The US could be heading for a national housing shortage this year despite the real estate sector struggling with healthy inventories, three million foreclosures, falling values, and rising vacancy rates, it is claimed.

Several leading economists are warning that not enough new properties are being built to keep up with expected population growth. They estimate that only a third of what will be needed is currently under construction.

According to Brian Wesbury, chief economist at First Trust Advisors, the US needs to add 1.5 million housing units per year just to keep up with population growth plus another 100,000 for fires and tear downs. ‘We need 1.6 million or more per year. Right now we’re down to about six and a half, seven months’ inventory, whether you look at new homes or existing homes. Housing starts are now between 500,000 and 600,000 a year,’ he said.

‘I think one of the secret investments, if you will, over the next decade is going to be housing. It is extremely cheap, inflation is on the way. But people are running away from it. You know, it’s that old adage – when there’s blood in the streets, that’s when you invest. And this is the time, I think, for real estate,’ Wesbury added.

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It may not be the most widespread measure of housing prices, but if you want to follow a powerful driver, look at rents.

Specifically, it’s the rents Americans pay on condos, apartments or houses that are about the same size, and share the same neighborhood as your ranch or colonial, that in the end determine what your house is worth.

"If you look at the trend in rents to see where housing prices are headed, you’re looking at the right measure," says Yale economist Robert Shiller.

In recent reports, Deutsche Bank demonstrates how steady or even falling rents have pulled down housing prices, to the point where in many markets it costs about the same amount to own as to lease. That’s a golden mean that America hasn’t seen in almost a decade. The DB research also offers convincing evidence that the wrenching adjustment in housing prices is finished for much of the nation, with a bit more pain to come in selected areas.

Before we get to the numbers, let’s examine why rents exercise a kind of gravitational pull over home prices.

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Existing home sales surprised the markets by rising 7.4% to an annual rate of 6.54 million units in November, the highest since February 2007, according to the National Association of Realtors (NAR). That’s only 10% below the all-time peak in 2005.

What’s more is that house prices, as measured by the S&P/Case-Shiller 20-City Home Price Index, rose for the fourth consecutive month in September before stabilizing in October when prices were flat.

The NAR is inevitably convinced that the worst is over and that housing is due for a rapid recovery, and that home prices will take out 2006’s peaks some time in 2011 or 2012.

Not so fast, guys!

The recovery in housing has been boosted by just about every artificial means imaginable:

• Interest rates have been kept historically low at 0% – 0.25% for a very long time.
• Fannie Mae and Freddie Mac, the bankrupt behemoths of housing finance, have been bailed out with what amounts to a blank check from taxpayers.
• The Federal Housing Agency (FHA) went on making mortgages with 3% down payments when nobody else was, thus very likely landing taxpayers with another bill for some large fraction of $1 trillion.
• And the government has been handing out cash subsidies for refinancing houses that were about to be repossessed and $8,000 subsidies for first time buyers – now $6,500 for all homebuyers.

Of course it looks like the housing market has recovered! The question is what happens when some of these subsidies are taken away?   Read more »

Leave it to the government to take a crippled housing market (which they helped destroy) and make it worse by prolonging its recovery.

Regulators have taken a loose and passive role watching the housing bubble inflate.  Now, true to their nature, regulators are making the problem worse with their slow response and lack of real-world solutions.

Real estate investors, in my opinion, have been unfairly squeezed by the ever tightening underwriting guidelines.  We are dealing with larger down payments, higher credit scores, larger cash reserves, and lower debt-to-income ratios.

As a real estate investor, Fannie Mae and Freddie Mac require you to have a bullet proof credit profile to even be considered for financing. When you consider that investors put up a larger down payment than most home buyers, require better credit, and typically research and buy investment property with a cash-on-cash return, lenders and regulators should be more willing to finance these solid transactions. They would also help solve the housing crisis by reducing the excess foreclosure inventory sought by rehabbers and wholesalers.

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Categories are graded from A thru F:

Economic Growth: D
The economy remains weak and although some indicators have improved compared to last month, they are improving from very low numbers. The third quarter GDP growth rate was revised downward to +2.8% from the preliminary report of +3.5%. Despite the downward revision, it still marks a great improvement from the second-quarter, and is the first quarterly increase in four quarters.

