Forclosure In The Neighborhood

Posted on February 8, 2008 by Nirav

Since I’ve been a homowner, landlord and tenant in my neighborhood for the past 6 years, I follow the real estate market pretty closely. I recently noticed that there was a condo on Realtor.com listed at $264,900. Since I bought my 2nd condo in 2003 for $270,000, I was curious to find out more info on it.

[Picture of a foreclosed condo for sale in San Diego]

I emailed my friend who’s an agent and she sent me the list details. Apparently its bank-owned. The previous owners bought in 2001 for $170,000 and refinanced it last year for $260,000. The mortgage company has it listed at $265k to break-even on it.

These condos were sold at a peak price of $375,000. I sold both of mine on either sides of the peak at around $350,000 each. A sale price of $265,000 represents a 30% drop from the peak. I’d be amazed if it sold at the asking price.

If I was in a hurry to buy property, I’d be tempted to make a low-ball offer. When I bought my condo in 2001 and again in 2003, there was usually only 1 for sale at a time and usually several buyers. Right now, its the opposite, several for sale and not a single buyer!

Even though the pricing looks good, I expect things to get considerably worse.

Residential Housing To Drop Another 25%

Posted on February 7, 2008 by Nirav

Since 2005, I’ve been saying that San Diego home prices are way overpriced and are due for a 40-45% correction. The homes are so far out-of-whack thats it’s 30-50% cheaper to rent than it is to buy. Of course, the National Association of Realtors (the cheerleaders of the real estate world) will always tell you its always a good time to buy, but anyone who can use a calculator might think otherwise.

Already in most parts of San Diego, home prices are down 20-30%, unsold inventory has sky-rocketed, and real estate is no longer the main topic of cocktail parties.

Someone recently asked me if I though it was a good time to buy in San Diego. Houses in a Cardiff/Solan Beach/Encinitas/Pt. Loma that were $800-900k during the peak were now in the $600-700K range. When would we see the bottom?

I obviously thought it made sense to wait until the prices overshoot fair-value and become undervalued. Real estate has a tendency to keep moving in a trend for a very long period of time. Once its started to go down, it’ll just keep on heading in that direction. The Federal Reserve may try to give the bust a ‘soft landing’ but that won’t have much of an effect. It’ll probably just increase the duration of the downturn, similar to what happened in Japan after their real estate market crashed and was depressed for 15 years.

BusinessWeek finally has an interesting article about the Housing Meltdown: Why home prices could drop 25% more on average before the market finally hits bottom..

Even Mike “Mish” Shedlock thinks that home prices will reach more reasonable levels in 2009. Nice to finally see some corroborative data from an economists point of view.

How many of you think the bottom is in 2008?

Buying Properties At A 60% Discount

Posted on January 11, 2008 by Nirav

There are still a lot of investors looking to get into real estate. Some of them are newbies looking for deals, and others are experienced and have sellers begging to take their properties off their hands.

According to Bloomberg.com,

40 cents on the dollar. That’s how much Morgan Stanley Real Estate paid for an 80 percent stake in the 32 communities, 60 percent less than the price at which the properties were valued just two months earlier. That’s also what some investors say they would pay for distressed land, condominiums, homes and whole developments, whether it’s now or later this year.

As the U.S. housing slump drags into its third year, sellers will start cutting prices as much as it takes to find buyers, said Marcel Arsenault, a self-described “vulture investor.” Properties will be available to buyers with the financial strength to ride out the slide. Now that a price has been set, all that’s left is the waiting.

“We’re watching Denver, Phoenix, Austin and Tucson, but South Florida is our principal focus,” said Arsenault, 60. “If you’re a vulture, Florida has more carrion. This stuff is lying on the ground. It’s lost life. Some of the stuff in Phoenix is still breathing. Perhaps not for long.”

Arsenault said he and his three partners may buy a block of about 50 new, unsold condominiums in Orlando, Florida. They have a price in mind and they’re willing to wait until they get it: 40 cents on the dollar.

“There’s a risk to buying too early in the downturn, but buying too expensive is our biggest pitfall,” he said.

