Standard and Poors

Mid-Day Market News & Commentary by Chris McLaughlin, December 30, 2008
http://www.shortsalesriches.com/welcome.html

——
You really can make a huge six figure income … even a 7 figure income … with no money out of your pocket in the deepest recession our country has ever faced.  How?  Just register now for our fr’ee webinar unveiling the strategies to use in this economy…all tonight at 9 PM ET: 

https://www2.gotomeeting.com/register/638209573

——
This should come as no surprise to most of our readers: home prices posted an 18% drop for October of last year, the biggest drop ever since the Standard & Poors/Case-Shiller 20 city housing index was created.  The 10-city index fared a bit worse, dropping 19.1%.  And there areas really got wacked: Phoenix dropped 33%, Las Vegas slid 32%, and San Francisco declined 41%. 

The Conference Board announced that its Consumer Confidence Index dropped 38 in December from a revised 44.7 in November.  The low number surprised economists: a survey of 62 number crunches estimated that the reading would come in around 45.   

But in good news for consumers, General Motors announced that it would once again offer zero percent financing for the next several weeks.  This comes on the heels of the announcement that GMAC was approved as a bank, therefore eligible to tap into $5 billion of the $700 billion of TARP funds. 

Now, on to our real estate investing education section…

Discounting Hedonic Pricing Models

Short sale investors interested in obtaining the lowest possible price should learn to turn the tables on rapid rate increases by discounting hedonic pricing models to their benefit. Hedonic pricing essentially works like this; instead of calculating the increase in a price of a home as inflationary, the “upgrades” and other enhanced “quality” measures are calculated independent of the base price of the home. While this is a valid method of taking quality improvements into account especially during periods of economic growth, it does little to account for increased “liabilities” during periods of economic or financial contraction.

Let’s demonstrate by using a basic example; Buyer A and Buyer B both purchased 3 bedroom, 2 bath homes on 1/3 acre lots with city utilities. Each home is 1500 sq. feet living area and is 3 years of age. Home A is a “bare bones” affordable housing model with laminate counter-tops, inexpensive carpet and off the shelf fixtures throughout. Standard bathtub, windows, doors and other items were used. The cost of the home was $100 per square foot or roughly $150,000 plus the price of the lot. Buyer B also purchased a home of the same size but with granite countertops, imported Italian tile, upgraded windows and custom features throughout. Upgraded appliances, a large in-ground pool, whirlpool spa tubs and other upgrades resulted in a cost of $300 per square foot or a selling price of $450,000 plus the price of the lot.

So far so good. Unfortunately, as the economy begins to stagnate items originally deemed highly desirable quickly become undesirable as the cost of maintenance and repairs outpaces the ability of homeowners to sustain these items. This is where short sale investors are likely to reap major benefits. Deep discounts of common upgrades or former enhancements are possible by keeping these rules of thumb in mind:

1.     If it requires high maintenance it is a liability and should be deeply discounted. In-ground pools are a prime example. Not only do they increase electric bills when heating but cleaning supplies and maintenance contracts can easily cost $100-$250 per month. Items that require regular out of pocket costs should be deeply discounted as potential liabilities for a property. Aggressive pricing estimates would deduct the cost of repairs, maintenance and even potential removal of the item.

2.     If it requires minimal maintenance but adds no additional value it should be discounted by comparing a standard pricing model. For instance, those beautiful granite countertops don’t save money or increase functionality to the home therefore they are of no more “real” value when selling than laminate or less expensive alternatives. Make a point of going through the home and putting together a comprehensive replacement price list based upon standard “off the shelf” alternatives for all items that do not activity save money or represent major buying incentives in the new economy.

