Home Construction Bust May Last Until 2011, U.S. Builders Say
By Bob Ivry and Brian Louis
May 29 (Bloomberg) -- New home construction in the U.S. may take until 2011 to return to last year's level, said David Seiders, chief economist for the National Association of Home Builders in Washington.
Monthly construction starts would need to jump by 21 percent to reach Seiders's benchmark for full recovery, which is 1.85 million. There were 1.53 million in April, the Commerce Department said. At the height of the five-year housing boom in January 2006, construction began on 2.29 million homes.
Rest of Article
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Tuesday, May 29, 2007
Monday, May 28, 2007
Q1 2007 Commentary - The Charleston Market Report
Q1 2007 Commentary - The Charleston Market Report
What is your most important asset DEBT NATION??
If you answered your house or crib then you are in the majority. Well, unfortunately most of us do not own our homes because the bank owns it. The minute you quit making payments long enough they will soon be knocking on your door to take your home away. We are merely paying a boat load of interest for the first 21 years and then we start to attack principal. This holds true only if you have a fixed interest rate on your loan otherwise you are just paying interest and are praying for appreciation from the housing market.
So what I did was run an amortization schedule for the latest average sales price of a house in Charleston for a 30 year fixed loan at 6.25%. If you look at the amortization schedule (which you probably have not seen since your last closing) the interest does not look fixed. Hmmmm? Why do banks/lenders call it a fixed rate when the interest is front loaded each year? Sounds like false adverstising and smoke and mirrors to me. Welcome to the world of interest rate reality folks. So, when you pay $315,000 for that home in Charleston and pay it off in 30 years you have actually paid a total of $698,223.21 for your crib. Now you realize why so many banks have such nice big offices in your area.
So lets say you live in this home you purchased for 7 years with an average annual appreciation of 6%. At the the end of 7 years the home would be worth $421,541.06. So here is the breakdown:
$421,541.06 Sales Price
$315,000.00 Purchase Price
__________
$106,541.06 Gain before Interest Paid
$131,524.58 Interest Paid over 7 Yr Loan
__________
($24,983.52) Loss after interest paid
There are many other costs I left out but I want to give you a simple example and demonstrate how that front loaded interest eats into your appreciation. The good thing about paying this interest (aka mortgage payment) is that you got some use out of a solid tangible asset: your home. Our homes are important to us because we eat, sleep and spend enormous amounts of quality time in these assets unlike a stock, bond or maybe even a painting of a clown if you invested with Al Parish.
Amortization Table
Look at interest payments vs. principal payments.
Does this look like a fixed rate to you?
The following table is based on the information entered in the calculator form.
Mortgage Amount: $315,000.00
Interest Rate: 6.25 %
Mortgage Length: 30 Years
Year Interest Principal Balance
2007 $19,582.95 $3,691.16 $311,308.84
2008 $19,345.53 $3,928.58 $307,380.27
2009 $19,092.84 $4,181.27 $303,198.99
2010 $18,823.89 $4,450.22 $298,748.78
2011 $18,537.65 $4,736.46 $294,012.31
2012 $18,232.99 $5,041.12 $288,971.19
2013 $17,908.73 $5,365.38 $283,605.81
2014 $17,563.62 $5,710.49 $277,895.32
2015 $17,196.31 $6,077.80 $271,817.53
2016 $16,805.38 $6,468.73 $265,348.80
2017 $16,389.30 $6,884.81 $258,463.98
2018 $15,946.45 $7,327.66 $251,136.33
2019 $15,475.13 $7,798.98 $243,337.34
2020 $14,973.48 $8,300.63 $235,036.72
2021 $14,439.57 $8,834.54 $226,202.18
2022 $13,871.32 $9,402.79 $216,799.38
2023 $13,266.51 $10,007.60 $206,791.78
2024 $12,622.80 $10,651.31 $196,140.48
2025 $11,937.69 $11,336.42 $184,804.06
2026 $11,208.51 $12,065.60 $172,738.47
2027 $10,432.43 $12,841.68 $159,896.79
2028 $9,606.43 $13,667.68 $146,229.11
2029 $8,727.30 $14,546.81 $131,682.31
2030 $7,791.63 $15,482.48 $116,199.83
2031 $6,795.77 $16,478.34 $99,721.48
2032 $5,735.85 $17,538.26 $82,183.22
2033 $4,607.76 $18,666.35 $63,516.87
2034 $3,407.10 $19,867.01 $43,649.86
2035 $2,129.22 $21,144.89 $22,504.97
2036 $769.14 $22,504.97 $0.00
I hope more realtors and mortgage brokers start to communicate better with each other and their clients to make sure the homebuyer is not over their head financially when purchasing a home. Please do not take the attitude of a local realtor I had a email chat with last week. You have a responsibility to save clients from themselves especially when they lack financial discipline. If you are selling people homes who can can not afford them maybe real estate is not right for you. This is a direct quote from the email sent to me from a local agent.
"The other concern is that so many of my buyer clients have no money to put down. They qualify but they’re living paycheck to paycheck. If their home appreciated significantly, they refinanced and cashed it out."
My response to this agent was simple. These clients should NOT be buying homes and they should be renting. The average American family is saving less as housing affordability seems to get worse each year. This scenario opened the door for creative financing and the current foreclosure problem facing many Americans. The ARMS that have been sold over the past few years have just begun to reset and now it is getting more difficult to refi out before the reset occurs because underwrting guidelines have gotten stricter and the real estate market has slowed down. We really have some people that are in store for some very difficult financial situations that will ruin lives.
Warren Buffet is a big fan of having compound interest work for him in his investments not against him. A good place to start is pay off that important asset first and then utilize the money you were paying towards a mortgage to real estate and/or financial investments.
Warren Buffett does not like debt
Warren Buffett does not like debt and does not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.
In 1982, Warren Buffett noted that Berkshire Hathaway preferred to buy companies with little or no debt and has repeated this mantra on many occasions. He adopts the same philosophy for his company, preferring to avoid debt but where necessary going into it on a long-term basis only with fixed rates of interest and to obtain the finance before they need it.
What Warren Buffett says about debt
Warren Buffet acknowledges that debt can effectively increase the return on equity in a company but warns against it. In 1987, he said this:
"Good business or investment decisions will eventually produce quite satisfactory economic results, with no aid from leverage."
"It seems to us both foolish and improper to risk what is important (including, necessarily, the welfare of innocent bystanders such as policyholders and employees) for some extra returns that are relatively unimportant."
"Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement.... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than than the underlying costs, sometimes there can be pretty serious consequences."
Have you ever wondered why some people are having tremendous success, and others are not. It comes down to a simple idea called " The Slight Edge". Some people have it and some people don't—BUT it's available to ALL of us! So what is the "Slight Edge?" Author Jeff Olsen uses a quote from Albert Einstein:
"Compound Interest is the greatest mathematical discovery of all time!"
However, he explains that the remarkable force of compound interest is at work in everything you do, every day of your life. It's simple—tapping into the Slight Edge means doing things that are easy. All it takes is doing those"simple" little disciplines consistently. Over time, those compounded little things will add up to incredible accomplishments. Making a couple of calls, saving a few dollars, eating most of the right things, getting a bit of exercise! Just little things—but compounded over time, they lead to phenomenal results. That is the "Slight Edge."
What? If it's that simple and easy, then why are so few people truly successful? Because they're also easy NOT to do. Anyone COULD DO them; but most DON'T!
Successful people understand the "Slight Edge." Unsuccessful people don't. It's a simple positive action. Or a simple lack in effort. Either way, it's the "Slight Edge" at work—working for you or working against you. One reason so few people grasp and use the power of the Slight Edge is that they tend to believe what they see, and the results the "Slight Edge" creates are invisible—at least today.
The best example—the Million Dollar penny. Would you rather have a million dollars today, or a penny doubled every day for a month? Most people take the million…but the penny and "Slight Edge" theory of compounding, is a much wiser yet PATIENT choice. On Day two, it's 2 cents, on Day three, it's 4; by the end of Week Two, it has doubled its way to a grand total of $81.92. It's at this point that most people feel they made the wrong decision, it isn't for them, and they quit or give up! At the end of Week Three, it's over $10,000—and on Day thirty-one, it jumps to more than $10 million. This power is called the "eighth wonder of the world'—the remarkable creative force of compounding interest. You now have seen the "Slight Edge." We all have it… the question remains, is it working for you or against you.
So it all comes down to the "Slight Edge" and the "Extra Degree." Have you ever watched 212 Degrees? If you have not please click on the link below:
212movie
My recommendation is to get the "Slight Edge" and the "Extra Degree" on your finances by formulating a budget and attacking the principal on your home. This can be done by paying extra money from discretionary income each month and I recommend a software program called the Money Merge Account.
Here is a third party endorsement from the author Edward Griffin.
Those who are familiar with my book, The Creature from Jekyll Island; A Second Look at the Federal Reserve, know that I am a strong advocate of getting out and staying out of debt. Consumer debt is a trap in which people find themselves working all their lives to make exorbitant interest payments.
Home ownership is different. It is a foundation for financial security even though it may require debt. If we don't have sufficient capital to purchase a home outright, we have no choice but to borrow the balance, but excessive interest payments remain a serious problem.
There are numerous ways to reduce or eliminate interest payments, but the ones I have examined are too complicated, too expensive, or, in some cases, unethical. Now I have found one that has none of these handicaps and, frankly, I feel I have an obligation to tell you about it.
THE MONEY MERGE ACCOUNT (MMA)
Recently, I was introduced to a program that, although not new in concept, was unique in its implementation. The company is United First Financial, formed by two young men from the mortgage-lending business who wanted to help their clients acquire homes without being obligated to 20 or 30 years of debt. They developed a method to borrow money at one cost and use it to eliminate a much higher-cost mortgage. It is similar to rolling over a high-interest loan into a lower-interest loan, but the effect is a hundred times greater – and that is not an exaggeration. They call this unique program the Money Merge Account, or MMA.
I have examined this program closely and am happy to conclude that, not only does it work exactly as the company guarantees, it is entirely ethical as well. So I decided to add the MMA to the Reality Zone. If you are making mortgage payments, I highly recommend that you check it out. You will be amazed at the amount of interest you can eliminate and how much sooner you can achieve true home ownership.
So I challenge everyone reading this website to gain the "Slight Edge" and the "Extra Degree" and research and then consider implementing the Money Merge Account. It's your choice. Gain the "Slight Edge" and "Extra Degree" or keep paying all that extra interest on your home to the banks and stay in the rat race. The choice is yours. Good luck!
I recommend you click here to gain more information on the MMA.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
What is your most important asset DEBT NATION??
