It's a beautiful, long holiday weekend. I've been celebrating Thanksgiving with my family, and I'm sure many of you are also busy with relatives and friends. So I'm going to keep this week's column short.
Specifically, I'm going to highlight three big questions we should all be thinking about — and offer up my best answers. I feel these are the most important three questions to ask right now because the answers will determine the next big moves in the market and the U.S. economy.
First, is the Citigroup rescue the end of the financial crisis?
We gained 494 points in the Dow Jones Industrials a week ago and another 397 points on Monday. The dollar also gave back some of its recent gains, and the large rally in Treasury bonds petered out. Clearly, Wall Street greeted the bailout of Citigroup with a big sigh of relief.
Will the rally stick? I hate to sound jaded. But haven't we heard after EVERY SINGLE ONE of these bailouts: "This is it. This will put the floor under the financials. Now is the time to buy, buy, buy?"
We heard it after Bear Stearns was rescued.
We heard it after Fannie Mae and Freddie Mac were taken under the government's wing.
We heard it after AIG was bailed out.
And we heard it when the TARP plan was originally rolled out. In fact, this rally so far looks A LOT like the one we got on September 18 and September 19. The Dow surged 410 points on the eighteenth and another 369 points on the nineteenth after news of the government's TARP plan first leaked.
But just like every other short-term rally before it, that rally quickly failed — and the market soon set new lows. So forgive me if I sound skeptical about this being the "end" of the financial crisis. It's more likely just another way station on the road to lower stock prices.
Second, will an economic stimulus plan work?
President-Elect Barack Obama's revised stimulus plan looks a lot more aggressive than what had been talked about previously. It's also much larger than the tax refund plan that was put into place in the spring. So it's definitely worth paying attention to exactly how the plan — and the prospects for its passage — evolves.
But is the stimulus plan a reason in and of itself to get bullish on the market? I don't think so.
Several hundred billion dollars is a lot of money. But the economic challenges we face as a country are extremely large. And the losses our financial institutions are piling up — both here and abroad — are much larger.
This plan could buy the economy some time, keeping it stronger than it would otherwise be. Still, if the underlying economy can't heal ... if the credit market problems don't get better ... then we'll be right back to square one when the impact of the stimulus wears off.
Indeed, the very real risk is that NO amount of stimulus can prevent the de-leveraging process from running its course.
Japan's experience in the 1990s is instructive. The government there passed repeated "bridge to nowhere"-type infrastructure plans, and the central bank slashed interest rates to zero in an attempt to help the economy recover from twin busts in the stock and real estate markets. End result: The economy struggled through a "Lost Decade" anyway.
Third, how in the holy heck are we going to pay for it all?
My daughters are three and six. They wouldn't know Treasury Secretary Henry Paulson or Fed Chairman Ben Bernanke if they ran into them at the grocery store.
But the decisions that Paulson and Bernanke are making today are going to bury them ... and maybe even THEIR children ... under a mountain of debt the likes of which the world has never seen.
Do you know how much we have committed as a country to rescue the financial system and credit markets? How does the number $7.8 TRILLION ... half the country's GDP ... sound to you? That's the price tag The New York Times put on all the bailouts and credit plans recently.
Included in its tally:
• The Fed's $2.4 billion program to buy commercial paper,
• The $1.4 trillion commitment from the FDIC to backstop interbank lending,
• The $29 billion bailout of Bear Stearns,
• The $306 billion in guarantees of Citigroup assets,
• The Term Auction Facility,
• The Money Market Investor Funding Facility, and
• All the other programs the Fed and Treasury have implemented.
It also includes yet another pair of programs just announced this week. The Fed has agreed to buy up to $800 billion in Fannie Mae and Freddie Mac bonds, mortgage-backed securities and securities backed by credit cards, auto loans, and small business debt.
I simply cannot figure out how we're going to pay for it all without borrowing an astronomical amount of money — and sticking future generations of American citizens with the bill.
For now, flight to safety buying is bolstering Treasury bond prices. But that effect will fade at some point. And when it does, you will likely see the price of Treasuries tank — and interest rates surge — due to the nation's profligacy.
So be sure to keep your head when investors around you are losing theirs. I do NOT think the answers to these key questions are as clear-cut as the bulls would have you believe. And I DO think focusing on safety remains the best course of action.
Friday, November 28, 2008
Friday, October 24, 2008
The Credit Virus Spreads Worldwide: Commentary from Money and Markets
Back in 1997, a minor currency crisis in Thailand rattled a few regional market players. But the rest of the world ignored it ... at first. They said it wouldn't matter to the U.S. and would be just a blip on the radar screen.
But soon the decline in Thailand's currency, the baht, accelerated. It went from a gentle slide to a full-scale rout. Before long, currencies in the Philippines, Indonesia, and South Korea began to fall out of bed.
Then regional stock indices later crashed. Our Dow suffered what was then one of the largest point declines on record. And the International Monetary Fund was forced to step in and bail out several economies — to the tune of tens of billions of dollars.
It was a scary time. But compared to what is happening now, the 1997 crisis looks like a day at the beach. Right now ... in far-flung corners of the world as diverse as Iceland, Hungary, Argentina, India, and elsewhere ...
Currencies aren't just declining. They're crashing.
Stock markets aren't just falling. They're collapsing.
Foreign investors aren't just walking for the exits. They're running ... and trampling anyone in their paths.
You may not keep a chart of the Hungarian florint, that nation's currency, on your screen. You probably don't look at Argentina's Merval Index very often, if ever. And you may have never touched an Icelandic krona in your life.
But if you could look at charts of all of these obscure indicators, like I have, or if you studied the fundamental behind the moves, as I have, you would conclude the same thing that I did a while ago: The virulent credit virus has spread worldwide. And that has serious implications for you and your portfolio. Here's more ...
Crisis in Hungary, Argentina, Iceland, oh my!
In Hungary, the currency has been plunging for weeks on end as global investors pare risk and withdraw funds from higher-risk emerging markets. The forint recently traded at 214 against the dollar, a huge decline from the 143 level back in July. In other words, one U.S. dollar buys many more forints than it did a few months ago.
That prompted a serious reaction from the Magyar Nemzeti Bank, Hungary's central bank this week. It jacked up the nation's benchmark rate to 11.5% — an increase of a full three percentage points — to defend the currency and stem the flight of capital.
Meanwhile, in Argentina, the country said it plans to seize $29 billion of private pension funds. This caused bond yields in the country to surge. The Merval stock index plunged 11% on Tuesday, then another 10% on Wednesday. It is down more than 55%on the year.
The government last raided pension fund investments to service its debt in 2001. But it didn't help. Argentina then defaulted in a move that sent shockwaves throughout the global capital markets.
As for Iceland, the market has all but collapsed. The country's three biggest banks have been nationalized. Its currency has lost more than half its value in the past two years. It's being forced to pursue a multi-billion dollar bailout from its Scandinavian neighbors and the IMF.
The most shocking of all: Its benchmark stock market gauge, the OMX ICEX 15 index, has plunged 89% year to date! To put that in perspective, if our Dow did the same thing this year, it would be trading around 1,460.
Even bigger countries, like India, are running into trouble. Overseas funds dumped a record $12 billion of Indian shares so far this year. Foreign exchange reserves have dwindled by $42 billion as the Indian rupee has imploded. It recently slumped from 39.20 against the dollar to 49.50 — a record low.
Bottom line: The credit virus is now spreading its sickness to the four corners of the world.
What it means back home
Some pundits have made a big deal about the recent improvement in certain domestic and developed market credit indicators. The gains stem from the Federal Reserve's and Treasury's largesse, as well as the banking bailouts being put into effect in continental Europe, the U.K. and Canada, among other places.
