. Those properties that are close to main transit centers which allow homeowners to easily go wherever they need to go might see an increase in demand. If I was planning to use public transportation from the start I certainly would have factored it into my housing decision. So while the Detroit auto industry may be in for another hit, public transportation companies and properties that are public transportation friendly should do well.
New York City is home to many rent-regulated apartment buildings. In fact, rent-regulated apartments account for 57 percent of the total in the Bronx, 42 percent of the apartments in Brooklyn, 59 percent in Manhattan, 43 percent in Queens and 15 percent of those on Staten Island, according to The New York Times. Typically these buildings aren’t great investments because the land value is high and the cash flow is proportionately low, but now several private equity funds have discovered a loophole of sorts that is turning these previously poor cash flowing apartments into great investments. It isn’t without some ethical issues, though.
Usually in these rent-regulated apartments, tenants will stay for long periods of time because the rents are much lower in these units than elsewhere in the city and the yearly allowable rent increases are small compared to the actual market increases. The opportunity these private equity funds and investors are exploiting is that when a tenant moves out, the landlord is allowed to increase that particular unit’s rent to market. Considering these rent-regulated units are being rented in some cases at 65 percent or more below market, according to The New York Times, it is easy to see how this endeavor can become quite profitable. The more tenants you can get out of the building, the more money you are going to make. The problem is that these tenants typically don’t want to move, and even if they do, there are often few options of places they can afford to go. This is where the questionable ethical practices come in.
Tenants in buildings that have been bought by the private equity funds are now complaining of harassment and other questionable tactics on the part of the landlords in order to get them to move out of the building. Some of their tactics, such as offering tenants three months' rent as compensation for moving out seems decent, but others, such as harassing phone calls or repeated baseless court proceedings, are over the line, in my opinion.
It seems that many of these firms are having success at getting tenants to move out, but I think many of these landlords are falling into the greedy and conniving area. The idea is a good one, but crossing the ethical line just isn’t worth it, no matter how much they are going to make on these investments. It appears that these questionable activities might come back to haunt them anyway. Some of the tenants who have been “harassed” are filling a lawsuit against one of the private equity firms, and another firm has already settled a lawsuit brought upon them for rent-gouging, according to The New York Times. It has certainly been my experience that it is better to do things right the first time, because if you try to cut corners you’ll pay for it in the end. I think that if these funds are patient and really try to work with these tenants to come to an amenable solution, these investments can work out great for everyone involved. But by trying to expedite things, and make some extra cash at the expense of their tenants, these funds are showing their greed and are likely pay the price.
I read an interesting opinion piece in The Wall Street Journal yesterday by Cyril Moulle-Berteaux, a hedge fund manager, which said the housing crisis was over, and that it bottomed out in April. I couldn’t help but respond to such claims, as I’m not sure how he can be so confident in his stance. You can read the whole article for yourself; I’m not going to get into all the particulars here, but I wanted to add a couple points.
The stats that Mr. Moulle-Berteaux used in his article sound great, but how much can we rely on such data? The answer is we can’t. Just as he says the data being used by the housing naysayers is inaccurate, so too must we be skeptical of his. Statistics can be found to back up just about any point you want to make, and beyond that you can analyze data sets in many different ways and skew them as need be.
The main point that he makes is that housing is now affordable to the masses again, so we should expect people to start buying. Typically, when the cost of renting nears the cost of owning, people will choose to buy. That argument makes sense to me. However, many people couldn’t buy now even if they wanted to. Lenders have tightened their standards to the point that, unless you are looking at getting a conforming loan, you are pretty much out of luck. That means that people need to be able to put up 20 percent in order to buy a home, and I’m not sure as many people have that kind of money as he thinks. During the housing boom we experienced the highest proportion of homeownership in U.S. history, and this was in large part because of the increased number people who were able to qualify for home loans. Now that these people can no longer qualify for home loans, the percentage of homeowners has to drop. As more and more people go into foreclosure and lose their homes, the percentage of homeowners is going to drop. Considering how the number of foreclosures is continuing to increase, I think it might be a bit premature to call a bottom.
