Real Estate News & Commentary by Chris McLaughlin, May 29, 2009
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Rise in mortgage rates threatens the housing market
Mortgage rates have risen to their highest level in the last 3 months. The average rate for a 30-year fixed mortgage jumped to 5.44% yesterday. This is in line with the steep increase in the yields of long-term treasury bonds. The 30-year rate was at a record low of 4.78% in April. The decision of the Federal Reserve to buy $1.25 trillion of mortgage securities and $300 billion in Treasury Notes this year led to a drop in mortgage rates early this year. Lower rates, in turn, led to an increase in mortgage applications. Analysts are now worried that the surge in mortgage rates could impact the economy adversely by curbing consumer spending. Mahesh Swaminathan, a mortgage strategist at Credit Suisse Group, says, “”The spike in rates has the potential to derail a lot of things.” According to Credit Suisse, a rise of 0.1% in mortgage rates translates into a 1% increase in home prices. Higher rates will hit home prices and sales. Ben Bernanke, Chairman of the Federal Reserve, referred to early signs of economic recovery as “green shoots” in an interview recently. T.J. Marta, a financial analyst, says, “If the Fed does not step in, you are going to see the ‘green shoots’ get frost bite.”
Recession hits shopping malls
Shopping malls in the U.S. are turning into ghost towns. A number of demographic factors along with the pressures of economic downturn are affecting the sector. General Properties, one of the largest shopping mall companies in the country, filed for bankruptcy last month. Department stores which occupy malls have been badly hit. Rating agencies have downgraded debt securities of leading retailers such as Macy’s and J.C. Penny to “junk” grade. Sears Holdings, a large consumer of mall space, is likely to close 23 stores in the next couple of months. According to Green Street Advisors, a real-estate research firm, in the 12 months ended March 31, shopping malls in the U.S. posted a 6.5% decline in tenants’ sales. Industry experts believe that a mall is in danger of failure if its annual sales per square foot figure falls below $250. By that rule of thumb, over 84 malls are already in the “dead” list. If the retail sector does not show signs of revival, Green Street estimates that over 100 properties will find a place in the dead-mall list by the end of this year. Burt P. Flickinger III, managing director of Strategic Resource Group, a research firm, says, “The shopping-center bankruptcies and the REIT bankruptcies are the ticking time bomb that people aren’t talking about.”
It is taking longer for receivables to get converted into cash
Cash is king, particularly in times of recession. According to The Hackett Group, an advisory firm, the 1,000 largest companies in the U.S. took 39.7 days to collect on sales in the fourth quarter of last year, as against 36.4 days a year earlier. In the first quarter of this year, the figure rose to 39.5 days. Inventory on hand rose to 31 days worth of sales in the first quarter of this year as against 28.2 days in the last quarter of last year. As companies look to conserve cash by delaying payments to vendors, they cause ripples of pain across the supply chain. Mark Tennant of The Hackett Group said, “If you make the wrong thing and sales reduce, you sit on it for a long time.” Companies are looking at cash flow management as an important management objective and some companies are tying executive bonus to cash flow.
Is recession abating?
Economists have predicted that the recession in the economy will end in the last quarter of this year. Chris Varvares, president of the National Association of Business Economists (NABE), says, “While the overall tone remains soft, there are emerging signs that the economy is stabilizing.” New data from different agencies seem to support NABE’s prognosis. According to the Commerce Department, new orders for durable goods rose 1.9% in April, the biggest increase in the last 16 months. A recent report from the Labor Department shows a drop in initial claims for state unemployment insurance by 13,000 to 623,000 in the week ended May 23. James Masi, chief fixed income strategist at the investment banking firm Stifel Nicolaus, said, “The data is consistent with the view that the rate of contraction is slowing, but we are still working our way through a recession. We haven’t hit a bottom yet.”
Oil price rise may impede economic recovery
Oil prices have risen 48% to $65 per barrel in the last five weeks. Oil, being an essential commodity in any economy, becomes dearer as its demand grows on account of recovery in the global economy. In addition, the U.S. dollar has depreciated against a basket of currencies in the last 5 weeks. A weak dollar leads to an increase in cost of imports including oil. Oil hit a record high of $147 per barrel last summer. While the current level is nowhere near $147, analysts are worried that the prospects of economic recovery may get hampered if oil prices continue to rise. With unemployment at a high, consumers are not in a position to absorb raising costs. Gasoline prices go up by 2.4 cents for every one dollar rise in crude. James Hamilton, an economics professor at the University of California, San Diego, says if the gasoline price increases, it could “postpone some of the recovery we’d been hoping for.”
Now on to our real estate investor education tips section…
Quick Tips to Making Money in a Down Economy
Still don’t believe real estate is the road to wealth in a down economy? History has demonstrated it time and time again but for those die-hard disbelievers, ask yourself a few simple questions….what else is likely to make money? Manufacturing? Maybe but who has the funds to buy? Retail?
Perhaps but discretionary spending is down…and falling fast – so fast in fact, that Americans actually turned a negative three percent savings rate into a positive five percent savings within the past two years. Think the financial market will come to the rescue – that’s a bet millions of American’s and other nations across the world are increasingly considered one of the most risky bets around.
So, what’s left? Well, real estate for one. Yes, it’s true real estate has dropped but that is actually the silver lining in what was an otherwise unrealistic pricing cloud. Here is a simple way to start small and build a secondary income, retirement fund or other financial goals for your family’s future..
Set aside the funds for your first down-payment. Whether you pull a little extra from savings, work a second job, take out a little loan or sell a few items is up to you…just put your hands on some extra cash that will provide enough to purchase your first short sale property. Not sure where to begin? Try all of the above or take time to evaluate whether or not you have access to any forms of private money – after all, with interest rates paying three percent or less in many instances – there are bound to be a few associates that would love the ability to get a real rate of return on their money.
Make offers – lots and lots of offers. There is an old saying in real estate – “You make money when you buy not when you sell”. Beginners to the short sale arena need to have a few solid “wins” under their belt before moving on to “bigger and better” deals. That means buying a major bargain…and buying a major bargain means putting out a lot of offers to see who takes the bait. Learn how to negotiate the right contract for your long term investment goals
Set a profit potential. For example, let’s assume you find a motivated seller who purchased a $200,000 home that would fetch a $150,000 once some deferred maintenance and upkeep was performed. Assuming you will have transaction fees and other expenses associated with the sale of the home, determine in advance what percentage of the price you will offer. Common examples are included below:
Private Investment Funds – 30 cents on the dollar. However, these are bundled bids that entail large numbers of properties and streamlined paperwork. Individual investors should not expect this type of extremely deep discount…although you could get lucky once in awhile.
Representative Groups – 50 cents on the dollar. Typically smaller than private investment funds, these are still larger than individual investors and may be able to take advantage of larger group deals.
Individual Investors – 50 to 80 cents on the dollar. Depending upon your total credit score, net worth, number of prior investments etc..
Establish your network. If you intend to hold or rent the property your network of realtors, brokers, tax experts and appraisers may be different than if you intend to flip or rent. Either way, begin establishing a team of trusted advisors and experts you can count on to help before, during and after the sale.
See you at the top!
Chris McLaughlin
http://www.shortsalesrichesturbocharged.com
PS:
It’s LIVE! The Launch of the Year has begun .. find
out tonight what all the fuss is about at 7:00 PM ET, 4:00
PM PST tonight (Friday):
https://www2.gotomeeting.com/register/133423498
Copyright Loss Mitigation Institute 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 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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