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Why Housing Prices Are Essentially Meaningless

July 30, 2009 by Marco Santarelli

It took the Wall Street Journal an entire survey to prove what readers of this column have known for months: The housing recovery, as it plays out, will be a localized event, varying greatly city to city, neighborhood to neighborhood, street to street.

The Journal, god bless them, compiled housing data to compare inventory changes, months supply, price drops, unemployment, and default rates across 28 US metro areas. Unsurprisingly, bubble markets like Las Vegas, Phoenix, and Miami look particularly horrid, whereas areas like Dallas (which avoided much of the housing mania) and cities like Charlotte and Seattle (which are just now seeing price declines accelerate) appear to be holding up rather nicely.

But drilling deeper into the raw data reveals a housing market that's deeply bifurcated, even within individual cities.

As low-end markets experience a sharp increase in buying activity due to supply shortages and vastly lower prices, illiquid high end markets are experiencing violent price swings — typically in the southward direction. This much is already known, and the Journal's study simply shows what we're told ad nauseam: real estate is, in fact, local.

What's far more applicable to home buyers and sellers around the country, however, isn't what a few broad (yet important) data points show about what's happening in a few hundred neighborhoods all lumped together. Instead, it's where individual submarkets are headed. After all, owning a home is an investment in a neighborhood, a street, a community — not necessarily a metropolitan area at large.

Housing prices, by extension — when measured as broadly as a metro area — are basically meaningless.

[Read more…]

Filed Under: Economy, Housing Market Tagged With: home prices, house prices, housing, Housing Market, Real Estate Market

Commercial Real Estate – The Next Shoe to Drop

July 28, 2009 by Marco Santarelli

I don't know if the real estate bubble is done popping. I suspect it is not.

If there is another shoe waiting to drop on the U.S. economy, its commercial real estate. Bloomberg reports that $165 billion in commercial real estate loans mature this year. They must be refinanced or sold. Either way, it seems like some losses must be taken.

As of July 8, 2009, $108 billion worth of properties were in default, foreclosure or bankruptcy. That's a lot. Throw in the 22-year high of vacant apartments, and you get a picture where landlords are really struggling.

Goldman Sachs took $700 million in losses from commercial real estate in the last quarter. And it did so without a hiccup. And we have the various government bailout programs to thank for that. Without the government sponsored ability to earn their way out of this mess, that $700 million could've been a much bigger deal.

The one hope regarding commercial real estate is that the problem is pretty well known. And so far, it's not moving the stock market.

Bloomberg threw out some big numbers for regional commercial real estate debt that was due in June. $463 million worth of office loans in Houston, $986 million in industrial mortgages in Portland, Oregon, $96 million in retail property in Orlando.

Was this debt paid? Was it refinanced? Is it in default? We don't yet know. And we won't know for up to 90 days, which is a typical grace period. It will be a while before we know whether these loans will become losses.

Filed Under: Economy Tagged With: commercial real estate, Real Estate Investing, Real Estate Market

Beyond Subprime in the Mortgage Market Meltdown

July 27, 2009 by Marco Santarelli

During the housing mania, it seemed that the majority of the United States suffered from a mass delusion. They believed their properties would always go up in price, but their mortgage payments wouldn't follow suit.

We have mountains of debt to work through yet. The last bubble was one for the ages. We've all heard stories of one kind or another…

There was the glass cutter who earned $5,000 per month, pretax. WaMu gave him a $615,000 home loan with payments of $3,600 per month.

There was a house – a shack, really – that appraised for $132,000 and got a mortgage of $103,000. The owner hadn't worked in 13 years. Upon foreclosure, a neighbor bought the house and paid $18,000 just to tear the thing down.

And the most eye-popping of all: A house in Fort Myers that sold for $399,600 on Dec. 29, 2005 – only to sell for $589,900 on Dec. 30, 2005.

America, it seems, just went crazy – borrowers, lenders, nearly everybody. These anecdotes and others are told in a new book titled More Mortgage Meltdown by money managers Whitney Tilson and Glenn Tongue.

But what caused the mania and how we got there is less to the point than what happens from here.

“If the problems in the mortgage market were limited to subprime loans, then the carnage would be mostly behind us,” the authors note. Subprime loans were the riskiest mortgage loans. Prime loans were where the borrower made a substantial down payment and had good credit history. Subprime loans, by contrast, were to borrowers of poor credit quality and spotty job histories.

The bigger problem is that the mortgage bubble infected a number of areas beyond just subprime. The subprime crisis was the first to drop, like a marathon dancer that falls to the floor exhausted. But there are still other dancers on the floor ready to topple over too.

Take a look at this next chart, which has gained some currency in the worried circles of financial people. It's worth a bit of study. It shows you the other dancers on the floor.

[Read more…]

Filed Under: Economy Tagged With: mortgage market, mortgage mess, national debt, Real Estate Investing, subprime

Why Real Estate is Still a Good Investment

July 22, 2009 by Marco Santarelli

Now that the housing bubble has crashed, a growing number of academics, journalists, and financial gurus are trying to reassess the value of real estate as a long-term investment class.

There is a growing — and much needed — consensus that much of the conventional wisdom about real estate as a “great investment” is over-hyped and oversold by the National Association of Realtors who also happen to be a powerful lobbying group, dictating our national housing policy.

The Wall Street Journal's Cheapskate columnist looks at housing and reaches a good conclusion (subscription required), explaining that the real financial return of homeownership comes from not having to pay rent: “That's why you should buy as much home as you need — but no more. A bigger home than you need isn't an investment — it's an extravagance, the equivalent of renting a bigger apartment than you need. You may choose to do so, but that doesn't make it a smart move financially.”

Unfortunately though, Cheapskate also makes a key math error in calculating the return on his real estate investments over the years: “When I constructed a very basic cash-flow model for our home-buying history-selling price minus purchase price, renovations and repairs — it showed a roughly 3.5% annualized return on investment, from 1991 through the summer of last year.”

[Read more…]

Filed Under: Real Estate Investing Tagged With: real estate comparison, Real Estate Investing, Real Estate Investment

Investing in a Real Estate Attorney

July 16, 2009 by Marco Santarelli

When looking to invest in real estate everyone is looking for a good deal. Whether you are looking for land to purchase and raise a family or looking to flip real estate and make a profit, you will want an attorney that understands all the ins and outs of real estate. The last thing you want is to put in time and effort believing you are getting a great deal just to find out you have been deceived.

The greatest benefit in hiring a real estate attorney is having them review everything before you sign on the dotted line. They are trained professionals who read complicated contracts every day. The terminology may be confusing to you and I, but having the attorney there going over every line of the contract can save you from signing a document you may regret.

In choosing a real estate attorney there are three factors that I believe are most imperative:

First, make sure the attorney is experienced and has proper credentials. If the lawyer has no experience they may not know exactly what wording needs to be in the contract. Yes, they have had more schooling than you or I, but they still lack practical application.

Second, make sure the attorney has a good attitude. If they appear as if they do not want to be working with you, you probably do not want to be working with them. People who do not enjoy their job are less likely to perform at a high rate than those who do enjoy their job.

Finally, be sure to find a real estate attorney that has a set fee. Costs can quickly rise when using an attorney. Be sure to clearly understand the attorney’s fee schedule before hiring them.

Remember, when investing in real estate for whatever the reason; also invest wisely in a real estate attorney.

Filed Under: Real Estate Investing Tagged With: Real Estate Investing

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