The U.S. government plans to lend an addition $800 Billion to help ease the current economic crisis. According to Edmund Andrews of the New York Times, the government has already pledged close to $7.8 trillion dollars in financial obligations this past year alone. The additional $600 billion allocated to purchases of debt for Fannie and Freddie seems like a mere pittance. Several analysts feel that this will help increase liquidity, as the 30-year fixed-rate mortgages fell almost an entire point.

THE GOVERNMENT HAS ACCESS TO DATA NO ONE ELSE HAS

I have faith in that they will make the best decisions with the tools available to them, but understand that there is a great deal of uncertainty involved. Even the most powerful nation on earth can not effectively manipulate market forces with a high degree of certainty. Some investors will greet this news with optimism while skeptics will point to further fundamental weakness in our economy. Whichever side of the fence you are on, you must explicitly take into consideration changes in policy, uncertainty, and risk in making informed investment decisions

Though it is impossible to forecast financial events with absolute certainty, it is important to realize that it is the anticipation of certain events and the expectation of various rates of return that will determine the present value of investments and income producing property. As expectations change, so does the investment value.

RISK MEASURES

Investors often use probabilistic and non-deterministic methods of analysis, depending on the situation and data available. One approach could include developing an expected cash flow and a standard deviation measure for each year, establishing probabilities of error, and investigating perfectly correlated, partially correlated, and uncorrelated cash flows.

Sensitivity analysis investigating how influential certain forecasts (rent, expenses, taxation etc) affect present value is often quite useful and easier to compute. Establishing different investment values under optimistic, probable, and pessimistic scenarios is quite effective as well. On the other scale of difficulty, if you have sufficient data, you could run Monte Carlo simulations which could help quantify risk in quantitative terms.

I would love to hear from our readers whether they incorporate changes in risk in their decision models and what approach they use. Though it’s easy to become overwhelmed with all the economic data and volatility in the market, there are plenty of analytical tools from the financial world that could greatly help Real Estate investors understand their investments.

Photo Credit: Mike Licht, NotionsCapital.com

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Tags: bailout, real estate investor, volatility

It is actually getting hard keeping track of just how much money the government’s various bailout initiatives add up to. An Associated Press report says “total bailout commitments, loans and pledges of backing neared a staggering $7 trillion.”

Of course, much of this is “money” that may never get spent, or will be returned to the government when it sells shares of stocks it has received to bailout many banks or lending institutions. But a lot of that money, of course, will probably never be seen again by human eyes.

The latest is a massive program the purpose of which is to free up credit. That was tried before; but this time the government is sort of saying “we mean it.”

And, perhaps it does.

The part that relates directly to real estate is this: The Fed is going to spent $500 billion to buy mortgage-backed securities. But it is only going to buy the ones backed by Fannie Mae and Freddie Mac, which means not the subprime ones that seemingly ignited this financial fire more than a year and a half ago.

Another $100 billion goes to buy mortgages currently held by the mortgage giants, says the A.P.

Not everyone thinks all this is a good idea.

I’ve talked to a few investment experts the last couple of days and some say , though painful, it would actually be best to let home prices sink more rather than keeping them inflated with an infusion of taxpayers’ money. They argue that this will only set up a vicious cycle and we will find ourselves right back where we started from not too far down the road.

Of course, no one really knows what will happen next, least of all the federal government.

Barack Obama has assembled his financial team–he is seeking continuity. But is that such a good idea? Many of the people the President-elect has tapped were involved in the months long bailout effort, much of which has not worked outright or backfired and made matters worse.

Hardly an encouraging reference I’d say!!

Tags: bailout, banks, barack obama, Economy, paulson, subprime

I love real estate as an investment class, but I must say, I do know of other investments that from time to time hold better returns than rental real estate.

Whoa! Hold on, mister!

I know…blasphemy! Talking about real estate’s downfall’s as an investment class can get one lynched over here…so I”ll tread lightly and prove my point.

Right now with all the government involvement, nobody knows where the real estate market is headed…at least not with enough predictability to make financial decisions that are significantly better than simple “guesses”.

Not so a year ago….back then I absolutely knew housing pricing were dropping and would drop at least another 25% in my area. I could plan investment strategies knowing this. But not now. The government has so deeply entrenched itself into the banking arena, I have no clue what banks will do with their mounting foreclosure portfolios.

