Tuesday, December 28, 2010

4 Real Estate Predictions for 2011

WASHINGTON - MAY 12:  Former Chairman of the F...Image by Getty Images via @daylife
The days when anyone could claim to have a reliable crystal ball for the real estate market have long passed. Nevertheless, what's past is prologue: There's a lot going on in the market right now that is likely to have a pretty predictable impact on real estate in 2011. Let's look at how homebuyers can expect to fare next year with these four real estate predictions:

Prediction #1
Prices and mortgage rates will stay low in most areas, but will rise in affluent areas and markets experiencing job/population growth. Buyers will have plenty of time to take advantage of low prices, which will stay low next year, except in markets with positive job and population growth.

If you've been watching the housing market bottom out over the past few years, cursing the fact that as soon as prices dropped, down payment requirements ticked upward, stop cursing and start saving. Any fears that you'll quickly be priced out of the market are relatively unfounded, in most areas. High numbers of homes for sale, the continued influx of distressed properties like short sales and foreclosures into the housing market, the overall economy's stagnation and high unemployment, and the probable lack of new government incentives for home buying will all combine to keep the supply/demand imbalance tilted pretty heavily in favor of buyers. That, in turn, will keep prices relatively low, especially compared to their 2006 peak. And when buyer activity is low, the Fed keeps interest rates low, too.

The exceptions? Affluent areas where wealthy households will continue to take advantage of relatively low home prices to buy homes; for example, San Francisco has had a double digit increase in home prices over the last 12 months. High unemployment rates in some of these high-end markets are misleading, as there may be job growth in the sector of high-income jobs requiring skills not possessed by many in the unemployment lines. Also, home prices will stay supported and possibly even creep up in cities that have had job and population growth over the past decade -- including Texas cities like Austin, Houston and San Antonio; Midwestern towns like Oklahoma City and Des Moines; and Salt Lake City, which Newsweek's Joel Kotkin deemed a "New Silicon Valley."

Prediction #2
Loan guidelines will tighten up, and down payments and loan costs may rise.

We've all seen lenders tighten up mortgage guidelines over the last few years, requiring bigger down payments and forcing buyers to document their income and assets. With its low 3.5% down payment requirement, loans insured by the Federal Housing Administration (FHA) have skyrocketed in popularity in this post-subprime era, going from about 3% of loans originated pre-bubble to about 30% of loans originated in 2010. Buyers' favoritism of FHA loans will only continue to increase in 2011; a recent study by the Home Buying Institute revealed that 87% of home buyers said they plan to use an FHA loan to finance their purchase, with easier qualifying guidelines being cited as the primary reason for preferring FHA loans to conventional.

The tight debt-to-income ratios and other standards do seem to be working; the National Association of Realtors recently noted that "mortgages that were recently originated show an outstanding performance, even better than during the pre-housing bubble years." As FHA loans look poised to dominate the lending market, the FHA faces two pressing needs: (a) cash, and (b) to ensure that default rates stay very, very low. In fact, this year, Congress considered (but refrained from passing) a bill proposing to boost FHA's bankroll by hiking the down payment requirement up to 5%. The same proposal called for eliminating buyers' ability to have sellers pay their closing costs as part of the deal; in fact, FHA did actually drop the permissible seller-paid closing costs guideline from 6% to 3% in 2010. FHA also raised the costs of mortgage insurance this year. You can expect this trend in tweaking FHA lending guidelines to require buyers to put more of their own skin in the game to continue in 2011.

Condos will become even more difficult to buy. As more condo owners find they can't sell their units and unit values fall, more will fall behind on their dues, walk away or rent their tough-to-sell homes out -- all of which will undoubtedly make it harder to finance and buy a condo in 2011.

Most lenders require that no more than 15% of home-owner's association (HOA) members be 30 days or more behind on their dues, and conventional (non-FHA) loans require at least 25% of the units be owner-occupied. While FHA guidelines allow loans on units in HOAs with up to 49% tenants, the condo complex must be FHA-approved to use an FHA loan to buy a unit.

The days when a quick FHA "spot" approval could be done on a unit-by-unit basis are long gone. Now, the whole complex must be approved before a unit can be bought or refinanced with an FHA loan. HOAs can apply for HUD approval, but it takes 2-3 months to obtain. The expedited, 10-day approval some lenders are authorized to bestow is increasingly hard to get, as lenders don't want to bear the burden of guaranteeing all loans made -- by them or another lender -- based on that approval. Foreclosed condo units tend to both be delinquent on their dues and non-owner occupied, making the problem even worse.

The HOA-related challenges around obtaining either FHA or conventional loan approval has stopped many units from being sold across the country, and that has already started to spiral into declining condo values and even more dues delinquencies and walkaways in condo complexes. And FHA condo HOA approval criteria are set to already get even tighter in 2011! Complexes with high delinquency rates or lots of non-owner occupied foreclosure units won't even qualify for non-FHA loan.

Prediction #4
Conservative buying will be the name of the game.

Not using every cent you possess for your down payment. Buying a home with a mortgage payment you can comfortably afford, even if you were approved for more. Negotiating already-good list prices downward and asking the seller to help you buy your interest rate down.

Next year, we'll start to see the aggressive general consumer bargain-seeking that some call "the New Frugality" take expression in buyers who first started saving up for home ownership at the start of the housing crisis, and have scrimped and conserved to buy at post-bubble pricing. We also may see the first wave of post-foreclosure buyers -- former homeowners who lost their homes during the sub-prime implosion around 2007-2008, and are fresh out of the 3-year post-foreclosure waiting period to qualify for an FHA loan.

We'll also see a significant number of buyers who have been sitting on the fence, waiting for the bottom and may have missed it, but believe they can make up for any missed timing opportunity with the right deal. All three of these groups, as well as any other buyers who decide to pull the trigger on buying a home next year, will be looking for low prices, and the sense that they're getting an amazing value for the price.
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Wednesday, December 22, 2010

Economic Forecast for 2011

Quarterly Gross Domestic Product (year-on-year...Image via Wikipedia
The Forecast
Here's a mediocre forecast for you. It's not a double dip or a doomsday story, but it's decidedly lackluster. At this rate of growth, the economy underperforms its potential for . . . as far as the eye can see.

