What everyone else on Redmol is talking about!
There's a lot of scary news out there. Planes crashing, wildfires destroying cities, threats of war in Middle East, and of course, the current (crap) state of market in the great American capitalism.
I would categorize this presentation by the Carlyle Group (a very large private equity group) as "factual information" as much as it is "chicken little"/"sky is falling" sensational media.
However, there's a widespread adoption of the bad news by the news folks, such as this The Economist post:
This crisis, like most others in rich countries, emerged from a property bubble and a credit boom. The scale of the bubble—a doubling of house prices in five years—was about as big in America’s ten largest cities as it was in Japan’s metropolises. But nationwide, house prices rose further in America and Britain than they did in Japan (see first chart). So did commercial-property prices. In absolute terms, the credit boom on top of the housing bubble was unparalleled. In America private-sector debt soared from $22 trillion in 2000 (or the equivalent of 222% of GDP) to $41 trillion (294% of GDP) in 2007 (see second chart).
Judged by standard measures of banking distress, such as the amount of non-performing loans, America’s troubles are probably worse than those in any developed-country crash bar Japan’s. According to the IMF, non-performing loans in Sweden reached 13% of GDP at the peak of the crisis. In Japan they hit 35% of GDP. A recent estimate by Goldman Sachs suggests that American banks held some $5.7 trillion-worth of loans in “troubled” categories, such as subprime mortgages and commercial property. That is equivalent to almost 40% of GDP.
But everyday bloggers that have a huge following by individual web surfers like you and me. For example, though this blogger doesn't command a huge traffic, he/she presents a perfect example of gloom and doom:
The pundits in the mainstream press did not even have the intelligence to call our current situation a “recession” until a full year had elapsed. I have little doubt that they will also not see what appears obvious to me, and increasingly many others as well that, while we are not there yet in terms of certain key benchmarks, we are well on our way to a full blow “depression.” Some have played the game right down the middle, calling our present situation a “Great Recession.” The truth of the matter remains—it’s the 11th hour now, and a make or break effort is being mounted by the new administration to try to stop the economy from sliding further.
Financial Blog “Whisky & Gunpowder” comments: “It will be called a “depression” if today’s economic tempest slips out of the government’s control. From a financial point of view, a depression is a period when the distortions of an inflationary boom are liquidated — a mass die-off of the economically misbegotten. From an economic point of view, it’s a period when the general standard of living decreases significantly.” And that’s an understatement.
I'm a big fan of Tony Robbins / Joel Osteen type of thinking: that yesterday is past and that the future is bright. Yet at the same time, I was very wary of getting into 5-6 cap investments that all these idiot brokers were trying to pitch to me.
So where do we draw the line?
Of course, no one can answer that for you, especially these financial "gurus" or god forbid, these bloggers.
What I know is that, after the rain, the sun will come. After the night, the day comes. After the storm, peace ensues.
Wow! Good news!
Fannie Mae is updating the policy that pertains to multiple mortgages to the same borrower.Fannie Mae’s current policy limits the number of one- to four-unit financed properties in which the
borrower may have an individual or joint ownership interest to four financed properties when the mortgage being delivered to Fannie Mae is secured by an investment property or second home. The limitation on the number of mortgages currently being financed applies to the total number of properties financed, not just the number of mortgages sold to Fannie Mae. Fannie Mae is modifying this policy to allow investor and second home borrowers to own five to ten financed properties if they meet certain eligibility and underwriting and delivery requirements as outlined in this Announcement. Unless otherwise stated, these requirements apply to all mortgage loans whether underwritten manually or through Desktop Underwriter® (DU®).
This is HOT! BUY BUY BUY!
Has the real estate bubble bottomed out? Are we in for a bright new future? Well, if you listen to the media, you have basically two answers - "yes, and we are close to the bottom" and "hell no".
Some media companies that cover real estate like Inman and Internal Herald Tribune (among a plethora of others) are championing the renewed surge of buyer enthusiasm in the market.
Huffington Post, on the other hand, are saying that the bottom is yet to be seen and that we should prepare for the worst. In fact, the real blood is yet to be spilled, according to this blog post:
Existing Home Sales rose month-over-month in Dec. Everyone is giddy over the possible implications –signs of a robust reversal in the housing market leading the consumer and banks out of the devastating asset valuation nose dive. Of course, this will lead to asset price mark-ups and a ‘v’-shaped, full-blown economic recovery. That would be nice.
But it can’t happen this way and accepting the existing home sales data without looking inside the numbers will lead to incorrect assumptions about the housing market and subsequent losses if you make bets according to the faulty data.
Yes, on a national basis existing home sales were up 6.5 over November but also down 3.5% from Dec of last year. This is just one blip up like four or five others we have seen in the past year - they are always greeted the same way. A large percentage of this came from CA so let’s focus there because other bubble states are very similar. The overall month-over-month rise was a function of crashing prices, lower rates and the CA law SB1137 keeping a flood of REO inventory off of the market. This is all good stuff…or is it.