Job losses have eased slightly compared to last month, yet remain awful compared to history. In the last 12 months the U.S. has lost nearly 4.7 million jobs, which is equal to a decline of 3.4% of the total payroll workforce – representing one of the largest declines in 60 years. The headline unemployment rate surprisingly declined this month, reaching 10.0% in November, down from 10.2% in October.

The U-6, a broader measure of unemployment that covers part-time workers who would like full-time work and those who have given up looking for work, also decreased to 17.2% in November, down from 17.5% in October. Mass layoff events – defined as a cut of 50 or more jobs from a single employer – eased once again in October to 2,127, and marks the first year-over-year decline since August 2007, representing a 3.5% drop compared to last year.

The length of time required to find employment continues to increase, with job seekers taking over twice the normal length of time to find employment. The November CPI (all items) rose to 1.8% from one year ago, while the Core CPI (minus food & energy) remained flat at 1.7%.

Leading Indicators: C-
The U.S. leading indicators took a leg down this month after a run of steady improvements in recent months. In October, the Leading Economic Index 6-month growth rate declined to 10.2%, yet remains one of the largest year-over-year growth rates on record since 1983. Although the ECRI Leading Index, which is a gauge of future economic growth, also declined to 23% since one year ago, it still represents one of the largest growth rates since ECRI began tracking the statistic in 1968. Read more »

Housing prices have taken a beating over the last few years all around the country.  However, a few major cities have finally hit bottom and are on their way back.

The question that some are asking now is whether the rebound is temporary, or a clear sign that those markets have come back from their trough.

Here are ten major cities that are clearly on the mend:

A large percentage of the sales activity today is coming from first-time home buyers and investors.  In some markets this activity makes up over 75% of the total sales volume.

Remember that job growth is the primary driver of housing demand.  And job growth translates into more people with incomes who can buy or rent homes.  These markets have not been affected as much by the high unemployment we see in other parts of the country.

If you are a real estate investor sitting on the sidelines waiting for a bottom then this may be the nudge you need to get up and start investing.  There are a large number of prudent real estate investing opportunities available today with historically low interest rates to boot!

The mortgage crisis has been the main shark in the water over the past couple of years. You should know where that shark is and whether or not it is hungry. The chart below shows you those ferocious fish may still have an appetite:

It shows you that we are past the viscous subprime crisis, when that shark chewed through the balance sheets of a number of banks and financial institutions, in some cases devouring them whole. However, it is not yet safe to get back in the water:

There are these other slices of mortgages that are not quite as risky as subprime that reset in the next couple of years. Years 2010 and 2011 face big resets in so-called Alt-A and Option ARM loans. What this means is more write-downs and more losses for banks and others who hold these mortgages.

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On November 19, 2009 Freddie Mac recorded an average 30 year mortgage rate at 4.83%, down from 4.91% the previous week. Just over one year ago, the 30 year mortgage rate averaged 6.04%.  So long as you have solid credit and a 20% down payment, whether real estate investor or homeowner, this time in history is certain to mark historic lows for home buying.  In addition, those who still have equity in their property can take advantage of an incredible refinance opportunity.

Mortgage companies have seen steady rises in applications for refinance, but certainly not at the volumes seen just two years ago. Why isn’t everyone flocking to refinance? The answer is quite simple, homeowner appraisals are often below the requirements needed to refinance and many homeowners are dealing with loss of income due to unemployment or wage cutbacks. The only solution is for the economy to pick up and create more jobs along with more competition for increased wages. Unfortunately such a task, although eventually likely, is not in the near future. Economists across the nation are predicting additional declines in jobs during the first quarter of 2010. Job creation is likely to remain slow during most of 2010.

Yet there is still a silver lining to the doom and gloom. It is likely that the federal government will do all they can to keep interest rates low up until actual job creation becomes more robust. Interest rate hikes over the next 6 to 9 months will only occur if outside-international influences force the hand of our financial markets to increase rates. Although a remote chance of this exists, I for one believe we have another year of healthy-low interest rates within the real estate market. Once rates do inch up it is likely to be welcome, so long as inflation remains tame and not hyper.

