Foreclosures Spike Again

Real Estate News & Commentary by Chris McLaughlin, March 30, 2009
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Foreclosures spike again in February

It was starting to look like the problem was easing before January, when foreclosure starts declined to 69,000 in November from 77,000 in October and then dropped again to 56,000 in December. But in January the number of started foreclosures jumped to 217,000, and now February’s numbers have leaped up again to 243,000. 87,000 homes were repossessed (foreclosures completed) by banks during February, a 28% jump from the 68,000 foreclosures completed in January. Since the mortgage meltdown hit in July 2007, 1,395,044 homes have been lost. In February, nearly 250,000 homeowners received either mortgage modifications or repayment plans from their lenders, according to Hope Now, the coalition of lenders, investors, and community advocacy groups put together by the Obama administration’s foreclosure prevention initiative.

AIG back in the news

American International Group (AIG) has cut or delayed payments to some of its real-estate ventures, potentially leaving the developers and their bankers in the lurch. AIG had previously been sued by Mitchell L Morgan Management Inc for missed and delayed payments, and the latest victim is Alabama shopping-center developer Alex Baker. The action puts 15 banks at risk of exposure to soured loans. AIG Global Real Estate, an arm of the insurance company, has interests totaling more than $23 billion across 53 million square feet of real estate. The Federal Reserve is monitoring AIG’s spending closely after committing $180 billion in bailout funds, but whether that’s helping or harming is still anyone’s guess.

Detroit failed

The Obama administration gave General Motors and Chrysler LLC failing grades Monday for their turnaround efforts. It promised a sweeping overhaul of the troubled companies, but also threatened a “structured bankruptcy.” Prior to the announcement, CEO Rick Wagoner announced his resignation, saying it came at the request of the Obama administration. GM will get 60 more days and Chrysler 30 more days in which to make a final push toward proving they can run viable businesses. If Chrysler succeeds — probably by merging with Fiat — it will receive a $6 billion loan. In GM’s case, the officials would not specify how much the carmaker might receive, but we can all guess it’ll be a lot.

Stocks slide on banking troubles

Bad news from the auto sector was bad enough, but Treasury Secretary Tim Geithner’s announcement that more banks would need help caused stocks to tumble, with the Dow opening 202 points lower, the S&P 500 index lost 21 points, and the Nasdaq composite lost 39 points. As Art Hogan, chief market strategist at Jefferies & Co put it, “We were starting to see some light at the end of the tunnel, but it’s beginning to look oddly like a train.” That pretty much captures investor sentiment this am. Would it be an understatement to say the week isn’t off to a good start? Especially if you own auto or banking stocks.

Now on to our real estate investing education section…

Understanding the Time Value of Money – Why Short Sales Still Make Sense

Deflation or Inflation? Chances are whichever side of the debate you happen to be standing on at the moment you are in good company. The government experts are readily printing money out of thin air…and actually admitted as much in recent weeks…while financial analysts, other governments around the globe and those with fixed incomes fear the rise of inflationary pressures. How could so many smart people have such a strong disagreement? It comes down to the time value of money. A topic of such importance it will have profound implications on the way you structure investments throughout your lifetime.

There are two primary methods used to determine the time value of money – Present Value and Future Value. Present value is what a dollar today is worth rather than the value compared to receiving it as some point in the future. For example, let’s assume you have an option to sell or hold a modest property purchased via short sale. To keep the calculations and comparisons simple, we will further assume the property is paid in full. You are reasonable positive you could pocket $100,000 by selling the property outright but wanted to know if this was your best option.

Typically, future dollars are worth less than present dollars due to inflationary pressures. The entire purpose of the Federal Reserve is to assure a steady supply of funds including controlled inflation (defined in the 1-3 percent range). So for example, if the rate of inflation was rising at 3 percent annually the value of $100,000 would be only $74,400 in only ten years. Wait 20 years and that same $100,000 is only valued at $55,000. Bump up the rate of inflation to 5 percent and $100,000 drops to only $61,000 in ten years and only $37,000 in 20…now you know why lottery ticket discount so much if you take the lump sum payment up front! Ditto for insurance companies.

Short sale investors should immediately realize money printing combined with the ability to use leverage in the form of loans can dramatically increase the ability to generate cash today – not ten or twenty years into the future. In fact, the more excess cash (above what is needed to pay your bills and service debts) you generate today, the better especially during times of inflation. If inflationary pressures hit the levels seen in the 70’s take a look at what happens …$100,000 turns into $42,000 within ten years and only$14,000 by year 20. What originally would pay for a modest home will eventually only be enough to buy a used car without taking steps to preserve your wealth.

Rarely, a reversal takes place where future dollars may become more valuable than current dollars as is sometimes seen during a deflationary cycle. That is what the government fears most since it would make it more costly to pay back all the loans and debt obligations – a cost so high it could jeopardize the foundation of the nation. However, the current deflationary concern is a temporary one at best. The Federal Reserve has repeatedly stated they expect the deflationary aspect of this current crisis to cool by the end of 2009 to 2010…listen carefully – unlike what many “think” they hear…the government and Fed Reserve is not claiming the pain will be over…only that the current deflationary spiral will come to an end. The lack of investment grade returns is unlikely to resume its former hay-day for quite some time while employment continues to lag. Both add up to very real pain as Americans are unable to make a profitable investment or keep pace with their standard of living from lagging wages.

Bottom Line: This is a once in a lifetime buying opportunity unlikely to last forever. Act before it is too late.

See you at the top!

Chris McLaughlin

http://www.shortsalesriches.com/welcome.html

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About the author:

Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.

    * As the top Florida foreclosure and pre-
      foreclosure expert, he oversees more than
      100 short sale & REO closings each month

   * Long-time authority on real estate investing
      and rapid flipping of distressed homes. Owns
      portfolio of nearly 100 high-value, high-profit
     properties

    * Owner and Supervising Broker of one of Florida’s
     largest Real Estate firms, running 4 different
     offices, supporting nearly 450 agents, uniquely
     positioning him to help thousands of investors
     make money in the biggest market opportunity ever!

     * Highly sought-after speaker, consultant, and
      seminar leader for current trends and hot topics
      in Real Estate Investing, Entrepreneurship, and
      Wealth Building

* On twitter: http://twitter.com/mclaughlinchris
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