Smart Real Estate News & Commentary by Chris McLaughlin November 22, 2010
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Foreclosure mess scares off homebuyers
The ongoing controversy surrounding foreclosures is taking its toll as homebuyers refused to look at distressed properties in October, and foreclosure sales suffered from delays, according to the latest Campbell/Inside Mortgage Finance Monthly Survey. Both the share of home purchases involving distressed properties and average prices for foreclosed properties fell last month, the survey found. News reports that major servicers were pulling REOs off the market, including some already under contract, spooked would-be homebuyers. The monthly survey found that 14% of owner-occupant homebuyers and 6% of investors refused to view foreclosed properties in October. Homebuyer fear was worse for short-sale properties where 30% of owner-occupant buyers, and 20% of investors refused to view these homes.
Servicing problems disrupted both short sales and REO sales. Survey results show that 24% of closings scheduled for October were delayed or canceled due to issues with short sales, while 12% were delayed or canceled due to REO title issues. Although distressed properties have dominated home sales for much of 2010, recent foreclosure problems helped trigger a dip in their share of the market last month, according to the survey. In October, distressed properties accounted for 44.3% of transactions tracked in the latest survey — down from 47.5% in September. “It’s clear that decreased homebuyer demand for distressed properties has resulted in lower prices,” said Thomas Popik, research director for Campbell Surveys. “With the foreclosure ‘fraud’ issue still out there, buyers are skeptical to purchase a REO. Until the fraud mess gets cleared up, most of our clients are second guessing their interest in REO properties,” reported a Florida real estate agent responding in the latest survey.
October home sales down
According to the RE/MAX National Housing Report released Friday, October home sales slid 9.8% from September and 30.2% compared to the year-ago period as seasonal slowdowns and the expired homebuyer’s tax credit took their toll. Activity in October is in line with “the usual summer-to-fall selling pattern,” falling from September, according to RE/MAX. Out of the 54 metropolitan areas surveyed, only Burlington, Vt., experienced a year-over-year increase in home sales activity. Sales were up 59.3% compared to 2009. “It’s understandable that sales are lower than the same time last year since the data was artificially inflated in October 2009 by homebuyers rushing to take advantage of the tax credit,” said Margaret Kelly, CEO of RE/MAX. “We’re pleased that despite all the market swings, home prices have remained stable.”
Home prices nationwide fell 0.68% in October compared to the same period in 2009. RE/MAX said 35 of the surveyed areas actually witnessed a price increase, while 18 witnessed a price decrease. The inventory of houses on the market in October dropped 5.7% from September and 1.1% from October 2009. There is now a 9.7-month supply of houses on the market, according to the report. RE/MAX considers a six-month supply of home equilibrium between buyer and sellers.
The bill comes due for states
States have borrowed $41 billion from a federal fund to cover unemployment checks for their jobless residents, and now the bill is coming due. Some 31 states will have to shell out an estimated $1.4 billion in interest payments on these loans next year. They had been spared this expense because of an obscure provision of the 2009 Recovery Act that expires on Dec. 31. The burden to cover this cost will fall mainly on businesses, who will see their unemployment taxes rise. But states will be hit too since the increased expense will likely deter companies from hiring new employees. “To escape the recession, we need economic recovery,” said Rochelle Webb, the president of the National Association of State Workforce Agencies and head of Arizona’s unemployment insurance system. “If local employers are facing increased taxes, they are going to say they can’t afford to expand their businesses.” States use taxes from employers to pay 26 weeks of jobless claims. But the tax revenue hasn’t kept up with the huge spike in unemployment, forcing many states to borrow from the federal unemployment trust fund. To pay the federal fund back, states have been raising taxes on companies. Two dozen states hiked such levies in 2010 and more are looking to do so again in 2011. But the interest payments on the federal loans cannot be paid from these standard unemployment taxes. Some states have automatic “solvency” taxes that kick in. in others, lawmakers are wrestling with how to cover the tab — at a time when budget shortfalls are already a problem.
Olick – which way are mortgage rates going?
“You can’t time mortgage rates any more than you can time the stock market, but that hasn’t stopped any number of my friends and colleagues from begging me to tell them if rates are going up or heading further down. I have no idea. What I do know is that borrowers are more sensitive now to mortgage rates than ever before in my memory, even as rates continue to hover near record lows. All you have to do is look at last week’s data on mortgage applications from the Mortgage Bankers Association. Rates jumped up over a quarter point, and applications to refinance plummeted 16.5%. Applications to purchase a home, which you would think would be far less sensitive to weekly rates, also dropped, albeit just 5%, but that was after many weeks of increases.
