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Housing sales up, recovery weak

The Commerce Department announced Friday that sales inched up to a seasonally adjusted annual rate of 429,000 from a downwardly revised 426,000 in July, but economists surveyed by Thomson Reuters had expected a pace of 440,000. It was the fifth straight increase and the strongest report in 11 months and sales have risen 30 percent from the bottom in January, but they were 4.3% lower than the same month last year, and are off about 70% from the peak of four years ago. The report was the second disappointing sign for the U.S. housing market. On Thursday, the National Association of Realtors said sales of previously occupied homes dipped 2.7 percent last month. Builders continue to make severe cuts in prices to attract buyers. The median sales price of $195,200 was off 11.7 percent from $221,000 a year earlier, and 9.5 percent below July’s level of $215,600. That was the largest monthly drop on records dating to 1963. Buyers, meanwhile, are rushing to take advantage of a federal tax credit that pays up to $8,000 to first-time owners.

BOA cuts off ACORN Housing

Bank of America has joined the chorus of outrage against the Association of Community Organizations for Reform Now (ACORN) suspended its current commitments to ACORN Housing. “Bank of America takes recent allegations made against ACORN and ACORN Housing Corporation employees very seriously,” the paper quoted bank as saying in a statement. I’m sure everyone here is familiar with the scandal involving the much maligned and much indicted ACORN, but for those who are not, just google “ACORN”, “child prostitution”, “illegal immigration”, “tax evasion”, and whatever other nasty things you can think up, and you’ll find more than you bargained for. Earlier this month, both houses of the U.S. Congress passed legislation that would cut off federal money to ACORN, after a conservative activist secretly filmed Acorn employees giving tax and housing advice to a couple who said they wanted to set up a brothel. Michael Shea, executive director of Acorn Housing, told the paper: “We’re not surprised that our lending partners like Bank of America want assurances that this won’t happen again.” That’s the understatement of the year!

Fed keeps buying MBS

The Federal Reserve’s gross purchases of mortgage-backed securities (MBS) from the government-sponsored enterprises (GSEs) reached $25.6 billion for the week September 17 through September 23. The spending confirms the Federal Open Market Committee’s (FOMC) report that the Fed is on track to buy $1.25 trillion in agency MBS, and intends to wind down the purchasing program before its anticipated conclusion at the end of Q110. Barclays Capital analysts reported that the Fed has bought MBS at a “steady pace of $25 billion per week.” It may be the last week of steady purchases, as the analysts expect the pace to slow slightly in the weeks to come. The weekly purchases include $6.02 billion from Freddie Mac, $18.5 billion from Fannie Mae, and $1.1 billion from Ginnie Mae. During that same time frame, the Fed sold $2.6 billion of MBS part of the program, for a net of $23 billion in weekly spending.

Derivatives on a roll –again

According to the Office of the Comptroller of the Currency, a Treasury Department agency, U.S. commercial banks earned $5.2 billion trading derivatives in the second quarter, as the level of risk eased in the global market for the complex financial instruments. Derivatives, traded in an unregulated $600 trillion market, were partly blamed for the financial crisis that ignited a year ago. The value of derivatives hinges on an underlying investment or commodity like currency rates, oil futures, or interest rates. Derivatives trading is dominated by about 20 big banks worldwide. The $5.2 billion in trading revenues in the April-June period was down from a record $9.8 billion in the first quarter, but a decline had been expected and was at least partly due to seasonal changes. Second-quarter revenues were the sixth-largest since the agency began keeping records in 1996. The collapse of the swaps brought the downfall of Wall Street banking house Lehman Brothers about a year ago and nearly toppled American International Group, prompting the government to support the insurance conglomerate with more than $180 billion in aid. Congress is weighing legislation to impose broad new oversight on derivatives. The Obama administration’s proposal, part of its plan for overhauling U.S. financial rules, would subject the banks that trade derivatives to requirements for holding capital reserves against risk and other rules. A new network of clearinghouses would be established to provide transparency for derivatives trades.

