Foreclosures Good for the Economy?

Strange as it may seem there actually might be a consumer spending benefit to the economy due to increasing defaults on home mortgages.

WHAT ??!!

Yes, the latest rise in consumer spending numbers is juiced by the simple fact that as more and more Americans stop paying on their mortgage…that frees up cash which finds it way into retail coffers.

YOU HAVE GOT TO BE JOKING??!!

No, strange but true. Check out this latest report from CNBC and Realty Trac.

Though someone might seem to think this is good news, think again, Foreclosures, NODs and Short Sales are INCREASING at a record pace which is continuing in the 3rd year since the burst of the bubble. Home values continue to suffer.

Let’s not forget that the single most important asset to the average American family is the “HOME”, which is being wasted. What this country needs is a paradigm shift back to values, and Government needs to do all it can to support “HOME VALUE” by creating JOBS and stimulating (or rewarding) HOME BUYERS.

The Federal Government Now Needs $1.9 T To Pay Its Bill!

If you look back at the focus of my blogs you will see that my agenda has always been to keep up with what is happening in our economy and how it is affecting the foreclosure market.  Let’s face it; the Market Advisors Investment Fund depends on the foreclosure market for its continued success.  In addition, I feel our readers need to know what’s happening in that market for their own real estate investing as well, whether that be through our Fund or strictly on their own.

So, in this blog I am reporting on a January 20th Associated Press article by Andrew Taylor about our record setting deficit!  And this folks is the end result of all the Wall Street bailouts, fiat money, unprecedented government spending and “meddling” that our leaders have been doing to “fix” our economy.  All of this during a recessionary period when tax revenues have been drastically cut.  Interesting philosophy – revenues are down so let’s spend more!  The bottom line is the $1.9 Trillion dollars being asked for right now (bringing the national debt up to $14.3 Trillion!!) won’t even carry us through the year!  Here’s what the White House has to say about this record breaking increase:  the increase “is critically important to make sure that financing of federal government operations can continue without interruption and that the creditworthiness of the United States is not called into question.”

Believe me the credit worthiness of the US is already being called into question.  Some how, some way, we are just going to have to eventually “bit the bullet” and let the market take over.  Stop with the programs!  It will hurt but the only way to get rid of all of this over leveraged debt is to let the market move it through the system.  Yes, a lot of Wall Street “icons” will suffer and many will fold, along with a lot of banks, but it will force the “pig through the python” a lot faster then with all of this government manipulation.

These deficits in spending will not go away and we, the taxpayers, will have to pay for them.  So we need to stop the spiral.  It’s not a party issue – it’s a freedom issue.  How many more years of record deficit spending can we stand?  I say none – what do you think?

Paul Davis, Market Advisors, LLC

OUTLOOK 2010

I wish everyone a very happy and successful New Year. I am excited about the potential for some very juicy acquisition opportunities coming our way in the residential real estate markets.

Here are my top 3 factors contributing to the BUY opportunity in 2010.

1. Short Sales will become even more opportunistic with the prospects of actually closing deals better than ever as Banks choose the path of a kinder, gentler approach with their troubled borrowers.
2. (2) major contributing factors to increased foreclosure activity will be Unemployment and a large volume of  “reset” or “recast” activity on existing ARM and Pay Option mortgages.
3. Feds squeezing banks by upping the ante on capital reserves will push more REO inventory out onto the marketplace.

Our portfolio for Market Advisors Real Estate Fund LP  is anticipating acquisitions with upwards of 18% cash on cash ROI. For January I am releasing only 20 units to Investors at $25,000 each. These won’t last long, reserve yours today. You may contact me by e-mail john@mymarketadvisors.com

TARP Money is Being Paid Back Early!

First it was Bank of America and then both Citi Bank and Well’s jumped onto the band wagon.  Now the latest among the list of TARP repayment companies is GM (yes, that’s Government Motors!).  Does this make any of you wonder what’s really going on here.  From my perspective this story has the smell of fish!  Where will these firms get that much money?  It will not likely come from eager investors.  Is it possible that the Fed is “buying” the new securities with taxpayers’ money?  If so, it is a bookkeeping trick to take the heat off Congress and the banks. You see the legislators want all this money for new spending projects instead of returning it to taxpayers.

This week I came across and excellent article by Kevin Hall in the Miami Herald entitles “GM Joins Rush to Repay Bailout Funds”.  Hall does a nice job of summarizing what all of these repayments mean and believe me it doesn’t mean that banks will now be lending more money.  In fact Hall points out that it probably means they will actually be lending less.  Here is an except from this article – it should give you pause to think:

So if companies are repaying TARP money, does it mean all is well and that lending will resume soon?

“I don’t view the TARP repayment as evidence that banks are healthier and now can do it,” said Vincent Reinhart, a former top economist at the Federal Reserve. “It’s rather that banks have an incentive to do it now because they see the stigma associated as even more significant than they had thought previously.”

