Short Sales Riches Blog » deflation

Foreclosures Spike Again

Chris McLaughlin — Mon, 30 Mar 2009 19:39:05 +0000

Real Estate News & Commentary by Chris McLaughlin, March 30, 2009
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Foreclosures spike again in February

It was starting to look like the problem was easing before January, when foreclosure starts declined to 69,000 in November from 77,000 in October and then dropped again to 56,000 in December. But in January the number of started foreclosures jumped to 217,000, and now February’s numbers have leaped up again to 243,000. 87,000 homes were repossessed (foreclosures completed) by banks during February, a 28% jump from the 68,000 foreclosures completed in January. Since the mortgage meltdown hit in July 2007, 1,395,044 homes have been lost. In February, nearly 250,000 homeowners received either mortgage modifications or repayment plans from their lenders, according to Hope Now, the coalition of lenders, investors, and community advocacy groups put together by the Obama administration’s foreclosure prevention initiative.

AIG back in the news

American International Group (AIG) has cut or delayed payments to some of its real-estate ventures, potentially leaving the developers and their bankers in the lurch. AIG had previously been sued by Mitchell L Morgan Management Inc for missed and delayed payments, and the latest victim is Alabama shopping-center developer Alex Baker. The action puts 15 banks at risk of exposure to soured loans. AIG Global Real Estate, an arm of the insurance company, has interests totaling more than $23 billion across 53 million square feet of real estate. The Federal Reserve is monitoring AIG’s spending closely after committing $180 billion in bailout funds, but whether that’s helping or harming is still anyone’s guess.

Detroit failed

The Obama administration gave General Motors and Chrysler LLC failing grades Monday for their turnaround efforts. It promised a sweeping overhaul of the troubled companies, but also threatened a “structured bankruptcy.” Prior to the announcement, CEO Rick Wagoner announced his resignation, saying it came at the request of the Obama administration. GM will get 60 more days and Chrysler 30 more days in which to make a final push toward proving they can run viable businesses. If Chrysler succeeds — probably by merging with Fiat — it will receive a $6 billion loan. In GM’s case, the officials would not specify how much the carmaker might receive, but we can all guess it’ll be a lot.

Stocks slide on banking troubles

Bad news from the auto sector was bad enough, but Treasury Secretary Tim Geithner’s announcement that more banks would need help caused stocks to tumble, with the Dow opening 202 points lower, the S&P 500 index lost 21 points, and the Nasdaq composite lost 39 points. As Art Hogan, chief market strategist at Jefferies & Co put it, “We were starting to see some light at the end of the tunnel, but it’s beginning to look oddly like a train.” That pretty much captures investor sentiment this am. Would it be an understatement to say the week isn’t off to a good start? Especially if you own auto or banking stocks.

Now on to our real estate investing education section…

Understanding the Time Value of Money – Why Short Sales Still Make Sense

Deflation or Inflation? Chances are whichever side of the debate you happen to be standing on at the moment you are in good company. The government experts are readily printing money out of thin air…and actually admitted as much in recent weeks…while financial analysts, other governments around the globe and those with fixed incomes fear the rise of inflationary pressures. How could so many smart people have such a strong disagreement? It comes down to the time value of money. A topic of such importance it will have profound implications on the way you structure investments throughout your lifetime.

There are two primary methods used to determine the time value of money – Present Value and Future Value. Present value is what a dollar today is worth rather than the value compared to receiving it as some point in the future. For example, let’s assume you have an option to sell or hold a modest property purchased via short sale. To keep the calculations and comparisons simple, we will further assume the property is paid in full. You are reasonable positive you could pocket $100,000 by selling the property outright but wanted to know if this was your best option.

Typically, future dollars are worth less than present dollars due to inflationary pressures. The entire purpose of the Federal Reserve is to assure a steady supply of funds including controlled inflation (defined in the 1-3 percent range). So for example, if the rate of inflation was rising at 3 percent annually the value of $100,000 would be only $74,400 in only ten years. Wait 20 years and that same $100,000 is only valued at $55,000. Bump up the rate of inflation to 5 percent and $100,000 drops to only $61,000 in ten years and only $37,000 in 20…now you know why lottery ticket discount so much if you take the lump sum payment up front! Ditto for insurance companies.

