Richard Davet, an Ohio native, was able to stall the foreclosure process for 11 years without making a mortgage payment, according to a recent article in The Wall Street Journal. How is this possible? Davet used various legal strategies to accomplish this feat, filling appeal after appeal and trying to expose loopholes in the system. His efforts made for quite the legal display, but he finally succumbed to the law and was removed from the house by the sheriff. Although he no longer lives in the house, he is still fighting to get his house back. You can read the article for more details on the efforts he was making.
After reading the article, the thought kept coming to my head was that, if this guy spent all that energy on something that could actually make him money, he could have afforded to pay his mortgage and none of this would have happened. He would still have his house, and a nice chunk of equity, making him better off. In addition, the bank would have saved a ton of money on legal fees, allowing them to loan that money to someone else, furthering the economy and so on.
I hope this story doesn’t inspire other people facing foreclosure to follow suit. Not only could such an attempt ultimately be bad for them, it would further harm banks, making life harder for people trying to get home loans. That, in turn, could lead to further punishment of the real estate market and of the economy overall.
Monday, December 31, 2007
Friday, December 28, 2007
Is There Really Oil In The Rocky Mountains?
Oil in the Rocky Mountains--sound far fetched? Well, it might not be. Oil prices continue to rise, fueled further by the unfortunate assassination of former Pakistani prime minister Benazir Bhutto yesterday. In addition, a new energy bill was just signed by President Bush, further reinforcing the desire for the U.S. to become energy independent.
Oil shale is abundant in the Rocky Mountains and there is already technology in place that can generate oil from the shale. As the cost to generate this oil continues to drop and the price of oil continues to rise, it seems to be only a matter of time before the U.S. turns the Rockies into an oil field.
Of course there are some drawbacks to drawing oil from shale, including, among other things, pollution concerns. As long as the price of oil stays high, though, these concerns will become increasingly overlooked, as with the oil sands production in Canada. For more information, read our article on Rocky Mountain Oil. But before you get too carried away and buy up land in the Rocky Mountains, it might also be good to read about real estate booms and busts.
Oil shale is abundant in the Rocky Mountains and there is already technology in place that can generate oil from the shale. As the cost to generate this oil continues to drop and the price of oil continues to rise, it seems to be only a matter of time before the U.S. turns the Rockies into an oil field.
Of course there are some drawbacks to drawing oil from shale, including, among other things, pollution concerns. As long as the price of oil stays high, though, these concerns will become increasingly overlooked, as with the oil sands production in Canada. For more information, read our article on Rocky Mountain Oil. But before you get too carried away and buy up land in the Rocky Mountains, it might also be good to read about real estate booms and busts.
Thursday, December 27, 2007
President Bush Signed The Energy Bill: Now What?
President Bush signed off on a new energy bill, the Energy Independence and Security Act of 2007, last week. The bill is being touted as “groundbreaking” by some and a disaster by others. The main pieces of the bill include new fuel standards for cars and new renewable fuel production requirements. But what does it mean for investors?
The biggest piece of this bill, in terms of impact to investors, will be the renewable fuel portion. According to the Energy Independence and Security Act of 2007, the U.S. will be required to produce at least 36 billion gallons of renewable fuel by 2022--about five times what we are producing now. The New York Times recently pointed out some of the arguments being made by the bill’s critics. “Critics contend it will make cars and trucks less safe and more expensive, divert farmland to costly production of feedstock for ethanol and other synthetic fuels, and raise the price of food because of competition for corn and grain between fuel refiners and livestock growers," according to The New York Times.
Because more land, specifically farmland, is going to be needed to grow these materials, one can expect the price of farmland to rise along with the prices of goods grown on that land. Investors who wish to capitalize on farmland should read our article on farmland investment.
The biggest piece of this bill, in terms of impact to investors, will be the renewable fuel portion. According to the Energy Independence and Security Act of 2007, the U.S. will be required to produce at least 36 billion gallons of renewable fuel by 2022--about five times what we are producing now. The New York Times recently pointed out some of the arguments being made by the bill’s critics. “Critics contend it will make cars and trucks less safe and more expensive, divert farmland to costly production of feedstock for ethanol and other synthetic fuels, and raise the price of food because of competition for corn and grain between fuel refiners and livestock growers," according to The New York Times.
Because more land, specifically farmland, is going to be needed to grow these materials, one can expect the price of farmland to rise along with the prices of goods grown on that land. Investors who wish to capitalize on farmland should read our article on farmland investment.
Wednesday, December 26, 2007
U.S. Home Prices Post Another Record Drop
More bad news for the U.S. housing market: according to the Standard & Poor's/Case-Shiller year-over-year index, there is a new record for the largest year-over-year fall in home values. The index reported a drop of 6.7 percent year-over-year in October for the top 10 metropolitan areas and a drop of 6.1 percent for the top 20 metropolitan areas. Out of the top 20 metropolitan areas, only three reported positive gains: Seattle, Portland and Charlotte.
In Seattle, prices aren’t dropping because sellers are not dropping their prices. Not much of anything is moving right now in the Seattle market. Sellers have been able to wait it out so far, but it remains to be seen just how much longer they can, or will, continue to wait. One thing is certain, though: The market is not as great here as the national media make it seem.
The previous record for the Standard & Poor's/Case-Shiller year-over-year index for the top 10 metropolitan areas, set in April 1991, was 6.3 percent. Homeowners and investors can remind themselves that home prices recovered from that previous low and they will eventually recover from this one as well. What we don't know is how low prices are going to go, or how long it will take to recover.
At this time, investors would be wise to focus on cash flow, not appreciation. Properties that provide cash flow are much more likely to retain their values. Once the market turns around, investors can look at getting back into more speculative plays.
In Seattle, prices aren’t dropping because sellers are not dropping their prices. Not much of anything is moving right now in the Seattle market. Sellers have been able to wait it out so far, but it remains to be seen just how much longer they can, or will, continue to wait. One thing is certain, though: The market is not as great here as the national media make it seem.
The previous record for the Standard & Poor's/Case-Shiller year-over-year index for the top 10 metropolitan areas, set in April 1991, was 6.3 percent. Homeowners and investors can remind themselves that home prices recovered from that previous low and they will eventually recover from this one as well. What we don't know is how low prices are going to go, or how long it will take to recover.
At this time, investors would be wise to focus on cash flow, not appreciation. Properties that provide cash flow are much more likely to retain their values. Once the market turns around, investors can look at getting back into more speculative plays.
Friday, December 21, 2007
Oil And Gas Investments: Not For Everyone
With oil selling at a record high, many people are becoming interested in oil and gas investments. Before investors get too excited about the prospects, though, they should be aware that the industry isn’t all sunshine and daisies. Investing in oil and gas comes with many risks, including the possibility that wells will come up completely dry and all investment funds will be lost.
In addition, many of the companies out there touting their investment opportunities are poorly run and likely to be out of business sooner rather than later, or they are flat out scams. If you are seriously interested in oil and gas investments make sure that A) you don’t invest more then you are willing and able to lose and B) You complete extensive due diligence on the company and their investment opportunity.
Some common scams the SEC cautions against are:
“Can’t Miss Wells.” They might say they posses some amazing new technology that is a sure fire bet to find oil, or they have some inside beat on the location that no one else has. Prospecting for oil is no sure thing; be wary of anyone who says otherwise.
“Unsolicited Materials.” If you are receiving random materials trying to get you to invest in oil and gas projects, chances are it is a scam. The truth of the matter is these investments are typically reserved for accredited investors and this type of solicitation is prohibited.
For the rest of the SEC red flags check their website.
The oil and gas industry can be complicated and the risks involved are not always easily understood. Investors who are new to the industry would be wise to work with a registered oil and gas broker/dealer who can guide them through their investment options. They will also be able to match investors with a reputable company that offers an investment suitable for the investor's risk and reward criteria. For more information on investing in oil and gas read our article: oil and gas investments.
In addition, many of the companies out there touting their investment opportunities are poorly run and likely to be out of business sooner rather than later, or they are flat out scams. If you are seriously interested in oil and gas investments make sure that A) you don’t invest more then you are willing and able to lose and B) You complete extensive due diligence on the company and their investment opportunity.
Some common scams the SEC cautions against are:
“Can’t Miss Wells.” They might say they posses some amazing new technology that is a sure fire bet to find oil, or they have some inside beat on the location that no one else has. Prospecting for oil is no sure thing; be wary of anyone who says otherwise.
“Unsolicited Materials.” If you are receiving random materials trying to get you to invest in oil and gas projects, chances are it is a scam. The truth of the matter is these investments are typically reserved for accredited investors and this type of solicitation is prohibited.
For the rest of the SEC red flags check their website.
