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Category: Investment (page 11 of 20)

October 28, 2007

HR 3915 Is Dangerous

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Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

HR 3915, The Mortgage Reform and Anti-Predatory Lending Act of 2007, was introduced by Barney Frank, (D-MA). Congressman Frank is also the Chairman of the House Committee on Financial Services. I outlined the key components of the bill with a link to the text here.

The danger behind this bill is that it doesn’t regulate the proper parties. When you read through the text, you’ll discover that there are two entities that are shouldering the brunt of the blame for the meltdown of the sub-prime mortgage market: originating firms and Wall Street securitizers. The bill stops short of levying any responsibility to the two most interested parties: borrowers and lenders (the individual investors). This bill exonerates them of the responsibility of due diligence.

Experience is the best instructor. An investor needs to lose 10% of his mortgage pool investment and a borrower needs to have his home foreclosed. That experience will instill a sense of personal responsibility in both parties. While loss of investment principal and foreclosure are devastating experiences, the old adage “time heals all wounds” truly is appropriate.

Jane Shaw, discussing Public Choice Theory:

Public choice takes the same principles that economists use to analyze people’s actions in the marketplace and applies them to people’s actions in collective decision making. Economists who study behavior in the private marketplace assume that people are motivated mainly by self-interest.

Ms. Shaw further exposes the dangers of regulation to correct market failure:

In the past many economists have argued that the way to rein in “market failures” such as monopolies is to introduce government action. But public choice economists point out that there also is such a thing as “government failure.” That is, there are reasons why government intervention does not achieve the desired effect.

This bill will provide a false sense of security to the consumer and encourage even more irresponsible behavior. Rather than let the instructional nature of failure naturally correct the market, the regulation would contract the industry so as to dissuade innovation and competition. The scoundrels will fleece the ignorant under the Read more

October 19, 2007

Sub Prime Mortgage Crisis Caused By Unexpected Success

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Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

Sub prime mortgage are defaulting at record proportions.  Lenders are closing their doors and confidence is waning on Wall Street. Greed, corruption, and irresponsibility have all been cited as the reasons for this contraction and collapse. While these factors might be contributing reasons, they are all byproducts from the underlying reason:

The real estate markets behaved better than were expected.

Understanding this concept will require a mastery of Dan Green’s presentation proving that real estate data is granular and not mosaic. Dan said:

But real estate is not a national story, folks. It’s highly, highly local.

To beat the point home, when you buy your next home, it won’t be a home that exists in all 50 states. It will be a home that exists in one state, in one town, in one neighborhood, on one street and that has its own character and economics. Much like the small pictures above.

And that’s what real estate is — it’s a series of very, very small pictures.

Lending developed into a national, or to use Dan’s analogy, mosaic, business. Local factors weren’t considered in the modeling when Wall Street developed the guidelines for Alt-A and sub prime loans. The Wall Street forecasters were correct in their assumptions that real estate was undervalued… nationally. The aging baby boomers and short supply would apply steady pressure on prices in the first decade of this millennium. Nationally, they expected properties to appreciate faster than the prior appreciation rate; they just didn’t anticipate that local markets would behave outside of their model.

Let’s set “ground zero” to Y2K. Wall Street forecasters expected real estate to appreciate at a rate exceeding 6% per annum. It did. They loosened loan guidelines, in a quest for yield, protected by rapidly appreciating collateral. Desirable areas, like Southern California Vegas, South Florida, and Phoenix, led the appreciation wave at rates that were double the expected appreciation rate. Other parts of the country, Idaho, Utah, and Texas, didn’t follow the boom until 3-5 years later. Nationally, the numbers made sense to Wall Street.

The Read more

October 5, 2007

You’ll lose money if you buy a house? Which house?

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Suburban Phoenix Real Estate Broker

Author website

This is my column for this week from the Arizona Republic (permanent link):

 
You’ll lose money if you buy a house? Which house?

Jim Cramer, a clownish buffoon who screams for a living on cable TV, went on the Today show last week and said, “Don’t you dare buy a home now. You will lose money.”

The clownish buffoons in the National Association of Realtors have no faith in your ability to discount hyperbole, so they denounced Cramer’s remarks as “misleading, inaccurate, and inappropriate.”

Ya think?

A steady mantra of the NAR during the housing downturn has been to insist that all real estate is local. My friend and fellow real estate weblogger Dan Green (TheMortgageReports.com) amends that obvious truth by pointing out that all real estate news is granular — national trends say nothing about local markets, and lower overall prices in the Phoenix area are consistently belied by steady appreciation in high-demand neighborhoods. And not all bad news is bad: 2007 is the worst year in real estate since 2002 — but 2002 was a very good year.