Will the borrowers get “bailout” money from the Feds? If so, then the banks just need to wait. This waiting will kill the current “short sale” market…the only existing home sale market in many California areas which is responsible for setting new lower prices for entire neighborhoods.

This is really disheartening…as a real estate investor, I wish the Feds would get their fingers out of the banking system, and quit trying to “save” the real estate market. The only thing that will save the real estate market, much like what is said about alcoholics, is hitting bottom.

“Hitting Bottom”…it’s an ugly term.

It reminds us, we can get collectively “drunk” and take the real estate market with us on some symbiotic roller coaster ride to the dark side where the party can kill. This is where we meet the Wall Street MBS investors who sacrificed intelligent underwriting for greed, who get us started with a few tequila shooters on an empty stomach before sending us to meet the Life of the Party, Fannie and Freddie! Those two kept us plied with drinks until the wee hours of the morning.

But the morning comes whether we like it or not…and lying beside us…the ugliest borrower ever! Coyote Ugly…if you know what I mean. Waking up next to a mortgage “date” that has no income, or credit, or looks or body…and who once awake, claims “you forced the loan”….when in reality the exact opposite was true…screams, “I’ve hit bottom”. You know you’ve hit bottom when all you want to do is take a shower and start over.

But in the name of “helping”, the Feds step in and deny you that shower and the ability to start over. They talk about rehab, second chances, bailouts, and regulation instead of the more effective “going broke”, “losing your house”, and “filled with shame” self-regulation that should rule the day.

Instead of hitting bottom, we’re left to hang in limbo - shame intact - waiting for the now much more distant day this will all be over.

And that’s why I think investing any further in the real estate market is too risky!

Next week, I’ll tell you my perfect investment that mimics many of the pluses of the “old” real estate market and is the right investment vehicle for these uncertain times…

Stay tuned…

Photo Credit: danflo

Tags: bailout, foreclosure, housing bailout, real estate investing

Zillow published a report today showing in fast relief just how out of touch the average home owner is when it comes to evaluating their own homes value.

Zillow’s survey says that half of home owners think their homes are worth the same as they were a year ago. 32 percent believe their home went up in value and 17 percent feel their home decreased in value.

Compare this to the reality that about 75% of all homes lost value since last year…we see just how delusional home owners really are.

It’s hard for me to fathom how the American public with hour after hour of news coverage on the real estate crisis, could still be so colossally blind to the truth.

Are they burned out…are they sticking their heads in the sand?

Is it too much to take to recognize the house you paid $400,000 three years ago is really worth only $200,000 today?

It just so happened a few minutes before reading the Zillow survey, I’d heard a pundit on CNBC say, “All across the US, the only real estate market is the foreclosure market”…meaining the only sales being executed were those done between banks and investors on foreclosures. He mentioned in some locales 80% of all resales were foreclosures.

If home owners’ perceptions are so glaringly wrong about the values of their homes, I can see why the “only the real estate market is the foreclosure market”. Folks who can’t face the truth don’t price their home to sell and the market shouts the truth at them…usually in vain.

It dawned on me if home owners don’t get their expectations in check, put their homes on the market at realistic prices, it won’t matter how loose or tight mortgage underwriting is or whether Bernanke can get mortgage reform passed.

It won’t matter because, there will be no one standing in line to borrow!

This is potentially more dangerous than a banking crisis. It’s like have a party and no one shows. Bernanke and Paulson are busy saving the banks and mortgage securitizers so the mortgage industry can stay operational for all the new borrowers once this hiccup is solved. But what if after all that, American’s can’t find a house to buy at a market price and sit on the sidelines?

It’s what happened to Japan when they hit the wall. Their central bank dropped rates to zero and still couldn’t get people to borrow.

What if the banks, now that they have government support, hang on to their foreclosure properties deciding to wait for a better market in which to sell? Between asleep homeowners and greedy bankers, the real estate market could be the next big “freeze”.

There is only one thing worst than dropping home values…frozen home values. At least if they are dropping, an end is coming. With frozen home values, a state of limbo exists.

This would really be the nightmare scenario everyone is trying to avoid. This is why Congress is having such trouble putting money in the hands of foreclosure victims. They don’t want to do anything that will stall the dropping of home values. They’d better watch out. If they give the banks too much support, there’s no motivation to liquidate foreclosed homes either.