I thought it might be interesting to take a look at how applications run with rates. Take a look first at the last three months of rates compared to refis. You can see a definite correlation that when rates go down, applications go up. That’s an easy one because a lot of refinancing is really just gambling with time. Now look at the same comparison to purchase applications. You would think, again, that home buyers, looking at the big picture, would not move dramatically over a small shift in rates, but they do seem to move accordingly. This just tells me that home buyers today are more nervous, sensitive and cash-strapped than ever before. So now to the question we all want answered, as we all try to figure out the Federal Reserve’s moves in quantitative easing II, where are rates going on the 30-year fixed (by far the loan of choice today)?
Peter Boockvar, Miller Tabak: ‘In the short term, because of the Fed’s almost daily influence in the US treasury market with their asset purchases, it has gotten very difficult to predict where the 10-year and thus mortgage rates go from here, but I think the bond market action in response so far is a sign that they are going higher. That raises of course a huge risk for the Fed. Over the past 10 years, the average spread between the 10 year US Treasury yield and the average 30-year mortgage rate according to Bankrate.com is 155 bps, and as of today we are at 167 bps with Bankrate 30-year rates at 4.55% and the 10-year at 2.88%, so pretty close to average. Over the next 2 weeks the Treasury comes to market with more auctions and that will be key short test of sentiment to the current level of interest rates in light of recent events.’”
Banks short $100-$150 billion
The top 35 US banks will be short of between $100 billion and $150 billion in equity capital after the new Basel III global bank regulations are imposed, with 90% of the shortfall concentrated in the biggest six banks, according to Barclays Capital. The BarCap study assumes the banks will need to hold top quality capital equal to 8% of their total assets, adjusted for risk. This 8% tier one capital ratio, a key measure of bank strength, provides a one point cushion against falling below the effective global minimum of 7% set in September by the Basel Committee on Banking Supervision. The Basel III reforms will hit banks in two ways – by gradually tightening the definition of what counts as tier one capital; and by forcing banks to increase the risk adjustment for big swathes of their businesses. Banks can respond by increasing their capital through retained earnings or equity issuance or they can cut their risk-weighted assets through sell-offs and by cutting back on risky business lines. Analysts say it is hard to predict the impact of the reforms on US banks because they have to apply Basel III risk-weighted asset changes as well as an earlier Basel II set of rules that European banks have been following for years. Analysts at CLSA, an arm of Credit Agricole, estimate the 14 biggest US global and regional banks will need a total of $41 billion to achieve the same 8% tier one ratio, if both the Basel II and III changes are included.
Now for our real estate education section…
Beat the Decade of Decay
Have your investments beat the decade of decay? It’s a question every serious investor needs to ask or otherwise, you may be one of the millions of Americans at risk for a long delayed retirement or worse…no retirement at all. Take this starting statistics as an example of why the past decade has been responsible for a decline in the standard of living:
$100,000 from the year 2002 is now only worth $87,000 in just 8 short years!
At the same time, the cost of many items you use every day has gone up…dramatically. Insurance, healthcare and tuition have experienced double digit inflation. Food, fuel and commodities are approaching triple digit increases. Meanwhile, “safe” investments like Treasury Bonds are actually negative after adjusting for inflation. It’s no wonder many people are wondering what they can do to beat the decade of decay. Fortunately there are still some solutions available to those interested in restoring their financial future.
1. Invest a portion of your portfolio into foreign currencies or assets -including real estate. Markets can be volatile so unless you are an experienced investor, FOREX is not the place to get your feet wet. On the other hand, the extra-low cost of land makes foreign real estate an especially attractive investment for many small business owners, retirees or just those that would like to hedge their bets.
2. Invest in natural resources. Gold, oil, gas, wheat, corn and even water are just a few areas that have experienced explosive growth. Of course, the stock market has experienced more than its share of ups and downs much less junior stocks, OTC and other areas often dominated by emerging natural resource companies. Of course, there is another way to invest in natural resources…direct ownership! It doesn’t take a lot to generate impressive returns; some gas and oil leases pay anywhere from a few hundred dollars per acre to $20,000 per acre in additional income each year…and you still own the land!
3. Invest in fast cash. Investing in short sale real estate is one way to use small amounts of money to generate large returns in a short period of time while remaining in control of the risk. Where else can you generate double or even triple digit returns in a matter of months (sometimes only weeks)…all in your spare time?
4. Invest in the present – not the past. Forget what worked in the past…that was yesterday and even if it worked once, there is no guarantee it will work again. Sure, stocks have gone up but they also go down when you expect it least. The same applies to precious metals, money market accounts and nearly every other investment classification. Although there is a proper time and place for each of these, one investment remains a cornerstone to every portfolio…real estate. High leverage, low risk and an above average level of control make it a mainstay for investors large and small.
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
* Follow me on Twitter: http://twitter.com/mclaughlinchris
* Join my Facebook Fan Page: http://www.mclaughlinchris.com
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