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Olick/Sharga – waves of foreclosures coming
Diana Olick of CNBC spoke with Rick Sharga of RealtyTrac, and he elaborated on the formal report we talked about above, giving her his thoughts on the coming year and 2011. He expects to see several different spikes in foreclosures over the coming year and into 2011, and he believes wholeheartedly that these foreclosures will be unavoidable and highly detrimental to a recovery in home prices. “Even if we peak in terms of unemployment rates in the first quarter of 2010 the foreclosure activity related to those job losses probably won’t peak until the end of 2010 or the first quarter of 2011,” says Sharga. And he believes there will be a third wave from resets on pay option ARM loans and Alt-A loans (loans underwritten with little to no documentation). Olick: “There is more and more talk of principal write-down, as the underwater elephant in the room weighs heavily on any recovery. Today I even heard that the Hope For Homeowners program, which came into being under the Bush administration and did very little to help anyone stay in their home, may be retweaked to deal with the underwater issue (when borrowers owe more than their home is worth). Part of H4H is principal write-down, unlike the big HAMP bailout from Treasury which requires no reduction of principal.”
2009 foreclosures – mainly sunbelt but spreading
RealtyTrac, the Irvine, California-based real estate data company, says in its Year-End 2009 Metropolitan Foreclosure Market Report that cities in four Sun Belt states accounted for all top 20 foreclosure rates in 2009 among metropolitan areas with a population of 200,000 or more. California accounted for nine of the top 20 metro foreclosure rates, followed by Florida with eight, Nevada with two and Arizona with one. Outside these states, the highest-ranked was Boise City-Nampa, Idaho at No. 24 with 4.66 percent of its housing units receiving at least one foreclosure notice in 2009. “The first wave of foreclosures was driven by home prices that were unsustainable and unbelievably poor lending practices, but now we have a second wave of foreclosures that it is being driven by unemployment,” Rick Sharga, senior vice president at RealtyTrac, said in an interview. “Foreclosures will likely increase in some of the secondary markets that are the most heavily impacted by unemployment,” he said. James J. Saccacio, chief executive officer of RealtyTrac, says “Areas like Provo, Utah, Fayetteville, Ark., Portland, Ore., and Rockford, Ill., all posted foreclosure rates above the U.S. average in 2009, and markets like Honolulu, Minneapolis and Seattle saw foreclosure activity increase at more than twice the national pace over the past 12 months — although all three of those markets still had 2009 foreclosure rates that were at or below the U.S. average.” Unemployment started driving foreclosures in late 2009 and will not crest until the end of 2010, he said. Negative equity has also been one of the biggest banes of homeowners, making many unqualified for home loan refinancing and preventing some from selling.
Initial jobless claims down
The Labor Department says in its weekly report that there were 470,000 initial job claims filed in the week ended Jan. 23, down 8,000 from a revised 478,000 the previous week. A consensus estimate of economists surveyed by Briefing.com expected new claims to fall to 450,000. The 4-week moving average of initial claims was 456,250, up 9,500 from the previous week’s revised average of 446,750. The report said 4,602,000 people filed continuing claims in the week ended Jan. 16, the most recent data available. That’s down 57,000 from the preceding week’s revised 4,659,000 claims. The 4-week moving average for ongoing claims fell by 94,250 to 4,669,250 from the previous week’s revised 4,763,500, but, as usual, the drop may just mean that more filers are dropping off those rolls into extended benefits. In November, Congress passed an extension of federally paid benefits for up to 99 weeks. But the law only helps those who have used up their first 26 weeks of benefits by the end of 2009, so depending on the state, not everyone will receive benefits for the entire 99-week span. The House and the Senate passed measures in December to extend the filing deadline through the end of February.
Fed keeps interest rates low
Yesterday the Federal Reserve left interest rates near zero and vowed to keep them there for a while to nurture an economic recovery held back by stubbornly high unemployment. The policy statement reflected a somewhat brighter tone than it had at the previous meeting in December. “Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating,” the Fed said. In the December statement, the Fed had said economic activity “has continued to pick up.” The decision to hold rates steady was 9-1, with Kansas City Federal Reserve Bank President Thomas Hoenig dissenting because he wanted the central bank to eliminate a phrase vowing to keep rates exceptionally low for an extended period. However, the Fed dropped a reference that had been included in December’s statement which said the housing sector ”has shown some signs of improvement over recent months. ”The Fed repeated its intention to allow purchasing of some $1.43 trillion in housing-linked debt to conclude as scheduled by the end of March, but added: “The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.”
