The Fed reports that more needs to be done about foreclosures


With foreclosures on the rise and market instability increasing, The Federal Reserve Chairman, Ben Bernanke urged lenders Tuesday to help distressed owners by lowering mortgage amounts.  He warned that foreclosures and late house payments are likely to rise a while longer, even with the efforts of industry and the government to curb a recession. Many lenders have increased their loss-mitigation options and grown more willing to work with owners in threat of default.

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Bill to allow judges to lower mortgage amount instead of foreclosure


In an effort to reduce the number of foreclosures this year and next year by an estimated 600,000+ households, there are two bills before Congress that would grand “judges the authority to reduce mortgage debt.”

The two bills only apply to borrowers that live in their homes and have either subprime mortgages or other non-traditional mortgages, such as interest-only loans.

“It is one of many efforts by government and consumer groups to encourage lenders and mortgage servicers to restructure loans to more affordable terms for home owners in danger of default.”

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The Fed Lowers Rates another Quarter Point – and my opinion on the current market condition

I guess this is old news now, but I thought I’d post it anyway to document history.  This is the second cut in a row in an attempt by the Fed to get the current housing slump and oil price spike under control and prevent our economy from going into recession.  I would be lying if I was to say that I have a full understanding of how this works and how the Fed’s adjustments effect all of us economically.

Click here for an article that spells it out the effects on the economy of lowering the interest rate.

I understand the basics.  You lower the interest rate, the cost of borrowing money goes down, so people, businesses, etc. borrow more money/buy more product, real estate, etc. and the economy is given an injection of growth through financial movement.  Unfortunately I think the present state of the real estate market as a whole (nationally) is a little more complicated.

What happened during that period of time many have come to call a “boom” is that the cost to borrow was little and people bought in the beginning because the lifestyle they desired was less expensive than it had ever been before.  They wanted that second home, interest rates were so low it cost almost nothing to borrow for it, so they made the stretch to make the purchase.  Tons of people did this, so many that there wasn’t the supply to meet the demand.  The buyer noticed this and decided to become a seller to capitalize on this.  He had something that he didn’t really need that someone else wanted and was willing to pay for it.  The property sold for a profit.  The buyer realized his quick profit and decided to do it again when he had the chance.  Multiply this scenario by hundreds of thousands across the country and you have a “boom”.

I remember at one point a guy was telling me that he missed his opportunity on several preconstruction development deals because he never got a call back.  At one point if you were not proactive in making sure you found out about and purchased the preconstruction, you missed out.  I had a friend that worked on a big project in Vegas in the middle of the “boom”.  He told me they were literally taking orders.  When someone called, their story was basically “if you are interested, send me a $5k reservation check overnight with the signed reservation agreement and we’ll try our best to get you a condo, but I don’t have time to talk because I’ve got 30 more phone calls to return in the next two hours.” If my memory serves me correctly, this was a 900 plus unit resort that was sold out as soon as they brought the product to market.

ok, back on point.  So, tons of buyers bought, and so many realized that they could “flip” out for a quick profit that buyers were no longer buying to use, but to resell.  Buyers were buying to sell and developers were scurrying to keep up with the demand.

The good and the bad of all this is that nothing happens overnight.  It took years for the market to heat up and it took years for the market to cool off.  As prices started rising pretty sharply, and interest rates started to rise, the buying began to slow.  In this particular case, the buying began to slow quicker than the developments could slow until it slowly flipped with there being slightly more supply than demand.  As buyers began to realize this they started trying to sell so as to recover their costs, sharply increasing the inventory on the market and further increasing the gap between supply and demand.  In addition all the buyers that bought – not because they could afford to buy and use, but to flip for a profit – are stuck with adjusting mortgages that they couldn’t afford in the first place.

So we’ve got a couple of pretty big problems that actually boil down to one huge problem:  we have a great deal more supply than we have demand and there are tons of people that bought that could not afford to buy that are getting foreclosed upon, which will further increase the market inventory – creating even more supply than demand.  The unfortunate thing about this is that we are just going to have to wait this out.  Unless the Fed lowers the rates an astronomical amount (which he won’t do and shouldn’t because a total swing in the opposite direction would actually be worse for our economy in the long run) or, Heaven forbid, something tragic happens on US soil again, we won’t see any huge change in the market for a while with regards to shrinking the gap between the supply and the demand.

I know this may seem glum, but there is a positive side to all this.  Those that can afford to hold will be fine.  Real estate, as with most investments, is statistically strong over the long term.  It is an exponential relationship: the longer the term, the lesser the risk, the lesser the term, the greater the risk.  The buyers that bought to flip and couldn’t afford to hold took the risk that they would not be able to sell and get foreclosed upon.

Had I the knowledge in 2003 to be buying and flipping, I would have totally done so.  I have friends that did very well during that period.  I also have friends that are holding several houses right now not knowing how they are going to make their bills next month, hoping (and praying) for a sale.

Another upside?  If you can buy and you like longer term investments, now is the time to buy.  Existing homes are selling for pennies on the dollar if you look hard enough and in many cases these properties can cashflow for the buyer with great credit.  In addition, developers are practically giving away new homes just to not carry the inventory.  I hear stories of developers taking offers at cost just to get out.  I wish we had that problem here (I’d love a new house), but this is mostly in larger metropolitan areas.  Our development boom happened on the beach.   Right now you can buy a condo on the beach for around $260 sqft.  I could be wrong about this number, but I think right now it is costing somewhere between $250 and $300 a square foot to build.  If you can buy right now, you should definately buy.

Ok, I’m done with my rant.  I hope this all makes sense, it’s 1am and I’m going to bed.  No more work today.

Foreclosure rates continue to rise

It isn’t hard to find negative news on the current state of the real estate market. We were talking in the office yesterday about how almost daily there is a new article about the foreclosure rate climbing, lending getting more difficult, etc. The latest I read on was that the foreclusure rate (nationally) in quarter 3 was 30% higher than quarter 2 and almost doubled from quarter 3 of 2006. This is said to be affecting 1 in 196 households. Nevada had the highest foreclosure rate – 1 in 61 households – tripled from quarter 3 in 2006. California had the second highest foreclosure rate – 1 in 88 households – four times what it was in quarter 3 in 2006. Numerically California was the highest with 94,772 filings in the third quarter. Florida was the third highest – 1 in 95 households – doubling from third quarter last year with 86,465 total filings

How long is it going to take to get out of this glut? Many have said that we have to get through all the foreclosures first. How long will that take? The problem with this is that it has not and will not be a quick process. In addition, the foreclosures add to the already too-full pool of inventory on the market.

Right now consumer confidence is down. Even the savvy investors are afraid to purchase now because they are worried that their purchase may go down in the coming months from what they bought it at.

Where is the light in all this? The light is in buying right now. I know this is what all the Realtors are saying right now, and of course it has some motivation to keep the paychecks flowing, but it has a lot of truth to it. The fact is, right now property can be bought at sometimes pennies on the dollar. If an opportunity comes around to make a purchase that will cashflow, you should take it in a second. You can’t worry about whether you’ll lose $10k in value over the next year, you have to look at the 3 to 5 year upside, or even more. Real estate was never a good short term investment, and the market over the last few years influenced people to forget that. Real estate becomes a good investment when you can generate more money on a regular basis than you are paying out. If you can cashflow $50 a month, you can have as many as you want and you’ll only make more money. Now I understand that there is more involved (like having enough for emergency reserves, etc.), but this is a simple example.

Now is a great time to buy, that’s the positive. It stinks for people like me who are trying to sell their home, but it is a great time to buy.