REAL ESTATE INVESTMENT AFTER BAILOUT
Accountant · COLLEGE PARK, GA · Member since 2008 · 10 posts · 1 vote
I am curiuos to have insight from people who were in the business post Savings and Loan Crisis...specifically from a more experienced perspective..What do u guys think will be the effect of the Bailout ...vis a vis Rea l estate prices....PLS I DO NOT WANT THIS TO DESCEND INTO POLITICAL DISCOURSE, AM NOT INTERESTED IN SOCIALIST,FASCIST AND CAPITALIST POLITICAL DIATRIBE( NOT INTERESTED) am stricly interested in what I can do to better myself under this emerging conditions.Thank you
Writing in all caps is considered yelling on biggerpockets. Be cautious with that.
Daniel - I think Gani's point was to shout . . .
Gani - If anyone tries to tell you that they have any idea what the bailout is going to do for the economy and real estate market, they are lying. Neither Bush nor Paulson nor Pelosi nor Obama nor McCain have any CLUE! All people can do is speculate.
My guess: The bailout should preserve (temporarily at least) credit markets so lending won't immediately dry up, which should keep the housing market alive.
x2 Joshua's summary of the situation.
A lot of the problem is the "mark to market" accounting method that is currently devaluing long term assets.
In Lee County Florida, Last month fannie and Freddie Disappreared off the radar screeen for foreclosures. Expect a lot of these assets to do the same.
I apologise for the caps...its just that we get sidetrack by sometimes going into the irrelevances of political discourse, instead of practical suggestions, which i beleive is the focus of this forum....so if I iritate anyone...pls accept my sincere apology
Not sure I get what you're saying, Jeff. Do you mean FM/FM have withdrawn their REOs from the market and are holding off on foreclosures?
I do think the bailout will help with the credit market. Lending will ease, though it may take a while.
As a buyer, I worry that the number of REOs available will decrease and their prices will increase, since the banks now have an alternative buyer for their bad loans.
As an individual investor, I'm concerned that large companies will end up being the ones to get the properties from the fed entity that's yet to be created. So, there will be yet another group of big players that will feed at the trough.
I understand the concern about the "mark to market" accounting. But, the banks have created this problem themselves with all these complex and hard-to-value vehicles. You can rest assured you and I will still have our investments "marked to market" each and every day, and we'll get a margin call the next day if the result isn't positive. I'm not too sympathetic to the argument that these investments are really worth more than the "current market".
In some places, $100 million would be a lot of houses, perhaps 10,000 or more. Even here in the Denver area, in hard hit areas, this could be 1000 houses. So, maybe there will be smaller packages. As much as I'd like to set up a company to take one of these packages, and I've broached the topic with a few friends, I'm having a hard time getting my head around how to pull it off.
I really don't think this bailout is intended to fix the RE market. I don't think it will have a radical effect, actually. We'll still have a bunch more foreclosures. We'll still have REOs. Prices will continue to fall.
Its intended to help the credit market. Whether or not it works remains to be seen. But, it the credit market is looser, investing should get easier. It should be easier for us to get loans. It should be easier for our buyers to get loans.
That said, I suspect many banks and other lenders will still hold the purse strings tightly for RE, even if they loosen up other lending. It will take a few years before they forget the burns.
I don't think lending will ever return to the guidelines of the bubble. So, that's a very fundamental change to the investing and housing market.
To go to the OPs questions, I think this will have little effect on RE prices. They will continue to fall, perhaps more slowly. We're still way above the long term trend line. I was concerned we would undershoot, and prices would end up below the long term trend. This bailout might generate enough credit that we'll have a "soft landing", and end up on the long term trend, rather than below. I suspect we still have a ways to fall in some markets.
Some very good comments. The main purpose of the 700 billion bailout was to ease the credit market between the banks, Wall Street, etc. Huge corporations like GE or governments -- state, county and city -- rely on liquidity in the credit market to grease their wheels. This bailout was to get the wheels of industry and government turning again. Most people did not realize that when the money came out of the market, it would effect everything from the former AIG chairmans retirement account to the street sweepers paycheck. This bailout was really not intended to help the real estate market per se.
That being said, 700 billion aint gonna get it. They will need trillions of dollars for this bailout. That means the government will start printing money and that means inflation. While housing values will keep dropping for a minimum of another year or two (or five, depending on how deep this goes), inflation is about to run rampant. So a house that has dropped in value to $100k in todays market, in two years will cost $115k - $130k just because the dollar is worth less. Or worthless to be more accurate.
The good news is that if you have fixed rate mortgages, the dollars that you pay in two to three years from now will be cheaper for you. Small comfort, I know.
On the plus side, seller financing will be huge in the coming years and investors who understand that can position themselves for great upside potential.
Barbara
I was like 10 to 12 years old when the S&L blew up in the later 80's so I can't provide expert input.
However, I have heard that $125 Billion dollars of adjustable rate mortgages are due to reset starting in December and that the amount of adjustable rate mortgages should be considerably less after that. So if it takes about 3-4 months to foreclose on someone, I would expect to see the market to be flush with foreclosures starting 2nd quarter 09 and the housing market bottoming out starting in 3rd quarter 09 since their should be less foreclosures coming on line to depress the market with.
