Facts, Fiction, and the Fantasy of Real Estate

These are not my views but those of the Toll Brothers, the famous luxury McMansion homebuilders, as CNN reported last week. Also, as reported by the WSJ: In his 40 years as a home builder, Mr. Toll says, he has never seen a slump unfold like the current one. “I’ve never seen a downturn in housing without a downturn in employment or… some macroeconomic nasty condition that took housing down along with other elements of the economy,” he says. “This time, you’ve got low unemployment, you’ve got job creation, you’ve got a ctable stock market and relatively low interest rates.” This followed CNN headline: “Builder: Oversupply slump worst in 40 years. Toll Brothers slashes outlook on new homes as orders plunge and revenue misses forecasts.” Indeed, sharply fallen profit results from Toll Brothers confirmed their view that this is the worst housing slump in decades. Similarly, Angelo Mozilo, the CEO of Countrywide – the country’s largest independent hom mortgage lender – recently stated, “I’ve never seen a soft-landing in 53 years, so we have a ways to go before this levels out. I have to prepare the company for the worst that can happen.” So, effectively the only debate now is whether housing conditions are the worst in the last 40 years or in the last 53 years. So much for the bullish soft-landing wishful thinking coming out of Wall Street these days…

Of course, the message from Toll Brothers and Countrywide is like the proverbial canary in the mine that is reflective of an ongoing route – calling it a slowdown or slump is a misnomer by now – in the U.S. Housing market. Every possible indicator of the housing sector that has been coming out in the last few weeks – discussed in detail below – suggests that the housing market is in a freefall. And today’s figures on existing home sales and unsold homes says it all; as Bloomberg concisely headlined: U.S. Existing-Home Sales Tumble; Unsold Inventory Is Highest in a Decade.

At this point there’s no doubt whether the housing sector is contracting – real residential investment fall at the annualized rate of 6.4 in Q2. The first derivative of the housing market is clear and the negative today and looking ahead for the next few quarters. There is not even a debate about the second derivative of the housing market as any estimate out there suggests that the housing sector will contract at a faster rate in Q3 and Q4 than in Q2. Some official estimates that I have seen suggest that real residential housing will contract at 10% – rather than the Q2 6.4% in the next two quarters. My own estimate – based on reading of the coming data – is that, actually, the contradiction is more likely to be of the order of 12-15% annualized rate in the next several quarters. So, the only remaining scary question is about the third derivative of the housing sector and at which point – in terms of quantities and prices – the housing market will bottom out.

I have also argued before that the effects of housing on U.S. economic growth and the role of housing in tipping the U.S. economy into a recession in early 2007 are more significant than the role that the tech sector bust in 2000 played in tipping the economy into a recession in 2001. There are three reasons:

1) The direct effect of the fall in residential investment in aggregate demnd will be as high as the effects of the fall in real investment in the 2000-01 episode. Then, real investment fell by about 2% of GDP. This time around the fall in residential investment alone – let alone the role of other components of real investment, such as software and equipment, that are really falling in Q2 – will be as large as residential investment could fall from the peak of about 6.2% of GDP (the highest level since 1950s) to as low as 4% of GDP at the bottom in 2007.

2) The wealth effect of the tech bust was limited to the elite of fols who had stocks in the NASDAQ. The wealth effect of now falling housing prices – yes median prices are starting to fall at the national level – affects every home-owning household: the value of residential real estate has also increased to 48.5% of household wealth in 2006 from 38.7% in 1996. Also, the link between housing wealth rising, increased home equity withdrawal (HEW) and consumption of durable and nondurables is very significant (see RGE’s Christian Menegatti brief on this), much more than the effect of the tech bubbles of teh 1990s. Last year, out of the 800 billion of HEW at least 150 or 200 billion was spent on consumption and another good 100 billion plus went into residential investment (house capital improvements, expansions, etc…). It is enough for house price to flatten – as they already did recently – let alone start falling – as they are doing now since they are beginning to fall in major markets – for the wealth effect to disappear, the HEW dribble to low levels and for consumption to sharply fall. Note that this year there will be large increases in the borrowing costs for 1 trillion of ARM’s while this figure for 2007 will be 1.8 trillion. Thus, debt servicing costs for millions of homeowners will sharply increase this year and next.

