Over 10.5 Millions U.S. Households are Underwater!

About 23% of U.S homeowners currently owe more on their mortgages then their homes are worth!  That’s the opening statement in a recent Wall Street Journal article by Ruth Simon and James R. Hagerty.  Here is some more eye opening news from this article……recent data from First American CoreLogic of Santa Ana, California shows that over 5.3 million U.S. households are tied to mortgages that are at least 20% higher then the homes current value!

In recent blogs I have addressed this issue and I have emphasized that we can’t ignore the impact of the “Shadow Inventory” and this new wave of foreclosures on future real estate prices.  Well, here is an excerpt from this article that goes right along with what we at Market Advisors have been saying all along:

“These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn’t expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.”

Another key point to consider is that the predicted growth in foreclosures in coming months will not  be only the result of unemployment.  As Simon and Hagerty point out, about 588,000 foreclosures last year were from people that could afford to pay but had severe negative equity.  This is a growing trend that will continue to add homes to the REO pipeline.

So, as we say at Market Advisors, continue to search for sharp price imbalances in what ever market you are focused on and don’t let this historically unique opportunity to invest in real estate pass you by.

Paul Davis, Market Advisors

Loan Modifications Tell the Tale….

Big Banks reporting “re-default rates” on existing loan modifications offer surprising insight into the health of the real estate market. Just look at Citibank’s numbers released today…

% of modified loans at least 60 days past due?

Over 8% for loans modified as of June 2009 (Only 3 months)

Over 30% for loans modified as of September 2008 (Only 12 months)

See the trend?

Loans have to be current for the first 3 months or be dropped from the program…so as the time passes 3 to 6 to 12 months the amount of defaults grows.

One culprit…unemployment. But, unemployment should not shoulder all the blame. ( I mean even with a 17% shadow unemployment rate it doesn’t add up that Citi would have over 30% of their loan mod portfolio in default after 12 months.)

The other culprit…”perceived loss of value” which means homeowners (borrowers) feel that their home is just not worth making a mortgage payment on, and therefore would rather pay nothing and eventually walk away.

This attitude towards value will feed this foreclosure market for the next 2 years, until employment picks up and then more “Buyers” will return to the market. This is why we at Market Advisors are buying real estate at these low foreclosure prices today and holding our portfolio for the next 5 to 7 years.

Read about Citibanks re-default report from Diana Glick of CNBC.

Existing Home Sales Hit a 2-1/2 Year High!

Many of you probably heard this news today and it’s definitely good news.  But we have to be cautious about reading too much into it.  I first read about this new 2-1/2 year high in existing home sales in a Reuters article by Lucia Mutikani (Nov. 23, 2009).  There are several facts in this article that are important to take note of.  One is that much of this increase is being attributed to people rushing to take advantage of the popular tax credits that have just been extended into next year.  Another is that lower mortgage rates and lower home prices are key factors in this rush to buy.  Also housing construction actually contributed to our economy in the third quarter for the first time since 2005.  In my opinion, all of these are good things to hear!

However, nowhere in this article did I see any mention of the huge “shadow inventory” that I have talked about in previous blogs, and what about the Alt-A / Option ARM foreclosures that I wrote about last week?  We also have to keep in mind that almost all of this purchasing activity is coming from first time home buyers and investors.  These two groups alone can’t be expected to absorb this entire future inventory as well.

Granted, this jump in existing home sales was a sizable jump but can we really say that existing home sales will continue to grow?  According to Lawrence Yun, the National Association of Realtors chief economist, we can.  Here is his quote: “Existing home sales have already bottomed. Home prices are almost there. We are seeing less of a decline in house values.”  I know he is the economist and he’s probably looking at a lot more data then I am, but I think existing home sales will take another dip when this “shadow inventory” hits the market.  And, be prepared – home prices haven’t bottomed out yet.  Only time and the size of this future inventory will tell us when we are there!  Take a look at this Reuters article and see what you think.

Paul Davis, Market Advisors LLC

Record Unemployment and the Alt-A / Option ARM Reset “Perfect Storm”

Here’s something to think about – if the broader measure of unemployment now stands at over 17% (and climbing) and if there are truly millions of Alt-A and Option ARM loans scheduled to re-cast in the next 2 years – what do you think will happen to our housing market when these two elements of our economy begin to collide in 2010?  It kind of makes you shudder a bit, doesn’t it?

