S&P’s bleak pognosis on subprime mortgage securities
Real Estate News & Commentary by Chris McLaughlin, July 7, 2009
http://www.shortsalesriches.com
* Follow me on Twitter: http://www.twitter.com/mclaughlinchris
“You Thought Short Sales Were Hard to Close?
Sorry - You Thought Wrong…”
This automation miracle finds listings, negotiates
low-ball price with the bank, and sells them to investors
without you doing anything more than signing the papers.
You don’t even pay for marketing!
Find out more for fr-ee right here Tuesday night:
https://www2.gotomeeting.com/register/836544099
S&P’s bleak prognosis on subprime mortgage securities
Standard & Poor’s (S&P) says it expects losses on loans behind mortgage securities to rise to as high as 40% and the dire assessment could “significantly impact” bonds with AAA rating. S&P increased its loss projections for subprime loans made in 2006 to 32% and for 2007 loans to 40%. The housing market is currently at its lowest level since 1930s and investors have seen a significant decline in the market value of their debt over the last couple of years. A rating downgrade could mean a further reduction in the market value of the securities. S&P expects loss severities, including the cost of foreclosure and liquidation, and decline in property values, to increase to 70% for subprime bonds issued in 2006 and 2007. For Alt-A bonds issued in 2006 and 2007, S&P expects loss severities to rise to 60%. “We have observed increases in loss severities and we expect them to continue to rise until we reach the trough of the market value decline, which we believe will be in the first half of 2010,” S&P said in a report.
U.S. home prices may fall through the first quarter of 2011
PMI Group, the fourth- largest mortgage insurer in the U.S., expects home prices to drop in more than 50% of the largest cities in the U.S. through the first quarter of 2011. The decline will be across “all regions of the nation” from California, Florida, Nevada and Arizona, the states most affected by the housing downturn. “The housing market has been hit by a demand shock of high unemployment and a supply shock of distressed foreclosure sales,” said LaVaughn Henry, senior economist at PMI. Analysts believe prices have to fall further in many areas before home values reach their trough. According to PMI, some 15 areas including Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa and Jacksonville in Florida; Riverside, Los Angeles, Santa Ana, Sacramento and San Diego in California; Las Vegas; Phoenix; Providence, Rhode Island; and Detroit have a 99% probability of lower prices in 2011. The areas with the lowest probability (of 6%) of lower prices in 2011 include Cleveland; Pittsburgh; Columbus, Ohio; San Antonio; Houston; Dallas, and Fort Worth, Texas.
Office space vacancy rises to a 4-year high, even as rents decline
According to Reis, a research firm, vacancy rate for office space rose to 15.9% in the second quarter of this year from 13.2% a year earlier. The need for office space has been declining as the unemployment rate inches closer to the 10% mark. The demand for office space has dropped for 6 straight quarters now. Occupied office space has fallen by 45.2 million square feet so far this year. By the end of this year, 67.6 million square feet of office space will have been given up. “Office properties are still facing extreme pressure in a troubled leasing environment,” said Victor Calanog, director of research at Reis. “It’s a tough time for landlords.” Rents paid by tenants were down 6.7% from a year earlier according to Reis. Washington saw the lowest office vacancy rate at 10% in the second quarter, followed by Birmingham, Alabama, New York City and Nashville, Tennessee. Sacramento, California, saw the biggest increase in office vacancies from the first quarter.
U.S. service sector’s best performance in 9 months
The Institute for Supply Management (ISM) on Monday said that its index tracking the service sector rose to 47 in June from a reading of 44 in May. This is above the estimate of 45.5 made by economists. A reading above 50 indicates economic expansion while a reading below 50 denotes contraction. Including June, there have been 9 straight months of contraction. However, the contraction is at its lowest since last September. The services sector accounts for about 70% of America’s economic activity. Does a reduction in contraction denote the likelihood of recovery in the near-future? Analysts do not think so. “It’s going to take a long time before the economy is really back up to its potential,” said Capital Economics analyst Paul Ashworth. Unemployment is the biggest concern. “The ISM employment indices suggest payrolls should be falling at about 200,000 a month now,” Ashworth said. Given the current unemployment level it may take years and not months for the sector to recover in a sustained manner. Six industries including real estate, finance and insurance, and hotel companies saw growth in June while 11 industries including retail, health care, and education saw a fall in output.