3) The employment effects of housing are serious; up to 30% of the employment growth in the last three years was due directly and indirectly to housing. The direct effects are job lost construction, building materials, real estate brokers and sales agents, and employees of the mortgage finance industry. The indirectly effects imply that the role of housing is eve larger than 30%. The housing boom led to a boom in consumer durables spending on home appliances and furniture. Indeed, in Q2 real consumption of such goods was already negative: as you have less new homes built and purchased and less old homes refurbished and expanded, you get less purchases of home appliances and furniture. There are also indirect effects of the housing bust on employment, even on purchases of motor vehicles. Indeed, the current auto sector slump is not unrelated to the housing slum. As the Financial Times put recently, the sharp fall in teh sales of Ford’s pick-up trucks is related to the housing slump as such trucks are widely purchased by real estate contractors. And indeed in Q2 real consumer durables (that include both cars, home appliances and furniture all related to housing) already fell, consistent with the view that we now have a glut in the stock of consumer durables (durables consumption has a investment-like nature to it as such goods last for a long time). Thus, as housing sector slumps, the job and income and wage losses in housing will percolate throughout the economy.

How bad are the signals coming from the housing sector? As recent news headline clearly put it: it is simply UGLY. Indeed, al the indicators from the housing sectors – including the latest housing starts and homebuilders (NAHB) forward looking business conditions – indicate a housing sector that is literally in a free fall. New home sales started to fall since the beginning of 2006 and in some regions they are down they are down over 30% relative to a year ago. As Bloomberg summarized in the new housing data: “Sales of previously owned homes in the U.S. fell more than expected in July, resulting in the biggest supply of unsold homes in more than a decade, as higher mortgage rates discouraged would-be home buyers… Purchases declined 4.1 percent last month to an anuual rate of 6.33 million, the lowest since January 2004, from 6.6 million in June, the National Assocation of Realtors said today in Washington. Sales fell 11.2 percent comapred with a year earlier.” Indeed, the number of unsold homes and the ratio of unsold homes to new home sales has therefore risen sharply to over 5.5 months of supply. Similarly the ratio of unsold homes to existing homes in the market has sharply increased. These are clear indicators of a glut of unsold homes in the market. Housing start are also sharply down elative to a year ago and expected to fall further over the next few quarters. Note also that, while overall mortgage applications are still up in the latest figures published, due to sustained refinancing applications, applications for purchase applicants have fallen 1% during the last week, this being the fifth fall in the last six weeks. Moreover, there is a large amount of evidence that suggests increasing cancellation of initial mortgage applications, as the slump in the housing market and in the economy is now scaring households considering buying a home. Thus, the official data on purchase mortgage applications is very likely to exceed actual home sales.

More generally, note that when demand for housing initially falls relative to a glut of supply, the initial market response is not on price, as it is the case of financial market where prices adjust rapidly, but rather on the quantity of unsold homes and on how long unsold homes stay on the market. Housing prices, unlike financial assets, are sluggish. This market inventory adjustment eventuallyt leads to lower prices once sellers realize that demand is low and that waiting is not going to help.

The housing market has thus followed so far the predicted various stages of adjustment to cycle driven by the initial housing bubble: initially a glut of supply of new homes as high prices (driven in part by speculative demand) led to high and excessive production of new homes; then a fall in demand as speculative high prices and rising rates made the purchase of housing less affordable to many; then, the ensuing inventory adjustment – an increase in unsold homes. Then the reduction in the production of new homes – lower housing starts – as homebuilders with falling revenues and profits and lower expected demand finally react to the growing unsold inventories. Indeed, the value of home builders’ shares on teh NYSE has fallen by almost 50% relative to a year ago. Finally, we have now a price adjustment in two directions: 1) an increase in rents as housing affordability fell since more and more housholds could not afforst to pay the speculative prices of existing and new homes; this increase in rents is now correctly jacking up owner equivalent rent and increasing headline CPI inflation; 2) the beginning of a fall in actual housing prices as the unsold homes is now putting downward pressure on actual prices.