As the Zillow report reminds us, you can’t legislate intelligence or awareness…and without it, our housing market could be in for the freeze no government or banking official can do anything about.

Yikes!

Tags: bailout, foreclosure, housing bailout, mortgage, REO

It is time for a history lesson now that this thing called a bailout has been passed into what passes for law under this administration. To help me with this lesson, three well known gentlemen have come into the classroom to assist me.

So we don’t put the student body to sleep, I’ve limited each to one remark. I also placed the parameter of importance on their one remark. Of course, what is important to them may not be important to you.

All I ask you to do in the way of a quiz is to relate their remarks to your life in this modern America. The first guest is still with us today and is oft quoted because he is considered a guru in the field of economics.

Speakers Three…

His name is Milton Friedman. His resume is impressive and his remarks have impacted government world over.

What is your remark Mr. Friedman?

“The elementary truth is that the Great Depression was produced by government mismanagement [of money]. It was not produced by the failure of private enterprise.“

Thank you, Mr. Friedman. I feel certain both the class and myself can grasp the magnitude of your words. After all, most of us in today’s class reside on the private enterprise side of the ledger. At least we say we do.

Our next speaker, John Maynard Keynes, is no longer among the living. However, he still enjoys a wide following among our present day government elitists. Please tell us your remark Mr. Keynes.

“Lenin was right. There’s no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I had no idea Mr. Keynes was going to mention a red, white and blue Communist so to stay politically correct let me hurriedly place my denials on the record and say that maybe Mr. Lenin was a member of an alternative political party and certainly not the main stream Democrat or Republican party of today.

After all, would today’s Dems or Reps pass legislation that would continue to enslave the populace and their third to fourth generation offspring? I highly doubt that would ever happen in modern America simply because it would continue the debauchery and that is truly un-American.

On the other hand, our currency is certainly debauched, isn’t it? I don’t know about you, but I’m in mental flux. Maybe I should not have invited Mr. Keynes.

Let’s move on to our last speaker. This gentleman passed away a long time ago but his remark is evergreen (some would say universal). It seems to be the foundational remark for political economics as we experience it in today’s world.

His name is Meyer Rothschild and many of you instantly recognize the name is the same as that in the House of Rothschild. Rothschild is their name and banking is their game. They have centuries of experience lending to kings, queens, prime ministers, dictators, etc.

Mr. Rothschild please make your statement.

“Give me control of a nation’s money and I care not who makes her laws”

Thank you, sir. If I comprehend the gravity contained in your words, what else is there to say about political economics and the laws of nations? And, if what I’m thinking is correct, your words could mean the Wall St banksters would benefit at the expense of the citizen in the event they robbed the said same citizen blind through phony and (probably) fraudulent securities.

Nah, can’t be, won’t happen in the U.S. of A. We would never allow our representatives to bail out their campaign contributors at our expense. After all, we ARE the free and the brave in that song everybody sings at sporting events.

Fuming, But Without Answers

If you guessed I’m still fuming over this ridiculous bailout, you are 100% correct. If you guessed I’m fuming over the in-your-face fact I will shortly see another avenue of potential revenue close, you are 100% correct. If you guessed I’m fuming over the fact we will see, yet again, another 98 to 99 percent incumbent re-election rate, you are 100% correct.

I don’t write these posts as political posts. I write them as financial posts under the explanatory umbrella of politics. It is the legals passed by Congress that get my blood boiling. I’m still waiting for them to pass laws.

This brings me to the subject of my next post – legal versus lawful. If, in my opinion, a person understands the very important difference between legal and lawful, a person will know why mortgage documents, for example, are merely “legal” but demand “lawful” money.

It is our money, our country, our children’s future and our heritage. Shouldn’t we, de minimis, at least fulfill our “lawful” responsibilities?

Photo Credit: srboisvert

Tags: $700 billion bailout, bailout, currency, Economy

Great. Taxpayers now own banks, investment houses, probably an auto company or two before long, and the British have shown that, despite having lost their empire, they still know a thing or two about handling a financial crisis that the U.S. and others can take lessons from…

But does this mean that people who were on the cusp of being kicked out of their homes are all of a sudden safe –if not sound–once again?

The wolf may not be at the door, but he is still lurking just around the corner, for sure.