Key motivator of the stagnant view: slow monetary growth. In recent months I commented on the Fed's "quantitative tightening" and why economic growth has been so slow. Second quarter GDP data confirm the slower rate of expansion.

The Good News
The Good News for the Economic Outlook: The Fed will shift gears and stimulate the economy. There's starting to be a recognition at the Fed that slow growth will be prolonged, and that some more easing would not be inflationary. In addition, the Fed board is about to get three new members, who are likely to be more inclined toward stimulus. One, it was pointed out to me, could be an inflation hawk. I replied that I, too, would be an inflation hawk if only I could find some inflation.

The Bad News
The Bad News for the Economic Outlook: Monetary policy takes time. The slow growth of the money supply over the past 12 months will have persistent effects. The new policy will impact the economy with a long time lag. I use 12 months as a very rough rule of thumb. Milton Friedman (happy birthday, by the way) famously observed that the times lags are "long and variable." So I forecast sluggish growth for four quarters, then a small pickup. I think there's the potential for a stronger pickup late in 2011, but the Fed would have to get working on that this month.

The Forecast
Double Dip Recession? Not in my forecast, but the slower economic growth is, the less cushion we have against another downward force. A European debt crisis seems the greatest risk at this time, but there are always risks. We simply do not have much margin for error.

What Actions to Take
What Should a Business Leader Do? Begin with a conservative sales forecast. Then add in some contingency planning for a second recession. You might also want to consider how to manage your business when sales are hard to forecast

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Monday, December 13, 2010

Authentic Real Estate: Foreclosure Volume Expected to Peak in 2011

Authentic Real Estate: Foreclosure Volume Expected to Peak in 2011: "Image via WikipediaNext year could very well be a peak year for foreclosures, says Rick Sharga, a senior vice president at RealtyTrac, an on..."

Foreclosure Volume Expected to Peak in 2011

Sign of the times - ForeclosureImage via WikipediaNext year could very well be a peak year for foreclosures, says Rick Sharga, a senior vice president at RealtyTrac, an online marketplace for foreclosure properties. The market is expected to tally about 1.2 million bank repossessions in 2010, up from 900,000 in 2009, he says. "We expect we will top both of those numbers in 2011."

That's partially due to issues the industry has faced with foreclosure processing that began in the fall and delayed a portion of foreclosures from being completed this year, he says. In the so-called robosigning controversy, some lenders halted foreclosures after learning procedures for signing off on foreclosure documents might not be in accordance with the law.

Continued high unemployment also is expected to exacerbate the foreclosure problem in the year ahead, as will upcoming interest-rate resets on adjustable-rate mortgages that will increase monthly payments for some homeowners, Mr. Sharga says.

In the meantime, data on the volume of loan modifications from the Treasury Department indicate that fewer borrowers were being approved for permanent modifications in recent months, says Greg Hebner, chief executive of MOS Group, a loss-mitigation service provider to mortgage lenders and servicers.

What's more, there's a growing feeling that modifying mortgages doesn't get to the heart of the housing crisis: "There is the perception that the answer to this involves trying to get job growth," which will help homeowners pay their loans and enable others to buy homes, said Jay Brinkmann, chief economist for the Mortgage Bankers Association, during a recent conference call with reporters.

For the longer term, however, the outlook for the foreclosure market is better since fewer homeowners are becoming delinquent on their mortgage payments. Thirty-day delinquencies are down 11% since the height of the recession in the first part of 2009, according to Mr. Brinkmann.

High housing inventory, along with high unemployment, will likely add up to continued depressed home prices in the year ahead in many markets, says Nichole Jordan, banking and securities industry practice leader for Grant Thornton, an accounting and business advisory firm.

"Realistically, you're not going to see home prices appreciate next year," says Jason Kopcak, head of whole loans at financial-services firm Cantor Fitzgerald. In fact, many in the industry are expecting prices to fall another 10% next year on a national basis, he says. RealtyTrac's Mr. Sharga says the national decline could be around 5%. Other economists are expecting prices to remain flat.

Next year "is going to be a wash, in terms of any meaningful recovery, and we're looking toward 2012," said Guy Cecala, publisher of Inside Mortgage Finance, during a conference call with reporters. And that's assuming there are no other major problems or delays to contend with, he says.

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Tuesday, December 7, 2010

5 End of Year Tax Strategies to Maximize 2010 Earnings

Assorted international currency notes.Image via Wikipedia
1. Sell Looser Stocks
This was a tough year for stock investors. With business investment lethargic and hiring gains only in a few key sectors stocks had little to draw from to advance in price. If you purchased stocks this year and have a significant loss from the purchase you may consider selling the stock before year end. If you’re hopeful that a losing investment will recover and you’re thinking of buying it back shortly after selling, be wary of the ‘superficial loss’ rule. A superficial loss occurs when you or your spouse sell an investment to realize the loss only to buy it back within 30 days after the sale date. The CRA can deny a superficial loss and instead add it back to the adjusted cost base (tax cost) of the repurchased security, meaning the benefit of the capital loss can only be obtained when the repurchased security is sold again and not repurchased within 30 days.

2 . If you turned 71 in 2010, it’s time to convert your RRSP
Registered Retirement Savings Plan (RRSP) annuitants who turned 71 in 2010 must convert their RRSPs into either a Registered Retirement Income Fund (RRIF) or a registered annuity on or before December 31, 2010. And if you plan on making any final contributions to your RRSP, you will only have until December 31 to do so as you no longer have the extra sixty-day advantage of delaying until March 1, 2011. If, however, your spouse or partner is under 72, you can continue contributing to a spousal RRSP in his or her name, provided you still have contribution room.