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While both the media and stock investors believe that housing has bottomed, they are unaware of the massive supply of homes that are already in the foreclosure process that will certainly drive home prices down even further when they are sold. We have been projecting a “W” shaped recovery for some time, and we are becoming even more convinced that we are right. The shape of the second leg down is almost completely dependent on the level of government intervention that will take place.

For a number of reasons, banks have not been aggressively taking title to homes and selling them, which has resulted in very few distressed sales in comparison to the actual level of distress in the market. This delay in REO sales, along with historically low mortgage rates and an $8,000 tax credit, has helped to stabilize the housing market – temporarily.

It is very clear that price stabilization is temporary unless something is done. Here are some facts to help project what housing will be like in 2010:

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It looks like the majority of U.S. housing markets have bottomed. So, if you’ve been thinking about buying investment property, this may be the time to make your move.

When the National Association of Homebuilders released its NAHB Index for October last week, it showed a drop of one point in homebuilders’ view of the market, from 19 to 18.

The good news:  The index is at double its level from last spring – when it bottomed out at nine – meaning homebuilders see an improving market.

The bad news:  The index is based so that a reading of 50 is the “neutral market” view. That means there’s a long way to go.

30-year mortgage rates are still close to their all-time low, currently around 5.1%. But rates probably won’t remain that low for long. Building inflationary pressures and the huge U.S. budget deficit will combine to eventually push interest rates higher.

Even if house prices drop by another 10% in some markets (except in the very worst areas, I wouldn’t expect too see anymore than that), you still may end up saving more on financing costs by buying now than you would by waiting for any further declines.

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During the past three years, home prices grew in the beer-guzzling heartland and fell in the wine-sipping coastal states.

If you’re a beef-eating, beer-guzzling, pick-up driving resident of heartland America, there’s a good chance you escaped the housing bust. But pesto-chomping, chardonnay-sipping, hybrid-driving city-slickers were probably out of luck.

Over the past three years, 23 states recorded home price gains in the majority of their metro areas, according to analytics firm Fiserv. And where were most of those gainers? In much of the so-called heartland: the South, the Plains and most of the non-coastal West.

Meanwhile, the 16 states that posted declines were led by much of New England and the Northeast, plus California, Florida, Nevada and Arizona.

Most telling, however, was that the 12 remaining states — those that posted mixed results in their metro areas — were found in every region of America.

And even in the mixed results states, such as New York, the bust hit "blue" metro areas, like New York City and Long Island (both down 21.7%), and spared "red" upstate cities. Buffalo prices grew 8.3%, Syracuse climbed 8.4%, Utica gained 10.4%, and Binghamton was up 17.7%.

The states where metro markets rose generally share two characteristics, according to Mark Fleming, chief economist for First American CoreLogic: low prices and open space.

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Contrary to popular opinion, home prices have not bottomed out, according to the financial information and analysis firm Fiserv.

The firm projects median home prices will drop 11.3 percent by June 30 of next year. It predicts declines in 342 of 381 markets over the next year. Only then will prices stabilize, and rise 3.6 percent in 2011, the firm predicts.

The S&P/Case-Shiller Home Price Index had seemed to indicate prices had already stabilized. The composite index of 20 cities rose in May, June, and July, and home prices gained 3.6 percent nationwide.

But it now looks like that may have been a blip due to the impact of the tax credit for first-time homebuyers, analysts said. By the end of November, when it expires, the credit will have been used by 1.8 million homebuyers, at least 355,000 of whom would not have bought a house without the tax break.

In Fiserv’s latest forecast, the markets that will have the steepest declines are those with the greatest number of foreclosures.  [Are these new opportunities for real estate investors?]

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Just when you thought foreclosure filings were stabilizing, they hit another all-time high with almost 938,000 homeowners filing in the third quarter, according to Realty Trac.  This is a 5% increase from the previous quarter.

Six states account for 62% of the nations foreclosures:
California, Florida, Arizona, Nevada, Illinois and Michigan accounted for 62 percent of the nation’s total foreclosure activity in the third quarter.  That accounts for 579,541 properties receiving foreclosure filings in the six states combined.