The oil and gas industry can be complicated and the risks involved are not always easily understood. Investors who are new to the industry would be wise to work with a registered oil and gas broker/dealer who can guide them through their investment options. They will also be able to match investors with a reputable company that offers an investment suitable for the investor's risk and reward criteria. For more information on investing in oil and gas read our article: oil and gas investments.
Thursday, December 20, 2007
Record Number Of Foreclosures In California, But Investors Are Not Buying
Last month the entire state of California had 12,282 properties go to foreclosure auction, but only 321 of those were actually sold, according to a recent article in the Modesto Bee. In Modesto, Merced and Stockton, there were 1,336 properties auctioned and only 17 actually sold.
At first glace these numbers appear rather shocking; how could things be this bad for foreclosures in California? When one remembers, though, how much housing values have gone down recently, and the fact that lenders typically submit a bid at least in the amount of how much they are owed, it makes sense. But according to the story in the Modesto Bee, lenders are willing to accept much less than what is owed--practically anything to move the properties at this point. One example in the story was a house being auctioned with an opening bid of only $301,500, even though the bank was owed $537,000. No one bid on the property and it was returned to the bank. That appears to be a discount of $235,500, so why didn’t anyone bid?
Chances are the house probably wasn’t worth $301,500, once you take into consideration the cost of repairs and so on, and that’s likely why no one bid on it. For most of these houses, that is probably the case, but it seems rather unlikely that there are not some good deals to be had. Out of more than 12,000 properties in California there have to be more than 321 good deals, especially with the discounts banks are willing offer right now.
The fact of the matter is many people are simply frightened to death by the real estate market right now, so there is much less competition for these deals than there used to be. That should be great news for investors: less competition means better deals are available. Since the market is still iffy at this point, the best strategy seems to be buy and hold, so if you can find a nice cash flow property and hold onto it for a while, you should be in good shape. While there might be some good fix and flip opportunities as well, they would come with a large amount of risk at this point. If you choose to go that route, just make sure you cover your bases and have a few different exit strategies in the bag, just in case.
For more foreclosure market information read our top 10 foreclosure markets for 2007 article.
At first glace these numbers appear rather shocking; how could things be this bad for foreclosures in California? When one remembers, though, how much housing values have gone down recently, and the fact that lenders typically submit a bid at least in the amount of how much they are owed, it makes sense. But according to the story in the Modesto Bee, lenders are willing to accept much less than what is owed--practically anything to move the properties at this point. One example in the story was a house being auctioned with an opening bid of only $301,500, even though the bank was owed $537,000. No one bid on the property and it was returned to the bank. That appears to be a discount of $235,500, so why didn’t anyone bid?
Chances are the house probably wasn’t worth $301,500, once you take into consideration the cost of repairs and so on, and that’s likely why no one bid on it. For most of these houses, that is probably the case, but it seems rather unlikely that there are not some good deals to be had. Out of more than 12,000 properties in California there have to be more than 321 good deals, especially with the discounts banks are willing offer right now.
The fact of the matter is many people are simply frightened to death by the real estate market right now, so there is much less competition for these deals than there used to be. That should be great news for investors: less competition means better deals are available. Since the market is still iffy at this point, the best strategy seems to be buy and hold, so if you can find a nice cash flow property and hold onto it for a while, you should be in good shape. While there might be some good fix and flip opportunities as well, they would come with a large amount of risk at this point. If you choose to go that route, just make sure you cover your bases and have a few different exit strategies in the bag, just in case.
For more foreclosure market information read our top 10 foreclosure markets for 2007 article.
Wednesday, December 19, 2007
The Effects Of The Fed's New Plan To Regulate The Mortgage Industry
Yesterday the Fed announced their grandiose plan to regulate the mortgage industry to cure it of its downward spiral. Unfortunately their plan isn’t going to do much at all to correct the problem. Their reforms are mainly targeted toward subprime loans which, for the most part, are no longer existent. The banks who are still in the industry have, for the most part, already adopted the points now being made by the Fed.
So what’s the point of trying to fix an industry that has already taken steps to fix itself? Many lenders made stupid lending decisions and now those lenders are out of business. That is how things should work, right? The market has a tendency to work itself out if left to its own devices.
While it is possible that the Fed is trying to prevent this type of thing from happening again, the more likely scenario is that they are trying to get some nice public relations from their efforts to show they care. But the Fed is a little late to the party.
The following are measures the Fed hopes to install as part of future mortgage regulation, taken from their press release:
That being said, investors who are concerned about these regulations shouldn’t be overly worried; the effects of these measures ultimately should have little to no effect on investors.
First off, these regulations appear to be for primary residences only; secondly, they are targeting higher risk--subprime--loans. Since the reality is no one can really get a subprime loan right now anyway, let alone a subprime investment loan, this measure will not do much. Keep in mind that these are merely suggestions by the Fed, meant to start discussions which will eventually lead to legislation, so the end result could be something completely different. At this point in time, though, the impact upon investors should be fairly minimal.
The biggest impact of this potential regulation is going to be on mortgage brokers, who will probably have to disclose everything under the sun now. Knowing how much their mortgage broker is truly making should be good news for borrowers, though. For more information on these potential regulations, read the press release issued by the Fed.
So what’s the point of trying to fix an industry that has already taken steps to fix itself? Many lenders made stupid lending decisions and now those lenders are out of business. That is how things should work, right? The market has a tendency to work itself out if left to its own devices.
While it is possible that the Fed is trying to prevent this type of thing from happening again, the more likely scenario is that they are trying to get some nice public relations from their efforts to show they care. But the Fed is a little late to the party.
The following are measures the Fed hopes to install as part of future mortgage regulation, taken from their press release:
- Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan.
- Creditors would be required to verify the income and assets they rely upon in making a loan.
That being said, investors who are concerned about these regulations shouldn’t be overly worried; the effects of these measures ultimately should have little to no effect on investors.
First off, these regulations appear to be for primary residences only; secondly, they are targeting higher risk--subprime--loans. Since the reality is no one can really get a subprime loan right now anyway, let alone a subprime investment loan, this measure will not do much. Keep in mind that these are merely suggestions by the Fed, meant to start discussions which will eventually lead to legislation, so the end result could be something completely different. At this point in time, though, the impact upon investors should be fairly minimal.
The biggest impact of this potential regulation is going to be on mortgage brokers, who will probably have to disclose everything under the sun now. Knowing how much their mortgage broker is truly making should be good news for borrowers, though. For more information on these potential regulations, read the press release issued by the Fed.
Tuesday, December 18, 2007
Is Gold Still A Good Investment?
Gold should, in theory, be a great investment in today’s turbulent market. Historically, gold has been the investment of choice in times such as these, and for good reason. (For more information on some of these reasons see our article on Investing in Gold.) Why is it, then, that gold has recently been losing value? Has the value of gold peaked? Has the gold market changed? Can we still count on gold to retain its purchasing power as it has throughout history? Let's look at some professional opinions on the subject:
Dominic Frisby, the commodities commentator for MoneyWeek, said, “Unquestionably, you must own gold for the long-term--governments are continuing to inflate the money supply, and combined with the rocketing oil price, a return to the dark days of the 1970s is by no means out of the question.” Frisby also said that gold is just undergoing a correction and that over the long term, it would continue its rise. This correction was likely the result of profit taking, but the fundamentals supported further increases in price.
Michael Sesit, a contributor to Bloomberg, has a different view of gold. “One of the enduring dogmas of global finance holds that gold is a safe-haven asset. The precious metal is billed as a hedge against inflation, the ultimate insurance policy against geopolitical risk and protection during periods of financial-market turmoil.
With the credit crisis and the Federal Reserve's response to it--cutting the federal funds and discount rates and injecting huge sums into the banking system--the emphasis on gold's value has lately focused on market dislocations and inflation. Although with Iran and the Middle East, not to mention other hotspots, the specter of political risk is ever present.
Investors--and there are many of them--who buy into these suppositions might as well believe in the tooth fairy.” Sesit goes on in his commentary to give several reasons why gold is not a good investment.
Should we run and buy gold? Should we sell all our gold while the value is still high? If you are worried about the future of your currency or another depression, owning gold might be a wise move. If nothing else, having some physical gold on hand might help you sleep better at night. However, because gold doesn’t pay dividends--on the contrary it costs money to hold it--if you think the economy is going to improve and all this currency value talk is overblown, then gold might not be the investment for you. Either way, though, it might be a good idea to have a little gold in your portfolio. Just in case.
Dominic Frisby, the commodities commentator for MoneyWeek, said, “Unquestionably, you must own gold for the long-term--governments are continuing to inflate the money supply, and combined with the rocketing oil price, a return to the dark days of the 1970s is by no means out of the question.” Frisby also said that gold is just undergoing a correction and that over the long term, it would continue its rise. This correction was likely the result of profit taking, but the fundamentals supported further increases in price.
