Tuesday, July 15, 2008 at 06:07AM
Future Government Interference
The events of the last few days have been discouraging for those hoping for free-market forces to return some sanity to the environment.
What else can we expect?
Let's review some possible future events, and likely answers from the powers that be:
1. More investment bankers fail (Lehman, etc.) - Fed opens the discount window.
2. More banks fail, and FDIC runs out of money - Fed opens the discount window.
3. More people stop paying on their mortgage - FDIC suspends foreclosures (like they've done at IndyMac)
4. Need more stock support - send in the PPT. Here's a link to EN for yesterday's example: http://exurbannation.blogspot.com/2008/07/no-ppt-nosiree.html#comments
5. Homeowners are underwater - force loan cramdowns on banks (Frank-Dud Bill).
6. Fannie/Freddie needs more bailout - "re-structure".
7. Mortgage credit tightening - push FHA/VA loans.
8. Neg-am resets - lift the reset caps to 125%, or waive them altogether.
I'd prefer to get this over with - but rather than having a swift, timely return to sanity in the real estate market, their actions are leading to a long and dreary fiasco that they hope will work itself out.
If the government is going to provide a continuous backstop for real estate, you might as well buy a house. If it doesn't work out, they'll be around to save you.
For most people it is better to wait this out until there is more certainty, and lower prices, before buying.
But for those willing to consider buying now, here are some tips to consider to help hedge your bet:
A. Buy in older areas where there should be less funny money. The more exotic mortgages in an area, the more likely to be foreclosures in the future.
B. Buy a one-story house - baby boomers are inreasing the demand.
C. Buy in neighborhoods where the inventory has been low the last couple of years. It's not a guarantee of future performance, but a decent indicator of the current homeowners' comfort level.
D. Buy newer homes with no HOA or Mello-Roos. The future suppy and demand for these will be better than either older homes, or newer homes loaded with fees.
E. Make lowball offers - if it doesn't make you cringe, it's not low enough.
F. Look off the beaten path. Dig out deals that aren't on the open market.
G. Look for superior homes with all the extras. Having the upgrades you want already saves out-of-pocket expenses, and hassle, of doing them yourself.
H. Where possible, utilize seller financing. If the home's value drops dramatically, you'll have more power re-negotiating the terms with the seller, than a bank - and your payment history won't be on your credit report. If that sounds kind of ruthless, well, I guess it is, but hey - it's the wild, wild west now.
But Jim, you're a realtor, isn't this self-serving?
It's in bold print above that most should wait it out, because the overall "market" will see more declining data for a long time to come - wait until you feel comfortable with the risk. In the meantime, there will be segments of the marketplace, and/or individual neighborhoods that survive. For those folks who can stomach the rath, get good help and take a look around. Buy only if you find a compelling, top-quality property at a very attractive price.
Jim the Realtor
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Reader Comments (18)
That list looks familiar. Thanks for the plug. That's two I owe you just from this week. Anyway I thought you might like to see a post I had from a couple years ago:
Sunday, August 27, 2006
What Where When?
Robert, what area do you think of when you think of investment property?
Investment property:
1. Unrecognized value.
2. -Potential- for appreciation.
3. Proximity for personal oversight.
4. Stable community.
5. SFR/Townhouse/4plex. A personal preference.
6. Pool of renters.
7. Rational land-use regulation. Some would call this a personal foible but I call it putting my money where my big mouth is and voting with my feet.
8. Nowhere near transit.
9. No HOA.
10. No Mello-Roos.
11. No pending plans for rezoning, a freeway, etc.
12. Defects are okay but no unkowns.
13. There’s about a hundred “second tier” factors as well.
Nice post Jim.
The government involvement will make the situation worse.Like Japan in the ninety and the depression.
1920 recession was the way to go. Just let it happen (government should not get involved) and get it over. The war saved the depression. The Japanese real estate crash went on for 15 years. The big drop was the first five years, Then there was a steady two to three percent loss for the next ten years.
You are right about waiting. The big losses will be over by 2012. Can't wait for the option arm in along the coast for the next three years.
The stats say their are only so many family that can afford these $800,000 and above house. What they don't tell you is that a lot of the family make big time money bought their house before 2000. So who was buying all these over $800,000 houses in the past eight years.
They are toast. Plus the economy will slow down after the recession. Falling employment (San Diego created zero jobs in 2007) and house price arm should do wonders to the coastal houses in the next three years.
I would add:
LOCATION - that is buy where the jobs are, the schools are top, and/or close to mass transit
ie - University City and Carmel Valley
People (including myself still want the best for our kids).
And - with gas reaching $5 a gallon and maybe $12 a gallon in 5 years, a central location will be C R I T I C A L !!!!!
Wow Jim, that's great advice. It's so un-Realtor-like.
I predict that you'll be expelled from the NAR soon. :)
Thats a great post. Any advice on how to go about this
F. Look off the beaten path. Dig out deals that aren't on the open market.
Any tips would be helpful for first time home buyers like me!
