If you are like me you have heard any number of pundits - TV talking heads, guru columnists, radio talk show hosts - give any number of dates - like next spring, 3rd Q 2010 - spewing as to when the “recovery” will begin. The actual date when the economy will begin to recover, according to me, is the day it actually begins to recover.

I probably should end this post right here but since I’m a windy type let me try to support my brilliant observation. For starters, it is no secret that the supply of unsold homes continues to bulge, foreclosures continue to rise and prices continue to fall. It is also no surprise that unemployment rates are rising.

The latest to announce layoffs is American Express. By July, AE will have laid off about 11,000 people. I would bet at least some of them own a home and are making monthly payments. I would also bet some of them will be entering that wonderful ga-ga land called foreclosure as a result of losing their job. Just a thought mind you.

Homebuilders Say…

Two homebuilders, Pulte Homes Inc. and Centex Corp., combined earlier this year and became the largest U.S. homebuilder. Being the biggest doesn’t always guarantee losses will go away and profits will continue. In fact, all it did for these two companies was narrow their quarterly losses. Unfortunately they continue to be battered by falling prices and a glut of unsold homes.

D.R. Horton Inc. is currently the industry’s No. 1 home builder. Guess what, DRH also reports its losses had shrunk, but like the aforementioned companies DRH said it still faces challenges from foreclosures, high inventory levels, tight homebuyer credit, low consumer confidence and job losses.

Do any of these factors sound familiar? They should. Given they are facts of life in this economy, how can anyone tell us the recovery will happen next spring, next summer or next anytime?

Truth is, they can’t. However, does that mean it won’t improve for you? Obviously not. But, in the big picture, most of us can see life as it is in our area. We know who is laying people off, who is downsizing as well as the size of the renter’s market, etc.

GM Strikes Locally

I don’t mean the union called a strike. I mean they are closing a dealership in Reno. The effect will be minimal as only 10 people will be looking for work. However, several of these people have insurance through our office so I know they are renters. When the dealership shutters its doors, these people will no longer be renters, insurance policy holders or consumers of services other than welfare services.

This might seem like a small matter but multiply it by God knows how many cities across the country. These same folks help keep the engine we call an economy running so the rest of us can have spendable dollars. In fact, one of the soon to be laid off, rents from a friend of mine. My friend knows it and admitted he won’t be able to fill the vacancy. Our rental vacancy rate is over 18%, and climbing.

Again, small potatoes but potatoes nonetheless. You probably recognize the size and shape of those potatoes because you keep up with your corner of the world. After all, if you are investing in real estate, you better be cognizant of your corner of the world.

To sum this all up, let me repeat my statement in the opening paragraph: The actual date when the economy will begin to recover, according to me, is the day it actually begins to recover.

Image by pixieclipx

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Tags: business, Centex, D. R. Horton, DR Horton, Pulte Homes, real estate

Many apartment buildings are now facing foreclosure because of falling prices, stricter underwriting guidelines and 5 year mortgages becoming due. For the astute buyer of apartment buildings these apartment building foreclosures could represent an investment windfall.

As a glaring symbol of the burst bubble in national residential real estate prices, the National Association of Realtors announced recently that a full 63% of homeowners in Las Vegas are now “underwater” in their mortgages. This simply means that they owe more than their property is currently worth. For many of these people, it simply makes no economic sense to continue paying for their mortgages when the underlying asset is no longer worth what they owe. This situation will probably lead to further foreclosures and further declines in real estate prices. As all eyes are currently watching the steep decline in residential real estate prices and rising foreclosures, the commercial side of real estate has hardly begun to realize the problems that may be looming on the horizon for many apartment building owners.

Homeowners in Las Vegas, for example, who are able to continue paying their mortgages may decide to hold on to their property for a few years and hope that real estate prices recover. They are able to make this decision because, presumably, they have 30 year mortgages. In contrast to residential mortgage holders, many investors in commercial real estate are holding on to 5 year mortgages. This means that they will be forced to refinance their properties when the notes become due and it couldn’t be happening at a worse time. Many apartment buildings rose in value right along side residential real estate prices and too many of these owners paid too much for their properties because they figured that as long as they were seeing a net profit every year from their rent collection then they had nothing to worry about.