If you answered your house or crib then you are in the majority. Well, unfortunately most of us do not own our homes because the bank owns it. The minute you quit making payments long enough they will soon be knocking on your door to take your home away. We are merely paying a boat load of interest for the first 21 years and then we start to attack principal. This holds true only if you have a fixed interest rate on your loan otherwise you are just paying interest and are praying for appreciation from the housing market.
So what I did was run an amortization schedule for the latest average sales price of a house in Charleston for a 30 year fixed loan at 6.25%. If you look at the amortization schedule (which you probably have not seen since your last closing) the interest does not look fixed. Hmmmm? Why do banks/lenders call it a fixed rate when the interest is front loaded each year? Sounds like false adverstising and smoke and mirrors to me. Welcome to the world of interest rate reality folks. So, when you pay $315,000 for that home in Charleston and pay it off in 30 years you have actually paid a total of $698,223.21 for your crib. Now you realize why so many banks have such nice big offices in your area.
So lets say you live in this home you purchased for 7 years with an average annual appreciation of 6%. At the the end of 7 years the home would be worth $421,541.06. So here is the breakdown:
$421,541.06 Sales Price
$315,000.00 Purchase Price
__________
$106,541.06 Gain before Interest Paid
$131,524.58 Interest Paid over 7 Yr Loan
__________
($24,983.52) Loss after interest paid
There are many other costs I left out but I want to give you a simple example and demonstrate how that front loaded interest eats into your appreciation. The good thing about paying this interest (aka mortgage payment) is that you got some use out of a solid tangible asset: your home. Our homes are important to us because we eat, sleep and spend enormous amounts of quality time in these assets unlike a stock, bond or maybe even a painting of a clown if you invested with Al Parish.
Amortization Table
Look at interest payments vs. principal payments.
Does this look like a fixed rate to you?
The following table is based on the information entered in the calculator form.
Mortgage Amount: $315,000.00
Interest Rate: 6.25 %
Mortgage Length: 30 Years
Year Interest Principal Balance
2007 $19,582.95 $3,691.16 $311,308.84
2008 $19,345.53 $3,928.58 $307,380.27
2009 $19,092.84 $4,181.27 $303,198.99
2010 $18,823.89 $4,450.22 $298,748.78
2011 $18,537.65 $4,736.46 $294,012.31
2012 $18,232.99 $5,041.12 $288,971.19
2013 $17,908.73 $5,365.38 $283,605.81
2014 $17,563.62 $5,710.49 $277,895.32
2015 $17,196.31 $6,077.80 $271,817.53
2016 $16,805.38 $6,468.73 $265,348.80
2017 $16,389.30 $6,884.81 $258,463.98
2018 $15,946.45 $7,327.66 $251,136.33
2019 $15,475.13 $7,798.98 $243,337.34
2020 $14,973.48 $8,300.63 $235,036.72
2021 $14,439.57 $8,834.54 $226,202.18
2022 $13,871.32 $9,402.79 $216,799.38
2023 $13,266.51 $10,007.60 $206,791.78
2024 $12,622.80 $10,651.31 $196,140.48
2025 $11,937.69 $11,336.42 $184,804.06
2026 $11,208.51 $12,065.60 $172,738.47
2027 $10,432.43 $12,841.68 $159,896.79
2028 $9,606.43 $13,667.68 $146,229.11
2029 $8,727.30 $14,546.81 $131,682.31
2030 $7,791.63 $15,482.48 $116,199.83
2031 $6,795.77 $16,478.34 $99,721.48
2032 $5,735.85 $17,538.26 $82,183.22
2033 $4,607.76 $18,666.35 $63,516.87
2034 $3,407.10 $19,867.01 $43,649.86
2035 $2,129.22 $21,144.89 $22,504.97
2036 $769.14 $22,504.97 $0.00
I hope more realtors and mortgage brokers start to communicate better with each other and their clients to make sure the homebuyer is not over their head financially when purchasing a home. Please do not take the attitude of a local realtor I had a email chat with last week. You have a responsibility to save clients from themselves especially when they lack financial discipline. If you are selling people homes who can can not afford them maybe real estate is not right for you. This is a direct quote from the email sent to me from a local agent.
"The other concern is that so many of my buyer clients have no money to put down. They qualify but they’re living paycheck to paycheck. If their home appreciated significantly, they refinanced and cashed it out."
My response to this agent was simple. These clients should NOT be buying homes and they should be renting. The average American family is saving less as housing affordability seems to get worse each year. This scenario opened the door for creative financing and the current foreclosure problem facing many Americans. The ARMS that have been sold over the past few years have just begun to reset and now it is getting more difficult to refi out before the reset occurs because underwrting guidelines have gotten stricter and the real estate market has slowed down. We really have some people that are in store for some very difficult financial situations that will ruin lives.
Warren Buffet is a big fan of having compound interest work for him in his investments not against him. A good place to start is pay off that important asset first and then utilize the money you were paying towards a mortgage to real estate and/or financial investments.
Warren Buffett does not like debt
Warren Buffett does not like debt and does not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.
In 1982, Warren Buffett noted that Berkshire Hathaway preferred to buy companies with little or no debt and has repeated this mantra on many occasions. He adopts the same philosophy for his company, preferring to avoid debt but where necessary going into it on a long-term basis only with fixed rates of interest and to obtain the finance before they need it.
What Warren Buffett says about debt
Warren Buffet acknowledges that debt can effectively increase the return on equity in a company but warns against it. In 1987, he said this:
"Good business or investment decisions will eventually produce quite satisfactory economic results, with no aid from leverage."
"It seems to us both foolish and improper to risk what is important (including, necessarily, the welfare of innocent bystanders such as policyholders and employees) for some extra returns that are relatively unimportant."
"Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement.... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than than the underlying costs, sometimes there can be pretty serious consequences."
Have you ever wondered why some people are having tremendous success, and others are not. It comes down to a simple idea called " The Slight Edge". Some people have it and some people don't—BUT it's available to ALL of us! So what is the "Slight Edge?" Author Jeff Olsen uses a quote from Albert Einstein:
"Compound Interest is the greatest mathematical discovery of all time!"
However, he explains that the remarkable force of compound interest is at work in everything you do, every day of your life. It's simple—tapping into the Slight Edge means doing things that are easy. All it takes is doing those"simple" little disciplines consistently. Over time, those compounded little things will add up to incredible accomplishments. Making a couple of calls, saving a few dollars, eating most of the right things, getting a bit of exercise! Just little things—but compounded over time, they lead to phenomenal results. That is the "Slight Edge."
What? If it's that simple and easy, then why are so few people truly successful? Because they're also easy NOT to do. Anyone COULD DO them; but most DON'T!
Successful people understand the "Slight Edge." Unsuccessful people don't. It's a simple positive action. Or a simple lack in effort. Either way, it's the "Slight Edge" at work—working for you or working against you. One reason so few people grasp and use the power of the Slight Edge is that they tend to believe what they see, and the results the "Slight Edge" creates are invisible—at least today.
The best example—the Million Dollar penny. Would you rather have a million dollars today, or a penny doubled every day for a month? Most people take the million…but the penny and "Slight Edge" theory of compounding, is a much wiser yet PATIENT choice. On Day two, it's 2 cents, on Day three, it's 4; by the end of Week Two, it has doubled its way to a grand total of $81.92. It's at this point that most people feel they made the wrong decision, it isn't for them, and they quit or give up! At the end of Week Three, it's over $10,000—and on Day thirty-one, it jumps to more than $10 million. This power is called the "eighth wonder of the world'—the remarkable creative force of compounding interest. You now have seen the "Slight Edge." We all have it… the question remains, is it working for you or against you.
So it all comes down to the "Slight Edge" and the "Extra Degree." Have you ever watched 212 Degrees? If you have not please click on the link below:
212movie
My recommendation is to get the "Slight Edge" and the "Extra Degree" on your finances by formulating a budget and attacking the principal on your home. This can be done by paying extra money from discretionary income each month and I recommend a software program called the Money Merge Account.
Here is a third party endorsement from the author Edward Griffin.
Those who are familiar with my book, The Creature from Jekyll Island; A Second Look at the Federal Reserve, know that I am a strong advocate of getting out and staying out of debt. Consumer debt is a trap in which people find themselves working all their lives to make exorbitant interest payments.
Home ownership is different. It is a foundation for financial security even though it may require debt. If we don't have sufficient capital to purchase a home outright, we have no choice but to borrow the balance, but excessive interest payments remain a serious problem.
There are numerous ways to reduce or eliminate interest payments, but the ones I have examined are too complicated, too expensive, or, in some cases, unethical. Now I have found one that has none of these handicaps and, frankly, I feel I have an obligation to tell you about it.
THE MONEY MERGE ACCOUNT (MMA)
Recently, I was introduced to a program that, although not new in concept, was unique in its implementation. The company is United First Financial, formed by two young men from the mortgage-lending business who wanted to help their clients acquire homes without being obligated to 20 or 30 years of debt. They developed a method to borrow money at one cost and use it to eliminate a much higher-cost mortgage. It is similar to rolling over a high-interest loan into a lower-interest loan, but the effect is a hundred times greater – and that is not an exaggeration. They call this unique program the Money Merge Account, or MMA.
I have examined this program closely and am happy to conclude that, not only does it work exactly as the company guarantees, it is entirely ethical as well. So I decided to add the MMA to the Reality Zone. If you are making mortgage payments, I highly recommend that you check it out. You will be amazed at the amount of interest you can eliminate and how much sooner you can achieve true home ownership.
So I challenge everyone reading this website to gain the "Slight Edge" and the "Extra Degree" and research and then consider implementing the Money Merge Account. It's your choice. Gain the "Slight Edge" and "Extra Degree" or keep paying all that extra interest on your home to the banks and stay in the rat race. The choice is yours. Good luck!
I recommend you click here to gain more information on the MMA.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Monday, May 14, 2007
Q4 2006 Commentary - Charleston Market Report
Commentary - Q42006
As I have mentioned before and many of you already know, real estate is seasonal and cyclical. The Q4 2006 indicators have gotten worse as expected because real estate slows down this time of year because of the holidays and the downturn the market is currently experiencing. In my opinion, the next couple of years will present some of the best buying opportunities for homes in certain parts of the Charleston market that buyers will see in a long time. The reason I come to this conclusion is from my experience in the stock market and what I currently see with high inventory, stagnant appreciation, longer Days on Market and loan pressures on borrowers. When the news is all bad and sellers become more desperate you look to buy. It is sort of that contrarian investment mentality the good investors must have when they smell blood. Successful investors folllow the often used quote to "Buy low and sell high."
I guess the current motto should be:
"When you begin to see blood in the streets buy property."
The article below is an example of blood starting to flow in the streets courtesy of the publicly traded builders across America.
