Is it even conceivable that home ownership in the US could drop from its current 67% – 68% range to 50% or even lower?

That is the gist of a conversation I had with a real estate agent last January.   Based on his reading of the tea leaves, he couldn’t foresee a scenario where home ownership rates could survive the mess we still find ourselves in.

You would be hard pressed not to see significant signs that the Government is totally committed to maintaining a high level of home ownership as illustrated by mortgage interest and state property tax deductions, avoidance of capital gains upon selling personal and investment properties, the Homebuyers Tax Credit versions 1 and 2 and others.

So… it seems implausible that home ownership could get below 60% let alone 50%.

Yet, as real estate investors, the premise of such a long and hard decline can only conjure up notions of great income producing deals and the opportunity for wealth building not seen in many years… that is of course unless this author got his way!

You have to get down to the fourth paragraph from the bottom to read that investors (speculators) and home owners may not be worthy of owning rental properties, but instead “non-profits” may be better suited to the job.

As a capitalist, this is enough for me to pop a gasket as it represents thinking that takes us one step further down the path where risk taking is punished and opportunities are provided to only the chosen few.

When I interviewed Josh several weeks ago we discussed the challenges presented by ever increasing pressure on our real estate businesses and profits by government organizations.  It is not hard to see how government is influenced with articles like this one.

What are you thoughts on both the referenced article and this subject in general?

Photo: naturesdawn

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Home Ownership Below 50%: Is it Possible?

The lower end of the market was hit first — and hardest — by the real estate crash; understandably so. People who are just squeezing by are naturally quick to default after a job loss, have little resources to draw upon as a cushion, and are presumably less likely to care about the negative credit consequences of walking away from an underwater mortgage. Yet, recent experience also suggests that the lower end properties were the first to bounce out of the slump, with the federal $8,000 tax credit offering a significant boost to the lower end market. Although the effectiveness of the tax credit was pretty much limited to that lower end market. (Naturally, once the price of a home gets into the mid six figures, the effect of a $8,000 credit diminishes — and the original tax credit had significant income limitations in any event.) Private investors snapping up cash flowing investment properties have also played a role in establishing the bottom, as have record low rates on conventional mortgages.

However, as the Wall Street Journal suggests, the second shoe may be getting ready to drop. The Journal points out that “30% of foreclosures in June [2009] involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago.” That is a fairly shocking increase. One reason identified by some pundits is the tendency of better-heeled homeowners to effect what is called “strategic default“: a business decision to walk away from an underwater property. Ironically, these are apparently more common in borrowers that had a high credit rating at the time of loan origination. But, as a commenter to the Journal article points out, strategic default is only one part of the equation; sometimes default is anything but stategic, even in the upper price ranges. Economic circumstances are forcing many defaults following job losses, particularly in the financial sector.

Nor can the effect of the credit crisis on higher priced homes be overlooked. As the financial crisis started, lenders suddenly got cold feet and began to fear non-conventional (and therefore, non-guaranteed) loans, bumping up rates and decreasing availability of jumbo and super-jumbo loans. Anything that could not be federally guaranteed became Kryptonite and the spread between conventional and jumbo rates jumped to record levels. Naturally, the number of high end homes sold plummeted — from 4.4% in 2007 to only 2.3% of the total market in 2009, according to the National Association of Realtors. All of these are not good omens for the high end — and many are now predicting that the crash will, like the Fresh Prince of Bel Air, migrate into the higher end neighborhoods.

On the other hand, not all signs are necessarily bleak. For one thing, most high-end purchasers tend to have a lot of their wealth tied up in the stock market. Since the stock market has rallied spectacularly this year, many people are feeling richer, even if they still have less than they had on paper at the peak. Indeed, even the New York Times has identified a new trend: bidding wars on well-priced upper end properties. How about 1.8 million for a two bedroom Manhattan apartment?

One things for sure:  if the second shoe drops, it will probably be something stylish and Italian, perhaps from Gucci or Bruno Magli.

Photo: Lachlan Hardy

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

High End Real Estate: Will The Second Shoe Drop?

This is where is gets interesting…like it hasn’t been already, right?

