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Pending Home Sales Surge Continuing
Pending home sales have risen for three consecutive months, reflecting the broad impact of the home buyer tax credit and favorable housing affordability conditions, according to the National Association of Realtors®. The Pending Home Sales Index, a forward-looking indicator, rose 6.0 percent to 110.9 based on contracts signed in April, from an upwardly revised 104.6 in March, and is 22.4 percent higher than April 2009 when it was 90.6. That follows gains of 7.1 percent in March and 8.3 percent in February. The data reflects contracts and not closings, which usually occur with a lag time of one or two months. Lawrence Yun, NAR chief economist, said “The housing market has to get back on its own feet and now appears to be in a good position to return to sustainable levels even without government stimulus, provided the economy continues to add jobs. A big concern surfacing recently is insufficient time to close the deal at the settlement table. However, the recent housing cycle has brought long delays related to the short sales approval process by banks, and from ongoing appraisal issues.”
According to him, homebuyers who responded to tax credits may encounter problems meeting the settlement deadline by June 30. Because of these market challenges, NAR has asked Congress to provide flexibility on the deadline for closing.
Retailers Post Another Month of Disappointing Sales
Analysts have failed in estimating inadequate consumer spend and the impact it will have, on the economy. After a disappointing April, the results from retailers in May underscores how fragile the economy recovery is at this stage. Analysts on average are expecting same-store sales to rise 2.6 percent in May from the prior year, according to Thomson Reuters. That compares with a decline of 4.8 percent in May 2009. Among the department stores, Nordstrom is expected to report the strongest year-over-year same-store sales growth, with sales expected to be up 4.8 percent, while Costco Wholesale was expected to report the strongest monthly increase among the discount chains, with sales expected to rise 7.3 percent, excluding gas sales, according to a Thomson Reuters survey.
However, the warehouse club store reported sales rose only 5 percent, excluding gas sales. Hot Topic was expected to post the biggest decline in same-store sales with an 8.3 percent drop, but its actual performance proved even worse. Same-store sales fell 9.0 percent. Although the monthly sales reports will be closely watched for their insights into consumer spending, the reports aren’t the gauge they used to be as many retailers, including Wal-Mart Stores, the world’s largest retailer no longer report monthly sales results.
Diana Olick – BofA: Mortgage Walkaways Have Huge Incentive
“Bank of America rolled out their new “Principal Reduction Enhancement” program, which is an earned principal forgiveness plan for borrowers behind on their mortgages and whose loans are at least 20 percent underwater in value. The plan is in conjunction with the government’s Home Affordable Modification Program, but the government’s principal reduction plan isn’t in place yet. What makes BofA’s plan so proactive is that it employs, “a principal reduction as the first step toward reaching HAMP’s affordable payment target of 31 percent of household income when modifying certain NHRP-eligible mortgages — ahead of lowering the interest rate and extending the term.” Why are they getting more aggressive on modifications? Because more borrowers are walking away. BofA’s credit loss mitigation executive, Jack Schakett, said the amount of strategic defaulters (those who can pay their loans but opt not to) are “more than we have ever experienced before.” He went on to say, “there is a huge incentive for customers to walk away because getting free rent and waiting out foreclosure can be very appealing to customers.”
Schakett says the foreclosure process is still taking 13 to 14 months (and by my estimates that’s an optimistic assessment), and so there’s over a year of free rent. While the banks are trying to improve the time, they’re just not there yet. 31 percent of foreclosures in March were deemed to be “strategic default” by researchers at University of Chicago and Northwestern University. We also learn from those same researchers that the likelihood of walking away increases by 23 percent when homeowners learn that a neighbor got some principal forgiveness. I’ll let you all argue that one.”
Fed’s Lockhart Says Rates May Rise With Unemployment Still High
Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank, to counter inflation, may eventually need to raise its target interest rate from near zero even with U.S. unemployment still high. “The policy rate may have to begin to rise even while unemployment is considerably higher than before the recession,” Lockhart said today in a speech in Atlanta. According to a Bloomberg News survey of economists, the U.S. economy strengthened in May amid the worsening in Europe’s debt crisis, as employment likely climbed during the month by more than 500,000 workers. The unemployment rate likely dropped to 9.8 percent from 9.9 percent, the survey found ahead of tomorrow’s government report. “The time is approaching when it will be appropriate to consider recalibrating interest rate policy,” he said in remarks prepared for the Atlanta Technical College. “I do not believe that time has yet arrived.” “However, extraordinarily low policy rates will become inconsistent with maintaining price stability,” he said.
