Real Estate News & Commentary by Chris McLaughlin, March 30, 2009
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Housing prices fall
The S&P Case-Shiller Home Price Index, measuring housing prices in 20 representative cities across America, fell for the 30th straight month in January, bringing house prices down to 2003 levels. And this time it actually set a record, falling 19% from January 2008. “There are very few bright spots that one can see in the data,” said David Blitzer, chairman of the index committee at Standard and Poor’s. “Most of the nation appears to remain on a downward path, with…nine of the MSAs (metropolitan statistical areas) falling more than 20% in the last year.” According to Mike Larson, a real estate analyst with Weiss Research, home prices won’t start advancing until the overall economy picks up.
Home bargains galore
In total, prices have plunged 29.1% nationally since they peaked during the second quarter of 2006, but that of course doesn’t figure in individual cities, where prices are more varied. Dallas is the least affected at 4.9%, and Phoenix lost the most, at 48.5% from its peak. All 20 index cities were in negative territory, but the biggest losers are Las Vegas, Miami, Phoenix, San Francisco, and San Diego — each losing more than 40%. The bad, and good, news is that the rate of decline has picked up recently. As Mike Larson, a real estate analyst with Weiss Research says, “”Arguably, that’s just what we need to drive up sales activity and reduce inventory.”
Big boys ready to pounce
Morgan Stanley is one of several early bird institutional investors getting ready to snap up real estate bargains — it’s close to raising $6 billion for a new global property fund: the Morgan Stanley Real Estate Fund VII Global. “I think these new real estate funds will look for distressed opportunities and they think they can bargain with developers who mismanage the balance sheets or have liquidity issues,” said Laure Wang, managing director of Asia Alternatives, a private equity fund of funds. According to Paul Vosper, chief operating officer for real estate at Morgan Stanley’s Alternative Investment Partners unit, the downturn in global property markets will create a period of strong returns.
Consumer confidence down
The Conference Board, a New York-based business research group, said its Consumer Confidence Index rose to 26 in March from a revised reading of 25.3 in February, but is still hovering around all time lows. Lynn Franco, director of the Conference Board’s consumer research center, said apprehension about the outlook for the economy, the labor market, and earnings is largely responsible for low consumer confidence. The percentage of people who said they were going to buy a home over the next six months fell to 2.0 percent from 2.3 percent, and the auto industry doesn’t have anything to celebrate either – the percentage of people who plan to buy a new car fell to 3.9 percent from 4.7 percent.
The next wave…banks walk away?
All over the US, banks are quietly declining to take possession of properties at the end of the foreclosure process, usually because the cost — from legal fees to maintenance — exceeds the diminishing value of the real estate. “It is what some of us think is the next wave of the crisis,” said Kermit Lind, an expert on foreclosure law at the Cleveland-Marshall College of Law. In Buffalo, where officials said the problem had reached “epidemic” proportions in recent months, the city sued 37 banks last year for the deterioration of at least 57 abandoned homes, even though the banks had walked away from many more foreclosures. So far, five banks have settled. The problem is most acute at the bottom of the market — houses that were inexpensive to begin with — and with investment properties, where investors and banks want speedy closure by writing off bad loans as losses. And we thought it couldn’t get worse…
Now on to our real estate investing education section…
Numbers to Know – Short Sale Quick Ratio or Acid Test
While many short sale investors and real estate pro’s use the current ratio on a regular basis, few take advantage of the relative benefits to be derived from making the quick ratio (aka Acid Test) readily available for review. Fortunately, the quick ratio really is quick…so take a few minutes to learn how to calculate this handy helper.
How to Calculate
The quick ratio or acid test basically equals cash plus short-term investments plus net receivables divided by current liabilities. For example, let’s assume you have $20,000 cash in the bank, another $30,000 in savings bonds gramma gave you, $35,000 in stocks or bonds that you can cash out and $15,000 in rent payments due with total current liabilities of $90,000. The numbers would look like this…
Cash and cash equivalents + Net Receivables = $100,000/ Current liabilities $90,000 = 1.11
How to Use
The quick ratio or acid test is increasingly used by lenders and others instead of the current ratio – because the quick ratio is even more “severe” or stringent, it is a quick and dirty method to measure the short-term debt paying power of an applicant. Essentially it is another liquidity measure albeit on steroids.
The standard is 1:1 ratio…the higher above 1 the better. For those of you able to demonstrate a 1+ ratio then toot your own horn! Make a point of showing this to prospective lenders to let them know you are good bet with something to offer.
For those at or near 1:1 the quick ratio is still a strong indicator as well as goal to consider. If you are able to trim just a little to better your current liquidity standing it might make the difference between mediocre versus the VIP treatment.
Eyes Wide Open
Finally, for those well below the 1:1 ratio consider going back to the current ratio or re-examining your assumptions. Review your cash equivalents to be sure you have the staying power in the event of an emergency or unexpected delay in funding or cash flow.
One of the few areas likely to cause a savvy short sale investor to falter is not the lack of profit but rather lack of readily available cash on hand or liquidity. In fact, this is a common problem that plagues investors and business owners at all levels; unfortunately, the average short sale investor does not have the benefit of a wide open federal window ready and waiting to hand over temporary loans to keep you in operation. The acid test provides a firm footing to keep you in the black and away from the risk associated with a liquidity crunch.
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com/welcome.html
P.S.
Don’t miss out webinar tonight at 8:30 PM ET, 5:30 PM PST:
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Copyright Loss Mitigation Institute 2009.
All Rights Reserved.
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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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