But the improvements have been minor when compared to the hundreds of billions of dollars in aid that has been thrown at the markets. There are also disturbing signs that the aid isn't getting at the core of the problem — the housing market.
One indicator of ongoing weakness there: The latest Mortgage Bankers Association figures on home loan applications. The group's index, which tracks demand for home purchase and refinance loans, plunged 17% in the most recent week. The purchase application sub-index is now plumbing depths not seen since October 2001, a sign that housing demand remains anemic.
All of these problems are now coming home to roost — again — in the U.S. stock market. The Dow plunged 232 points on Tuesday and another 514 points on Wednesday. Despite yesterday's bounce, it appears to be headed much lower over time.
I hope this underscores the message Martin and I have been preaching for months on end ...
Stop listening to the happy talk out of Washington.
Understand this is a dangerous, treacherous economy — and a market with many potholes, time bombs, and hazards ahead. You have to come at it with a clear head and a realistic approach.
Stay the heck away from vulnerable stocks. Maintain high levels of cash in safe investments like short-term Treasuries or Treasury only money funds. Or, if you're a more aggressive investor who's willing to go on the offensive, consider shooting for big profits using vehicles like inverse ETFs and put options. They're making some investors a killing in this market.
But soon the decline in Thailand's currency, the baht, accelerated. It went from a gentle slide to a full-scale rout. Before long, currencies in the Philippines, Indonesia, and South Korea began to fall out of bed.
Then regional stock indices later crashed. Our Dow suffered what was then one of the largest point declines on record. And the International Monetary Fund was forced to step in and bail out several economies — to the tune of tens of billions of dollars.
It was a scary time. But compared to what is happening now, the 1997 crisis looks like a day at the beach. Right now ... in far-flung corners of the world as diverse as Iceland, Hungary, Argentina, India, and elsewhere ...
Currencies aren't just declining. They're crashing.
Stock markets aren't just falling. They're collapsing.
Foreign investors aren't just walking for the exits. They're running ... and trampling anyone in their paths.
You may not keep a chart of the Hungarian florint, that nation's currency, on your screen. You probably don't look at Argentina's Merval Index very often, if ever. And you may have never touched an Icelandic krona in your life.
But if you could look at charts of all of these obscure indicators, like I have, or if you studied the fundamental behind the moves, as I have, you would conclude the same thing that I did a while ago: The virulent credit virus has spread worldwide. And that has serious implications for you and your portfolio. Here's more ...
Crisis in Hungary, Argentina, Iceland, oh my!
In Hungary, the currency has been plunging for weeks on end as global investors pare risk and withdraw funds from higher-risk emerging markets. The forint recently traded at 214 against the dollar, a huge decline from the 143 level back in July. In other words, one U.S. dollar buys many more forints than it did a few months ago.
That prompted a serious reaction from the Magyar Nemzeti Bank, Hungary's central bank this week. It jacked up the nation's benchmark rate to 11.5% — an increase of a full three percentage points — to defend the currency and stem the flight of capital.
Meanwhile, in Argentina, the country said it plans to seize $29 billion of private pension funds. This caused bond yields in the country to surge. The Merval stock index plunged 11% on Tuesday, then another 10% on Wednesday. It is down more than 55%on the year.
The government last raided pension fund investments to service its debt in 2001. But it didn't help. Argentina then defaulted in a move that sent shockwaves throughout the global capital markets.
As for Iceland, the market has all but collapsed. The country's three biggest banks have been nationalized. Its currency has lost more than half its value in the past two years. It's being forced to pursue a multi-billion dollar bailout from its Scandinavian neighbors and the IMF.
The most shocking of all: Its benchmark stock market gauge, the OMX ICEX 15 index, has plunged 89% year to date! To put that in perspective, if our Dow did the same thing this year, it would be trading around 1,460.
Even bigger countries, like India, are running into trouble. Overseas funds dumped a record $12 billion of Indian shares so far this year. Foreign exchange reserves have dwindled by $42 billion as the Indian rupee has imploded. It recently slumped from 39.20 against the dollar to 49.50 — a record low.
Bottom line: The credit virus is now spreading its sickness to the four corners of the world.
What it means back home
Some pundits have made a big deal about the recent improvement in certain domestic and developed market credit indicators. The gains stem from the Federal Reserve's and Treasury's largesse, as well as the banking bailouts being put into effect in continental Europe, the U.K. and Canada, among other places.
But the improvements have been minor when compared to the hundreds of billions of dollars in aid that has been thrown at the markets. There are also disturbing signs that the aid isn't getting at the core of the problem — the housing market.
One indicator of ongoing weakness there: The latest Mortgage Bankers Association figures on home loan applications. The group's index, which tracks demand for home purchase and refinance loans, plunged 17% in the most recent week. The purchase application sub-index is now plumbing depths not seen since October 2001, a sign that housing demand remains anemic.
All of these problems are now coming home to roost — again — in the U.S. stock market. The Dow plunged 232 points on Tuesday and another 514 points on Wednesday. Despite yesterday's bounce, it appears to be headed much lower over time.
I hope this underscores the message Martin and I have been preaching for months on end ...
Stop listening to the happy talk out of Washington.
Understand this is a dangerous, treacherous economy — and a market with many potholes, time bombs, and hazards ahead. You have to come at it with a clear head and a realistic approach.
Stay the heck away from vulnerable stocks. Maintain high levels of cash in safe investments like short-term Treasuries or Treasury only money funds. Or, if you're a more aggressive investor who's willing to go on the offensive, consider shooting for big profits using vehicles like inverse ETFs and put options. They're making some investors a killing in this market.
Sunday, September 28, 2008
The Market, Keeping Your Money Safe, and Investment Options
It would be extremely difficult to miss the tumultuous activity in the financial markets these days. Everyone is talking about the financial industry, the debt market, failing systems, corporate collapses, bailouts…it goes on and on. The financial landscape is changing by the hour, if the not the minute. This is a historic time in the United States - one that we have not seen for many years and hopefully will never see again. In this article I will discuss the Government's Backstop Plan and the effects it could have on you and the real estate market. I will also touch on the fundamentals you need to focus on in a volatile market.
Friday morning (9.26.08), President Bush came out with a brief statement using very decisive words to stress that a plan will be put together. There is no disagreement in the need for aiding the market, but there is great disagreement in how. Regardless of your political perspective or stance, the country must come together to ensure that the financial markets are stabilized and limit the detrimental effects of this tremendous downturn.
Today it seems that the market and the economy are in a holding pattern, waiting for details on the government's backstop plan. These details will add light and life to the financial market and add liquidity to the market so that credit will be granted again. The details will also add light to the real estate market. We are not at the bottom of prices. We are not done with foreclosures. However, the Plan could help to minimize the foreclosures by adjusting mortgages that are hurting people. This in turn reduces the number of low comparables entering the market to slow, and hopefully stop, sinking real estate prices. In addition, with liquidity in the market, community businesses and individuals will be able to get the credit and cash they need to continue business, send children to college, and buy that house that is currently sinking in value.
From a real estate and investing perspective, there are some fundamentals and attractive strategies to consider to help keep your money safe and even create a healthy return. At the very base of keeping your money safe you need to think about the failing banks and brokerage institutions; you need to think about deposit insurance and the amount of money you have in your accounts.
The Federal Deposit Insurance Corporation (FDIC) insures bank deposits. You should visit the website www.fdic.gov and review your accounts to ensure that you are covered and what you need to do if anything should happen to your bank. Here is some of the important information taken from the FDIC website:
What Does the FDIC Insure?
