"The most valuable truths are the ones most people don't believe. They're like undervalued stocks. If you start with them, you'll have the whole field to yourself. So when you find an idea you know is good but most people disagree with, you should not merely ignore their objections, but push aggressively in that direction." Paul Graham
He makes a lot of assumptions in this analysis, but if he’s right about the increasing number of foreclosures and the slim number of non-REO sales taking place, the California housing market will continue to be a scary place for quite some time.
Take a look at the debate going on at his Web site if you want to see other people’s perspectives on his video.
We are now undergoing a self-reinforcing cycle of default, foreclosure, home price declines, and mortgage credit contraction, the likes of which we have not experienced since the 1930s. The annual number of U.S. foreclosures nearly doubled between 2005 and 2007 to more than 1.5 million, and some private forecasts project 2 million foreclosures or more during 2008 if action is not taken now. Beyond their immediate costs, which include hundreds of thousands of displaced families and tens of billions of dollars in financial losses, these defaults and foreclosures are now resulting in wider problems for our communities and our economy.
When this happened in the early 1990s, the FDIC helped shut down banks and liquidate their assets. Now it says we’re facing a crisis that’s even worse. If bank failures begin again in earnest, the FDIC will have a lot of work on its hands.
Home prices in ten large U.S. cities fell on average by 13.6 percent in the year ending in February, and home price declines of more than 15 percent were registered in major metropolitan areas of California, Nevada, Arizona, Florida, and Michigan. A large inventory of unsold homes points to a protracted oversupply of homes. Of the net 6.6 million homes added to the U.S. housing stock since 2004, more than half are currently vacant. The problem is made worse by the difficulty of securitizing mortgage debt outside of the government-sponsored enterprises. The data show that private MBS issuance in the fourth quarter of 2007 was down 80 percent from the same quarter the year before, and originations of nonconforming loans financed by private mortgage backed securities (MBS) declined by similar amounts.
More than half of the unsold homes are vacant. That’s 3.3 million empty houses. Empty houses are eventually attacked by weather, vandals, and squatters. What will happen to property values then?
Because of the high costs associated with foreclosure (which can range up to 40 percent of the value of the property), it is in the interest of both borrowers and lenders to avoid this remedy whenever possible. But the progress of loan modifications to date has been too slow. A recent study indicates that seven out of ten seriously delinquent borrowers are not yet in any loss mitigation process, and that new loans are becoming delinquent faster than the servicers can modify them on their own.
Loan modifications are going to be an important part of bringing the housing market to a recovery point. I don’t think it’s the government’s job to make sure that these modifications take place. Rather, lenders have every reason to preserve themselves financially by increasing the efficiency of their loss mitigation efforts and by selling their problem loans to investors who are skilled at dealing with delinquent loans.
Subsidizing lenders who are unable to do this simply subsidizes their irresponsible lending choices and business practices. Subsidizing homeowners who put nothing down and are now in distress has the effect of penalizing homeowners who used substantial down payments to buy their properties but have lost most or all of their equity. (See Richard Martens’ post on homeowner bailouts.)
Investors are already responding to lenders’ needs by doing short sales, buying REOs, and purchasing pools of unwanted mortgage paper. Profits exist where lenders need help, and the strength of that need is going to increase through the coming recession.
Fannie Mae has reported a loss of more than $2 billion in the first quarter and expects severe weakness in the housing market throughout the rest of the year….
The government has increasingly looked to Fannie Mae to restore stability in the market by buying up mortgages and selling them as securities. Three-quarters of mortgage-backed securities are issued by Fannie Mae and its smaller sibling, Freddie Mac.
To raise capital, the company said it would cut its dividend and offer $4 billion in an immediate share offering. It intends to raise another $2 billion later in the year.
The government is relying on Fannie Mae to reduce the problems we’re facing on the mortgage market. In order to help Fannie Mae do this, investors will have to buy Fannie Mae’s stock.