Banks are still under severe stress, he said.

And what about those “toxic Assets” that the TARP Funds were supposed to resolve?  Well as Hall explains, they are still on the banks books but because of a relaxation of accounting rules (can we change the accounting rules in our businesses?) banks can now value those assets at their “expected future value” (what ever value they want!!) so they don’t have to book any loss based on current value.  This makes their balance sheets look a lot better and guess what – they are using their balance sheets, in part, to pay off this TARP money.  Are they healthier for it…….it’s not likely.  Stay tuned because we are going to keep following this process to see just how much it ends up helping (or hurting) the average citizen.

Paul Davis, Market Advisors LLC

Holiday Cheer ?

I always enjoy keeping in touch with Diana Olick’s Blog (CNBC Realty Check). This time Diana offers a right-on perspective of Big Bank foreclosure activity for the Holidays and 1st Qtr 2010.

“Beware Holiday Foreclosure Moratoria”

Check it out here.

Do you know who Meredith Whitney is? You should…

Meredith Whitney is the CEO Of Meredith Whitney Advisory Group, and is considered “The Analyst” to call the banking debacle before the meltdown in September 2008. If you don’t know her, you should, and take stock in her opinion and analysis of the direction of our nation’s banking system.

Check out her latest comments here.

I applaud Meredith, her astute and forthright analysis that the current Big Bank system and its business behavior is counter productive to a meaningful recovery. Just more evidence that 2010 will be “the best year ever” for buying real estate. After all one should be buying low and selling high…right?

If You Think the Housing Meltdown Was Bad…………

I recently read an article by Doug Hornig entitled “If You Thought the Housing Meltdown Was Bad……wait until you see what’s in the cards for commercial real estate”.  Now I’ve written about the pending commercial foreclosure crisis before but I’ll have to admit, I’ve been so caught up in the residential crisis and all of its permutations that I kind of let the commercial issue slip to the back of my mind.  So, Doug’s article definitely “snapped me to attention” again.  The breadth and depth of our current economic “upheaval” is more then just a bit too complicated for most of us to understand.  But, I think we can all agree that the mortgage lending industry is at the heart of the problem.  The failures in that market segment have extended their tentacles out and have touched every other segment of our economy – impacting building, manufacturing, professional services, consumerism, and ………….

According to Hornig, the next big problem is commercial real estate.  Here are the opening couple of lines in his article: “That’s right, the next train wreck will be in commercial real estate. Couldn’t be worse than last year’s residential market crash? That remains to be seen. But it’s coming soon, probably as early as the second quarter of next year, and there’s nothing that can prevent it.” Hornig derives a lot of his information from one of the most knowledgeable commercial real estate professionals in the industry, Andy Miller.

Miller, of the Miller Fishman Group of Denver, reports that two years ago commercial real estate carried a value of about $6.5 Trillion and that real estate was supported by about $3.3 Trillion in loans.  Well today the loan amount hasn’t changed much but the value has been estimated to be about half of what it was two years ago!  Oops!  The commercial market is “under water”.  That means writing down about half to two-thirds of these loans.  Now if the banks were to have to take that hit all at once, then, according to Miller, “there won’t be any banks”.

Adding to the problem is the fact that, like residential loans, these commercial loans were also bundled into exotic financial vehicles, called commercial mortgage-backed securities, which were sold and resold on Wall Street for great profits.  And who do you think purchased most of these exotic securities?  You guessed it – the banks!

So, here is the situation as it is described by Miller:”What happens to a property when its value drops way below the loan, a seller can’t get enough money to get out, a buyer can’t raise enough money to get in, and the bank can’t afford to foreclose? Simple. It just sits there, carried along on the bank’s books at some inflated “mark to fantasy” price that makes the institution’s balance sheet look passable.”

The bottom line is our financial economy is in for another major hit that –in turn – will effect all of us.  As this commercial crisis escalates the banks will do the same thing they did last year: “run to the government palms outstretched”.  Who knows how long it will take us to recover from this new set of pressures.  One thing is for sure, you can expect real estate prices to continue to drop for the near future.  Check out this article and see what you think.

Paul Davis, Market Advisors

Real Estate Speculators Getting A Bum Rap?

During a Market Advisors live seminar last night an interesting topic was discussed. Are speculators (flip investors) getting a bum rap as more and more lending constraints are impairing the ability to flip properties effectively…

The short answer YES!

Speculators contribute to the process of “working our distressed inventory” and also contribute to the cause of “increasing property values”. There should be a concerted effort on the part of Big Banking to assist all types of Buyers, including Investors, to bring distressed properties back to livable condition, as well as, moving these non-performing assets off the balance sheet of the big banks.

Constraining Buyers of any type or investment style is just plain stupid, and goes against “free market” principals.

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.