World history is bursting with real life examples that are metaphorical parallels of the nursery rhyme detailing an egg falling off a wall.
Humpty Dumpty sat on a wall.
Humpty Dumpty had a great fall.
All the king's horses and all the king's men
Couldn't put Humpty together again.
The clear lesson gleaned from this rhyme is that once a fragile organism is shattered, the pieces cannot be glued back together to recreate the original organism. This lesson holds true to all varieties of organisms; eggs, eco-systems, dinosaurs, polar bears, armies, societies, empires, and one especially pertinent in today’s world, economies.
As the world changes, we are forced to change with it. We can try to be conscious of the changes and attempt to work with the forces creating the change, or we can use all of our might to resist the change. There is a lot to be said for the pride and determination it takes to stand up for what you believe in; however, there is a fine line between strong pride and determination and stubbornness. At some point the forces of change may overpower the resistance, and being able to recognize this “tipping point” is the first step in conserving resources and maximizing the opportunities created by the impending changes.
Are there parallels between Humpty Dumpty and the world economies? It is not clear whether anyone has the answer to this question, but what is becoming clearer everyday is the strength and breath of the recession, which is on the brink of being classified as a depression (even though economists have no clear definition of a depression), is growing, and the economic experts of the world cannot reach any consensus on how to slow the growth or ultimately solve the wide variety of economic problems. The most recent developments seem to carry significant impacts, but those impacts do not seem capable of alleviating the intense pressures building on the world economies. It is clear that the forces of change still have the upper hand in the power struggle with our resistance. However, the developments, specifically the new public/private toxic asset plan outlined by the government and the Fed injecting more than $1.25 trillion into the US economy, do seem to have implications for investors even if they do not have the might to wrestle control of the economy.
Treasury Secretary Timothy Geithner recently announced the government’s plan to team with a handpicked group of private funds to purchase $1 trillion worth of toxic assets, much of it mortgage backed securities (MBS) deteriorating from the real estate bust, from struggling banks, the same banks the government has dubbed “too large to fail.” The details of this plan helped to create the rally we are seeing on Wall St. If the plans can successfully transition from paper to practice, the banks will be able to exchange the deteriorating assets for lendable money, loans will be more achievable for small businesses and the general public, fund managers will have new product to sell, pension funds will be able to satisfy their long-term obligations with a new product, and the government can pat themselves on the back for resisting the continued downturn.
However, paper is not practice. The next six to eight weeks should be a honeymoon period seen through rose-colored glasses, but the reality of practice carrying out like the plans on paper seems unlikely. This plan will be in full swing within six to eight weeks, and until the plan can be tested in practice, no bad news will be counted against the bank stocks. Until the plan is in place, we will continue to assume that the outcome on paper will mirror the outcome in practice. This is one opportunity to consider from an investing perspective. The Wall St. rally may continue for a few weeks; the low set on March 6th may endure until we can determine if this plan has any traction. If you are an active and sophisticated investor in the stock market, this could present an opportunity; however, this is one of the most economically volatile periods in history, there are no sure bets.
The Geitner plan has obstacles to its success. Foremost, as presented the plan is attempting to inject $1 trillion into the banking system by purchasing toxic assets, but there are $5 trillion worth of MBS and derivatives outstanding. This crisis is growing larger every day, and the $1 trillion provided in this plan is only a small piece of the funds being committed by the government and the Fed, much of which is coming from the taxpayers or being printed; i.e. “Monopoly” money. We should not expect this public/private plan to have any major impacts, and in reality there is a good chance we could see this plan fall apart before it takes off.
While this plan may seem far-reaching because the government is reaching out to private entities to help motivate the market to act on these toxic assets, the reality is that the Treasury has created the requirements for participating in the program in a way that only a small number of large funds can qualify. The funds need to have raised at least $500 million in the past, command a large sales force, and already own at least $10 billion in distressed loans. Only five to ten companies have such experience, and one or two rise to the top. In effect, the government is choosing the company(s) they want to team with. While this limiting factor seems typical of government actions, the ultimate unhinging is a result of the experience these private companies bring with them.
