Smart Real Estate News & Commentary by Chris McLaughlin, February 11, 2010

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Foreclosures down – but not for long

Foreclosure rates fell in January compared with the previous month, but remained sharply higher than a year ago, according to a new report by the foreclosure tracking Web site RealtyTrac.  The month-to-month decrease in foreclosures is most likely a temporary improvement, said Rick Sharga, vice president of marketing at RealtyTrac, and has to do with the holiday season.  “Because of the holiday season, offices that do the processing are closed,” said Sharga. “The drop in foreclosures [in January] is something we’ve seen a couple of years now. I don’t think this the beginning of a downward trend.”  The number of Americans receiving foreclosure notices was down 9.7 percent in January from December 2009, but 15 percent higher than last January. In all, 315,716 properties generated a foreclosure notice. That means one in every 409 homes in America received a foreclosure notice. (Foreclosure notices are defined as a default notice, bank repossession or auction sale notice.)  Real estate Web site Zillow.com also released a report last night that found one in five US mortgages were “underwater” during the fourth quarter. The ten states with the highest foreclosure rates were little changed from the previous month. According to the RealtyTrac report, Nevada remains No. 1, with one in every 95 properties in the state getting a foreclosure notice, even though the state showed a 18 percent decrease in foreclosures from the previous year.  Arizona ranked second with one in every 129 households receiving a notice, followed by California (one in 187 households), Florida (one in 187 households) and Utah (one in every 231 households).  South Dakota had the lowest rate, with one in every 25,820 properties receiving a foreclosure notice.

Jobless claims drop

According to the Labor Department, there were 440,000 initial jobless claims filed in the week ended Feb. 6, down 43,000 from a revised 483,000 the previous week.  Economists were expecting initial claims to drop to 465,000, according to a consensus estimate from Briefing.com.  The 4-week moving average of initial claims, which smoothes out volatility in the measure, was 468,500. That’s down 1,000 from the previous week’s revised average of 469,500. The government said 4,538,000 people filed continuing claims in the week ended Jan. 30, the most recent data available. That’s down 79,000 from the preceding week’s revised 4,617,000 claims.  Economists were expecting continuing claims to have declined 2,000 to 4,600,000.  The 4-week moving average of continuing claims was 4,603,500, a drop of 17,750 from the preceding week’s revised average of 4,621,250.  As usual, many economists say the decline in continuing claims reflects a growing number of filers who have dropped off the jo  bless rolls into extended unemployment benefits.

Commercial real estate is the next crisis

The Congressional Oversight Panel said in a report that mounting commercial real estate losses could endanger the banking system and thwart economic recovery.  A total of $1.4 trillion in commercial real estate loans will require refinancing in the next four years, and more than half of those loans are underwater, written for properties whose value has dropped like a rock.  The expected losses when loans go bad could hit between $200 billion to $300 billion and threaten 3,000 small and mid-size banks with a disproportionate share of commercial real estate assets on their books, according to the panel.  The report is intended to “wave a red flag” to the White House and Congress that the commercial real estate loan market is going to get a lot worse before it gets better.  “We’re at a point where even as TARP is ramping down another major challenge in our economy is ramping up,” said Elizabeth Warren, the oversight panel’s chairwoman. “We need to start now, before the system is  on the brink of collapse to figure out a plan,” she added.  The panel’s research found that 2,988 banks are heavily invested — with more than three times their assets tied up — in commercial real estate loans. Of that number, 2,500 banks each have less than $1 billion in assets.  The panel offers a number of possible solutions for policymakers to head off a commercial real estate crisis, including stress tests for banks, injecting capital into these small banks, buying their toxic assets, or guaranteeing loans.

White House Council of Economic Advisers issues annual report

The annual report by the White House Council of Economic Advisers will be delivered to Congress today, and will look at the actions President Obama took to deal with the recession over the past year.  The report will examine the current economic crisis, including the steps the government took to shore up the financial and housing markets. It also looks at the need to reduce the federal government’s deficit and to tackle long-standing problems such as health care costs, climate change and living standards.  Obama has made job creation his central focus in his second year in office. He has recently traveled the country promoting tax credits for small businesses, the source of many new hires. And on Tuesday, he brought together congressional leaders to push for a bipartisan agreement on legislation to boost hiring.  Council Chairwoman Christina Romer expects an average of 95,000 jobs a month to be created in 2010 and the nation’s GDP to expand at a 2.5% rate.  Romer called the report “a page-turner.” Good to hear – if it’s like everything else coming out of the White House these days it’ll be an enthralling work of fiction.