Policy makers are debating when to begin withdrawing record liquidity from the financial system as the economy emerges from the worst recession since the Great Depression. The Fed’s preferred inflation gauge — the core personal- consumption expenditures price index, which strips out food and energy — rose at an annual rate of 0.6 percent in the first quarter, the slowest pace since records began in 1959.
DSNews.com – Commercial Defaults Hit Record for Both Investors and Banks
Pressures continue to drive up commercial mortgage defaults. The economic downturn has choked off demand for retail and office space, with vacancy rates rising and prospects of new occupants limited by the duress of today’s job market. At the same time, commercial real estate (CRE) values have dropped more than 40 percent in some markets, pushing a growing number of property owners severely underwater. According to new data from Real Capital Analytics, the default rate for commercial real estate loans owned by the nation’s FDIC-insured banks increased from 3.83 percent in the fourth quarter of 2009 to 4.17 percent in the first quarter of 2010. Real Capital says this is the highest default rate reported since 1992, the first year for which data is available, when it was 4.55 percent.
Year-over-year, the default rate is up by 192 basis points. By contrast, at its cyclical low in the first half of 2006, the commercial mortgage default rate was 0.58 percent. As of the first quarter of this year, $45.5 billion of bank-held commercial mortgages were in default, according to Real Capital’s tally. A separate study released this week by Trepp LLC shows that the share of past due loans held by investors in commercial mortgage-backed securities (CMBS), including those already in foreclosure and REO, jumped 40 basis points in May to 8.42 percent – the highest in the history of the CMBS industry. To put the delinquent CMBS universe into perspective, Trepp says that just six months ago, the delinquency rate was 5.65 percent. One year ago, it was 2.77 percent.
Now on to our real estate education section…
All About Commercial Risk
Commercial real estate has been making headlines as the next step for short sale investors but as many novice commercial investors are learning, there are substantial differences required to close the deal. First and foremost is the question of finance. Typically, commercial real estate has more stringent requirements and/or often requires substantially larger sums of money however, the basic process is still the same. The lender wants to reduce risk and remove a non-performing asset from their books.
Demonstrate the ability to pay the loan and you are halfway toward becoming a commercial investor. Critical is an understanding of the major risks associated with commercial loans from the lenders perspective. Use this as a quick checklist when putting together an offer or evaluating your own potential.
1. Credit Risk. Perhaps the most common type of risk, this simply indicates the ability of the borrower to meet the contractual obligations as outlined in the loan documents…aka, the ability to pay. However, because you are dealing with commercial loans, the credit risk can be impacted by several items including competitive market factors (ie, the inability of the property to lease as expected, increased or decreased demand etc), interest rate sensitivity, rollover of leases (long term leases may be stable but are also more prone to declining values), changes in regulatory environment including zoning and tax laws.
2. Interest Rate Risk. The majority of commercial real estate is financed on a floating rate basis so interest rate risk is a very real threat depending upon the timing of cash flows, yield curves and other economic conditions that may adversely impact the economic climate.
3. Liquidity Risk. Banks must meet obligations the same way that private individuals are required to do so; loss of liquidity means the bank is unable to extend credit or must call loans in order to raise capital. For an investor, liquidity risk is typically isolated to the ability of the bank to loan money in the future should you require it in order to roll-over or refinance a loan.
4. Compliance Risk. Once the domain of elusive economic theory, compliance risk has risen to disproportionate levels thanks in large part to the current crisis as well as outside influences. Examples are broad but range from potential liability of bad debts during the mortgage boom to the current oil spill at BP; a bank may be held responsible for assets held as collateral. High risk assets will be assessed a premium.
Short sale investors seeking entry into the exciting world of commercial real estate should review each property from the perspective of the lender; examine risk levels and potential threats through the eyes of the bank in order to maximize your prospect for success.
See you at the top!
Chris McLaughlin
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Copyright Loss Mitigation Institute LLC 2009.
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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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