Market Conditions Lead to Great Opportunity in Apartment Market

During the real estate investing frenzy apartment building buyers didn’t take into account the possibility that real estate prices would drop so precipitously is such a short period of time. Now, many apartment building owners are facing a dire situation. For example, let’s assume an apartment building investor purchased an apartment building in 2005 for 1 million dollars. He came out of pocket for $200,000 and he financed the purchase with a 5 year balloon note that becomes due on January 1, 2010. He financed 80% of the purchase price. In the last years, however, the market price of his apartment building has dropped 20%. It is now appraised by the bank as being worth $800,000. Unfortunately, when he goes to the bank to get a loan, the loan officer tells him that the bank has changed their underwriting guidelines and they are now only willing to finance 70% of the appraised value of the property. Now, he is only able to finance $560,000. The problem is that he still owes just around $800,000 on the property. The difference between $800,000 and $560,000 is $240,000. Unless the apartment building owner can come out of pocket to pay this additional $240,000 to the bank then he will eventually be forced into foreclosure. It is safe to assume that many apartment building owners will make the same choice that thousands of home owners have, to walk away from the mortgage and the property, chalking it off as a lesson learned.

For the first time buyer of apartment buildings, this could be a windfall in the making. There could be thousands of properties, in good condition, appearing on the market at rock bottom prices.

Tags: apartment building foreclosues, apartment building investing, apartment foreclosures, buy apartment buiding foreclosues, how to buy apartment building foreclosures, how tobuy apartment building, invest in apartment foreclsoures

As a young boy (way too many years ago) whenever I wanted something that was outrageously expensive my mother would say, “sure, I’ll go out back and pick some cash off of the money tree.” This was, of course, a variation of the adage that money doesn’t grow on trees. Ah, if only it did.

Unfortunately there are a whole lot of grown men and women who never outgrew that childhood misconception. Many of these irresponsible adults inhabit the various state capitols as well as that bastion of fiscal irresponsibility otherwise known as the United States Congress. Let’s not forget the shinning example of financial restraint residing at 1600 Pennsylvania Avenue. What were their mothers teaching them?

Lessons Learned

What conjured up these monetary thoughts from long ago? It was actually an article I was reading about the budget woes that California was facing. We all know that the economic downturn has affected all but a few state budgets. My own state, Nevada, is facing a shortfall of approximately $1 billion, which is nothing compared to California’s anticipated deficit of $15.4 billion. That number is already 18% of the budget and could grow to over $21 billion depending on the outcome of a special election on May 19^th.

It was the following quote that caught my attention:

“Sacramento is not Washington - we cannot print our own money. We can only spend what we have.” - Arnold Schwarzenegger, California Governor

What a concept! Only spend what we have, hmmm. It seems to imply that if he could print money he would. I hope nobody tells him that the Constitution does allow states and municipalities to have their own currency.

States are learning some valuable lessons that the Caped Crusaders of the Washington Beltway don’t seem to understand, you can’t spend money like a drunken sailor with impunity. Creating social programs ad nauseum will lead to problems when the revenue dries up. California and most other states are now faced with the prospect of cutting programs, worker layoffs and raising taxes. Exactly the opposite of what should be done during a recession.

Swampland Shenanigans

Unfortunately Washington can and does print money as needed. A recent report shows that the United States Government will borrow 46 cents for every dollar it spends in the next fiscal year. Imagine if your household did that, how long could you survive before you went bankrupt? At some point this house of cards has to come crashing down.

So how is this being handled? By spending more money of course. We’ve had the bank bailouts and the stimulus package. A budget deficit that was at one time projected to be an unprecedented $1 trillion is now expected to top $1.8 trillion. Obama’s proposed $3.6 trillion budget is using economic assumptions that call for the GDP to decline by 1.2% this year and actually grow by a fairly robust 3.2% next year. Most economists call these numbers pure fantasy. Now the President is pushing for a health care plan with an initial cost estimate of $1.5 trillion, any wagers on how much higher the actual bill will be?

But have no fear. Just as he promised during his campaign, President Obama has gone through the budget line-by-line in an effort to cut wasteful spending. He came up with a “whopping” $17 billion in cuts. That represents less than ½% of his proposed budget. To put it another way, it would be like having credit card debt of $10,000, reducing it by a “whopping” $46 and being ecstatic about the progress you’ve made.

  Another fine mess you’re gotten me into. - Stan Laurel (Laurel & Hardy)

Tags: California budget crisis, deficit, Obama spending plan

Secretary of Housing and Urban Development Sean Donovan was on Bloomberg this morning discussing the state of housing and the Obama Making Home Affordable Plan. There are some signs that the program is starting to work.”I think we have a good balance of carrots and sticks” said Donovan when asked about banks and servicers working together to modify mortgages for homeowners unable to make mortgage payments. Time will tell if indeed the plan is working. I can tell you that here in Arizona, one of the hardest hit areas, the numbers are starting to be not as dismal. Mark Tait, a principal in NXT Generation Real Estate shared some interesting numbers with me last week:

In the greater Phoenix Metro area:

• Year over year closing are up almost 4000 units.
• Inventory has dropped almost 9000 units since December, 2008.

