Tag Archives: housing market

Finding a Floor in Housing

“U.S. home prices rose in September for the sixth straight month, signaling that the housing market is in the midst of a recovery” screamed the headline in MarketWatch earlier this week.  Indeed, there has been positive news for housing lately.  Besides rising home sales and prices, foreclosures have been declining and stocks of homebuilders have done well this year.  Prices have risen significantly in Phoenix and some coastal areas in California and Florida, with numerous stories of bidding wars and sellers’ markets.

Consumer confidence has also reached up to levels not seen in the last few years, and housing is seen by most economists now as more of a help than a hindrance to the general economy.  One large financial institution is predicting that home prices will increase 4-5% annually for the next several years.  On the note buying side, some of my fellow mortgage note buyers are acting like we have returned to the glory days of 2005 and 2006.  Clearly, the media and many “experts” believe that the real estate recovery is well underway.

Is the housing recovery sustainable in the short (< 2 years) and medium-term (2-5 years out)?  In the short term, anything is possible, so I would not even hazard a guess unless I could read the minds of politicians (though I’m sure that I would not like what I would find if I could).  Over the medium-term, any recovery is susceptible to headwinds, including:

1. Falling household incomes and high household debt, in combination with a high unemployment rate, means that most families are in no position buy a house.  The banks are still being fairly tight with real estate loans too.
2. A large percentage of current home buyers are investors (27% in 2011) or foreigners (including Chinese looking for a safer place to park their cash).  These are groups that are more volatile than typical homeowners and are likelier to jump ship at the first sign of trouble.
3. Lots of mortgages are still in trouble.  There are 1.6 million homes in some form of foreclosure backlog (per RealtyTrac), 2 million foreclosures in progress, between 1.5 million and 4 million homes at least three months behind on payments (per Barclays Capital Research), and 10 million mortgages underwater.  There have been 5 million completed foreclosures since 2006, out of 50 million households carrying a mortgage (per Dr. Housing Bubble).
4. Interest rates, currently around 3.5% for a 30-year fixed loan, have been held unnaturally low by the Fed.   Those rates must and will go back up, making loan payments more difficult for many.
5. The federal government is involved in nearly every mortgage loan out there.  This is the same government with trillions of dollars in debt that it has no way of paying back, where the Federal Housing Administration will soon need a bailout, and where a change to the mortgage interest deduction is being considered (though I don’t think the deduction will change much).

When considering what will happen with the U.S. real estate market, we must also consider indirectly related factors and competing investments like the stock market, real estate trends in other countries, world economies, and similar characteristics.  When I look at the structural issues facing the U.S. and other major economies, along with the continued ineptness of politicians and bureaucrats, it is hard to be optimistic about most investment types.  I’ll go out on a limb to predict that any current recovery will be short-lived and that housing prices will be at least 10% lower in five years than they are now.  Feel free to call me at the end of 2017 to either congratulate or ridicule me for my prediction.

The Worst Kind of Rescuer — Note investor

Since the beginning of the financial crisis, politicians and bureaucrats trying to rescue it have consistently done nothing but fall over their own feet.  We would be hard pressed to point to a single true success story among the multitude of programs and regulations that have been proffered during the last five years.  All the while, the national debt has increased by trillions of dollars and the housing market remains comatose.

Having now seen transcripts from Federal Reserve monetary policy meetings of 2006, it is abundantly clear that the Fed had no clue about the coming housing market meltdown and ensuing crisis.  The warning signs were there, but either incompetence or arrogance prevented the leadership from recognizing the obvious.  Ben Bernanke described the cooling housing boom as healthy and said “so far we are seeing, at worst, an orderly decline in the housing market”.  Tim Geithner complained that Alan Greenspan had not received the credit that he deserved, a view that is shared among very few people these days.

Today, the continuation of previous policies and the introduction of new ones have run up the federal debt to an amount equal to the country’s entire gross domestic product.  If we add in future obligations related to an aging population, throwing more money to Fannie and Freddie, pensions, etc., the total rises to levels that are difficult to imagine and nearly impossible to pay back.  Taxpayers are in no condition to help with revenues, given that unemployment remains high and household debt is increasing (up 9.9% in November for installment debt, the fastest rise since November 2001).  As the financial industry gets even more opaque and complex, we’re more likely to see additional problems than solutions from that sector.

Where does the country go from here to address its overwhelming debt?  Really, there are four ways to get the country out of its current debt predicament.  The first two – growth and default – are highly unlikely.  As consumers and state/local governments pare down their debt, there will be little overall growth though select sectors will prosper.  As deep as the country’s debt problems have been and continue to be, a default by the federal government has a very low probability of happening.  If it did occur, borrowing costs would go up and there are additional ramifications too scary to consider.

The other two avenues are austerity (spending less money) or inflating our way out of the problem.  Austerity would be the better way to go, but causes pain and unrest during the short term.  Since most of the population has no grasp of the enormity of the country’s financial situation, politicians have talked a lot about lowering expenses but taken few actions to tackle the problem.  While some cost savings have been put in place, they will have minimal real impact.  That is why the administration has requested (and will get) the debt ceiling raised by another $1.2 trillion during the coming weeks.