 3. Contribute to an RESP
If you have a child or grandchild who has never participated as a beneficiary in a Registered Education Savings Plan (RESP) and who turned 15 sometime in 2010, December 31 is your last chance to contribute at least $2,000 to his or her RESP in order to collect the 20% Canada Education Savings Grant (CESG) for 2010 and create eligibility for CESGs in 2011 and 2012. If you miss the deadline, the child or grandchild will not be eligible for any CESGs in the future.

4. Spread some goodwill
December 31 is the last day to make a donation and get a tax receipt for 2010. Keep in mind that gifting publicly-traded securities, mutual funds or segregated funds with accrued capital gains to a registered charity not only entitles you to a tax receipt for the fair market value of the security or fund being donated but eliminates any capital gains tax as well.

5. Pay off investment expenses and interest
To deduct any investment-related expenses on your 2010 tax return, the amounts must actually be paid by year-end (December 31). Such expenses include interest paid on money borrowed for investing, investment counseling fees for non-registered accounts, professional accounting services for tracking rental or business income and safety deposit box rental fees.

As always, it’s best to discuss all tax-planning strategies with a financial advisor or tax professional to properly determine your eligibility and see how these and other potential tax-savings opportunities might fit into your overall financial plan.
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Saturday, November 27, 2010

Who Benefits from Weakness in Real Estate?

Real Estate = Big MoneyImage by thinkpanama via Flickr
Since it is now official that the US economic outlook has been downgraded and will be soft for the next 2 to 3 years who could be the beneficiaries? In volatile economic environments all assets are open game to a potential downfall.  Speculators of real estate are poised to benefit from these bad economic times in several ways:

If you currently own real estate
Given that macro-economic conditions will remain soft with employment, consumer and business spending at terminal ebbs current homeowners can benefit in refinancing their existing mortgage to historical low interest rates. Government stimulus will continue to keep interest rates low. This will offer the homeowner lower monthly mortgage payments to help cushion household cash flow challenges given the downturn in the job market. If you own rental property refinancing to a lower rate will help drive down mortgage payments as well and improve rental income. A softer economy means fewer speculators will enter the home buying market and should keep rental occupancy rates high. Though his all sounds good on paper, banks underwriting criteria has never been tougher. An equity position of  less than 25% (75% loan-to-value) may disqualify many wanting to refinance. If you purchased your home between 2004 to 2008 chances are near certain that your home has devalued 30% or more. This reduced equity position may not allow you to share in the benefits of lower rates.  A good resource to check current value of you home is http://www.zillow.com/.

If you are looking to purchase real estate:
A perfect storm is when two powerful forces converge to create a miraculous event. Due to a Clinton Administration mandate to increase home ownership and an over abundance of bank liquidity, the years 2002-2007 created an unprecedented surplus of real estate transactions. When the clouds cleared and the bubble burst in August 2007 home values plummeted creating a landslide of foreclosures. In the newly downgraded economy banks will try to maintain a "normal" market by not flooding the pipeline with foreclosed inventory. This will be hard to maintain given how much REO inventory bank's are holding on their balance sheets. As the economy slowly improves the real estate market will improve accordingly. During this time of overabundance of inventory good deals on real estate will be found. Brave buyers will find low purchase prices, bank owned purchase transactions taking up to 90 days to close and seller incentives. I have heard from wealthy people that the only time they buy is when everyone is selling. Now is that time..
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Wednesday, November 17, 2010

The International Gage of US Real Estate

This week the BBC reported that Ireland is in secret negotiations with  EU officials to bail out and restructure their country's mounting debt load. Fears of an European melt down begin to surface and news pundants fly internationally. These rumors drive down US stocks and  fog the forecast for economic recovery. Given that the US economy is effected by global events how can you realistically forecast? Since the invention of the Internet and the speed by which information can become viral the standards that were once seemed  insignificant are now very significant. All these market over-reactions are the result of nervous investors and a continuing financial recovery from the 2007 banking melt-down. The US will be sailing through very choppy waters (economically speaking). Given that real estate is a bell-weather for the US economy and a key leading indicator, look for the current flat to minimum appreciation market to remain for the next 2 to 3 years.

Buy real estate for the shelter it provides and only if there is value. Incredible deals can be found in real estate these days at fractions of the costs 3 years ago. Below is an good example of a property here in Santa Cruz offered at only $477,500:


Tuesday, September 28, 2010

The Forecast of Future Home Values Given Shadow Inventory

There have been many estimates of what could be the amount of foreclosed homes that banks are holding off the market, keeping prices artificially high. Some estimates are as high as over a million units. The term "shadow inventory" represents the amount of homes that are in foreclosure and have yet to hit the market. Once these homes are put on the market for sale it will represent a large price impact to the current inventory of homes as supply will increase and prices will decrease. Shadow inventory has never been clearly estimated, but now reports are beginning to surface on how big this inventory could be given the amount of 5 year ARM and subprime mortgages that were originated between 2006 and 2007. In 2004 to 2007 up to 80% of mortgages originated were ARM loans.

News estimates are being provided my Morgan Stanley that a much higher range between 1 million and 8 million units could enter the market in 2011-2013. One million units could be absorbed into the current market place without much impact, but 8 million units could spell catastrophic numbers for home values over the next 2 years. Some of these homes will never be brought back to the market as they are in very undesirable, blighted areas or remote locations. These homes could be bulldozed and converted into parks, recreational areas or left as open space for future development.

Keeping shadow inventory under control is one of the big banks main objectives. At GMAC Mortgage memos have been sent to executives to halt the evictions tied to homeowners in more than 20 states, easing tensions and supporting prices. Banks views have begun to change to slow foreclosures and keep homeowners in their homes during a time of record seizures.

Real estimates of shadow inventory will be around 3 to 3.5 million units that will enter the market in the coming months and nowhere as large as the 8 million units predicted. Further estimates are that 1 million units per year could be absorbed without a significant impact to home prices. Given this estimate it should take 3.5 years for a normal supply/demand home market to return. This seems like a very long time, but given how bad the banking crisis really was, it is not as bad as it could have been.

