Real Estate News & Commentary by Chris McLaughlin, May 20, 2009
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Mortgage applications increase
The Mortgage Bankers Association (MBA) released its Weekly Mortgage Applications Survey for the week ending May 15, 2009, and the Market Composite Index increased to 915.9, 2.3 percent up on a seasonally adjusted basis from 895.6 one week earlier. On an unadjusted basis, the Index increased 2.0 percent compared with the previous week and increased 42.0 percent compared with the same week one year earlier. The Refinance Index increased 4.5 percent to 4794.4 from 4588.6 the previous week and the seasonally adjusted Purchase Index decreased 4.4 percent to 254.0 from 265.7 one week earlier. The four week moving average for the seasonally adjusted Market Index is down 6.4 percent, the four week moving average for the seasonally adjusted Purchase Index is up 0.1 percent, and the Refinance Index average is down 8.2 percent. The refinance share of mortgage activity increased to 73.6 percent of total applications from 71.9 percent the previous week, and the adjustable-rate mortgage (ARM) share of activity increased to 2.4 percent from 2.3 percent of total applications from the previous week.
Housing affordability at record level
According to the quarterly Housing Opportunity Index compiled by the National Association of Home Builders and Wells Fargo Bank, housing affordability is reaching record levels in the US. Nearly 73 percent of all homes sold in the first three months of 2009 considered affordable — the highest percentage ever reported by the 18-year-old index. “Affordable” means that a family making the national median household income of $64,000 must be able to devote no more than 28 percent of their income toward housing costs. The most affordable major metropolitan areas and their median home prices are: Indianapolis; Youngstown, Ohio; Akron, Ohio; Grand Rapids, Michigan; Syracuse, N.Y; Warren, Michigan; Cleveland; Buffalo, N.Y.; Toledo, Ohio; and Dayton, Ohio, with prices ranging from 78,000 to 119,000.
Stimulus not stimulating
A recent “Sentiment Index” question conducted in April by the Construction Industry Round Table and FMI Research for the Second Quarter of 2009 found that Obama’s stimulus package isn’t that stimulating. When top CEOs from leading design and construction firms were asked whether they had begun to see the effects of the American Recovery and Reinvestment Act of 2009 (ARRA), 62 percent of the respondents said no, with only 38 percent answering in the affirmative. Mark A. Casso, President of the Construction Industry Round Table, says, “While still early in the process, the initial reports are mixed at best and belie uneasiness about the timing, focus, and effectiveness of the estimated $100 billion which will go directly to infrastructure design/construction. In many cases the CEOs are seeing stimulus funds barely able to replace the loss of state-funded projects. “Couple this with the growing concern of over-reaching by the federal government with regard to new requirements on such things as financial disclosures, compensation levels, false claims acts, and union ties, it makes for a very serious picture, one in which many firms are reluctant to participate in,” noted Casso.
Once TARPed, always TARPed?
Now that the administration has forced the banks to take TARP funds, giving it back is turning into a problem. Among the conditions for repayment, the government won’t let any bank repay the TARP until after June 8, when 10 of the 19 biggest banks have to present plans to boost their capital under the so-called stress tests. The government also won’t allow any one bank to repay the TARP first but will approve them in batches, and they’ll still have to pass another stress test, issue debt that isn’t government guaranteed, demonstrate the ability to self-fund in the market, and win the approval of their banking supervisor. All this to just to pay back funds they were forced to take in the first place.
Now on to our real estate investor education tips section …
Prostitutes, Beer and Short Sales?
“The federal government is sending each of us a $600 rebate.
If we spend that money at Wal-Mart, the money goes to China.
If we spend it on gasoline it goes to the Arabs.
If we buy a computer it will go to India.
If we purchase fruit and vegetables it will go to Mexico, Honduras and Guatemala.
If we purchase a good car it will go to Germany.
If we purchase useless crap it will go to Taiwan
And none of it will help the American economy. The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in US. I’ve been doing my part.”
Marc Faber
Say what you will but legendary Marc Faber has a way with words. Although humorous, the underlying message is a bit too close for comfort. America has indeed gone from the largest exporter in the world to the biggest importer; the largest lender to the biggest borrower and the most self sufficient population to the most dependent…in one generation.
So, how does this impact short sales? More than you may think. President Obama just recently proclaimed the obvious fact that every investor and economic analyst has seen coming for months…America cannot sustain the current level of borrowing without risking rapidly escalating interest rates…and as every real estate investor, homeowner and banker knows…interest rates are what drives real estate. Consider this, a modest 5 percent fixed 30 year mortgage will only cost $805 per month for a $150 home….just slightly below the current median priced home in the United States. Using a very conservative 25 percent ratio, a working couple would only need to earn $8 to $10 per hour each to afford this home. On the other hand, the same house with a 10 percent interest rate would cost $1,316 per month. Using a historical high rate such as that experienced during the late 70’s and early 80’s when interest rates hovered at 15 percent or more, the exact same home would cost just under $1,900 per month. Obviously, interest rates matter.
However, given the current economic crisis facing the nation, one wonders how to encourage economic growth without continued borrowing. As Marc Faber so succinctly demonstrates, our consumer economy tends to send money out of the country – providing little advantage or benefit to those small business owners and others seeking to keep people employed. It’s no mystery why the recent high’s experienced in the real estate market also lead to one of the most booming periods in recent economic history – real estate is a key ingredient to a healthy and stable economy. Homes are local. So are the workers that put in the plumbing, install air conditions and put in roofing and truck supplies across town – or across the nation. The real estate agents, appraisers, bankers and insurance agents that support the sale of the homes all make a living from the direct or indirect sale of real estate. Large equipment sales including bulldozers, well augers and other items used to clear land and develop roads, install power lines and other utilities keep still more people employed. In fact, it is estimated that real estate directly or indirectly impacts nearly one of every eight workers in America simply because it is one of the last things locally produced that provides a true income.
What other options does America have to put people back to work and stop sending money out of the country? At least in Marc Faber’s mind…very few outside of beer and prostitutes. Remember, bank bail-outs don’t create new jobs nor do they stabilize the long term outlook of the economy. Throwing money at car manufacturers may help for awhile…if they are able to recuperate in enough time to begin producing cars Americans want to buy….but people buy cars when the economy is good – the economy doesn’t get better simply by putting car manufacturing on life-support. No, what is needed is a true incentive to get the real estate market back on track and put people to work. Low interest rates -not higher.
Unfortunately, that is not the current direction the economy is taking. Despite their best efforts (or perhaps due to their efforts) experts have been unable to put the banks on federal and state borrowing. Short sale and other real estate investors may be nearing the last big buying opportunities to be had in this lifetime prior to the advent of high interest rates. So, do your patriotic part and join Faber by buying local to put American’s back to work!
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com/welcome.html
P.S.: Don’t miss our webinar this Thursday night at 8:30 PM ET,
5:30 PM PST:
https://www2.gotomeeting.com/register/292738091
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 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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