The company (1) reported a loss of more than $2 billion last quarter, (2) cut dividends, and (3) is planning to package up and sell more loans in a troubled secondary market. In addition, the company is (4) lowering its down payment standard to 3 percent in areas with falling home prices.
(5) Fannie Mae’s stock is down 25 percent this year, and (6) its own chief executive doesn’t think the U.S. housing market will recover until 2010.
If you were considering purchasing its stock, what would you do?
Some people say it’s impossible to make predictions about the economy.
I disagree.
I moved to Oklahoma City in September 2006 expecting its housing market to remain stable through the coming recession. The market is beginning to confirm that expectation.
Forbes recently made a list of America’s top ten recession-proof cities (out of the fifty largest cities).
Oklahoma City is #1 on that list.
Nationally, home prices are falling, unemployment is on the rise and the economy is expected to grow slowly–or even contract–in the first half of the year.
But some cities are doing just fine.
Take Oklahoma City, Okla. With falling unemployment, one of the country’s strongest housing markets, and solid growth in agriculture, energy and manufacturing, it looks best positioned among the nation’s largest metropolitan areas to ride out the current crisis.
Oklahoma City, Okla.
Median home price: +8.2%
Unemployment: 3.5% (from 4.7% in February 2007)
Key growth: Leisure and hospitality, +6%; construction +11.5% from 2007
Did someone say something about a recession? With falling unemployment, one of the strongest housing markets in the country, and strong growth in agriculture, energy and manufacturing, Oklahoma City might not have received the recession memo, and it looks best positioned of the nation’s metropolitan areas to ride out the current crisis. Booming valuations of Oklahoma City’s largest companies, like Devon Energy and Chesapeake Energy, suggest the energy sector is the right place to be.
The price of oil may fall in a recession as it has in the past. That would hurt Oklahoma City’s housing market. Despite this, our cost of living is so low that housing doesn’t have much room to fall before bottoming out.
We all make predictions about the economy, whether we realize it or not. Someone who chooses to live in San Jose, CA is inadvertently betting that housing prices won’t drop there - or he is willing to accept whatever decline occurs. His neighbor, who moves to Oklahoma City or Houston, is also making a bet. It’s simply a more conscious one.
Last week, we went to a seminar hosted by the Oklahoma City Real Estate Investors’ Association. Justin Gentry, a local real estate investor, showed us a strategy that will allow him to eventually collect an income of a million dollars a year.
Here is the basic outline of his strategy:
Buy a house at a large discount that needs minimal repairs to be put in rentable condition. The gross rent per month should be at least 2% of the purchase price of the house.
Fix the house up and rent it out.
Borrow against the house at 50-65% LTV to pull all of the acquisition and repair expenses back out of the house. Small, local banks will lend based the overall cash flow of Justin’s housing portfolio.
Use the money to buy the next house. Do this once a week.
Use the rents to pay the loans down as quickly as possible.
If Justin continues buying one house per week, he’ll have two hundred houses after four years. Once they’re paid off, each house will throw off about $5000/year in net cash flow. For two hundred houses, that’s a total income of a million dollars a year.
That income will rise each year as rents increase. If Justin ever needs to, he can borrow against his free-and-clear homes and have quick access to several million dollars of cash.
You can do this too. One of the challenges will be finding one house a week to buy that will give you enough cash flow to follow Justin’s plan.
There are ways to do this in many areas of the country. Stay tuned as we continue to post profit-generating strategies that take advantage of a buyer’s market.
One of the members of our team ran across this article from the Bank Wage-Hour and Personnel Report (No. 7, Vol. LVIII). My emphases are in bold.
The FDIC is warning banks to prepare for the increased workload that will come as more and more loans default. It’s advising banks to bring on the staff necessary to work these problems out with the borrowers.
The banking crisis is not going away. Don’t be caught off guard.