“As a man on the street, I can tell you multiple offers are back and most REO properties.” said Tait, “$200k and below are going out at FULL PRICE.” Now does this mean that we have a bottom in housing? No, I don’t think we have hit bottom in terms of values yet, what I can say though is that activity is returning to the market–and that is the first step on a long road to stability.

Tags: housing, mortgage, real-estate-owned, residential, United States Secretary of Housing and Urban Development

I had been hearing a lot of talk lately about how home foreclosures were down. Real estate agents were pointing to this and saying that the market was going to turn around soon. Even the talking heads on the late night news were reporting that foreclosure filings were down and things were going to get better. Could we really have hit bottom?

Image via Wikipedia

Not so fast. This was just a case of spinning the facts to make them say what you wanted. What they didn’t tell you was that foreclosures had dropped because of a moratorium on new filings. Fannie Mae and Freddie Mac, along with many banks, had temporarily halted foreclosures while they waited to hear how the new administration was going to handle the crisis.

Hail Mary Falls Incomplete

However, the moratorium was recently lifted and that hoped for game saving touchdown pass fell to the ground. New foreclosures were up 24% in the first quarter from the previous year, so much for hitting bottom. When it became apparent that Obama’s plan was not going to be a miracle cure, the banks resumed taking properties back. In a press release Realty Trac’s CEO, James J. Saccacio, said “In the month of March we saw a record level of foreclosure activity - the number of households that received a foreclosure filing was more than 12 percent higher than the next highest month on record.” Clearly there was not going to be a fantastic comeback in this game.

The states hardest by foreclosures were, once again, Nevada, where one of every 27 homes received a filing, Arizona, California, Florida, Illinois and Michigan. This is a contest where being number one is not such a good thing.

Hype, Hope & Reality

The campaign trail hype and rhetoric has been replaced by harsh reality. This mess is not going away anytime soon. While Federal Reserve chairman, Ben Bernanke, sees “green shoots” and President Obama sees “glimmers of hope” in the economy, reality paints a much gloomier picture. While it is important for the President to remain optimistic, these foreclosure numbers are hardly a reason to be hopeful about any recovery in the near-term.

Nobel Prize winning economist and New York Times columnist, Paul Krugman, isn’t so hopeful. Despite being an unabashed Obama supporter, he is concerned that the administration could become complacent as a result of their own spin doctoring about these hopeful signs. In a recent column he says, “Don’t count your recoveries before they’re hatched.”

Even one of the worst economic times in our history, the Great Depression, had a number of false starts. When things are really bad people will look at any positive statistic as a sign of better days. Unfortunately many of these numbers are nothing more than the dead cat bouncing again. We may have a long way to go before this is over.

The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy. - Milton Friedman (economist)

Tags: Ben-Bernanke, Foreclosures, Great Depression, obama, Paul Krugman

Last week mortgage rates were exactly flat confirming my forecast that rates may not rise for the third week in a row. The week started off strong but ended with a whimper for 2 main reasons:

• Wells Fargo’s announcement of record $ 3 Billion in earnings
• Mike Mayo’s downgrade of the banking sector. Mike has a history of making accurate bank  predictions

This week there is plenty of good hard data for markets to sink their teeth into.

Tuesday, we’ll get a look at Retail Sales. Because consumer spending accounts for two-thirds of the economy, a lower-than-expected figure for Retail Sales would dampen Wall Street’s current optimism for the U.S. and that would likely lead mortgage rates lower.

Then, on Thursday, Housing Starts is released.

Housing Starts measures the number of new homes on which the nation’s builders broke ground last month. If starts are up, it may mean that builders are optimistic for housing — a good sign for the economy. However, if starts are down, it should help reduce housing inventory over the next few months — also a good sign for the economy. I know that sounds like a “heads I win-tails you lose”  statement, but both can be positive in the right light.

With many people–including myself seeing signs of a housing stabilization happening in some of the hardest hit markets, and all the incentives to purchase the spring buying season promises to be an interesting one!

(Image Courtesy of: Arizona Mortgage News)

Tags: investment banks, Wall-Street, wells fargo

A little bit of a different take on this week’s mortgage market data. Gotta change it up sometimes ya know?

Tags: Economy, mortgage, Mortgage Market, mortgage rates