The Federal Deposit Insurance Corporation (FDIC) is a government corporation that insures all deposits at insured banks, including checking and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to the insurance limit. Use this form to find out if your bank is insured.
How Much Does It Cover?
The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.
Ways To Increase Your Coverage
Since accounts at different banks are insured separately, the easiest way to increase your coverage is to simply keep less than $100,000 at any one bank. You could have $100,000 each at 500 different banks, and be insured for $50 million in total.
You may also qualify for more than $100,000 in coverage at one insured bank if you own deposit accounts in different ownership categories. For example, here is a way that a husband and wife could qualify for $600,000 in total insurance all at one bank:
The Securities Investor Protector Corporation (SIPC) helps to recover losses for investors if a SIPC member broker/dealer is closed due to bankruptcy or other financial hardship. If you have brokerage accounts you should visit the website at www.sipc.org to ensure you are working with an SIPC member and that you understand what you would need to do if something should happen to your brokerage firm.
Once you have peace of mind about your money in banks and institutions, you can turn your focus to the money you have invested in real estate. You know that the best strategy is to buy low and sell high, but how do you do that and where do you do that today? You don't want to buy a second home or vacation property to hold for a short time and look for appreciation. Those days are gone. We are not yet close enough to the bottom of prices and you will need a lot of cash to hold these properties to eventually see the return. Here is what you can do:
Do Nothing: Put your money in a safe account and wait until you see the market cycle start to climb again. The advantage is that you won't lose. The disadvantage is that you won't gain.
Private Lending: Credit markets are dry and the legalities around them are stricter. That means there is more demand for private lending and more return to be obtained. Look to established channels to lend through, and do plenty of due diligence before jumping in. The advantage to this is you don't need to utilize your credit or purchase anything. You gain a return for lending your own money.
Rental Property: Buy a cash flow positive rental property. Look for a market that has seen slow and steady growth, has increasing population and employment, or a market that has a housing shortage due to that growth or due to high foreclosures. As I have written about before, if people cannot or are not buying homes, people will rent. The rental market is climbing as the home buying market is falling. You do need to be able to obtain an attractive mortgage. The upside is that your money is working for you, there are no out of pocket costs, and the market will eventually turn up again.
Look Internationally: The international market offers many advantages. Off shore investing offers diversification, foreign exchange advantages, tax and legal benefits, and many times higher returns. No investment is without risk, so there is due diligence to be done. You need to look for credible and experienced companies to work with if you don't want to go at it alone. You will share some of the return, but you will also gain by their involvement in due diligence, legal, tax and negotiation activities.
Distressed Assets: If you are an accredited investor, please contact us for more information about purchasing distressed mortgage assets.
The financial, credit/debt, and real estate markets are in turmoil. Politics has been interjected as well. It is a tough time for everyone, but you can be sure that just as the cycle is down today, it will be up again in the future. Take care of your cash today! And if you can, continue to invest. There are always the right investment vehicles in any market cycle.
Article Link: http://www.propertyvestors.com/article_i22-08.php
Friday morning (9.26.08), President Bush came out with a brief statement using very decisive words to stress that a plan will be put together. There is no disagreement in the need for aiding the market, but there is great disagreement in how. Regardless of your political perspective or stance, the country must come together to ensure that the financial markets are stabilized and limit the detrimental effects of this tremendous downturn.
Today it seems that the market and the economy are in a holding pattern, waiting for details on the government's backstop plan. These details will add light and life to the financial market and add liquidity to the market so that credit will be granted again. The details will also add light to the real estate market. We are not at the bottom of prices. We are not done with foreclosures. However, the Plan could help to minimize the foreclosures by adjusting mortgages that are hurting people. This in turn reduces the number of low comparables entering the market to slow, and hopefully stop, sinking real estate prices. In addition, with liquidity in the market, community businesses and individuals will be able to get the credit and cash they need to continue business, send children to college, and buy that house that is currently sinking in value.
From a real estate and investing perspective, there are some fundamentals and attractive strategies to consider to help keep your money safe and even create a healthy return. At the very base of keeping your money safe you need to think about the failing banks and brokerage institutions; you need to think about deposit insurance and the amount of money you have in your accounts.
The Federal Deposit Insurance Corporation (FDIC) insures bank deposits. You should visit the website www.fdic.gov and review your accounts to ensure that you are covered and what you need to do if anything should happen to your bank. Here is some of the important information taken from the FDIC website:
What Does the FDIC Insure?
The Federal Deposit Insurance Corporation (FDIC) is a government corporation that insures all deposits at insured banks, including checking and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to the insurance limit. Use this form to find out if your bank is insured.
How Much Does It Cover?
The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.
Ways To Increase Your Coverage
Since accounts at different banks are insured separately, the easiest way to increase your coverage is to simply keep less than $100,000 at any one bank. You could have $100,000 each at 500 different banks, and be insured for $50 million in total.
You may also qualify for more than $100,000 in coverage at one insured bank if you own deposit accounts in different ownership categories. For example, here is a way that a husband and wife could qualify for $600,000 in total insurance all at one bank:
The Securities Investor Protector Corporation (SIPC) helps to recover losses for investors if a SIPC member broker/dealer is closed due to bankruptcy or other financial hardship. If you have brokerage accounts you should visit the website at www.sipc.org to ensure you are working with an SIPC member and that you understand what you would need to do if something should happen to your brokerage firm.
Once you have peace of mind about your money in banks and institutions, you can turn your focus to the money you have invested in real estate. You know that the best strategy is to buy low and sell high, but how do you do that and where do you do that today? You don't want to buy a second home or vacation property to hold for a short time and look for appreciation. Those days are gone. We are not yet close enough to the bottom of prices and you will need a lot of cash to hold these properties to eventually see the return. Here is what you can do:
Do Nothing: Put your money in a safe account and wait until you see the market cycle start to climb again. The advantage is that you won't lose. The disadvantage is that you won't gain.
Private Lending: Credit markets are dry and the legalities around them are stricter. That means there is more demand for private lending and more return to be obtained. Look to established channels to lend through, and do plenty of due diligence before jumping in. The advantage to this is you don't need to utilize your credit or purchase anything. You gain a return for lending your own money.
Rental Property: Buy a cash flow positive rental property. Look for a market that has seen slow and steady growth, has increasing population and employment, or a market that has a housing shortage due to that growth or due to high foreclosures. As I have written about before, if people cannot or are not buying homes, people will rent. The rental market is climbing as the home buying market is falling. You do need to be able to obtain an attractive mortgage. The upside is that your money is working for you, there are no out of pocket costs, and the market will eventually turn up again.
Look Internationally: The international market offers many advantages. Off shore investing offers diversification, foreign exchange advantages, tax and legal benefits, and many times higher returns. No investment is without risk, so there is due diligence to be done. You need to look for credible and experienced companies to work with if you don't want to go at it alone. You will share some of the return, but you will also gain by their involvement in due diligence, legal, tax and negotiation activities.
Distressed Assets: If you are an accredited investor, please contact us for more information about purchasing distressed mortgage assets.
The financial, credit/debt, and real estate markets are in turmoil. Politics has been interjected as well. It is a tough time for everyone, but you can be sure that just as the cycle is down today, it will be up again in the future. Take care of your cash today! And if you can, continue to invest. There are always the right investment vehicles in any market cycle.
Article Link: http://www.propertyvestors.com/article_i22-08.php
Tuesday, July 15, 2008
Financial Markets on the Edge of Panic: Commentary from Money and Markets
Attention: Pay close attention to Freddie and Fannie Mae in the coming months. Monumental events are on the way! Additional targets to watch include WAMU, Lehman Brothers and Wachovia Bank.