The evidence on falling home prices is now becoming clearer. Since the end of World War II, there has never been a year on year fall in housing prices. There have been instead several quarters in which housing prices declined. Of course in some regions where there were housing busts prices declined for a while: in Texas during the housing bust of teh mid 1980s that led to teh Savings and Loan crisis; in California in the early 1990s following the recession in that state; in Boston in 1990. Those episodes were all associated with the housing bust that was related to the 1990-91 recession. So, you do not need a persistent year-on-year fall in median housing prices to have a housing bust; such a bust can occur even if prices are flattening or falling in some regions, but not nationally. Moreover, such regional busts can be associated with national recession, as in the 1990-91 episode. The fact that the latest housing bubble was concentrated on the two coasts does not mean that the coming housing bust in these regions will not have national macro effects. For one thing, the value of the housing stock in those regions will not have national macro effects. For one thing, the value of the housing stock in those two regions is close to 50% of the total housing stock given the bubble of recent years. Thus, a housing bust in the two coasts can and will have macro effects.

The National Assocation of Realtors reported taht the median price of an existing home rose only .9% in July from a yar ago. So, housing prices are practically flat at the national level. Worse, relative to a year ago housing prices have already fallen in the North East (-2.1%), in the Midwest (-.6%) and the West (-.3%). Not only are housing prices falling in the bubbly two coasts; they are also starting to fall in the Mid-West, the region where the conventional wisdom was that there was no housing bubble. The fact that home prices are falling in the Mid-West where prices did not skyrocket in the bubble years is a scary signal of how much the housing bust and glut in supply will lead to a sharp fall in housing prices in the quarters ahead with painful effects on wealth, and thus consumption, of households. You can expect falling median housing prices, on a year-on-year basis, at the national level to start very soon. Note also that on an inflation adjusted basis, real home prices (relative to the CPI index) are already falling at a 4% plus rate.

Also, as noted by Dean Baker: “current house price indices are failing to pick up the full decline in prices because they miss the various concessions (seller paid closing costs, buyer-side realtor bonuses, and seller subsidized mortgages) that seller often use to move their houses.”

Even more ominously, futures markets now expect that house prices will fall during 2007. Following the lead and prodding of Robert Shiller – the maverick Yale professor who predicted teh 2000 stock bust and is now predicting a housing bust – the Chicago Mercantile Exchange opened this spring a new futures market for house prices in ten U.S. cities. While this market is very new and still relatively illiquid, it is now predicting that U.S. house prices will fall in 2007 at the national average level, for the first time in over fifty years. The index of this futures’ market for the entire U.S. is projesting a 5% price fall in 2007. And the futures contracts for individual cities show expected declines in housing prices even larger for Miami, New York, Boston, San Francisco, San Diego, and Las Vegas.

The likely fall in median home prices in 2007 may actually turn out to be larger than the 5% priced in the futures market. In fact, one of the peculiar features of the latest housing cycle has been the presence of a large housing bubble: prices were going up will above economic fundamentals because of the speculative demand coming from expectations of increased housing prices that were feeding further speculative demand: “condo flipping” is the popular term for this speculative demand. Now that the bubble is bursting the fall in prices will be sharper than the one implied by medium term fundamentals as the initial price increase was due to a bubble that is bursting and leading to a fall in speculative demand: with prices now falling homeowners and specualtors have no incentive to buy new homes as they expect prices to be lower in the future. So, an expected price fall leads to fall in speculative and fundamental demand and triggers actual larger than otherwise fall in actual prices. The speculative excess of a price bubble will now bring the bust of this price bubble. While the effect will be slower then in asset markets where prices adjust instantaneously (due to the sluggish nature of housing prices and their slow adjustment to increased inventories) eventually this price adjustment will occur – as it is now – and it will be very persistent over time. You can expect falling housing prices throughout most of 2007.

The simple conclusion from the analysis above is that this is indeed the biggest housing slump in teh last four or five decades: every housing indicator is in free fall, includding new housing prices. By itself this slump is enough to trigger a U.S. recession: its effects on real residential investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession. And on top of the housing bust, U.S. consumers are facing oil above $70, the delayed effects of rising Fed Fund and long term rates, falling real wages, negative savings, high debt ratios and higher and higher debt servicing ratios. This is the tipping point for the U.S. consumer and the effects will be ugly. Expect the great recession of 2007 to be much nastier, deeper and more protracting than the 2001 recession.

