Archives for September 2012

Is the Fed's QE3 Good for the Housing Market?

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Last week, the Federal Reserve announced a new round of “quantitative easing,” or QE3, meaning the Federal Reserve will  fire up the printing presses to buy $40 billion worth of  mortgage-backed securities (MBS) every month on an open-ended basis in an effort to further drive down historically low interest rates.

Federal Reserve Chairman Ben Bernanke said QE3 should put downward pressure on mortgage rates, helping the housing market.  By lowering borrowing costs and spurring  banks to lend more, the Fed hopes to induce more spending and eventually set  the stage for more hiring.  The Fed tied its bond-purchase program explicitly to jobs, saying it will keep buying bonds until it sees a substantial improvement  in the labor market.

Who benefits from QE3?

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The Delaware Series LLC for Real Estate Investors

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Following up to our previous article titled, “3 Reasons a Series LLC Should be a Real Estate Investor’s Best Friend“, we now focus on benefits of a Delaware Series LLC.

The Delaware series LLC is a form of a limited liability company that provides liability protection across multiple “series”, each of which is theoretically protected from liabilities arising from the other series.  It is similar to a parent/subsidiary structure, such as GM and it’s various brands.  For example, you could have a master LLC that owns different subsidiaries which in turn own small groups of real estate.  The subsidiaries would shield both the master and other subsidiaries from liability.  Thus, a real estate investor can reduce the exposure to the assets that any one subsidiary owns.

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More Evidence That Home Prices Have Hit Bottom

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In each of the last three years, home prices have increased in the spring and summer, when more people are buying homes, before giving back all of those gains and then some in the fall and winter, when activity cools.

But it is beginning to look like that might not happen this year, absent a major stumble for the economy.

Home prices in July were up by 3.8% from one year ago, the largest year-over-year jump in six years. Moreover, prices have shot up by 9.6% from February, when they registered their lowest levels of the housing downturn, according to CoreLogic data released Tuesday.

This adds evidence to the case that U.S. home prices may have hit bottom earlier this year. Even though prices will soften in the autumn, “we have a much better supply and demand dynamic” than in previous years, says Mark Fleming, chief economist at CoreLogic.

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National Economic Outlook (September 2012)

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Let's do the jobs math. In August, as in the preceding months, the number of jobs was 1.4 percent higher than last year. We're probably stuck at this growth rate which translates to 1.8 million new jobs per year.

Unemployment is at 8 percent but it rarely gets below 5 percent, so the “excess” unemployment is about 4 million. At 1.8 million per year it would take just a couple of years to put those 4 million back to work, but new people enter the workforce every day so it will probably take twice as long.

What will accelerate the recovery is construction, which has been below replacement levels as we coped with an excess 4 million homes built during the boom. We've almost absorbed that excess and there will soon be unmet demand in many local markets; home prices have bottomed out in half of the 315 markets we cover. Other construction will also increase as state and local governments spend on delayed infrastructure projects.

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Just How Cheap is US Housing?

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Consider Minneapolis, Minn.  You could’ve bought, out of foreclosure, a three-bedroom, two-bath house of 1,356 square feet on a quarter acre lot for about $29,000. It needed a lot of work, but houses in the neighborhood recently sold for $75,000.

Your mortgage would be under $100 per month and about the same in taxes. You could’ve got $1,000 in rent. Even if you had to put $40,000 in the house, your gross yield (cap rate) would’ve been 17.4% on the property.

This is one example sleuthed by my friend Gary Gibson. “The house had mold damage and needed a lot of work,” he wrote. “Beautiful yard, however.”

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