Commentary:
Our nation may be on the cusp of economic catastrophe — call it a panic, a meltdown, an implosion; I don't care what you call it. But it's bad. And it's coming straight at you like a runaway bus.
In times of crisis, people naturally gravitate toward gold, because it's the one investment that can hold its value when the fertilizer hits the fan.
As for silver, well, any trader will tell you that silver is gold on steroids. When gold jumps, silver can leap twice as far, percentage-wise.
What if I'm wrong — what if there is no economic catastrophe? What if the government is able to stop the crises that are lining up from turning into full-blown disasters? Well, gold and silver are STILL good bets to ride the economic tides that are surging now.
Today, I want to explore a reason why I think our country is in real trouble ...
Financial Markets on the Edge of Panic:
I don't have to tell you the news in financial markets is bad ... the problem is it's going to get much, much worse. We are seeing financial institutions collapse like slow dominoes: Countrywide Financial and New Century Financial last year ... Bear Stearns earlier this year ... IndyMac last week. Meanwhile, Fannie Mae and Freddie Mac are on federally mandated life support. Since Fannie and Freddie own or guarantee about half of the $12 trillion of U.S. mortgages, they might be too big to fail. But their shareholders are getting clobbered. And big regional banks are small enough to fail ... which is why National City and Washington Mutual both saw their stocks get 25% haircuts on Monday as terrified investors stampeded for the exits.
These are all just stocks on the leading edge of a much larger problem. The mortgage crisis has become the Andromeda Strain of financial markets, devouring everything it comes in contact with. According to a Bridgewater study, total financial losses from the current credit crisis will hit $1.6-trillion — and that estimate was made BEFORE last week's bad news. It's not just the losses on banks' books. A recent Bank of America study said that the meltdown in the U.S. subprime real estate market had led to a global loss of $7.7 TRILLION dollars in stock market values just since October.
Now we're seeing the damage spread into the "prime" mortgage market. Signs of devastation are everywhere. Two million homes are vacant across America even as tent cities of the dispossessed spring up in urban areas. RealtyTrac, the leading online marketplace for foreclosure properties, said that in June, U.S. foreclosure filings jumped 53% year over year. In fact, one in every 501 U.S. households received a foreclosure filing during the month.
Former Treasury Secretary Larry Summers says that housing finance has not been this bad since the Depression. And there are more shoes to drop. In fact, there could be many more shoes to drop. More than 300 banks could fail in the next three years, according to RBC Capital Markets analyst Gerard Cassidy, who had in February estimated no more than 150 banks were in trouble!
Bottom line: Your money could be at risk. The percentage of uninsured deposits has doubled since 1992, climbing to about 37% of the nation's $7.07 trillion in deposits at the end of the first quarter, according to an analysis of data reported to the FDIC.So, more than a third of America's deposits are at risk. Now would be a good time to check and see if the balance in any of your accounts has climbed over the insured limit of $100,000.
Commentary:
Our nation may be on the cusp of economic catastrophe — call it a panic, a meltdown, an implosion; I don't care what you call it. But it's bad. And it's coming straight at you like a runaway bus.
In times of crisis, people naturally gravitate toward gold, because it's the one investment that can hold its value when the fertilizer hits the fan.
As for silver, well, any trader will tell you that silver is gold on steroids. When gold jumps, silver can leap twice as far, percentage-wise.
What if I'm wrong — what if there is no economic catastrophe? What if the government is able to stop the crises that are lining up from turning into full-blown disasters? Well, gold and silver are STILL good bets to ride the economic tides that are surging now.
Today, I want to explore a reason why I think our country is in real trouble ...
Financial Markets on the Edge of Panic:
I don't have to tell you the news in financial markets is bad ... the problem is it's going to get much, much worse. We are seeing financial institutions collapse like slow dominoes: Countrywide Financial and New Century Financial last year ... Bear Stearns earlier this year ... IndyMac last week. Meanwhile, Fannie Mae and Freddie Mac are on federally mandated life support. Since Fannie and Freddie own or guarantee about half of the $12 trillion of U.S. mortgages, they might be too big to fail. But their shareholders are getting clobbered. And big regional banks are small enough to fail ... which is why National City and Washington Mutual both saw their stocks get 25% haircuts on Monday as terrified investors stampeded for the exits.
These are all just stocks on the leading edge of a much larger problem. The mortgage crisis has become the Andromeda Strain of financial markets, devouring everything it comes in contact with. According to a Bridgewater study, total financial losses from the current credit crisis will hit $1.6-trillion — and that estimate was made BEFORE last week's bad news. It's not just the losses on banks' books. A recent Bank of America study said that the meltdown in the U.S. subprime real estate market had led to a global loss of $7.7 TRILLION dollars in stock market values just since October.
Now we're seeing the damage spread into the "prime" mortgage market. Signs of devastation are everywhere. Two million homes are vacant across America even as tent cities of the dispossessed spring up in urban areas. RealtyTrac, the leading online marketplace for foreclosure properties, said that in June, U.S. foreclosure filings jumped 53% year over year. In fact, one in every 501 U.S. households received a foreclosure filing during the month.
Former Treasury Secretary Larry Summers says that housing finance has not been this bad since the Depression. And there are more shoes to drop. In fact, there could be many more shoes to drop. More than 300 banks could fail in the next three years, according to RBC Capital Markets analyst Gerard Cassidy, who had in February estimated no more than 150 banks were in trouble!
Bottom line: Your money could be at risk. The percentage of uninsured deposits has doubled since 1992, climbing to about 37% of the nation's $7.07 trillion in deposits at the end of the first quarter, according to an analysis of data reported to the FDIC.So, more than a third of America's deposits are at risk. Now would be a good time to check and see if the balance in any of your accounts has climbed over the insured limit of $100,000.
Sunday, June 1, 2008
Vacation Homes turn into Primary Residencies
Summer is here! As vacationing comes into full swing, so have the questions about opportunities, investments and discounts in vacation areas.
We will have a number of opportunities to choose from including Myrtle Beach and the Dominican Republic - pay special attention to our special alerts in the next 30 days.
In the mean time, though, as you are driving on the shores of the Outer Banks, or laying on the beach in Key West, don't stop yourself from dreaming about the possibility of making your vacation spot your home.
How can buying a vacation home not only be profitable for you, but perhaps your home in the future? Anna Gregory Wagoner, Esq is with Investors Title Exchange Corporation, and explains some new changes in 1031 Exchange. Read on to learn from an expert, how these changes can benefit you...
--------------------------------------------------------------------------------
The IRS Issues a Safe-Harbor for Vacation Homes
By Anna Gregory Wagoner, Esq.
Until recently, there has been no specific guidance from the IRS as to whether or not vacation homes qualify for 1031 exchange treatment. In May, 2007, the Tax Court issued a ruling in the case of Barry E. Moore et ux v. Commissioner that provided the most comprehensive discussion of vacation homes to date. In that case, the taxpayers had owned a lake house for 12 years. During the first few years the taxpayers used the house frequently but then moved away and did not use the house very often for several years. The taxpayers exchanged the lake house for another lake house that they also used personally, but argued that both houses were held for investment. The tax court found that the primary use of the property should control the "held for investment" test and that in this case the primary use was personal, and therefore; the property did not qualify for 1031 treatment. In the Moore case, the court considered the following factors in making their determination:
The primary use of the property was for personal use;
The taxpayers never rented or tried to rent the house;
The taxpayers did not keep the house well-maintained after moving away;
The taxpayers did not deduct maintenance expenses or depreciation on their tax returns;
The taxpayers treated all mortgage deductions as a 2nd home mortgage on their tax returns;
The mere hope of appreciation does not show investment intent.
