Government efforts to stimulate the economy and prevent the recession from being as deep as it could have been have met with mixed results and that’s not a big surprise. When you spend $787 Billion on so many different programs you will have some that work, others that are so-so and some that are complete flops.

One popular program has been the $8,000 tax credit for first-time homebuyers. This is a program that made a lot of sense in that the real estate market has borne the brunt of the pain in the downturn. A program that helps to revive that sector of the economy, despite its flaws, has to help. Although it is due to expire in a month, there is a push to extend it in some form.　

Cash for Duffers?

The auto industry is another that has suffered greatly. Manufactures, parts suppliers, dealerships and their employees have suffered a lot of pain. The city of Detroit is experiencing the nation’s highest unemployment rate in large part because of job losses at automotive manufacturing plants. That was the driving force behind the creation of the Cash for Clunkers program. Whether you liked the program or not, it did stimulate sales in that sector for a short time.

Apparently the Government must have felt that golfers needed a stimulus of their own. I first noticed newspaper display ads for electric golf carts popping up a few weeks ago. What caught my eye was the mention of a Federal Tax Credit of up to $5,500. The ad stated that you could purchase an $8,000 golf cart for less than $2,700 after the credit. Is this supposed to somehow stimulate the economy?

It gets worse, or better, depending on how you look at it. Some states offer a tax credit in addition to the Federal one, which can essentially make the golf cart entirely free. An online search revealed that Oklahoma is one of the states (article). Apparently the IRS, in its infinite wisdom, not only ruled that golf carts qualify as electric vehicles and are eligible for the credit (article), they also declared that there is no limit to the number of carts an individual can buy.

A New Strategy

So why invest in real estate with all its inherent headaches and risk? Instead buy golf carts. When the Federal program ends you can turn around and sell the carts at prices below what dealers can offer. If you live in a state that provides a credit that makes the cart free whatever you sell the cart for is pure profit. That seems a lot less risky than flipping real estate.

Of course, if enough people employ this strategy many golf cart dealers will be driven out of business because they can’t compete. Another Government program and its unintended consequences, what a beautiful thing!

Democracy is the art and science of running the circus from the monkey cage. – H.L. Mencken

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

Real Estate, The Stimulus And…Golf Carts?

The White House keeps telling us that we’re in a recovery, yet anyone watching the economy, housing, foreclosures, unemployment, the stock market, commercial real estate, and dozens of other factors will tell you that they have some rose colored glasses glued on. Of course, if they didn’t, what they would tell us is that things are bad – getting worse – and they don’t know what they are going to do about it.

With that in mind, the commerce department announced today “that sales fell 3.6 percent to a seasonally adjusted annual rate of 402,000 from a downwardly revised 417,000 in August.”

It was the first decline since March. Sales in September were off 7.8 percent from a year ago. Despite the surprising decline, the market is up 22 percent from the bottom in January, though down more than 70 percent from the peak in July 2005. The median sales price of $204,800 was off 9.1 percent from $225,200 a year earlier, but up 2.5 percent from August’s $199,900.

Many blame the coming end (maybe?) of the $8,000 new home buyer tax credit for the decline, but that is just a simplistic explanation. As I mentioned previously, there are a plethora of factors that are at the core of our housing slowdown. Until we see a solution to these, no gift to new home buyers, no matter how big (and a big thanks to the government for considering that folks who already own a home might be able to stimulate things with a credit as well – NOT) , will stop the market from the troubles it is facing.

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

New Home Sales fall 3.6% for September, First Decline Since March

In my previous posting with the VERY long headline the other day, I challenged any and all to contradict me when I —and a Congressional oversight committee—concluded that the Obama administration’s attempt, thus far, to gain meaningful mortgage modifications has totally flopped.

In even less time than I thought would be the case, I have been proven sadly right: A new RealtyTrac report just out says that foreclosures are up a full 5 percent from summer to this fall…..meaning almost 940 thousand properties were impacted….