Orleans Homebuilders Inc. of Bensalem, Pennsylvania, sold 1,400 lots to nine different buyers in December for $32 million. The book value of the properties was $86 million, the company said in a statement. Orleans also anticipates receiving about $20 million to $25 million in federal income tax refunds as a result of the sales, the statement said.

Don’t be fooled by 20% discounts from appraisals obtained during the peak. The market has probably dropped significantly since then.

Don’t be in a hurry to buy right now, unless you have deep pockets. The credit liquidity is definitely going to create a strain on home prices for quite a while. Fannie Mae’s Chairman announced that he expects the housing market to continue to slide into 2010. That’s quite a change in tune from 6 months ago, where everyone was saying that prices would pick up in 2008.

Are Stocks Better Than Other Investments?

Posted on December 15, 2007 by Nirav

There’s always someone at a party who’s claiming their investment asset of choices is the best. In 1999, it was stocks. In 2005, it was real estate. Right now, I’m claiming its Canadian Income Funds and commodities like gold. But is there an investment that’s actually better than something else?

Many proponents of the stock market have claimed that it is better than real estate. It’s more liquid and there’s never been a 10 year cycle where the S&P 500 had a down year. Of course, that’s rubbish. Ever try selling your stocks when the market is tanking? You’ll get taken to the cleaners. According to CNN Money, stocks follow a 16 year cycle. They go up for 16 years and then they’re roughly flat for the next 16 or so years.

Right now the Dow Jones Index is almost where it was back in early 2000. Adjusting for inflation, you’re still underwater. There’s also an often quoted comment about the stock market returning 11.5% a year over the long run. According to Ben Stein, this is factually incorrect. Over a rolling 20 year period since 1900, the stock market has on average returned just under 8%. Real estate also has had similar cycles. In Southern California, where I live, the market was down from 1991 to 1996, after booming for several years. Then in 1997 until 2005 it boomed again. Right now its falling again. Similarly in Salt Lake City, another market I follow and invest in, real estate boomed from 1991 until 1997 and then was stagnant until the end of 2004. Since 2005, its been in on the upswing again.NAR, the National Association of Real Estate, often cite the fact that nationwide, real estate has never gone down. That’s a useless fact unless you’re going to be buying a house in every major city in every state. Locally, real estate does follow periodic and somewhat predictable cycles. Between 2000 and 2005, when the stock market was tanking, real estate performed wonderfully.

And like stocks and real estate, commodities also have their own cycles. Chuck Butler , President of Everbank.com just sent me this email, “… the current Bull Market for commodities is at about 7 years and running… History shows us that (going back 200 years) that Bull Markets in Commodities have trends that last 17-22 years”. If you had bought gold in 1971 for $35/oz, you would’ve done extremely well by selling it in 1980-81 for nearly $800/oz. However, between 1982 and 2000 it languished and you might have given up and sold everything in 1999 after seeing the tremendous returns of the stock market. After all, nothing beats the stock market, right!

But $800/oz gold is here again. I’ve been investing since 2005 when it was around $500/oz. Gold has tripled since its lows of 2000 and is probably set to rally even further as the US Dollar continues its slide.

Even businesses are not free from cycles. There are times when businesses are cheap to buy (if you have the money) and are great money makers, and there are times when they are expensive (although easy with cheap money and easy liquidity) and tough to sustain at a profit.

So essentially there is no ideal investment. No single investment will yield substantial returns, year after year, for extended periods of time. Either you have to be on top of the economic factors that affect the various cycles, and keep switching in and out every few years or decades, or you need to diversify your assets so you have equal exposure to various different asset classes.

So unless you have exposure you US & foreign stocks and bonds, global real estate, currencies, commodities like oil & gas, precious metals, building materials like steel, lumber and copper, and even your own businesses, your investment portfolio is incomplete.

Claiming that one investment is better than another is just the result of ignorance. (Unless you decide to get a job as a day-trader, in which case trading indexed futures is probably the best vehicle, although the toughest to succeed at. But thats not an investment, its more like a job!)

