Self-Employed

Yesterday's Wall Street Journal had a front-page article about Countrywide Financial Corp. and its loan delinquencies that got me thinking. The beginning of the article quoted all the problems with sub-prime loans and the delinquency rates. (Old news...but bad news sells papers.) However, buried in the article was the fact that "fast and easy" loans (no income verification/no documentation loans) through Countrywide currently have a lower percentage of delinquencies than do traditional full-documentation loans. This was attributed to the fact that, in order to qualify for "fast and easy" loans, borrowers need higher credit scores than they would for full-documentation loans. (Source: WSJ)

This leads me to my query: Assuming that the above is indicative of the industry as a whole, why are "fast and easy loans" disappearing along with sub-prime loans, thus penalizing small business owners who try to minimize their income through legitimate tax planning means?

Sounds to me like throwing the baby out with the bath water.

Home Market

Nationally, existing home sales rose 2.9% in February (month to month) and, according to today's CCI report, the number of people who intend to purchase homes in the next 6 months has increased. However the CCI number as a whole was dreadful. The CCI measures consumers' confidence in the economy. (Source: WSJ, CNBC)

As a whole, I take the above to indicate that, although consumer sentiment with respect to the state of the economy as a whole is not favorable, consumers are realizing that the prices in this market present too good of an opprtunity to pass up.

Glass 1/2 Full or 1/2 Empty?

The pending home sales index, which measures homes under contract (but which have not yet closed), remained steady from December to January, which is a sign of market stabilization. This latest piece of data supports the notion that the market may see the beginning of a gradual recovery as early as the middle of this year. However, limiting the amount of foreclosures dragging down home prices is a key component to a recovery. (Source: WSJ, NAR, MSNBC)

Federal Reserve Chairman Ben Bernanke had a simplistic, bold and somewhat innovative suggestion a few days ago when he advised that institutions holding mortgages should consider lowering the principle of such loans. (Source: WSJ, MSNBC)

While at first glance this seems to be an insane suggestion, it may actually make sense. People are more apt to make their mortgage payments if they have equity in their homes. Conversely, no matter how low mortgage rates go, many people will default if they owe more on their homes than their homes are actually worth. Depending on the amount of any reduction in principle, this option is likely more profitable than the foreclosure process. Moreover, foreclosures will ultimately feed the current cycle of home devaluation. Devaluation of collateral is an investor's worst nightmare!

A caveat to the above is that any such program needs to be administered on an equitable and voluntary basis so as to maintain stability and foster faith in the real estate/mortgage market. Speaking of which, how much faith will investors have if bankruptcy courts are given the power to unilaterally rewrite mortgage terms, as some are suggesting, as a solution to the current mortgage problem? (Source: WSJ)

As an aside and in keeping with my recent entries, if you are in a position to buy, do so now. Most often analogized to the stock market and apropos to the housing market, predicting the absolute bottom is like trying to catch a falling knife. Further, the cuts in the prime rate made by the FED recently have not had the desired effect on fixed mortgage rates over the last few weeks. In fact, mortgage rates are on the rise. With that said, I am hopeful that the FED will drop prime another 1/2 point at its next meeting in approximately two weeks. Perhaps such a drop will convince lenders to be a little more free with their money in the not so distant future.

Opportunities-Pitfalls/Subprime/Jumbo Loans

I've seen a tremendous drop in per unit costs for multi-unit residential properties in the last 12-18 months. My experience is that per unit costs in the Merrimack Valley seem to have dropped 20-25% on lower end 2-4 unit properties. That said, a word of caution before anyone considers taking advantage of these "buys".

By way of example, say an investor finds a 3 unit property listed at $170,000 in Methuen which, believe it or not, actually exists. A savvy (or not so savvy) investor thinks he/she can purchase this property for $150,000 and get the steal of the century.

Maybe...maybe not.