Michael Sesit, a contributor to Bloomberg, has a different view of gold. “One of the enduring dogmas of global finance holds that gold is a safe-haven asset. The precious metal is billed as a hedge against inflation, the ultimate insurance policy against geopolitical risk and protection during periods of financial-market turmoil.
With the credit crisis and the Federal Reserve's response to it--cutting the federal funds and discount rates and injecting huge sums into the banking system--the emphasis on gold's value has lately focused on market dislocations and inflation. Although with Iran and the Middle East, not to mention other hotspots, the specter of political risk is ever present.
Investors--and there are many of them--who buy into these suppositions might as well believe in the tooth fairy.” Sesit goes on in his commentary to give several reasons why gold is not a good investment.
Should we run and buy gold? Should we sell all our gold while the value is still high? If you are worried about the future of your currency or another depression, owning gold might be a wise move. If nothing else, having some physical gold on hand might help you sleep better at night. However, because gold doesn’t pay dividends--on the contrary it costs money to hold it--if you think the economy is going to improve and all this currency value talk is overblown, then gold might not be the investment for you. Either way, though, it might be a good idea to have a little gold in your portfolio. Just in case.
Monday, December 17, 2007
Is Ben Bernanke More Like Santa Claus Or The Grinch?
After cutting interest rates yet again, most people would logically lean towards Bernanke acting more like Santa Claus; after all, he is trying to help investors out and boost the economy, right? While many investors were hoping for a nicer present this Christmas--i.e., a 0.50 percent rate cut--they still got a present nonetheless.
However, many investors are pointing towards Bernanke being more like the Grinch at this point. But that could just be because they are acting like greedy little kids crying because they only got an Apple iPhone for Christmas when they expressly told you they wanted an iPhone AND a Nintendo Wii.
The Grinch wouldn’t even bother to give a present at all, right? In fact, if Bernanke was the Grinch, he probably would have raised rates and then gone to his little cave and laughed himself to sleep. Yet others are saying Bernanke pulled a fast one and is really the Grinch disguised as Santa Claus. Come to think of it, the Grinch just might try something like that--at least you couldn’t put it past him. Here are a few arguments for each case.
Ben Bernanke is the Grinch in disguise:
Ron Paul is one person who believes that Ben Bernanke is the Grinch operating under the disguise of Santa Claus. Paul claims that Bernanke and the Fed are robbing from Americans' savings by decreasing the value of the dollar through interest rate cuts and money supply increases. Even a 0.25 percent increase is too much. An entertaining video of a Q & A session with Ron Paul and Ben Bernanke speaks to this point: http://www.youtube.com/watch?v=yAwvlDJgJbM
Bernanke is the Grinch:
Morris Beschloss, an economist and columnist for The Desert Sun (Palm Springs), said “Bernanke is so far behind the curve now….There is such a down-drag now in the banks. Even if the banks wanted to help out with the foreclosures banks don’t like to take property. But they themselves are in trouble. I would have absolutely bet today that they would have went with 50 basis points. I got angry. I thought this was an absolutely [done] deal. I thought they might even go 75. To me, I would call this the worst action the Fed has ever made.”
Ben Bernanke is Santa Claus...still looking…
Okay, so no one thinks Bernanke is Santa Claus. Either he didn’t deliver a big enough rate cut or else any thought of a rate cut is simply blasphemous--it doesn’t seem like there is much of a middle ground here in people’s minds. No wonder everyone hates the Fed Chairman: They can never do enough. Maybe we all should send Bernanke a Christmas card in the spirit of the holidays. After all, even in the movies, the Grinch and Scrooge didn’t turn out to be all bad.
However, many investors are pointing towards Bernanke being more like the Grinch at this point. But that could just be because they are acting like greedy little kids crying because they only got an Apple iPhone for Christmas when they expressly told you they wanted an iPhone AND a Nintendo Wii.
The Grinch wouldn’t even bother to give a present at all, right? In fact, if Bernanke was the Grinch, he probably would have raised rates and then gone to his little cave and laughed himself to sleep. Yet others are saying Bernanke pulled a fast one and is really the Grinch disguised as Santa Claus. Come to think of it, the Grinch just might try something like that--at least you couldn’t put it past him. Here are a few arguments for each case.
Ben Bernanke is the Grinch in disguise:
Ron Paul is one person who believes that Ben Bernanke is the Grinch operating under the disguise of Santa Claus. Paul claims that Bernanke and the Fed are robbing from Americans' savings by decreasing the value of the dollar through interest rate cuts and money supply increases. Even a 0.25 percent increase is too much. An entertaining video of a Q & A session with Ron Paul and Ben Bernanke speaks to this point: http://www.youtube.com/watch?v=yAwvlDJgJbM
Bernanke is the Grinch:
Morris Beschloss, an economist and columnist for The Desert Sun (Palm Springs), said “Bernanke is so far behind the curve now….There is such a down-drag now in the banks. Even if the banks wanted to help out with the foreclosures banks don’t like to take property. But they themselves are in trouble. I would have absolutely bet today that they would have went with 50 basis points. I got angry. I thought this was an absolutely [done] deal. I thought they might even go 75. To me, I would call this the worst action the Fed has ever made.”
Ben Bernanke is Santa Claus...still looking…
Okay, so no one thinks Bernanke is Santa Claus. Either he didn’t deliver a big enough rate cut or else any thought of a rate cut is simply blasphemous--it doesn’t seem like there is much of a middle ground here in people’s minds. No wonder everyone hates the Fed Chairman: They can never do enough. Maybe we all should send Bernanke a Christmas card in the spirit of the holidays. After all, even in the movies, the Grinch and Scrooge didn’t turn out to be all bad.
Friday, December 14, 2007
The Self-Directed IRA: An Alternate Way To Invest In Real Estate
Used correctly, a self-directed IRA can dramatically increase the returns an investor earns in their retirement account. If used imprudently, however, the opposite can happen. A few months ago, NuWire Investor published an article about self-directed IRAs that spoke about the advantages of using a self-directed IRA to achieve true diversification.
Some will argue that people can and should buy real estate, for example, in a traditional IRA account through a REIT, and claim that the method is much safer, more liquid and so on. While there are advantages and disadvantages to both routes, the fact of the matter is that the two methods are very different.
One potential problem with REITs was pointed out by MoneyWeek in their daily newsletter recently:
“As one property fund manager told The Sunday Telegraph, ‘If the liquidity levels in these funds fall much further, managers will start to get very worried. They are trapped between an illiquid property market and the highly liquid structure they offer investors. In markets such as these, the two just don’t tally.’
….Property funds of course, are able to freeze withdrawals, if necessary, more easily and legitimately than your average savings bank. But the first one to do so will virtually guarantee a run on the others.”
With the current state of the real estate market, this is something people should pay more attention to. If these funds are faced with the reality that the only way they can raise the funds needed to pay off investors wanting out is to start fire-selling their buildings, investors in REITs are going to be in big trouble.
Once people start to get worried about the prospects of this happening is precisely when the runs will start to happen, and as MoneyWeek pointed out, it will likely be industry wide, not just contained to a fund here and a fund there.
If you, too, are worried about investing in REITs, but still want to stay involved in the real estate market, a self-directed IRA is something to consider. With a self-directed IRA, you are in control, and the success or failure of the investment relies upon you rather than the whims of other investors or fund managers.
Some will argue that people can and should buy real estate, for example, in a traditional IRA account through a REIT, and claim that the method is much safer, more liquid and so on. While there are advantages and disadvantages to both routes, the fact of the matter is that the two methods are very different.
One potential problem with REITs was pointed out by MoneyWeek in their daily newsletter recently:
“As one property fund manager told The Sunday Telegraph, ‘If the liquidity levels in these funds fall much further, managers will start to get very worried. They are trapped between an illiquid property market and the highly liquid structure they offer investors. In markets such as these, the two just don’t tally.’
….Property funds of course, are able to freeze withdrawals, if necessary, more easily and legitimately than your average savings bank. But the first one to do so will virtually guarantee a run on the others.”
With the current state of the real estate market, this is something people should pay more attention to. If these funds are faced with the reality that the only way they can raise the funds needed to pay off investors wanting out is to start fire-selling their buildings, investors in REITs are going to be in big trouble.
Once people start to get worried about the prospects of this happening is precisely when the runs will start to happen, and as MoneyWeek pointed out, it will likely be industry wide, not just contained to a fund here and a fund there.
If you, too, are worried about investing in REITs, but still want to stay involved in the real estate market, a self-directed IRA is something to consider. With a self-directed IRA, you are in control, and the success or failure of the investment relies upon you rather than the whims of other investors or fund managers.
Thursday, December 13, 2007
Government Inflation Numbers Not Suitable for Retirement Calculations
If you are calculating your future retirement needs using the government’s inflation numbers, the consumer price index (CPI), or using the CPI for other calculations, you should keep reading. According to John Williams, an economist who runs a website called shadowstats.com, the government has been fudging the inflation numbers since the 1980s.