Therefore, my objective between now and then is to accumulate properties now for cash flow and position myself to be able to accumulate more property in late 09.
What do you think?
I have to agree seller financing is coming back with a vengence the next few years. Personally I'm positioning myself to take full advantage of this within my local market.
My understanding is that the sub prime crash is only the tip of the iceberg. In the next few years there will be many more adjustible rate mortgages that will mature and that there will be an even greater # of these going into forclosure.
Does anyone have any opinions on that?
Heres an article from this past June. Its a graph from Credit Sussie.
http://bubbleinfo.squarespace.com/journal/2008/6/7/neg-am-reset-update.html
You can see one peak of Neg Am loans approaching by the end of this year but then a bigger peak in Oct.
This is just with one company, but you can imagine the peaks are similar throughout the entire industry.
Most were 3 -5 year adjustment periods.
So if a good portion of these loans were done 04-07 the wrath is really just begining for foreclosures.
Unless the government steps in and works out rates and reduces prinsicpals.
I agree with Lee Common & others-Owner finance or other creative financing may take off as good people cannot be approved for a mortgage.
I make no predictions regarding banks and politicians fixing anything in a logical or timely manner unless it lines their own pockets.
Interesting article about the end of the big money era in NY with all of this going on
http://www.nytimes.com/2008/10/05/business/05era.html?_r=1&em&oref=slogin
What's interesting regarding RE is this on page 2:
“I had a rental on the market for $11,500 a month. On Monday, we got an offer for $8,500, which we countered with $9,500. They came back with $8,000,†she said. “I told them they were going the wrong way but they said, because of what was happening in the financial markets, this is our new offer. And guess what? The owner accepted it.â€
So I'll repeat again what I think will happen to RE, and everything else, (though not specifically because of the bailout) is DEFLATION. Go ahead and yell again but that's where our credit laced society is heading. The problem is NOT liquidity, if it was, things would be better by now. The problem is SOLVENCY, sell off all the world's assets (if that was even possible-aliens maybe?) and pay off the world's debts and there is still a TON of debt left over.
So make sure you cash flow and that you're not needing rent increases to make a deal work-and lower to mid end rentals look the best as people start to trade down.
No amount of bailing will keep the housing boat afloat at it's current level. Median home prices still need to fall at least 35% to bring them into line with median income, assuming income doesn't fall, given the fact that the lending institutions have been forced by reality to return to sane lending practices.
We're back to a substantial down payment, and realistic appraisals. Those of you who learned real estate in the last 10-15 years are out of your element, and should probably go get jobs.
I really doubt bail out bucks reach joe and jane six pack. Too many fingers in the pie to actually reach them.
A lot of the problem is the "mark to market" accounting method that is currently devaluing long term assets.
Adrian, not to be a wise guy, but how does an accounting technique devalue assets? The last time I checked, something is only worth what someone else will pay for it.
From Calculated Risk (http://calculatedrisk.blogspot.com/2008/09/mark-to-market-quotes.html):
"Suspending mark-to-market accounting, in essence, suspends reality."
Beth Brooke, global vice chair at Ernst & Young LLP, WSJ, Sept 30, 2008
"Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick."
analyst Dane Mott, JPMorgan Chase & Co., Bloomberg
"Suspending the mark-to-market prices is the most irresponsible thing to do. Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings."
Diane Garnick, Invesco Ltd., Bloomberg
That's not the complaint. Its the reverse. Some company owns a CDO that was originally worth $200M. Based on current values and short sales, the value of that CDO might currently be, $100M. Mark to market forces these companies to adjust the value on their books to $100M, not $200M that they've been using.
Look at the stories here about short sales, especially on seconds. $50K HELOCs being shorted to $5K, and having to fight with the first to get that. A CDO (or CMO, SIV, or WTF) made up of a bunch of HELOCs is realistically worth, what, 10 cents on the dollar? The mark to market rules force adjusting the accounting to recognize that.
If you bought stocks on margin, these very same #(&(*)& companies would mark them to market EVERY DAY. If it fell too low, they would demand their money from you right away, or they would sell your stock and then come after you for the difference.
I'm with David. These companies are whining about having to realistically account for their crap investments.
I don't believe lenders are forced to mark the price of a non-performing loan to zero. I'd like to see a reference to where you see that requirement. They do have to mark it down to reflect the reduced value.
They've further complicated the picture by putting CDS (credit default swaps) into the mix. As the risk of loan default goes down, the value of the corresponding CDS goes up. But, they may not go at the same time, since the CDS is a separate investment from the loan, and trades independently. The expectation is that these two (the CDS and the loan) balance out, but when they move out of step, the bank's balance sheet becomes very volatile.
The argument against mark-to-market is that its hard to value these instruments. And therefore, and temporary "paper" loss shouldn't be turned into an actual loss on a quarterly statement. OTOH, anyone who was counting on their stock portfolio for retirement money is pretty much screwed in the same way when the need to sell their tanked stocks to pay their bills.