In addition, we have to consider the mob mentality. Even if prices have dropped to an equilibrium, in boom and bust cycles, both the boom and bust typically go further on their perspective ends than they statistically should. The reason for this is that people follow a mob mentality; we are natural followers and we don’t want to be the first ones to the party, so to speak. Therefore, even if April marked the statistical bottom, the market is probably still in for some additional correction before people are ready to jump back in. When they do, though, it will likely be a nice little surge of activity.
Many of Mr. Moulle-Berteaux’s points are valid, and who knows--maybe he will turn out to be right. But from my experience, trying to time the market is just a practice in futility. There are so many factors that go into determining these things that chances are you are going to be wrong when you try to time a market. In my mind, the factors that investors need to keep an eye on are property yield or cash flow. Cash flow is an age-old indicator of property value, and it rarely lets us down. Steep losses are realized when people panic and leave the market all at once. If a property owner is seeing cash flow, they have no need to panic. So my advice to you is to not bother trying to time the market. Be smart, and if you are going to buy, buy on cash flow rather than trying to use your--or anyone else's--crystal ball.
Summer is approaching, and with it comes anticipation of all its pleasure: picnics, barbecues, baseball, summer vacation and life-destroying drought. From San Diego to Atlanta, from below the Texas border to the Rockies, people of the Sun Belt are bracing for another summer of watering the lawn with their bathwater...at night...wearing a ski mask to avoid hefty fines. Just what are people doing to prepare and conserve in these hard-hit places? Let’s start with my old hometown, Atlanta...
To celebrate Sunny Perdue’s “Take a Shorter Shower” month, Stone Mountain Park premiered its Snow Mountain attraction last November. The 1.2 million gallon slush ball was conceived to give sunny Atlanta a most deserved winter wonderland, but apparently a bunch of prissy naysayers who like taking showers more than seeing children happy shut the attraction down after opening day. Reprehensible isn’t it? What had they to complain about? Besides this:
“Snow blowers were pulling water from the DeKalb County water system, instead of the park's lake because park officials wanted the snow to be pure white.”
People in Georgia wanting something to be pure white?! NEVER!
Ahem...
In a state where there are no natural lakes (the main reservoir, Lake Lanier, is a flooded town that routinely stuns and drowns swimmers with debris floating from the bottom), and where most of the watersheds have been paved over for parking lots and tract housing (Georgia’s lack of natural barriers made it prime for unchecked growth for the last decade), one would think that the legislature would have a better contingency plan than “Screw over Alabama and Florida” but that’s what it boils down to. Water wars between the three states have been flaring for over 15 years, and last year saw a particularly nasty clash between Georgia and Florida when the Northern Aggressor—in a rare, bipartisan decision—voted to divert millions of gallons of water that had been promised to Florida to protect endangered mussels and sturgeon in the northern lakes. Meanwhile, the hundreds of golf courses across Georgia kept their sprinklers on. As long as they can pay for it, who are we to stop them?
This smacks of an “almighty dollar” scenario that may play out on the other side of the country in Vegas, whose reservoir at Lake Mead is tapped by aqueducts to many surrounding cities. That reservoir is already at half capacity and declining rapidly. According to a report published by researchers at Scripps Institution of Oceanography, UC San Diego, Lake Mead may be bone-dry by 2021.
I have heard people suggest that Vegas is protected by the vast wealth contained there, which will allow the city to simply buy water when it becomes necessary... I’m sure those generous casino and hotel moguls will be just thrilled to share with everyone. Might I add that this would necessarily be at the cost of towns that would see their water supply go to a higher bidder? Is this really an ideal scenario to anyone? And can one be sure that Vegas’ coffers won’t dry up as well? Casinos are not recession-proof, and if Cirque du Soleil has to start performing their hit water show “O” in a vat of urine, Vegas may lose its appeal and the house may finally lose a round. Benjamin Franklin said in his Poor Richard’s Almanac: “When the well runs dry, we shall know the true worth of water.” One can only hope that whoever has it will accept feather boas and sequined thongs as payment.