Since then, the government has changed how they calculate the CPI numbers several times, with each new method lowering the resulting numbers. The logic used in making these changes is flawed, and if people knew how the numbers were calculated, they would almost surely hesitate to use them.
Why would the government want to orchestrate this scam? Williams points to their Social Security obligations. The government’s Social Security payments to individuals are indexed to the CPI, and the higher the CPI, the more the government has to pay out. When one considers how huge the government’s Social Security debt is, along with the fact that there is little to no hope of them being able to pay it without some help, it makes complete sense.
People can choose whether to believe Williams or not, but he makes a convincing case that is certainly worth listening to. If you are looking for a better inflation number to base your calculations upon, Williams recommends that you add about 7 percent to the CPI. On shawdowstats.com, there is a CPI calculator tool that might be helpful. On the site Williams also discusses in more depth the various changes to the CPI calculation and their subsequent flaws.
To demonstrate the difference 7 percent can make during the course of a career, the value of the portfolio of a person contributing $5,000 a year for 40 years would take a hit of around $1,000,000 in terms of true buying power. Remember, this 7 percent is on top of the approximate 2 to 3 percent inflation number being published by the government. That means that you need to be making 9 to 10 percent in return on your money just to stay even with inflation.
Since then, the government has changed how they calculate the CPI numbers several times, with each new method lowering the resulting numbers. The logic used in making these changes is flawed, and if people knew how the numbers were calculated, they would almost surely hesitate to use them.
Why would the government want to orchestrate this scam? Williams points to their Social Security obligations. The government’s Social Security payments to individuals are indexed to the CPI, and the higher the CPI, the more the government has to pay out. When one considers how huge the government’s Social Security debt is, along with the fact that there is little to no hope of them being able to pay it without some help, it makes complete sense.
People can choose whether to believe Williams or not, but he makes a convincing case that is certainly worth listening to. If you are looking for a better inflation number to base your calculations upon, Williams recommends that you add about 7 percent to the CPI. On shawdowstats.com, there is a CPI calculator tool that might be helpful. On the site Williams also discusses in more depth the various changes to the CPI calculation and their subsequent flaws.
To demonstrate the difference 7 percent can make during the course of a career, the value of the portfolio of a person contributing $5,000 a year for 40 years would take a hit of around $1,000,000 in terms of true buying power. Remember, this 7 percent is on top of the approximate 2 to 3 percent inflation number being published by the government. That means that you need to be making 9 to 10 percent in return on your money just to stay even with inflation.
Wednesday, December 12, 2007
Is A U.S. Recession Looming?
Kathleen Camilli of Camilli Economics was recently quoted in the Wall Street Journal, as seeing “the internal dynamics of the U.S. economy deteriorating into recession" this quarter. "Growth will be negative this quarter, nonfarm payrolls will be revised down, and from what I can see, personal-consumption expenditures are rapidly slowing," she said. "All U.S. consumers, wealthy and middle-class, pull back their spending when their housing investments stop appreciating and start deteriorating in value. This is already under way, and has been exacerbated further by high oil prices." If you believe Camilli, then the U.S. is facing a recession.
However, there are also economists, such as Milton Ezrati, who don’t see a U.S. recession as very likely. He was quoted by Reuters as saying, “[The] subprime [mortgage crisis] in and of itself is not enough to cause recession."
"If it engenders a general fear of taking on credit risk, as it has recently, and engenders a general fear about lending and extension of any kind of loan, then I think that could create a recession," Ezrati said. But he emphasized that he does not consider that a likely scenario.
The Wall Street Journal recently polled 52 economists, who put the chance of a U.S. recession at an average 38 percent. Because there is no level of certainty either way, investors would be wise to cover themselves for either scenario.
However, there are also economists, such as Milton Ezrati, who don’t see a U.S. recession as very likely. He was quoted by Reuters as saying, “[The] subprime [mortgage crisis] in and of itself is not enough to cause recession."
"If it engenders a general fear of taking on credit risk, as it has recently, and engenders a general fear about lending and extension of any kind of loan, then I think that could create a recession," Ezrati said. But he emphasized that he does not consider that a likely scenario.
The Wall Street Journal recently polled 52 economists, who put the chance of a U.S. recession at an average 38 percent. Because there is no level of certainty either way, investors would be wise to cover themselves for either scenario.
Tuesday, December 11, 2007
How do the Fed Interest Rate Changes Really Affect Mortgage Rates?
Wondering why your mortgage payment hasn’t gone down even though the Fed has lowered rates? It is a common misconception that mortgage rates are directly tied to the federal funds rate. In fact, mortgages in general are not directly tied to the federal funds rate at all. Here are some quick pointers to keep in mind when considering how concerned you should or shouldn’t be about the decisions of the Federal Reserve Bank:
The market, not the federal funds rate, determines mortgage interest rates. Mortgage Backed Securities are bonds sold on public exchanges by Freddie Mac, Fannie Mae and the like. More than any other factor, the prices of these securities have the most impact upon mortgage rates.
Fixed rate mortgages are long term interest rates, while the fed funds rate is short term. Investors in fixed rate mortgages are much more concerned with factors such as inflation than they are with the short term federal funds rate. In some cases, mortgage rates will actually go up when the fed lowers the funds rate because the market fears future inflation may result from the cut.
Adjustable Rate Mortgages (ARMs) are tied to indexes, not the federal funds rate. The most common indexes are the London Inter Bank Offered Rate (LIBOR), the 11th District Cost of Funds Index (COFI), and the Constant Maturity Treasury (CMT). There are various factors that determine the movement of these various indexes. For example, the LIBOR is tied to interest rates in London, not the U.S.
Home Equity Lines of Credit (HELOC) are the mortgage type most closely tied to the fed funds rate. Most HELOCs are priced on some margin above the prime rate. While the prime rate is not the federal funds rate, it does track it almost exactly at 3 percent above.
In many cases the lowering of the federal funds eventually (albeit indirectly) makes its way to mortgages. However, this is far from a certainty and generally takes some time. As a holder of an ARM, or someone looking to get a new mortgage, don’t hold your breath expecting the looming fed rate decrease to save you money on your mortgage any time soon. In fact, it may cost you in the short term if investors in mortgage backed securities think more rate cuts will equal more inflation.
Monday, December 10, 2007
The Yen Carry Trade Is Picking Up Steam Once Again
From Bloomberg:
“Australia's dollar led gains against the yen yesterday among the 16 major currencies, rising 1.1 percent as investors returned to the so-called carry trade.
In these trades, investors get funds in a country with low borrowing costs and buy assets where interest rates are higher, earning the difference. The risk in this strategy is that exchange-rate swings erode gains from rate differentials.
The Bank of Japan's benchmark rate is 0.5 percent, the lowest among industrialized nations, compared with 11 percent in South Africa and 6.75 percent in Australia.”
From Daily FX:
“…with prices teetering on the edge of deflation, consumption remaining weak, labor market conditions deteriorating, and businesses reflecting some slowing, the BOJ would likely be doing more harm than good to the Japanese economy by raising rates from 0.50 percent.”
From Reuters:
“Fujii at Bank of America said the dollar and other currencies were likely to be underpinned against the yen by Japanese households and individuals investing winter bonuses in foreign assets in the next few weeks.
A variety of new funds have been launched this month to lure such cash looking for better returns than those available in Japan, where 10-year bond yields are just 1.5 percent and domestic stocks have underperformed other equity markets.”
“Australia's dollar led gains against the yen yesterday among the 16 major currencies, rising 1.1 percent as investors returned to the so-called carry trade.
In these trades, investors get funds in a country with low borrowing costs and buy assets where interest rates are higher, earning the difference. The risk in this strategy is that exchange-rate swings erode gains from rate differentials.
The Bank of Japan's benchmark rate is 0.5 percent, the lowest among industrialized nations, compared with 11 percent in South Africa and 6.75 percent in Australia.”
From Daily FX:
“…with prices teetering on the edge of deflation, consumption remaining weak, labor market conditions deteriorating, and businesses reflecting some slowing, the BOJ would likely be doing more harm than good to the Japanese economy by raising rates from 0.50 percent.”
From Reuters:
“Fujii at Bank of America said the dollar and other currencies were likely to be underpinned against the yen by Japanese households and individuals investing winter bonuses in foreign assets in the next few weeks.
A variety of new funds have been launched this month to lure such cash looking for better returns than those available in Japan, where 10-year bond yields are just 1.5 percent and domestic stocks have underperformed other equity markets.”
Pending Home Sales Up For Second Straight Month
From Bloomberg:
“The National Association of Realtors' index of pending sales climbed 0.6 percent, following a revised 1.4 percent increase in September that was bigger than initially estimated, the group said today in Washington.
