“BOOM!  Here comes the BOOM….ready or not!” - from the song Boom by P.O.D.

Greetings from the Metropolis of Cedar Crest, New Mexico!

With a torn achillies tendon, I hobbled my way into the gym and turned up my Ipod.  The song Boom by P.O.D. (one of the best workout songs there is) came on and I started to tear it up…pain and all.   Pull ups, bench press, back rows……..Arrggh!

I hate working out…but I have a body type that if I do not workout I will ballon.  Bad memories of being called “fat tard” back in the sixth grade start to infiltrate my mind when I move up pant sizes.

Anyway…..

After my workout, I sat on a bench and listened to the song again…..and I started thinking real estate.  “Boom…here comes the Boom…ready or not!” The chorus continued to repeat itself in my mind..and I  thought long and hard about all the articles and books I have read in the past about what is to come in the Real Estate Market.  Unfortunately, the “boom” is not in regards to “good times”…but…bad times for most…and opportunistic times for the smart investor.

One thought that sticks in my mind is what I read in Harry S. Dent’s April 2008 newsletter “….due to the fact that we have three major concurrent bubbles - stocks, real estate, and commodities - all unwinding in a similar time frame within a global economy with very different demographic and bubble trends.  The last time all three major assets cycles peaked was the crash from 1835 to 1843, which led to the depression of the early 1840s”  (there is a lot more to the report….but this caught my eye and my simple mind).  Interesting huh?

“Obviously things are not going well.” - Captain Obvious

So….assuming things are going to get worse (which they are) and assuming real estate values you are going to plummet (which they are).  Also assume that gas prices go up (which they will) and the population starts to hoard it’s money (economics 101). One more thing….assume we are heading into what most experts agree…deflation.  Now the questions are….what is a real estate investor to do?  Is it too late?

What do the experts say?

Well… here are three schools of thought (there are hundreds more…but who would read all that?) that come from a range of so called experts (Harry S. Dent, Robert Kiyosaki, Nouriel Roubini,  Robert Prechter, and  John Williams) and they all have to do with the philosophy that “cash is king” (This is how I interpreted the information and by no means should you think that I interpreted the information correctly…do your own research please):

1. Raise as much cash as possible via LOC (lines of credit…if you can get one), HELOC (Home Equity Line of Credit…if you can get one)…then hold on.  Be a scavenger and cherry pick deals as they come up.  My feeling is you will not see the “cherries” until early next year.  Remember…when the market hits bottom…here is where you will make your money….on the purchase…and you will be ready if you have cash.
2. Sell everything….and hold on to your cash.  Same as number one…but with the thought that if you sell now, most experts believe you can buy it back at 40 - 50 cents on the dollar in the future.  Holy cow!
3. Sell your non-cash flowing properties (i.e. land) and under performing assets now (if you have a buyer).  Also sell your A and B properties.  Hold on to properties that serve lower income populations.  The thought process here is that class “C” apartments, mobile home parks, and retail shopping centers (retail that caters to lower income populations) will provide nice cash flow and probably over perform (if you purchased right) in the coming years.

Smart investors make their money in good markets and in bad ones……which one will you be?  Only time will tell.

OH…..I would love to hear what you are doing to prepare.  If you are not…I want to hear from you anyway..so please comment….

Until next time…..rob

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Tags: cash, cashflow cash flow, depression, Economy, finance, Harry S. Dent, heloc, investor, real estate, Real Estate Investing, recession

To just about no one’s surprise, the U.S. Congress failed to act on a foreclosure prevention measure before closing down for the long July 4th weekend. And, some think the Congress won’t do all that much once the weekend is over, either.

A New York Times estimate is some 55,000 more homes will be in foreclosure by next Monday! Amazing.

Mind you, the bill being considered by the Senate is far from a cure-all: It is voluntary, for one thing, and it would ask lenders to issue new mortgages at a reduced rate of 85 percent of the current price of the home.

By many accounts, then, even passage of this measure would be a drop in the bucket. But a drop is better than a drought anytime.

Could it get much worse? What are you kidding!

Yeah, it could get worse. In fact, it already has.

Evidence:

Since January 1st, stocks have lost $2.1 TRILLION. I don’t even know how many zeros that is?
Last month, the market suffered its biggest June loss since the Depression.