Here’s the real truth: All real estate is particular. You’ll lose money if you buy? Nonsense. The right rental home will pay for itself no matter happens to home values.

Don’t buy a home? Which home? A few weeks ago I was in a trashed house that was listed at $200,000 below market. We estimated that it need $50,000 to bring it back to turn-key condition, with a four-month span of time between purchase and resale. Even allowing for errors in our estimates, the house would net out to between 200% and 300% cash-on-cash return in one third of a year. Do that three times and $50,000 capital becomes as much as half-a-million dollars in a year’s time.

All real estate is particular: Which buyer? Which seller? Which house? Which ownership strategy? Which anticipated return? If you’re looking for a residence you intend to occupy for less than three years — rent. You’ll almost certainly lose money buying now. But there is a ton of money to be made in particular real estate transactions right now — provided you Read more

October 2, 2007

The Weight Loss Process and the Real Estate Market: The Same Animal in a Different Form

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Real Estate Investor

Author website

Much like the real estate market my life has taken on significant changes over the past two months.  Fortunately, unlike the real estate market, my life has been on the upswing.  A major focus for me has been weight loss, resulting in my dropping nearly 40 pounds in about two months.  As I am not one for long personal stories, the major reason for sharing this is to relate how weight loss and real estate seem to go hand and hand.

The Realization

I am fat.  Plain and simple, one day I realized I was fat.  There were plenty of signs, quite obvious to others, which I chose to ignore: tighter pants, lower energy, the mirror, etc.  Eventually the mountain of evidence reaches a tipping point; a point at which, despite my best efforts, I simply could not ignore the fact that I was no longer the chiseled college athlete of six years ago.  For me, this point was when, on a whim that was clearly not thought out, I decided to weigh myself.  When the scale read 260 pounds and I officially weighed more than my father, it was a sad day.  The day became even sadder when my wife thoughtfully pointed out that the BMI for a person my height (6′ 2″) suggested that I should weigh 190 (thanks, dear).  

The real estate market reached this point about six months to a year ago.  Much like me, the market chose to ignore that fact that real estate prices were increasing much faster than wages.  Additionally, prices continued to increase at break neck speeds assuming the lowest interest rates in history would get even lower.  At the height of market gluttony, people were using homes as personal cash registers, spending as if the money created from nothing, would magically go on forever.  Then one day, the market hit a tipping point.  For the real estate market, my guess would be the subprime market disaster acted as this point.  At this point people begin to wake up and come to their senses.

The Action Plan

Getting back to the fundamentals of eating right and exercising brought me Read more

September 28, 2007

If you don’t want to get trampled . . .

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Suburban Phoenix Real Estate Broker

Author website

…do not come between the NAR and Hillary Clinton’s scheme to give every newborn child a $5,000 savings account:

Democratic presidential candidate Hillary Rodham Clinton said Friday that every child born in the United States should get a $5,000 “baby bond” from the government to help pay for future costs of college or buying a home.

Clinton, her party’s front-runner in the 2008 race, made the suggestion during a forum hosted by the Congressional Black Caucus.

“I like the idea of giving every baby born in America a $5,000 account that will grow over time, so that when that young person turns 18 if they have finished high school they will be able to access it to go to college or maybe they will be able to make that downpayment on their first home,” she said.

The magic words are “downpayment on their first home.” There is no liberty the NAR won’t trample to juice the housing market. The obvious fact that the people taxed to provide these “baby bonds” will buy fewer and smaller homes — and will have substantially smaller portfolios to invest in commercial real estate — will not dawn on the dolts.

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September 28, 2007

Looking for a bargain-priced home? If you don’t Flinch!, the seller will

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Suburban Phoenix Real Estate Broker

Author website

This is my column this week from the Arizona Republic (permanent link):

 
Looking for a bargain-priced home? If you don’t Flinch!, the seller will

Let’s talk a little bit about buying strategies. Last week’s rate adjustments by the Federal Reserve Bank may have scared up a few buyers. I’m taking a lot of calls from Canada, and investors seem to be trying to time the bottom of the market.

Here’s a simple idea: If you were to buy a newer three bedroom, two bath stucco-and-tile suburban tract home for $160,000, putting 20% down, it would be cash-flow positive at $850 a month rent. That includes everything, mortgage, HOA, taxes, maintenance, vacancy — everything. The positive cash-flow would net out to about $5 a month after taxes, but the point is that the Phoenix real estate market is back to the point where a rental home is self-amortizing. If home values go up in the future, so much the better, but the home will pay for itself either way.