‘We're not likely to see any further collapse at this point,’ said Richard DeKaser, chief economist at National City Corp. in Cleveland, who had forecast a gain. ‘I'm not optimistic about the outlook for the housing market, but we're scraping bottom in the fourth quarter.’
The gains in September and October follow the biggest back- to-back drop since records began in 2001. The Federal Reserve is likely to cut its benchmark interest rate tomorrow to prevent the housing recession and higher borrowing costs from weakening the broader economy, economists said.”
From Reuters:
“Economists polled by Reuters before the report were expecting pending home sales to decline 1 percent.
The stronger-than-expected data helped U.S. stock prices extend gains in early morning trade.
Year-over-year, pending sales were down 18.4 percent, the third largest drop since the trade group began keeping such records in January 2001. A sale is said to be pending when a contract has been signed but the sale has not yet closed.”
From USA Today:
“The trade group's chief economist, Lawrence Yun, cited job growth and the replacement of subprime lenders to borrowers with weak credit with government-backed loans as reasons for the improved outlook.
‘Despite over-exaggerated negative coverage on the housing conditions, many local markets are actually seeing price increases,’ Yun said at a press briefing. ‘Mortgage availability is improving’
The trade group also said its index that forecasts near-term home sales inched upward in October. The trade group's seasonally adjusted index of pending sales for existing homes rose 0.6% to 87.2 from an upwardly revised September index of 86.7, but was down 18.4% from a year ago — the third-largest year-over year decline on record.”
“The National Association of Realtors' index of pending sales climbed 0.6 percent, following a revised 1.4 percent increase in September that was bigger than initially estimated, the group said today in Washington.
‘We're not likely to see any further collapse at this point,’ said Richard DeKaser, chief economist at National City Corp. in Cleveland, who had forecast a gain. ‘I'm not optimistic about the outlook for the housing market, but we're scraping bottom in the fourth quarter.’
The gains in September and October follow the biggest back- to-back drop since records began in 2001. The Federal Reserve is likely to cut its benchmark interest rate tomorrow to prevent the housing recession and higher borrowing costs from weakening the broader economy, economists said.”
From Reuters:
“Economists polled by Reuters before the report were expecting pending home sales to decline 1 percent.
The stronger-than-expected data helped U.S. stock prices extend gains in early morning trade.
Year-over-year, pending sales were down 18.4 percent, the third largest drop since the trade group began keeping such records in January 2001. A sale is said to be pending when a contract has been signed but the sale has not yet closed.”
From USA Today:
“The trade group's chief economist, Lawrence Yun, cited job growth and the replacement of subprime lenders to borrowers with weak credit with government-backed loans as reasons for the improved outlook.
‘Despite over-exaggerated negative coverage on the housing conditions, many local markets are actually seeing price increases,’ Yun said at a press briefing. ‘Mortgage availability is improving’
The trade group also said its index that forecasts near-term home sales inched upward in October. The trade group's seasonally adjusted index of pending sales for existing homes rose 0.6% to 87.2 from an upwardly revised September index of 86.7, but was down 18.4% from a year ago — the third-largest year-over year decline on record.”
Friday, December 7, 2007
Evaluating The Latest U.S. Jobs Report
From Bloomberg:
“Jobs proved to be one of the few bright spots in a year when home prices plunged the most in at least four decades, energy costs hit a record and mortgage-bond losses roiled financial markets. Gains in wages and employment may help prop up spending as the economy struggles to avoid its first recession since 2001.
‘It buys the economy time and allows the Fed to lower rates without panicking,’ said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, who forecast payrolls would rise by 90,000. ‘The economy is slowing down in the fourth quarter, but not so rapidly that you're going to have a big down-draft in consumer spending.’”
From Forbes:
“By itself, the job growth will likely not be enough to dissuade the Federal Reserve from cutting interest rates. Peter Morici, a professor of business at the University of Maryland, explained that the November job growth still showed strains from spiking subprime defaults.
‘Residential construction, financial services, and manufacturing displayed weakness, indicating growth is slowing significantly in the fourth quarter and further raising prospects for an interest rate cut at the Dec. 11 meeting of the Federal Open Market Committee,’ said Morici. At the meeting, the Federal Reserve's policy-setting panel is widely expected to cut its federal funds target rate by at least 25 basis points from the current 4.5%.”
From The Daily Reckoning:
“ADP uses the same birth/death model that the Bureau of Labor Statistics uses, which automatically voids this report in my mind. You see even the BLS admits that the birth/death model exaggerates the wrong way when cycles turn.
And the ISM non-manufacturing (service sector) Index fell yesterday, and their jobs portion of the index fell to just above the expansion level of 50, to 50.8… So, the ISM doesn't agree with ADP either…
But, as I said, this information was quickly swept under the rug, and those that were betting on a 50 BPS cut from the Fed next week, quickly removed those bets, and bought dollars… And stocks thought this news was just marvelous, but then they thought bad employment numbers were marvelous too, which means… carry trades went back on yesterday!”
“Jobs proved to be one of the few bright spots in a year when home prices plunged the most in at least four decades, energy costs hit a record and mortgage-bond losses roiled financial markets. Gains in wages and employment may help prop up spending as the economy struggles to avoid its first recession since 2001.
‘It buys the economy time and allows the Fed to lower rates without panicking,’ said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, who forecast payrolls would rise by 90,000. ‘The economy is slowing down in the fourth quarter, but not so rapidly that you're going to have a big down-draft in consumer spending.’”
From Forbes:
“By itself, the job growth will likely not be enough to dissuade the Federal Reserve from cutting interest rates. Peter Morici, a professor of business at the University of Maryland, explained that the November job growth still showed strains from spiking subprime defaults.
‘Residential construction, financial services, and manufacturing displayed weakness, indicating growth is slowing significantly in the fourth quarter and further raising prospects for an interest rate cut at the Dec. 11 meeting of the Federal Open Market Committee,’ said Morici. At the meeting, the Federal Reserve's policy-setting panel is widely expected to cut its federal funds target rate by at least 25 basis points from the current 4.5%.”
From The Daily Reckoning:
“ADP uses the same birth/death model that the Bureau of Labor Statistics uses, which automatically voids this report in my mind. You see even the BLS admits that the birth/death model exaggerates the wrong way when cycles turn.
And the ISM non-manufacturing (service sector) Index fell yesterday, and their jobs portion of the index fell to just above the expansion level of 50, to 50.8… So, the ISM doesn't agree with ADP either…
But, as I said, this information was quickly swept under the rug, and those that were betting on a 50 BPS cut from the Fed next week, quickly removed those bets, and bought dollars… And stocks thought this news was just marvelous, but then they thought bad employment numbers were marvelous too, which means… carry trades went back on yesterday!”
Builders Are Liquidating Land At Huge Discounts
From The Wall Street Journal:
“What's happening in Phoenix has begun to play out across the U.S. in recent weeks. Public home builders and land developers, who dominated the market during the boom, are bloated with land and need to sell, partly to record losses to recoup taxes. Meanwhile, more nimble private builders and opportunistic investors are raising money and starting to snap up the pieces, buying parcels for as much as 60% discounts.
‘It's a great time to be looking for land in Phoenix,’ says John Fioramonti , senior managing director at Myers Builder Advisor, a real-estate consulting firm based in Scottsdale, Ariz. ‘The national builders are just in a panic to get rid of excess inventory.’
The land deals in Phoenix and elsewhere are a vivid reminder that even when housing markets are scraping bottom, investors are willing to buy land if the price falls low enough.”
From Financial Times:
“It makes sense for builders to consider liquidity-boosting options while they are available. There is no shortage of investors looking to snap up land when the price is right. Home builders may end up selling at excessive discounts but their losses could be even worse if they wait and the housing slump gets worse. Property values are still sinking, and builders are expected to take further impairments on land and housing stock in the fourth quarter.”
From CNN Money:
“The decline in the value of builders' land and home inventory was further demonstrated a week ago when Lennar the No. 1 home builder by revenue, reported that it was selling 11,000 properties, including some completed homes, to the real estate arm of Wall Street firm Morgan Stanley for only 40 percent of its previously stated value.”
“What's happening in Phoenix has begun to play out across the U.S. in recent weeks. Public home builders and land developers, who dominated the market during the boom, are bloated with land and need to sell, partly to record losses to recoup taxes. Meanwhile, more nimble private builders and opportunistic investors are raising money and starting to snap up the pieces, buying parcels for as much as 60% discounts.
‘It's a great time to be looking for land in Phoenix,’ says John Fioramonti , senior managing director at Myers Builder Advisor, a real-estate consulting firm based in Scottsdale, Ariz. ‘The national builders are just in a panic to get rid of excess inventory.’
The land deals in Phoenix and elsewhere are a vivid reminder that even when housing markets are scraping bottom, investors are willing to buy land if the price falls low enough.”