In the Geitner plan, the private companies are tasked with valuing the deteriorating assets. There are sophisticated mathematical models that are employed to determine the value of assets, the problem is that these assets are unprecedented; there are no historical models to work from so the private firms are tasked with valuing assets that are free-falling. This puts the private fund firms at odds with the banks. The banks are being devalued at a lightning pace, and they want as much as they can get for the toxic assets because every penny will help save them from complete collapse. But the private funds are gambling with any price they set; no one knows where the bottom will be. Clearly the funds want to purchase the assets as low as possible.
These assets have value; many of them are attached to tangible property like real estate. The problem is that the market is falling and no one knows how low the values will go. Underlying every one of those tangible assets are homeowners who could lose their jobs next month and stop paying the mortgage. However, Wall St. has the same underlying principles as Las Vegas, and there are always people willing to gamble. The current market value for these assets is approximately $25 - $35 on $100. However, this value is far too low for banks. The “too big to fail” banks took major gambles (along with everyone else in the U.S. and the world) and overleveraged themselves with these toxic assets. If all the assets were sold for $35 most banks would be forced to take losses large enough to send them into bankruptcy.
Ultimately, there is a strong chance the Geitner plan will not work in practice. If and when appropriate prices are not reached for these assets, the auctions will lock up and the markets will hammer the banks; it is highly likely the current rally will turn bearish in the not-too-distant future. If this theory turns into reality the next step seems to be nationalization. In the end, the best solution could be the path of least resistance, which many times is also the path less traveled.
The second development that has risen to the forefront of the economic mêlée is the recent announcement that the Federal Reserve will increase its purchases of Fannie Mae and Freddie Mac MBS from $500 billion to $1.25 trillion, double its purchases of Fannie, Freddie, and Federal Home Loan Bank bonds to $200 billion, and finally, the Fed will buy as much as $300 billion in longer-term U.S. Treasury securities. (The Federal Reserve, aka the Fed, by name appears to be a governmental agency, but in reality it is a quasi-public banking system, i.e. a government entity with private components, with the power to print money! If you haven’t taken the time to consider what the role of the Fed is in our economy it is worth the research. This announcement by the Fed is somewhat shocking. In poker terms, this could be viewed as “going all in.” These strategies will have far-reaching effects, but whether they are the desired effects is questionable at best.
In effect, the Fed is printing money to turn around and buy debt securities issued by the Treasury. These are strategies usually implemented in third-world countries trying to get off the ground or in countries like Germany prior to World War II that are willing to try anything to stay out of a deep depression. As a reminder of history, the German attempt did not fare well; the strategy created hyperinflation and intensified a dangerous and far-reaching depression. This strategy has the direct effect of severely devaluing the U.S. dollar and crippling U.S. foreign creditors; this is dangerous considering we are a heavy debtor nation asking for tens of billions of dollars per month from foreign sources to fund our massive “bailouts” and deficits. However, there is no persuading the Fed. They have made their decision, and we will have to deal with the consequences of these decisions…perhaps for generations to come.
On the positive side, these strategies continue to create opportunity. Mortgage rates are hovering around all-time lows. Real estate is sinking, and deals can be found for those willing to look. The Fed’s moves are creating a great opportunity to get financing for new projects at amazing rates, or simply refinance into lower rates. As of last week, the average 30-year mortgage rate was at 4.89% and is expected to sink to 4.5% in the near future. As a historical comparison, the lowest annual average mortgage rate seen in the 20th and 21st centuries was 4.7%, set right after World War II. In essence, this is the cheapest mortgage money has ever been! The Feds moves are clearly having a major impact on interest rates, and this creates a great opportunity to leverage the bank’s money for your gain. These rates may help to make real estate projects more attractive, and if you already have a mortgage now may be the time to refinance; a typical rule of thumb is that if you can save 1% on your interest rate it is probably worth refinancing. But keep in mind that refinancing carries with it costs; so you need to stay in the new mortgage long enough to recoup the costs.