More Land Mines For Builders
The real estate market performance in 2004-2005 was an anomaly and represented the "top of the market." 2006 was a year in which the market hit reality and finally slowed down. Talk to any Realtor with experience and they probably will admit the slowdown was good for the market because the "mania" was getting out of control. I believe the most critical stat regarding the 2005 market is that approximately 25% of the investors and speculators are now out of the current real estate market. This explains the drop in volume for 2006. I look forward to 2007 and beyond.
As far as the economy goes I feel the national economy is going to get worse before it gets better. There are a couple of major problems out there that are looming and if kernels in a bag of popcorn represent risk then we are starting to see some kernels pop. A couple of the problems are:
1. Jobs
* The construction, real estate and mortgage industry will continue to shed jobs due to the housing slowdown. This should put a strain on future unemployment numbers if the government factors them into their stats. According to a study done by Northern Trust from 2001 to 2005, 43% of the private sector jobs were related to housing. Once the Fed began increasing short term rates in June 2004 real estate related job creation plummeted by 68.2%. This will have to have an impact on future unemployment numbers.
* Our local economy is strong but keep in mind that the Charleston economy relies heavily upon the real estate industry.
2. Consumer Spending
* Many consumers have used their homes as ATMs in the past housing boom.
* Now that home appreciation is declining or flatenning out in some markets the Mortgage Equity Withdrawals (MEWs) are declining, which puts less consumer dollars into the economy.
3. Problem Loans
* The foreclosures are increasing and subprime lenders are blowing up, which will cause a tightening of credit making it harder for homebuyers to get loans. Since December 2006, 12 lenders have now gone caput. Realtytrac has documented that foreclosures are up significantly since 2005 and that the foreclosure filings have exceeded 100,000 for 5 consective months.
* There has also been a surge of mortgage fraud across the country which has hurt many banks.
* There are also $1-1.5 trillion in loans that are set to reset this year. If these borrowers are boxed in and can not sell their home or refinance they face the choice of making a higher monthly payment they probably cannot afford, bankrupcy or foreclosure on their home.
* The Subprime Tsunami
Here is the scenario: China is creating wealth at record levels. Its central bank has invested more than $1 trillion in U.S. Treasuries and mortgaged-back securities. In fact, it is the largest investor in MBSs. The fastest-growing piece of MBSs has been subprime loans.
Years ago, Wall Street figured out it could make a mint off mortgages and began packaging them as fast as the Chinese were building high-rises in Shanghai.
But the supply was constrained, so the Street urged originators to originate more home loans, as they had plenty of investors, including deep pockets from China (and Japan as well).
Then along came the minority/immigrant home-buying market as an opportunity. Promoting home ownership to this crowd became the rallying cry of President Clinton, President Bush, Congress, the Realtors, the home builders, mortgage bankers and the average bus boy who until now could not afford to buy a house. It was an apple-pie bandwagon that no one could resist.
But how do you dig deep into this market unless you permit nothing-down loans, low-cost ARMs and loose underwriting? You can't.
Hello subprime mortgage market. Bingo -- it became the formula for the biggest property-ownership push since the Homestead Act. The politicians fed off the phenomenon and the industry lapped up transactions. Sitting behind the curtain was Wall Street, of course, which made a boat load of money.
Add careless underwriting on refinancings and credit lines and the money that came from China to help make more loans goes right back to the Chinese shores as consumers use their houses to buy depreciating assets like cars, clothes, toys and all sorts of stuff.
Now for the hangover: the upside-down homeowner. Mortgage payments for many homeowners are doubling, inflation won't fill the gap, and many in this new class of homeowners are in trouble. Writing risky loans to unqualified home buyers is generally stupid. Inflation covered up the mess for awhile but not anymore.
This summer much of this nonsense will come to a head.
It is like all financial scandals that involve Wall Street and real estate (remember the Savings & Loan crisis): there are severe consequences. Generally, consumers pay the cost of other people's gains.
This is how the subprime tsunami works. The ocean recedes, people run to the beach and go WOW, then the big wave destroys them and the property behind them.
Is it really this dire? I hope not.
What do you think?
--Bradley Inman, publisher, Inman News
4. Looming slowdown or recession
* The residential housing industry is currently smack in the middle of a slowdown.
* Commercial real estate business is still very strong locally but this site deals mostly with residential.
* Many of my Leading Indicator Momentum Charts look very similar to the recession we experienced back in the early 90s. Most of the current real estate agents and investors were not active in Charleston during this period but ask anyone who worked in the real estate business in this town during that time and they will tell you it was not pretty.
* The chart below comes from Guerite Advisors and this chart sure does look like a leading indicator for previous recessions.
Have you ever heard "if you own it a truck delivered it?" Well, one way to see get some visibility into the economy is by looking at the truck tonnage index. See a trend below?
Commodities
Have you wondered why oil has dropped around $50 per barrel? Oil has many more uses than just our automobiles. When the economy starts cooling there is less demand for the products that oil is used to manufacture.
Consider the following I found on www.lifeaftertheoilcrash.com:
It's not just transportation and agriculture that are entirely dependent on abundant, cheap oil. In addition to transportation, food, water, and modern medicine, mass quantities of oil are required for all plastics, all computers and all high-tech devices.
Some specific examples may help illustrate the degree to which our technological base is dependent on fossil fuels:
1. The construction of an average car consumes the energy equivalent of approximately 20 barrels of oil, which equates to 840 gallons, of oil. Ultimately, the construction of a car will consume an amount of fossil fuels equivalent to twice the car’s final weight.
2. The production of one gram of microchips consumes 630 grams of fossil fuels. According to the American Chemical Society, the construction of single 32 megabyte DRAM chip requires 3.5 pounds of fossil fuels in addition to 70.5 pounds of water.
3. The construction of the average desktop computer consumes ten times its weight in fossil fuels.
4. The Environmental Literary Council tells us that due to the "purity and sophistication of materials (needed for) a microchip, . . . the energy used in producing nine or ten computers is enough to produce an automobile."
I also recently noted in my blog that the price of copper has gone down substantially with the housing downturn.
Were you aware??
* The average new home uses 500 pounds of copper.
* Copper is often referred to as "Dr. Copper" because of its unique ability to forecast economic trends.
* Copper is often called "the commodity with a PhD in economics."
The green line represents a significant slowdown in the CRB commodities index over the past year.
These commoditiy facts show why the housing and manufacturing sectors are gasping for air. If these sectors bleed into the rest of the economy then you may start hearing the R word in the media.
In my opinion all this bad news and the "kernels about to pop" will present real esate buyers good opportunities in certain Charleston areas. Please keep in mind that there are also certain areas and types of properties I would stay away from as a buyer right now. There are plenty of sellers offering concessions and there are sales well below list price in our market right now. As inventory, Days on Market, foreclosures rise and credit tightens these factors will present an opportunity for qualified buyers to do some hard negotiating with sellers. If the sellers do not take your offer then just tell them and their agent to have a nice day and look for the next deal. The key to buying real estate in this market will be to have a real estate agent who can help you price your bids appropriately and be patient in your search.
Do you want some good news? Mortgage rates are still low! One of the most important aspects of your real estate transaction still allows you cheap financing, especially if you have good credit. What better environment could you want in real estate with a buyer's market and low interest rate financing options?
If you want more details on the areas of Charleston to focus on for a buying opportunity you are welcome to have me and my team represent you in your buying decision. Proper negotiations and the ability to analyze and price homes will be critical. With the analysis I perform on this website and my finance, real estate and appraisal experience I think we are qualified to help you if you need it.
So all of you buyers on the sideline start doing your market research and get prepared to play "Lets Make a Deal". If you are a seller then you better learn how to play "The Price is Right."
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
As I have mentioned before and many of you already know, real estate is seasonal and cyclical. The Q4 2006 indicators have gotten worse as expected because real estate slows down this time of year because of the holidays and the downturn the market is currently experiencing. In my opinion, the next couple of years will present some of the best buying opportunities for homes in certain parts of the Charleston market that buyers will see in a long time. The reason I come to this conclusion is from my experience in the stock market and what I currently see with high inventory, stagnant appreciation, longer Days on Market and loan pressures on borrowers. When the news is all bad and sellers become more desperate you look to buy. It is sort of that contrarian investment mentality the good investors must have when they smell blood. Successful investors folllow the often used quote to "Buy low and sell high."
I guess the current motto should be:
"When you begin to see blood in the streets buy property."
The article below is an example of blood starting to flow in the streets courtesy of the publicly traded builders across America.
More Land Mines For Builders
The real estate market performance in 2004-2005 was an anomaly and represented the "top of the market." 2006 was a year in which the market hit reality and finally slowed down. Talk to any Realtor with experience and they probably will admit the slowdown was good for the market because the "mania" was getting out of control. I believe the most critical stat regarding the 2005 market is that approximately 25% of the investors and speculators are now out of the current real estate market. This explains the drop in volume for 2006. I look forward to 2007 and beyond.
As far as the economy goes I feel the national economy is going to get worse before it gets better. There are a couple of major problems out there that are looming and if kernels in a bag of popcorn represent risk then we are starting to see some kernels pop. A couple of the problems are:
1. Jobs
* The construction, real estate and mortgage industry will continue to shed jobs due to the housing slowdown. This should put a strain on future unemployment numbers if the government factors them into their stats. According to a study done by Northern Trust from 2001 to 2005, 43% of the private sector jobs were related to housing. Once the Fed began increasing short term rates in June 2004 real estate related job creation plummeted by 68.2%. This will have to have an impact on future unemployment numbers.
* Our local economy is strong but keep in mind that the Charleston economy relies heavily upon the real estate industry.
2. Consumer Spending
* Many consumers have used their homes as ATMs in the past housing boom.
* Now that home appreciation is declining or flatenning out in some markets the Mortgage Equity Withdrawals (MEWs) are declining, which puts less consumer dollars into the economy.
3. Problem Loans
* The foreclosures are increasing and subprime lenders are blowing up, which will cause a tightening of credit making it harder for homebuyers to get loans. Since December 2006, 12 lenders have now gone caput. Realtytrac has documented that foreclosures are up significantly since 2005 and that the foreclosure filings have exceeded 100,000 for 5 consective months.
* There has also been a surge of mortgage fraud across the country which has hurt many banks.
* There are also $1-1.5 trillion in loans that are set to reset this year. If these borrowers are boxed in and can not sell their home or refinance they face the choice of making a higher monthly payment they probably cannot afford, bankrupcy or foreclosure on their home.
* The Subprime Tsunami
Here is the scenario: China is creating wealth at record levels. Its central bank has invested more than $1 trillion in U.S. Treasuries and mortgaged-back securities. In fact, it is the largest investor in MBSs. The fastest-growing piece of MBSs has been subprime loans.
