New housing starts stop

Real Estate News & Commentary by Chris McLaughlin, May 19, 2009

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New housing starts stop

The Commerce Department’s March reading of housing starts fell to the lowest level since the government began keeping records in 1959, plummeting 12.8% to a seasonally adjusted annual rate of 458,000, down 12.8% from a revised 525,000 in March — the second lowest reading came in January, when the rate of housing starts was 488,000. Economists were expecting housing starts to come in at 520,000, according to a consensus estimate compiled by Briefing.com. Compared to the same month last year, privately owned housing starts were 54.2% below the revised April 2008 rate of 1,001,000. Increased unemployment and skyrocketing foreclosures of existing homes seems to be the impetus deterring new builders. Applications for building permits, an indicator of future construction activity, fell 3.3% to a seasonally adjusted annual rate of 494,000 in April. The measure for building permits was also a record low, going back to January 1960; the furthest back the government has records.

Behind the numbers

“Markets trade on headlines but the details of this report are less bad,” said Ian Shepherdson, Chief U.S. Economist at High Frequency Economics, in a research note, referring to the market drops this morning. While the housing start numbers look terrible at first glance, “The devil is in the details here,” as Mike Larson, real estate and interest rate analyst at Weiss Research says. “The weakness in April was concentrated in the multifamily sector of the market – condos, apartments, and so on,” said Larson. “That likely stems from the ongoing condo glut and the tighter financing conditions we’ve seen in the commercial real estate arena.” New construction of multi-family homes with 5 units or more sank to an annual rate of 78,000, down 42% from a revised 135,000 in March, BUT, new construction of single-family homes, considered the core of the housing market, actually rose 2.8% in April over the prior month, to an annual rate of 368,000. Stability in the single-family sector combined with a recent uptick in builder confidence, according to a report from the National Association of Home Builders/Wells Fargo released Monday, indicate the rate of deceleration in the construction market could begin to slow.

Short sale defined

In case some of us still don’t know what a short sale is, the National Association of Realtors (NAR) has defined it for us in the Handbook on Multiple Listing Policy: “a transaction where title transfers, where the sale price is insufficient to pay the total of all liens and costs of sale and where the seller does not bring sufficient liquid assets to the closing to cure all deficiencies.” The board also made a few somewhat more helpful recommendations, stiffening standards for realtors, and opposing some of the administration’s more knee-jerk regulation.

Banks to repay TARP?

Because of the stifling regulation the government brings with it, banks are scrambling to repay Troubled Asset Relief Program (TARP) money most of them never wanted in the first place,. Treasury Secretary Timothy Geithner has said that if regulators certify that a bank would be sound without government help, the Treasury would gladly take the money back, but he left a loophole, telling lawmakers last month that his role was to ensure the soundness of the entire financial sector. Goldman Sachs, JPMorgan Chase & Co, and American Express Co are expected to be in the first wave of major lenders allowed to return TARP funds, since the government’s stress tests said none of the three needed to raise capital, even among the most negative economic scenario that regulators considered. Wayne Abernathy, an executive at the American Bankers Association and a former Treasury official, told Reuters earlier Monday that he expected the Treasury would act soon to let large banks repay TARP. I guess we’ll see.

John P. Hussman, of Hussman Strategic Growth Fund and Hussman Strategic Total Return Fund, offers a stark warning about the future implications of the Obama bailout. It’s worth reading:

The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured.

But by transferring wealth from those who did not finance reckless loans to those who did – providing monetary compensation without economic production – the bureaucrats at the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery.

[T]he bailout ensures that any incipient recovery will be cut short, because the only reason that our economy is able to absorb the present supply of government liabilities is extreme risk aversion that creates a demand for default-free instruments. If that risk aversion abates, it will quickly be replaced by higher short term interest rates, higher monetary velocity, and inflation that can be expected to be quite difficult to control. At that point all the Fed will be able to do is to swap one government liability (monetary base) for another (Treasury securities). The genie will not easily go back into the bottle.

