Real Estate News & Commentary by Chris McLaughlin, April 27, 2009
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Housing messages mixed
The Obama administration keeps telling us things are looking up, but the real players in both the economy and real estate are all over the map in both results and predictions. The National Association for Realtors has pulled together some of those confusing housing indicators from last week:
- The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, reported that home prices rose 0.7 percent from January to February 2009.
- The February 2009 RPX Monthly Housing Market Report said home sales increased month over month in 22 of 25 key metropolitan statistical areas and 13 of these areas posted the largest gain in February 2009 since 2006.
- The National of Association of REALTORS® reported that existing home sales dropped in March 2009, and median prices fell 12 percent from a year earlier.
- First American CoreLogic announced that national housing prices declined 12.2 percent in February from a year earlier and have been in decline for 24 straight months. It predicted that home prices would continue to decline through 2010.
Clarification or more mixed messages?
Just to keep up the confusion by trying to explain it, The National Association of Home Builders reported that production of single-family homes is unchanged, despite falling housing starts. “Today’s numbers are right on target with NAHB’s forecast, which anticipates that housing starts will bottom out in the second quarter, after new-home sales have stabilized,” said NAHB Chief Economist David Crowe. “Single-family starts remained virtually unchanged over the past three months, indicating that we are closing in on a bottom. Multifamily starts – which tend to bounce around from month to month — were responsible for the decline in total starts as they readjusted following a substantial gain in February.” But he warned, “A substantial recovery in housing of the kind that’s required to help get the national economy back on its feet will not happen until the logjam in acquisition, development and construction financing has been broken.
Swine Flu hits the market
World stocks tumbled after seven weeks of gains, and both oil and the euro fell on Monday as concerns intensified the spread of swine flu would hit the global economy. Mexico seems to be the center of the outbreak, although cases have spread to countries around the world. As many as 103 deaths in Mexico are thought to have been caused by swine flu, CNN reported. In the United States, the largest number of cases has been reported in New York City. “The swine flu seems to be one of those ‘Black Swan’ events that has caught the market by surprise. This is a concern as to whether it might impact any potential…recovery chances,” said Martin Slaney, head of derivatives at GFT Global Markets. The MSCI world equity index fell 0.7 percent. The U.S. government plans to issue a travel warning later Monday urging Americans to avoid all “nonessential” trips to Mexico because of an outbreak of swine flu, a U.S. official said.
GM slashes jobs, debt, and dealerships
In its latest bid to stay out of bankruptcy, General Motors announced plans to drop Pontiac, cut 23,000 U.S. jobs by 2011, and slash 40% of its dealer network. GM is also offering bondholders 225 shares of its stock for every $1,000 it owes the bondholders in principal. GM’s first plan was turned down by President Obama’s auto industry task force in February, but this restructuring announcement goes much further.
The company had announced many of the job cuts in February, but Monday’s news that GM would have about 38,000 hourly U.S. employees by 2011 represents an additional reduction of 7,000 to 8,000 jobs beyond what GM disclosed in its previous viability plan. The Obama administration’s task force said today that the new plan “reflects the work GM has done since March 30 to chart a new path to financial viability,” but added that it “has made no final decision regarding the treatment of its current loan to GM or with respect to any future investments in the company.” Not exactly a rousing endorsement, is it?
Wall Street Journal explodes at regulators
In perhaps its harshest language yet, the Wall Street Journal takes a crack at mismanagement by Paulson and Ben Bernanke. Here’s how the article opens: “The cavalier use of brute government force has become routine, but the emerging story of how Hank Paulson and Ben Bernanke forced CEO Ken Lewis to blow up Bank of America is still shocking. It’s a case study in the ways that panicky regulators have so often botched the bailout and made the financial crisis worse. In the name of containing “systemic risk,” our regulators spread it. In order to keep Mr. Lewis quiet, they all but ordered him to deceive his own shareholders. And in the name of restoring financial confidence, they have so mistreated Bank of America that bank executives everywhere have concluded that neither Treasury nor the Federal Reserve can be trusted.”
Now on to our real estate investing education section…
Derivatives – The Next Shoe to Drop?
About the time short sale investors have started to grow weary of watching the evening news a new economic threat is beginning to rear its ugly head – derivatives. While most of the media has been content to talk about falling real estate prices (which are beginning to look good in comparison to other investment options), faltering currencies, corporate bankruptcies and bail-outs only the most fearless dare to mention what is on everyone’s mind…the dreaded derivative market.
To get a perspective on the situation consider these startling facts:
The total value of residential real estate in the United States is estimated to be roughly $10 Trillion.
The annual GDP of the USA is roughly $15 Trillion.
The global GDP for the entire world is roughly $50 Trillion.
The total value of all real estate in the entire world is roughly $75 Trillion.
The derivative market is roughly $516 Trillion…excluding private transactions between non-reporting entities.
Obviously the problem is huge which is one reason big banks are eager to settle the real estate related problems as soon as possible in order to position themselves – with cash in hand – for the next stage of the economic playbook. By now there should be one burning question on the minds of every savvy short sale investor; “Which banks are heavily invested in derivatives?”…well, that is a good question and one in which we have an answer. In order of shock and awe are the derivative investments of some of the biggest names in the banking industry as of the end of 2008 as represented by a percentage of their risk based capital is as follows:
Wachovia: Approximately 53 percent
Bank of America: 194 percent
Citibank: 258 percent
JPMorgan Chase: 430 percent
HSBC: 595 percent
Scary isn’t it? This means that for every dollar of capital held by HSBC, they have nearly $6 of exposure to the derivative market however, all of these banks are above the suggested maximum of 25 percent exposure so at what point does it even matter? This type of scenario is what has many economic experts calling for the end of the historic strategy of buying and holding stocks, bonds and even dollar based currency for the foreseeable future as one bubble after another continues to burst.
Remember, the entire global GDP is only $50 trillion….which would not even be enough to “bail-out” Citibank alone should the derivative market collapse. Now ask yourself, where do you intend to park your hard earned money over the coming years? Stocks? Bonds? Currencies backed by governments forced to bail-out one bad investment after another?
How about putting it into the one tangible asset that provides the fundamentals required for a great return, flexible financing, long term tax breaks and a historical precedent unlike all others…real estate. The choice is yours – listen to the same media pundits that lead you down this path and believe the rhetoric about the market moving upward or cash out while you still can and invest in something safe for the long haul. Just remember, when the derivative shoe finally does drop…you heard it here first.
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com/welcome.html
P.S.
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Copyright Loss Mitigation Institute 2009.
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.
* 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
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