Here’s a better idea, one that has been making me crazy for more than a year. The name of this game is Flinch!

Normally, when buyers are looking for a home, they’re looking for that one unrepeatable masterpiece, the only home they could even consider buying.

What if, instead of looking for one ideal home, they resolved to look for three — or five — that might fill the bill? Now they’ve got bargaining power.

The game works like this: Make multiple low-ball offers on all the houses that might work for you, with all of those offers being subject to your final approval. Make it plain to all of your sellers that the first one to salute goes under contract, and the others go home empty handed.

This is exactly what sellers were doing to buyers two years ago, with multiple counter offers. By now there are at least eleven homes for sale for every qualified buyer. It’s time buyers exercised their incredible negotiating power.

What happens if it doesn’t work? Try again in a different neighborhood. Or try same neighborhood six weeks from now. Here’s the trick to winning at Read more

September 24, 2007

Prometheus abundant: Giving the gift of mind

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Suburban Phoenix Real Estate Broker

Author website

Do you want to fight a war on poverty? A war on terror? A war on the senseless waste of the sole source of capital, the human mind? Here’s your chance. For two weeks in November, you’ll be able to buy two XO laptops, the One-Laptop-Per-Child computer, with one coming to you and the other going to a hungry young mind overseas.

From the Boston Globe:

With orders for its rugged XO laptop falling short of its initial goal, the One Laptop Per Child project announced today that it would let consumers in the United States and Canada buy the cute computer for a limited time.

In an interview last week, Nicholas Negroponte, the former MIT Media Lab director and founder of the so-called $100 laptop initiative, conceded that he had not locked in the 3 million orders that he once said were necessary to trigger mass production.

The new “Give 1, Get 1” initiative could be the antidote, he said, by helping to spread the project.

For a limited two-week span in November, people will be able to buy two laptops for $399, one for the buyer and one for a child in a developing country.

My take: Donate both, perhaps with one going to a child in your own home town. Even better:

Starting today, people who simply want to donate a laptop to a child in a developing country for $200 can do so online at XOgiving.org.

I think there must be three billion candidates for this machine, so I can’t imagine how most of them will get one before they are no longer children. But the bounty of the harvest is planted one seed at a time.

Prometheus literally means “foresight.” Because of the gift of mind, the uniquely Hellenic gift, I live in a world of vast abundance. I used to joke that Americans should “count their microprocessors instead of sheep,” but, by now, I can’t get an accurate count of the microprocessors sitting on my desk. When I think about some young Prometheus growing up chained to the stultification of ignorance, indolence and superstition, I could not be more grateful for this chance to Read more

September 23, 2007

Is Greenspan to Blame for the Housing Crisis? And, if he is, is this entirely a bad thing?

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Suburban Phoenix Real Estate Broker

Author website

The second half of a US News dyscomium on Alan Greenspan’s Fed:

The global spread of capitalism has increased inflation-dampening competition throughout the world and allowed investors to accept lower yields when investing in bonds. What’s more, globalization has boosted incomes, in Asia and beyond. That has expanded the pool of savings that can flow into U.S. debt, forcing rates lower. The result, according to a 2006 paper by economist Tao Wu at the Dallas Federal Reserve Bank, is a “substantially weakened” Fed.

Then again, Greenspan might want to embrace his role in all this. Just as the Internet bubble left behind Google, eBay, and 90 million miles of fiber optic cable, the credit bubble upgraded America’s aging housing infrastructure and created a host of online services—Realtor.com, Zillow—that have permanently shifted the balance of power from real-estate agents to consumers. As Australian economist and bubble-ologist Jason Potts puts it, “A bubble is good for growth because it creates a low-cost environment for experimentation.” Even if it eventually pops.

It’s understood that unwarranted risk results in a voluntary transfer of wealth from the badly-advised to the better-advised. In real estate, professional investors are slavering at the sidelines waiting to pick up foreclosed homes.

For my own part, I find myself wondering why only a few price categories have risen substantially during what has been the ten years since the U.S. went of the Volckerized pseudo-gold-standard. I had thought the answer was in productivity increases owing to technology, but I hadn’t considered the impact of much cheaper imported goods, especially from China.

What Paul Volcker was doing, and what Greenspan was doing until 1997 or so, was surfing the price of gold as a guide for currency inflation. If the price of gold was relatively stable, then the Fed was inflating the currency at approximately the same rate that productivity was growing. Post hoc — irrational exuberance, dot.com bomb, Enron/Tyco/etc., 9/11, housing boom — the price of gold is up substantially, which argues that the money supply has increased far ahead of productivity. Except that prices for services and manufactured goods (excluding housing) have not risen accordingly. Ignoring Read more

September 19, 2007

Are You Better Off Now Than You Were Four Years Ago?

by

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

Ronald Reagan asked us that question in the 1980 Presidential debate. The obvious answer, in 1980, was NO.