The Lake Mead crisis is complicated by a 1944 water-sharing treaty with Mexico, which guarantees that a certain minimum of potable water from the Colorado River reach the Mexican border. A desalination plant was built just north of the border to make good on this promise, but by the time the river reaches the Colorado River Delta—half a century ago, a two million acre expanse of wetlands and lagoons—it is a mere trickle, and the surrounding area is a salt flat.
Elsewhere, tensions over the Rio Grande water supply continue to rage in South Texas and Mexico. A decade-long water-debt to the U.S. by Mexico was resolved in 2005, but only after an estimated $660 million of losses because of failed crops in the Texas Valley. Texas is seeking redress through NAFTA in Canadian courts for these losses, and the soured relations between the two states show no signs of improvement.
During the worst years of the drought, the government did what it could to aid Southern farmers by funding updates and improvements to irrigation systems, but reservoirs throughout the Sun Belt are still pitifully limited, and rampant growth in cities such as Vegas and Atlanta and Phoenix (which seems to have the soundest approach to the water crisis of the three) threaten to turn these towns into dust bins in a matter of years. As much as some people would like to believe it, this is not a problem that money alone can solve. Only real planning and foresight will be enough to protect these cities from complete desiccation.
If you choose to invest in any city threatened by drought, then do not fail to research the city’s contingency plans and make your own. Increasing interest in sustainable housing is making additions such as home reservoirs more accessible. For those living in drought-affected areas, such considerations may become absolutely vital, and so for those investing in these areas, having a house whose residents can actually take a shower may make the difference between a hot-ticket and sand trap. Now...I’m off to the golf courses!
Mortgage giant Fannie Mae today reported first a first quarter loss of nearly $2.2 billion, or $2.57 a share, much higher than the expected loss of $0.81 analysts were expecting, according to The New York Times.
Those who are regular readers of this blog know that one of my biggest fears is that one of these mortgage giants will fail. The impact of a Fannie Mae or Freddie Mac failure would be felt hard and fast, and would likely send the already precarious economy into a colossal tail spin. Not only would the housing market tank, but so would the entire U.S. economy. I am not excited about those prospects and the new-found power given to these companies by the government is not increasing my confidence level at all.
I understand why the government loosened the guidelines for the companies, yet at the same time it scares me. While the possibility remains that these changes will help the credit markets, and in turn the housing market and economy, they also increase the chances of these companies failing and the potential impact of a failure. According to The New York Times, Fannie Mae and Freddie Mac now control more than 80 percent of the mortgage market--more than double their market share of just a couple years ago. If these companies fail, the mortgage market is for all intents and purposes dead--a scary possibility. Of course, the government won’t let these companies fail, but how much would a bail out cost taxpayers? Some estimates put the number over a $1 trillion, a number that would have serious consequences to a nation already over $9 trillion in debt.
I have my fingers crossed that we won’t have to witness the failure of either of these mortgage industry giants, but as the losses continue to mount, I get more and more fearful. America has a lot riding on these two companies, so let's hope that they are able to keep it together.
The Las Vegas real estate market has been notoriously hard-hit by the foreclosure crisis: 51 percent of unsold homes in Vegas are now vacant. This has presented investors with a large selection of single-family properties for investment. In a market such as Las Vegas with an abundance of vacant homes, investors should view such purchases as long-term investments and know that it may take several years before a home turns a profit. But what about some of the ultra-lux homes? According to a recent article in the Los Angeles Times, luxury homes in Vegas may be second only to a Fried-Scorpion-on-a-Stick Stand in terms of bad investments:
“About 1,000 houses are listed for sale in Las Vegas for $1 million or higher, more than 600 of them built since 2004. But unless they've been constructed in the last year or two, the properties are considered out-of-date, making them all that more difficult to sell, real estate agents say.”