Sunday, September 12, 2010

Economy Shows First Signs of Growth

We are seeing the first signs that the US economy is showing growth. Though US gross domestic production remained flat in its August 2010 report, other economic gauges are showing that the US economy is increasing production. In it's Beige Book report released on September the 8th the US Commerce Department said that tourism, agriculture, consumer spending, non-financial services and transportation numbers expanded while manufacturing eased. Most of these industries were in decline through the summer and now are showing signs of increased production.

The real estate industry numbers were not as optimistic. As a result of the expiration of the home buyer tax credit in June, the real estate industry continues to show weakness. Median home prices and sales dipped in July and August. Business contraction is also weighing in on the commercial real estate industry. Tenants' shrinking business profits are overshadowing the sector. New pessimism is beginning to emerge as commercial real estate owners seek refinance and banks remain tight on underwriting guidelines. Increased vacancies and banks unwillingness to ease lending policies will increase commercial property foreclosures in 2011 driving the sector into further decline.

The good news in all of this is the Obama Administration latest economic proposals were received as one of the first long term solutions to a declining economy. The plan will stimulate small business growth through decreased payroll taxes and business investment tax credits. Though the plan is not enough stimulus to drive small business into the profit margin, it will provide the initial push the economy needs to increase business investment and hopefully job growth.

Monday, September 6, 2010

States Forecasted for Highest Unemployment

It is such good news to hear that the Obama Administration is starting to get it right in regard to economic stimulus. Today several key financial incentive announcements were unveiled that target business investment tax credits, extensions of the research and development tax credit and infrastructure spending. The stimulus targets the engine that creates cash flow and commerce for millions of Americans; small business. This news arrives in time to counter balance the latest unemployment rate numbers. Compiled below is a top 10 list of the US states that should see unemployment rates rise greater than other states:

1. Nevada 14.3
2. Michigan 13.1
3. California 12.3
4. Rhode Island 11.9
5. Florida 11.5
6. South Carolina 10.8
7. Mississippi 10.8
8. Oregon 10.6
9. Ohio 10.3
10. Illinois 10.3

Tuesday, August 31, 2010

Why Economic Recovery Will Be Slow

I have been thinking of a good analysis for our economy. Imagine if you were told 2 years ago that you had cancer and needed emergency surgery to live. After the surgery the doctors told you they successfully removed the cancer, but there were several infections that will remain and you need to prepare for a long, slow recovery. I feel the same about the US economy. We are past the bad stuff, but recovery will take time.

One of the "band aids" that was put on the economic "wound" initially was the Obama Stimulus Program. The program was designed to help the economy by creating jobs, prolonging benefits to the unemployed and elderly, provide tax cuts and other stimulus thus kick-starting the economy into growth. But, like drinking a caffeine soda, once the buzz is over you feel drained. The plan had good short-term intentions, but no long-term infrastructure was created by the plan to sustain economic recovery. The plan was intended to maintain household cash flow in a dropping economy, allow consumers debt relief via loan modifications thus increasing savings rates. Now a year later most of the jobs created by the stimulus have been completed, benefits are near end, tax cuts have helped somewhat, but with less income being earned tax cuts will only survive the economy not revive the economy.

The main infection we are facing is the depleting revenue needed to fund the infrastructure of government. Municipalities, being one of the largest employers in the US, are reliant on taxpayer revenue. Property tax, sales tax, payroll tax, personal income tax, retirement tax are all in decline and infrastructure costs (roads, bridges, health care, wages) are on the rise . We have reached a tipping point where alarming cut backs in schools budgets, police force, fire departments, water districts, department of transportation are deteriorating the fabric that holds everything together. Municipalities are searching for alternative revenue sources and will begin to include emergency sales tax increases on November ballots across the country. This move by municipalities will drive the economy into further decline by taxing the heart of the economy, the consumer. What else can government do? Without much needed revenue cities budget deficits face the same bitter economic reality as businesses and individuals. Just such an event is happening with the city of Half Moon Bay, Ca. The city is "strongly recommending" that residents vote to approve a sales tax increase or the city will consider un-incorporating and handing the city of Half Moon Bay back to San Mateo County because they are insolvent. Events like this show the depth of the problem we all face.

What we have a year later is an abundance of pessimism. Yes we are saving more money per household, but spending less as well. Consumer confidence, though currently on the rise, is the life blood of the economic revival. With interest rates low and budget deficits high the government is running out of tools to fix the problem. Small business are the back bone of this great nation. Governments can stimulate small business growth through hiring incentives, revenue tax cuts, payroll tax cuts, temporarily lowering the minimum wage and creating easy qualifier business loan programs. These measures will increase hiring and begin to turn the wheel of economic recovery. With these measures in place our patient will then get of bed and regain the health and strength it once had.

Wednesday, August 25, 2010

As Median Home Prices Decline Who Are The Winners?

News came out today that median home prices in Santa Cruz have dropped again. The Santa Cruz Sentinel reported that median home prices declined from a jaw dropping $775,000 in 2007 to a median value of $510,000 in July 2010 (down 34%). Initially the report seems to be good news for home buyers and would increase home affordability in a very depressed economy. Unfortunately, just like a snake in the grass when you step on it, the news has the potential to rear back and bite. When home prices plummet and home buyers are still reluctant to buy what does that tell the market?

There are some commodities that consumers will pay any price for (gas, water, air) and personal economics have little effect on demand. Real estate markets have witnessed depressions before, but none have had the meteoric rise and fall as the one we are currently experiencing. The shear magnitude of foreclosures that will be entering the market in the months to come coupled with rising unemployment has driven home buyers into a state of skepticism. Why should anyone buy a home now with future home prices softening?

Median home price drops portray a deeper meaning into consumer confidence. Market price reflects what buyers are willing to pay for a commodity. A large part of consumer confidence is future employment. If the economy reflects soft employment saving cash takes top priority and the need to buy big ticket items go on the back burner. If the consumer believes buying a home is like buying other depreciating assets like a car, a refrigerator or washer dryer then buying a home will take on a lower priority. In tight economies consumers will seek alternatives (buying used instead of new) for less cash. Renting a home will be seen as a cheaper alternative until the economy picks up or prices begin to rise.