Although California’s foreclosure activity decreased almost 2% from Q2 there were still 250,054 properties that received a foreclosure filing.   That was a 10% drop in default notices but a 4% increase in scheduled auctions and 12% increase in REOs.

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I have avoided this subject since it is extremely comprehensive and difficult to comprehend. But out of popular request, by you my readers, I have decided to tackle the subject of US currency valuations, its impacts, and related investor fear in this article.

The U.S. dollar is the preferred world reserve currency and the most powerful instrument both domestic and international. This article explores how you, the real estate investor, are impacted from its valuation and what we should be doing as a nation to best manage it.

Fear is certainly not unwarranted given that a swing in dollar valuation against foreign currencies impacts the price of almost all U.S. goods. In particular, investors of U.S. Real Estate and U.S. Equities watch our currency very closely to monitor the future health of our economy. When the dollar is highly valued compared to other currencies the US consumer reaps lower domestic prices for all imported consumer goods and materials (everything from toys to building materials). Of course a highly valued U.S. dollar makes all of our exported goods more expensive to international consumers.

In contrast a weak US dollar makes imported consumer goods more expensive and exported goods less expensive to the rest of the world. Large swings create havoc to our economy and make monetary policy difficult at best. Ultimately, ourselves and the international community strive for a predictable and stable U.S. currency. This allows us to regulate our monetary policy more effectively and stabilizes the prices of goods and services. From time to time we have seen our international suppliers/buyers manipulate our currency in hopes of getting more out of the U.S. consumer, however given our recent economic woes, most of the international community is trying to create dollar stability.

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Homeowners are facing an economic crunch from the housing crash, but investors often face even more severe repercussions. More than 1 in 3 foreclosures are of investment properties, and should the foreclosure epidemic worsen as forecast, that number is expected to rise as more investors walk away from mortgages.

During the real estate boom investors and speculators bought homes, fixed them up and many sold within months. But the real estate crash prevents them from doing just that. Living in a home intended to be an investment property has become the answer for some investors, while others select to rent the property. More than 240,000 homes sit vacant nationwide, according to the U.S. Census Bureau.

A key strategy of buying a home to flip has gone by the wayside as more and more real estate investors purchase properties for the long term. Just when and how long it will take to reap profits from their investments is an uncertainty with some economists saying that it could take more than 10 years for the market to become healthy enough to make a good profit.

In his book “The Millionaire Real Estate Investor”, Gary Keller, founder of Keller Williams Realty International, keeps a basic theme: “Buy real estate right, pay it down and pay it off.” The ultimate goal should be to own lots of real estate free and clear for maximum cash flow. That mantra is attracting millions of investors and wannabe investors back into the depressed housing market to invest.

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For most people, it is difficult to read through a financial newspaper or watch late night television without seeing repeated (possibly obnoxious) exhortations to invest in commodities such as gold or silver. The logic of these advertisements is frequently sound, since it is certainly true that government irresponsibility is leading toward a currency collapse and massive inflation.

What frequently gets left out of the analysis are the other options available for investment that offer far greater prospects for return than gold or silver.

We are in absolute agreement over the prospect for commodity price inflation in the future. We are in absolute agreement over the massive deficits, crushing debt, and lax monetary policy of the government being a harbinger of runaway inflation over the coming decades. We are also in agreement over the dimming long-term prospects for the stock market, since there doesn’t appear to be a new pool of investment capital to propel the stock market into an upward spiral like the one experienced over the last 25 years.

The strategy that we advocate is to use the attributes of rental real estate to invest in the commodities used for home construction. By following this strategy, we gain ownership of valuable commodities such as wood, concrete, petroleum products, and other building materials with the advantage of leverage from the bank and tax advantages from the government. We affectionately refer to this phenomenon as ‘packaged commodity’ investing because the commodity products are packaged into a residential home instead of sitting in a warehouse. The culmination of this strategy lies in the fact that commodities packaged into real estate investments can be rented to tenants. As an investor, this allows you to purchase commodity products while outsourcing the interest payments to a tenant and hedge against inflation with fixed rate debt, while delaying the payment of taxes through a section 1031 exchange.

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Is the U.S. housing market truly at a turning point, as real estate investors seem to increasingly believe? Or is this actually a false dawn, meaning that there are problems ahead for those who turned bullish too soon?