In a town where Hank Overalls becomes Mr. Henry Tuxedo and Lucy Dressbarn becomes Lady Prada von Guccistein overnight, in a place where the word of the moment is always “New!” whereas “Classic” and “Established” are maledictions, it is only natural that the homes be as extravagant and aesthetically bankrupt as their occupants. The trouble is—in case you don’t know—Las Vegas is situated in a flat, hostile desert, and there isn’t much in the way of a view or an established neighborhood. With acres of land available for development and only an impotent Bureau of Land Management to moderate it all, one developer after another (and sometimes the same one, over and over) has created the next “hot” neighborhood, and residents have followed:
“One developer, Christopher Homes, recently opened a neighborhood of homes in the hills west of the Strip selling for $1.7 million to $3 million. Several houses have sold to residents of adjoining neighborhoods who lived in their houses for less than five years, including homes built by the same developer, said Erika Geiser, the company's vice president.”
“‘They feel their residence is obsolete,’ she said. ‘They're looking for something more innovative, more cutting-edge.’”
Cutting-edge, indeed. Like so many glass pianos of yesteryear whose tops are now marred by the fine cuts of straight razors and the occasional syringe, the old homes are indeed pathetic vestiges of a bygone era, and I don’t blame the homeowners from moving on. Here is a table displaying some of the bare necessities that people expect to find in their new homes:
Classic
NEW!
5,000 to 7,000 square feet
8,000 to 10,000 square feet
Walk-in showers
7 foot by 7 foot showers
Granite tile bathtub
Granite slab bathtub
12” by 12” polished travertine tiles in entrance
20” by 20” polished travertine tiles in entrance
Stainless steel counters, glass tiles in kitchen
Stainless steel counters, glass tiles in laundry room
Plastic chandelier
Chandelier made of human sternums*
*May or may not be an exaggeration. Would it be all that surprising if it were true?
All of this is to say, it takes knowing the future of what people will want in a home—and where people will want that home—to win at investing in ultra-lux homes in Vegas, and in the end you’re probably better off the blackjack tables. Take the sad story of Mr. William Derentz, for example:
“William Derentz, who heads the company that runs the annual Harvest Festival in Laguna Hills, bought a 5,400-square-foot home in Las Vegas for $2 million in 2004. He never moved in, since he planned to resell it in a year or two at a hoped-for profit of $1 million.”
Alas, the market tanked and defeated Derentz moved into the house in February, but while there, he will remodel the backyard, adding “his-and-her” cabanas to make it a more competitive seller. He may want to make those “his-and-her” reservoirs instead, given that the Las Vegas real estate market may never recover if it runs out of water first.
More on the increasingly dire water crisis in the Southern U.S. and Mexico in tomorrow’s post: “Water, Water Everywhere, But Not A Drop To Fill My 49 Square-Foot Shower,” or perhaps “The Day After Tomorrow Part II: The Day After Cinco De Mayo.”
It appears there will soon be a new “most expensive house in the world.” The fifth richest man in the word and head of Mumbai-based petrochemical giant Reliance Industries, Mukesh Ambani is building a new home which will cost nearly $2 billion. How do you know when you have too much money? How about when you are having a $2 billion house built for you. Considering Ambani is worth some $43 billion according to Forbes, this $2 billion home is in no way a stretch for him, but maybe it is just a tad extravagant.
According to an article in Forbes, the Ambanis will leave their extensively remodeled 22-story tower home in downtown Mumbai for their new 27-story 400,000 square foot skyscraper (visit Forbes for more details), also located in Mumbai and equipped with nearly every extravagance imaginable. A building of this size wouldn’t ordinarily cost $2 billion, but because of the material being used and the fact that the designs of each floor are very different, the costs are much higher. I’m not typically one to go bashing wealthy people for their extravagant spending habits, but this was a little disturbing to me. They already have one of the most expensive houses in the world and are simply one-upping themselves, flaunting their wealth in the face of poverty and deprivation being experienced in their country. Here is an excerpt from the World Food Programme’s website:
Nearly 50 percent of the world's hungry live in India, a low-income, food-deficit country. Around 35 percent of India's population - 350 million - are considered food-insecure, consuming less than 80 percent of minimum energy requirements.