U.S. auto sales are now officially at a 15 year low and dropping.

Even Starbucks is buckling–announcing it will layoff up to 12,000 employees and close down 600 stores.

And, as amazing it may now seem, these are but a few of the latest ramifications of the the subprime mortgage crisis that ignited this global fire.

While there are more vacant homes on the market, credit is so damn tight that fewer and fewer people can afford them, even at such “bargin” prices. In fact, the interest rate on a 30 year fixed mortgage is actually up, making it that much more difficult for a buyer to — well, buy!

In the months ahead, economists fear that credit card debt will strangle more and more people who will then miss payments to the bank or not pay at all.

For some, the answer to this entire problem is a simple one: Fix the housing mess and everything else will fall into place.

But I am not convinced it will be as easy as that.

After all, while we like to talk about this crisis as having been sparked by the mortgage debacle, the truth is far more complex than that. Bank and lender greed, lax government oversight, suspect credit evaluations, dubious exotic investment vehicles–all these and more interacted to bring us to where we are today. No single fix, then, of any single component of this puzzle will solve it.

But you have to start somewhere, so it might as well be with the foreclosure mess. And that is why Congress must come back after the 4th with the pedal to the metal or else witness the further destruction of the global economy as we know—knew?—it.

Tags: Economy, foreclosure bill, Foreclosures, housing, housing law, recession, senate

In deciding whether to buy a home in a distant suburb, you may want to sit down and do some hard and honest calculating about the cost of gas for your commutes–a cost that is going up at the same time housing values are going down in many parts of the nation.

It is ironic, of course. Many moved to the burbs because they could afford homes there they could never have afforded in a major city. Only now, those people are taking a beating on two fronts: the shrinking value of their homes combined with the escalating costs of gasoline.

The California failure

Take California, where the mortgage mess/credit crunch has hit hard.

The Los Angeles Times reports new figures out showing home prices in Southern California falling off a cliff–down 27 percent in May from just a year ago. And, that’s an average. Many places in California are being hit even harder–with median prices falling 31, 42 and even 43 percent in the town of Victorville.

Meantime, the Times talks to one man who says he is now spending $400 more each month for gas that he did two years ago.

Even if gas prices decline slightly, the overall trend is upward. That means the cost of driving is, more than ever, an important part of the financial equation that must be looked at before deciding on that “cheaper” home in the suburbs.

If you are trying to sell your home in the suburbs, you may also be finding that there are fewer takers–not only because of the difficulty obtaining credit, but also because of the expense of commuting nowadays.

A bit of good news…maybe?

Many real estate investors and “experts” have argued that as prices continue to decline, bargain hunters will begin buying up all those cheaper houses.

For the most part, this has not happened yet on a grand scale because, while home prices may have fallen, being able to get a mortgage has become increasingly difficult, even for those with pretty good credit scores.

Yet, DataQuick tells the Times that in Riverside County, California–where the value of homes dropped almost 29 percent over a one year period, the “volume of homes sales in May of this year actually increased 4.1% from a year earlier…”

Worth keeping an eye on.

Tags: California foreclosure, Economy, Foreclosures, housing, lending, mortgage mess, Riverside County, Victorville

Everybody knows a recession is when your neighbor loses his job. A depression is when you lose your job. Apparently more of us are coming closer to depression than we would like to believe.

The data you are about to read is from the June 2008 edition of Collections & CREDIT RISK magazine. This particular magazine touts itself as the consumer & commercial credit authority. I’ve been a subscriber for several years and agree with their self assessment.

Some of the people and sources quoted in the article, Late with Their Mortgage Payments, Consumers Lose Faith in the Economy, have been quoted before so you might recognize their names.

RealtyTrac CEO James J. Saccacio is one of the people offering an opinion. On the topic of federal, state and local governments and community groups offering a helping hand to consumers he, in part, says, “stopgap measures could be simply deferring another flood of foreclosures which would mean extending the length of time required for the market to recover.”

My question would be does it really make a difference if these entities attempt to help. By their own admission (in this article) the industry says loan workouts are far and few between. If the industry says it isn’t willing to work with the borrowers, what difference, in actuality, does it make if stopgap measures are utilized to halt the flood of foreclosures?