SOTU
In his State of the Union (SOTU) address last night, President Obama said his administration will focus on accelerating hiring in the short run and, in the longer term, on fostering sustainable jobs that grow wages. The administration’s effort will center on tax incentives for small businesses: cutting levies on small businesses and extending the bonus depreciation tax incentive for companies that purchase equipment, Obama also wants to invest in infrastructure. He believes pouring more money into road, bridge, rail and water projects is a good way to build jobs quickly and improve the economy in the long term. Obama also wants to spend more in energy projects, including encouraging families to retrofit their homes with energy-saving measures, building new nuclear power plants, investing in biofuels and clean coal technology, and passing an energy and climate bill.
Other economic items on Obama’s agenda that include doubling exports in the next five years, passing reform measures that will foster a strong, healthy financial market, and putting a large fluffy Teddy Bear on each American’s pillow. Ok, I just made up the last one, but why not throw it into the massive wish list? Oh, and the president also highlighted the achievements of his $862 billion stimulus package, which he said boosted employment by 2 million jobs — including 300,000 in education and 200,000 in construction and clean energy — since it was enacted nearly a year ago. Using the latest vague reporting criteria of this ongoing job-saving-and-creating series of claims, that’s a lowball claim – shouldn’t it be in the trillions of jobs saved, created, or just imagined? And of course he vowed not to back down from efforts to revamp the U.S. healthcare system. Ugh.
DSNews.com – housing supply declining
New data from Altos Research shows that housing supplies have been steadily declining for the last 16 months. The company says there are 20 percent fewer homes for sale now than there were in 2008. Some fear this decline is because banks have been holding back their repossessed properties, but Altos doesn’t expect this so-called shadow inventory to result in a real estate day of reckoning in 2010 as some market observers have warned. In fact, Scott Sambucci, VP of data analytics at Altos Research, says the industry won’t see any effects from the supply of homes lurking in the darkness until inventory levels pick up.
And he doesn’t foresee that happening anytime soon, primarily because banks have no immediate motivation to offload these assets from their balance sheets, and are keenly aware that a sudden jump in the number of homes on the market could be detrimental to already-fragile property values. With a smaller selection of inventory, buyers will pay a higher price, and Sambucci says he’s already seen definite evidence of a price floor in 2009. Home price statistics started out 2010 on a good foot, according to Altos’ data, with seven-day moving averages within the company’s index bouncing off their lows and starting to tick up. In addition, the number of homes with price reductions and the magnitude of these discounts are diminishing, although Sambucci says that could indicate buyers’ willingness to pay more or it could just mean sellers are becoming more realistic about what they can get. Either way, price reduction stats, while still elevated, are moving in the right direction, he says.
Now on to our real estate investing educational section…
Equity vs. Debt Financing for Short Sales
A cornerstone of short sale success is learning how to obtain the best financing. Unfortunately, novice investors are often unaware of even the most preliminary information when it comes to equity versus debt financing. Here to help is a quick tutorial about this all important topic.
Basically there are two ways to finance most short sale investments – loans or investments. Loans use debt instruments like a mortgage and are by far the most common method used by most short sale investors. However, tighter lending standards, high fees and limits on the number of loans as well as seasoning requirements have led many of the most successful short sale investors to seek alternative funding mechanisms. Equity financing fills this much needed gap.
Unlike a loan where the borrower agrees to repay a specified amount over a specified period of time reflective of the principle borrowed plus interest, equity financing provides needed funding in return for partial ownership of the property. Equity financing can be as formal or informal as desired (although it is highly advisable to formalize the agreement in order to protect both parties) while providing enhanced versatility and a win-win for all involved.
There are pros and cons to be considered before using either equity or debt financing.
- Pro’s of Loans: Plain and simple, you get to keep all the profits! It’s often easier to settle disagreements since no other interests aside from your own have legal recourse in the transaction.
- Con’s of Loans: Big debt, little recourse in the event of a major loss, default risk.
- Pro’s of Equity Finance: Shared risk. Use of other people’s money. May not have to repay all/portion of funding if property does not perform as expected. Personal property can be protected. Advice and guidance from experienced investor. Ability to purchase more properties without limit on number or loans or other requirements.
- Con’s of Equity Finance: If an investor seeks to control the property or exercise decisions it can become a nuisance. Must share profits.
Bottom line: Most short sale and REO investors find equity funding a valuable resources well worth the time and effort to cultivate. Using equity funding can allow a small time short sale investor to move into bigger, better and more frequent deals without the high cost or overhead.
See you at the top!
Chris McLaughlin
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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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{ 1 comment… read it below or add one }
Very interesting. Thanks for sharing.
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