We keep being told that these massive government measures are aimed at helping Wall Street as well as Main Street–and, to some degree, this is certainly true.

And yet, we still do not have a firm plan in place that has as its primary purpose the preservation of home owners facing foreclosure. The housing plan passed earlier this year by Congress still hasn’t had much of an impact. And, one can only wonder whether the government buying stakes in troubled banks will actually force them to amend the mortagage terms of their most troubled clients?

If banks are really going to use their new financial lifeline provided by taxpayers to extend a helping hand to home owners, why are they still so vigorously opposed to changing the bankruptcy laws to allow judges to amend mortgage terms to help people stay in their homes? Most experts think that is the best way to ease the housing crisis, so why are they trying to block it at every turn?

One can’t help but wonder whether the big banks will take the money and help themselves while giving the cold boot to the rear ends of cash starved homeowner/clients?

90 days?
Barack Obama is proposing a 90 day hold on any pending foreclosures, but is that really going to help much? Seems a bit like a band-aid being applied to a cancerous mole. But McCain’s notions don’t really seem better. So, on this front, it may just end up being a draw.

What should have Americans really worried, if they are not already, is the lack of political leadership across the board. Neither Obama nor McCain have exactly been ahead of the curve on this one. And, the Bush administration is apparently taking its bailout cues now from the U.K.–talk about Masterpiece Theatre!

The more things change, the more they stay the same?

The other day, I received in the mail an invite of sorts from WAMU–now Chase–telling me how I could, if I qualify, get a nice, cheap mortgage at incredible rates. Odd, isn’t this how we sort of got into this mess allegedly in the first place? I know, the bank will no doubt say that what has changed is that it will now actually try and make sure that it only lends money to those likely to pay back. But, one can’t help but wonder, what with the US government pumping billions into these institutions, whether or not they won’t quickly revert to their past practices? That WAMU letter I got would suggest that is a real possibility.

If it does start getting easier to get credit, then, it would stand to reason, those cheap homes now on sale all over the country should be bought up fairly quickly.

But homes prices are still expected to drop so , even if credit become more available, buyers may still elect to stay on the sidelines waiting…which would only bring home prices down more.

Also, some economists are now predicting–even with this massive bank rescue plan–that U.S. unemployment may rise to more than 8 percent this coming year! Not great news for the housing market, either.

Don’t let the current excitment fool you. We are not out of the woods. Not by a long shot.

Photo Credit: kyz

Tags: bailout, banking, banks, Economy, government bailout, mortgage, REO

The Fear

There were a number of investors, novice and veteran alike, who had recently been through a foreclosure seminar and were excited about the possibilities in the market. However, it was the more experienced investors who were most fearful. Many of them had been investing for many years, if not decades, and had never seen anything like what we are experiencing now. There were mortgage brokers who were unable to get deals through because of the credit freeze and realtors who couldn’t make deals happen because their buyers couldn’t get loans. The big question seemed to be, would the whole house of cards that is the economy come crashing down?

Generally speaking, savvy investors can make profitable deals in any market, up, down or sideways. The concern is that there is a total lack of direction, they don’t know which way to turn. The Government bailout (now being called a rescue) is a big pile of money without a clear set of instructions on how it is going to be used. A big fear is that it is going to become a big cesspool of corruption, much like Washington itself.

The Loathing

The other thing that jumped out at me as I worked the room was the anger that people felt. There was anger that irresponsible behavior was being rewarded, why should those who made idiotic mistakes be bailed out? They were mad about the CEO’s who were rewarded with excessive pay, perks and parachutes as the companies they ran crumbled. There was resentment over the fact that greed had run rampant and left common sense in its wake along with the wreckage of banks, brokerage firms and insurance companies.

However the real loathing was reserved for our elected officials. The caped crusaders of the beltway who are supposed to be looking out for us, can’t seem to rise above their own self-interest. The House of Representatives couldn’t bring the $700 Billion bailout package to a vote without the House Speaker making a self-serving partisan speech that ultimately doomed the bill. It was left to the Senate to push a bill through but they couldn’t get it done without larding it up with billions more in pork. While Democrats and Republicans were busy playing the blame game and pointing fingers at each other, the members of the real estate club couldn’t believe that these clowns didn’t get it, people are fed up!

Economic Course Correction

Tags: bailout, real estate club, real estate investing