Why Low Interest Rates Are Bad For You

Posted on November 11, 2007 by Nirav

Check out this excellent, excellent video where Ron Paul rips Bernanke a new one. He explains why lowering the interest rates is screwing the US citizens. Low rates leads to a weak dollar which causes inflation (since we import nearly everything from foreign countries).

By lowering the rates, the Feds are enabling inflation. Which they probably want because it makes it is much easier to pay back all the money the government has borrowed from foreigners. The government currently needs around $2 Billion per day to sustain itself. Paying back foreign countries with dollars that are worthless is quite an enticing option.However, it doesn’t come without any cost. Putting more dollars in circulation devalues the current value of each existing dollar. If the Fed increases the money supply by 10% per year, the value of each dollar of your savings is decreased by a corresponding 10% too. Since you’re not getting 10% interest in the bank, your savings are being eroded every year. This is what Ron Paul was concerned about. The savings of elderly people are being eroded while simultaneously, everything is getting more expensive.

As the cost of everything goes up, eventually the cost of real assets will catch up. Real assets include commodities like gold, wheat, corn, lumber, oil and especially investments like real estate. So the low interest rates has the effect of propping up real estate prices and engendering the so-called soft landing in the real estate market. However, since its mostly wealthy people who own multiple properties that are leveraged with mortgages, as the value of the dollar drops and the value of real estate increases, they get to pay down their mortgage with cheaper dollars while simultaneously enjoying the appreciation in their properties.

This is basically a redistribution of wealth from the poor and middle classes to the wealthy. So you should either vote for Ron Paul or invest in gold (pretty easy to do), foreign currencies (slightly more difficult) or cash-flowing properties (pretty difficult right now). The worst thing to do is nothing or whine about how unfair life is.

Are 50% Discounts Becoming Common In Florida?

Posted on November 4, 2007 by Nirav

Looks like the housing market is bad in more than just Miami. I just got this email from a real estate agent based in Florida regarding a Short Sale.

We have several sellers ready to walk away from their property without a penny. We have begun negotiations with the sellers lender who has expressed a desire to sell quickly and accept far less than the loan balance. Now I am looking for the buyer (you) who wants to buy a property at a huge discount.

Here is an example: Seller paid $260,000 last year for a BRAND NEW, 2,300+ Square Feet, 3 Bedroom, 2 Bath, 2 Car Garage, Covered Porch Home in Palm Coast Florida. The best offer we have is $135,000. We are looking for the highest and best. I don’t know how low the bank will go. It is up to you to offer. If you don’t the guy may get it for $135,000.

We have a lot of these and we get more everyday. If you want to Buy or Sell, Call Now

A Short Sale is where an owner is upside down on his house (his mortgage is higher than the house is worth) and the bank is willing to take less than they owe on it. Why would the bank take less? Because the home owner is several months behind on his payments, and has probably tried to sell it for what he owes for a few months with no success. It usually costs the bank around $50,000 to get rid of a house once its been in foreclosure, so in order to speed up the process and avoid going through the hassle, they agree to a short sale.

The seller is benefited since he doesn’t have a foreclosure on his credit. However, the bank usually sends out a 1099 tax statement for the difference. Which means the seller is still stuck with a tax liability. But paying 30% on a $100,000 is much better than paying the $100,000 from your pocket and not getting to deduct it as a tax loss! (To be more specific, homeowners cannot deduct the loss while investors can). So the only person truly benefiting is the buyer of the property. So long as he can afford the payments and doesn’t need to sell it at a loss in another 2 years!

Housing Continues To Get Worse

Posted on October 7, 2007 by Nirav

Housing continues to get worse. According to a recent article in BusinessWeek:

A strong job market, the thriving casino and convention industry, and the highest population growth in the country made Vegas a boomtown for builders. Sin City represented one of the top five markets.Today, new homes are empty and communities half-built. The number of unsold homes has reached as much as 48,000, by some estimates, up from a more or less steady level of 10,000 over the last several years. “Builders have a glut of houses that’s going to weigh on home prices for awhile.” says Dennis L. Smith, president of Home Builders Research Inc., a local consultancy.