Years ago, Wall Street figured out it could make a mint off mortgages and began packaging them as fast as the Chinese were building high-rises in Shanghai.
But the supply was constrained, so the Street urged originators to originate more home loans, as they had plenty of investors, including deep pockets from China (and Japan as well).
Then along came the minority/immigrant home-buying market as an opportunity. Promoting home ownership to this crowd became the rallying cry of President Clinton, President Bush, Congress, the Realtors, the home builders, mortgage bankers and the average bus boy who until now could not afford to buy a house. It was an apple-pie bandwagon that no one could resist.
But how do you dig deep into this market unless you permit nothing-down loans, low-cost ARMs and loose underwriting? You can't.
Hello subprime mortgage market. Bingo -- it became the formula for the biggest property-ownership push since the Homestead Act. The politicians fed off the phenomenon and the industry lapped up transactions. Sitting behind the curtain was Wall Street, of course, which made a boat load of money.
Add careless underwriting on refinancings and credit lines and the money that came from China to help make more loans goes right back to the Chinese shores as consumers use their houses to buy depreciating assets like cars, clothes, toys and all sorts of stuff.
Now for the hangover: the upside-down homeowner. Mortgage payments for many homeowners are doubling, inflation won't fill the gap, and many in this new class of homeowners are in trouble. Writing risky loans to unqualified home buyers is generally stupid. Inflation covered up the mess for awhile but not anymore.
This summer much of this nonsense will come to a head.
It is like all financial scandals that involve Wall Street and real estate (remember the Savings & Loan crisis): there are severe consequences. Generally, consumers pay the cost of other people's gains.
This is how the subprime tsunami works. The ocean recedes, people run to the beach and go WOW, then the big wave destroys them and the property behind them.
Is it really this dire? I hope not.
What do you think?
--Bradley Inman, publisher, Inman News
4. Looming slowdown or recession
* The residential housing industry is currently smack in the middle of a slowdown.
* Commercial real estate business is still very strong locally but this site deals mostly with residential.
* Many of my Leading Indicator Momentum Charts look very similar to the recession we experienced back in the early 90s. Most of the current real estate agents and investors were not active in Charleston during this period but ask anyone who worked in the real estate business in this town during that time and they will tell you it was not pretty.
* The chart below comes from Guerite Advisors and this chart sure does look like a leading indicator for previous recessions.
Have you ever heard "if you own it a truck delivered it?" Well, one way to see get some visibility into the economy is by looking at the truck tonnage index. See a trend below?
Commodities
Have you wondered why oil has dropped around $50 per barrel? Oil has many more uses than just our automobiles. When the economy starts cooling there is less demand for the products that oil is used to manufacture.
Consider the following I found on www.lifeaftertheoilcrash.com:
It's not just transportation and agriculture that are entirely dependent on abundant, cheap oil. In addition to transportation, food, water, and modern medicine, mass quantities of oil are required for all plastics, all computers and all high-tech devices.
Some specific examples may help illustrate the degree to which our technological base is dependent on fossil fuels:
1. The construction of an average car consumes the energy equivalent of approximately 20 barrels of oil, which equates to 840 gallons, of oil. Ultimately, the construction of a car will consume an amount of fossil fuels equivalent to twice the car’s final weight.
2. The production of one gram of microchips consumes 630 grams of fossil fuels. According to the American Chemical Society, the construction of single 32 megabyte DRAM chip requires 3.5 pounds of fossil fuels in addition to 70.5 pounds of water.
3. The construction of the average desktop computer consumes ten times its weight in fossil fuels.
4. The Environmental Literary Council tells us that due to the "purity and sophistication of materials (needed for) a microchip, . . . the energy used in producing nine or ten computers is enough to produce an automobile."
I also recently noted in my blog that the price of copper has gone down substantially with the housing downturn.
Were you aware??
* The average new home uses 500 pounds of copper.
* Copper is often referred to as "Dr. Copper" because of its unique ability to forecast economic trends.
* Copper is often called "the commodity with a PhD in economics."
The green line represents a significant slowdown in the CRB commodities index over the past year.
These commoditiy facts show why the housing and manufacturing sectors are gasping for air. If these sectors bleed into the rest of the economy then you may start hearing the R word in the media.
In my opinion all this bad news and the "kernels about to pop" will present real esate buyers good opportunities in certain Charleston areas. Please keep in mind that there are also certain areas and types of properties I would stay away from as a buyer right now. There are plenty of sellers offering concessions and there are sales well below list price in our market right now. As inventory, Days on Market, foreclosures rise and credit tightens these factors will present an opportunity for qualified buyers to do some hard negotiating with sellers. If the sellers do not take your offer then just tell them and their agent to have a nice day and look for the next deal. The key to buying real estate in this market will be to have a real estate agent who can help you price your bids appropriately and be patient in your search.
Do you want some good news? Mortgage rates are still low! One of the most important aspects of your real estate transaction still allows you cheap financing, especially if you have good credit. What better environment could you want in real estate with a buyer's market and low interest rate financing options?
If you want more details on the areas of Charleston to focus on for a buying opportunity you are welcome to have me and my team represent you in your buying decision. Proper negotiations and the ability to analyze and price homes will be critical. With the analysis I perform on this website and my finance, real estate and appraisal experience I think we are qualified to help you if you need it.
So all of you buyers on the sideline start doing your market research and get prepared to play "Lets Make a Deal". If you are a seller then you better learn how to play "The Price is Right."
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Q3 2006 Commentary - Charleston Market Report
Sellers are from Mars and Buyers are from Venus
I can not remember where I saw this analogy used but I believe it sums up what is happening in the local Charleston real estate "mental market" right now. Right now the entire country is in a housing recession and many sellers are still pricing their homes as if it were last years market. There is also a greater than 50% chance we could enter into a mild or severe recession after the new year. The Existing Residential Sales indicator just went to unfavorable status for the first time since July 1995! In fact, all of my main indicators that are tracked with the Market Momentum Charts are now in Unfavorable status. So I am going to do something I am good at and be very honest. Many of the sellers and/or real estate agents pricing homes right now simply have them priced to high for this market. If you do not have to sell your home right now take it off the market and try to rent it out. If you need to sell your home quickly and you are not getting any calls or showings then I would strongly urge you to go back and re-evaluate your list price with your agent. The real estate market is very similar to the weather and the stock market because it runs in cycles. Just as we recently had a bull run in the real estate market it could now take years before we see a market like that again because it will take time to work out the excess inventory that has been built up over the years. Even if the Fed decides to cut short term rates next year it still will not be enough to help because the market is to inelastic. Just because you might have an appraisal in hand that states the estimated market value of your home is $500,000 (For Example) does not mean that is what the market will bring you in the form of a sales price. The contract price is determined by YOU the Buyer and YOU the Seller coming to an agreement on what the home is worth. Remember, an appraisal is an estimate of market value by one person and in a slower real estate market older comps may not show what buyers are willing to pay for a home today.
Pricing a new listing for sale is an area I think many realtors and sellers are struggling with today. When I was an appraiser one of the hardest appraisals I would do was recommending a list price for a seller as the market was changing. During a hot real estate market it is easy because people had no rhyme or reason to what they were paying and prices just continued to escalate. Now, in a slowing real estate market the real estate agent and/or seller must get a true feel for the psychology of the buyer in their respective markets. It becomes extremely difficult when competition of homes for sale increases and comparable properties in the immediate area may become hard to find due to a lack of sales. If you are high on your list price then valuable marketing time will be lost as the sellers continues to pay on the existing mortgage. The worst scenario is being correct on the list price but not having any demand or buyers for your particular property because of the market slowdown. This can become a frustating aspect of real estate when inventory builds up, Days on Market increases and you realize real estate is not as liquid as you would like it to be at a financially critical time in your life.
Why is the seller so firm in their resolve to remain firm on price? (Courtesy of Matrix)
*Sellers are used to being in charge - The economy is slowly weakening as evidenced by the erosion of GDP but its still relatively solid. Sellers have enjoyed a dominating postion for much of the past nine years, not quite as long as the Republicans have controlled Congress (sorry, but election day is still ringing in my head). Perhaps thats the reason for the seller’s delay in adjusting to the market (not the shift in power to Democrats). They are simply used to the way things have been.
*Its about ego, not greed (buyers don’t understand this) - Ego is a big part of setting real estate prices for listings, not greed [WaPo]. Generally speaking, according to the evolving body of neuroeconomic research, people logically make rather simple dollars-and-cents analyses when they buy small items, but become more emotional around large decisions, particularly those that affect their futures.
*Sellers don’t underestimate the power of “denial” - The word “denial” must have been created for them, psychiatrist Peterson said. As applied to real estate, denial is a condition in which sellers cannot bear to part with their homes for less than what they believe they’re worth.
The solution? Brokers need to continue to educate the sellers on the accurate value of their property and simply don’t take the listing if its not priced within the realm of reasonableness. The other solution is simply to wait for sellers to adjust. But be patient, it may take a while.
So the main question now is are we near the bottom of the housing market?? Market experts are calling for different outcomes, which is enough to confuse everyone. Paul Kasriel of The Northern Trust Company is the Senior Vice President and Director of Economic Research, responsible for producing the Corporation's economic and interest rate forecasts. He advises the Bank's Assets-Liabilities Committee as well as the Corporation's Investment Policy Committee. In the commentary, Near A Housing Bottom? he takes a very detailed look at some national data to answer this important question. I recommend you read his article.
I took the following supply/demand paradigm explanation from John Burns Consulting because I think it does an excellent job of explaining the dynamics of the current market.
Changing the Demand / Supply Paradigm
In most markets across the country, there is more demand for additional homes (typically measured by job and population growth) than there is supply of new homes (measured by permit activity). A quick glance at this data by market below shows this.
However, there is a significant imbalance between the demand and supply that really matters. While we need more homes, the demand figure that matters is the number of buyers, and the supply figure that matters is the number of sellers. Consider these definitions:
Demand: The number of people who:
A) want to buy a home AND
B) can afford to buy a home AND
C) will buy in your location.
This calculation includes investors, who are disappearing or gone.
Supply: The number of new and resale homes available for sale in their price range and desired location.
Demand for reasonably priced homes within a reasonable commute is huge because job and population growth is strong. Homes in these locations need to be priced reasonable to sell.
Demand for unreasonably priced homes or for homes far from work is abysmal because buyers have plenty of choices today. This is particularly evident in markets like Phoenix and Washington, D.C., where the economies are booming, yet net prices are down 15%+ in the outlying areas.
What Happened?