Nutritional and health indicators are extremely low. Nearly nine out of ten pregnant women aged between 15 and 49 years suffer from malnutrition and anemia. Anemia in pregnant women causes 20 percent of infant mortality. More than half of the children under five are moderately or severely malnourished, or suffer from stunting.
How can you possibly justify a $2 billion expense when half of the starving people in this world come from your country? For most wealthy Americans, it is hard to understand and relate to such dire problems half a world away. Once you witness with your own eyes a person dying of starvation, you get a new perspective on life, or at least anyone with a heart would. Unfortunately—or fortunately depending on your perspective—many Americans never see such things first hand and such problems seem as unreal as they are remote. But Mr. Ambani, I must imagine, has witnessed these problems first hand, as it would be hard to avoid them while living in a country facing such a crisis.
Ambani is pouring money back into the economy with the construction of his residence, along with the 600 or so staff he is expected to keep in order to maintain his home. Those people are probably thankful to Mr. Ambani, but I can think of a thousand ways in which just a fraction of this $2 billion could be used to better help his countrymen.
I’m not a frequent reader of Indian media, but I imagine that this fellow is not looked upon too highly by the poor in India. If I were Ambani, I don’t think I could sleep at night in my overly extravagant palace while elsewhere in my city thousands of people are dying of starvation and malnutrition. Personally, all I would be able to think about is that I could have saved every one of them, but instead I chose to have that custom solid gold toilet. Sounds like a nightmare to me...but hey...as long as he can live with himself.
America is embracing Hispanic culture, and investors should too. The Hispanic population is the fastest growing segment of the U.S. population, and according to the most recent Census Bureau release Hispanics now comprise 15 percent of the total population or some 45 million people. Furthermore, it is projected that by 2050 Hispanics will make up 25 percent of the total U.S. population. There are numerous ways in which investors can embrace and profit from the emergence of Hispanic culture in America. I will mention a couple.
Real estate investors in particular can capitalize on this trend is by making their rental properties more Hispanic-friendly. Advertise and use signage with both English and Spanish. If you are having a property manager service your property, why not find one that is bi-lingual? A bi-lingual property manager would be able to capitalize on both English and Spanish speaking tenants, offering you more coverage. Depending on your location—California and Texas in particular—you might think about pulling out all the stops to make your rental Hispanic-friendly.
There are many businesses one could start that take advantage of this growth. One of the more interesting ones to my mind was included in our Business Ideas article, namely the creation of bi-lingual call centers in Latin America that service the U.S. population. There is a plethora of bi-lingual natives in Central America in particular that offer cheap labor. How long do you think it will be before U.S. companies stop outsourcing call center business to places like India, where labor is rapidly becoming more expensive? In addition to rising costs in places like India, there is also the difference in time zones, which isn’t a problem in Latin America. Labor might be a tad more expensive, but it is well worth it when you can have employees who speak the top two languages in the U.S. and who reside in the same time zone as you.
No matter what business or type of investment you’re in, there is probably a way which you can better cater to the Hispanic population. Investors who embrace this culture stand to do well in coming years, while those who ignore it could have serious regrets.
The U.S. won the dubious honor of having the worst housing market in the world in 2007, recording an 8.9 percent drop in housing prices nationwide. The second worst housing market after the U.S. was Ireland, which saw a 7.32 percent drop. We all knew things were bad in the U.S. housing market, but the worst in the world? That is quite a distinction.
When looking at these numbers we must remember a couple things, though.
First, not all the countries in the world provide national housing market data, so many countries are not even included in the data set.