This case was the only guidance issued on the treatment of vacation homes until the IRS issued Revenue Procedure 2008-16, which goes into effect on March 10, 2008. This Revenue Procedure set forth a safe-harbor under which the qualification of a dwelling unit for 1031 exchange treatment will not be challenged by the IRS. Under this procedure a dwelling unit will qualify as exchangeable property even though it is used periodically for personal enjoyment if the following standards are met:
The relinquished property must have been owned by the taxpayer for at least 2 years preceding the exchange; and
Within those 2 years, the taxpayer must have rented the property out at fair market rental for at least 14 days each year; and
The taxpayer's personal use must not have exceeded the greater of 14 days or 10% of the number of days rented each year.
The same rules apply to the replacement property, which must be owned by the taxpayer for at least 2 years following the exchange. If the taxpayer's use of the replacement property does not comply with the safe-harbor, the taxpayer must go back and file an amended tax return and treat the transaction as taxable sale rather than an exchange.
Taxpayers should note that this Revenue Procedure broadly defines "personal use". Use by any of the following people will be held to be personal use by the taxpayer: the taxpayer or any other person who has an interest in the unit (such as a co-owner); any family member of the taxpayer or such other person; any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit); or any person if the unit is rented for less than fair market rental. A taxpayer may rent the unit to a family member to be used as that person's principal residence so long as fair market rent is paid, and the rental will not be considered personal use by the taxpayer. The taxpayer is also allowed to use the unit while making repairs or doing maintenance to the unit, but he must be able to prove that he actually did work on the unit.
While this revenue procedure is being referred to as the vacation home safe-harbor, it actually applies to the conversion of any property from personal use to eligible exchange use. This presents an excellent planning opportunity for those who currently own personal use property (even a principal residence) and want to convert it to eligible exchange property. All a taxpayer would need to do is own the personal use property for at least two years, rent it out at fair market value for 14 days each year, limit their own personal use of the property to 14 days a year or 10% of the rental period, and then sell it in an exchange, with no questions asked. A taxpayer could do the same with replacement property for two years following the exchange. If the taxpayer wanted to use the unit as his personal residence in the future and eventually take the Section 121 personal residence exemption, he must own the property for at least 5 years and live in the property for at least two out of the 5 years preceding the sale to exclude gain recognition under Section 121. So, he could rent the property out for the first two years following the purchase, per terms of the safe-harbor, and then live it in for the next 3 years as his primary residence, and then sell it, excluding gain recognition under Section 121.
Some in the industry have stated that this safe-harbor is a gift to the taxpayer, as it provides him with specific guidance as to how he can convert his vacation home to eligible exchange property. Use of this safe-harbor will require proper planning, especially in light of the two-year period of qualified use required under the safe-harbor. It is also important to recognize that a safe-harbor is simply a specified structure, which when followed, results in IRS not challenging the transaction's eligibility. It is conceivable that a taxpayer might still do an exchange of property, outside of the safe-harbor, on property that is converted from personal use to investment use, if facts and circumstances demonstrate that it truly has been held for investment. However, in many areas of tax, if a safe-harbor exists and is not followed, neither the IRS nor the courts have been sympathetic to the taxpayer. In attempting a non-safe harbor conversion of personal use property to investment property, or vice versa, a taxpayer may be subject to a higher level of scrutiny by the IRS, and should seek competent tax advice from an attorney or CPA before attempting a non-safe harbor conversion of personal use property to be used in an exchange.
--------------------------------------------------------------------------------
PropertyVestors is an investment group of CEOs, entrepreneurs and savvy real estate investors that are taking active steps to maximize their profits, while minimizing their risk by creating a diversified real estate portfolio. Investors are able to easily apply diversity in real estate geographically and by asset class through its various investment strategies and types of inventory. PropertyVestors enables investors to capitalize on different market conditions. With PropertyVestors, you can take advantage of a new investment model and innovative real estate strategies. PropertyVestors' real estate strategies and ongoing education can position you build your net wealth, while minimizing risk.
To learn more about 1031 Exchange, to be introduced to Investors Title Exchange Corporation or for general information about PropertyVestors and its offerings, email invest@propertyvestors.com or call 1-877-90-BUYER.
Thank you for reading, and I hope that found value!
About the Author
Sarah Barry is the founder of PropertyVestors (www.propertyvestors.com). PropertyVestors is a successful real estate investment group that creates above-market returns at below-market risk. Access to PropertyVestors' three smart real estate strategies enables investors to achieve double- to triple-digit returns on their real estate investments.
Anna Gregory Wagoner, Esq.
Anna grew up in Salisbury, North Carolina. She graduated from Wake Forest University in 1994 with a Bachelor of Arts in Psychology. Anna Gregory continued her education at Wake Forest, receiving her Juris Doctor from the School of Law in 1999. Prior to joining Investors Title, Anna Gregory worked as a real estate associate with Isaacson, Isaacson, & Sheridan, LLP for four years. She has also worked on real estate issues for a large corporation and has experience as a title attorney. Anna Gregory is a member of the North Carolina Bar Association. She is also a member of the Raleigh Jaycees. Anna Gregory joined ITEC in February, 2006.
We will have a number of opportunities to choose from including Myrtle Beach and the Dominican Republic - pay special attention to our special alerts in the next 30 days.
In the mean time, though, as you are driving on the shores of the Outer Banks, or laying on the beach in Key West, don't stop yourself from dreaming about the possibility of making your vacation spot your home.
How can buying a vacation home not only be profitable for you, but perhaps your home in the future? Anna Gregory Wagoner, Esq is with Investors Title Exchange Corporation, and explains some new changes in 1031 Exchange. Read on to learn from an expert, how these changes can benefit you...
--------------------------------------------------------------------------------
The IRS Issues a Safe-Harbor for Vacation Homes
By Anna Gregory Wagoner, Esq.
Until recently, there has been no specific guidance from the IRS as to whether or not vacation homes qualify for 1031 exchange treatment. In May, 2007, the Tax Court issued a ruling in the case of Barry E. Moore et ux v. Commissioner that provided the most comprehensive discussion of vacation homes to date. In that case, the taxpayers had owned a lake house for 12 years. During the first few years the taxpayers used the house frequently but then moved away and did not use the house very often for several years. The taxpayers exchanged the lake house for another lake house that they also used personally, but argued that both houses were held for investment. The tax court found that the primary use of the property should control the "held for investment" test and that in this case the primary use was personal, and therefore; the property did not qualify for 1031 treatment. In the Moore case, the court considered the following factors in making their determination:
The primary use of the property was for personal use;
The taxpayers never rented or tried to rent the house;
The taxpayers did not keep the house well-maintained after moving away;
The taxpayers did not deduct maintenance expenses or depreciation on their tax returns;
The taxpayers treated all mortgage deductions as a 2nd home mortgage on their tax returns;
The mere hope of appreciation does not show investment intent.
This case was the only guidance issued on the treatment of vacation homes until the IRS issued Revenue Procedure 2008-16, which goes into effect on March 10, 2008. This Revenue Procedure set forth a safe-harbor under which the qualification of a dwelling unit for 1031 exchange treatment will not be challenged by the IRS. Under this procedure a dwelling unit will qualify as exchangeable property even though it is used periodically for personal enjoyment if the following standards are met:
The relinquished property must have been owned by the taxpayer for at least 2 years preceding the exchange; and
Within those 2 years, the taxpayer must have rented the property out at fair market rental for at least 14 days each year; and
The taxpayer's personal use must not have exceeded the greater of 14 days or 10% of the number of days rented each year.