Hold onto your seat – more economic news coming this week

You may have noticed that the economic news over the last few months is up, down, and all around. This week, a number of data points should provide a bit more insight. Coming down the pipeline this week are the Labor Department’s monthly reading on the labor market, due Friday. Unemployment is considered one of the economy’s biggest obstacles. We’ll also get reports on home prices, manufacturing, consumer confidence, construction spending, and factory orders. We’ll also get updated outlooks from some of the major companies ahead of third-quarter earnings reports next month. As the quarter comes to a close, companies may signal how well they have been doing and what their expectations are for the remainder of the year. The stock market sold off last week, weighed down by unexpected drops in home sales and durable goods orders, as well as tumbling commodity prices, but analysts say last week’s decline doesn’t necessarily mean the market’s sentiment has changed. If anything, investors have come to accept that some of the economic data, especially on the labor front, will be weak for the foreseeable future.

Now on to our real estate educational section…

Deflation & Short Sales – A Timeline into the Future

Economists and investors alike have been engaged in a hot debate regarding inflation versus deflation; on one side of the ring are heavy hitters like legendary Marc Faber, Peter Schiff and Kiyosaki (inflationists) while the deflationists cite the works of “Mish” Shedlock and Henry Dent. The question is of more than passing interest to every short sale investor; invest wrong and it could easily wipe-out a lifetime of earnings.

In order to summarize the major considerations of deflation versus inflation it is necessary to take a few steps back and objectively evaluate the scenario. First, real estate is a hard asset which tends to do well during periods of rapidly rising inflation however, unlike gold or other commodities, real estate does require maintenance in order to retain its value. On the other hand, when purchased at a solid “value”, real estate is able to use leverage and create a return on every dollar invested.

Few investors or economists would quibble with the fact that assets prices have currently experienced a dramatic downturn; real estate is down 25-50 percent from former highs; certainly enough to make many people give a serious look at deflationary concerns. Before writing short sale real estate off as a bad investment due to deflationary pressures, it is a good idea to consider how long the deflationary period is expected to endure. Here are a few things to keep in mind:

Dollars are not safe. Foreign investors have recently made public remarks over their growing reluctance to continue buying American dollars and are reducing the quantity and velocity of purchases. As demand for dollars continues to wane, expect a flight to safety away from fiat currency and into hard assets or other alternative investments. Weak dollars translate into higher prices for all commodities and hard assets over the long term.
Business is suffering. As tighter lending standards combined with rising unemployment and reduced consumer demand is putting a squeeze on small business owners as discretionary spending continues to dwindle. Experts anticipate this trend is likely to continue into the foreseeable future as manufacturer reduce capacity and inventory…eventually leading to shortages and increased prices rather than continued declines.
Continued Printing. Uncle Sam has printed more dollars in the past year than at any time in the history of the nation. The age old relationship between supply and demand deems the more there is of something the less valuable it is – in this case, there is a lot of fiat currency floating around with very little restraint anticipated in the near future. The situation is so dire that Marc Faber recently suggested the collapse of the American economic system within 5-10 years at the same time the BRIC nations are calling for alternative index currency.

What does this mean for the average investor or short sale buyer? Simple, expect tighter lending standards to make it more difficult for households to buy a mortgage in the future, expect rising cost of materials and increased government regulations to further increase the cost of building new homes and expect the cost of all assets/investments to rise as the value of the fiat currency plummets.

The time to buy is now – people are in a “back to basics” mentality where home, family and security take precedent over flashy cars, whirlwind vacations or luxury goods. Give consumers what they need at a price you can afford – it’s a simple method tried and tested to yield impressive results over time. Find out how easy and affordable it can be to get started with short sales in your spare time by tuning in to one of the free online webinars.

See you at the top!

Chris McLaughlin

http://www.shortsalesriches.com

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Real Estate News & Commentary by Chris McLaughlin, September 28, 2009