Market conditions that pose several challenges to this buyer-centric definition of demand include:
1) Higher Mortgage Rates: As mortgage rates increase, buyers can't afford homes at the same prices they once could. A buyer who could afford a $400,000 adjustable-rate mortgage in March 2004 can only afford a $300,000 mortgage today.
2) Inflated Sales Volume: The creative financing options and increased home equity realized during the housing market boom allowed for an extremely high number of buyers, most likely capturing sales that would have otherwise occurred in future years. Most of the people who could purchase did. Layer investors in on top of this, and you realize that 2005 was a Sales Volume bubble.
3) Financing: Potential moveup buyers who purchased or refinanced a home in recent years may have a lower interest rate (and possibly property tax) on their existing mortgage than what they could obtain today. They also can't sell their home for as much as they could have sold it last year. These factors keep qualified moveup buyers from moving.
4) Location: People generally don't want to live in outlying areas unless they have no other choice. The number of people willing to make long commutes for current prices is less than the supply of homes in those areas.
Conclusion
The traditional indicators of housing demand and supply are important, but may not indicate the true health of a market. Even when the job growth to permit ratio is strong, you can still have problems. Monitor the sales volumes (resale and new) as the proxy for demand, and listings and unsold homes under construction as a proxy for supply. Consider your potential buyers' willingness to commute to job centers, and their willingness - and ability - to pay to do so.
Source: John Burns Real Estate Consulting
Some more evidence on weak housing data. (Courtesy of The Big Picture)
1. Despite falling interest rates, Mortgage activity dropped;
2. Pending sales of Existing Homes declined; Home prices fell;
3. September marked the sixth consecutive month that spending on private residential construction fell;
4. The Housing recession has spread into Consumer Spending: year-over-year change in real consumption was 2.8%, the lowest year-over-year growth since the 1H ‘03;
5. The September 2006 U.S. Foreclosure Market Report shows that foreclosures are up more than 63 percent from September 2005.
Despite all the negative data, the new mantra circulating is that Housing is stabilizing; That then morphed into Housing was bottoming.
The charts suggest something else: via Bob Bronson), we see Housing is only starting to roll over:
I wish I had better news to provide you for the 3rd Quarter, but we are in the midst of the ugly part of the housing cycle. It is an unfortunate bump in the road. Even with the general trend being negative there are still deals to be done in Charleston. I have attended a few meetings at Sandlapper Real Estate Group and there are plenty of people looking, buying and selling real estate right now.
As I report all of this weak local and national housing data I am sure many people who read this report think I am just a gigantic Bear regarding the real estate market. Over the long term I am bullish on the local real estate market here in Charleston. I am a lifelong resident of Charleston and love everything this beautiful city of ours has to offer. I feel at this particular part of the cycle in a weak real estate market that people who decide to buy or sell properties make educated decisions. Do your homework. Be patient. Get with qualified real estate agents who truly understand this market.
Charleston is not going anywhere on the real estate radar due to our beautiful beaches, polite locals, historic properties, warm weather, low taxes, great restaurants, beautiful golf courses, great sporting venues, strong tourism and a quality of life second to none! These are just a few reasons why people of all ages will continue to move to a city with unparalleled history, beauty and charm for years to come.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
I can not remember where I saw this analogy used but I believe it sums up what is happening in the local Charleston real estate "mental market" right now. Right now the entire country is in a housing recession and many sellers are still pricing their homes as if it were last years market. There is also a greater than 50% chance we could enter into a mild or severe recession after the new year. The Existing Residential Sales indicator just went to unfavorable status for the first time since July 1995! In fact, all of my main indicators that are tracked with the Market Momentum Charts are now in Unfavorable status. So I am going to do something I am good at and be very honest. Many of the sellers and/or real estate agents pricing homes right now simply have them priced to high for this market. If you do not have to sell your home right now take it off the market and try to rent it out. If you need to sell your home quickly and you are not getting any calls or showings then I would strongly urge you to go back and re-evaluate your list price with your agent. The real estate market is very similar to the weather and the stock market because it runs in cycles. Just as we recently had a bull run in the real estate market it could now take years before we see a market like that again because it will take time to work out the excess inventory that has been built up over the years. Even if the Fed decides to cut short term rates next year it still will not be enough to help because the market is to inelastic. Just because you might have an appraisal in hand that states the estimated market value of your home is $500,000 (For Example) does not mean that is what the market will bring you in the form of a sales price. The contract price is determined by YOU the Buyer and YOU the Seller coming to an agreement on what the home is worth. Remember, an appraisal is an estimate of market value by one person and in a slower real estate market older comps may not show what buyers are willing to pay for a home today.
Pricing a new listing for sale is an area I think many realtors and sellers are struggling with today. When I was an appraiser one of the hardest appraisals I would do was recommending a list price for a seller as the market was changing. During a hot real estate market it is easy because people had no rhyme or reason to what they were paying and prices just continued to escalate. Now, in a slowing real estate market the real estate agent and/or seller must get a true feel for the psychology of the buyer in their respective markets. It becomes extremely difficult when competition of homes for sale increases and comparable properties in the immediate area may become hard to find due to a lack of sales. If you are high on your list price then valuable marketing time will be lost as the sellers continues to pay on the existing mortgage. The worst scenario is being correct on the list price but not having any demand or buyers for your particular property because of the market slowdown. This can become a frustating aspect of real estate when inventory builds up, Days on Market increases and you realize real estate is not as liquid as you would like it to be at a financially critical time in your life.
Why is the seller so firm in their resolve to remain firm on price? (Courtesy of Matrix)
*Sellers are used to being in charge - The economy is slowly weakening as evidenced by the erosion of GDP but its still relatively solid. Sellers have enjoyed a dominating postion for much of the past nine years, not quite as long as the Republicans have controlled Congress (sorry, but election day is still ringing in my head). Perhaps thats the reason for the seller’s delay in adjusting to the market (not the shift in power to Democrats). They are simply used to the way things have been.
*Its about ego, not greed (buyers don’t understand this) - Ego is a big part of setting real estate prices for listings, not greed [WaPo]. Generally speaking, according to the evolving body of neuroeconomic research, people logically make rather simple dollars-and-cents analyses when they buy small items, but become more emotional around large decisions, particularly those that affect their futures.
*Sellers don’t underestimate the power of “denial” - The word “denial” must have been created for them, psychiatrist Peterson said. As applied to real estate, denial is a condition in which sellers cannot bear to part with their homes for less than what they believe they’re worth.
The solution? Brokers need to continue to educate the sellers on the accurate value of their property and simply don’t take the listing if its not priced within the realm of reasonableness. The other solution is simply to wait for sellers to adjust. But be patient, it may take a while.
So the main question now is are we near the bottom of the housing market?? Market experts are calling for different outcomes, which is enough to confuse everyone. Paul Kasriel of The Northern Trust Company is the Senior Vice President and Director of Economic Research, responsible for producing the Corporation's economic and interest rate forecasts. He advises the Bank's Assets-Liabilities Committee as well as the Corporation's Investment Policy Committee. In the commentary, Near A Housing Bottom? he takes a very detailed look at some national data to answer this important question. I recommend you read his article.
I took the following supply/demand paradigm explanation from John Burns Consulting because I think it does an excellent job of explaining the dynamics of the current market.
Changing the Demand / Supply Paradigm
In most markets across the country, there is more demand for additional homes (typically measured by job and population growth) than there is supply of new homes (measured by permit activity). A quick glance at this data by market below shows this.
However, there is a significant imbalance between the demand and supply that really matters. While we need more homes, the demand figure that matters is the number of buyers, and the supply figure that matters is the number of sellers. Consider these definitions:
Demand: The number of people who:
A) want to buy a home AND
B) can afford to buy a home AND
C) will buy in your location.
This calculation includes investors, who are disappearing or gone.
Supply: The number of new and resale homes available for sale in their price range and desired location.
Demand for reasonably priced homes within a reasonable commute is huge because job and population growth is strong. Homes in these locations need to be priced reasonable to sell.
Demand for unreasonably priced homes or for homes far from work is abysmal because buyers have plenty of choices today. This is particularly evident in markets like Phoenix and Washington, D.C., where the economies are booming, yet net prices are down 15%+ in the outlying areas.
What Happened?
Market conditions that pose several challenges to this buyer-centric definition of demand include:
1) Higher Mortgage Rates: As mortgage rates increase, buyers can't afford homes at the same prices they once could. A buyer who could afford a $400,000 adjustable-rate mortgage in March 2004 can only afford a $300,000 mortgage today.
2) Inflated Sales Volume: The creative financing options and increased home equity realized during the housing market boom allowed for an extremely high number of buyers, most likely capturing sales that would have otherwise occurred in future years. Most of the people who could purchase did. Layer investors in on top of this, and you realize that 2005 was a Sales Volume bubble.
3) Financing: Potential moveup buyers who purchased or refinanced a home in recent years may have a lower interest rate (and possibly property tax) on their existing mortgage than what they could obtain today. They also can't sell their home for as much as they could have sold it last year. These factors keep qualified moveup buyers from moving.
4) Location: People generally don't want to live in outlying areas unless they have no other choice. The number of people willing to make long commutes for current prices is less than the supply of homes in those areas.
Conclusion
The traditional indicators of housing demand and supply are important, but may not indicate the true health of a market. Even when the job growth to permit ratio is strong, you can still have problems. Monitor the sales volumes (resale and new) as the proxy for demand, and listings and unsold homes under construction as a proxy for supply. Consider your potential buyers' willingness to commute to job centers, and their willingness - and ability - to pay to do so.
Source: John Burns Real Estate Consulting
Some more evidence on weak housing data. (Courtesy of The Big Picture)
1. Despite falling interest rates, Mortgage activity dropped;
2. Pending sales of Existing Homes declined; Home prices fell;
3. September marked the sixth consecutive month that spending on private residential construction fell;
4. The Housing recession has spread into Consumer Spending: year-over-year change in real consumption was 2.8%, the lowest year-over-year growth since the 1H ‘03;
5. The September 2006 U.S. Foreclosure Market Report shows that foreclosures are up more than 63 percent from September 2005.
Despite all the negative data, the new mantra circulating is that Housing is stabilizing; That then morphed into Housing was bottoming.
The charts suggest something else: via Bob Bronson), we see Housing is only starting to roll over:
I wish I had better news to provide you for the 3rd Quarter, but we are in the midst of the ugly part of the housing cycle. It is an unfortunate bump in the road. Even with the general trend being negative there are still deals to be done in Charleston. I have attended a few meetings at Sandlapper Real Estate Group and there are plenty of people looking, buying and selling real estate right now.