The same rules apply to the replacement property, which must be owned by the taxpayer for at least 2 years following the exchange. If the taxpayer's use of the replacement property does not comply with the safe-harbor, the taxpayer must go back and file an amended tax return and treat the transaction as taxable sale rather than an exchange.
Taxpayers should note that this Revenue Procedure broadly defines "personal use". Use by any of the following people will be held to be personal use by the taxpayer: the taxpayer or any other person who has an interest in the unit (such as a co-owner); any family member of the taxpayer or such other person; any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit); or any person if the unit is rented for less than fair market rental. A taxpayer may rent the unit to a family member to be used as that person's principal residence so long as fair market rent is paid, and the rental will not be considered personal use by the taxpayer. The taxpayer is also allowed to use the unit while making repairs or doing maintenance to the unit, but he must be able to prove that he actually did work on the unit.
While this revenue procedure is being referred to as the vacation home safe-harbor, it actually applies to the conversion of any property from personal use to eligible exchange use. This presents an excellent planning opportunity for those who currently own personal use property (even a principal residence) and want to convert it to eligible exchange property. All a taxpayer would need to do is own the personal use property for at least two years, rent it out at fair market value for 14 days each year, limit their own personal use of the property to 14 days a year or 10% of the rental period, and then sell it in an exchange, with no questions asked. A taxpayer could do the same with replacement property for two years following the exchange. If the taxpayer wanted to use the unit as his personal residence in the future and eventually take the Section 121 personal residence exemption, he must own the property for at least 5 years and live in the property for at least two out of the 5 years preceding the sale to exclude gain recognition under Section 121. So, he could rent the property out for the first two years following the purchase, per terms of the safe-harbor, and then live it in for the next 3 years as his primary residence, and then sell it, excluding gain recognition under Section 121.
Some in the industry have stated that this safe-harbor is a gift to the taxpayer, as it provides him with specific guidance as to how he can convert his vacation home to eligible exchange property. Use of this safe-harbor will require proper planning, especially in light of the two-year period of qualified use required under the safe-harbor. It is also important to recognize that a safe-harbor is simply a specified structure, which when followed, results in IRS not challenging the transaction's eligibility. It is conceivable that a taxpayer might still do an exchange of property, outside of the safe-harbor, on property that is converted from personal use to investment use, if facts and circumstances demonstrate that it truly has been held for investment. However, in many areas of tax, if a safe-harbor exists and is not followed, neither the IRS nor the courts have been sympathetic to the taxpayer. In attempting a non-safe harbor conversion of personal use property to investment property, or vice versa, a taxpayer may be subject to a higher level of scrutiny by the IRS, and should seek competent tax advice from an attorney or CPA before attempting a non-safe harbor conversion of personal use property to be used in an exchange.
--------------------------------------------------------------------------------
PropertyVestors is an investment group of CEOs, entrepreneurs and savvy real estate investors that are taking active steps to maximize their profits, while minimizing their risk by creating a diversified real estate portfolio. Investors are able to easily apply diversity in real estate geographically and by asset class through its various investment strategies and types of inventory. PropertyVestors enables investors to capitalize on different market conditions. With PropertyVestors, you can take advantage of a new investment model and innovative real estate strategies. PropertyVestors' real estate strategies and ongoing education can position you build your net wealth, while minimizing risk.
To learn more about 1031 Exchange, to be introduced to Investors Title Exchange Corporation or for general information about PropertyVestors and its offerings, email invest@propertyvestors.com or call 1-877-90-BUYER.
Thank you for reading, and I hope that found value!
About the Author
Sarah Barry is the founder of PropertyVestors (www.propertyvestors.com). PropertyVestors is a successful real estate investment group that creates above-market returns at below-market risk. Access to PropertyVestors' three smart real estate strategies enables investors to achieve double- to triple-digit returns on their real estate investments.
Anna Gregory Wagoner, Esq.
Anna grew up in Salisbury, North Carolina. She graduated from Wake Forest University in 1994 with a Bachelor of Arts in Psychology. Anna Gregory continued her education at Wake Forest, receiving her Juris Doctor from the School of Law in 1999. Prior to joining Investors Title, Anna Gregory worked as a real estate associate with Isaacson, Isaacson, & Sheridan, LLP for four years. She has also worked on real estate issues for a large corporation and has experience as a title attorney. Anna Gregory is a member of the North Carolina Bar Association. She is also a member of the Raleigh Jaycees. Anna Gregory joined ITEC in February, 2006.
Thursday, May 1, 2008
Loan Servicing in the Housing Industry - A Solution
For the next three to five years (approximately 2008 through 2012) the residential housing industry will struggle to maintain profitability. The industry faces an oversupply of homes purchased by borrowers who are unable to service their purchase-money loans, refinance loans, or home equity credit lines. Lenders must reconcile depressed real estate values with sometimes questionable underlying debt instruments. New buyers must be found for properties vacated by foreclosure or the threat thereof.
Many profit making opportunities will emerge in the course of solving these problems. You hear about how the ultra affluent and Wall Street is profiting from the credit crisis. This article focuses on the select acquisition of distressed notes secured by single-family residences, and how you can profit too.
Link to Executive Summary: http://www.propertyvestors.com/article_i20-08.pdf
Many profit making opportunities will emerge in the course of solving these problems. You hear about how the ultra affluent and Wall Street is profiting from the credit crisis. This article focuses on the select acquisition of distressed notes secured by single-family residences, and how you can profit too.
Link to Executive Summary: http://www.propertyvestors.com/article_i20-08.pdf
Tuesday, April 1, 2008
Real Estate and the Credit Crunch Update 2008
The Current Affairs of the Real Estate & Capital Markets
by Rob E. Lee
All trees aspire to grow to the sky; likewise during a boom market the human spirit cannot believe that there will be an ultimate bust. As last year drew to a close the investment environment transitioned from cautious optimism to a heightened level of realization that there was a global credit crisis brewing in the financial markets.
Today, the commercial real estate market has entered a period of declining values, or as any would say "correcting values" in an effort to adjust the risk basis. Many properties are overleveraged or encountering financial difficulty. The collapse of the housing market coupled with fuel and food price inflation are putting tremendous strain on the American consumer, the ultimate driver of our economy.
Hidden behind the creative genius and financially engineered products that drove much of the aggressive view that the economy could do no wrong during the last decade, Wall Street and Main Street have been oversold, especially with respect to securitized single-family residential debt products, or subprime loans. In fact, the housing market was overleveraged more than anyone realized, or even suspected, relative to the fundamental values of the underlying residential assets.
According to Jack Cohen, CEO of Cohen Financial, a leading commercial real estate investment bank, a massive real estate resetting and de-leveraging is occurring during this first quarter of 2008. Some say it is due directly to sub-prime and single family housing troubles. Mr. Cohen says this is not entirely true. The commercial and residential markets are not linked but for three items: 1) space demand is linked by the health of the economy; 2) lending is linked through the capital markets; and, 3) bond pricing is linked through the investor base (supporting the capital markets). Otherwise, no other links exist. Commercial and residential issues are not at all intertwined. "None of the flaws in the sub-prime business model are remotely present in the commercial real estate lending business. To the contrary, the strengths of the commercial real estate lending business model were not present in the sub-prime business model," stated Cohen.