I don’t think we can turn our backs on these facts and we can’t keep drinking the “cool-aid” being fed to us by the mass media and our government telling us that we are in recovery!  I came across two excellent articles this week that address this “collision” very realistically.

One article from the New York Times online, “Broader Measure of US Unemployment Stands at 17.5%” by David Leonhardt, reports that even though the October national unemployment figure is reported to be 10.2%, if we take into consideration; people who are recently unemployed; add to that people who have been out of work for over six months and have stopped looking; include those who have only been able to find part-time work, then the number rises to 17.5% – a new recorded high.  The previous recorded high for this “broader” measure was 17.1% back in December, 1982.

These are important numbers because I think we can all agree that no matter how high the DOW goes (it hit over 10,400 today!) until we see a sustained decrease in unemployment – we really can’t expect to see true economic recovery.  David also reports in his article that historically, in past economic crisis, it took about five years for unemployment numbers to maintain a sustained reduction.  That means we still have 2 years to go!  Of course most economists today are predicting that turn-around to start in mid to late 2010.  Either way, we still have a ways to go.

Now what does all of this have to do with the real estate market and foreclosures?  Well, as Bill Bonner points out in his article, “The Second Wave of Foreclosures Has, Perhaps, Finally Begun”, we are on a collision course with rising unemployment and a huge wave of Alt-A and Option ARM loans that are set to “re-cast” in 2010 and 2011.  So, here is what Bill has to say about this new “perfect storm”.

“Rising unemployment and a new variety of mortgage resets continued to gradually shift the nation’s foreclosure epicenters in the third quarter away from the hot spots of the last two years and toward some metro areas that had avoided the brunt of the first foreclosure wave,” said James J. Saccacio, chief executive officer of RealtyTrac. “While toxic subprime mortgages drove much of that first wave of foreclosures, high unemployment and exotic Alt-A and Option ARMs are spreading the foreclosure flood to more metro areas in 2009”.

What do you think will happen when all of this new foreclosure inventory hits the market?  And what is going to happen with the huge back-log of “shadow inventory” that we know is being held back by the banks right now?  Our guess at Market Advisors is that it is all going to start hitting the market in 2010.  So get ready for some fantastic opportunities and as Bill quotes at the end of his article – “we’ll soon see real estate prices take another tumble” – a bit of an understatement in our opinion.

Paul Davis, Market Advisors

Building Up the “War Chest” for 2010

Boy oh Boy!I am like a kid in the proverbial candy store. There is going to be some super deals coming up in the first half of 2010 as more REO inventory literally spills onto the market. 

At Market Advisors we are building cash into our fund, Market Advisors Real Estate Fund LP to go shopping during the winter and spring of 2010.

How do I know this?

• Failed Loan Modifications
• Unemployment will continue to take its toll
• The  “Hold” strategies of Banks will begin to fail
• Home values will fall in first quarter 2010

The first half of 2010 will be a banner opportunity to make portfolio acquisitions!

Affordability is Through the Roof!

Today I want to take some time to talk about a topic that I think is important for us all to understand and learn about.  How many of you have recently heard this statement, or something like it: affordability is through the roof’?   I know I have and I think you will all agree with me that it is true, but we need to keep the “affordability factor” of today’s real estate market in perspective.  Mark Hansen addresses this issue head-on in his most recent blog entitled: “Affordability – Housing’s Red Herring”.  

As Mark points out, in those states that were most hard hit by the real estate “bubble”, like California, the affordability index is an important validation metric for speculators.  But, they are comparing housing prices today with pricing during the peak of the “bubble” years (2003 – 2007).  Yes, prices are down on average about 50% from the peak in 2007 (a good thing for speculators) but are they truly more affordable for the average home buy today?  I would contend not necessarily.

Here’s what Mark has to say about this point:  “From 2003-2007 we saw mortgage and housing risk-taking and leverage conditions that never existed before and won’t for a long time. Therefore, even after an outright collapse in CA house prices, affordability for like-priced properties today is not as favorable as it was during the bubble years when loans were easy and leverage extreme.”