So who stands to gain the most when home ownership becomes less attractive? Not real estate agents, not homeowners, not mortgage brokers, appraisers, home inspectors and certainly not home buyers either. Real estate investors are winners on both ends of the this scenario. As home prices fall investor acquisition costs will fall. As fewer consumers buy and turn into renters the demand for rental units will increase. For owners of rental properties (especially multi-unit) value should remain strong, capitalization rates and vacancy rates should fall and rents will rise. Because a large portion of multi-residential values are based the above mentioned factors, values will rise accordingly. It will be a real estate investors that will laugh all the way to the bank gaining both appreciation and cash flow, a rare event in a down economy. Good to know there will be some winners to will keep the sector going.

Tuesday, August 17, 2010

Summertime Blues

Summer has historically been a slow time to buy real estate. The slowest months for sales is November through March, but August ranks #2. During August most home sellers are on vacation soaking up the final few weeks before kids are back in school. August is a time where minds meander under camp sites starry skies. These are the final weeks before 9 months of a heavy regiment of football practice shuttles, daylight savings time adjustments and daily homework assignment check ups. Preoccupation is a significant hindrance and the big brains in real estate know this fact. That is why inventories are very low right now. There is a strange calmness in the air. Things are beginning to change in the real estate market. Kind of like the still before a huge thunderstorm releases its fury.

Banks are sitting on hundreds of thousands of bank-owned properties that will be released as a steady stream onto the market after the Labor Day weekend. The release will be a significant opportunity for home buyers. It will provide what is called a perfect storm: Real estate values 30% to 50% off their 2007 highs combined with mortgage rates at historic lows. Why then are US home buyers not bursting down the doors like shoppers at a one day 50% off sale? Does real estate offer less shelter value than it did 4 years ago? Have families stopped growing? Simply put, consumers are scared about future employment and are very cautious when adding large debt items (like mortgages) to the household budget. Consumers shopping habits are a clear sign of their optimism or pessimism. Currently US home renters, though interested in the quality of life upgrade home ownership offers, are staying put until the job market improves.

For the bold, few that can qualify for home ownership, have steady employment and FICO scores above 630 there are amazing loan programs available with as little as 3% down and 30 year fixed mortgage rates well under 5%. If you are a veteran with an honorable discharge (DD214) VA loans offer 0% down and the VA funding fees can be financed into the first mortgage. Don't let bad credit stop you either, most veterans can qualify 3 years after a bankruptcy. Don't let lack of closing cost money stop you, there are still some government closing costs credits available in certain areas. Home sellers are offering appliance upgrade incentives, closing costs credits, inspections and repair costs credit as well. Bottom line, if you need shelter and are ready to see amazing value in real estate, start looking at the housing inventory after Labor Day. You will be very impressed with the quantity of properties available at tremendous value.

Friday, August 13, 2010

Let's Get Back to Work!

There have been several economic theories mentioned in the news lately about the correct plan to stimulate economic growth. The current plan is for the Federal Reserve to begin an aggressive attack on lowering interest rates. There are many tools in the Fed toll belt that could be used, but recently the Fed has been purchasing Treasury bonds with the proceeds of maturing mortgage bonds. The Fed did so to make sure that the money supply wouldn't start contracting at a time when cash-strapped states are cutting spending to close their budget gaps. Buying bonds in the open market lowers the inventory of existing bonds for sale thus decreasing bond rates.

Is lowering the cost of borrowing money the answer to economic stimulus? In theory, by lowering rates and increasing the ability for consumers to qualify for loans, the Fed would be adding money to the economy, boosting consumers cash flow and increasing consumer spending. The theory seems credible except for the fact that increasing consumer debt is the foundation of the stimulus.

Having originated mortgages for 15 years and witnessing the economic impact of borrowing money first hand, I can honestly say that lowering the cost of debt does not lower the long term effects of debt. It simply moves short-term concerns (cash flow) to long-term concerns (accumulation of debt). The pendulum swings, but unfortunately does not stop swinging. Over the long term it turns a fire cracker into a stick of dynamite. At sometime the debt needs to be paid back. Do we really want to add more debt to a nation with a savings rate of less than 3%?
In the big picture, after the immediate need has passed, did the stimulus really benefit the debtor?

Increasing consumer debt is not the answer to economic stimulus, creating jobs is. Jobs increase cash flow not at the expense of the consumer, but for the benefit of the consumer. Business expansion will do all the hard work for the economy. The Fed also has business stimulus tools in the tool belt that could jump start business loans. How about lowering payroll taxes, unburden business by decreasing health plan taxes, allow easier trade of goods to name a few. The Obama Administration is too focused on the benefits of the few and the expense of the many. Use the tools that stimulate business hiring. Let's get back to work!

Tuesday, August 10, 2010

Prepare for an Uppercut!

I hate getting hit in the face, so when I see a punch coming my way I try to duck. An uppercut to the jaw is coming to most Americans next year so here is your chance to dart and weave. Not that you need more bad news, but the Obama Administration will have sweeping tax increases waiting for most Americans in 2011 and 2012. This is especially bad news for small business owners struggling to stay afloat. If your best friend is not a tax consultant you may want to begin to find one, because your net income for the next two years will be on the ropes taking body blows and jabs.

Personal income tax rates in 2011 will begin to rise. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:

The 10% bracket rises to an expanded 15%
The 25% bracket rises to 28%
The 28% bracket rises to 31%
The 33% bracket rises to 36%
The 35% bracket rises to 39.6%

Higher taxes on marriage and family. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level. The dependent care and adoption tax credits will be cut.

The return of the Death Tax! This year, there is no death tax. For those dying on or after January 1 2011, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones. Higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The dividends tax will rise from 15 percent this year to 39.6 percent in 2011. These rates will rise another 3.8 percent in 2013.