From Financial Times:
“It makes sense for builders to consider liquidity-boosting options while they are available. There is no shortage of investors looking to snap up land when the price is right. Home builders may end up selling at excessive discounts but their losses could be even worse if they wait and the housing slump gets worse. Property values are still sinking, and builders are expected to take further impairments on land and housing stock in the fourth quarter.”
From CNN Money:
“The decline in the value of builders' land and home inventory was further demonstrated a week ago when Lennar the No. 1 home builder by revenue, reported that it was selling 11,000 properties, including some completed homes, to the real estate arm of Wall Street firm Morgan Stanley for only 40 percent of its previously stated value.”
Thursday, December 6, 2007
Bank Of England Lowers Rates While Euro Zone Stays Put
From the Houston Chronicle:
“The Bank of England cuts interest rates for the first time in two years by a quarter of a percentage point to 5.5 percent amid fears that the global credit crunch will significantly slow economic growth. The European Central Bank holds its rate steady at 4 percent as it waits for more data on the economic outlook.
THE SIGNS: Calls for a rate cut in Britain, despite rising inflation, were accelerated by surveys showing the country's decade-long house price boom is coming to an end and deteriorating consumer confidence. The ECB was under less pressure to move, despite surging inflation, because of relatively solid economic growth in the euro zone.”
From Forbes:
‘”Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow,’ said the Bank of England.
Meanwhile, the European Central Bank said it would hold its key interest rate at 4.0% on Thursday, a move widely expected by economists after eurozone inflation showed no sign of easing last month.
‘The latest information has confirmed the existence of strong short-term upward pressure on inflation,’ said the ECB on Thursday. Monthly inflation estimates from the European Commission in November showed price increases hitting a six-year-high of 3.0%, up from 2.6% in October.”
From Guardian Unlimited:
“’The reappraisal of risk in financial markets is still evolving and is accompanied by continued uncertainty about the potential impact on the real economy,’ said Trichet. ‘We will therefore monitor very closely all developments by acting in a firm and timely manner.’
However, Trichet made clear the ECB was not dropping its guard on the danger of knock-on or ‘second round’ effects of high oil prices on broader inflation, despite the turmoil on financial markets.
‘We will ensure that second round effects and risks to price stability over the medium term do not materialise,’ he said.
The Bank of England cut interest rates by a quarter percentage point to 5.5 percent earlier on Thursday, while the Bank of Canada surprised markets with a similar cut on Wednesday. Economists expect another rate cut from the U.S. Federal Reserve on Dec. 11.”
“The Bank of England cuts interest rates for the first time in two years by a quarter of a percentage point to 5.5 percent amid fears that the global credit crunch will significantly slow economic growth. The European Central Bank holds its rate steady at 4 percent as it waits for more data on the economic outlook.
THE SIGNS: Calls for a rate cut in Britain, despite rising inflation, were accelerated by surveys showing the country's decade-long house price boom is coming to an end and deteriorating consumer confidence. The ECB was under less pressure to move, despite surging inflation, because of relatively solid economic growth in the euro zone.”
From Forbes:
‘”Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow,’ said the Bank of England.
Meanwhile, the European Central Bank said it would hold its key interest rate at 4.0% on Thursday, a move widely expected by economists after eurozone inflation showed no sign of easing last month.
‘The latest information has confirmed the existence of strong short-term upward pressure on inflation,’ said the ECB on Thursday. Monthly inflation estimates from the European Commission in November showed price increases hitting a six-year-high of 3.0%, up from 2.6% in October.”
From Guardian Unlimited:
“’The reappraisal of risk in financial markets is still evolving and is accompanied by continued uncertainty about the potential impact on the real economy,’ said Trichet. ‘We will therefore monitor very closely all developments by acting in a firm and timely manner.’
However, Trichet made clear the ECB was not dropping its guard on the danger of knock-on or ‘second round’ effects of high oil prices on broader inflation, despite the turmoil on financial markets.
‘We will ensure that second round effects and risks to price stability over the medium term do not materialise,’ he said.
The Bank of England cut interest rates by a quarter percentage point to 5.5 percent earlier on Thursday, while the Bank of Canada surprised markets with a similar cut on Wednesday. Economists expect another rate cut from the U.S. Federal Reserve on Dec. 11.”
Foreclosure Investors Get Ready…
From The Wall Street Journal:
“The number of mortgage loans at least 30 days past due reached its highest point since 1986 during the third quarter as foreclosure starts increased across all loan types, according to a Mortgage Bankers Association survey released Thursday.
The quarterly survey found the delinquency rate for mortgage loans on one-to-four unit residential properties was 5.59% during the third quarter on a seasonally adjusted basis. That represented an increase of 47 basis points from the second quarter of this year and 92 basis points from the third quarter of 2006."
From Bloomberg:
“In the quarter, 3.12 percent of prime borrowers made their mortgage payments at least 30 days late, up from 2.73 percent in the second quarter, the report said. The subprime share of late payments rose to 16.3 percent from 14.8 percent.
The numbers were driven by California, the U.S.'s largest state, and Florida, Brinkmann said. The two states had 36.4 percent of all of the nation's prime adjustable-rate loans and had 42.4 percent of new foreclosures during the quarter, he said. They had 28.1 percent of subprime adjustable mortgages and 33.7 percent of foreclosure starts for that type of loan.”
From Reuters:
“About 994,000 U.S. households are in the process of foreclosure, said Doug Duncan, the MBA's chief economist.
‘Not all of them will lose their house, but that's how many are currently at serious risk of losing their house,’ he said.
The percentage of loans in the foreclosure process rose to 1.69 percent of loans outstanding, up 0.29 percentage point from the prior quarter and up 0.64 from a year earlier.”
“The number of mortgage loans at least 30 days past due reached its highest point since 1986 during the third quarter as foreclosure starts increased across all loan types, according to a Mortgage Bankers Association survey released Thursday.
The quarterly survey found the delinquency rate for mortgage loans on one-to-four unit residential properties was 5.59% during the third quarter on a seasonally adjusted basis. That represented an increase of 47 basis points from the second quarter of this year and 92 basis points from the third quarter of 2006."
From Bloomberg:
“In the quarter, 3.12 percent of prime borrowers made their mortgage payments at least 30 days late, up from 2.73 percent in the second quarter, the report said. The subprime share of late payments rose to 16.3 percent from 14.8 percent.
The numbers were driven by California, the U.S.'s largest state, and Florida, Brinkmann said. The two states had 36.4 percent of all of the nation's prime adjustable-rate loans and had 42.4 percent of new foreclosures during the quarter, he said. They had 28.1 percent of subprime adjustable mortgages and 33.7 percent of foreclosure starts for that type of loan.”
From Reuters:
“About 994,000 U.S. households are in the process of foreclosure, said Doug Duncan, the MBA's chief economist.
‘Not all of them will lose their house, but that's how many are currently at serious risk of losing their house,’ he said.
The percentage of loans in the foreclosure process rose to 1.69 percent of loans outstanding, up 0.29 percentage point from the prior quarter and up 0.64 from a year earlier.”
Wednesday, December 5, 2007
Subprime Rates To Be Locked For 5 Years
From the East Valley Tribune:
“The Bush administration has hammered out an agreement with industry to freeze interest rates for certain subprime mortgages for five years in an effort to combat a soaring tide of foreclosures, congressional aides said Wednesday.
…Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.”
From Bloomberg:
“Treasury Secretary Henry Paulson is finalizing the deal as the housing recession enters a third year, threatening the economic expansion. Paulson and Housing and Urban Development Secretary Alphonso Jackson will hold a press conference tomorrow at 1:45 p.m. in Washington to discuss the plan, Treasury said in a statement.”
From WNBC:
“Congressional aides said the Bush administration has worked out an agreement with the mortgage industry to freeze some mortgage rates.
Interest rates for certain subprime mortgages would be frozen for five years in an effort to deal with a rising number of foreclosures.
The sources said it's a compromise between banking regulators who wanted a longer time frame of as much as seven years and industry arguments that the freeze should just last a year or two.”
“The Bush administration has hammered out an agreement with industry to freeze interest rates for certain subprime mortgages for five years in an effort to combat a soaring tide of foreclosures, congressional aides said Wednesday.
…Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.”
From Bloomberg:
“Treasury Secretary Henry Paulson is finalizing the deal as the housing recession enters a third year, threatening the economic expansion. Paulson and Housing and Urban Development Secretary Alphonso Jackson will hold a press conference tomorrow at 1:45 p.m. in Washington to discuss the plan, Treasury said in a statement.”
From WNBC:
“Congressional aides said the Bush administration has worked out an agreement with the mortgage industry to freeze some mortgage rates.
Interest rates for certain subprime mortgages would be frozen for five years in an effort to deal with a rising number of foreclosures.
The sources said it's a compromise between banking regulators who wanted a longer time frame of as much as seven years and industry arguments that the freeze should just last a year or two.”