That leaves inflation as the most likely course of action.  Holders of U.S. debt and any other dollar-denominated financial instrument (including stocks, bonds, real estate, etc.) will get burned as the dollar loses value, but the government will care little as they will see no other politically viable course of action.  When this all hits the fan, holders of precious metals like gold and silver, as well as those owning more stable currencies, will be rewarded.

Alan Noblitt is the owner of Seascape Capital and a note investor.  As a note investor for all 50 states and on most property types, he can help mortgage note holders in nearly any any situation.

Shattering the American Dream — Buyer mortgage note

According to our political leaders and certain well-placed economists, the U.S. economy is recovering well from the recession.  If only the country could get the housing market back on track, then everything would be just dandy.  In my view, while the housing downfall heavily contributed to the financial crisis that started about four years ago, real estate is now more of a symptom of the economic malaise than a cause.  Unemployment, government debt, and general economic uncertainty are driving our current problems.

Real estate is nowhere near a recovery anyway, with joblessness being the biggest factor.  Consider:

* Young adults who are just starting out (and are historically the ones most likely to buy starter homes) have no money to buy a house due to having no job or a low paying job, as well as to the high levels of student loans for many that can reach well into six figures.
* The home ownership rate for all age groups under the age of 55 has declined from 1980 to 2010, stayed flat for ages 55-64, and increased slightly for those above age 65.  The rate for those people ages 25-34 is only 42%, while 77.5% of adults over 65 own their own homes.
* The level of homeowners who are more than 90 days late on their mortgage stayed flat (7.72% in November) over the second half of 2011. (1/6/12 Housing Wire)
* The average time for a foreclosure to complete has climbed from 253 days in 2007 to 674 days (almost 2 years) in 2011. (1/6/12 Dr. Housing Bubble).  Gee, why pay rent or a mortgage when you can live for free at someone else’s expense.

So, of course, the government would have the common sense to let the housing market go through its normal cycle so that it can begin to recover, right?  Oh silly us, but of course not!  Despite the Fed’s approach of keeping interest rates down, with mortgage rates finishing 2011 near a record low of 3.95% for a 30-year fixed loan, housing continues to be in the dumps.  How have the government programs done so far in rescuing housing?

* The Home Affordable Modification Program (HAMP) was supposed to reach 3-4 million borrowers, but at best helped less than 800,000.
* Despite trillions of dollars in government help, major banks are still doing minimal lending, and even then only to customers with stellar credit.  One could argue that the banks are no more solvent today than they were four years ago.
* FHA has been giving loans to borrowers who could only put in a down payment of 3.5%.  If housing values went up, the borrowers could then enjoy the profits, while if they declined those folks could walk away with minimal financial impact.  Not surprisingly, the default rate for FHA loans that have been ongoing for at least two years is almost three times higher than that of Fannie and Freddie, two other government entities being bailed out by taxpayers due to lax lending standards.
* A couple of days ago, Fed chairman Bernanke suggested converting foreclosed houses into rentals to stem price declines.  Sounds logical until you consider the fact that government involvement would certainly just make it messier and more expensive.

At its core, the economic problems of this country can be traced back to Washington, D.C.  Everyone who has thought about it must know that the more the federal government borrows, the less likely they are to pay it back.  Raising taxes would only address a small part of the debt issue and cutting programs is anathema to politicians, so we’re left with a major conundrum.  The bureaucrats won’t face up to the true problem until all other options have been tried and failed.  Sadly, we have a long road in front of us.

Alan Noblitt is a buyer mortgage note in all 50 states.  If you are in need of a buyer mortgage note, please contact him.

How to Invest in Real Estate Notes – Part 1

Investing in a safe place that also provides you with a good
return on investment has been a challenge since the origin of markets.  From high employment and dropping housing  prices, to unsustainable debts at the federal and state levels, to several foreign wars and emboldened Asian powers, the U.S. has a deeper set of economic issues than at any time in our recent history.

The housing market has been absolutely crushed over the past four years, and commercial properties are also struggling.  Some very smart and well known investors are
saying that now is a great time to buy either a primary residence or a secondary home.  Personally, I don’t agree with them, as the underlying demographics and economy picture are scary.

However, an investment opportunity of which many are unaware is the buying of real estate notes.  Even most realtors and mortgage brokers have either never heard of real estate notes or know little about them.  That is because real estate notes, also known as mortgage notes and deed of trust notes, make up only a small slice of the overall real estate market.

A mortgage note is created when one individual or business sells a specified property to a buyer.   The two parties agree to the sales price, down payment, terms, etc. and
then create a note to show how the buyer will make payments to the seller.  The seller is considered to be “carrying the note” and may either sell the note to a mortgage note buyer or keep it.

Becoming a mortgage note buyer and persuading note holders to sell you their note is not something that you should quickly jump in to.  After all, every mortgage note carries some risks, and the smart mortgage buyer is constantly thinking potential issues and worst-case scenarios.  The most obvious risk is that a property buyer defaults on the note and the
mortgage buyer is forced to foreclose.  However, other elements like the condition of the property, having legally valid documents, the payer’s credit, etc. can all influence the
probability of a default and the chances of the mortgage buyer recovering their
investment in that scenario.

The above description has acquainted you with the basics of real estate notes.  In Part 2, we will dig into more of the details of mortgage buyers and what to do when someone is
willing to sell their real estate note.