We had so many positive comments about our top 5 positive things about the market … so we’re going to post it again for you:

As 2008 draws to a close and short sale investors look to 2009 the question on everyone’s mind is whether or not the economy will continue its downward spiral or experience a recovery. Despite the considerable abundance of doom and gloom reporting in the media, there are a few bright spots that aren’t receiving the full attention deserved. Short sale investors searching for a silver lining in an otherwise cloudy economic environment would do well to focus on these current trends:

1. $40 per gallon oil and $1.65 per average gasoline. How low will it go and how long it will last is subject to debate but one thing is certain; those who rely upon gasoline and oil are experiencing a bit of much needed relief in the form of lower prices.

2. Low Mortgage Rates & Dropping LIBOR Rates. The cost of money is cheap – not just inexpensive but downright cheap. Make no mistake about it, real interest rates are the lowest in decades and make it less expensive than ever to borrow money to build a short sale empire. It is possible to buy more house for less money while simultaneously spending less on taxes and insurance. It’s a win-win-win situation for those with the courage to buy when others are selling.

3. Huge Fiscal Stimulus. Coming soon to a federal budget near you is a huge fiscal stimulus package destined to become one of the largest in history. Bridges, roads, hospitals, schools, utilities and other mega-projects are slated to spur the economic growth needed to jump-start the economy. Whether you believe the stimulus package will work or worsen the long term economy, one thing is certain; those workers will need affordable and convenient housing for long term projects. Short sale investors would do well to make a mental note of future road plans, schools and other large building projects in the target areas of interest. Whether you buy low and sell high or wait for the path of progress to reach you, it is a position of strength rather than weakness.

4. Long Term Lag-Times. The global decline in commodities and other tangible assets will eventually lead to long term shortages with tremendous upside profit potential for short sale investors. Remember, there is a lag time between the supply and demand which will result in high demand and low supply once the economy stabilizes. Everything from basic building materials to mineral rights, timber and even natural gas holdings will be impacted. Savvy short sale buyers would do well to realize the long term potential inherent in their holdings.

5. More Renters. Foreclosures aren’t over…in fact, due to legislative restrictions on the number of “bad loans” and tangible assets a bank may have on the books at any given point in time, the current bail-out simply provided the liquidity required for banks to prepare for the 2^nd stage of the growing mortgage meltdown. Most experts agree that what began as a sub-prime mess is expanding into ARM’s, low/no Doc loans and even prime mortgages in response to rising unemployment, falling stocks and bonds plus a plethora of other economic problems hit the average homeowner.

——–

See you at the top!

Chris McLaughlin
http://www.shortsalesriches.com/blog

P.S.:

Are you ready to get 2009 rolling?  Then it is time to come to our LIVE “Recession Proof Real Estate Investing” webinar tonight – at 9 PM ET:

https://www2.gotomeeting.com/register/638209573

P.S.S.:

Have you seen the hilarious “Short Sale Kid Gets a Holiday Haircut.”  Don’t miss this challenge issued by Nathan Jurewicz:
http://www.youtube.com/shortsalesriches

Market News & Commentary by Chris McLaughlin, September 29, 2008
http://www.shortsalesriches.com/welcome.html  

The Dow Jones Industrial Average rebounded from its stunning 777 point decline yesterday, with a 485 point bounce as investors got a little more confident after Congressional leaders suggested something would be done this week regarding the $700 billion Bailout.  In addition, a key report on consumer confidence was higher than expected.  The Consumer Confidence Index rose to 59.8, but many analysts were expecting a drop to 55, so that surprise also helped stocks advance.

One idea that is gaining traction on Capitol Hill is raising the Federal Deposit Insurance Corp. (FDIC) rate.  Lawmakers have suggested raising it to $250,000 from its current $100,000, and both Presidential candidates jumped on the bandwagon in support on this idea.  FDIC Chairwoman Shelia Bair today asked Congress for approval to raise the limit to an unspecific amount. 

