The imminent failure of both Freddie Mac and Fannie Mae has already begun to have a detrimental impact on the larger US economy and the ability of home buyers to finance the purchase of a new home.

This is an unfortunate circumstance for many young families who may not be able to qualify for a mortgage to purchase their new home because of tighter bank underwriting guidelines. While this is a negative situation for young families looking for their own homes it could be a potential wind fall for the owners and operators of apartment building complexes across the United States. All of the people displaced by the housing bubble along with new populations of young people looking for housing will have to turn to rental properties for housing. The fact that more and more residential, single family homes are entering into foreclosure should also further diminish the available supply of rental units on the market.

When a home is in foreclosure or bank owned it can’t be rented and it sits as an empty, unavailable property. For example, on the residential street where I live in Fort Lauderdale there are 3 or 4 houses on one block that appear to be completely abandoned and in some stage of foreclosure or bank ownership. No one can rent these homes because they are bank owned and waiting for a buyer. Meanwhile the prices of homes in the neighborhood are still priced well above the ability for most working families to afford, especially considering the difficulty many are experiencing when searching for an affordable mortgage.

The obvious choice for many young families and those displaced from their homes because of foreclosure is to find a rental property to live in while saving money for the future purchase of a single family home. With the expected decline in available rental homes available on the market due to bank ownership many families and young people will be looking to apartment buildings for housing. This increase in the number of potential renters comes just at a time when the construction of multi-family buildings has begun to decline.

The decline in the construction of new apartment buildings is due to the fact that many banks and real estate financiers are cutting back on new construction projects nationwide. They are unwilling to take the risk of funding new construction during a time when residential real estate prices are dropping rapidly. According to the Associated Press, the “Standard & Poor’s/Case-Shiller U.S. National Home Price Index tumbled a record 15.4 percent during the quarter from the same period a year ago.”

It remains to be seen what impact the decline in availability of rental properties will have on the rental rates for major metropolitan areas.

If you're new here, you may want to subscribe to our RSS feed or sign up for our real estate social network. Thanks for visiting!

Tags: apartment building vacancies, apartment investing, Economy, fannie, Fannie & Freddie Mac Loans, freddie, freddie mac, rental vacancy

Homes sold–up 25.5%. Homes sold–up 17.1 % Homes sold–up 48.6%. Is this happening on Mars? In Russian invaded Georgia? In the Arctic? Would you believe this is happening in, of all places, Southern California!
Well, the figures, as they say, speak for themselves. Apparently, falling home prices over the past year are bringing about a pretty hefty increase in sales for most areas of SoCal, other than Los Angeles itself.

The number of homes sold in Riverside County this July compared with the year before jumped 48.6%;in Orange County, sales rose 17.1% and in San Diego County, the increase came in at 10.5 percent. In LA County, sales continued their downward slide–negative 3.2 %.

Starting to work?
Of course, in some ways, this should be expected. Lower home prices should bring more buyers into the marketplace. But this housing crisis is coupled with a severe credit crunch. So, the prices may be down, but fewer people can get a mortgage to take advantage of the situation.

And yet, some folks clearly are abe to take advantage of the lower prices–the median home price in Southern California last month was $348,000, down from $505,000 just one year ago–more than a 30% drop!

So, it’s over. Right?
Not so fast. The temptation might be to look at what is happening in California and conclude the housing crisis is now finally drawing to a close.

Don’t go there just yet,though.

The mortgage giants Fannie Mae and Freddie Mac are far from robust. To the contrary, an article in Barrons last weekend suggesting the government will have to bail out Mae and Mac after all –which would not go over well with the shareholder crowd–or the taxpayer–caused a dramatic reaction.

Fannie nosedived to a 19 year low and Freddie dropped to its lowest price in 17 years because of the report.

The health of both Fannie and Freddie —directly related to whether this housing crisis will end sooner or later. And, that is still up in the air.

Taking just one part of the country and trying to draw conclusions about the rest of the country would be an enormous mistake it seems to me. We need to see further evidence of increased housing sales, from different regions of the nation, before proclaiming victory.

Didn’t Bush do something like that a few years back with Iraq?

Tags: Economy, Foreclosures, housing, mortgage news, real estate news

Another one bites the dust…

A major Las Vegas construction project was halted last week.  The $4.8 billion Echelon Place development on the Las Vegas strip had been hailed as a sign that the city will survive the current economic woes.  Construction on the 87 acre project began in June 2007.  The developer, Boyd Gaming Inc., expects the construction to be halted for up to a year. 

The Project

The project includes four hotels totalling almost 5,000 rooms.  The plans also call for a 300,000 square foor shopping venue, 750,000 square foot convention center, 140,000 square foot casino, 4,000 seat theater and approximately 30 restaurants and bars.  It was a major piece in the development of the north strip area.