California bonds edging closer to junk status
Bonds issued by the Golden State are anything but gold now. Fitch Ratings, a credit rating agency, has downgraded California’s long-term debt to “BBB,” just one category above junk status. Fitch has cited California’s budget woes as the main reason for the downgrade. “[I]nstitutional gridlock could persist, further aggravating the state’s already severe economic, revenue and liquidity challenges,” Fitch said in a release. The state’s budget gap of $26.3 billion forced it to issue IOUs last week for the first time in 17 years. Consequently, many county agencies will get paid in paper. “The fact that they have to take this step shows how tight the state’s cash became and how limited their options are in the absence of a budget solution,” said Douglas Offerman, Fitch credit analyst. “Without a budget, [the controller's] flexibility gets more and more reduced over time.” Will California default on its debt obligations? “It won’t happen,” says Tom Dresslar, spokesman for California Treasurer Bill Lockyer. California has a lot to worry about regarding the rating of its bonds. If its bonds are reduced to “junk,” the state’s debt raising capability may be severely impaired.
Now on to our real estate investor education section…
To Diversity or Not…That is the Question
Common wisdom holds that diversification is the key to safety and the secret to building long term wealth but does this golden nugget of investment knowledge really hold true? By now every investor with a pulse should be ready to carefully evaluate every piece of investment advice before putting their hard earned dollars to work; scandals, worthless securities and severe economic strain have turned retirement accounts into little more than emergency funds while millions of Americans are completely rethinking the concept of retirement in light of meager savings.
So, should you heavily invest in short sales while the price is right or are you spreading yourself too thin and putting yourself at risk? If you are one of the plethora of people that would never dare consider the option of not diversifying – keep reading before making up your mind. In his latest book “A Gift to My Children” by legendary investor Jim Rodgers, Rodgers clearly comes out against diversification. A quick look through history shows many of the wealthy failed to follow that worn-out advice and became outright rich because of it; Henry Ford, Bill Gates, Rockefeller and others were heavily invested in what they knew best.
The Down Side of Diversification
Diversification is nearly always portrayed as a way to reduce risk but it simultaneously reduces profit. For example, if an investor has $100,000 to spend and they spread it across ten different stocks, the chances of all ten going up (after correcting for inflation) are minimal. It happens but typically they rise and fall at different rates over different periods of time. Some will go out of business entirely while others will reach stratospheric rates of return. Typically the winners and losers “average out” to create a long term rate of return of roughly 8 percent. Unfortunately, as millions of Americans have found, when the market is down it can take considerable time to reverse losses. Add in holding fees, transaction costs, the rate of inflation and taxes…well, you get the idea.
On the other hand, if the same investor had put the entire $100,000 into a “sure-fire” stock they would have one of three outcomes: win, loose, hold steady. Yes, it is a risk but it’s also the way to obtain big life-changing rewards. Unfortunately, stocks are not easily controlled and do not conform to the hard work or direct intervention of the average investor.
However, real estate does. It still retains excellent tax advantages, provides a direct input by investors that are able to impact the value of the property through a multitude of individual decisions such as how to use the property (rental, flip, option etc) or even how to stage and repair. Before you allow others to tell you short sales are risky or that putting all your eggs into one basket is a recipe for financial failure; take time to examine the current condition of that person’s portfolio versus a short sale investors. Despite the downturn in the economy, chances are the short sale investor is outpacing the traditional stock and bond diversification investor by significant margins.
Remember, it is still possible to diversify while building a short sale investment profile simply by expanding the type of properties purchased and geographic location. Stop accepting common wisdom as the plain truth – instead, start putting it to the test. Chances are you will agree short sales have the most to offer by a long shot.
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com
PS:
“Strange New Automation Strategy Closes Short Sales
Fast and Easy!”
Think of it! Our new automatic system for finding and
closing short sales is letting people cut their
work-week in half… and triple their income!
If you’re ready to say good-bye to endless hours of
labor, and far too few dollars in return, find out
more for fr-ee – no cost, no obligation. Just click
the link below..
https://www2.gotomeeting.com/register/836544099
Copyright Loss Mitigation Institute 2009.
All Rights Reserved.
http://www.shortsalesriches.com
http://www.shortsalescoach.com
http://www.reomillionaireclub.com
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 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 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
* Follow me on Twitter: http://twitter.com/mclaughlinchris
* Add me on Facebook: http://www.facebook.com/mclaughlinchris