And the housing bust is not going to be the only U.S. phenomenon. As I will discuss in another blog, housing bubbles festered in many other economies including many European ones. Thus, the combination of high oil prices, delayed effects of rising interest rates and slump of housing that is now leading to a U.S. recession is a phenomenon that is common to many other economies, including several European ones. So, expect the same deadly combinations of three ugly bears (slump housing, high oil prices, and rising interest rates) to hammer Goldilocks and sharply hurt Europe and other economies in the world.

Credit/FICO scores are probably the most important trivial numbers in your life. You have three of them… do you have any idea what those numbers are? Probably not, you probably know your scores in the terms above, “they’re good, they’re bad, or my credit is ugly!” Knowing what your credit score is a service every other pop up window on the world wide web offers, but not the information the average consumer can benefit from.

What you should be concerned with is what you can do to affectively raise your credit score so you are in a position to move forward. If you are considering a refinance or purchase first take the necessary steps that I am going to list here to get your scores up so you qualify for the best rate.

These are the areas you need to focus on…

Balances, look at your existing credit card balances, and if any are over 50% of your credit limit… 6,000 on a 10,000 dollar limit for example pay down that card so it is under the 50% mark. Taking such action will immediately improve your scores so you qualify for a better rate. Another trick would be to raise your credit limit to 13,000, this would have a similar effect because it is essentially dropping the percentage owed under 50%.

Make sure nothing is past due. If you have late payments, there is nothing you can do to correct the past, but let time pass. You do however, want to make sure that the amount you owe is current, pay off anything past due, this will improve your score. When the time comes if you find out that something is reporting late that was in fact a mistake, an experienced loan consultant can take steps to correct the mistake during the process, saving you time, effort, and money.

Now for collections. There is a right and wrong way to dispute a collection. The wrong way is to call it in and file a dispute. This type of action will register your complaint, but the goal is to get the collection removed, not just disputed. Moreover, you want it removed without having to pay for it, so here is the trick.

Draft three letters, one to each credit bureau, and send them one day air.

Here are the addresses:

Equifax: PO Box 105873/Atlanta, GA 30348

Experian: PO Box 9601/Allen, TX 75103

Transunion: PO Box 4000/Chester, PA 19016

The letter should state that you are disputing the collection in question, include the account number, and collection agency, and reference the fact that you have sent them a letter as well.

The burden of proving that you owe the collection is on them. If they cannot prove that you are in fact in debt to them within thirty days the collection must be removed from your credit report.

Now the letter you send to the collection agency, you are going to send in regular mail, to the most obscure address you can find. You want the letter to end up in a department that has nothing to do with verifying the account.

The goal is to have the companies red tape work for you. By the time they get the letter to the right people in the company, have time to research it, and get the information back to the credit bureaus, you have a good chance of that thirty day time period passing. If it does, that account is off your report, and your scores will go up.

This is a trick I learned from someone that worked for a collection agency, and if executed correctly will work.

One thing to consider paying off a collection is not necessarily the best course of action. By paying it off you are for all intents and purposes admiting guilt. Taking such action can actually lower your scores immediately (although it will improve them in the long run).

Finally, and probably you best ally is time. Once you are current on your credit card payments, ahve no past due amounts, no collections, or judgments, time is on your side, and every passing day will help your scores.

There is no sense in rushing something that does not need to be rushed. Talk with a consultant and make sure that they understand your concerns. They can help you form an action plan that will improve your scores over time. Furthermore, they probably have insider knowledge that can help accomplish this goal faster then you working alone.

Best of luck, and to your success…

peter@approved-online.com  

Is what every client thinks that they deserve, unfortunately finding the lowest rate is not just a problem, it’s the unicorn of the mortgage industry. I just googled “lowest rate” and there are 85,000,000 websites offering the lowest rate, which means 79,999,999 sites are lying, and even if you do find the one site that does have the lowest rate the chances of your qualifying for it, is about as unlikely as you finding the site. Multiply those chances together and you have better odds winning the lottery.

I am not being negative, I am being realistic.

I know that the words “lowest rate” is that mysterious catch phrase that will get just about anyone’s attention, but keep in mind, we live in a capitalist society, and advertising is not just part of our daily lives, it is an unspoken religion all of us participate in whether we are willing to admit it or not.