Mike Alley has gotten whacked hard by the area’s declining housing market. In the spring of 2005, Alley, an independent real estate agent in Racine, Wis., moved to Las Vegas, lured by the warm weather and the strong real estate market. He quickly found a sales job with Pulte, where he says agents were pulling in $500,000 a year for basically taking orders. “It was nutty,” says Alley. “Houses were flying off the lot.”

A year later, he decided to jump into the market himself and buy a home. He spent a month searching, settling on KB’s Huntington subdivision. The neighborhood attracted a mix of folks, from couples just starting out to empty nesters. More important, there were a lot of families with young kids the same age as his. The $86,000 worth of upgrades, including higher-end cabinets and granite countertops, thrown in by KB Homes at a discount clinched it. Alley thought he was getting a deal: In August, 2006, he paid $360,000 for a three-bedroom home in Quayside Court, which was appraised for $415,000.

Yet even Alley, who made his living in this industry, says he was blindsided by the markdowns. Today he reckons his home is worth around $300,000. “I didn’t quite keep my finger on the pulse of what [KB is] doing in this community,” says Alley, who’s largely gotten out of the real estate business. “I’m looking at the sales data, and they were selling my model for $50,000 less even months after I bought it.”

This is another example of the fact that real estate agents don’t often know much about real estate cycles or investing. Never ask an agent if its a good time to buy. They don’t know and its not really their job. Their job is to help you select your perfect home based on your criteria and budget and their knowledge of the local neighborhoods. More importantly, they take care of the paperwork that most homebuyers find imtimidating and incomprehensible. Their job profile does not usually include providing investment advice, even if they claim they’re investment experts.

Pictures of An Investment Property

Posted on October 1, 2007 by Nirav

After spending the past 12 months lightening my holdings, I currently have 5 investment properties left. 3 of them are in Salt Lake City and 2 are in Indianapolis.

Of the ones in SLC, two are located in Saratoga Springs with spectacular (spectacular to Californians who are used to “desert views” and dried-out shrubs) views Lake Utah. Here’s what one of them looks like.

And here’s the kitchen.

Its about 10 times nicer than my place in San Diego; at 1800 sq ft, its twice the size and and (with a 20% drop in San Diego prices and a 30% rise in SLC) only about 10% more expensive. But unlike my condo in SD, it sits on a quarter acre of land.

Homes For Everyday Heroes?

Posted on September 14, 2007 by Nirav

According to the FirstHomebuilders.com, based out of florida, they’re selling homes to everyday heroes. You can buy one of their brand new homes with $500 down and as little as $795 per month.

Considering that the cheapest homes are in $150,000 range, thats sounds like 102% financing with an Interest-only payment and it probably an adjustable interest rate too.

That sounds like a loan program they’ve been advertising for the past 4 years to people who can’t afford a home in the first place? Since when did we start calling these people “everyday heroes”?

Mortgage Lenders Squeeling Like Pigs: WAMU First To Cry Uncle

Posted on August 12, 2007 by Nirav

Despite Ben Bernanke’s optimism that the sub-prime issues wouldn’t spread to the rest the of the economy, not only is it spreading to the rest the of the economy, its become our favorite export to global economies too!

The resulting liquidity crunch has already begun. Many banks just announced that they’ll no longer accept loans through brokers. This is to reduce the additional cost of having a middle-man.

Washington Mutual also announced that its Jumbo loans would be priced at 8%. OUCH! Basically, WAMU is having a tough time reselling these loans on the secondary market (to unsuspecting pension and hedge funds) so they’ve jacked up the rates on these.

As of 2007, a jumbo loan (in most parts of the country) is a loan thats over $417,000 for a single-family residence.

Unfortunately, with the median home price in San Diego is over $500,000. (Not sure of the exact figures but its dropping from the peak). This means the average family has a jumbo loan on their median-priced home.

It was ok when rates where 4.5%, but now when rates are at 8%, the corresponding home payment will jump 43%!!!! I don’t know about you, but I’d be looking to move if my home payment rose 40%+.

I think as the rates rise and loans become more difficult to get, home prices will start falling faster than they have in the past 2 years. Many people are still in denial about dropping home prices in SoCal – but this looks like the beginning of the end. I wouldn’t be surprized if rates fall another 25% of where they are today.

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