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Home prices down
The S&P/Case-Shiller 20-city home price index recorded a decline of 0.2% in November from October. Prices were down 5.3% compared with 12 months ago. Experts had forecast that prices would be off by only 5% compared with last November, according to Briefing.com. The lone good news is that the rates of year-over-year declines have continued to shrink. “While we continue to see broad improvement in home prices as measured by the annual rate, the latest data show a far more mixed picture when you look at other details.” said David M. Blitzer, spokesman for Standard & Poor’s. “Only five of the markets saw price increases in November versus October.” Four markets covered by the index — Charlotte, Las Vegas, Seattle and Tampa — hit their lowest index levels in four years, according to Blitzer. Any gains they recorded in recent months have been erased. The five markets that showed month-over-month gains were led by Phoenix, where prices rose 1.1%. Thirteen markets had declines, with Chicago being the biggest loser at 1.1% down. Miami and Dallas showed no change. “We have a very fragile housing system,” said Michael Carey, an economist with Calyon Securities in New York. He worried that as the government withdraws support from the housing market, prices could begin slipping again. That would put more homeowners into the position of owing more on their mortgage than their home is worth and could lead to another wave of foreclosures.
Obama to freeze discretionary spending
According to two senior administration officials, President Obama will announce in tomorrow’s State of the Union address that he’s proposing to save $250 billion by freezing all nonsecurity federal discretionary spending for three years. The freeze would exempt the budgets of the departments of Defense, Homeland Security, and Veterans Affairs, along with some international programs. All the details will be officially unveiled February 1 when the president publicly releases his next budget blueprint for fiscal year 2011 — which starts October 1 — and beyond. Under the proposal, which would need to be approved by both houses of Congress, all federal discretionary spending would be frozen at its current level of $447 billion per year. Within that parameter, however, individual federal agencies would have the power to give some programs increases, while cutting money elsewhere.
The move will spark a major debate within the president’s own party, with senior Democrats already saying the cuts would be tough to swallow. A senior Senate Democratic aide said it will prompt a major fight after the Bush administration “underfunded domestic programs for so long. Why would we want to play into the Republicans’ hands like this?” Immediate Republican reaction was split, with some senior GOP aides saying the freeze is something they could support, while others said it did not go nearly far enough. “Given Washington Democrats’ unprecedented spending binge, this is like announcing you’re going on a diet after winning a pie-eating contest,” said Michael Steel, a spokesman for House Minority Leader John Boehner, R-Ohio. “Will the budget still double the debt over five years and triple it over 10? That’s the bottom line.”
Strategic default
Tishman Speyer Properties and its primary partner BlackRock Inc. decided over the weekend to turn over the 56-building Peter Cooper Village and Stuyvesant Town, once viewed as one of Manhattan’s most valuable residential properties, to creditors rather than pursue other options including potentially putting it into bankruptcy. The joint venture bought the property at the height of the market for $5.4 billion. Now, thanks to falling values in commercial and residential real estate, it’s worth about $2 billion. The move came after the venture was unable to restructure the $4.4 billion in debt used to help finance its top-of-the-market purchase, and means that the owners won’t use bankruptcy as a defensive strategy to keep control. In addition to the first mortgage, there is $1.4 billion of junior, or “mezzanine,” debt on the property and some holders of that debt have also been maneuvering for control in recent weeks. Some junior creditors may try to replace the Tishman venture as owners by agreeing to pay the debt service on the first mortgage. If CW Capital takes over, the mezzanine investors likely will suffer a big loss.
Now the question is, “who will take the keys on behalf of which level of debt,” said Mark Edelstein, head of the real-estate group at law firm Morrison & Foerster LLP. According to a person familiar with the situation, the Tishman venture has reached out to CW Capital to start the property-transfer process. Until the weekend, the Tishman partnership was considering various options including potentially putting the property into bankruptcy protection, according to people familiar with the matter. But on Saturday, the group decided to give it up to creditors. “We make this decision as we feel a battle over the property or a contested bankruptcy proceeding is not in the long-term interest of the property, its residents, our partnership or the City,” the venture said in a statement. Diana Olick has a question: “Apparently it’s just good business. So why is it not just good business for homeowners to walk away from their mortgages? [Homeowner] borrowers are looking at the same negative equity and loss on investment, simply on a smaller scale. Somehow it’s fine for commercial investors, but not for individuals?
