Real Estate News & Commentary by Chris McLaughlin, February 10, 2009
http://www.shortsalesriches.com/welcome.html
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“2 Careers That Boom in a Recession!”
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So much for a honeymoon for President Barack Obama, at least when it comes to the economy. Wall Street reacted to his bailout plan …and it wasn’t pretty. Yesterday the market tanked … with the Dow Jones Industrial Average dropping 4.62% to 7,888.88. Ouch.
Was it really that bad? What happened was the typical “buy on the rumor, sell on the news” hype that’s common on Wall Street. What folks need to realize, and what we’ve been saying in this e-mail for months, is that there will not be an easy fix. There is no silver bullet that will take us out of this mess. So the markets headed lower, as they were reminded that our economy is indeed in trouble.
Frankly, I’m rather disgusted with the junk that’s in the non-stimulus bill. All of this spending by the government will lead to … you guessed it: massive inflation. The government just can’t keep printing money. Let’s hope enough pressure is added to Congress to make this happen. They have to FIX HOUSING FIRST in order to have a true economic recovery. Anything short of fixing housing just wastes billions of dollars without accomplishing the real objective: stabilizing housing prices, which therefore stabilizes banks.
And hey, guess what? We’re not in this alone, our friends in the UK are in the same boat. The head of the Bank of England said that Britain was in a “deep recession” and that economic growth would not likely happen until the end of 2009. “The risks surrounding the central projection for growth are judged to be weighted heavily to the downside,” the Bank of England said.
And if you’d like to see some grandstanding today, make sure you don’t miss CNBC, as the CEOs from the nation’s leading banks appear before Congress. And the typically brash and arrogant jet-setting CEOs were humble with all smiles today, with lots of love going to the government. And one CEO stated the obvious. Lloyd C. Blankfein, head of Goldman Sachs, noted: “Many people believe — and, in many cases, justifiably so — that Wall Street lost sight of its larger public obligations and allowed certain trends and practices to undermine the financial system’s stability.”
Now, on to our real estate investing section…
Short Sales and Deflation
Is it going to be inflation or deflation? Maybe both. Whatever side of the fence you have been sitting on, short sales are likely to be the best solution for your financial survival. We have previously discussed the advantages of buying short sales and foreclosure real estate as an inflationary hedge but how does it hold up in the event deflation takes hold? Good question…and the facts might just surprise you.
First, it’s important to understand what deflation really is. Contrary to what some think, deflation is not merely a drop in prices – instead, it is actually a contraction if the volume of money relative to the goods and services available for purchase. Savvy short sale readers should immediately recognize two important considerations; the focus upon a contraction in volume and the inclusion of the word “relative”. This is why real estate tends to hold up very well in a deflationary cycle despite initial drops in price!
Remember, real estate is a lagging indicator of an economy. It takes time to access the raw materials, build a home and sell it. It takes even longer to do so when builders have stopped building, lenders have stopped lending and producers have discontinued orders for supplies. Although the price of homes has dropped over the past 18 months, the current credit contraction is expected to be short lived especially considering the massive spending programs currently being implemented by the federal government.
Right now, the volume of real estate sales has dropped so there are more goods (ie, homes) on the market. As demand continues to decline, fewer and fewer suppliers will build new homes. Everything from drywall to bathtubs will experience a contraction of volume resulting in less production and fewer sales. Some will go out of business while others will merely stop producing all but the most common examples. Eventually it will cost more to keep the business open than is being produced resulting in shortages.
While the initial focus of a deflationary cycle is on the short term drop in prices, fewer people take a long term outlook and realize the very real long term shortages that are likely to transpire. Unlike prior deflationary episodes, “Just in time” manufacturing and shoe-string inventories are likely to result in a much faster cycle of shortages. It is these same shortages that begin to create upward pressures on needed and necessary items such as housing.
In a nutshell, the short sale investor is wise to understand the deflationary lifecycle in order to recognize premium purchasing opportunities:
1. Debtors are forced to cover losses by selling assets; in this case, banks are unloading “bad loans” to the federal government who is assuming these losses and printing cash to prop up banks.
2. The total value of assets begins to decline as debtors sell for any price just to raise required capital.
3. Dropping prices begin to impact other supporting businesses; credit tightens and production costs increase relative to profits further escalating the problem.
4. Bankruptcy and lay-offs take place exacerbates the problem while resulting in further declines.
5. Production costs outstrip profits. Companies begin to close and supplies, raw materials begin to grow scarce.
6. People begin to focus on safe affordable housing, food, medicine and other necessities.
7. Shortages take place in earnest as the excess inventory is insufficient for current demand.
8. Demand once again exceeds supply – driving the cost of goods higher. Those holding available tangible assets can demand – and receive – top prices.
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com/welcome.html
P.S.
This week’s webinar replay is right here…for the next 8 hours:
http://www.webinarwizards.com/custom/index.cfm?id=170879
P.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
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