It’s All About Organic Sales
Organic sales - me selling a home to you - gauges to true health of the housing and mortgage markets and are at record lows. Two years ago organic sales were 95% of all sales and in Dec they made up 42.5% of all sales in CA. Foreclosure-related sales make up the rest. Nationally in December, only 55% of all sales were organic. The foreclosure market is now the housing market crowding out Ma and Pa Homeowner who can’t compete against banks and servicers ‘dumping’ properties.
Organic sales plummeting means that home owners are not freely able to transact. This tells me a few things a) that home owners are stuck upside down in their home and can’t sell b) the all-important move up buyer is non-existent and can’t even afford to buy the home they presently live in given present-day sensible lending guidelines c) home owners with equity can’t sell their home in order to get the down payment for the new home. Organic sales plummeting is a leading indicator to foreclosures that most have not put together yet.
Are Falling Values Good for Housing?
The pundits preach that falling values are great for housing because more people can buy. That is not the whole story. In this market after such a devastating past year and a half for home prices, lower prices are a leading indicator of two things – more loan defaults and more zombie home owners ‘stuck’ in their home unable to sell or refi.
Both of these are a leading indicator of future home price depreciation. Thus, the negative feedback loop in housing that has devastated the sector.
Show me a month where a) organic sales rise b) values stay flat or rise and c) new loan defaults and foreclosures stay flat or drop d) foreclosure related sales rise - that would be a positive. At present, ‘d)’ is the only factor in place.
Those citing a drop in inventories as the ‘mustard seed of hope’ forget that from Dec through Feb many that had no luck selling the prior year keep their homes from the MLS awaiting the Spring selling season. Inventory always surged from Mar to May. Additionally, they also forget about ’shadow inventory’ in the form of REO that is not listed. Realty Trac said in a recent story that they show that only about a third of all REO is listed and trackable as inventory. The rest is sitting rotting at the banks/servicers. These numbers are very close to numbers I have quoted in the past through independent research.
A Flood of REO Properties About to Hit
Looking forward a few months, the REO inventory ‘wave’ that has built up in the past 12-months is about to hit hard. In CA, the SB1137 law exacted on Sept 5th forced a 60-day moratorium on Notice-of-Defaults and Notice-of-Trustee Sales. A Notice-of-Trustee Sale is needed before an insti can take a home to foreclosure. The law essentially kicked the can down the road where all of the inventory will hit as the Spring/Summer selling season kick off. In this respect, the plan worked.
Where do we stand on sales?
So who do we believe? There's so much jitter and fritter that everyone and anyone's an expert. If you have enough fear in the market, speak up and people will listen.
Let's face it. It's going to get harder and harder to obtain financing in this market where the debt instruments are as scarce as water is in Sahara Desert. In fact, take a look at the Fannie Mae limit guidelines for single family loans (as of the date that this post was written):
Single-Family Mortgage Loan Limits effective January 1, 2008:
First mortgages
Note: One- to four- family mortgages in Alaska, Hawaii, Guam, and the U.S. Virgin Islands are 50 percent higher than the limits for the rest of the country.
Second mortgages
What do you do? Dig up your own pond for others to drink out of (in a sense).
Seller financing, a.k.a. owner financing, seller note, owner/seller carryback, etc., is going to be a very very attractive method of financing the transaction. But why would anyone want to be the bank and hold a 30 year loan over straight up cash? Well, there are many reasons and here's a pretty good explanation of why a seller might consider it.
But you have to be careful as the buyer (i.e. who's receiving the note) OR the seller (i.e. who's the giving and holding the note) as there are risks to ANY debt instruments that are paid over time. Especially, if it's a wraparound.
Take a look at this well detailed blog post to get a feel for what's involved. And if you're doing a wraparound note, it's definitely tricker, but not impossible. But apparently, existence of seller note during a 1031-exchange might be a problem.
I recommend you seek out this method of financing, as it is cheaper (in fees, but might be higher in rate) and faster to close than traditional bank financing.
And people thought that the last real estate boom caused by the low interest rate (i.e. cheap money) was bad. This is like throwing gas gas truck into a wildfire in hopes of extinguishing it:
NEW YORK (CNNMoney.com) -- Lobbyists are pushing the Treasury Department to consider a plan to purchase mortgage-backed securities in the hopes of driving mortgage rates to as low as 4.5%, an industry source said.
Last week's Fed move drove mortgage rates down to 5.5%, from 6.06% a week earlier. The Fed said on Nov. 26 that it would purchase up to $500 billion in mortgage-backed securities from Fannie, Freddie and Ginnie Mae, and that it would buy another $100 billion in direct debt issued by those firms.
What's next? Maybe the Feds will decide to sell human eggs that they farm from homeless women to rich couples whose wives are infertile.
I do not know what the long term repercussion of such large government intervention in the economy. Just like the multi-billion dollar bailout of the Big 3 auto makers is doomed to fail, this might be another one of those "oops" moments in economic history.
Politicians fail to realize correction almost ALWAYS follows any type of economic boom. The only way that the economy will heal itself is to let it! That's the key. Let it heal on its own.
No goverment intervention will do any good in the long run. Let nature take its course. If people need to burn for their financial mistakes, then let it be.
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