Short sale investors should immediately realize money printing combined with the ability to use leverage in the form of loans can dramatically increase the ability to generate cash today – not ten or twenty years into the future. In fact, the more excess cash (above what is needed to pay your bills and service debts) you generate today, the better especially during times of inflation. If inflationary pressures hit the levels seen in the 70’s take a look at what happens …$100,000 turns into $42,000 within ten years and only$14,000 by year 20. What originally would pay for a modest home will eventually only be enough to buy a used car without taking steps to preserve your wealth.

Rarely, a reversal takes place where future dollars may become more valuable than current dollars as is sometimes seen during a deflationary cycle. That is what the government fears most since it would make it more costly to pay back all the loans and debt obligations – a cost so high it could jeopardize the foundation of the nation. However, the current deflationary concern is a temporary one at best. The Federal Reserve has repeatedly stated they expect the deflationary aspect of this current crisis to cool by the end of 2009 to 2010…listen carefully – unlike what many “think” they hear…the government and Fed Reserve is not claiming the pain will be over…only that the current deflationary spiral will come to an end. The lack of investment grade returns is unlikely to resume its former hay-day for quite some time while employment continues to lag. Both add up to very real pain as Americans are unable to make a profitable investment or keep pace with their standard of living from lagging wages.

Bottom Line: This is a once in a lifetime buying opportunity unlikely to last forever. Act before it is too late.

See you at the top!

Chris McLaughlin

http://www.shortsalesriches.com/welcome.html

P.S.

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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 flipping of distressed homes. Owns
      portfolio of nearly 100 high-value, high-profit
     properties

    * Owner and Supervising Broker of one of Florida’s
     largest Real Estate firms, running 4 different
     offices, supporting nearly 450 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

* On twitter: http://twitter.com/mclaughlinchris
* On facebook: http://www.facebook.com/addfriend.php?id=709199143

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Wall Street Scoffs At New Bailout Plan

Chris McLaughlin — Wed, 11 Feb 2009 16:18:03 +0000

Real Estate News & Commentary by Chris McLaughlin, February 10, 2009
http://www.shortsalesriches.com/welcome.html

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So much for a honeymoon for President Barack Obama, at least when it comes to the economy. Wall Street reacted to his bailout plan …and it wasn’t pretty. Yesterday the market tanked … with the Dow Jones Industrial Average dropping 4.62% to 7,888.88. Ouch.

Was it really that bad? What happened was the typical “buy on the rumor, sell on the news” hype that’s common on Wall Street. What folks need to realize, and what we’ve been saying in this e-mail for months, is that there will not be an easy fix. There is no silver bullet that will take us out of this mess. So the markets headed lower, as they were reminded that our economy is indeed in trouble.

Frankly, I’m rather disgusted with the junk that’s in the non-stimulus bill. All of this spending by the government will lead to … you guessed it: massive inflation. The government just can’t keep printing money. Let’s hope enough pressure is added to Congress to make this happen. They have to FIX HOUSING FIRST in order to have a true economic recovery. Anything short of fixing housing just wastes billions of dollars without accomplishing the real objective: stabilizing housing prices, which therefore stabilizes banks.

And hey, guess what? We’re not in this alone, our friends in the UK are in the same boat. The head of the Bank of England said that Britain was in a “deep recession” and that economic growth would not likely happen until the end of 2009. “The risks surrounding the central projection for growth are judged to be weighted heavily to the downside,” the Bank of England said.

And if you’d like to see some grandstanding today, make sure you don’t miss CNBC, as the CEOs from the nation’s leading banks appear before Congress. And the typically brash and arrogant jet-setting CEOs were humble with all smiles today, with lots of love going to the government. And one CEO stated the obvious. Lloyd C. Blankfein, head of Goldman Sachs, noted: “Many people believe — and, in many cases, justifiably so — that Wall Street lost sight of its larger public obligations and allowed certain trends and practices to undermine the financial system’s stability.”

Now, on to our real estate investing section…

Short Sales and Deflation

Is it going to be inflation or deflation? Maybe both. Whatever side of the fence you have been sitting on, short sales are likely to be the best solution for your financial survival. We have previously discussed the advantages of buying short sales and foreclosure real estate as an inflationary hedge but how does it hold up in the event deflation takes hold? Good question…and the facts might just surprise you.

First, it’s important to understand what deflation really is. Contrary to what some think, deflation is not merely a drop in prices – instead, it is actually a contraction if the volume of money relative to the goods and services available for purchase. Savvy short sale readers should immediately recognize two important considerations; the focus upon a contraction in volume and the inclusion of the word “relative”. This is why real estate tends to hold up very well in a deflationary cycle despite initial drops in price!

