Will the Real Estate Investor Please Stand Up?

After the housing market crashed, we are now in a period of pointing fingers in order to assign blame. Was it the homeowner’s fault for overstretching his / her abilities? Was it the mortgage banker who made loans that he / she shouldn’t have? Was it the guy on Wall St. who repackaged the bad loans into derivatives that no one could understand? Or was it the investor who rushed into areas like Florida, Nevada and California, flipping houses, banking on price appreciation going up and up, while running up the prices and making real estate unaffordable for homeowners and other investors, and thus forcing them into these exotic loans? Methinks that all of these are the root cause. We all collectively did our part. And some are guiltier than others. But we needed to educated ourselves a bit more, and anticipate these results, including the homeowner.

What concerns me is that our media, which is always overzealous to skew public opinion, places the blame on some parties more than others. And lawmakers have to respond, as their constituents beat themselves into a frenzy. Yet the Wall Street guys get a bailout package, and homeowners don’t get a whole lot of anything. And some states are now passing laws that make it illegal for investors to rescue homeowners in default. For example, New Jersey is looking to pass such a law now. According to the proposed law, it is illegal for anyone other than a nonprofit organization to counsel a homeowner and negotiate for a short sale with a bank. This is just stupid. Homeowners need all the help they can get, in order to get up from under these loans and resetting ARMs. Banks are overwelmed with shortsales and other workouts, and things are slipping through the cracks. Investors who are skilled with foreclosures and short sales are in a unique position to help the homeowner and the bank to deal with this overwhelming situation. Not all investors are honorable, of course. While many investors craft a true win-win all around, some “investors” are true scammers (I put “investors” in quotations, because they are not investing, but rather conning people out of their mone). And now these bad apples, who are in a minority, are screwing it up for everyone els, because for an inexperienced homeowner, it’s hard to tell if the investor is a good guy or a bad one.

But the investors who will survive the real estate calamity of 2008-2009 are a creative bunch. They are setting up non-profits or aligning themselves with non-profits, to help them carry out these deals. Good for them! If an investor can craft a deal that gets the homeowner out of foreclosure without messing up their credit, while keeping the bank from having to take back the house that they don’t know what to do with, there is no reason why this investor shouldn’t profit. Remember, you will always get paid in accordance with the value that you produce.

It is difficult to find any humor in the subprime industry’s collapse. However, this cute cartoon slideshow “Subprime Primer” does inject some humor into the otherwise grim situation. I am not 100% of the source that sent this to me, it ended up in my bookmarks, and I only just got around to reviewing it.

If you would like to almost add some levity to the situation, check it out! http://www.slideshare.net/guesta9d12e/subprime-primer-277484/

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There has been quite a bit written in the blogosphere about the “bailout” of our crumbling financial system. I don’t much feel like rehashing what’s been written, but I would like to state my opinion and cite some of my favorite blogposts on the topic, as I have had some time to ponder the issues. And finally, I would like to explore how this affects the real estate market and real estate investing.

First off, when I first heard about the proposed “bailout”, my gut reaction was that a bailout of any sort goes against the notions of free markets and capitalism. You mess up, you pay the price. You do well, you get rewarded. Isn’t that why immigrants come to this country? It sure is why my parents and I came here when I was 14: the opportunity to make something of yourself and your life, regardless of your connections to the KGB. What kind of message are we sending to corporations and other entities? It’s OK to fail. Your job is safe, the taxpayer will bail you out. Corporate greed is OK too.

Then I thought about it, and perhaps some kind of action plan is necessary (well, it was necessary a while ago, but our leaders were too busy telling us that the fundamentals are strong). What we need is not a bailout. Something different. Not sure what, yet. If the financial markets keep spiraling down into this vortex, the impact on the country’s economic health could be catastrophic. But how catastrophic? Would it be more damaging than the $700 billion + bailout is to the taxpayer’s wallet? It’s hard to say. But what if this bailout still doesn’t solve the problem? That’s entirely possible too. To ensure that it works, there needs to be a stronger plan of action vs. a fuzzy “blank check” approach. I find Robert Reich’s blogpost the most illuminating writing on the topic in terms of a strong action plan and concrete rules and oversights to be put in place.