These properties often have many hidden costs associated with them. Some common issues are lead paint and mold, to name just a few. It would not be unusual for a neglected property to have renovation costs of $30,000 per unit. Investors, especially novice investors, may be better off paying $225,000 for a similar property with de-lead certificates and in move-in condition. It is all a risk vs. reward analysis. The $225,000 property may yield a similar return to the property listed at $170,000 (with minimal risk) once renovation costs are factored into the investment. Renovation costs are always an unknown and even the most experienced investors sometimes underestimate these projects. Remember that "sweat equity" involves opportunity costs.

In short, my point is that you need to do your homework and know what you are getting into so that you reap the rewards of your investment. With that said, I am a firm believer in investing in real estate and am always available to assist investors through this process.

As an aside, Countrywide Financial Corporation appears to be expanding its efforts to mitigate the fallout from the subprime mortgage mess. Do not hesitate to contact your mortgage company in this regard, irrespective of whether or not it happens to be Countrywide, as other mortgage companies are sure to follow suit. (Source: WSJ)

Finally, it appears that President Bush on Wednesday will raise the limits on jumbo loans from approximately $417,000 to as much as $725,000. Given the market in my geographic sphere of influence, this is very good news! Anyone who needs to sell, or wants to buy, a home in the $550,000-$800,000 range will be in a much better position if this adjustment is indeed signed into law. (Source: NAR, CNBC)

Bernanke/Countywide/Mortgage rates

Yesterday, Ben Bernanke gave every indication that the FED will lower rates at its next meeting. Most experts expect a 1/2 point reduction and as much as 1 1/2 points in total reductions by the end of March. Moreover, Mr. Bernanke alluded to the fact that the FED will not hesitate to intervene in between meetings if more negative economic indications develop. He was particularly focused on declining home values, ongoing liquidity issues and the jobless rate. Along with future rate cuts, Mr. Bernanke announced that the FED will auction an additional 60 billion dollars in 28 day loans over the next month to financial institutions. (Source: CNBC, WSJ)

Bank of America has acknowledged its intent to buy Countrywide Financial Services. (Source: WSJ)

On average, mortgage rates dropped from 6.07% to 5.85% over the last week. (Source: WSJ)

For qualified buyers, it just keeps getting better, but low rates and low home prices do not usually coexist for lengthy periods of time.

Year End

It's been awhile and, with year end around the corner, I have a few thoughts I wanted to share in '07:

This highly touted plan to save homeowners with adjustable rate motgages through work-out programs to convert ARMs into fixed mortgages is optional. In other words, the entities with control over these mortgages have no obligation to enter into or abide by the criteria as laid out in this plan. Moreover, borrowers are being placed in 3 catagories and only one category is eligible. Without getting into the details, to my knowlege there is not yet a formula for these classifications. All that said, it is still worth looking into if a person feels they may qualify.

For those of you who have pre-approvals, do not make the mistake of relying on the same. The mortgage industry is in turmoil so stay in close contact with your lender/broker, if you are seriously shopping for a home.

Sellers who must sell need to price their homes properly and stage them to perfection in order to sell given the time of year and state of the market. However, the buyers who are shopping now are serious. The tire kickers wait for the spring and fall. The point being, if you follow the above advice, it is quite possible to sell your home at this point and time.

In short, I still believe that the market may start to turn in the seller's favor, in late spring/early summer of '08. However, that is optimistic and a mere starting point. More likely, we are looking at the fall of '08.

Merry Christmas and happy holidays to all!

Winter = Buy

Talk about a perfect storm...wow!

It's getting cold outside. I have counted snow twice. Thanksgiving has passed. Look what's around the corner...

More cold weather...Christmas...New Year's Eve...school vacations...basic lethargy relating to the time of year.

Sellers:

If you have the luxury, wait for spring! That said, if you must sell now, price your property correctly and stage the property with an eye toward your target market. For a more in-depth explanation of that last statement, feel free to give me a call any time.

Buyers:

Buy...buy...buy!

In conjunction with the cyclical issues mentioned above, interest rates remain at historic lows and, as the stock market continues to devalue, there is more and more likelihood that the FED will lower rates by a quarter to half a point in mid-December.