As I report all of this weak local and national housing data I am sure many people who read this report think I am just a gigantic Bear regarding the real estate market. Over the long term I am bullish on the local real estate market here in Charleston. I am a lifelong resident of Charleston and love everything this beautiful city of ours has to offer. I feel at this particular part of the cycle in a weak real estate market that people who decide to buy or sell properties make educated decisions. Do your homework. Be patient. Get with qualified real estate agents who truly understand this market.
Charleston is not going anywhere on the real estate radar due to our beautiful beaches, polite locals, historic properties, warm weather, low taxes, great restaurants, beautiful golf courses, great sporting venues, strong tourism and a quality of life second to none! These are just a few reasons why people of all ages will continue to move to a city with unparalleled history, beauty and charm for years to come.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
May 2007 Commentary - Charleston Market Report
I hope everyone had a wonderful Mothers Day!
Earlier this week I gave a presentation to the Real Estate MBA Class at the Citadel. I really enjoy speaking with these students because many of them are on their way to becoming the future leaders in the community or they already have some very important jobs in Charleston. The presentation I gave them was focused on Supply and Demand and Risk Management. The reason I focused on these two areas is because they are the cornerstone of The Charleston Market Report and how I consult and manage investments in real estate and securities.
The causes of price movement in the stock market are related to the following:
Were you aware?
Market and sector forces together typically cause 80% of the price movement in a stock. That means the company fundamentals usually account for less than 20% of a stock’s price movement. This is the reason a company’s stock price sometimes seems to move independently of the fundamentals!
Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King
Many investors run sector rotation portfolios to try and gain an edge instead of using more traditional investment approaches. The strategy of the sector rotation funds is to allocate your money in these favored sectors and stocks based on relative strength. Basicly, what you have is micro markets in the stock market to focus on and avoid. You must constantly monitor these sectors and if you can spot trends you will do very well.
The five main real estate indicators I use in the Charleston Market Report (1. Existing Home Sales 2. New Building Permits 3. Foreclosures 4. Inventory 5. Interest Rates) are meant to give you a macro view of the current risk in the overall housing market. They are used to help spot a change in trends. The difference in real estate versus securities is that a change in trend in real estate is like turning a cargo ship around.....it takes time. Trends in securities can occur and change very quickly.
The Charleston real estate market is no different. The media always discusses how good or bad the Tri County market is but Charleston has micro markets that are favored and unfavored at this time. This is why I break down the single family homes versus the condo/townhouse homes seperately because they are two different segments of the market. Even though the overall Charleston residential real estate market is in a higher risk status right now that does not mean certain areas are not performing well.
If you look at the Market Matrix in The Charleston Market Report you will notice that the appreciation and inventory of single family homes in Goose Creek vs. Mt. Pleasant are like night and day. I would consider Goose Creek a favored sector and Mt. Pleasant an unfavored sector of the local real estate market. This was not the case about 3 years ago hence you can see the analogy of market rotation and a change in trend. Goose Creek has appreciated 12.3% since last year and has only 2.9 months worth of inventory. Meanwhile, Mt. Pleasant has 10 months worth of inventory and an appreciation rate of 3% since last year. There are other examples of certain markets doing well in the Tri-County while others perform poorly.
I think it is pretty cool that you can have a system focused on supply and demand to spot trends in both real estate and securities. It works much better than relying on analysts because supply and demand has no hidden agenda and are purely derived from market data. You just need to be able to interpret the data and you are on your way to making better investment decisions. When you add in the risk management component which calls for doing your own due diligence and measuring risk in the market you will decrease the odds of losing money on future deals.
Fyi, I just added a new section to the website called Housing Cartoons. Even though the market has slowed it does not mean we can not get a good laugh out of it every once in a while.
Have a great month everyone!
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Earlier this week I gave a presentation to the Real Estate MBA Class at the Citadel. I really enjoy speaking with these students because many of them are on their way to becoming the future leaders in the community or they already have some very important jobs in Charleston. The presentation I gave them was focused on Supply and Demand and Risk Management. The reason I focused on these two areas is because they are the cornerstone of The Charleston Market Report and how I consult and manage investments in real estate and securities.
The causes of price movement in the stock market are related to the following:
Were you aware?
Market and sector forces together typically cause 80% of the price movement in a stock. That means the company fundamentals usually account for less than 20% of a stock’s price movement. This is the reason a company’s stock price sometimes seems to move independently of the fundamentals!
Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King
Many investors run sector rotation portfolios to try and gain an edge instead of using more traditional investment approaches. The strategy of the sector rotation funds is to allocate your money in these favored sectors and stocks based on relative strength. Basicly, what you have is micro markets in the stock market to focus on and avoid. You must constantly monitor these sectors and if you can spot trends you will do very well.
The five main real estate indicators I use in the Charleston Market Report (1. Existing Home Sales 2. New Building Permits 3. Foreclosures 4. Inventory 5. Interest Rates) are meant to give you a macro view of the current risk in the overall housing market. They are used to help spot a change in trends. The difference in real estate versus securities is that a change in trend in real estate is like turning a cargo ship around.....it takes time. Trends in securities can occur and change very quickly.
The Charleston real estate market is no different. The media always discusses how good or bad the Tri County market is but Charleston has micro markets that are favored and unfavored at this time. This is why I break down the single family homes versus the condo/townhouse homes seperately because they are two different segments of the market. Even though the overall Charleston residential real estate market is in a higher risk status right now that does not mean certain areas are not performing well.
If you look at the Market Matrix in The Charleston Market Report you will notice that the appreciation and inventory of single family homes in Goose Creek vs. Mt. Pleasant are like night and day. I would consider Goose Creek a favored sector and Mt. Pleasant an unfavored sector of the local real estate market. This was not the case about 3 years ago hence you can see the analogy of market rotation and a change in trend. Goose Creek has appreciated 12.3% since last year and has only 2.9 months worth of inventory. Meanwhile, Mt. Pleasant has 10 months worth of inventory and an appreciation rate of 3% since last year. There are other examples of certain markets doing well in the Tri-County while others perform poorly.
I think it is pretty cool that you can have a system focused on supply and demand to spot trends in both real estate and securities. It works much better than relying on analysts because supply and demand has no hidden agenda and are purely derived from market data. You just need to be able to interpret the data and you are on your way to making better investment decisions. When you add in the risk management component which calls for doing your own due diligence and measuring risk in the market you will decrease the odds of losing money on future deals.
Fyi, I just added a new section to the website called Housing Cartoons. Even though the market has slowed it does not mean we can not get a good laugh out of it every once in a while.
Have a great month everyone!
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
April 2007 Commentary - Charleston Market Report
Let me just start out this newsletter by commenting on the recent events surrounding Dr. Al Parish, a (now former) professor from Charleston Southern University. I know Dr. Parish and respect his economic analysis work in Charleston. I am not familiar with his investment expertise. For those of you reading this who are not in Charleston, Dr. Parish was recently accused of securities fraud by the SEC and the FBI is also investigating him. The man was investing millions of dollars for individuals and institutions in investment pools without a securities license and he was not registered with the state or the SEC. Please click below for the entire list of stories:
http://newsfiles.charleston.net/SpecialReports/al_parish.html
Folks, I talk often about doing your due diligence on any financial transaction and this is a classic case. This is one of the saddest stories I have ever witnessed locally and it affects many people I know in this community. The fiduciaries that allowed money to be invested with this man failed and they are liable. You do not invest millions of dollars with someone who does not have a securities license and will not tell you how he invests your money. Institutions all over the country follow strict guidelines and procedures regarding the investment process and clearly Charleston Southern and others did not. The "he is a nice, smart guy with a proprietary investment black box routine" is not enough when millions of dollars are at stake. The fiduciaries that allowed this to happen have some explaining to do to their donors and investors.
Dr. Parish is a classic example of an "ego gone wild." I am not a psychiatrist but clearly something is wrong upstairs in his brilliant mind. He lived a very lavish lifestyle courtesy of his trusted investor clients. If or I should say When he is found guilty of these crimes he should pay the price just like any hardened criminal. He has destroyed lives and ruined people financially because of his greed and lets hope he gets his memory back. The big question right now is where is the money? I would assume the Cayman Islands or maybe a Swiss Bank account would be a good place to check. If he can not remember maybe shock therapy will help jog his memory.
FYI, the Q1 2007 report should be out in a couple of weeks. It should be a doozy since there is so much to discuss right now.
Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
By Kevin Depew
1. Real Estate Woes Contained to Congress
According to an article on Bloomberg this morning, it appears the housing woes are going to be successfully contained to Congress... which will then ensure the woes are magnified and ultimately spread out evenly to infect all areas of our lives.
Although it has yet to get much play in the media for what it really means, an important housing-related article was on Bloomberg this morning.
U.S. lawmakers want to stem the rising number of mortgage delinquencies (good for votes) by targeting investors who finance mortgage lending through mortgage backed securities.
Bloomberg says the top Republican and Democrat (God help us when bipartisanship rears its ugly head) want to write new laws making investors who buy mortgage bonds liable for deceptive or bad loans.
That all sounds well and good on the surface; place the burden for bad loans on the investors who are responsible for facilitating the lending practices in the first place.
And check out this vote-winning sound bite:
- "More money was being lent than should have been lent," said Committee Chairman Barney Frank (D- MA), who added that growth in the market for mortgage bonds "provided liquidity without responsibility."
Ho ho ho! "Liquidity without responsibility!"
That's a real kick in the crotch coming from a congressman of either party.
2. But Congress Woes Spreading to All Areas of American Life
So, while Congress is busy "containing housing woes," we'we'll tell you what this rush to legislate really means.
It means that ultimately Congress is going to "save" the current crop of "homeowners" from themselves by raising the cost of borrowing for everybody else.
Mortgages are going to be far more difficult to obtain for everyone.
And because the new laws are going to make it far more risky for investors to facilitate lenders through mortgage-backed securities, the existing pool of money available for mortgages will be reduced, which will also raise the costs to subsequent mortgage borrowers.
The irony is that in the long run the greatest beneficiary of these new laws won't be either homeowners or mortgage borrowers, but the government-sponsored enterprises, Fannie Mae and Freddie Mac.
See, by the time Congress realizes that the net result of the legislation is a full blown mortgage availability crisis it will be time for lawmakers to step back in and expand the role of the GSE's.
Honestly, you can't make this stuff up!
3. Why Investors Should Consider Real Estate
For an alternate take on real estate, take a look at this article in the Wall Street Journal this morning, "Why Investors Should Consider Real Estate."
While acknowledging that "residential real estate is struggling," the article notes that some sectors of the real estate market such as commercial real estate are still "relatively healthy."
But the underpinnings of the view that real estate is "OK" for investors still comes down to asset allocation and long-term performance, according to the article.
"From a financial-planning perspective, real estate is an asset that investors should have in their portfolios over the long term. That is because real estate serves as a counterweight to inflation, while REITs, according to data from research firm Ibbotson Associates, have a low to moderate correlation with stocks."