Condo Conversions Out, Condo Reversions In
From the Pittsburgh Post-Gazette:
“At the same time, after years of existing apartment buildings being converted into condominiums, the trend is reversing; according to Real Capital Analytics, a New York-based research company, ‘reversions’ -- condo buildings that were turned back into rentals -- outstripped condo conversions in the second quarter of 2007, the first time that has happened since the 1980s.”
From The Wall Street Journal:
“That is the strategy developers and lenders are aiming to use on billions of dollars of troubled condo complexes. ‘If there's a potential rainbow out there in the clouds, it's that some of these stalled condo projects work as rentals,’ says Roger Winston, an attorney at Ballard Spahr Andrews & Ingersoll LLP in Bethesda, Md., who advised owners on several so-called condo reversions.
And while a few reversions have succeeded, the obstacles to make the switch from condo to rental are high. Among the hurdles: lenders reluctant to lengthen loan terms because rental properties produce income more slowly than condos; irate condo owners who don't want to live with renters; crushing tax assessments based on old condo sales prices; and a rental market that is weak in some of the worst-hit condo markets, such as Florida and Arizona.”
From Apartment Finance Today:
“The supply of half-built and unsold condominiums was described as both a threat and a potential opportunity. Can a developer make money taking over a ‘busted condo’ and retooling it as rental housing? Yes, said Bozzuto, but it’s very difficult, especially on half-completed projects that have some occupancy by buyers.”
“At the same time, after years of existing apartment buildings being converted into condominiums, the trend is reversing; according to Real Capital Analytics, a New York-based research company, ‘reversions’ -- condo buildings that were turned back into rentals -- outstripped condo conversions in the second quarter of 2007, the first time that has happened since the 1980s.”
From The Wall Street Journal:
“That is the strategy developers and lenders are aiming to use on billions of dollars of troubled condo complexes. ‘If there's a potential rainbow out there in the clouds, it's that some of these stalled condo projects work as rentals,’ says Roger Winston, an attorney at Ballard Spahr Andrews & Ingersoll LLP in Bethesda, Md., who advised owners on several so-called condo reversions.
And while a few reversions have succeeded, the obstacles to make the switch from condo to rental are high. Among the hurdles: lenders reluctant to lengthen loan terms because rental properties produce income more slowly than condos; irate condo owners who don't want to live with renters; crushing tax assessments based on old condo sales prices; and a rental market that is weak in some of the worst-hit condo markets, such as Florida and Arizona.”
From Apartment Finance Today:
“The supply of half-built and unsold condominiums was described as both a threat and a potential opportunity. Can a developer make money taking over a ‘busted condo’ and retooling it as rental housing? Yes, said Bozzuto, but it’s very difficult, especially on half-completed projects that have some occupancy by buyers.”
Tuesday, December 4, 2007
Objections To Subprime Rate Freeze Legislation
From CNBC:
“Many hedge funds, along with other institutional investors such as mutual funds, money market funds and retirement plans, are invested heavily in mortgage securities. Some hedge funds in particular made strategic bets on the decline of the subprime mortgage market, and they could argue that the government-backed plan is unfair meddling that will cheat them out of money.”
From The Wall Street Journal:
“Even some subprime borrowers object to the plan. Justin Miller, a 27-year-old mortgage broker in Coral Springs, Fla., says he made a bad investment decision when he bought a $600,000 oceanfront home last December with two subprime loans. But he's committed to making the $6,000 in monthly payments -- and the higher payments once the rates go up.
‘A lot of people are trying to point fingers and get themselves out of something they put themselves into,’ he says. ‘I put myself in this position. I need to find a way to make it work.’
Mr. Miller says that the rate-freeze proposal reminds him of a television commercial: The announcer asks, ‘Do you owe back taxes?’ A client responds, ‘I settled for half of what I owe.’ Says Mr. Miller: ‘How's that fair? Everything seems to be backward.’”
From City Journal:
“The Paulson plan’s flaws are manifold—and fatal. First, it will reward and encourage irrational behavior by future home buyers. It wasn’t logical for people to take on mortgage obligations that they couldn’t afford, but it will become logical in the future if they can reasonably expect that the government and their lenders will bail them out when the going gets tough.
Second, the deal will thwart the market by keeping home prices artificially high. In recent years, laughably easy credit has allowed many people to ‘buy’ homes who otherwise couldn’t have. We’ve had ‘liar’ loans, in which people could claim a false annual income without fear that their mortgage lenders would confirm the figure. We’ve had ‘Nina’ loans (short for ‘No Income, No Assets’). And we’ve had ‘Ninja’ loans, for ‘No Income, No Job or Assets.’ Consumers, armed with the easy money provided by these lenient arrangements, have pushed home prices to record levels as measured against personal income. The decline of home prices, then, was both inevitable and healthy. But Hope Now, by placing an artificial floor under home prices, will penalize first-time buyers who did the right thing: not taking out mortgages that they knew they couldn’t afford, but renting instead until prices fell and they could afford homes with more conventional mortgages.”
“Many hedge funds, along with other institutional investors such as mutual funds, money market funds and retirement plans, are invested heavily in mortgage securities. Some hedge funds in particular made strategic bets on the decline of the subprime mortgage market, and they could argue that the government-backed plan is unfair meddling that will cheat them out of money.”
From The Wall Street Journal:
“Even some subprime borrowers object to the plan. Justin Miller, a 27-year-old mortgage broker in Coral Springs, Fla., says he made a bad investment decision when he bought a $600,000 oceanfront home last December with two subprime loans. But he's committed to making the $6,000 in monthly payments -- and the higher payments once the rates go up.
‘A lot of people are trying to point fingers and get themselves out of something they put themselves into,’ he says. ‘I put myself in this position. I need to find a way to make it work.’
Mr. Miller says that the rate-freeze proposal reminds him of a television commercial: The announcer asks, ‘Do you owe back taxes?’ A client responds, ‘I settled for half of what I owe.’ Says Mr. Miller: ‘How's that fair? Everything seems to be backward.’”
From City Journal:
“The Paulson plan’s flaws are manifold—and fatal. First, it will reward and encourage irrational behavior by future home buyers. It wasn’t logical for people to take on mortgage obligations that they couldn’t afford, but it will become logical in the future if they can reasonably expect that the government and their lenders will bail them out when the going gets tough.
Second, the deal will thwart the market by keeping home prices artificially high. In recent years, laughably easy credit has allowed many people to ‘buy’ homes who otherwise couldn’t have. We’ve had ‘liar’ loans, in which people could claim a false annual income without fear that their mortgage lenders would confirm the figure. We’ve had ‘Nina’ loans (short for ‘No Income, No Assets’). And we’ve had ‘Ninja’ loans, for ‘No Income, No Job or Assets.’ Consumers, armed with the easy money provided by these lenient arrangements, have pushed home prices to record levels as measured against personal income. The decline of home prices, then, was both inevitable and healthy. But Hope Now, by placing an artificial floor under home prices, will penalize first-time buyers who did the right thing: not taking out mortgages that they knew they couldn’t afford, but renting instead until prices fell and they could afford homes with more conventional mortgages.”
Peru Trade Agreement Approved
From Bloomberg:
“The agreement will boost trade between the U.S. and Peru, which totaled $8.8 billion last year, by $1.5 billion. It will open the door for more Peruvian exports of asparagus and apparel and more American meat and grain into Peru, according to the U.S. International Trade Commission. It could also lure foreign investors to Peru.
It ‘will create more employment by opening up Peru for industrialists to install plants here to supply the U.S. market,’ Peruvian President Alan Garcia said in Lima today.
Proponents of free trade said the wide vote margin should set the stage for approval of three other trade accords, with Panama, Colombia and South Korea.”
From MarketWatch:
“’This agreement will level the playing field for American exporters and investors and will expand an important market in this hemisphere for U.S. goods and services, which will help strengthen economic growth and job creation in the United States,’ President Bush said in a statement following the vote.
Business lobbyists and trade groups hailed the pact, and held out hope that the framework on labor and environmental standards would pave the way for approval of pending but more controversial pacts with bigger trading partners.”
From Associated Press:
“Opponents also looked to the bigger picture, blaming past trade pacts, particularly with China and Mexico, for rising trade deficits and the loss of American manufacturing jobs. ‘One of the major reasons that the middle class in the United States is shrinking, poverty is increasing and the gap between the rich and the poor is growing wider is in fact due to our disastrous, unfettered, trade policy,’ Sen. Bernie Sanders, I-Vt, said.
The accord has strong backing from business groups such as the U.S. Chamber of Commerce and the National Association of Manufacturers. It is opposed by labor and other groups who say the tougher labor and environmental standards won't be enforced and that Peruvian peasants won't be able to compete with cheaper American farm goods.”