And, in case you’re not counting (and who is??? anyone??????) RealtyTrac says that puts the number of foreclosure postings at about 3.5 million by the time the year is out, compared to 2.3 million a year ago. CNN is even reporting the headline, “Foreclosures: ‘Worst three months of all time’

As an Associated Press report points out, “unemployment is the main reason homeowners are falling into trouble.” God, what would we do without the keen insights of the A.P.?

And, what of the government’s program of foreclosure modification? Easier to find a brain inside of Paris Hilton’s head!

As I said in my last post—quoting from a newly released Congressional report–the fact is the banks have all but ignored the entire modification thing, opting , for the most part, to continue taking in all sorts of fees for late monthly payments rather than reducing the principal owed to make it easier for folks to stay in their homes and maybe one day actually pay off the mortgage…which is supposed to be the idea. Right?

Only a week ago, you may recall, Obama claimed the mortgage relief effort is working! Yeah, and I think I found that brain inside of Paris Hilton’s head.

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

Foreclosures Jump 5 Percent From Summer; Government Effort To Curtail Foreclosures Sinks Like Lead Duplex

Where have we seen this before? A major backer of home mortgages may need a bailout. Oh yeah, that was right here. Wasn’t it only a year ago that Fannie Mae and Freddie Mac needed a bailout to save them from themselves? They had so many bad loans on the books because of lax rules and loose oversight.

Now it seems that the Federal Housing Administration (FHA) is in trouble. According to an article in the New York Times (article) 20% of loans insured last year and another 24% of those from 2007, are in serious trouble.

Didn’t They Learn?

Banks all across the country have tightened lending standards requiring that the borrowers actually have the ability to repay. Imagine that! It seems that just throwing money at anyone who can fog a mirror is not good business. While people complain about how tough it is to get a loan now, they are better off in the long term.

Why hasn’t the FHA figured this out? Yes it is a good idea to stimulate the economy by helping people buy homes. But what’s the point if the house winds up in foreclosure a short time later? That just makes the problem worse in the long run.

The FHA is currently insuring a whopping 6,000 loans a day! If the numbers hold that means they are insuring 1,200 bad loans a day or more than 300,000 bad loans a year. How exactly is this helping the economy?

Return to Sanity

I’m all for helping people achieve the American Dream of owning a home. However, it needs to be done in a responsible manner or we’re all going to suffer just as we have been. The housing bubble was caused in large part by speculation that was fueled by easy money and excessive borrowing. Trying to fix the problem by repeating the mistakes that caused it is like trying to borrow your way out of debt. Oh wait a minute, that’s what the Government’s been trying to do – my bad.

This may be a radical thought in this age of entitlement but – people who can’t afford a loan shouldn’t get one!

A government that robs Peter to pay Paul can always depend on the support of Paul. – George Bernard Shaw

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

Déjà vu All Over Again In The Mortgage World

Has the real estate market bottomed?  No, nope, not a chance.  We are through 1 of 3 storms and have a crippled economy and really high unemployment.  The good news is that we are through the worst.  With terrible times come tremendous opportunities.  After the last up cycle where everything went way higher then it should have, this had to happen.  It is inevitable.  If you are like me, you see the next 3-5 years as the opportunity of a lifetime.  Here is why.

 Storm 1 – We have survived the 1^st wave of foreclosures.  Properties in some areas dropped 40% and the inevitable correction has begun.

 Storm 2 – A 2^nd wave of foreclosures is on it’s way and will do the same.  Only now home values are already much lower so drastic home value declines are unlikely.  This will however impact home values negatively and keep them down for some time, hopefully a plateau for a few years.  This chart shows that delinquent mortgages are much higher in 2009 then in 2008 and the previous 3 years.

 Storm 3 – The interest rate hike.  It is coming.  The Fed will eventually raise rates to fend off inflation.  This will increase mortgage payments, decrease cash flow, operations and returns and people will not be able to afford as much home with the higher payments.  Result?  A negative impact on home values.

 You can look at this outlook as depressing or exciting.  I strongly advise the later.  The next 3-5 years there are going to be tons of distressed properties and opportunities to cherry pick from.  In 30 years we will look back and say “Remember when we could buy property for nothing.”  Will that time is the next 3-5 years.  So savvy investors get ready.  We are through the worst part, now get out there and make it happen!