Are we better off now, in the real estate markets, than we were four years ago? I think the obvious answer is YES. Now, bubble bloggers and end of the world prognosticators will most likely throw out graphs, cite the reasons for a depression, and suggest that Greenspan created an artificial bubble.

The problem with bloggers is that we have a short-term memory. We should; we’re rewarded for doing just that. Let me give you an example: I tripled my page views by covering the Countrywide Financial crisis on my home weblog. If I want more traffic, all I have to do is research the referring search terms and tailor my new content to those interests. The result? An exponential climb in page views.

Bloggers are rewarded for living in the moment not for seeking the truth (or a deeper understanding of it).

How different is your net worth today from 2005? Well, if you’re in San Clemente, CA, Goodyear, AZ, Naples, FL, or Henderson, NV, it’s probably down. These four areas have been brutally hammered with foreclosures while the rest of the country has been riding out this slowdown. And that makes good headlines fodder for the mainstream media and good page view bait for the real estate weblogger.

How different is your net worth in the aforementioned cities if you bought, say, four years ago– in 2003? It’s pretty darned good ! In 2003, a home in Goodyear, AZ could be had for about $200,000. That home may have risen to a peak of $325,000 in 2005. It may have retreated to $275,000 today. Let’s say it drops to $240,000 in two years. A 20% down payment (of $40,000) would have doubled in value in a six year period. The debt service could be written off to rent collected or opportunity cost (rent that would have been paid). The resulting return on equity, for that Read more

September 7, 2007

I Want My Half

by

Mega-Producing Realtor

Author website

An email I received:

Dear Russell;

How many years have you been in Real Estate here in the valley? (I know it has been a long time)

We were going to build a custom home for resale in Circle G Ranches Silvercreek, which is in Gilbert. We had a lot partner that owned the lot and would subordinate it to us to get the construction loan. When the project was completed and sold, all debts would be paid and the profits would be split 50/50.

The deal did not work out. The real estate market (as you are very aware) has softened. The lot she bought in March 2006 for $485,000.00 has now appraised for $430,000.00. The lot owner feels she has suffered a loss on the lot and wants us to split the $55,000.00 loss, yet she will keep the lot and in the future either sell the lot or build a home on it.

What do you think? We think she hasn’t suffered a loss until the lot is sold and she officially suffers a loss.

Thank you for your time.

half-halfThis is my 30th year in the real estate business. I started with John Hall & Associates early in the year in 1978. Now for the far more important question, has your lot investor suffered a real loss. It depends on how you look at it. Is the “loss” real to her? I think that answer is yes. Is it real to me? Not so much.

Have prices dropped since March of 2006? Yes, absolutely. Is that lot now worth less? Maybe. But if we look at who appraisals are for we may get better insight on this issue. Appraisals are for the lender or necessary to show some other party the “true value”. They are not required by the buyer or seller. Oddly, issues like the buyer’s FICO score can be a factor in determining the appraisal amount – so – no disrespect to appraisers – but I’m not very interested in what an appraiser thinks the value is, unless that appraiser is going to buy it. There are various rules that appraisers must follow Read more

September 4, 2007

ARMs Look Scary Before They Look Good or (How Wall Street Dupes the Little Guy)

by

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

I don’t look real smart today, do I ?

Mortgage rates in general took a fairly substantial dive during the previous week with longer term rates dropping double digits in most cases and some rates returning to mid-2006 levels. However, the Mortgage Bankers Association reported a spectacular increase in the interest rate of the one-year adjustable rate mortgage (ARM).

Hold on just one second ! Now is the time when you SHOULD be a contrarian. The alternative title of this post is the one you should read. Wall Street has always been ahead of the little guys and gals. They look into the future, and try to get money committed to best profit off of their forecast. If an annual ARM rate is rising above the fixed rate mortgage rate, Wall Street is trying to induce borrowers to lock up money.

Why would anybody in their right mind do that?

Wall Street thinks rates are going to drop like a ball off of a table. They think the inverted yield curve we’ve seen is a precursor to a recession. The inverted yield curve has indicated an impending recession some 85% of the time since the Civil War – which side would you bet on if this were Vegas?

Nobody likes the R word. I’ve been sensitive to the R word since Bill Gross of PIMCO talked about the housing recession in late 2005. He, and I, are more sensitive to the concept of a “housing recession”; we’re both in California. It’s estimated that close to 10% of the jobs in California are related to the housing industries be they Realtors in Rialto or a painters in Petaluma.