NAR – Home sales surge

According to the latest survey by the National Association of Realtors (NAR), sales increased from the third quarter in 48 states and the District of Columbia; 32 states saw double-digit gains. Year-over-year sales were higher in 49 states and D.C.; all but three states had double-digit annual increases.  Total state existing-home sales, including single-family and condo, jumped 13.9 percent to a seasonally adjusted annual rate 1 of 6.03 million in the fourth quarter from 5.29 million in the third quarter, and are 27.2 percent above the 4.74 million-unit level in the fourth quarter of 2008. Distressed property accounted for 32 percent of fourth quarter transactions, down from 37 percent a year earlier.  Lawrence Yun , NAR chief economist, said the first-time home buyer tax credit was the dominant factor. “The surge in home sales was driven by buyers responding strongly to the tax credit combined with record low mortgage interest rates,” he said. “With inventory levels t  rending down over the past 18 months, we expect broadly balanced housing market conditions in much of the country by late spring with more areas showing higher prices.”  NAR President Vicki Cox Golder , owner of Vicki L. Cox & Associates in Tucson, Ariz., said near-term market conditions will remain favorable. “Mortgage interest rates are expected to trend up later this year, but right now we have very good conditions with steadying home prices and favorable inventory in most areas, especially in the higher price ranges,” she said.

Double dip in house prices?

According to data compiled by Zillow, a real estate sales and data services provider, there are signs that the feared “double-dip” in house prices may have taken hold of US housing prices in as many as one in five major housing markets.  While some individual markets have experienced a bottoming out and increase in prices, 29 of the 143 markets Zillow tracks is now showing signs of a possible double dip in home values. In those markets, home values have flattened or have begun to decrease again after showing at least five consecutive monthly increases during 2009 — what Zillow called early signs of what could a double dip.  The Zillow Home Value Index put the national median price at $186,200 in Q409, a 5% decrease from Q408. Compared to Q309, prices declined 0.5% during the last quarter of 2009. The index is a measure of median home values of all single-family residences, condominiums and cooperatives, both on the market and not for sale. Q409 marked the 12th consecuti  ve quarter of year-over-year declines, Zillow said.  “The good news is that, for those markets that will see a double dip in home values before reaching a definitive bottom, this second dip will not be a return to the magnitude of depreciation seen earlier, but rather will look more like a modest aftershock of the earlier downturn,” said Zillow chief economist Stan Humphries.

Now on to our real estate investing educational section…

The Return Attribution of Real Estate

More money has been made in real estate than all industrial investments combined.

— Carnegie

Traditional investors often overlook real estate in preference to stocks or bonds but even a precursory examination of the return attribution of real estate provides sufficient evidence to support the inclusion of real estate in even the most conservative portfolio. In fact, there is a large body of evidence that demonstrates a 15 percent investment of real estate considerably reduces total portfolio risk…a fact not lost on large retirement funds who have historically invested between 15 to 20 percent into real estate. The return attribution of real estate contains both unique and common characteristics when compared to other investment vehicles each of which will be detailed below:

Capital Appreciation – Without a doubt, capital appreciation combined with leverage has made well maintained real estate a favorite among investors for generations. The long term growth in value is similar to that typically associated with equity asset classes but with increased use of leverage.

Bond-Like – Persistent and predictable cash flow from rental real estate mimics interest paid on bond coupons or similar investments. Investors seeking safety coupled with long term income often look to real estate in order to diversify from bonds or annuities.

Performance & Credit Profile – This frequently overlooked aspect of real estate investment cannot be underestimated in importance especially in a tight credit market; real estate has a credit profile much like the credit rating of a bond. Residential versus commercial holdings and the quality of the location, tenant etc all enter into the credit profile of the property. Savvy short sale investors learn how to maximize the credit profile in order to increase leverage and overall return for the entire portfolio.

Externalities – These are outside influences that impact the desirability and value of a property. Common examples include physical attributes unique to each property, zoning, etc… Even during the most dramatic economic decline, these attributes are what make some properties retain (or increase)  in value even as others rapidly lose valu

Tax Benefits – Real estate enjoys very favorable tax benefits including the use of depreciation, capital gains, tax exempt status, the ability to sell/transfer some tax benefits and other incentives designed to maximize investment potential.

Inflation Hedge – Real estate has historically outperformed nearly all other asset classes during period of inflation. Not only does it tend to act as a hedge against inflation but it tends to hold value during deflationary periods as well. Once the “bubble” has popped, real estate reverts back to its former norm as consumers reign in spending and focus on the basics of shelter, food and medicine.

See you at the top!

Chris McLaughlin
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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.