As the residential market's weakness increased in 2007, the commercial real estate market reached its pinnacle to date, with mega multi-billion portfolio deals such as the Blackstone Group and Equity Office Properties (EOP) Trust transaction. When the cracks in the foundation of the credit markets appeared as a result of the subprime mortgage market meltdown, the commercial real estate market took notice and quickly inventoried its own aggressive dealings and pricing during the past five years. Risk aversion quaked throughout the world's credit markets, resulting in the Federal Reserve pumping liquidity into the financial markets and dropping the federal funds rate. The world and domestic commercial real estate investors prepared for new terrain.
The Federal Reserve created the perfect environment and many lenders detached risk from reward in a market where more money was made securitizing the loans rather than holding them. Demand for securitized loans forced lenders to sacrifice underwriting standards and reengineer loan products such as interest-only loans and low or no debt-service coverage requirements. Financing at all levels of the capital stack created more asset demand. Cap-rate compression happened quickly, falling from 11% in 1995 on average to 6.29% in June 2007. Without leverage, investors would demand a higher return.
In the wider marketplace, the subprime debacle has ensnared some of the biggest institutions on Wall Street. Write-downs at Merrill Lynch totaled $22 billion by mid-January, and Citigroup wrote off $20 billion. Citigroup Chairman Charles Prince and Merrill Lynch CEO Stan O'Neal resigned. Even mortgage financiers Freddie Mac and Fannie Mae, stalwarts of the secondary mortgage market, face potential write-downs of $16 billion for the fourth quarter of 2007 because of flawed subprime loans and other investments.
The threat of recession is also taking a toll on the market, further shaking the confidence of bond buyers and sellers. The Federal Reserve's startling, 75 basis point cut in interest rates on Jan. 22 - the largest reduction in more than two decades - quieted turbulent stock markets momentarily, but raised new questions.
"While it's meant to stabilize things, that to me are going to make people more nervous," says Kim Diamond, managing director at Standard & Poor's, since it signals the Fed's deep concern over the economy. "A 75 basis point cut off-cycle is pretty extreme."
Despite a slowdown in 2007's growth rate, the U.S. economy remains resilient beyond most expectations - but that is what keeps market nerves on edge while providing a much-needed stable market influence. Fortunately the global economy is on solid footing and is expected to grow at a faster pace, helping the U.S. weather this slow domestic economic picture.
For borrowers, the call to action is to proceed cautiously and creatively, rather than sit on the sidelines. Forget about an attempt to convince a lender to be "aggressive" or "creative" when financing your next real estate deal. Banks have gone back to basics - solid fundamentals, and nothing less will do.
Although inflation pressures probably will continue in 2008, the Federal Reserve has shown its willingness to accommodate the markets by lowering interest rates and injecting liquidity into the economy to help avoid a recession. Unemployment remains low, but with the continuing housing slump and high energy prices, consumer spending and job growth may slow. Strong employment will favor commercial real estate, keeping vacancies low and providing the necessary support for investment earnings. However, geographic differences in commercial investment markets will play a pivotal role, as some U.S. regions have seen variations in their local economies.
Unstable financial market realities favor commercial real estate. As the financial markets become riskier and less attractive, commercial real estate - as long as it holds its own - becomes more attractive on a relative basis. It does not mean that prices continue to climb, but commercial real estate does maintain a more attractive position relative to stocks and bonds . With average yield rates on commercial real estate investments still higher than those for many other investment alternatives, commercial real estate likely will continue to be a preferred investment vehicle from a risk-adjusted basis. For example, National apartment fundamentals were strong during 2007, thanks to a great deal of help from the subprime lending fallout in the residential market. However, supply may begin to outpace demand, as unsold houses are rented and units slated for condominium conversion re-enter the market as rental units.
With continuing strength in overall commercial real estate fundamentals, it is no surprise that capital still is flowing into the market. However, the amount of funds has slowed, especially highly leveraged debt, and likely will continue to decrease this year. This trend will continue to affect asset pricing, working to move prices below the record-setting levels of the past year. This slow but steady downward movement should help to calm fears of overpricing in some markets.
Although we view debt capital as tightening the hatch and clearly as more discriminating and volatile, there is still an ample amount of debt capital to support the right level of financial leverage for commercial real estate. Further, there is plenty of equity capital from both domestic and foreign sources that is inclined to invest in commercial real estate.
2008: Markets to Watch
The following list of top 10 markets by property type is based on RERC's price/value analysis, which utilizes RERC's valuation expertise, market knowledge, and financial modeling capabilities to identify these markets.
Office Industrial Retail Multifamily
Salt Lake City Kansas City, KS Los Angeles Portland, OR
Austin, TX Sacramento Baltimore Austin, TX
Sacramento Seattle Minneapolis San Antonio
New York Dallas Cleveland Chicago
Cleveland San Diego Charlotte, NC Washington, DC
San Francisco Houston Philadelphia Norfolk, VA
Los Angeles Cleveland San Antonio Seattle
Seattle St. Louis Las Vegas Charlotte, NC
Denver Minneapolis Miami Denver
Portland, OR Los Angeles Sacramento, CA New York
Despite the psychological drama of the credit crunch - from tightening underwriting standards to the global stock market plunge on Jan. 21 - plenty of capital is still available for deals in the $20 million to $30 million range, the core industry size, brokers say. However, overleveraged property investors undoubtedly will face loan defaults, workouts or foreclosures. This is the downside of overleveraging assets in a cyclical business, which forces property owners to go through a detoxification process so that the lending cycle can begin anew.
Industry confidence can be regained if fear doesn't overtake rational decision-making. "We can talk ourselves into recession. If we continue to terrify ourselves, and let this drag out, then it's going to become a self-fulfilling prophecy," said Randy Reef, senior managing director of Bear Stearns, at the CMSA conference in Miami. The CMBS market was overheated and poised for a reversal, but losses can be kept tolerable, he maintains.
Many echo the thoughts of Jack Cohen, of Cohen Financial in that the industry doesn't need new or more capital. Rather, in 2008 we need old capital confident enough to invest. This is only possible if everyone stops pining for the easy lending days of 2006 and the first half of 2007 and accepts the new world we live in for what it really is-good for business! The dislocation of capital happened for technical reasons; let's not make this worse by eroding commercial real estate fundamentals. Accepting the shift is the fastest path to a new foundation of wealth creation. Capital is still plentiful for deals that make sense and real estate investment banks like Cohen Financial are still able to finance deals and provide capital for those buyers and sellers who realize the market is still full of opportunities.
About the Author
Rob E. Lee, M.B.A., CCIM
Senior Associate of Investment Properties for Colliers International's Private Capital Advisors Group in Los Angeles and is currently serving as the President for the Greater Southern California CCIM Chapter. He can be reached at Robert.Lee@Colliers.com or (310) 787-1000. He is a 2006 alumnus from the Graziadio School of Business and Management.
by Rob E. Lee
All trees aspire to grow to the sky; likewise during a boom market the human spirit cannot believe that there will be an ultimate bust. As last year drew to a close the investment environment transitioned from cautious optimism to a heightened level of realization that there was a global credit crisis brewing in the financial markets.
Today, the commercial real estate market has entered a period of declining values, or as any would say "correcting values" in an effort to adjust the risk basis. Many properties are overleveraged or encountering financial difficulty. The collapse of the housing market coupled with fuel and food price inflation are putting tremendous strain on the American consumer, the ultimate driver of our economy.
Hidden behind the creative genius and financially engineered products that drove much of the aggressive view that the economy could do no wrong during the last decade, Wall Street and Main Street have been oversold, especially with respect to securitized single-family residential debt products, or subprime loans. In fact, the housing market was overleveraged more than anyone realized, or even suspected, relative to the fundamental values of the underlying residential assets.