Shore Up Loan Workout Staff, FDIC Advises
April 15, 2008
The Federal Deposit Insurance Corporation (FDIC) is urging insured financial institutions with significant commercial real estate (CRE) concentrations, including concentrations of construction and development (C&D) loans, to immediately undertake a number of risk management actions. Such actions include bolstering the institution’s loan workout infrastructure and staffing to handle the increased workload associated with problem loans….
According to the FDIC, institutions with CRE and/or C&D concentrations should ensure that they have sufficient staff with the appropriate skill sets to properly manage an increase in problem loans and workouts.
Staffing decisions may involve hiring, making internal staffing changes, and training. Human resources strategists may also entail entering into arrangements with third-party experts on a temporary outsourcing basis. The FDIC suggests that management should develop a ready network of legal, appraisal, real estate brokerage, and property management professionals to handle additional prospective workouts.
If your institution’s management is currently adopting risk management strategies to contain the damage from subprime loan losses and the associated financial repercussions, you should insist on a place at the planning table. No risk management strategy can be successful without adequate staff who are appropriately trained to handle the potential wave of problem loans.
The bank lost seven billion euros due to its positions in the U.S. real estate sector.
UBS is selling 14 billion euros of its subprime mortgages for 9.7 billion. That’s 69% of face value. Black Rock, the U.S. investment fund buying the loans, is going to make a killing.
The United States is like a concrete block tied to the legs of a hapless swimmer. We’re dragging the world with us, and there’s only one direction we can go.
UBS is to cut 5,500 jobs, 7% of the people who work there, and this comes on top of 1,500 previous layoffs. The Swiss bank is Europe’s biggest casualty of the subprime mortgage debacle, and most of the job cuts involve its US and UK investment banking sectors.
UBS reported a first-quarter loss of just over seven billion euros -…
We just got back from Vena Jones-Cox’s Foreclosure Summit. The Summit provided us with a unique opportunity to network with real estate investors in the Indianapolis area. Here are highlights of a select few among many of the seminars from the four-day conference:
Donna Bauer, otherwise known as The NoteBuyer (Inc.), taught a full-day seminar on buying and profiting from real estate backed notes. By special request from last year’s Foreclosure Summit registrants, she taught a special full-day seminar.
Steve Dillon, a former experienced loss mitigation trainer at EMC Mortgage, spoke for two sessions on negotiating successful short sales.
Don DeRosa, a real estate investor and nationally known teacher who presented in Oklahoma City last year, presented a seminar on negotiation techniques and a seminar on buying houses subject to the existing financing.
There was a feel of excitement in the air throughout the entire conference.
Vena Jones-Cox and Lucy Brenton gave us some interesting insights about the mortgage market. They explained why the opportunities for distressed property investments are only going to get better and better.
I just got back from a Mastermind Group meeting sponsored by Millionaire Possibilities, a real estate investors’ club in Oklahoma City.
If you’re considering investing in real estate, it’s a good idea to attend the investor club meetings in your area. The more experienced members of these groups are in touch with the market. They can help you develop a business strategy, even a slower market like this one.
The clubs are also a good way to get leads on properties, find contractors, and network with other investors.
Here’s a quick summary of how the clubs in the Oklahoma City area have helped us in the last month:
We received leads on two newly built, overleveraged houses in Oklahoma City through members of the club. Since the homeowners have missed payments and owe more than their houses are worth, we’re doing short sales on both.
One of our short sales was approved in Edmond, OK. We’re listing it on the MLS through a club member.
We bought a house in Edmond by taking over the existing loan and did three weeks of rehab work using contractors from the clubs. The first person who walked through the finished house put the house under contract and has agreed to close by May 1.
Three members of the club called me to ask for advice about whether to buy houses they had put under contract. After hearing how much work the houses needed, I advised them to consider whether they’d be able to make any money on those houses after paying for rehab work, interest on their loans, Realtor commissions, and closing costs. They decided to use the inspection contingencies in their contracts and will not be buying those houses.
Use the links below to find real estate clubs in your own area. After you visit, post a comment here and let us know what the meetings in your area are like.
We just got back from Vena Jones-Cox’s 