Thanks!
Yeah, even some second time home buyers don't know how to look "off the beaten path" :o)
Any ideas?
"Frank-Dud Bill" ROFL.
I cringe when I see someone use the term PPT; it sounds so tinfoil hat-ish. Looking at that chart that Rob posted the other day, however, it's impossible to deny that something is going on.
The Dow fell below 11k today. That's a bit frightening.
"The beaten path" is the MLS. That's the stuff that gets picked over by everyone else, and what you get if you rely on realtor.com or a lazy agent.
A good agent should be able to bring you product you don't see on every website in town. Whether you do it yourself, or have a good agent do it for you, it takes a lot of effort.
It is seraching all of the places where sellers leave clues, besides the MLS. Newspaper ads, FSBO websites, default notices, etc. for starters, but once you have an address, it is using your resources to save time and gasoline - primarily the satellite photography. Once the house passes the sky-photo test, then somebody has to dig up their phone number or go knock on their door.
But once you get face-to-face, what do you say? If they aren't on the open market, then they are going to be stand-offish, and depending on their motivation, some degree of over-priced.
I could give you the list of questions, but my job is to ask the right questions, the right way, at the right time. Trying to turn a possible seller with questionable motivation into a deal is harder than it looks.
Rob,
I considers just doing the "Ode to Rob" week, but thought no one else would find it funny. But let's touch on your first mention. the 'unrecognized value'.
To me unrecognized value means that the price is too low - the person who put the price on it overlooked something that wasn't obvious.
There are probably dozens of examples, and I'll encourage others to chime in, but I'll start the list.
1. Properties that have Mello-Roos that expires in the next few years - you could get the seller to pay it off through escrow, or handle it yourself. Ever tries to sell a house that didn't have Mello-Roos in a Mello-Roos neighborhood? Check that one story on Nightshade in Carlsbad that sold for about $100,000 more than it was worth because the seller paid off the $35,000 MR bond. (they may have gotten some extra value out of it because it was a one-story too.)
2. A house with 'visual openness'. You don't have to be on a canyon or have an ocean view to get an extra pop for having little or no buildings behind you looking in.
3. A house in an area about to be re-zoned, or re-developed.
Jim-
Your candor and concern for the truth makes you a great example for professionals in every field.
Hats off to ya-
B
Isn't it possible (as I have read several times in comments by investors) that Paulson, Bernanke, et. al. are desperately trying to keep things together until after the November elections. After all, some changes are clearly beyond the Fed's prior powers and without Congressional authorization. Everything seems to be geared towards saving the banks and investment banks from their own lack of ethical standards.
I agree with those who say something is going on, but I don't want to write a thesis on why.
I am not in the market for housing, but I wouldn't step into the housing market now for anything [ unless I were to win the lottery 8^) ]. But I'd have to play to win and that's not happening.
Also, I would like to add that you might rent in the area that you are thinking about buying. You well know the pluses and minus of the neighborhood. Plus, you might know what house that might be for sale before that house hits the market. (sorry Jim, you might save on commissions)
"D. Buy newer homes with no HOA or Mello-Roos. The future suppy and demand for these will be better than either older homes, or newer homes loaded with fees."
All newer homes (built in 21st century) I've looked at have MR & HOA. How old is "newer" as used above?
No HOA is all well and good until a situation arrives on your street which reminds you why HOAs exist in the first place.
The govt needs to step out of the way and let the chips fall where they may. This is natural selection in its purest form. Those most able to adapt and identify ways to profit from the chaos will survive. I'm watching interviews of people in line at IndyMac who had 250K in a savings account and have no idea how FDIC insurance works.
Any schmuck on the street unless they are mother Teresa will not refuse free money. It is lenders to impose rational constraints on who gets a loan. But they threw that all out the window for the past five years with all these exotic B.S. loans...who didn't see this day coming? I welcome it, all the posers in houses they don't belong in will get smoked out, the agents who showed properties well beyond their clients' means (and knew it) will get smoked out, the brokers, the lenders, everyone who rode the false gravy train will get theirs. Here's an idea, a new consumer-watchdog website which will be a national hall of shame registry for all the participants from bottom to top in these shady loan transactions.
Unrecognized value can be as simple as seeing past the paint color. How many times have you seen those "buy my pig" TV shows where people reject a house because of the red wall in the second bedroom?
There are several possible reasons why REOs aren't hitting the market yet, including:
(a) understaffed banks
(b) loans split into many portfolios
(c) banks trying to prop up their balance sheet so they aren't among the first to fail
(d) trying to hold off on the real devastation until the next administration (both internal to the bank, and national government)
There is probably a good smattering of all of that going on.
OK, here's a stupid question. If I want to pay off my Mello-Roos on my house in order to sell it at a more attractive price, how do I find out what that amount is?