Mark also points out that it’s important to realize that even though prices are down, the available pool of buyers has shrunk considerably.  Again it gets back to household affordability and the ability in today’s market for owner occupied buyers to finance their purchase.  Buy tightening up qualification requirements significantly and eliminating exotic loan programs we have reduced the number of potential buyers dramatically.  So, no matter how low the prices are once you have tapped the pool of first-time home buyers and investors, who is left?

Throughout history and especially from 2000 on, the “move-up” home buyer controlled the market.  Where are those people today?  They are sitting on property with negative equity and they can’t sell in today’s market in order to move up even if they could qualify.

So as you can see, affordability being “through the roof” isn’t necessarily going to drive the market back into “good health” as many analysts and economist would like you to think.  Of course for cash buyers like the Market Advisors Investment Fund, affordability in today’s market is a good thing and we will continue to capitalize on price imbalances as long as they exist.

Take a look at Mark’s blog and see if you don’t agree.  We believe there is still a lot of adjustment that will have to happen before we see stabilization in this real estate market.

Paul Davis, Market Advisors LLC

Why are we not maximizing our retirement portfolios?

I came across this article addressing the facts that most working Americans, especially ages 50 plus, have still not maximized their retirement savings to a level where they can simply “retire”.

In fact read the article here, before I go on.

The above mentioned article was derived from a survey Wells Fargo conducted targeting the health of retirement portfolios for workers ages 50-59. The results are staggering and I would hope for those of you who still feel “underfunded” to achieve a successful retirement…sobering.

Blame poor planning, late to the game, market fluctuations, or certainly bad investments such as mutual funds, ETF’s, etc. Regardless, the result is a large population of our country entering their “60s” with a definite need to continue working well into their 70s and beyond. I shudder to think about the economics of sustaining and providing, as an employer, for a significant workforce that is aged 60 and above.

At MyMarketAdvisors we strive to educate our clients, subscribers, and friends, to take ACTION NOW! Take control of your retirement portfolio and maximize its potential so you can ENJOY a real and sustained retirement on your own terms. BELIEVE IT!

So, What Are The Dangerous Side Effects of Ultra-Easy Money?

Every once in  while you come across an article that really does a great job of summarizing in a clear and understandable way the incredible complexity of our global financial crisis.   I think Gary Dorsch in his most recent article published in www.SafeHaven.com does a great job of doing just that.  He brings together many elements of our world-wide economy with a lot of “cause and effect” descriptions to show the “Dangerous Side Effects of Ultra-Easy Money” .

Here is Gary’s opening statement just to give you a feel for the tone of his article:  “Operating under the elixir of ultra-low interest rates, and flush with trillions of fiat currency at their disposal, courtesy of the world’s top-20 central banks, hedge funds and banking Oligarchs are once again making risky and daring bets in commodities, emerging markets, junk bonds, and blue-chip stocks, defying gravity with trades that would have been un-thinkable just six-months ago.”

I love his use of the word “Oligarchs” (Oligarchy: Government in which all power is vested in a few persons or in a dominant class or clique).  It’s probably a pretty apt description of our current banking system!  I also like the way, through the use of excellent graphs, that Gary is able to tie together so many different key factors that are all impacting our economic system (the consumer confidence index, the Dow Industrials, interest rate trends, Gold prices, unemployment, etc.).

Here is Gary’s “Big Picture” view of what is happening:  “In order to engineer a 180-degree turnaround in trader psychology, from the chronic fear of meltdowns last year, to the opposite side of the spectrum – the euphoric illusions of V-shaped recoveries, the “Group-of-20″ have committed $12-trillion of taxpayer money, equivalent to a fifth of the entire globe’s annual economic output. The G-20’s largesse has been used to fund capital injections into banks, soaking-up toxic assets, guaranteeing financial company debt, and flooding the world credit and stock markets with ultra-cheap liquidity.”

You’ll have to read Gary’s article to see how he believes all of these various government “bail-out” strategies are impacting our current economy and why he believes we are still in for a rough ride ahead before we start seeing any true recovery.

Paul Davis, Market Advisors