Investment pros routinely agree that a portfolio should have between 5% and 20% invested in real estate that is not a primary residence.
Since for the overwhelming majority of people in America their home makes up almost 65% of their total net worth, this is clearly problematic.
It implies that the average investing homeowner who follows this advice would end up with a real estate weighting of, what, 70-80%?
4. How to Invest in Real Estate
The WSJ article mentioned above helpfully notes that investing directly in real estate isn't always practical for the individual investor.
Why not Real Estate Investment Trusts? Or real estate mutual funds?
Two of the REITs mentioned in the article are Vornado Realty Trust (VNO), and Boston Properties (BXP).
Check out the charts below showing VNO (Blue) and BXP (Red) versus the S&P 500 (Green) between 1998 and 2002.
You don't have to back of the envelope the math to see that there's not a lot of correlation there.
Now, check out the chart showing the same three instruments since 2003.
You want to invest in real estate? Buy an S&P 500 index fund.
5. How Not to Invest in Real Estate
Meanwhile, for a quick lesson in how not to invest in real estate consider the case of the nation's largest homebuilder,D.R. Horton (DHI).
D.R. Horton says fiscal second-quarter home orders fell 37%, far weaker than even housing perma-bears expected.
The company said it had orders for 9,983 homes, compared to 15,771 a year ago.
Meanwhile, the dollar value of those orders was $2.6 billion from $4.4 billion a year ago, a decline of 41%.
So prices are falling slightly faster than orders.
And that dollar figure doesn't even include incentives.
And then there's the 32% cancellation rate.
And what about the fact that, like other builders, D.R. Horton will continue to discount homes aggressively to move inventories?
And what if the company is later this year forced to write down the value of its land holdings?
Bah! Questions!
Have a great month everyone!
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
http://newsfiles.charleston.net/SpecialReports/al_parish.html
Folks, I talk often about doing your due diligence on any financial transaction and this is a classic case. This is one of the saddest stories I have ever witnessed locally and it affects many people I know in this community. The fiduciaries that allowed money to be invested with this man failed and they are liable. You do not invest millions of dollars with someone who does not have a securities license and will not tell you how he invests your money. Institutions all over the country follow strict guidelines and procedures regarding the investment process and clearly Charleston Southern and others did not. The "he is a nice, smart guy with a proprietary investment black box routine" is not enough when millions of dollars are at stake. The fiduciaries that allowed this to happen have some explaining to do to their donors and investors.
Dr. Parish is a classic example of an "ego gone wild." I am not a psychiatrist but clearly something is wrong upstairs in his brilliant mind. He lived a very lavish lifestyle courtesy of his trusted investor clients. If or I should say When he is found guilty of these crimes he should pay the price just like any hardened criminal. He has destroyed lives and ruined people financially because of his greed and lets hope he gets his memory back. The big question right now is where is the money? I would assume the Cayman Islands or maybe a Swiss Bank account would be a good place to check. If he can not remember maybe shock therapy will help jog his memory.
FYI, the Q1 2007 report should be out in a couple of weeks. It should be a doozy since there is so much to discuss right now.
Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
By Kevin Depew
1. Real Estate Woes Contained to Congress
According to an article on Bloomberg this morning, it appears the housing woes are going to be successfully contained to Congress... which will then ensure the woes are magnified and ultimately spread out evenly to infect all areas of our lives.
Although it has yet to get much play in the media for what it really means, an important housing-related article was on Bloomberg this morning.
U.S. lawmakers want to stem the rising number of mortgage delinquencies (good for votes) by targeting investors who finance mortgage lending through mortgage backed securities.
Bloomberg says the top Republican and Democrat (God help us when bipartisanship rears its ugly head) want to write new laws making investors who buy mortgage bonds liable for deceptive or bad loans.
That all sounds well and good on the surface; place the burden for bad loans on the investors who are responsible for facilitating the lending practices in the first place.
And check out this vote-winning sound bite:
- "More money was being lent than should have been lent," said Committee Chairman Barney Frank (D- MA), who added that growth in the market for mortgage bonds "provided liquidity without responsibility."
Ho ho ho! "Liquidity without responsibility!"
That's a real kick in the crotch coming from a congressman of either party.
2. But Congress Woes Spreading to All Areas of American Life
So, while Congress is busy "containing housing woes," we'we'll tell you what this rush to legislate really means.
It means that ultimately Congress is going to "save" the current crop of "homeowners" from themselves by raising the cost of borrowing for everybody else.
Mortgages are going to be far more difficult to obtain for everyone.
And because the new laws are going to make it far more risky for investors to facilitate lenders through mortgage-backed securities, the existing pool of money available for mortgages will be reduced, which will also raise the costs to subsequent mortgage borrowers.
The irony is that in the long run the greatest beneficiary of these new laws won't be either homeowners or mortgage borrowers, but the government-sponsored enterprises, Fannie Mae and Freddie Mac.
See, by the time Congress realizes that the net result of the legislation is a full blown mortgage availability crisis it will be time for lawmakers to step back in and expand the role of the GSE's.
Honestly, you can't make this stuff up!
3. Why Investors Should Consider Real Estate
For an alternate take on real estate, take a look at this article in the Wall Street Journal this morning, "Why Investors Should Consider Real Estate."
While acknowledging that "residential real estate is struggling," the article notes that some sectors of the real estate market such as commercial real estate are still "relatively healthy."
But the underpinnings of the view that real estate is "OK" for investors still comes down to asset allocation and long-term performance, according to the article.
"From a financial-planning perspective, real estate is an asset that investors should have in their portfolios over the long term. That is because real estate serves as a counterweight to inflation, while REITs, according to data from research firm Ibbotson Associates, have a low to moderate correlation with stocks."
Investment pros routinely agree that a portfolio should have between 5% and 20% invested in real estate that is not a primary residence.
Since for the overwhelming majority of people in America their home makes up almost 65% of their total net worth, this is clearly problematic.
It implies that the average investing homeowner who follows this advice would end up with a real estate weighting of, what, 70-80%?
4. How to Invest in Real Estate
The WSJ article mentioned above helpfully notes that investing directly in real estate isn't always practical for the individual investor.
Why not Real Estate Investment Trusts? Or real estate mutual funds?
Two of the REITs mentioned in the article are Vornado Realty Trust (VNO), and Boston Properties (BXP).
Check out the charts below showing VNO (Blue) and BXP (Red) versus the S&P 500 (Green) between 1998 and 2002.
You don't have to back of the envelope the math to see that there's not a lot of correlation there.
Now, check out the chart showing the same three instruments since 2003.
You want to invest in real estate? Buy an S&P 500 index fund.
5. How Not to Invest in Real Estate
Meanwhile, for a quick lesson in how not to invest in real estate consider the case of the nation's largest homebuilder,D.R. Horton (DHI).
D.R. Horton says fiscal second-quarter home orders fell 37%, far weaker than even housing perma-bears expected.
The company said it had orders for 9,983 homes, compared to 15,771 a year ago.
Meanwhile, the dollar value of those orders was $2.6 billion from $4.4 billion a year ago, a decline of 41%.
So prices are falling slightly faster than orders.
And that dollar figure doesn't even include incentives.
And then there's the 32% cancellation rate.
And what about the fact that, like other builders, D.R. Horton will continue to discount homes aggressively to move inventories?
And what if the company is later this year forced to write down the value of its land holdings?
Bah! Questions!
Have a great month everyone!
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
March 2007 Commentary - Charleston Market Report
Ok, now to business. I wrote a little article about the market meltdown last week. If you did not read it and would like to just click on the article: Market Meltdown
If you own a home, have a mortgage, are invested in the stock market or possibly work in the business (real estate, finance/mortgage business, construction, banks or stock market) then you need to pay close attention to what is occuring with the lending industry right now. If you want my take on it and want to look at my ugly mug here is an interview I did with Erin Colgan from Live 5 News last week. She did a great job and I wish more of the interview could have been played but most of it ended up on the cutting room floor.
Live 5 News Interview
Ladies and gentlemen the bottom line is that this implosion in the lending industry will have an impact on the real estate business and the economy. I do not care if some clown on CNBC or other news program says it won't because they are simply of full of you know what. I do not write on these subjects to blow hot air around Charleston and to the subscribers in other parts of the US. I do it because I am involved in these industries and saw the writing on the wall a long time ago. I actually spoke about a lending bubble back in September of 2006 in a certain local newspaper and many of you know where that led me. I speak the truth and those who do not want to hear it either do not care, are ignorant or are in denial. If you want to track "The Lenders Not Girls Gone Wild" industry then I recommend you go the following website:
Implode-O-Meter
This website is amazing. Each week the number of lenders that go "kaput" just keeps growing. This site has only been active since Dec. 2006.
So what will the "Lenders Not Girls Gone Wild" saga bring us. One word......RISK. If you read the Market Meltdown article above the 300 lb gorilla in the market right now is China. Not only is their stock market VERY speculative and in bubble status but the Chinese government owns a bunch of US Treasuries and CDOs (Collaterilized Debt Obligations). If the Chinese get ticked off that Wall St. sold them a bag of crap in the form of CDOs there may be some repurcusssions. In an article on Bloomberg last week about CDO Funding by Jody Shenn all the big wirehouses such as Merrill, Lehman, Bear Stearns, Citigroup, Goldman Sachs and UBS refused to comment on their underwriting of billions of dollars of CDOs. Hmmmmm, I wonder why????? About $173 billion with a B worth of CDOs backed by subprime mortgage bonds and related derivatives wer created last year, according to JP Morgan. Uh Oh!!
So now if you want to insure your investment portfolio because of the increase in risk then your insurance just went up. Folks, the large institutional traders can not just start selling all their holdings. What many of them should be doing is protecting their downside by buying protective puts, which is a form of insurance in the investment world. The problem is that their is an index called the VIX that measures volatility on the stock market. Last week the VIX shot up like a rocket and now it costs much more to protect portfolios just like it costs us Charlestonians to buy insurance for our homes on the coast. When the risk gets high, the insurance goes up. Ever tried buying home insurance a week before a hurricane may hit the east coast? Ever see what happens to insurance rates months after a hurricane hits the east coast? Good luck.
So if you hear somebody from one of the big Wall St. firms saying the "Lenders Not Girls Gone Wild" blowup is no big deal then they probably work for someone who has their hand caught in the cookie jar right now. The sad thing about this necessary correction that is occuring is that the Goldmans and Merrills of the world will make much more money than they lose when the dust settles. The little guy who got snookered or simply purchased the wrong loan and is in a financial squeeze right now and possible foreclosure situation is the person that really pays the price.