[T]he attempt to save bank bondholders from losses – to provide monetary compensation without economic production – is not sound economic policy but is instead a grand monetary experiment that has never been tried in the developed world except in Germany circa 1921.

This policy can only have one of two effects: either it will crowd out over $1 trillion of gross domestic investment that would otherwise have occurred if the appropriate losses had been wiped off the ledger (instead of making bank bondholders whole), or it will result in a stunning and durable increase in the quantity of base money, which will ultimately be accompanied not by a year or two of 5-6% inflation, but most probably by a near-doubling of the U.S. price level over the next decade.

The other way of saying “a near-doubling of the U.S. price level over the next decade” is “The value of your savings will be cut in half over the next 10 years.”

http://www.hussmanfunds.com/wmc/wmc090518.htm

Now on to our real estate investor education tips section …

Short Sale & REO Negotiations – Bad Product Round-Up

Here’s a tip to keep in mind when evaluating potential short sale properties and placing an offer…be sure to evaluate whether or not the building is impacted by bad products, recall notification or other defects that could drive down property values or require extensive (and costly) repairs. It could save you a small fortune even if you aren’t positive the property is impacted. Follow these simple steps and use the following check-list as a starter:

Inform the lender or seller of your suspicion. If a home was built within the general time frame or uses materials that could be considered potentially suspect, request a copy of the building supply list, product numbers or other information in order to verify or eliminate the suspicion.

Include the information in the appraisal. The appraiser may not have an up to date list or even be aware of every product recall on the market; in fact, most simply check to make sure the item works as expected in the case of HVAC/other and eliminate the most obvious defects like glaring holes…few, if any, actually consider the quality of the materials used to build the home.

Put it into writing. The seller, lender and appraiser should all be

notified of any confirmed defects or faulty building products used on the construction of the home so be sure to put it into writing.

Remember, even though the home is being sold “as-is”, there is still an obligation to inform prospective buyers about known defects.

Make a contingent offer. All offers should be made on a contingency basis until the final inspection is performed especially if you suspect the use of bad building products were used in the construction of the home. Re-negotiate your offer based upon the findings of the appraiser and/or proof of materials used.

Keep a list and check it twice. There are more bad building products on the market than you might ever realize; in fact, according to some experts almost every home contains one or more potential problem products. Here is a short list of some of the more commonly encountered – and frequently overlooked – materials used in the construction of newer homes that could impact property values:

Roof Insulation – Beazer phenolic foam roof insulation.

Pressed Wood Siding – Numerous manufacturers are either in court or have active settlements.

Drywall from China – Corrosion, respiratory problems and even plumbing erosion.

Weyerhauser Hardboard Siding.

Omege Sprinklers and fire prevention

Louisiana-Pacific composite deck boarding and materials

GE electric stove/range

Home Heating Vent Pipes

Central Fireplace – actual fireplace and/or inserts

Kidde fire extinguishers

Maytag refrigerators

Window blinds – many varieties!

Rheem oil furnace

Bosch and Siemens Dishwashers

Woolf Steel Propane fireplace

Gas vent dampers by Effikal

Gas Boilers by PB Heat

Gas range by Wolfe appliances

Indoor light fixtures by Lithonia

Goodman Air Conditioners and Heat Pumps

Heat Recovery Ventilators by Venmar

Lighting fixtures by Progress Lighting

Miele gas dryers

Hearth and Home fireplace wall controls

American Flame fireplaces

Carbon Monoxide Alarms – several

Kenmore Wall Ovens

Bathroom medicine cabinets sold by Lowes

Shop/garage lights by Cooper lighting

Carrier Air Conditioners and/or Heat Pumps

Dishwashers by GE, Asko and others

FLOR carpet tiles

Plus MANY Many others!

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See you at the top!

Chris McLaughlin

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

P.S.: Don’t miss our webinar this Tuesday night at 8:30 PM ET,

5:30 PM PST:

https://www2.gotomeeting.com/register/965247674

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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