Finally, Paulson’s connections to the Street make the whole thing appear just a bit too fishy for my taste. And the Section 8 is just the last straw. It reads exactly like this:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Did that make anyone else’s hairs on the back of the neck stand up? Eeeekkk! We are headed towards something very very bad in this country. We are allowing an ex-Goldman guy to have unilateral control (without being reviewed by a court of law!!) to make decisions on the Wall St. bailout. That would make it very easy to cover stuff up, wouldn’t it? Hmmm…. And no one can investigate…

When did it become OK for the American public to give up all control of their lives and decision making to folks who supposedly should be acting in the interests of the public, but have way too much conflict of interest to actually do so? How did we allow ourselves to be scared into Patriot Act and the Iraq war? And now we are being scared into passing this piece of steaming shiitake? Are we still a democracy? Sure doesn’t feel like it. Feels like we are headed towards a dictatorship, a military state. I am exceedingly concerned for this country and the ease with which the American Dream and Democracy are being annihilated in front of our very own eyes. Our founding fathers must be rolling over in their graves.

So… I must somehow bring this back to real estate and real estate investing. How does this affect real estate investing? Well, in the same way as this whole mess has been affecting real estate for the past year or so (this mess started in real estate, if you remember). It is close to impossible to get a mortgage for an investor (and now, as of Dec 1, Fannie won’t allow to finance more than 4 properties per person, including primary residence). So forget about conventional channels. If you want to take advantage of good deals, you must learn and implement creative real estate investing (seller financing, subject-to, private lending, etc.)

Everyone is cautious, however; homeowners and investors are waiting for the market to hit bottom before moving. And now that the sky is falling, and we seem to be writing a blank check signed by the American Taxpayer, Joe Investor who is hoping to work the foreclosure market and get some cashflow properties is a bit more afraid of his future and is a bit more hesitant to act. Investing for cashflow, if you follow creative real estate strategies, remains a viable strategy. As far as other exit strategies, it’s a bit more dicey…  Jim Homeowner to whom Joe Investor hopes to sell his rehab is also more hesitant; he is more concerned about keeping his job than straddling himself with a new liability in the form of a new house. And now that Jim Homeowner is funding a bailout of epic proportions, well, there goes his saved up 20%+ downpayment that he now needs to buy a house.

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Happy Friday!

Perusing real estate blogs, found some interesting “Top 10″ lists on Real Estate Bloggers.  There are several lists, but as an investor, I find these most relevant:

Top 10 most stable real estate markets

Top 10 best cities for job and wage growth

Have readers of this blog had any experience with any of these markets? Please post your comments!

Every so often, we read headlines about housing prices (seems like every other headline is about housing prices these days), and they all seem to contradict each other. Why is it that while NAR numbers say we are flat-to-mildly-decreasing, the Case-Schiller index states that we are decreasing? Which numbers do we trust, and why are they so different?

To start, there are 3 major indeces:

1. OFHEO (Office of Federal Housing Enterprise Oversight - they regulate Fannie Mae and Freddie Mac)
2. S&P / Case-Shiller index
3. National Association of Realtors (NAR)

1) OFHEO looks at existing home sales and excludes new home purchases. In addition, it only looks at conforming loans, ignoring transactions that are not guaranteed by Fannie and Freddie. Homes with non-conforming mortgages are seeing larger price declines than the homes that OFHEO tracks. So this means that the numbers that OFHEO reports are not as volatile as the rest of the indeces. To make matters even more complicated, OFHEO also considers appraisals that are generated when people refinance their homes, which is almost always different from the purchase price, and is a truer indication of market value.

2) Similar to OFHEO, Case-Shiller looks at existing home sales and excludes new home purchases. Although there are actually three Case-Shiller indeces (monthly 10-city survey, monthly 20-city survey, and a quarterly report that looks at all nine U.S. Census regions), the one that makes it to headlines most often is the monthly 20-city survey. In addition to already being more volatile than OFHEO, this survey can be even more misleading as a proxy for the national situation, as it looks at only 20 metropolitan statistical areas. It just so happens that these areas include some of hardest-hit areas as far as price declines, such as Detroit, Las Vegas, Los Angeles, Miami, Phoenix, San Diego and Washington, D.C. Additionally, Case-Shiller can miss trends in micro-markets, as it doesn’t consider sales of condos and co-ops. So, next time that you are tempted to get worked up over Case-Schiller numbers, don’t. Especially if it’s the monthly survey.

3) NAR’s methodology is much more straightforward. It looks at sales of existing homes listed by MLSs, and reports median home prices. As we know, there can be a disconnect between a sales price and a home value. In addition, NAR considers median prices only, reducing the impact of price volatility in upper price ranges.

Case in point: Freddie Mac home-price index indicateed that housing in New York state fell just over 4 percent in value in the past year. Meanwhile, the Case-Shiller index tells a different story, indicating that New York’s home prices are down roughly 15 to 16 percent from their high.

Source: To make sense of the home price indeces, I used a very well written analysis written by Matt Carter for Inman News