This "Robin Hood Agenda" will rob Americans of much of their income tax deductions and distribute it to Obama funded health care programs, public infrastructure costs and a very expensive war overseas. If you feel that small business owners or families with children are feeling rich these days, you have another thing coming. This tax increase will drain the demographic, further decreasing consumer spending, thus extending the trend of bankruptcies and foreclosures. Worse than that it will extend US economic decline further into the future, decreasing jobs and business expansion. Hard to say what the impact will be to an already battered American, but imagine how Rocky Balboa looked after his prize fight with Apollo Creed after 15 rounds. "Yo, Adriane!!"

Monday, August 2, 2010

It's the Spending Stupid!

News reports are commenting on how the US consumer is spending less these days.
Why is consumer spending so important to the recovery of our economy? What about government spending, corporate spending, industrial or agricultural spending? Shouldn't these numbers far surpass the spending of Johnny Lunchbox?

Consumer spending taps into the very psych of the consumer. Think of it like a pulse on a patient in a doctors care. If the pulse is weak it says much about the patients overall health. Consumers spend with their emotions. Low confidence about future employment will equate to low spending at the retail counter. So if consumers are less confident are there any economic benefits to reduced consumer spending?

Consumer spending accounts for a whopping 60% of the US Job growth. Needless to say it is a key to the the economic recovery equation and 1.3% of the US growth rate is tied to consumer spending. Though second quarter 2010 GDP grew at a solid 3.2% annual pace that’s slower than the 5.6% pace of the previous quarter. This news arrives against the backdrop of a national unemployment rate that stubbornly remains at 9.5%. All this means that our economy is not changing anytime soon because the consumer has no confidence in the near term recovery.

The only benefit to not spending cash is saving cash. In the second quarter, the consumer savings rate was 6.2%, up from 5.5% in the prior two quarters. That's much better than the anemic savings rate of just 2.1% in 2007. If there is a silver lining to the slow economic recovery it is that the typical US consumer is reducing debt, saving more and being frugal with what they purchase. If we can maintain this pace the consumer will come out of this more stable and more financially sound. It is the spending that makes us or breaks us.

Friday, July 30, 2010

Investing for Smart Gardeners

I heard it said years ago that you should treat investments like you would tend to a rose garden; trim, fertilize and prune to gain the maximum beauty. I also remember the old investment strategy of cost averaging; owning a hand full of stocks, buying the stocks consistently at various times throughout the year at both high and low prices and holding the investment never selling, thus lowering the overall cost. In a volatile market where most investments are taking a pounding the question is, should we own stocks at this time?

The same can be said of the current real estate market. From 2007 to today real estate investment seems out of favor. It is over stocked with too many homes, values way too high given current affordability levels and too much additional inventory will be entering onto the market via bank owned foreclosures. Buying real estate at this time seems to be a fools game. But for those that are real estate investors these are very exciting times. We dream of times like these! Like good gardeners with years of experience we have seen down markets before(1973,1980,2000)and wish we would have bought up the market at 1/2 to 1/3 the price and watched ourselves make a killing a few years later.

Real estate as an investment delivers 5 financial benefits: Appreciation, Tax Advantages, Residual Income Cash Flow and Shelter. For the past 20 years or so real estate has delivered on all 5 benefits, but more so on the appreciation. In some of the best years (2004-2006) real estate delivered over 20% appreciation per year. That is unprecedented for a conservative investment! The same can be said with the stock market 1984-1987 and 1996-1999. These were the glory years where good luck rained down upon you like a ticker tape parade. It should also be said that the years following these huge upturns were very unpleasant for "greedy pigs" that stayed in the market hoping to continue their run on fortune. Like growing tomatoes in winter, the time is just not right.

Market volatility is part of the game. Prices rise and fall as investors jump from one pool of favor to the next. For now most investors are on the sidelines waiting to purchase at the bottom of the market. As for both stocks and real estate we are no where near the bottom. A good indicator will be when employment begins to rise without "artificial fertilizers" such as government subsidiaries or incentives. In the end, nature will take its course regardless how much we trim, fertilize and prune. Smart gardeners will buy seeds and plant regardless of the weather conditions. They will be the ones with the most fruit to sell when buyers come back to market.

Monday, July 26, 2010

The Truth About Inflation and Deflation

There are warnings from the economic forces that we are in a new period of deflation and there needs to be a mindset adjustment to survive financially. The past 20 years or so have been a blessed time where jobs were plentiful, companies sales volumes increased and stock prices rose accordingly. The next several years will be plagued with quite the opposite. In these times of economic contraction what skills do consumers need to stay afloat? First let's define inflation and deflation.

Inflation is a good and bad thing. The good thing about inflation is that companies are increasing prices because there is a scarcity of goods in the market place (demand is high). With the factory conveyor belt turning faster more employees are needed to process the goods being manufactured. More hiring means more cash streaming into the economy. That seems like a perfect scenario except most times wages do not keep up with rising prices. If you cannot buy enough groceries to feed your family with increased earnings are you truly better off?

Deflation is also a good and bad thing. During times were prices are falling your dollar will go further (you can buy more goods), but at the cost of decreased income. Economic contraction means the factory conveyor belt is turning slower so less employees are needed. If your dollar is buying more, but your wages are less are you truly better off?

The truth about inflation and deflation's affects are your ability to adjust spending. The mindset for the years ahead is to focus on saving money. Stay away from debt and unnecessary spending across the board. Commodities such as homes, cars and clothes that are currently sold at a premium will adjust down eventually as less are being purchased. In periods of economic contraction cash is king because there is less of it. Unlike times of inflation, in deflationary periods where prices are falling, a penny saved is really a penny saved. If you are a saver the next few years will be a blessed time. Be frugal and your piggy bank will be your new best friend.

Wednesday, July 21, 2010

The New Value

I have been reading articles lately how determining value is becoming an art form. How do you appraise an asset today when so many economic variables effect its value tomorrow? New appraisal repositories are entering the field of reference. A once easy task is becoming a sophisticated venture. When it comes to financial assets (houses, boats, cars, stocks, cash, gold) which is the best to hold when most hard assets are in decline?