Retail sales to rise – a bit – in 2010
A 2010 forecast from the National Retail Federation (NRF) says retail sales should rise 2.5 percent this year, marking an expected improvement from a 2.5 percent drop in 2009 and a 1.3 percent increase in 2008. Excluding the past two years of recession, a 2.5 percent rise in retail industry sales would mark the lowest year-over-year increase since 1995, when the trade group began tracking such figures. “I wouldn’t describe this as a very strong year,” said NRF Chief Economist Rosalind Wells in an interview. The data covers retail industry sales, excluding automobiles, gas stations, and restaurants. “We’re not going to have a V-shaped recovery in the economy, and we won’t have a V-shaped recovery in consumer spending or retail sales. It’s a slow return to a more normal level,” Wells said. For 2010, Wells expects consumers to keep a frugal mind-set with a focus on values. That should help sales at discount retailers, warehouse clubs and off-priced retailers. “The hope is that as the year goes on, we’ll see improvement in the job market. When that happens, we’ll see a better consumer confidence level, we’ll see higher incomes, and that will all contribute to making consumers feel better and loosening up the pocket book,” Wells said.
Principal reduction in 2010?
With more than half of all modified loans expected to re-default in 2010, servicers are likely to increase the use of principal forgiveness, according to rating agency DBRS. Despite a growing number of government-backed modifications, DBRS noted that mortgages that are more than 60 days delinquent typically also comprise more than half of modified loans on the books after six months. “[This] 50% re-default rate on modifications continues to be staggering given the income verifications and trial modifications being done by many servicers,” the agency said in the commentary today.
That trend shows no sign of relenting, as Amherst Securities Group noted “tragic” re-default rates in November. Laurie Goodman of Amherst has said the fundamentals of certain modification programs put them at a disposition for unsuccessful modification. The Treasury Department’s Home Affordable Modification Program (HAMP), for example, is “destined to fail” she said, as it does not address negative equity issues even after principal reduction. DBRS said modifications that forgive mortgage debt will likely become the preferred loss mitigation strategy for servicers during 2010. DBRS also expects the US government to continue the call for large-scale loan modifications this year.
Now on to our real estate investing educational section…
Where’s the Wealth?
Money is no longer the store of value it once was…in fact, currency has transitioned from a wealth substitute into outright I.O.U’s with little to no relationship to the underlying assets (or lack thereof) associated with issue. Thanks to unprecedented use of the printing press, most experts agree money will continue its downward spiral for some time to come. So, what is left to fill this critical role once the currency has reached a crisis stage?
One often overlooked cause of the real estate boom was the widespread use of housing and real estate as a substitute store of value for a declining currency. In order to understand why short sales remain a popular investment strategy, it’s important to ask the question few economist dare tackle…”Where’s the wealth?” Rising unemployment, global outsourcing and an economy based on book-keeping techniques is not exactly a recipe for long term wealth creation. Manufacturing jobs are long gone and the service sector tends to be overworked and underpaid. So, where is the real wealth?
According to the BLS or Bureau of Labor Statistics, traditional segments of the economy such as manufacturing and blue collar labor jobs are expected to remain weak. Service sector jobs are generally expected to keep pace with population growth and industries that cannot outsource or offshore are expected to grow. In plain language…health and medical care, mechanics, housing/real estate and repairmen are what remain as “cornerstones” to the American economy.
Stop and reflect for a moment on the investment areas available to the average investor; health and medical care are growing but heavily contingent upon FDA approval, insurance reimbursement (remember those bad banks and derivatives underwritten by AIG/others?) and other high risk ventures. Good stocks are often picked up and heavily promoted by institutional investors leaving the little guy to fend for themselves. Ultra small endeavors such as mechanics and repairmen are “job replacement” type enterprises that do little more than generate a subsistence wage replacement for the worker. What does that leave? Real estate. It’s one of the few areas of wealth generation still available to the average investor. Combined with leverage and inflationary pressure, it’s also not only a viable method of generating real wealth but it’s also a true storehouse of wealth.
History has proven the value of real estate as a store of value time and time again. From Weimar Germany to Japan, those holding real estate fared the currency crisis far better than investors of stocks, bonds or other traditional holdings. One sure sign of currency crisis is when governments begin doctoring their CPI and/or PPI equivalents….similar to the current sleight of hand undertaken by our own government via seasonal and hedonistic price adjustments.
Where’s your wealth? Is it tied to volatile exchange rates? Federal bonds with negative real returns? A weekly paycheck that could be outsourced any day? Short sales provide the average American one of the few remaining outlets to financial security without excessive risk. Plain, simple and time tested.
See you at the top!
Chris McLaughlin
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Copyright Loss Mitigation Institute LLC 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 reselling of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
running 4 different offices, supporting over
400 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
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