Remember, real estate is a lagging indicator of an economy. It takes time to access the raw materials, build a home and sell it. It takes even longer to do so when builders have stopped building, lenders have stopped lending and producers have discontinued orders for supplies. Although the price of homes has dropped over the past 18 months, the current credit contraction is expected to be short lived especially considering the massive spending programs currently being implemented by the federal government.

Right now, the volume of real estate sales has dropped so there are more goods (ie, homes) on the market. As demand continues to decline, fewer and fewer suppliers will build new homes. Everything from drywall to bathtubs will experience a contraction of volume resulting in less production and fewer sales. Some will go out of business while others will merely stop producing all but the most common examples. Eventually it will cost more to keep the business open than is being produced resulting in shortages.

While the initial focus of a deflationary cycle is on the short term drop in prices, fewer people take a long term outlook and realize the very real long term shortages that are likely to transpire. Unlike prior deflationary episodes, “Just in time” manufacturing and shoe-string inventories are likely to result in a much faster cycle of shortages. It is these same shortages that begin to create upward pressures on needed and necessary items such as housing.

In a nutshell, the short sale investor is wise to understand the deflationary lifecycle in order to recognize premium purchasing opportunities:

1. Debtors are forced to cover losses by selling assets; in this case, banks are unloading “bad loans” to the federal government who is assuming these losses and printing cash to prop up banks.

2. The total value of assets begins to decline as debtors sell for any price just to raise required capital.

3. Dropping prices begin to impact other supporting businesses; credit tightens and production costs increase relative to profits further escalating the problem.

4. Bankruptcy and lay-offs take place exacerbates the problem while resulting in further declines.

5. Production costs outstrip profits. Companies begin to close and supplies, raw materials begin to grow scarce.

6. People begin to focus on safe affordable housing, food, medicine and other necessities.

7. Shortages take place in earnest as the excess inventory is insufficient for current demand.

8. Demand once again exceeds supply – driving the cost of goods higher. Those holding available tangible assets can demand – and receive – top prices.

See you at the top!

Chris McLaughlin

http://www.shortsalesriches.com/welcome.html

P.S.

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*************************************************
Finally, a blog for Real Estate professionals
that want up-to-the-minute news, & how it impacts
us and our market…

http://www.shortsalesriches.com/blog
*************************************************

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 flipping of distressed homes. Owns
      portfolio of nearly 100 high-value, high-profit
     properties

     * Highly sought-after speaker, consultant, and
      seminar leader for current trends and hot topics
     in Real Estate Investing, Entrepreneurship, and
      Wealth Building

—

Mortgage Rates Hit a 4 Year Low As Short Sale Investing Gets More Fun!

Chris McLaughlin — Fri, 12 Dec 2008 16:58:07 +0000

Mid-Day Market News & Commentary by Chris McLaughlin, December 12, 2008
http://www.shortsalesriches.com/welcome.html

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The good news keeps coming for mortgage rates: they hit a 4 year low at 5.47% and then dropped further to 5.33% yesterday, with no points or origination fees. The new rates have encouraged fence sitters to jump off and begin making purchases, and loan officers have reported a bounce in mortgage applications as well.

Bank of America announced late yesterday that it would be giving pink slips to over 35,000 employees as it finalizes its merger with Merrill Lynch. The reduction will account for approximately 10% of the combined companies’ total employee base. The announcement comes on the heels of a similar one from Citigroup, which announced last month that it would eliminate 52,000 jobs, or about 15% of its total workforce.

And in a sign of the greedy times on Wall Street, get this: the former Chairman of the Nadaq Stock Market was arrested for what investigators have described as a “stunning fraud that appears to be of epic proportions.” The fraud is estimated to be a “50 billion Ponzi scheme,” where the assets that Mr. Madoff would tell his investors about actually didn’t even exist. I wonder whether Madoff will ask the Treasury for a bailout? Think about it … banks lied about the value of their mortgage bank securities and induced people into loans they weren’t suited for, so why given them money and not Madoff? Ok, I’m just kidding but you get the point!