The shutdown has approximately 800 construction workers heading to the unemployment lines  Economic forecasts for Las Vegas had been pointing at 2009  as the year of recovery.  Echelon Place was prepared to hire 10,000 workers when it opened.  This would have provided a major spark to the local economy and helped to revive a stagnant housing market.

 While this is a major project, it is not the largest in the area.  The City Center project is slated to cost a staggering $9.2 billion and provide an even greater number of jobs in the area.  The developer of City Center, MGM Mirage and Dubai World, have had their share of problems but have, so far, managed to keep their project on track.

Credit Markets to Blame  

Boyd Gaming CEO, Keith Smith, had this to say: “It was a decision based on the economic climate for capital.  A lot has changed in the past year.  The financing is just not there.”  It certainly can’t be an easy decision to mothball a project of this size and scope.

While they claim to be halting the project for a year, it remains to be seen if and when it actually starts again.  There have been many projects in Las Vegas that never get off the ground for various reasons, but this one is halfway done. 

Las Vegas is a city that prides itself on fantasy and illusions.  As you travel the strip you can see the New York city skyline, pyramids of Egypt, a volcano, and the Eiffel Tower.  We now have a monument to the real estate bubble as a $4.8 billion construction project gathers dust.  

Man, I really like Vegas. - Elvis Presley

.

Last week I opened my big mouth and said I’d present another solution to the foreclosure problem we are facing today. Before I do, I happened across this law:

“every insolvency of a bank shall be deemed fraudulent, and the president and directors shall be severally punished by imprisonment and labor in the penitentiary . . . provided that the defendant . . . may repel the presumption of fraud by showing that the affairs of the bank have been fairly and legally administered, and generally with the same care and diligence, that agents receiving a commission for their services are required and bound by law to observe. . . .”

as I was researching information on bills of credit. I thought a few of you might like to see that law on the books today. I know I would. I bet the CEOs of IndyMac Bank, Countrywide, Freddie Mac, Fannie Mae and a few others would have done business a bit differently if this law actually existed and was enforced.

By the way, it did exist as Section 28, Art. XX, of the Georgia Banking Act [State Banking Act of 1919 (Acts Ga.1919, p. 219)]. I say did in the past tense because as you might guess, it has been watered down over the years by the courts. Today defaults and insolvencies are blamed on the borrowers and especially the sub prime borrowers.

But that is a different tale and I’m not marching down that avenue today. I posted the above because I thought you would like to see what life used to be like for irresponsible banksters.

Here is what life is like now for irresponsible banksters. It is a snippet from an online AP story of July 14, 2008:

Brian Bethune, chief U.S. financial economist at Global Insight, called the troubles at Fannie and Freddie a “potentially dangerous turn of events” for the U.S. economy. He said they needed to be addressed quickly with an infusion from the government — read “taxpayers” — of as much as $20 billion in new capital for both institutions.

Notice who the goat is in the second paragraph. You and me, laughingly called the taxpayer. The jokesters running these two scams draw not only their paychecks but bonuses. Every year they go before Congress and weep and whine about how tough they have it and Congress keeps letting them run barefoot through the treasury.

My solution for today is to have the U.S. Marshals do to the banksters what they do to organized crime bosses. Haul them away in handcuffs. I’m not totally heartless. I’d give them $300 to put on their books in the joint. That way they can at least visit the commissary once a month.

I don’t believe it will ever happen because it appears all of the marshals, US attorneys and the like are really cloned Mike Nifongs. But, I can still hope it will happen.

Tags: bankers, congress, default, foreclosure, Foreclosures, Mortgages, subprime

Here are some mighty strong words: “The subprime lending debacle has caused the greatest loss of wealth to people of color in modern U.S. history.” That is the conclusion of the lead author of a new report by United for a Fair Economy, Amaad Rivera, as quoted in an excellent article in the Christian Science Monitor.

The report, says the paper, also concludes that “Black/African-American borrowers will lose between $71 billion and $92 billion in the current foreclosure crisis…” Add another loss for Latino borrowers of another $75 billion to $98 billion, says the paper.

Why?

The paper reports that a little more than half of African-Americans and 4 in 10 Hispanics back in 2006 got subprime mortgage loans. And, as we all know, defaults on subprime loans were the spark that ignited this entire economic mess that now is taking down the banking system along with the real estate one.

When viewed in this light, it is apparent who is getting hit the hardest–as a group–by this awful downturn.

Says the paper, “There’s broad support on Capitol Hill for shoring up government-sponsored home-mortgage giants Fannie Mae and Freddie Mac: They’re too big to fail, many say. But there’s much less consensus over what to do about people who are losing their homes,especially in poor, inner-city neighborhoods–or even over how to understand their plight.”