Now that the $8,000 first-time home buyer tax credit has been extended to loans that close by the end of June, 2010….and there has been an addition of a $6,500 credit for so-called “move-up buyers”-we wait to see what impact it will have on the housing market in the months ahead.

With unemployment still going up, will the tax credit make much of a dent and really help light a spark to juice up the economy?

All along, some critics have argued that the tax credit was used mostly by people who were in en economic position to buy homes anyway and that it really didn’t bring a hell of a lot of people into the tent. And, the Obama administration was not all that keen about extending and expanding the program anyway.

One analyst worries–as do many others–that when the credit eventually does come to an end, and mortgage rates rise, any budding real estate market recovery will take a nose dive.

“…the fear is that rates are going to go up strongly, so a lot of people are trying to get in the door now before that happens,” argues Milessa Cohn of The Manhattan Mortgage Company.

But, she continues, “…once rates begin to go back up and we lose the tax credit, that’s going to slow the real estate market down again,” she told Reuters.

Of course, that is always the problem when the government –or anyone else for that matter–artifically inflates and supports a market: what happens when the air goes out of the balloon?

It may not be pretty. Remember the last story with a balloon?

Photo Credit: Cimexus

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

The $8,000 Tax Credit Question: Are We Setting Ourselves Up For An Even Bigger Problem?

After having written my last several articles on current happenings in our market, I came away with the impression that I had become as bad as the regular media only focusing on the negative and never looking for the positive.  Overall, this negative crap just doesn’t work for me… but regrettably I acknowledge that it is not prudent to keep our head in the sand either!

With that in mind I am going to focus this article on an event that is positive news to those real estate investors who buy and sell into the homeowner market.

The Homebuyer Tax Credit Extension

For those readers who keep abreast of these things, and it better be all of you, you know what I am about to discuss – the recent extension of the Home Buyers Tax Credit.  The new bill was signed into law on November 6th and essentially extends and expands the program.  The details of the program can be found in the UPI story, How the New Homebuyers Tax Credit Works.

In keeping with my commitment to focus on the positives of this bill, I want to discuss how each of you, as real estate investors, can position yourself between now and May 1st 2010 to profit from this program.

I will start with this premise…

There is a predominant opinion, supported by sales data, that we’re in a buyers market.  Meaning, that at certain price points, buyers are willing to buy in this market and, in my opinion, they will continue to buy as long as interest rates and prices represent value and affordability.

So, how do you profit?

1. Find a great deal!  A great deal may be one that needs few repairs and can be purchased at 70% or less of comparable properties.  Or it may be a deal that needs more extensive repairs in which case you need to purchase it at less then 50% of the selling comparables.  Actually, I would be more comfortable with 40% or less as a purchase price.
2. Assuming it needs little in the way of repairs you can do what many investors are doing today and list and sell it immediately to a homeowner buyer.  
3. If the deal needs more work, you have the entire Winter to make the repairs. You’ll want to get it on the market in time for Spring, and under contract before the May 1st deadline.
4. If you are only in the position to wholesale deals, the Homebuyer Credit plays right into your hands because many rehabbers don’t have the time to look for quality deals.  And since it looks like homeowner buyers are going to be kept in the market as a result of the credit, you know rehabbers are going to be very active.

While I realize that this is just an overview, the bottom line is this.

The Government has just given us a huge gift… even if we are paying for it with our taxes.  Take advantage of it in every way that you can.

Photo Credit: aussiegall

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

How Can Real Estate Investors Profit from the Home Buyers Tax Credit Extension?

I cringe to even think of writing this post, peppered with politics, but we just had an election for a Governor here in Virginia and it raises a few points that I think investors (well any businessman or woman) should keep in mind. Don’t worry, we’re not talking party politics, but local political involvement.

Put simply: you should take politics into close consideration when you choose your markets and you should try to influence the policies of the government in the markets were you are already investing.

Local Government Events are Informative and Great for Networking

When you go to a town hall meeting, a good portion of the topics for discussion are real estate related. Planning and zoning meetings are nothing but real estate issues. You can gain some great insights about possible investing opportunities and/or early warnings of looming pitfalls.

You can also meet and see the best local real estate attorneys in action without paying for their time. You can meet developers, landlords, contractors, and all flavors of wealthy and influential people at these meetings. Go see and be seen in the thick of it all and good things will happen.