When Erin from Channel 5 interviewed me she asked me what the solution was for this mess. I gave her a great answer but it got cut. I forgive you Erin. So I am going to give all of you the answer. The answer comes in the form of two words: Budget and MMA. We all need to do a better job budgeting our money in the Go Go society we live in but it is hard. When you combine the budgeting problem with the fact that most of us are paying nothing but interest on our home loans in a real estate market that has little or no appreciation right now how do we build equity in our homes. If you think the days of 10-20% annual appreciation are around the corner in real estate please tell me where. No calls about condos in Panama please.
In order to make any headway in your real estate investments over the next couple of years we all need to attack and pay down the principal on our homes. Interest only and even fixed rate loans are not going to cut it in a flat/stagnant market. Unfortunately, a fixed rate is really an adjustable rate if you just look at your ammortization schedule. Pure smoke and mirrors created by the banking industry folks. The Effective Rate calculation is a measure of the actual interest rate consumers pay on their home loans by factoring in the front-end loaded interest. Below is the calculation for determining the effective interest rate.
Using a financial calculator:
PV = equity built in a given time period
N = number of years being analyzed
PMT = monthly payments (as a negative sum)
CPT, then I/Y (Compute, then Interest/Year) = Actual Interest Rate
Go ahead and figure your own effective interest rate on your home. I dare you. I guarantee you that you will get very upset. Go ask your banker. I bet they will not even know what you are talking about. Many lenders are all telling us in many cases we simply just refinance our homes. This is simply not the case and in many situations will push us all further into the "never ending interest rate payment rat race."
If we use a $150,000 30 yr fixed rate loan at 6% here are the numbers:
If the loan is kept for 25 years, the consumer would wind up paying almost $270,000 over 25 years for $104,000 in loan equity. Entered into our formula, the actual rate is 9.43%. That’s right, 9.43% - not 6.0! And that’s based upon giving up the loan only 5 years early.
Now how much would the real rate be if that loan was kept for 20 years? The answer is 14.82%. What about for 15 years? The answer keeps rising. It’s a 24.16% interest rate. Paying $161,879 and with less than $44,000 of it going back to Principal shouldn’t seem like a 6% rate because itisn’t.
And it only gets worse. Holding on to that low 6% fixed-rate 30-year loan for 10 years results in paying an actual 43.48% interest rate. Keeping it for 7 years results in paying a staggering 68% interest rate to the lender. Keeping it for only 5 years results in the equivalent of a 102% rate. Holding it for 3 years yields an actual 182% rate and 1 year a 580% rate!
Unfortunately most of us only live in our homes for an average of five years so we all get Boooo Yahhhhed in interest don't we. The average homeowner is paying a 102% effective interest rate on their home....Unbelievable!
So are you getting shafted on your loan today? I know I am. That is why I am implementing the Money Merge Account software program into my loan. I have just become a rep for United First Financial that created the software that shows us how to cancel out the interest the banks are charging on your first loan by opening up a seperate HELOC account. In order to get more info on this software go to the United First Site and watch the 50 minute video. If you could save a couple hundred Gs in change would you watch a video? I sure did. BTW, the MMA account comes with a Guarantee. I never use that word in the investment business. If you have more questions about this solution to get us all out of the "interest paying rat race" give me a call. I will be holding seminars on this amazing software soon in Charleston and around the country soon. I am dedicated to it because I know the benefits and value it will add to people all over the country. More details to follow soon.
I almost forgot about the monthly real estate report. Well as Mr. Glaze from Sandlapper says "the numbers are the nunber are the numbers." Inventory keeps getting higher in most segments of the market. The real estate industry is hoping that spring will bail us out of a crappy market. No more excuses about bad weather if it doesn't Mr. Lareah from the NAR. Mortgage implosions, gyrating stock markets and less available buyers due to the Credit Crunch is certainly not going to help in my opinion. Time will tell.
Have a great month everyone!
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
If you own a home, have a mortgage, are invested in the stock market or possibly work in the business (real estate, finance/mortgage business, construction, banks or stock market) then you need to pay close attention to what is occuring with the lending industry right now. If you want my take on it and want to look at my ugly mug here is an interview I did with Erin Colgan from Live 5 News last week. She did a great job and I wish more of the interview could have been played but most of it ended up on the cutting room floor.
Live 5 News Interview
Ladies and gentlemen the bottom line is that this implosion in the lending industry will have an impact on the real estate business and the economy. I do not care if some clown on CNBC or other news program says it won't because they are simply of full of you know what. I do not write on these subjects to blow hot air around Charleston and to the subscribers in other parts of the US. I do it because I am involved in these industries and saw the writing on the wall a long time ago. I actually spoke about a lending bubble back in September of 2006 in a certain local newspaper and many of you know where that led me. I speak the truth and those who do not want to hear it either do not care, are ignorant or are in denial. If you want to track "The Lenders Not Girls Gone Wild" industry then I recommend you go the following website:
Implode-O-Meter
This website is amazing. Each week the number of lenders that go "kaput" just keeps growing. This site has only been active since Dec. 2006.
So what will the "Lenders Not Girls Gone Wild" saga bring us. One word......RISK. If you read the Market Meltdown article above the 300 lb gorilla in the market right now is China. Not only is their stock market VERY speculative and in bubble status but the Chinese government owns a bunch of US Treasuries and CDOs (Collaterilized Debt Obligations). If the Chinese get ticked off that Wall St. sold them a bag of crap in the form of CDOs there may be some repurcusssions. In an article on Bloomberg last week about CDO Funding by Jody Shenn all the big wirehouses such as Merrill, Lehman, Bear Stearns, Citigroup, Goldman Sachs and UBS refused to comment on their underwriting of billions of dollars of CDOs. Hmmmmm, I wonder why????? About $173 billion with a B worth of CDOs backed by subprime mortgage bonds and related derivatives wer created last year, according to JP Morgan. Uh Oh!!
So now if you want to insure your investment portfolio because of the increase in risk then your insurance just went up. Folks, the large institutional traders can not just start selling all their holdings. What many of them should be doing is protecting their downside by buying protective puts, which is a form of insurance in the investment world. The problem is that their is an index called the VIX that measures volatility on the stock market. Last week the VIX shot up like a rocket and now it costs much more to protect portfolios just like it costs us Charlestonians to buy insurance for our homes on the coast. When the risk gets high, the insurance goes up. Ever tried buying home insurance a week before a hurricane may hit the east coast? Ever see what happens to insurance rates months after a hurricane hits the east coast? Good luck.
So if you hear somebody from one of the big Wall St. firms saying the "Lenders Not Girls Gone Wild" blowup is no big deal then they probably work for someone who has their hand caught in the cookie jar right now. The sad thing about this necessary correction that is occuring is that the Goldmans and Merrills of the world will make much more money than they lose when the dust settles. The little guy who got snookered or simply purchased the wrong loan and is in a financial squeeze right now and possible foreclosure situation is the person that really pays the price.
When Erin from Channel 5 interviewed me she asked me what the solution was for this mess. I gave her a great answer but it got cut. I forgive you Erin. So I am going to give all of you the answer. The answer comes in the form of two words: Budget and MMA. We all need to do a better job budgeting our money in the Go Go society we live in but it is hard. When you combine the budgeting problem with the fact that most of us are paying nothing but interest on our home loans in a real estate market that has little or no appreciation right now how do we build equity in our homes. If you think the days of 10-20% annual appreciation are around the corner in real estate please tell me where. No calls about condos in Panama please.
In order to make any headway in your real estate investments over the next couple of years we all need to attack and pay down the principal on our homes. Interest only and even fixed rate loans are not going to cut it in a flat/stagnant market. Unfortunately, a fixed rate is really an adjustable rate if you just look at your ammortization schedule. Pure smoke and mirrors created by the banking industry folks. The Effective Rate calculation is a measure of the actual interest rate consumers pay on their home loans by factoring in the front-end loaded interest. Below is the calculation for determining the effective interest rate.
Using a financial calculator:
PV = equity built in a given time period
N = number of years being analyzed
PMT = monthly payments (as a negative sum)
CPT, then I/Y (Compute, then Interest/Year) = Actual Interest Rate
Go ahead and figure your own effective interest rate on your home. I dare you. I guarantee you that you will get very upset. Go ask your banker. I bet they will not even know what you are talking about. Many lenders are all telling us in many cases we simply just refinance our homes. This is simply not the case and in many situations will push us all further into the "never ending interest rate payment rat race."
If we use a $150,000 30 yr fixed rate loan at 6% here are the numbers:
If the loan is kept for 25 years, the consumer would wind up paying almost $270,000 over 25 years for $104,000 in loan equity. Entered into our formula, the actual rate is 9.43%. That’s right, 9.43% - not 6.0! And that’s based upon giving up the loan only 5 years early.
Now how much would the real rate be if that loan was kept for 20 years? The answer is 14.82%. What about for 15 years? The answer keeps rising. It’s a 24.16% interest rate. Paying $161,879 and with less than $44,000 of it going back to Principal shouldn’t seem like a 6% rate because itisn’t.
And it only gets worse. Holding on to that low 6% fixed-rate 30-year loan for 10 years results in paying an actual 43.48% interest rate. Keeping it for 7 years results in paying a staggering 68% interest rate to the lender. Keeping it for only 5 years results in the equivalent of a 102% rate. Holding it for 3 years yields an actual 182% rate and 1 year a 580% rate!
Unfortunately most of us only live in our homes for an average of five years so we all get Boooo Yahhhhed in interest don't we. The average homeowner is paying a 102% effective interest rate on their home....Unbelievable!
So are you getting shafted on your loan today? I know I am. That is why I am implementing the Money Merge Account software program into my loan. I have just become a rep for United First Financial that created the software that shows us how to cancel out the interest the banks are charging on your first loan by opening up a seperate HELOC account. In order to get more info on this software go to the United First Site and watch the 50 minute video. If you could save a couple hundred Gs in change would you watch a video? I sure did. BTW, the MMA account comes with a Guarantee. I never use that word in the investment business. If you have more questions about this solution to get us all out of the "interest paying rat race" give me a call. I will be holding seminars on this amazing software soon in Charleston and around the country soon. I am dedicated to it because I know the benefits and value it will add to people all over the country. More details to follow soon.
I almost forgot about the monthly real estate report. Well as Mr. Glaze from Sandlapper says "the numbers are the nunber are the numbers." Inventory keeps getting higher in most segments of the market. The real estate industry is hoping that spring will bail us out of a crappy market. No more excuses about bad weather if it doesn't Mr. Lareah from the NAR. Mortgage implosions, gyrating stock markets and less available buyers due to the Credit Crunch is certainly not going to help in my opinion. Time will tell.
Have a great month everyone!
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
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