According to Jack Cohen, CEO of Cohen Financial, a leading commercial real estate investment bank, a massive real estate resetting and de-leveraging is occurring during this first quarter of 2008. Some say it is due directly to sub-prime and single family housing troubles. Mr. Cohen says this is not entirely true. The commercial and residential markets are not linked but for three items: 1) space demand is linked by the health of the economy; 2) lending is linked through the capital markets; and, 3) bond pricing is linked through the investor base (supporting the capital markets). Otherwise, no other links exist. Commercial and residential issues are not at all intertwined. "None of the flaws in the sub-prime business model are remotely present in the commercial real estate lending business. To the contrary, the strengths of the commercial real estate lending business model were not present in the sub-prime business model," stated Cohen.
As the residential market's weakness increased in 2007, the commercial real estate market reached its pinnacle to date, with mega multi-billion portfolio deals such as the Blackstone Group and Equity Office Properties (EOP) Trust transaction. When the cracks in the foundation of the credit markets appeared as a result of the subprime mortgage market meltdown, the commercial real estate market took notice and quickly inventoried its own aggressive dealings and pricing during the past five years. Risk aversion quaked throughout the world's credit markets, resulting in the Federal Reserve pumping liquidity into the financial markets and dropping the federal funds rate. The world and domestic commercial real estate investors prepared for new terrain.
The Federal Reserve created the perfect environment and many lenders detached risk from reward in a market where more money was made securitizing the loans rather than holding them. Demand for securitized loans forced lenders to sacrifice underwriting standards and reengineer loan products such as interest-only loans and low or no debt-service coverage requirements. Financing at all levels of the capital stack created more asset demand. Cap-rate compression happened quickly, falling from 11% in 1995 on average to 6.29% in June 2007. Without leverage, investors would demand a higher return.
In the wider marketplace, the subprime debacle has ensnared some of the biggest institutions on Wall Street. Write-downs at Merrill Lynch totaled $22 billion by mid-January, and Citigroup wrote off $20 billion. Citigroup Chairman Charles Prince and Merrill Lynch CEO Stan O'Neal resigned. Even mortgage financiers Freddie Mac and Fannie Mae, stalwarts of the secondary mortgage market, face potential write-downs of $16 billion for the fourth quarter of 2007 because of flawed subprime loans and other investments.
The threat of recession is also taking a toll on the market, further shaking the confidence of bond buyers and sellers. The Federal Reserve's startling, 75 basis point cut in interest rates on Jan. 22 - the largest reduction in more than two decades - quieted turbulent stock markets momentarily, but raised new questions.
"While it's meant to stabilize things, that to me are going to make people more nervous," says Kim Diamond, managing director at Standard & Poor's, since it signals the Fed's deep concern over the economy. "A 75 basis point cut off-cycle is pretty extreme."
Despite a slowdown in 2007's growth rate, the U.S. economy remains resilient beyond most expectations - but that is what keeps market nerves on edge while providing a much-needed stable market influence. Fortunately the global economy is on solid footing and is expected to grow at a faster pace, helping the U.S. weather this slow domestic economic picture.
For borrowers, the call to action is to proceed cautiously and creatively, rather than sit on the sidelines. Forget about an attempt to convince a lender to be "aggressive" or "creative" when financing your next real estate deal. Banks have gone back to basics - solid fundamentals, and nothing less will do.
Although inflation pressures probably will continue in 2008, the Federal Reserve has shown its willingness to accommodate the markets by lowering interest rates and injecting liquidity into the economy to help avoid a recession. Unemployment remains low, but with the continuing housing slump and high energy prices, consumer spending and job growth may slow. Strong employment will favor commercial real estate, keeping vacancies low and providing the necessary support for investment earnings. However, geographic differences in commercial investment markets will play a pivotal role, as some U.S. regions have seen variations in their local economies.
Unstable financial market realities favor commercial real estate. As the financial markets become riskier and less attractive, commercial real estate - as long as it holds its own - becomes more attractive on a relative basis. It does not mean that prices continue to climb, but commercial real estate does maintain a more attractive position relative to stocks and bonds . With average yield rates on commercial real estate investments still higher than those for many other investment alternatives, commercial real estate likely will continue to be a preferred investment vehicle from a risk-adjusted basis. For example, National apartment fundamentals were strong during 2007, thanks to a great deal of help from the subprime lending fallout in the residential market. However, supply may begin to outpace demand, as unsold houses are rented and units slated for condominium conversion re-enter the market as rental units.
With continuing strength in overall commercial real estate fundamentals, it is no surprise that capital still is flowing into the market. However, the amount of funds has slowed, especially highly leveraged debt, and likely will continue to decrease this year. This trend will continue to affect asset pricing, working to move prices below the record-setting levels of the past year. This slow but steady downward movement should help to calm fears of overpricing in some markets.
Although we view debt capital as tightening the hatch and clearly as more discriminating and volatile, there is still an ample amount of debt capital to support the right level of financial leverage for commercial real estate. Further, there is plenty of equity capital from both domestic and foreign sources that is inclined to invest in commercial real estate.
2008: Markets to Watch
The following list of top 10 markets by property type is based on RERC's price/value analysis, which utilizes RERC's valuation expertise, market knowledge, and financial modeling capabilities to identify these markets.
Office Industrial Retail Multifamily
Salt Lake City Kansas City, KS Los Angeles Portland, OR
Austin, TX Sacramento Baltimore Austin, TX
Sacramento Seattle Minneapolis San Antonio
New York Dallas Cleveland Chicago
Cleveland San Diego Charlotte, NC Washington, DC
San Francisco Houston Philadelphia Norfolk, VA
Los Angeles Cleveland San Antonio Seattle
Seattle St. Louis Las Vegas Charlotte, NC
Denver Minneapolis Miami Denver
Portland, OR Los Angeles Sacramento, CA New York
Despite the psychological drama of the credit crunch - from tightening underwriting standards to the global stock market plunge on Jan. 21 - plenty of capital is still available for deals in the $20 million to $30 million range, the core industry size, brokers say. However, overleveraged property investors undoubtedly will face loan defaults, workouts or foreclosures. This is the downside of overleveraging assets in a cyclical business, which forces property owners to go through a detoxification process so that the lending cycle can begin anew.
Industry confidence can be regained if fear doesn't overtake rational decision-making. "We can talk ourselves into recession. If we continue to terrify ourselves, and let this drag out, then it's going to become a self-fulfilling prophecy," said Randy Reef, senior managing director of Bear Stearns, at the CMSA conference in Miami. The CMBS market was overheated and poised for a reversal, but losses can be kept tolerable, he maintains.
Many echo the thoughts of Jack Cohen, of Cohen Financial in that the industry doesn't need new or more capital. Rather, in 2008 we need old capital confident enough to invest. This is only possible if everyone stops pining for the easy lending days of 2006 and the first half of 2007 and accepts the new world we live in for what it really is-good for business! The dislocation of capital happened for technical reasons; let's not make this worse by eroding commercial real estate fundamentals. Accepting the shift is the fastest path to a new foundation of wealth creation. Capital is still plentiful for deals that make sense and real estate investment banks like Cohen Financial are still able to finance deals and provide capital for those buyers and sellers who realize the market is still full of opportunities.
About the Author
Rob E. Lee, M.B.A., CCIM
Senior Associate of Investment Properties for Colliers International's Private Capital Advisors Group in Los Angeles and is currently serving as the President for the Greater Southern California CCIM Chapter. He can be reached at Robert.Lee@Colliers.com or (310) 787-1000. He is a 2006 alumnus from the Graziadio School of Business and Management.
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