Whether Humpty Dumpty can be saved is still a question worth asking, but it’s not clear whether any of the King’s Men have any idea how to answer such a difficult question. However, as they continue to create new strategies to glue the pieces back together, opportunities will arise and fortunes will be made…and lost.
The Opportunity in Real Estate
The key to investing in real estate is to educate yourself on the current market conditions, find quality investment opportunities, and act before the conditions change. PropertyVestors is here to help you accomplish these goals. In this edition of our monthly newsletter, we have highlighted three separate partners/projects that approach investing in the current market from different creative angles. Each of these strategies is designed to capitalize on the current market conditions, and because the strategies use different approaches to investing and utilize various locations, diversification of your investments remains a high priority.
Purchasing Rehabs for Rentals:Blue Moon Capital
A $5,000 down payment is all it takes to transfer ownership while Blue Moon Capital completes the rehab of your rental property for you. BMC will facilitate, manage, complete & pay up-front for property rehab of an average $35,000 Scope of Work. You will get 20% Equity in the property as a head start, based on your lender's final appraisal, along with a 12-month home warranty. Current focus is Pittsburg, Atlanta, Baltimore, Cleveland, Kansas City, and Philadelphia. Property Management companies are ready to fill your rental property. Great cash flow opportunity!
The mortgage crunch has created the perfect investor opportunity....Experts say "BUY NOW" in modest markets such as Cleveland, OH. Foreclosures are high, prices are low and the rental market is strong. Yet, high down payment requirements and tight lending standards still prevent investors from taking advantage of one of the best buying periods seen thus far. Blue Moon Capital offers a $0 down financing, turn-key investment model not seen anywhere else. Learn how Blue Moon Capital is a great source for taking advantage of the BUYERS MARKET with a creative in-house financing model that requires $0 down and only a $5,000 Investment. Please contact PropertyVestors for more information.
Select Private Lending Investments: American Homes
Due to the strict guidelines and "red tape" associated with bank financing these days, many real estate investors with great projects are turning to Private Lenders to obtain financing. The investors are able to obtain the financing quicker and easier, and the Private Lenders are able to have a great return with a secure investment. We have strong relationships with successful and established real estate businesses with strong track records. Our Spotlight for this month's newsletter is on our partner American Homes (AH). In December, a PropertyVestors member funded one of AH's projects, and you will notice a very positive quote from them in the newsletter. We currently have Private Lending opportunities open in Richmond, VA with AH, and the opportunities range from $10k-$1.2m, offer 7-12% annual return backed by real estate, and have solid execution plans and security. Earn 5-8 times CD Rates secured by real estate” (Current 6 month CD is 1.52%)
Preconstruction Syndicate Investments:BridgePoint
A preconstruction syndicate is our most exciting, cutting edge strategy. PropertyVestors works closely with BridgePoint on our "Preconstruction Syndicate" deals as they are the leader in this market space. BridgePoint has created an amazingly creative strategy to capitalize on today's market conditions, with possible returns beginning at 40%. Their strategy includes protective addendums that are key to promoting profits and minimizing risk. Markets that we are currently focused on are Panama and Dominican Republic. Immediate opportunities available.
BridgePoint has developed a proprietary strategy that grants them the unique privilege of providing developers with the means to fulfill their requirements and, in exchange, negotiate terms that transfer much of the market risk from their purchasers to the developer.
Please contact us to learn more about these strategies and upcoming projects at invest@propertyvestors.com.
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.
Furthermore, PropertyVestors enables investors to capitalize on different market conditions. The strategies include private lending options; preconstruction syndication; and opportunties in emerging markets, coastal regions and waterfront properties. 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.
For general information about PropertyVestors or its offerings, email invest@propertyvestors.com or call 1-877-90-BUYER.
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.