Why the Wall Street shuffle with higher ARM rates? They want you to take the risk of a fixed rate so they can stick them in the MBS pools for a few years. They know those loans will sell at a premium in 12-18 months- when rates are dramatically lower. To continue the Vegas Read more

August 17, 2007

Is opportunity knocking in the real estate market?

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Suburban Phoenix Real Estate Broker

Author website

I tell people we live in the last affordable ghetto in North Central Phoenix. We live right on the edge of the neighborhood, the place where $400,000 makes its leap to $750,000 on the way to a million. We moved here knowing what the neighborhood had to do, and, so far, it has not disappointed us.

This morning, I’ve been drooling over this listing. The comp value of this home in turn-key condition should be around $600,000, maybe more. Sad for the sellers, and I could kick them for letting the house go to hell, but this is a sweet opportunity that will bear fruit right about the time Persephone comes back from Hades.

This is my friend and client, investor Richard Nikoley, writing yesterday:

Probably not what everyone is thinking, right now, but if I’m going to keep my head about me and keep a market perspective on the market, then I have to consider that when some people sell out of fear, panic, to preserve diminishing profits, or to stop losses, there’s always someone on the other side of that trade. So the question arises — and one should always, always try to discern the motivations behind each side of a transaction — why are an equal number of people buying, right now, what so many are selling, right now? Could it be because others are selling at cheaper and cheaper prices and those buying are seeing bargain-basement prices? If you had to guess, who would you suspect is likely getting the advantage?

For some reason, people don’t tend to think of the stock market like they do most other things. In other areas, it’s called a sale. There’s always someone, somewhere, wanting to get out of an asset — for whatever reason — and depending on their motivation, they’ll take less and less for it. Others lie in wait for such opportunities in order to accumulate assets at relatively low prices.

Everyone is welcome to their doomsday, economic collapse, chickens-coming-home-to-roost scenario, or whatever. But do keep in mind that what is going on is essentially and mostly an exercise in total freedom and Read more

August 11, 2007

Thomas Sowell: Housing woes caused by land-use restrictions and federal micro-management of lenders

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Suburban Phoenix Real Estate Broker

Author website

Hoover Institute Economist Thomas Sowell:

Amid all the hand-wringing and finger-pointing as housing markets collapse, mortgage foreclosures skyrocket, and financial markets panic, there is very little attention being paid to the fundamental economic and political decisions that led to this mess.

The growth in risky “sub-prime” mortgage loans by people buying homes they could not really afford has been a key factor in the collapse of housing markets, when the risks caught up with both borrowers and lenders.

But why were home buyers suddenly taking out so many risky loans and lenders suddenly arranging so much “creative” financing for these borrowers?

One clue is the concentration of such risky behavior in particular places and times.

Interest-only mortgages, where nothing is being paid on the principal for the first few years, enable many people to get started on buying a home with lower mortgage payments at the outset.

But of course it is only a matter of time before the mortgage payments go up and, unless their income has gone up enough in the meantime for them to be able to afford the new and higher payments, such borrowers can end up losing their homes.

Such risky mortgage loans were rare just a few years ago. As of 2002, fewer than 10 percent of the new mortgages in the United States were of this type. But, by 2006, 31 percent of all new mortgages were of this “creative” or risky type.

In the San Francisco Bay Area, 66 percent of the new mortgages were of this type.

Why this difference in times and places? Because housing prices were skyrocketing in some places and times, so that people of modest incomes had to go out on a limb to buy a house, if they expected to buy a house at all.

But why were housing prices going up so fast, in the first place? A number of studies of communities across the United States and in countries overseas turned up the same conclusion: Government restrictions on building.

While many other factors can be involved — rising incomes, population growth, construction costs — a scrutiny of the times and places where housing prices doubled, tripled, Read more

August 6, 2007

The Carnival of Real Estate . . .

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Suburban Phoenix Real Estate Broker

Author website

…is up at RealEstateUndressed. Host Larry Cragun got around our having broken the rules on entries by breaking all the rules. In consequence, this week there will be two consumer-focused real estate carnivals and no Carnival of Real Estate.

Even so, our friend John L. Wake took second place with Landscape staging your home.

Michael Cook came in fifth with Can I Still Get a Mortgage in Today’s Lending Markets? With Cold Hard Cash and Great Credit, Certainly; Otherwise?

I respect the right of each weekly judge to do what he or she wants about the Carnival — the lord knows we do. But much more than that, I respect, admire, revere and exalt actual excellence in real estate weblogging. We’re going to do something different from now on. News later…

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