Real Estate News & Commentary by Chris McLaughlin, June 22, 2009
http://www.shortsalesriches.com
“2 Careers That Boom in a Recession!”
I’ll tell you about one of these for fr*ee
in my no-charge, no-cost, no-obligation
webinar right here live Tuesday at
8:30 PM ET, 5:30 PM PST:
https://www2.gotomeeting.com/register/443058482
Why would I do that for no charge? Because
I want a chance to tell you about the other
high-income opportunity, too.
And I can’t do it in an email.
But if you’re finally ready to blast out of
this economic mess, then get a move on… I’d
hate for you to miss out, because we always fill
up a day or so early. See if there’re any spots left:
https://www2.gotomeeting.com/register/443058482
Where are home prices headed?
According to analysts, home prices may fall in the near-term and rise only in 2012. “We expect prices to drop for another year and then stabilize before starting to rise with incomes,” says Standard & Poor’s Chief Economist David Wyss. The S&P/Case-Shiller U.S. National Home Price Index, which tracks the movement of home prices, will fall about 16% this year before stabilizing. Fiserv, a research firm, has forecasted the 2012 home prices in 50 largest metro areas across different states.
In some states such as Wisconsin, Ohio, Indiana, and Michigan, home prices will see a rise by 2012. However, in states such as Florida, California, New Jersey, and New York, prices will fall until end 2012. Elliot Eisenberg, a senior economist with the National Association of Home Builders says there’s still pain to come in states where there’s oversupply. “Prices will have to come down further and it will take a while to burn off the excess inventory that’s floating around there,” said Eisenberg. So what should home buyers do now? Is it a good time to buy? “To generalize, yeah, it is a good time to buy a house. I don’t think there’s any urgency because I think it’ll still be a great time to buy a house a year from now,” says economist Richard DeKaser of Woodley Park Research.
Cash for clunkers
Do you own a clunker that gives you 18 miles or less per gallon? Here is your chance to make some money by replacing it with a more fuel efficient car. Last week, Congress passed the “cash for clunkers” program using which car owners can get a $3,500 subsidy if they purchase cars and vans that are more fuel efficient than their older cars by 4 miles per gallon. The subsidy goes up to $4,500 if the new car is more fuel efficient than the old car by 10 miles per gallon. The subsidy will help the auto industry which is seeing a spate of bankruptcies.
“We really appreciate Congress’ efforts to move this quickly across the legislative finish line,” said Mike Moran, spokesman for Ford Motor Company. Transportation Secretary Ray LaHood, said: “It provides incentives for consumers to buy new, more fuel-efficient cars and trucks, providing a boost to the auto industry and protecting jobs, while limiting fuel use and greenhouse gas emissions.” Opponents to the program say that the bill represents an “artificial” incentive to the industry. “It’s defying the laws of economics and saying we can manufacture enough of a demand to keep the auto industry afloat,” said Jeff Flake, a Republican Congressman. Some auto analysts have raised doubts about the effectiveness of the program to stimulate demand for cars. “That is the major sticking point for Americans: How do you finance your vehicle? How do you pay for it?” said Rebecca Lindland, an auto industry analyst for the consulting firm IHS Global Insight.
Banks likely to report higher profits this quarter
Analysts believe that banks will report better numbers this quarter on account of higher underwriting fee and a steeper yield curve. Both equity and debt markets have seen increased issuances and refinancing, increasing banks’ underwriting fee in the current quarter. In the recent weeks, the spread between 2-year Treasury notes and 10-year issues has hit its highest. Banks, which typically borrow short term and lend long term, are likely to profit from the rise in spread. Thomas Lee, JPMorgan Chase’s chief U.S. equity strategist, says financial firms are his top sectoral pick. “Job cuts on Wall Street probably bottomed in March,” said Lee.
“As you go through the sectors in the economy, when they make the last cuts in jobs, confidence in that sector bottoms and confidence actually starts to recover.” Despite the good news, most of the analysts tracking the sector are still underweight on banks. “The market knows that it is a sector which, arguably, is not a sector that offers the best earnings potential over a two or three-year period shall we say,” said Michael Hartnett, Banc of America Securities-Merrill Lynch chief global equity strategist. “Bank earnings are clearly going to be a huge swing factor, but they are going to be incredibly difficult to predict.”
When an index fund ceases to be an index fund
Index funds have grown significantly in the last decade or so after investors got disgusted with overpriced, actively managed mutual funds. Last year alone, actively managed equity funds saw a net outflow of $245 billion, while equity Exchange Traded Funds (ETF), which are index funds, posted net cash inflows of $140 billion, even as asset values tanked. Now mutual funds are looking at creating “actively managed” index funds to see if they can wring out more fees from index funds. How will actively managed ETFs operate?