Like many things in this world, success in real estate is sometimes more dependent on who you know rather than what you know. I’m not talking about anything underhanded or seedy. I’m not talking about getting cozy with the councilmen. I’m talking about knowing a go-to lawyer who you are confident is familiar with local issues the very minute you need him. Or, having a well respected, reliable, local contractor in your Rolodex when a major development opportunity arises and your budding relationship with that local developer might also be handy. The biggest asset to real estate investing is being able to eliminate bad deals. Knowing the right people can help you zero in on the best deals and provide you with the confidence you need to move swiftly and competently to payday. Sometimes it’s not about knowing the answer it’s about knowing who to ask.

If You Don’t Try to Direct the Machine then You Just Might Get Run Over

Many critical decisions are made at town meetings. Think of it like an auction. If nobody shows up then somebody just might get a steal. If you’re not there, you might be the one that gets robbed.
You must consider local policies and politics when you decide to invest. Pick the towns and counties that are conducive to your type of investing and then do everything you can to ensure those local politics don’t turn against your business. Be present when decisions are being made.

So many issues are being decided right now by people with very little at stake in the arguments. It’s socially popular right now to stand up against the evil developer. During the real estate boom local governments were eager to get their cut of the action. A politician would be talking about affordable housing issues in one meeting and then raising impact fees on developers in another meeting, impact fees that contributed to the price bubble.

Impact fees¹ are a great example to help make my point. Land costs used to account for about 5-10% of the costs of a single family home construction project. Back then, cities would issue bonds to develop roads and sewer systems, knowing that the houses that were built would mean new residents and more property taxes. Those taxes from the new residents would then be used to pay back the bonds. Today, developers and or builders do all the roads and utilities themselves plus they are paying enormous impact fees and in some cases are being tagged to improve surrounding infrastructure. For example the developer might have to widen the highway that runs next to the new subdivision she is building to accommodate the additional traffic that the subdivision brings. However, it is very likely that that the road widening need is probably 10 years overdue. So now land costs make up 20-30% of the average single family home development project. And yet taxes did not go down in the same time frame.

How did local government manage to pass on such massive expenses to the private sector yet not save any money?
How does that happen? Well politicians don’t want to raise taxes. People take notice of that. But it is very politically popular to raise impact fees on evil developers. It’s a total win for current local residents. They get more money in their treasury to pay for those upgrades to the schools and police departments that are 10 years over due without raising taxes. Instead, the poor new residents (most likely young families just starting out) pay those impact fees when they buy their home, thereby covering the neglected costs of the past 10 years.

New construction prices drive the market. If builder costs go up $20,000, then they increase their sales price accordingly, and it trickles down. The current homeowners didn’t have to pay the additional taxes, and, instead, they actually get paid themselves because their home values increased. Then they retire, sell their home, and take that equity down to Florida to live on. It’s money right out of that young couples pockets who are now strapped to the max. It’s wealth taken right out of the community.

At the risk of seeming too political, I will say that it seems to me that building roads and sewers systems is pretty clearly a government function. More and more, however, local government is abdicating its natural responsibilities such as establishing infrastructure and focusing on other, more “petty” issues.

If You Won’t take the Time to Learn the Issues Then Forget Everything I just Said

No one has more at stake in a community than those who own the land on which the community is built. Everyone else can easily up and move. You are tied down to that community by your investment.

You (the investor) also have a unique perspective since you are in business. You have a realistic vision of the American business cycle. That alone puts you at least one step ahead of the average citizen or nosy neighbor who just might show up to a town hall meeting. However, if you’re not going to take the time to learn the real issues and you’re not going to set aside your prejudices and be open minded to the realities of the issues, then you will certainly just be wasting your time and could probably end up damaging your business rather than finding opportunity. You have to be willing to make a little commitment to the issues in order to be better off just staying home and watching the latest realty TV series.

¹ Impact fees are fee’s that are assessed to builders of new residence. The money is intended to pay for the additional burden to local infrastructure. For example, to add more classrooms to the local school because the subdivision will mean more children.

Photo Credit: theslowlane

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Grow Your Real Estate Network; Get Involved Locally

At first blush, these two seem like polar opposites. After all, what does the proposed health care bill being ballyhooed have to do with real estate investing?