And in the latest on the Big 3 Bailout, it appears that Congress hit a snag and can’t come to agreement … so the Bush Administration is reversing course and now suggests that the money might be able to come from the $700 billion TARP. “Under normal economic conditions we would prefer that markets determine the ultimate state of private firms,” White House press secretary Dana Perino stated. “However, given the current weakened state of the US economy, we will consider other options if necessary, including use of the TARP program to prevent a collapse of troubled auto makers.”

Now, on to our topic of the day: Recession, Depression, Inflation, Deflation…What’s it all About and How Does it Impact Real Estate?

Ronald Regan once stated “A recession is when a neighbor loses his job. A depression is when you lose yours. If we were to apply the same logic to the real estate market, then the nation has been in the midst of a recession for some time as people have been steadily losing (or walking away from) their homes. In fact, there is a great deal of recent debate on whether the nation is already in a recession and heading for a depression or whether the easy money economics of the Federal Reserve will prevent a depression at the risk of creating further inflation…or perhaps world-wide deleveraging will actually result in massive deflation instead. Let’s take a few moments to examine real estate in each of the above scenarios’…

Recession. Unlike employment figures (or stocks), real estate doesn’t act the same as jobs during a recession. When a worker loses a job the position may be completely eliminated (or the stock completely wiped out). When someone loses a house it reverts back to the prior owner, heirs, bank or local government. Short sale buyers realize the inherent value in the home or property and act like a middle man to obtain a percentage of that value for themselves in the form of resale, rentals or retained equity.

Depression. During a depression the entire economy may slow down so much that little to nothing is being produced. Job loss often runs rampant as prices drop below the cost of production. Unemployment drives labor costs down – creating a downward spiral as unemployed workers are unable to afford more than the basic necessities. Again, jobs and stocks alike may all but disappear during a depression but a house remains standing. Housing is a basic necessity and tends to take top priority even during the most critical economic crisis.

Inflation. Inflation tends to drive the price of all commodities and assets higher as the replacement cost rises; real estate is no exception. With the Federal Reserve practically printing money out of thin air, the ability to own or control physical assets with a fixed rate of interest is often the best way to preserve wealth during periods of escalating inflation. On the other hand, the increased cost of production and labor often leads to more work for less pay among employees.

Deflation. Falling assets prices and world-wide deleveraging tend to drive down the price of commodities and assets including real estate. However, short sale buyers are often purchasing property at or near the fully depreciated value. Even those who experience further price drops still have other options available to bridge the gap until the market recovers; rentals, owner financing and factoring may each help raise needed capital or reduce individual debt repayments until the property has regained full value.

What Happens to Real Estate In a Recession?

Chris McLaughlin — Wed, 15 Oct 2008 16:19:24 +0000

Impact of a Recession on Real Estate

Mid-Day Market News & Commentary by Chris McLaughlin, October 15, 2008
http://www.shortsalesriches.com/welcome.html

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At midday investors continued to hold their breath, as the Dow Jones Industrial Average was down 317.24 to 8993.75. A government report released this morning showed that retail sales had dropped by 1.2 percent, which was twice as much as most analysts had been expecting. The report does not bode well for the upcoming holiday season, where many Americans are seen as tightening their belts.

JP Morgan Chase’s profit dropped 84 percent to $527 million from the $3.4 billion in the year ago third quarter. “It’s an unpleasant situation, and I don’t want to underplay it. It’s unpleasant for the country,” said CEO Jamie Dimon. “I hope that the financial crisis, with the powerful moves made by governments around the world, will start to ease.”

In other banking news, Wells Fargo fared much better than JP Morgan Chase. Its third quarter profit fell 25% to 1.64 billion from $2.17 billion in the year ago period. The company was successful in breaking up the proposed Citigroup-Wachovia merger and now Wells plans on merging with Wachovia. Citigroup has indicated that it will not stop the deal but does plan on extracting its pound of flesh in court for damages.

Now on to our real estate investing news arena…

Recession, Depression, Inflation, Deflation…What’s it all About and How Does it Impact Real Estate?

Ronald Regan once stated “A recession is when a neighbor loses his job. A depression is when you lose yours.” If we were to apply the same logic to the real estate market, then the nation has been in the midst of a recession for some time as people have been steadily losing (or walking away from) their homes. In fact, there is a great deal of recent debate on whether the nation is already in a recession and heading for a depression or whether the easy money economics of the Federal Reserve will prevent a depression at the risk of creating further inflation…or perhaps world-wide deleveraging will actually result in massive deflation instead. Let’s take a few moments to examine real estate in each of the above scenarios’…