Bill Thomas, Chief Executive Officer of Grail Advisors, which launched its active ETF last month, said: “We are operating the ETF just like a fundamental mutual fund.” According to Thomas, the actively managed ETF is “similar to traditional actively managed mutual funds … because it allows portfolio managers unrestricted trading.” This is not good news for investors. More trading means higher transaction fees and the possibility of capital gains tax. Active ETFs are not as cheap as inactive ETFs; but they are lot less expensive than active mutual funds seeking to generate index-beating returns to investors. Who will want to invest in active ETFs? There probably are investors who want the best of both worlds – lower cost than actively managed funds but higher return than inactive index funds.
Is the Citigroup deal unfair to small shareholders?
When the government funded Citigroup under the Troubled Assets Relief Program (TARP), small shareholders were happy. The bailout prevented a huge value loss to Citigroup shareholders. As part of the deal, the preferred shares issued to the government could be converted into ordinary shares. Last week, Citigroup announced that the bank would convert preference shares into ordinary shares, and consequently the government would get a 36% stake in the company. Citigroup, as part of the deal, got a reduction in the coupon rate they are required to pay out on the government’s preference shares.
Some shareholders believe that the terms of the deal favor the government and private investors from whom Citigroup raised money to strengthen its capital base. Victor Filatov, former president of Capula Investment Management and a Citigroup shareholder, said: “Citigroup owes some answers as to why there’s no vote, as to why there’s a discount, why are they cutting the dividend, and what’s going to happen.” Filatov believes there will be a negotiation on the terms of conversion if the stock price falls. “Inevitably, there will be some class action lawsuits,” said Filatov.
Now on to our real estate investor education section…
Cash is King
Chances are you have been sold on the idea of using leverage and OPM or Other People’s Money for so long that you might have forgotten about a simple little strategy called cash. While the use of leverage and OPM certainly has a proper place when it comes to investing, there are distinct advantages to the use of cash that might make you want to take a second look at your strategy. Keep in mind, you can still use OPC – Other People’s Cash – if they are inclined to work out that type of deal, or you can go it alone and keep all the profits for yourself.
Either way, cash is king especially in today’s tough climate and there is a very real reason behind it. Supply and demand. Right now banks and other lenders need to shore up bad books to keep their own margins in the black – that requires cash. Even more importantly, there are a lot of people facing bankruptcy or foreclosure with a need for quick cash. Those that are good bets or have access to cash are sitting pretty to pick up short sales for next to nothing…in fact, throughout history this has been how the largest transfers of wealth have always taken place. People with the means to purchase when everyone else needs to sell can more or less set their own price…especially when it comes to short sales.
Advantages to Cash
- No seasoning. In fact, very few “rules” or “requirements” altogether.
- No small loan surcharge.
- No PMI or private mortgage insurance.
- No interest rates at all – only a straight return on your original investment.
- No requirement for expensive insurance especially when the house is being repaired or vacant (it’s still a good idea).
- No extraneous fees, inspections or other lender requirements.
In fact, you might be shocked how easy it is to purchase a property using cash. Not that you would want to go without any of the above mentioned precautions but at least in theory it is possible to show up at a house, view it, draw up a contract and write a deposit check. Title insurance and closing take place at your discretionary time. Nothing could be easier. No need for extensive paperwork, endless inspections and hoop-jumping. Of course, what really matters is the bottom line. Does buying with cash make good financial sense? You bet it does.
Float – If you intend to turn the property around quickly it’s really only a question of time. The period of time you use the cash to float the property until the sale. Let’s says you start with $50,000 and buy a modest little house for cash then flip it asap for a modest $5k gain. That’s 10% profit within just a few weeks. If you were able to do that once every month it would represent well over 100% profit annualized…a modest sum that would still blow the roof off any regular investment even during the best of times.
Long Term – But what about holding a property rather than flipping? Using the exact same example of purchasing a $50,000 home let’s assume you rent it out for 1 percent or $500 per month/$6,000 per year or approximately 12 percent return each and every year. That is before counting in appreciation! Just ask how many stock or bond investors can reliably obtain a 12 percent return on their capital each and every year…before appreciation. It’s unheard of.
Either way you look at it – cash is king and it makes great financial sense when investing in short sales.
———
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com
PS:
“2 Careers That Boom in a Recession!”
I’ll tell you about one of these for fr*ee
in my no-charge, no-cost, no-obligation
webinar right here live Tuesday at
8:30 PM ET, 5:30 PM PST:
https://www2.gotomeeting.com/register/443058482
Why would I do that for no charge? Because
I want a chance to tell you about the other
high-income opportunity, too.
And I can’t do it in an email.
But if you’re finally ready to blast out of
this economic mess, then get a move on… I’d
hate for you to miss out, because we always fill
up a day or so early. See if there’re any spots left:
https://www2.gotomeeting.com/register/443058482
Copyright Loss Mitigation Institute 2009.
All Rights Reserved.
http://www.shortsalesriches.com
http://www.shortsalescoach.com
http://www.reomillionaireclub.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
* Add me on Twitter: http://twitter.com/mclaughlinchris
* Add me on Facebook: http://www.facebook.com/mclaughlinchris
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