I interviewed earlier today an African-American woman who is an example of this very issue: She holds down one full time and two part time jobs, works seven days a week, is a widow, is supporting a live-in 17 year old niece, and, this week, will probably lose the home she long lived in with her husband in a “mixed” neighborhood, as she puts it, of Southern California.

To listen to her story, is to listen to all the stories out there of those suffering the worst housing downturn since the Great Depression: The value of her home dropped by nearly $100 thousand over a year and a half period, she says. She had to refinance several times to pay the bills. She tried in vain to get help from her lender. She started falling behind on her monthly mortgage payments. She has lost this battle!

Of course there are many white Americans who are in the very same place as this woman–also in dire need of a helping hand from the government…from somebody!

But she represents more…she represents a tidal wave of economic destruction that is tearing about entire neighborhoods in this country. Places where people who may have started on a lower rung of the ladder bought into the American dream only to get ripped off by greedy lenders who cared less about reinforcing the matrix of a community than about selling the loan to some other agency, some foreign bank perhaps, in the form of a repackaged security.

When the woman in question tried to extract an ounce of empathy from her lender — a lender now, itself, under government scrutiny for its home loan practices, she was told it no longer owned her mortgage…months later, she still hasn’t been able to find out exactly who does!

And so, this week, she will put pen to paper and leave behind for good a place she once came home to every night to eat dinner with her husband; a place she once watched her now fully grown son mature; a place she once took pride in; a place she once thought she’d live in till the day she retires; a place that, within days, will no longer belong to her.

She will visit it from time to time now that she has moved into a nearby rental unit. She will pass by it in her car but not turn into its driveway. She will keep on going because the American dream has now passed her by. Some dreams just don’t happen twice.

Tags: foreclosure, lender, loan, mortgage, sub-prime, subprime

The Associated Press is reporting today that Wachovia Bank, the nation’s fourth largest bank in terms of assets, will be shutting down it’s mortgage lending division.

“Wachovia Corp. lost $8.86 billion in the second quarter, and said Tuesday it was slashing its dividend and cutting 6,350 jobs after losses tied to mortgages soared.” In addition, “late Monday, Wachovia announced plans to leave the wholesale mortgage lending business. And beginning Friday, the company will no longer offer mortgages through brokers, joining other lenders making similar moves to exit the troubled sector.”

Any guesses on who is next?

Tags: bank failure, foreclosure, lender, loan, mortgage, wachovia, wachovia bank

Hedging is the practice of risk mitigation for Wall Street investors and we in the real estate investment world could learn a thing or two from the boys in the power ties.

A good working definition of “hedging” to get started:

“An investment made in order to reduce the risk of adverse price movements in a security, by taking an offsetting position in a related security, such as an option or a short sale.”

As real estate investors we could “cover” the “adverse price movements”…loss of 30% of real estate prices…by taking an “offsetting position in a related security”…but how do we do that?

It’s easier than it sounds.

For example, August 2006, I knew (and so did you as a real estate investor paying attention to the market) we had hit the top for real estate values. I also knew in many markets the top was really a bubble top…the builders over built, the Fed over stimulated, and the mortgage industry over lent.

A burst was eminent….it was “baked into the cake”.

As a holder of real estate one would say a proper “hedge” would just be to sell. Take your profits off the table.

I say, “Hogwash”.

As a long term real estate investor, I’m in it for the monthly cash-flow. It was difficult and costly to acquire these holdings…so I’m not about to dump long term cash-flow for a 1 time payout.

Truly hedging the pending fall in real estate is better option. I want to make back $1 for $1 every lost dollar in real estate equity plus the money it takes to buy the offsetting position.

One perfect way I used were called LEAPS or Long-Term Equity Anticipation Securities. Think of them as 3 year options that you can get a 10-1 leverage. As you know you can option hoping the underlying security goes up - a call option. Or you can option hoping the underlying security goes down - a put option.

So I was looking for a real estate hedge…and I figured the bursting bubble would kill subprime mortgage companies like Novastar and home builders like Toll Brothers and others.

The Perfect Hedge: As real estate values dropped so would the stock price of these companies, so my “offsetting position in a related security” would go up if I shorted the mortgage and home builder stocks. The leverage of using LEAPS 3 year puts gave me all the time I needed from August 2006 to August 2009 to show a profit.

I did a few live seminars in Denver CO in November of 2006, showing folks just how to do this under the title, “How To Profit From the Coming Crash in Real Estate”.

In 3 sessions, I must have taught over 60 people. Most had come wanting to learn about foreclosure investing, most already had rentals…and most looked at me like I was an alien from outer space.

I still get emails 3 years later saying…”I should have listened”

Folks it’s not just good enough to make money from real estate. Sometimes you must use your knowledge to make money on real estate.

My hedge trades are up over 385%…many of the companies I shorted with LEAPS went from $60 a share to bankrupt. Those returns dwarf what small amounts of equity lost due to the real estate crisis.

Think about it…