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Real Estate and Mortgage Issues July 8, 2008

Posted by shaferfinancial in Uncategorized.
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Just wanted to post on the most recent RE and Mortgage Issues.  First as I have been saying for a long time now foreclosure rates are being pushed by the sub-prime loans. Even though sub-prime and FHA loans account for only 20% of loans, they account for 60% of foreclosures.  And even in this class the foreclosures are driven by two states, Florida and California which have 21% of loans outstanding and 36% of the loans in foreclosure.  These two states had the most speculative action and the largest run-up  in prices, so now we see them leading the way back down.  Now here is the important part.  This was a predictable event.  When you see pricing marching upward 20-30%, then you know there is a bubble and the equity returns will descend to the mean.  When you loan money to folks who have no reserves and poor credit scores, there will be a large group of them fail to make payments.  Its not rocket science folks!  Indy Mac, a large lender in the option arm market has now stopped lending and will probably fail.  Regular readers know my opinion of option arms by now.  If you entice folks by telling them they have a 1% mortgage rate and/or they don’t have to pay back even the interest on the loan, then you are going to get folks that take you up on that and end up in foreclosure.

As far as values, outside of a few speculative areas and a few areas where jobs have vanished, values remain pretty decent.  Here is a video on Manhattan real estate for those interested in high end markets: http://www.dottieherman.com/video_mmo2_long.htm

Bottom line, is that lending has gone back to what was standard before 2002 and rates remain historically low.  You are going to need some capital (as well as you should) to buy a home except for FHA loans.  Don’t try to time the market, make decisions based on a well thought out plan.  Remember the calculus for personal residence and investment properties are completly different.  For your home, save some money up for at least a 10% down payment, get credit scores above 700, and take your time (there is much inventory).  Remember people who don’t own their own home rarely have positive net worths at the end of the day.  Investment property figure cap rates, cash flow, local rental histories, and area job growth.  Do your homework and don’t overpay just because the area is hot!

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Comments»

1. BawldGuy Talking - July 9, 2008

You’ve made some pretty tough, but obviously factual observations about the current landscape. What you don’t do is paint an unnecessarily bleak picture.

We’re all looking to see how all this shakes out. In the end, it’s capital that’s needed. The good news?

As anyone paying close attention to the world’s current financial status knows, ya can’t swing a dead cat without hittin’ massive amounts of capital. It’s there. It’s just a matter of time before it begins to flow to where it’s needed most.

We can count on that timing not matching our preference. 🙂

2. shaferfinancial - July 9, 2008

Your right about the capital being there.

3. Warren - July 13, 2008

The world economy is not in good shape. What I think is recession is coming soon. Can’t foresee any sign that real estate will get a decent return in current economy situation. Is better to keep the bullet and shoot for bargain later on.

4. shaferfinancial - July 14, 2008

Warren, couple of points:
1. There is massive amount of capital going into real estate as we speak. This is both good and bad, good because it is keeping the pricing for large scale investment real estate and upper level personal real estate (see Manhattan) steady. Its bad because the high values mean lower cap rates than those of us who need high cap rates to create wealth like to see.

2. Real Estate is always local below that institutional level. So even if most of the country is overpriced (and I don’t see this), there are still some areas where an small individual investor can get decent cap rates, small down payments that cash flow, and good rental strengths.

You think Warren Buffett is surveying the horizon and saying all is bad so I just gonna sit on the sidelines? No, he is actively looking for promising companies to pick up at a decent price. This is his sweet spot! And it is ours too!

5. Bookmarks about Mortgage - September 18, 2008

[…] – bookmarked by 4 members originally found by cephalon on 2008-08-23 Real Estate and Mortgage Issues https://shaferfinancial.wordpress.com/2008/07/08/real-estate-and-mortgage-issues/ – bookmarked by 2 […]


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