Guess what those two words “lowest rate” are? Propoganda! That’s right… every year, banks spend millions of dollars pitching how important rate is. I am by no means saying it is not important, what I am saying is there is another part of the equation that will cost you more money than the rate. That is the term. A longer term, even with a lower rate means you will end up paying more for your home than you would with a shorter term and a higher rate.

 Don’t believe me, that’s the beauty of real estate finance, numbers never lie.

 For example…

A 500,000 dollar loan at 6% interest over thirty years will have a principle and interest payment of 2,997.75 per month. Over that 30 years you will have spent 1,079,190.95 to pay off the loan.

A 500,000 dollar loan at a 5% interest over forty years will have a principle and interest payment of 2,410.98 per month. Over that 40 years you will have spent 1,157,271.84 to pay off the loan.

So by accepting a 30 year term rather than a 40 year term, you have saved 78,080.89.

On top of that there is no lender that is going to offer you a lower rate on a longer term, it just doesn’t happen, so finding that 5% 40 year when a 6% 30 year is available is just not realistic, chances are your 40 year rate will be more like 6.25% – you pay for the longer term.

I know what you are thinking. You don’t plan on staying in your home for the full term – most people don’t – so lowest rate is still what is important. You may be right, but my point is that numbers don’t lie, and any loan consultant that is experienced should be able to show you the break even point, and if you plan on staying in your home longer than that period, then it might be a good idea to accept a higher rate, you will save money in the long run.

This last point is referencing fixed programs in relation to adjustible rate mortgages, it also sheds light on closing costs. Sometimes it makes sense to pay for the loan up front. This will help lower your rate, without compromising other relavent terms, that most neglect.

 My point is simple… everyone offers lowest rate. How does 1% sound? Probably pretty good until you find out the balance on your loan will increase every month. What these salesmen fail to tell the average consumer is that rate is only part of the larger picture, and being able to brag about finding a rate lower than your neighbors, is not the objective. Your objective should be finding a program that meets and will help you accomplish your financial goals.

To do this first you must find a consultant, not a salesman. Second, you need to be open to the fact that they are a professional, and are involved in the real estate indutry on a daily basis. Listening to them, is not a bad idea, it is smart. They possess knowledge that you probably don’t. When you go to the doctor, you don’t tell him what you need to make you better, he prescribes the necessary medication. A loan consultant working for you, can save and indirectly make you a substantial return on your investment, but for you to realize this, you have to be open to listening to his or her suggestions. A good loan consultant is as valuable as your doctor, your attorney, and the butcher all rolled into one. They will keep you healthy by providing you sound advice that if taken, will releave stress. You can speak openly to them with full confidence that nothing you say will be repeated to any outside parties. And the money they save and/or make you will put food on the table.

If you are concerned about someone you are working with right now, by all means email me, and I would be happy to audit the program, price of doing business, and ultimate cost of what you are getting yourself into, all with no obligation.

I hope that this is helpful.

peter@approved-online.com

Anyone familiar with San Diego CA knows that the rising debate about illegal immigrants is a heated and opinionated conversation. Obviously, there is no easy solution, but Escondido CA has taken a step that many support, and just as many are against. They have past a law making it illegal to rent to illegal aliens. The thought behind the law is the property values are being affected by illegal residents, and by passing this law, it will force illegal aliens out of Escondido which will increase property value. Some might consider this a form of redlining (an illegal practice of refusing to loan to a specific race)… but can you redline an illegal alien and does redlining apply to leasing? Another question is how they will enforce such a law, and what the penalty is for someone that breaks it?

The answer to these questions are not in, and it will probably be some time before we can see the impact this law has on the community. Please post your opinion on what you think will happen, if it is right or wrong, and the impact this is going to have on the community.

Hard Money is the fastest growing lending segment which is why I have returned to this subject. Many investors are using it for foreclosures, investment properties, and rehabs.