New home sales jumped almost 10% in July, while the Case-Shiller home price index rose for the second successive month. Yet luxury homebuilder Toll Brothers lost $493 million in the quarter ending July 31, considerably worse than analysts had expected.

Housing stocks are certainly acting as if a recovery must be on the way. Pulte Homes Inc. has more than doubled from its low. Toll Brothers Inc. is up around 70% from its bottom. D.R. Horton Enterprises is up almost four times from its bottom. Lennar Corp. is up about 4.5 times from its low. Finally, Hovnanian Enterprises Inc. is up almost tenfold from its low after a flirtation with bankruptcy. Yet all of these companies are still racking up quarterly losses, according to their most recent earnings reports.

In terms of house prices, it would seem unlikely that a bear market bottom has been reached. Yes, the average house price is now back down around its long-term average of about 3.2 times average earnings, or only a little above it. But history suggests that markets don’t bottom at their average valuation: In fact, after such a huge excess to the upside, they overshoot on the downside.

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I’m sure you know by now that it was the first wave of defaults in “subprime” mortgages that helped spark today’s economic meltdown.  What you might NOT know is that there’s a whole second wave of mortgages in the pipeline that are just as toxic and just as large as the first.  This second wave may be just as far reaching.

You can see that the first peak in subprime loan “resets” arrived smack dab in the middle of 2008. And many billions in bank write-downs, along with trillions of dollars in market losses, immediately followed.

This second wave of toxic property loans, made up of so-called “option ARM” or “Alt-A” loans, won’t hit peak resets until 2011.

What are these toxic loans? They are the fancy mortgages snapped up by middle Americans to buy homes nobody imagined would be worth only a fraction of their selling price  just two years later.

And just like in the subprime wave, these loan contracts also carry a “reset” risk in the fine print, when already high monthly mortgage payments could as much as double — right at the height of the second biggest market meltdown since the Great Depression.

Millions of additional consumers will freeze up as their finances go over a cliff.  More bank losses will drag down even more so-called “blue chip” retirement portfolios, and the impact of the consumer bust will get “multiplied” yet again. Millions of additional Americans could lose everything.

Will this present us with new real estate investment opportunities?  Very likely.  In addition to the large number of foreclosures and bank REOs, most real estate markets around the country will continue to offer investors with low-priced real estate due to an ongoing buyer’s market sustained by excess inventory.

What do you think the upcoming second wave of mortgage “resets” will bring us?

The FHA is a big reason that home prices haven’t fallen even further. The FHA’s aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. The FHA is an even larger percentage of the new home mortgage industry – nearly 25% according to HUD.

The FHA insurance fund, however, is likely running dry. According to a report from mortgage finance experts, the FHA will not meet its minimum requirement as of its fiscal year-end, which is only 26 days from now. For months, we have been investigating this and reporting our findings to our clients.

While almost all of the experts believe that Congress would support the FHA if necessary (it’s currently self-funded), we wonder if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. Already, FHA has contracted its own standards to require a 10% down payment for those with credit scores below 500.

Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent.

Given the FHA’s September 30 fiscal year-end, this financial reality will come to light about the same time that other market forces run out of steam:

• Just as the $8,000 tax credit expires.
• Just as more of the stalled REO currently held on banks’ balance sheets will be coming to market.

The culmination of all these factors means housing could see another leg down by early next year. 

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Texas is a state that we highly favor these days due to it’s growing economy, growing population, and excellent real estate markets.  Currently we offer two real estate investment opportunities in Dallas:

* Single Family Homes:  Dallas Single Family Investment Property

* 3-Bedroom Duplexes:  Dallas Duplex Investment Property

A total of 22,511 existing homes were sold in Texas last month, a 4.8 percent decline from July 2008, according to MLS data compiled by the Real Estate Center at Texas A&M University. The median price increased 0.6 percent to $153,800 during the same period, and the state finished the month with a 7.4-month inventory of existing homes.

Here is how select Texas cities fared in July (data current as of August 28, 2009):

This is a great time to be investing in prudent Texas income property.  Call us for more information on markets and opportunities available today.  What are your favorite Texas markets?  (comment below)