Norada Real Estate Investments

U.S. Housing Market Intelligence Report (August 2011)

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Categories are graded from A thru F:

Economic Growth: C- (June 2011: D+)
The U.S. economic recovery remains sluggish. Real GDP grew at a 1.3% pace in 2Q11, following downwardly revised growth of 0.4% in 1Q11; far below the 1.9% rate of expansion previously estimated for last quarter. We now have positive Y/Y employment growth for eleven consecutive months, with payrolls expanding by 117,000 in July, up from 46,000 in June, and the unemployment rate dropping from 9.2% to 9.1%. Initial jobless claims fell to 400,000 in July. Government payrolls decreased by 37,000 in July, the ninth straight sequential drop.

The average length of unemployment increased to 40.4 weeks (new record high), and the labor force percentage of those unemployed over 27 weeks dipped slightly from 4.1% to 4.0%. On a positive note, retail sales continue to improve, with Y/Y growth at 8.5%.

Leading Indicators: C- (June 2011: C)
Leading indicators for the economy are mixed this month, with our overall grade for this subsection of indicators dropping from a C in June to C- in July. Many of the leading indicators we analyze have been trending down over the past several months, returning to levels not seen since mid-2009, a time when the U.S. economy was still in the midst of the Great Recession. For example, the ISM Purchasing Managers Index has fallen two consecutive months, dropping to 50.9 (just above the expansion threshold value), a level not seen since July 2009. In addition, the Vistage CEO Confidence Index fell in 2Q11, crossing into negative Y/Y territory for the first time since 2Q09. Corporate profit growth was revised down from last quarter, rising at an 8.8% Y/Y clip in 1Q11, the weakest annual growth rate since Q309. Other leading indicators such as the ECRI Leading Index were relatively flat versus last month.

[Read more…]

National Economic Outlook (August 2011)

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Jobs, jobs, jobs! That's what we'll hear from now on through the 2012 election, and rightly so. Although they claim otherwise, Wall Street and the Big Banks are not the essential, indispensable, must-be-bailed-out part of the national economy: it's people with jobs.  Those people account for 70 percent of the economy (the government is 20 percent).

As we've already seen, those people aren't spending very much money these days, needing no more time-share condos, full-size SUVs, leather furniture, and flat-screen TVs. Which means there are fewer jobs for the people who were making those things a few years ago.

The national economy grew at a modest annual rate of 1.3 percent in the second quarter of this year, better than the 0.4 percent of the first quarter, but there is some cause for anxiety: personal spending was flat in the second quarter, after growing between 2 and 3 percent in 2010.

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Bad Debt vs. Good Debt

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This is an investing concept that’s not often thought about within the context of real estate, but it’s vital for you to understand the differences between these two types of debt.

Bad debt is typically referred to as consumer debt. What makes bad debt “bad” is the fact that it’s not being used on anything that produces cash flow or appreciates over time. Vacations, clothing, iPads, and anything else that doesn’t work for you in generating a return on that debt is considered bad debt.

Bad debt sources usually come from credit cards, but they can also include car loans, store credit, and personal lines of credit. Interest rates are usually high and are generally higher than most good debt sources.

If that isn’t bad enough, the interest you pay is almost never tax deductible. The only exception to this rule might be a qualifying business expense if you can deduct such an expense.

[Read more…]

U.S. Housing Market Intelligence Report (June 2011)

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Categories are graded from A thru F:

Economic Growth: D+
Trends were mixed this month, as a few metrics ticked up while the majority ticked down, resulting in a drop from C- last month to D+ this month for overall economic growth.  The employment market improved once again this month, (albeit at a less than stellar pace) and Y-O-Y employment growth has now been positive for nine consecutive months.

Payrolls expanded by 54,000 in May, the smallest gain since September 2010 when 29,000 jobs were lost, while the unemployment rate increased marginally from 9% to 9.1%.  The government continues to slash jobs (29,000 this month), and has now eliminated roughly 850,000 jobs over the last 12 months.  In addition, the average length of unemployment increased to 39.7 weeks (a new record high), and the labor force percentage of those unemployed over 27 weeks rose to 4%.  While still down Y-O-Y, mass layoffs have been trending up over the last several months, rising again this month.

The rate of inflation (both full and core) continued to increase this month, maintaining its steady upward trend that began in Spring/Summer 2010.

[Read more…]

National Economic Outlook (June 2011)

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With presidential elections coming up next year, and Osama Bin Laden now dead, we're going to be hearing a lot of political talk about the old Bill Clinton mantra,“It's the economy, stupid.” So, let's look at the basics.

“The economy” means jobs. From the high point of the expansion that ended in 2007, to the low point of the recession in early 2010, the economy lost about 9 million jobs. Almost 2 million of those jobs have been recovered and the economy is adding new ones at a rate of 1.5 million a year, but even if this rate improves, that's only another 2 million before election time, still leaving us down 5 million jobs from where we were.

The culprit, of course, is ourselves. Instead of freely spending money like we did, we've been putting it in the bank, an extra $400 billion a year. That equals a lot of jobs, even if some of them are in China. In the long run this is a good thing because we had gone over our eyeballs in debt, but in the short run it means the economy will grow only slowly.

[Read more…]

U.S. Housing Market Intelligence Report (April 2011)

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Categories are graded from A thru F:

Economic Growth:  C-
Economic growth trends were mixed this month, as several key metrics ticked up while others ticked down.  The employment market improved once again as year-over-year employment growth has now been positive for seven consecutive months, and unemployment now stands at its lowest level since March 2009.

In addition, retail sales improved this month, while real GDP for the fourth quarter was revised slightly higher to 3.1%. On the downside, the rate of inflation (both full and core) continues to increase, while the average length of unemployment increased to an all-time high, currently at 39 weeks.

Affordability:  D+
Affordability has rarely been better for entry-level buyers, and rarely worse for move-up and move-down buyers, who need to extract equity from their existing home.  As such, we continue to grade our overall affordability indicator at a D+.  After increasing every quarter from Q1-2009 through Q2-2010, owner equity declined for the second consecutive quarter in Q4-2010; a reflection of the continued downward pressure on home prices.

Mortgage rates remain near historical lows, and home prices have dropped from unrealistic boom levels to entirely sustainable levels, with some markets like Las Vegas well into “over-correction” territory.  Our housing-cost-to-income ratio remains low, now at 22.4%, and our JBREC Affordability index stands at a remarkable 0.0, which is the highest possible rating for affordability.  The median home price-to-income ratio has declined to 2.8, which is less than the long-term historical norm and near a level conducive to market health.

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Why Real Estate Investors Love Inflation!

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Investors love real estate because it acts as a hedge against inflation. This occurs for several reasons:

One, on an historical basis, housing prices rise just as fast or faster than the rate of inflation. Two, although investors can’t always raise rents to account for inflation (due to fixed-rent leases of one year or more), the value of the property itself will increase. Three, when real estate investors have a fixed-rate loan, expenses will stay the same, and they pay back that loan with money that’s worth less than what they borrowed! In effect, it’s a form of debt reduction. It just doesn’t get any better than that!

Inflation should be moderate in order to benefit investors. Hyperinflation or its opposite – deflation – are definitely bad news for everyone.

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The U.S. Housing Market's False Bottom

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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:

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…]

Is the US Currency Dying?

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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 , 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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The U.S. Housing Market's False Dawn

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Is the U.S. housing market truly at a turning point, as 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.

[Read more…]

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