For those of you who want to see it broken down by State, here you go.

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

Where is the real estate market going?

I was listening to a financial talk show on the radio the other day; the host was going nuts over an upcoming Treasury auction where over $140 Billion in 2, 5, and 7 year notes were going to be auctioned. This would represent the most auctioned at one time ever, and would be on top of $60+ Billion in notes auctioned the week before.

This got me to thinking about how much debt was out there and ultimately where current mortgage rates were and what direction they were headed in.  Here is what I found… 

The State of Debt

In my search I ran across this very sobering set of statistics about who holds the most US debt… take a look at the data, and if you’re not concerned about where interest rates and inflation are heading, then you must be asleep.

Scary, scary stuff… and as one of the comments indicates; that last $4.75 Trillion is the Treasury printing money, buying its notes with the funny money and putting the funny money into the system. That ’s called monetizing your debt — just like borrowing from your credit card.  We know it didn’t work for consumers… surely the Government is smarter that a bunch of uneducated consumers?  NOT!

OK… what does all of this have to do with mortgage interest rates?  Perhaps a lot.

The Impact on Mortgage Interest Rates

With all of these notes selling, I was extremely surprised to see that mortgage rates have been dropping from their summer highs of over 5.5% and are now hovering around 5%. And, many are predicting that these rates may hit historical lows by the end of the year.  This really is great short term news, as it means home buyers are getting a double assist when purchasing a home today — low mortgage rates, mostly backed by the FHA, and the $8,000 first time homebuyer tax credit.

However, due to the high level of Treasury sales, most reasonable people would see that in order to get investors to continue to buy these bonds the yield is going to have to be increased, and the Fed may just have the answer.  Assuming their appetite for funds doesn’t get in the way, the Fed plans to stop buying 10 year notes.  If they in fact do this, they will remove themselves from the equation and the yield curve should start to trend upward from its current 3.5% position.

Since mortgage rates track to the yield curve and are usually separated by 1.5 basis points (mortgage rates higher then yield) in spite of what others may be predicting, we can expect mortgage rates to head higher and probably top the 6% mark later this year.

Will it happen?

While I am not a betting man… I can’t find a scenario where mortgage interest rates can stay at their current level. Plan accordingly.

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

Mortgage Interest Rates: Where Are They Heading?

There are a multitude of economic indicators to use as a barometer of the economy. Many are extremely complex, while others are fairly simple. One of the more unusual ones actually seems to make a lot of sense. Look at your underwear drawer!

I was recently reading an article in the Washington Post (article) and assumed that it must have been a slow news day. The reporter was talking about how consumer confidence can be gauged by the underwear you keep. It seems that there is even a Men’s Underwear Index (MUI), and former Federal Reserve Chairman Alan Greenspan sees it as a credible means of tracking consumer sentiment.

Replenishment Item

The theory behind the index is that men will replace their underwear as it wears out. However, when times are tough they will wait longer than usual before purchasing a replacement. So when money is tight the sales of boxers and briefs are in the toilet. When people feel better about the economy again you will see the sales rise.

 When you think about it, it makes total sense. It’s a theory that can be applied to other items as well. Watch the sales of anything that is semi-discretionary and you will likely find that it mirrors the state of the economy.

Look for Signs

There are certain things that people have to buy regardless of how the economy is doing. We all need to eat, our cars need gas, people have to have shelter. It’s the little things that show the true state of things. Are people buying regular coffee instead of the fancy latte? Are they buying store brands instead the national names? Shopping at discount outlets instead of major department stores?

 While this may seem obvious, the change happens gradually. By tracking such an index, such as the MUI, you can spot these changes before they are obvious to all. It can help you stay ahead of the curve in the investment game rather than just being a follower.

So look in that underwear drawer, are your briefs full of holes? If so, the economy probably is too!

I don’t believe in the after life, although I am bringing a change of underwear. – Woody Allen

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

How’s the Economy? Check Your Underwear