Another quoted source is TransUnion. I would think they know a thing or two about delinquencies and can paint a picture of the nation as a whole, at least credit wise. They say the mortgage borrower delinquency rate – people 60 or more days late with their mortgage payment - is expected to rise throughout 2008 to 4.0% up from 2.9%.

If their quoted figures of 15 million adults getting calls from collectors is true, I would believe this information has relevance. After all, 1.1% is a staggering rise in a short of period of time.

Experian Consumer Direct did a survey and found “the number of severely delinquent mortgage accounts grew 15% between February 2007 and February 2008.” They did not define severely but I have to believe it is people who are a minimum of 90 days late and are about to receive a Notice of Defualt.

Maybe the most telling remark made in this article is by Theodore Iacobuzio, managing director and practice leader for TowerGroup. He said, “No one doubts the seriousness of the current credit crisis, but it’s noteworthy that the largest financial institutions are more likely than others to characterize its impact as severe or worse.”

Compare that quoted remark with what we’ve been hearing from some of TV’s talking heads and the White House. Maybe, just maybe, the most relevant information sits with those inside the industry who have the capacity to look at the macro credit picture.

Maybe, just maybe, we should be hearing more from them and less from the bleached blond bauble heads masquerading as “news” reporters. Then, maybe not…

Tags: consumers, Credit, default, Economy, Foreclosures, housing, inflation, loans, realtytrac

I’m like everyone else. All I can do is take what I’ve been taught couple it with my experiences and what I’ve learned to make what to me appears to be an informed decision.

Therein lies the rub at least as far as this real estate debacle is concerned. I look at the foreclosure filings in my county and see they are up. I read articles that tell me other areas, with few exceptions, are also experiencing an uptick in foreclosure filings.

I combine the two pieces of information and come to the conclusion the foreclosure mess will be with us for the remainder of 2008 and likely throughout 2009. I also deduce, maybe incorrectly, that the turn around won’t happen until 2010, if then.

On the other hand, I also read articles that tell me this mess will bottom out in 2009. One of the reasons stated is that people are staying away from the real estate market today because they don’t want to buy an asset that might lose value right away.

Wouldn’t it stand to reason that if the mess isn’t predicted to turn around until 2009 anything you buy today will lose value? And if it doesn’t turn around, won’t you continue to lose value?

In fact, if I am right and this thing doesn’t turn around until 2010, today’s buyers will be in the same position their predecessors were in, i.e. owing more than the asset is worth. What is to prevent them from walking away? Does this mean the “turn around” will only be two or three months in duration?

I also factor the rising costs of such things as gas prices, groceries, utility bills, clothes and other life mainstays into the paradigm and for the life of me can not see how anyone can say, with a straight face, 2009 is the bottoming out year.

Let’s not forget that big brother is pumping tons of cash into the economy at break neck speed. For the economists in the audience, you already know this is inflation. For the rest of us, it is still called inflation.

Inflation is nothing more than robbing the citizens of their wealth and transferring that wealth to the government. There are many good sites that explain the principle more eloquently than I could so if you want to learn the mechanics, please visit one of them.

If what I said is true, this spiral can only continue one way. Again, if that is true, ALL of us will be living in homes worth far less than they were yesterday and indeed may even be worth less than their current mortgage balance. Heck, they may be worth even less than what we paid for them ten years ago. How about that for a kick in the pants?

Mind you, this won’t be because we were bad borrowers or because we didn’t obey the laws of economics or finance. We did but the 800 pound gorilla didn’t. Is there an answer?

If you weren’t born yesterday, you know there is an answer. You also know the answer is to change the players and not the game. The game was working just fine and sustained both people and economic growth in an orderly manner.

The players who need to be changed are the regulators. At least I think that is the first crew who should be sent to Exile Island. It is these guys who took the reins off sensible lending practices and looked the other way when every Tom, Dick and Harry in the lending business wrote their own rules instead of following established guidelines.

Rather than make this a 5 page post, I’ll stop here and ask that you to tell me what you believe is/are the answer(s).

Read PART II of this Post.

Tags: home value, homes, house values, property valuations, real estate, real estate values

Just Surfing for Foreclosure Information

As I was surfing the Net looking for foreclosure information, I stumbled across a study titled:

HOUSING POLICY DEBATE VOLUME 17 ISSUE 1
NOTE: The study is copyrighted by the Fannie Mae Foundation.