I will readily admit I haven’t read the 1900 plus page bill but I have a friend who did. I won’t tell you about the number and size of emails he has sent me but suffice it to say, he has read it. For starters, the IRS is the agency that will enforce its mandates.

Real estate investors are forced to deal with this behemoth on at least an annual basis. Sometimes it is even fun, right? NOT!

If that is the case, imagine having your real estate transaction impacted because of this health bill. For those who say that is far fetched, stay tuned for three provisions that WILL kick you in the butt.

You see, this bill besides pork laden and lopsided is based on a lot of assumptions that will become law. Since the government has already steamrolled over the financial and auto industry and if this bill passes as proposed will roll over the health care industry, it stands to reason that real estate investment isn’t far behind. After all, REI is a cash cow.

THREE PAGES

These were extracted from the bill by my buddy. My comments on how they could impact real estate investing follow each section.

1. Employer Mandate Excise Tax (Page 275): If an employer does not pay 72.5 percent of a single employee’s health premium (65 percent of a family employee), the employer must pay an excise tax equal to 8 percent of average wages. Small employers (measured by payroll size) have smaller payroll tax rates of 0 percent (<$500,000), 2 percent ($500,000-$585,000), 4 percent ($585,000-$670,000), and 6 percent ($670,000-$750,000).

   Comment: If the D.C. bullies decide you as a real estate investor are an employer – the IRS can modify their current definition – you will have been hit by an 8% excise tax on every transaction. That would be $4000.00 deducted from each $50000.00 in sales profit. In other words, if you thought you’d walk out of escrow with a 50K check, you were wrong.

2. Surtax on Individuals and Small Businesses (Page 336): Imposes an income surtax of 5.4 percent on modified adjusted gross income (MAGI) over $500,000 ($1 million married filing jointly). MAGI adds back in the itemized deduction for margin loan interest. This would raise the top marginal tax rate in 2011 from 39.6 percent under current law to 45 percent—a new effective top rate.

   Comment: Another surtax. This one is lower but 5.4 percent of a big number is a big number. To collect, the government would make the escrow officer a tax collector. By the way, this probably doesn’t apply across the board. But, again, it could.

3. Individual Mandate Surtax (Page 296): If an individual fails to obtain qualifying coverage, he must pay an income surtax equal to the lesser of 2.5 percent of modified adjusted gross income (MAGI) or the average premium. MAGI adds back in the foreign earned income exclusion and municipal bond interest.

   Comment: Look at that, another tax and this is only three of the 1900 pages. Remember, the government is saying you HAVE TO have health insurance. Not a far stretch is requiring all real estate investors to have to have worker’s compensation or some other type of coverage.

IF YOU THINK

If you think any of this is far fetched, do some research on the original purpose of the social security number. It was NEVER to be used as a personal identification number. Honorable intentions didn’t stay honorable. Try getting phone or electric service today without giving up your SSN.

Am I an alarmist? Nope, I prefer to call myself a realist. The camel already has his nose under the tent and is trying to get his fat ass all the way in. That day isn’t far off and you and I will be paying for his room and board.

If you think this post has nothing to do with real estate investing, that’s OK. The government does and may already have yet unveiled plans to include you in their revenue grab.

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

The Health Care Bill and Real Estate Investors / Professionals

If there really is an economic recovery underway–no matter how weak–one sure thing that would kill it is a devastating collapse of the commercial real estate market.

And, I’m afraid, that is exactly what appears to be shaping up in the not very distant future.

A survey by the Real Estate Roundtable (which sounds like something out of the tales of King Arthur) reveals that executives “do not expect the U.S. commercial real estate market to emerge from critical condition any time soon,” according to a Reuters report.

It is not exactly news that the commercial real estate market has been going down the toilet for at least a couple of years. Still, it is disappointing to learn that this group of high powered execs is so down on the future health of this vital segment of the American economy.

Any suggestions on how to breathe new life into this dying market? Sure. Says the posting, “Policymakers need to restore credit availability…”

Really? Think that’s the problem? No or little available credit?

Guess you learn something everyday!

Photo Credit: rutlo

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

U.S. Commercial Real Estate At Death’s Door; Next Shoe Ready To Drop