Hard-money loans are mortgage loans that are offered by private individuals rather than financial institutions, such as banks or credit unions. These individuals are known as “hard-money lenders.” Borrowers who do not qualify for mortgages through financial institutions often look to hard-money loans as an option. These borrowers usually have bad credit, insufficient income, or other factors that are considered undesirable to financial institutions. Property conditions may play a role as well, in why financial institutions categorize these borrowers as high risk. A hard-money loan may also be an attractive choice for borrowers who are behind on their mortgage payments or in danger of foreclosure.

With a hard-money loan, a private individual, who is oftentimes also the property seller, acts as the lender and extends a loan to the high-risk borrower. The hard-money lender can be a person, a trust, a real estate investment group, or any other private entity. Because the private lender is taking on this risk, this lender charges higher interest rates than traditional mortgages obtained through financial institutions. The interest rates on hard-money loans can be twice as high or higher than loans available through traditional mortgage lenders. This is simply because these borrowers are considered much higher-risk candidates. But buying a hard-money home loan can be a great option for someone whose other financing options are non-existent.

Despite higher interest rates, there are some advantages to a hard-money loan. The borrower can negotiate the interest rate and other terms and conditions more easily with the private hard-money lender than with a financial institution. The borrower also saves money on title insurance premiums and attorney’s fees – charges often applied by financial institutions. Because borrowers don’t have to wait for mortgage approvals from financial institutions, the closing period is also considerably shorter.

Period of time it takes to close a loan can be attributed to the fact that often times, you do not need to open escrow (although recommended) or get an appraisal thereby shortening the period significantly. The amount of information required is also significantly less than your traditional loan. Often times just a few pages, it allows people to cut throught the red tape and get the cash they need immediately.

For more information, feel free to contact me peter@approved-online.com

FlightLine is an area in Carlsbad California that has been used and maintained by mountain bikers and trail runners for over two decades. The city of Carlsbad refers to the area as Carlsbad Oaks North. It was originaly set aside as wide open natural space to help mitigate impacts from all of the commercial development in the Palomar Airport Road office park development projects.

Flightline (Carlsbad Oaks North) is owned by San Diego County and is managed by the Center for Natural Lands Management (referred to from here on out as CNLM) which runs the land under the rules of a Conservation Easement. This easement doesn’t allow bycicle use on public land. CNLM has recently been ordered by the county to close the entire area to public access.

Please go to this link, sign the petition, and help save one of North County’s most valuable resources.

http://www.rideflightline.com/ 

this is important people, theres not much open recreation space available in this land of urban sprawl…

repost this please, thank you.

peter@approved-online.com

If you are looking to improve your business, and develop strategic alliances, then we need to talk. I am a lender that has systems and technology in place that will help you close more deals. This is not a gimic, and does not cost anything.

I am looking for new partners that share my professional philosophy and are looking to develop long standing relationships with clients that lead to more referrals.

Please take a look at the following worksheet and email me if you are interested.

 peter@approved-online.com

Being a By Referral Only mortgage consultant has taught me everyone benefits when effort is concentrated. I have produced this worksheet instead of a flier because if I didn’t have the price, product, and service already in place, you would fire me. I am proud to say that I have never been fired. Please take a few minutes out of your day, and tell me what you expect your lender to accomplish for you and your business. I have a simple goal in life – to be the number one financial real estate broker in the
United States. I am interested in seeing if we can help accomplish each others goals. Call it a Strategic
Alliance. Call it a Master Mind Group. Whatever name you give it, incredible things happen when people put their minds together and focus on action. It begins by telling me your expectations: 

Name: _____________________________

Company: __________________________________________

Telephone #: ____________________________

Email: _________________________________________ 

Describe the effort of your current lender?

Describe your ideal lender?

On a scale of 1 to 10 how important are referrals to your business?               1  2  3  4  5  6  7  8  9  10

On a scale of 1 to 10 how many referrals make up your current business?     1  2  3  4  5  6  7  8  9  10

Is your current lender providing you with steady referrals?     Yes          No

 Do you and your lender have a business strategy in place that is responsible for referrals?      Yes         No

If not, would you like one?         Yes         No

What is your target market? Are you using marketing strategies that focus on your target market?         Yes           No

Are your lender’s marketing strategies in sync with your own and your target market?     

Yes       No

What are your goals in real estate?

Does your current lender know your goals?       Yes        No

Are they working with you to accomplish your goals?          Yes         No

When is the best time and method to contact you?