As the economy contracts so does the value of most hard assets. Some will reduce in value greater than others. The most expensive of financial assets would be real estate. One of the main contributors to the housing decline (besides supply increasing and tight lending) is that most homes needs to be acquired through obtaining a loan. In a down economy shouldering excessive debt can make life challenging. The affordable homes market is not as affected (less debt) than the expensive home market (more debt) and therefore is selling easier. Other assets such as boats, autos, art, and jewelry have had a significant decline in value as well. Most investors at this time would rather hold cash that any of the above mentioned assets. In down economies cash is king.

We should also mention gold. It has been said that gold is the best asset to hold in a down economy. With declining value in cash and exchange rates of foreign currencies, investors are selling cash and buying gold. There has been a huge run on gold as investors sell other "cash like" assets such as commercial paper, bonds, stocks, and Cd's. In down economies gold has always been the counter-cyclical assets of choice. It is easy to sell and looks pretty on your finger.

So what is the most valuable of assets? It would be your health! Having good health will save you thousands of dollars on prescription medication, keep your medical insurance premium low, reduce sick days from work and generally make you a more pleasant person to be around. Health is the #1 asset to hold in any economy. So be a smart investor and take your vitamins, get on that treadmill, floss your teeth and cut back on the ice cream. The return on investment will last a life time!

Monday, July 19, 2010

Gains Are Found in the Highs and Lows

It is always insightful to see changes in the landscape. The feeling you get after a rain and seeing the flowers in full bloom. Being in the finance industry since 1985 I have gained much perspective (and a grey hair) in the highs and lows that come with investing. It is insightful as well to see the many changes that come when financial reforms are put into place. The feeling you get when you know the impact reforms will have on an industry will shift the balance of power.

During the meteoric rise of real estate values during the years of 2002-2007 it was insightful to see investors stumbling over themselves to scoop up houses to the tune of 20% annual appreciation. I had experienced the same unbridled consumption during my stock broker years in the 80's. Movies like "Wall Street" glamorized the edginess of being on the inside and capitalizing on fast money. Stocks were the rage and hot-shot money managers had rock star status predicting the next up and coming, million dollar, over night trade. Stock investors were earning 200% gains on penny stocks, new technologies were making the medical stocks rocket and even sleeper industries like retail companies were growing double digits. All good things must come to an end and as the SEC tightened rules after the market crash in October 1987 the balance of power shifted into tighter trading reforms.

What impact will the current reforms have on business? Reforms make the system contract as new rules fall upon the players. Regulations act like filters to decrease the pace of expansion. Business loans will become harder to fund, both "stay afloat" loans and "business expansion" loans, as businesses collateral-backed assets dry up. With less money to lend business will need to become more innovative to survive. There is a natural selection in process. Businesses that fail were targeted by the system to fail. It is the way it is meant to be. As the business landscape changes there will be new and innovative "rock star" business that will thrive. Just like flowers after a rain they will bloom brightly for all to see.


Saturday, July 17, 2010

One Step in the Right Direction

Very soon our president will sign into law the Financial Overhaul Bill of 2010. This 390,000 word document was created from the ashes of the 2008 banking collapse that brought the worlds financial systems to its knees. The bill, being released from the Senate next week, will be the heaviest piece of legislation ever created and the most sweeping reform bill since the great depression. Though the repercussions of the bill will not be felt for years, it stands to protect consumers from predatory lending, sets up systems to more heavily scrutinize financial institutions and generally make banking a more transparent operation.

This is not the first time the banking system has failed though. The Savings and Loan crisis of late 1980's was the first major event to call into question where banking executives bread was being buttered. Systems become corrupt when individuals that are being compensated by volume incentives are told to "ethically police" the system. Any organization managed only by its internal components is doomed to fail. Leaving the Rooster in the hen pen will not always make more chickens.

In my opinion the reform bill is a very good thing. Being an ex-mortgage banker myself and experiencing first-hand the rise and fall of the financial industry, banks need more scrutiny for their own good. Consumers will be the residual beneficiaries of the bill, but so will the global banking system. Initially, as in 1991 when the S & L Reform Bill came into law, there will be complaints, increased fees and substantially greater processing times, but over time the global banking system will be in better synchronicity. This is one step in the right direction.


Thursday, July 15, 2010

Is the Truth Black, White or Grey?

Many mixed signals are coming from Wall Street. Every day we get peppered with positive and negative reports. On one channel we get that unemployment is increasing (bad) then another channel reports that the unemployment "trend" is improving (good). I turned on the radio and heard that mortgage rates are the lowest that they have been since 1963 (good), but home foreclosures outpace new home sales (bad). Oil giant British Petroleum capped the gushing oil well in the Gulf (good), but the Gulf Coast may take centuries to recover ecologically (bad). I guess it is how you see things that make you either smile or frown.

For home buyers or home sellers the recent drop in property values can be seen in two perspectives as well. If you are a homeowner selling the home you have lived in for years then you are probably thinking "Why didn't we sell years ago when values where higher". The other perspective could be "Look at how cheap homes are now! When we sell we can buy a bigger home cheaper than what we owe on this home". Home buyers are pummeled with decisions. The shear volume of properties that are hitting the market daily is overwhelming. For a home buyer, in this crazy market, it is hard to hit the bulls eye when the target keeps moving.

Fact is that value is very subjective. Each human is in a slightly different space and sees value proportionate to their interests. Mixed signals, whether they come from Wall Street or Main Street, are a way of life. I was told long ago to never believe anything you hear and only half of what you see. Most feel that news is presented with some form of bias and we must go with our gut and find the truth out for ourselves. Bad news sells newspapers and over-dramatization is the norm. We are taught that truth is black or white, but in today's media, truth is somewhere in the grey.

Monday, July 12, 2010

Eliminate Mortgage Interest Tax Deduction?