Second, the U.S. is a large country and housing markets across cities and states are different from one another, so the number is simply a national average. Florida and California in particular had an extremely strong negative effect on these calculations, while states such as Texas have actually held up fairly well through the housing crash. Thus comparing the U.S. housing market to one such as Hong Kong, for example, is a stretch at best.
Nevertheless, we can still consider ourselves to be the champions of housing market futility, and while there is no trophy involved, we can revel in the fact that we are #1.
Property taxes are on the rise across the country as local governments are feeling the effects of the economic downturn. According to an article in the Wall Street Journal, property taxes account for around 40 percent of municipal governments' funding. Falling property values coupled with higher material costs have caused local governments to feel the pinch; they are now preparing to pass that on to homeowners.
The article it pointed out a few cities which are working to raise property taxes. One of the largest cities was Memphis, Tennessee. The mayor of Memphis is proposing a 17 percent increase in property taxes, according to the article. This was one of the larger proposed increases, but if this measure actually gets passed, it will surely have a huge impact on homeowners and investors in Memphis.
Property taxes are one of the harder expenses for real estate investors to swallow because they typically own several properties and can feel as if they are paying more than their fair share. The taxes go towards things such as roads and schools, which can help bring in quality tenants, but the immediate benefit to investors is less than it is for the typical homeowner. Investors usually can pass on property taxes to their tenants through the rent, but when property taxes are raised, investors are many times forced to eat the difference, especially if they are locked into a fixed-term lease. One of the benefits of typical commercial property leases are that landlords are able to pass on any increases in expenses directly to the tenants.
Residential landlords might want to think about taking a page out of the commercial investor’s book and put a clause in their contracts which allow for a bump in the rent if property taxes are raised. After all it is only fair for the tenants to pay for the added expense since they are the ones directly benefiting from the services provided by property tax revenues.
$800,000.
Notice, that isn't a question because I already know the answer. Rather, it's a statement with one of those exclamation points to show that my voice is being raised in a mix of bewilderment and anger.
The advice 
Though the current sales level is up from the January low of 331,000, to put the March sales rate in its proper historical context, consider that the pre-2009 all-time low of 338,000 in September of 1981 works out to a population-adjusted rate of about 460,000.
First-time buyers made up 53% of existing home sales in March. Charles McMillan, NAR's president, said first-time buyers are "crucial" to a recovery in the overall housing market.
With bank repossessions and notices of default set to pick up dramatically in some parts of the country as 
No, former Fed chief Alan Greenspan was not included.
Though not too much should be made of 
Nice work.
While a 22 percent gain sounds impressive, it is important to recall just how low last month's record low numbers were.
Housing starts fell 15.5 percent in December to a seasonally adjusted, annualized rate of just 550,000, worse than the previous low of 651,000 set in November.
It remains to be seen whether sales return to the 4.9 million rate average of the last year, the 8.6 percent tumble from 4.91 million in October to just 4.49 million in November helping to push the inventory level back up to the high for this cycle at 11.2 months of supply.
Sales have declined 35.3 percent from year-ago levels, the worst decline since April 1980 when new home sales plunged 50.5 percent. Inventory remains at historically high levels, averaging 11 months of supply over the last year, as builders continue to offer incentives and slash prices.
The index rose to 60.1 from a mid-month reading of 59.1, up from November's historic low of just 55.3 as lower gasoline prices and 
Two areas showed month-to-month improvement - Cleveland and Boston - while home prices in Dallas were unchanged from August. Cleveland was the only region where the annual home price decline improved from a year ago, from -6.6 percent in August to -6.4 percent in September.
Nordine has made his own fortune not only by selling homes but also by investing shrewdly. In the 1980s, he bought about 20 properties, most of them single-family homes in Torrance. He sold them off in 1990 and '91 when he anticipated a bust was coming. He dived back into the market in the mid-1990s -- this time apartments in Santa Monica -- and sold off most of them in 2005.
