Real Estate News & Commentary by Chris McLaughlin, June 30, 2009
http://www.shortsalesriches.com
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Home prices fall in major U.S cities
The Standard & Poor’s/Case-Shiller index, which measures the movement of home prices in 20 major U.S. cities, dropped 18.1% in April from a year earlier. This follows an 18.7% drop in March. The price drop was largely on account of increasing foreclosures. “The market will likely remain out of balance for some time given the flood of foreclosures,” said Michelle Meyer, an economist at Barclays Capital. “Home prices are likely to continue to fall, albeit at a slowing pace, even after the economy technically emerges from the recession.” The decline in home prices is stabilizing the housing market. According to the National Association of Realtors, home resales rose 2.4% in May to an annual pace of 4.77 million units. Lennar Corp., the third-largest U.S. homebuilder, reported last week that home deliveries in the second quarter rose 47% while new orders rose 67%, from the first quarter of this year. Stuart Miller, Chief Executive Officer of Lennar, said: “While we are sensing pent-up demand in the market, rising unemployment, increased foreclosures and tighter credit standards continue to present challenges for the industry.”
Loan modifications program yet to take off
The Obama administration introduced the $75 billion loan modifications program 4 months ago to refinance and modify millions of mortgages, by offering government subsidies and incentives for servicers, lenders, and borrowers. The plan offers $1,000 to mortgage companies for each loan they modify, followed by $1,000 per year for the next 3 years. The program has been ineffective so far with millions of homeowners continuing to slip into delinquency and foreclosure. Analysts attribute the slow progress of the program to operational constraints faced by mortgage companies. Michael Barr, the assistant Treasury secretary for financial institutions, said mortgage companies need to do better to promote the program. “They need to do a much better job on the basic management and operational side of their firms. What we’ve been pushing the servicers to do is improve their infrastructure to make sure their call centers are doing a better job. The level of training is not there yet,” said Barr. Mortgage companies acknowledge they need to do more. Tom Kelly, a spokesman for JPMorgan Chase, which now owns Washington Mutual, said the bank has added 950 loan counselors since the beginning of the year, bringing the total to 3,500, in order to expedite the process. “But we’ve got a lot more to do,” said Kelly.
State can probe racial discrimination in mortgage lending.
In an important judgment, the U.S. Supreme Court has ruled that New York’s attorney general can investigate whether banks discriminated against minorities while offering mortgage loans. In 2005, Eliot Spitzer, then the New York state attorney general, said data showed that loans to minorities carried higher interest than loans to non-minorities, and wished to start a probe. The Office of the Comptroller of the Currency (OCC), a federal agency that oversees banks, opposed the probe because it believed the probe fell outside state jurisdiction. The Supreme Court ruled in favor of the New York state attorney general. Andrew Cuomo, the current New York attorney general, said: “This is a huge win for consumers across the nation.” According to Cuomo, the ruling will help state attorneys to protect consumers from the “illegal and improper practices by our country’s biggest and most powerful banks.” James Cox, a securities law professor at Duke University, said the ruling gives state attorneys a “bully pulpit” and “even without subpoena power they can still hold press conferences and take steps to swing public opinion.” Michael Calhoun, president of the Center for Responsible Lending, said the ruling “is a victory for taxpayers, who have suffered enormously as a result of abusive business practices in all types of lending.”
GM seeks approval for the “new GM” plan
Just 30 days after filing for bankruptcy under Chapter 11, General Motors (GM) has sought court approval for selling its prized assets such as Chevrolet and Cadillac under Section 363 of the bankruptcy code to a “New GM.” GM’s old assets would remain behind for liquidation. The proposal is likely to face opposition from GM’s bondholders. Analysts believe that GM’s case is likely to be strengthened by the permission of U.S. Supreme Court for the sale of Chrysler to Italy’s Fiat. Stephen Lubben, a bankruptcy professor at Seton Hall Law School, said: “I think it is going even perhaps more smoothly than Chrysler, which is kind of interesting considering how much bigger GM is than Chrysler.” GM has emphasized in its court filings that its proposal will avoid a “systemic failure” in the U.S. auto industry and provide “a genuine opportunity for the business to survive and thrive in an economically viable entity.”
The “not in my backyard” syndrome
The Obama administration’s financial reform plan, unveiled on June 17, is facing opposition from almost all constituents – banks, hedge funds, and industry associations such as the U.S. Chamber of Commerce. The “not in my backyard” (NIMBY) reaction is predictable as industry constituents begin to realize how the new regulations will impact their business. Scott Talbott, a lobbyist for the Financial Services Roundtable, which represents large financial companies, said: “I think the NIMBYism started once we had something to shoot at—before that, it wasn’t really real. Then once we have the legislative language, the real fights will begin.” While banks and other players say they have valid concerns on the impact of the new regulations, consumer advocates and groups supporting government proposals have criticized financial industry participants. “It’s a strategy to try to split people on Capitol Hill and try to confuse people,” says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group, a consumer advocacy organization. “It’s an attempt to blame it on the other guy—they’re hoping to water down reform, deflect criticism of their industry.”
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
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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 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
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