I have read recently that in an effort to increase government revenue the Obama Administration is considering eliminating the mortgage interest tax deduction. I can only imagine what a quagmire government cash flows must be in from funding such colossal projects as the 2008 banking crisis, the ongoing and escalating expense of the Afghanistan war, Haiti relief efforts and now the Gulf oil spill. Trying to understand the myriad of government economics would take a brain much larger than mine. Given that there are big brains on government payrolls I am sure there must be better ideas on the plate that nixing the mortgage interest tax deduction. What are they thinking? Hasn't the real estate industry had enough impact? Even the consideration of such drastic measures would deliver a knock out punch to an industry barely hanging on to the ropes.

In an effort to better understand the "Robin Hood" mindset of taxing the rich and giving to the poor, what would elimination of the tax credit render the average American? If you had a $200,000 mortgage and were claiming $10,000 a year in mortgage interest deduction you would now pay taxes on $10,000 of income that was shielded by the deduction. If you were in the 25% income tax bracket you would have to pay $2,500 additional in taxes per year ($208 per month). In a down economy with national unemployment just under 10% how is that going to stimulate consumer confidence? Talk about a regressive tax. This would kill the economy, unfairly burden the homeowner and hurt everyone employed by or associated with the housing sector.

Might I suggest a more progressive attack. If you want to go after the rich (I mean the really rich) start by taxing capital gains more aggressively. Then go for the ultra rich by taxing drug and oil companies. How about manufactures who produce products that damage our water, air and soil like tobacco, plastics and pesticides. How about a tax on the fast food industry that create products that produce high blood pressure, cholesterol and diabetes. Leave the homeowner alone. Yes, Robin Hood would be very proud of all that.

Sunday, July 11, 2010

How European Woes Effect You

The European debt crisis is showing new signs that its credit problems are far from over. The European Nations, being one of the largest buyers of US mortgage backed securities manufactured from 2004-2007, is beginning to face the fact that their exposure to sovereign debt could haunt them for years to come. In 2009 US banks imposed “stress tests” on their ability to adequately provide sufficient liquidity during an emergency run on assets and avoid another round of government bank bailouts. European banks are now implementing similar tests.

Highly publicized economic events show stress on the system such as Greece’s public revolts against reforms as the government slashed programs and raised taxes to cover their mounting debts. Germany and Spain are also engaging economic reforms restructuring debt, reducing political banking appointees and branches. The Bank of England, in similar fashion, recently increased their “capital cushions” to protect banks liquidity.

How do European credit woes affect you? Banks are trying to avoid another liquidity crisis by increasing reserve requirements. These reforms have made rates banks lend to each other (over night funds) increase. Tighter banking reforms will drain the system of liquidity. Less liquidity will hinder banks ability to lend freely. Underwriting guidelines will become tighter and loan application scrutiny will increase. If you haven’t applied for a loan in a few years get ready for a new experience. Tighter regulation will not only affect the amount of information you will have to provide, but also lengthen the process, increase costs and ultimately may hinder your loan approval. Over the long term these reforms will provide a more stable global financial structure with significant safety valves, both high and wide, to protect itself from another melt down. Over the short term there will be more pain and less gain.

Saturday, July 10, 2010

The New "Downsized" Real Estate Forecast

There are new economic forecasts pouring in from Wall Street that there will be another down turn in home values in the months to come. Economists are predicting decreases between 3% to 5% nationally, but some markets could see greater declines. This should come as no surprise as new home ownership economic stimulus money dried up in April of this year, employment is sluggish at best and consumer confidence is in steep decline . It is sad but true that without government incentives people are just not that optimistic about purchasing real estate. You would think with mortgage rates at historic lows, home prices 35% off their market highs (much more in some areas) and plenty of seller incentives on the table, buyers would be flocking to home ownership. Fact is in down economies cash is king and most are holding on to cash for necessities and emergencies. People feel in their gut that we will be in a down economy for several more years and gambling on home ownership is not a option at this time.

What drove the boom in real estate values from 2001 to 2006 were market speculators, investors and huge Wall Street REIT pools. There was plenty of cash to be made and everyone wanted in on the game. Cash was everywhere flowing like a river. Like all good things must come to an end, in August of 2007 financial markets froze and the party was over. There is an old adage that greedy pigs get slaughtered. Most "pigs"who participated in the speculation are now broke or slowly becoming broke. Real estate can be a good investment depending on what time frame in the economic cycle you hold it.

The bottom line is that real estate is in essence shelter. Along with food, air and love we all need somewhere to lay our head at night. There have been decades where real estate was never seen as an investment, but as a home to raise your children and shelter your family from the storm. Purchase real estate not on speculation, but on becoming a member of the community and laying down roots. Owning a home adds value to everyone that surrounds you, not to mention tax advantages and a potential for appreciation. Renting will never feel as good as owning and owning now is cheaper than it has been in 10 years.


Friday, July 9, 2010

Why We Drill Offshore and Pay $3.00 for Gas

It is a very sad moment when you suddenly realize that we are all just being led down the chute like pigs in the poke. As individuals we like to feel that our contributions helps the world somehow and what we do everyday matters. Then you read an article that sets you back a few feet and makes you question what really is the big picture? Who is really running the show? Is our world run by a planet of individuals or is it run by governments and corporations back slapping, cigar filled, back-room hand shake deals.

We have all been led to believe that the world of goods and services runs on a system of supply and demand. Prices for these goods and services are determined by how much we demand and how much is available (ie, higher prices if what we demand is a scarce resource). Then you find out that prices of something that everyone on the planet demands is not calibrated that way. Maybe the world as we know it is not as we know it. Maybe governments and corporations have back-door agreements that artificially fix prices so that they can benefit financially while the rest of us suffer.

Imagine how much better we would be economically if gas prices were allowed to be a true supply/demand market price. How much better would your bank account look if it only cost $25 to fill your gas tank instead of $60? How much lower would your power bill be? How much would air fares go down? Fact is gas prices have a HUGE impact on us all and not just at the gas pump. High gas prices ripple through the economy like waves, effecting everything in its path. Though there are other artificially priced industries due to government subsidies, tariffs, fines and taxes, none that impact us as much in the pocket as gasoline. The article below says it all. Time to squeal...


Tuesday, July 6, 2010