Bottom line (read my prior entry for supporting statements by experts), this market should swing back in favor of sellers perhaps as early as this spring. With that in mind, take advantage of this market while you have this opportunity. If you continue to wait in hopes of timing the absolute bottom of the market, you may just miss out completely.

James Owens

Caterpillar's CEO, James Owens, was interviewed today on CNBC and was relatively upbeat, predicting a soft landing for the U.S. economy as a whole. (Source: CNBC)

As some of you are aware, Owens' negative comments last week - and the journalistic interpretations thereafter - were largely responsible for a drastic decline in the stock market. However, today, Owens backed off some of his recessionary comments and more narrowly defined the scope of the same to deal specifically with real estate and related markets. Most importantly, Owens stated that the real estate market is unlikely to turn around until the middle of next year. The converse suggests that he believes the real estate turnaround will begin sometime in the middle of next year. (Source: CNBC)

Why were these comments significant? As the CEO of Caterpillar, and given the nature of the company's various business interests, Owens is intimately familiar with the real estate market. I find the middle of next year as a possible entry point for a real estate recovery to be encouraging given the more pessimistic expectations of many "experts." Moreover, given the fact that job and wages reports show recent improvement, I reiterate that residential investment properties are attractive at this point and time. Keep in mind that in conjunction with the above, Countrywide Financial Services estimates that 86% of the subprime loans they approved in 2006 would be denied under their current underwriting requirements. (Source: CNBC, WSJ)

Hmmm...residential real estate prices are lower than they have been in recent years and people are employed and receiving higher wages, yet many cannot qualify for loans. That sounds to me like a recipe for rental profitability, which should only increase as foreclosures continue in the immediate future. As always, the advisability of investing in rental property is predicated on a person having the risk tolerance to be a landlord in tenant-friendly Massachusetts.

With respect to my previous blog entry, although it is true that Countrywide Financial Services is reworking adjustable rate mortgages as stated, there are indications that they are using delinquency as a prerequisite for altering these loans. That being said, this remains an opportunity to be explored by those of you who are behind, or are in jeopardy of falling behind, in your adjustable rate mortgage payments. (Source: WSJ)

Opportunity Knocks

For purposes of brevity, I won't get into statistics with respect to inventory, pricing and/or financing. It suffices to say that this week, there was conflicting data with respect to all three. That being said, the most encouraging news related to those of you who have adjustable rate mortgages.

This week, Countrywide Financial announced that it was going to reach out to its customers who entered into adjustable rate mortgages to the tune of $16 billion. What that apparently means is that Countrywide is willing to refinance $16 billion of adjustable rate mortgages in the form of fixed rate mortgages. This is unprecedented. For those of you who have an adjustable rate mortgage, irrespective of whether it's funded by Countrywide or another lender, it is incumbent upon you to contact your lender with respect to this rare opportunity. It is my strong belief that other lenders will have no choice but to follow Countrywide's lead and refinance their ARMs into fixed rate mortgages.

As an aside, I predict the Red Sox in 5.

Looking Up!

Bad news sells, so, as usual, it has been the primary focus of late.

At the beginning of the week, the buzz consisted of the fact that foreclosures in September were up significantly year over year. However, foreclosures were actually down in September when compared to August. (Source: CNBC and Fox News)

Now, while normally it is appropriate to compare months or quarters from year to year, given the data and current market conditions, I believe the August to September analysis is more telling. The question is whether this is merely a blip, or a trend toward a housing recovery. Although inventories remain at unhealthy levels in this area, I believe that the future is not as bleak as the media would have us believe.

On a micro level, I am seeing buyers finally stepping up to the plate to take advantage of the low prices and interest rates. In fact, a few buyers are heeding my advice and exploring the purchase of rental properties.

For you buyers out there, remember, it is virtually impossible to time the bottom of the market. Do you want to risk a rise in interest rates in the hopes that prices may dip slightly in the next year or so?

Food for thought...