One of the co-authors, Geoff Smith, is a vice president at the Woodstock Institute, a policy group in Chicago. This study was conducted in Chicago between 1998 and 1999.

Foreclosure Study Findings

The study found that each foreclosure within an eighth of a mile of a single-family home results in a 0.9% decline in the home’s value. Smith is of the opinion that “If you were to replicate that study now, you’d probably find a bigger impact because there are more foreclosures and they’re bringing down the housing market overall.”

Since I am only familiar with the real estate market in a small geographic area, my first inclination is to agree with him. After all, foreclosed homes often fall victim to neglect and vandalism and what seems like a faster deterioration process. This has the inherent effect of dragging down the neighborhood.

Add the competition factor and I believe you have a formula that puts the decline figure into the 1 plus % range. Where it might have been 0.9%, it is now 1.7% to 1.9%.

Mind you, this is just one factor in the overall picture but given the numbers are large, it seems to be an important factor. If I am correct and it is 1.9% that means a house valued at $300,000 would decline $5700 on a straight line basis.

If this is a compounding number, the second year causes another 1.9% decline. I’ll assume the current real estate decline will be of only a two year duration. That may ease some of the sting in these declining numbers.

I put this (dated) study on the table to get some discussion about the relevance of its conclusion in today’s environment as well as to hear the actual experience in other parts of Foreclosure USA.

We all know foreclosures effect value. Calculating a precise percentage may be difficult but it is doable as the study proved. It would seem to me if we are investing in this market we would want to know as much as we can about price factors.

Tags: Economy, foreclosure, Foreclosures, home, house, housing, vacant home, vandalism

I read several posts lately about the dire nature of the real estate market with questions about whether now is a good time to invest based on the “badness” of the market. These are sensible warnings and no one can be faulted for calling a spade a spade. However, the assumption that someone is in denial if they claim now is a good time to invest might be a little too sweeping as generalizations go.

I agree that anyone who has his head in the sand and is pretending all is well is treading on a thin mindset, but there is something else to consider. The market is what it is. In a way, an investor’s impetus to invest is outside comparative market analysis, except in the sense of predicting time frames for turnarounds. In other words, an investor’s main concern is not if the market is up or down, but rather does a particular investment make sense in the context of where the market is and the future prospect of where the market might go.

Hardly anyone will ever time the market perfectly, and it’s not necessary. The main thing is to take each investment and judge by it by numbers. Right now may be the best time to buy if the numbers work and if your prediction of turnaround time is fairly accurate. Of course no one knows if the market will get drastically worse, but when the market is good no one knows if the market will get drastically better, so we take chances that extremes will be avoided. There is risk involved in investing.

Investors are a different breed who live by risks. An investor weighs risks in an up market just as he weighs risks in a down market. The risk in a down market is that the market will continue downward further than expected, so getting the best price and establishing cash flow are important. If you decide to buy in a down market, you are betting the market will not go down further (or much further) than the price reduction you negotiate and that the cash flow will help offset what further downward movement there is until the market turns upward again. In an up market price is still important although you may have to pay closer to asking price, but you are betting the market will continue to rise until you get to a point where you can sell for a profit.

If interest rates are following the heat then rates should be lower in a down market and higher in an over-heated market - this is if we are going by rational actions. But whatever may be the case, an investor need only judge by how the market IS, not by its “goodness” or “badness”.

If you have judged this market for what it IS and looked at the numbers that have to materialize for the investment to make sense, then now is as good a time as any to invest. It’s a matter of knowing your market and predicting the future fairly well. If you are in a market where the economy is diverse and the only thing holding it back is a national slowdown, then it’s pretty safe to say your market will rebound and probably won’t sink into oblivion.

At any given time markets are in flux, but you should be able to predict fairly well if nothing major has changed locally. If you are trying to time the market and waiting for a bell to signal the absolute bottom, you will most likely miss it because there are no bells, just investment judgment.

This is what investing is about. This is what separates investors from normal buyers who buy when they think every is good and is going to get better. It will take more number crunching and you have to use discipline to stick with a plan of action, but if you’ve made a plan based on the numbers that have to make sense, then the rest is the risk an investor takes.

This may not make sense to some people, but it does to me.

Tags: investing in an up or down market, Investment risks, real estate, real estate investing, real estate timing