Most political pundits are saying that the Bailout mess has damaged the Presidential candidacy of John McCain.  The Republican contender suspended his campaign to help pass the bailout bill, but given its rejection by the U.S. House of Representatives some of questioning McCain’s effectiveness.  McCain is now in a catch-22: does he suspend his campaign again to help get something passed, or does he continue campaigning?  It will be an interesting week for those following politics, that’s for sure. 

Now for real estate news…

The Case-Shiller/Standard & Poors 20 city housing index gave some grim news to homeowners today, noting that the 20 city index fell 16.3 percent in July from the year ago period.  The 10 city index dropped 17.5%, the largest decline in 21 years since the index was developed.  The largest price drop was in Las Vegas, which fell over 30%.

Now on to our real estate investor & Realtor education section.  Here’s a great question that many clients might be asking us these days … is real estate still the road to riches? 

Ahhh, like Dorothy in the financial allegory turned Hollywood fable “The Wizard of Oz”, most people agree there is no place like home but is real estate still the road to riches? Perhaps you would do better to stop searching for short sales and spend your time building an eBay business or build a fat bank account by day-trading. Maybe the yellow-brick road of gold leads the way to wealth. Forever in the pursuit of knowledge, let’s take a quick look at how the Forbes 400 made it to the Emerald City. In their recently released 2008 version of the (not so creatively named) “Forbes 400”; a list of the wealthiest 400 individuals in the nation, it is interesting to note the following:

Nearly 10 percent of the Forbes list made their fortune exclusively from real estate compared to only 15 out of 400 from medicine, 38 out of 400 from technology, 12 out of 400 from fashion/retail and only 35 out of 400 from energy – including big oil! A large number of finance billionaires also have substantial holdings in real estate related assets.

Live in California, New York, Florida or Texas – in that order.

Do it Yourself….271 of the 400 were entirely self-made with an average net worth of just under 4 Billion as compared to those who inherited some of their money ($3.62 Billion) or those who inherited all ($3.95 Billion).

In the midst of one of the most volatile financial markets in history, it might be a good idea to take a step back and examine whether or not short sales and real estate remain a viable investment. After all, prices have dropped and the media is filled with stories of foreclosures, defaults and rising unemployment. On the other hand, panic selling has paved the road to riches for many millionaires (and billionaires!) in the pages of history.

So, is real estate still to road to wealth in the United States? Without a doubt – Yes – especially when you have been granted the proverbial ruby slippers to keep you safe:

1.     Leverage. Leverage remains an investor’s best friend but use it wisely by retaining a safety net and avoiding the use of funds you can’t afford to lose. Like the friendly lion that showed courage in the face of adversity, the free-market rewards bravery…just remember, stupidity is severely punished.

2.      Time. Einstein was once quoted as saying the strongest power in the world was that of compound interest – learn how to combine leverage with time to harness that power when purchasing short sales and bank foreclosures.

3.     Never be fooled by smoke and mirrors. One of the keys to Short Sales Success is learning that the almighty Oz…or the almighty banker…is often little more than an elaborate charade designed to impress. The recent rash of bank failures should prove how wrong that image can be…from Wachovia to Wamu, all that glitters is not gold but it could certainly work in your favor once you understand how to see behind the curtain and understand the real motives at play.

 Are you ready to see behind the curtain?

 
Chris McLaughlin, J.D., M.B.A.
web: http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com

Phone: (800) 452-7627

P.S.:  

So we’re going to do it again tonight at 9 PM ET, 6 PM PST (Tuesday).  We’re hosting a Webinar (you need a computer and a phone to participate).  Last week’s webinar was nearly sold out, so if you’re interested in learning how to make money in this market jump on this now and register while we still have openings:

https://www2.gotomeeting.com/register/759612505

P.P.S.: If you want to have a great laugh, check out this latest YouTube video about some hate mail that Nathan and I received!   Here’s the link:

http://www.youtube.com/watch?v=AHWX_2oXdm8

and if you like what you see in the video, then go here and take action:

http://www.shortsalesriches.com/welcome.html