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.

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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No blog post of today would be complete without a reference to the Bear Stearns buyout last night. (JPMorgan had purchased the crumbling financial giant at $2.00 per share, even though it was trading at $4.81 per share right before). This is an astounding event, which brings the already-started carnage of Wall Street appear more and more real. Bear Stearns is a financial giant, a symbol of strength and longevity! And it was brought to its knees by the panic in the credit markets. Things just got a lot more scary and a lot more real. How many other banks will tumble? If the huge Bear was laying growling on its side, what about the smaller banks??

All of this made me wonder about the impact that Wall Street turmoil would have on the City of New York and especially its real estate. Just yesterday afternoon, my boyfriend and I were discussing the current downturn in real estate, and how Manhattan has been largely spared so far (even though property prices have appreciated quite steadily over the years, they still appear steady today, as there is no inventory oversupply). We attempted to answer the following questions: “Is Manhattan headed southward eventually, as business prospects all over the country deteriorate? As we slip further into recession, will Manhattan become an undesirable place to be, as jobs are cut but cost of living takes a while to head south? How long will it take Manhattan real estate prices (sales as well as rentals) to catch up to reality? The very rich will be largely unaffected, most likely. But what about the rest of Manhattan and the other boroughs? Will there be a time in the near future when people will afford to buy / lock in lower rents in Manhattan? Should we head to Florida until this shakes out and then come back and pick up some Manhattan real estate?” We were trying to understand Manhattan real estate cycles, which are a unique animal, very unlike the rest of the country, due to very skewed supply/demand relationships.

Funny thing, the Bear Stearns announcement comes on the heels of this discussion. In my mind the debacle is symbolic of the Wall Street troubles, which are only just starting. During this massacre, what will happen to a city, whose wealth is so closely intertwined with the wealth of Wall Street? So far, it’s been mostly decreases in bonuses on the Street, with some layoffs. But many more layoffs are near. As Bear Stearn employees get laid off, followed by other banks’ employees, what will happen? Will these folks downgrade to cheaper apartments, or will they move to the ‘burbs? Already there was a guy hawking cheaper apartments in front of Bear Stearns today! Will the Street employees sell their Manhattan condos, while prices are still high, and demand from foreign buyers is still strong in Manhattan? Will they rent after they sell? Will they rent in the city or in the ‘burbs? Or will they rent in the other boroughs and Jersey City / Hoboken across the river? And speaking of foreign investors… If New Yorkers’ demand for NYC real estate cools, will the foreign demand be enough to keep it afloat?

As I ponder real estate issues, I read other blogs and articles. So I had come across this video while reading Curbed. An interesting watch, as it gives views for both sides of the coin: Wall St affecting Manhattan real estate vs. not affecting. Arguments are presented by Dolly Lenz of Prudential Douglas Elliman, that the Wall St problems are already built-in to the real estate market, as bonus cuts were anticipated. Hmmm… A collapse of a major financial giant was built-in? The panic that is sure to ensue as a result was built in? I have a hard time believing that all of this will have no impact on the city’s economy and well-being. If much of the City’s growth and economic strength has been driven by Wall Street, wouldn’t it make sense for the Street to take down the City’s real estate premiums? Seems like Dolly is practicing the “hide your head in the sand and enter into denial” approach.

But then again… real estate prices, just like all prices, are a product of supply and demand. And since Manhattan is an island, we can’t build out and increase the supply, except for building upwards. So supply is somewhat fixed. Demand will mostly likely cool down (for rentals and retail sales), due to all the factors discussed above. But will it cool to the levels where it equals supply? Will it cool equally for rentals and sales?

Several major banks are releasing their earnings tomorrow. What gets released tomorrow will help guide my understanding and will help me confirm / rebuff the “many more Bears” theory.