“The agreement will boost trade between the U.S. and Peru, which totaled $8.8 billion last year, by $1.5 billion. It will open the door for more Peruvian exports of asparagus and apparel and more American meat and grain into Peru, according to the U.S. International Trade Commission. It could also lure foreign investors to Peru.
It ‘will create more employment by opening up Peru for industrialists to install plants here to supply the U.S. market,’ Peruvian President Alan Garcia said in Lima today.
Proponents of free trade said the wide vote margin should set the stage for approval of three other trade accords, with Panama, Colombia and South Korea.”
From MarketWatch:
“’This agreement will level the playing field for American exporters and investors and will expand an important market in this hemisphere for U.S. goods and services, which will help strengthen economic growth and job creation in the United States,’ President Bush said in a statement following the vote.
Business lobbyists and trade groups hailed the pact, and held out hope that the framework on labor and environmental standards would pave the way for approval of pending but more controversial pacts with bigger trading partners.”
From Associated Press:
“Opponents also looked to the bigger picture, blaming past trade pacts, particularly with China and Mexico, for rising trade deficits and the loss of American manufacturing jobs. ‘One of the major reasons that the middle class in the United States is shrinking, poverty is increasing and the gap between the rich and the poor is growing wider is in fact due to our disastrous, unfettered, trade policy,’ Sen. Bernie Sanders, I-Vt, said.
The accord has strong backing from business groups such as the U.S. Chamber of Commerce and the National Association of Manufacturers. It is opposed by labor and other groups who say the tougher labor and environmental standards won't be enforced and that Peruvian peasants won't be able to compete with cheaper American farm goods.”
Monday, December 3, 2007
Dollar May Be Ready For A Turn Around
From The Wall Street Journal:
“If economies outside the U.S. slow, the U.S. may no longer seem like such a bad place for foreign investors to put their money, especially given how much further a euro or yen will go in the U.S. than they do at home. That could restrain the dollar's fall. More immediately, troubled U.S. financial firms may need to sell foreign-currency-denominated assets to shore up their balance sheets before they close their books at year end. Repatriating that money will mean buying dollars, and that could boost the currency.
Meantime, hedge funds and other speculative investors have placed heavy bets on the dollar continuing to lose ground against other currencies. If the dollar starts to rise, they will be forced to unwind those bets, and the dollar's rebound could be fierce.”
From International Herald Tribune:
“The U.S. budget and trade deficits are narrowing in tandem for the first time since 1995, when the dollar gained 8 percent as measured by the Federal Reserve's U.S. trade weighted dollar index. The economy will expand 2.4 percent in 2008, compared with 1.9 percent for Europe, according to surveys conducted last month by Bloomberg News.
‘I am confident that the dollar will have a significant rally next year, especially against the euro and the pound,’ said Stephen Jen in London, the head of currency research at Morgan Stanley. Jen said that he expected the U.S. currency to strengthen to $1.35 against the euro by December 2008 from $1.4633 last week. ‘The deficits are shrinking fast.’”
From Bloomberg:
“The median forecast of strategists is for a 5 percent gain to $1.40 against the euro in 2008. Redtower Ltd. in Aberdeen, Scotland, is the most bullish, calling for the dollar to gain to $1.23 by the end of next year.
Jim O'Neill, chief economist in London at Goldman Sachs Group Inc., the most profitable securities company, said last week the narrowing trade deficit will help revive the dollar's allure. Goldman had predicted that the dollar would weaken as U.S. growth slowed while the rest of the world expanded.”
“If economies outside the U.S. slow, the U.S. may no longer seem like such a bad place for foreign investors to put their money, especially given how much further a euro or yen will go in the U.S. than they do at home. That could restrain the dollar's fall. More immediately, troubled U.S. financial firms may need to sell foreign-currency-denominated assets to shore up their balance sheets before they close their books at year end. Repatriating that money will mean buying dollars, and that could boost the currency.
Meantime, hedge funds and other speculative investors have placed heavy bets on the dollar continuing to lose ground against other currencies. If the dollar starts to rise, they will be forced to unwind those bets, and the dollar's rebound could be fierce.”
From International Herald Tribune:
“The U.S. budget and trade deficits are narrowing in tandem for the first time since 1995, when the dollar gained 8 percent as measured by the Federal Reserve's U.S. trade weighted dollar index. The economy will expand 2.4 percent in 2008, compared with 1.9 percent for Europe, according to surveys conducted last month by Bloomberg News.
‘I am confident that the dollar will have a significant rally next year, especially against the euro and the pound,’ said Stephen Jen in London, the head of currency research at Morgan Stanley. Jen said that he expected the U.S. currency to strengthen to $1.35 against the euro by December 2008 from $1.4633 last week. ‘The deficits are shrinking fast.’”
From Bloomberg:
“The median forecast of strategists is for a 5 percent gain to $1.40 against the euro in 2008. Redtower Ltd. in Aberdeen, Scotland, is the most bullish, calling for the dollar to gain to $1.23 by the end of next year.
Jim O'Neill, chief economist in London at Goldman Sachs Group Inc., the most profitable securities company, said last week the narrowing trade deficit will help revive the dollar's allure. Goldman had predicted that the dollar would weaken as U.S. growth slowed while the rest of the world expanded.”
Chavez Defeat, A Victory For Democracy
From Time:
“And, to the astonishment of his opponents, Chavez did. At around 2 am this morning, Caracas time, Chavez conceded his first electoral defeat since winning Venezuela's presidency in 1998. After facing an unusually strong protest movement on the streets of Venezuela's major cities — led not by traditional opposition figures but by university students who'd grown fearful that Chavez was moving the country toward a Cuba-style dictatorship — his reforms were narrowly beaten back by a 51% to 49% margin. The result, and Chavez's graceful acceptance of it, may well have set not only Venezuela, a key U.S. oil supplier, but all of Latin America on a far surer path to democracy in the 21st century.”
From The Wall Street Journal:
“The outcome is a humiliating defeat for Mr. Chávez, who had turned the referendum into a plebiscite, telling Venezuelans that a "no" vote was tantamount to treason. Until now, Mr. Chávez had won every political contest he faced by landslide margins.
Chávez detractors charged that the referendum was part of a strategy to use elections to dismantle Venezuela's democracy and replace it with a Cuba-style dictatorship.”
From Bloomberg:
“The loss signals waning support for Chavez's drive to bring socialism to the region's fourth-biggest economy by concentrating power in his hands and increasing state control of private lives. Voters refused to abolish presidential term limits or allow government censorship during declared emergencies. Chavez also sought to shorten the work day and end central bank autonomy.
‘This is the first significant setback that Chavez has ever had,’ said Adam Isacson, director at the Center for International Policy in Washington. ‘He has lost popular support. He has lost support of some of the army and the poor.’
He has also lost confidence of investors. The government's 9 1/4 percent dollar bond due in 2027 fell 22 percent this year before the referendum, with almost half the loss coming in the month before the vote. The bond gained the most in two months afterwards, rising as much as 4.15 cents on the dollar to 103 cents and paring a tumble that has made Venezuelan debt the world's worst performer this year, according to data compiled by Bloomberg.”
“And, to the astonishment of his opponents, Chavez did. At around 2 am this morning, Caracas time, Chavez conceded his first electoral defeat since winning Venezuela's presidency in 1998. After facing an unusually strong protest movement on the streets of Venezuela's major cities — led not by traditional opposition figures but by university students who'd grown fearful that Chavez was moving the country toward a Cuba-style dictatorship — his reforms were narrowly beaten back by a 51% to 49% margin. The result, and Chavez's graceful acceptance of it, may well have set not only Venezuela, a key U.S. oil supplier, but all of Latin America on a far surer path to democracy in the 21st century.”
From The Wall Street Journal:
“The outcome is a humiliating defeat for Mr. Chávez, who had turned the referendum into a plebiscite, telling Venezuelans that a "no" vote was tantamount to treason. Until now, Mr. Chávez had won every political contest he faced by landslide margins.
Chávez detractors charged that the referendum was part of a strategy to use elections to dismantle Venezuela's democracy and replace it with a Cuba-style dictatorship.”
From Bloomberg:
“The loss signals waning support for Chavez's drive to bring socialism to the region's fourth-biggest economy by concentrating power in his hands and increasing state control of private lives. Voters refused to abolish presidential term limits or allow government censorship during declared emergencies. Chavez also sought to shorten the work day and end central bank autonomy.
‘This is the first significant setback that Chavez has ever had,’ said Adam Isacson, director at the Center for International Policy in Washington. ‘He has lost popular support. He has lost support of some of the army and the poor.’
He has also lost confidence of investors. The government's 9 1/4 percent dollar bond due in 2027 fell 22 percent this year before the referendum, with almost half the loss coming in the month before the vote. The bond gained the most in two months afterwards, rising as much as 4.15 cents on the dollar to 103 cents and paring a tumble that has made Venezuelan debt the world's worst performer this year, according to data compiled by Bloomberg.”
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