Monday, April 7, 2014

Many Homes No longer Underwater – Good for the Investor?

In a recent article written by Kenneth Harney in the Los Angeles Times, we learn that four million homeowners are no longer “underwater” on their loans. As many of us know, a good number of these homes may be investor-owned. Obviously this is good news for the economy at large.

It is also good news for real estate investors -- if someone is in the process of foreclosure, rising prices lower the deficiency exposure for the individual (this is true for homeowners as well as investors, of course).
In addition, investors with clean credit can use the rising equity to refinance and get the great rates which can be obtained today, and in many cases improve their cash flow (possibly) quite significantly.

Needless to say, in some of the markets investors may even begin to think about selling and if they bought in 2009-2011, may already realize nice gains. Most investors are more interested in keeping the homes, as appreciation is likely to occur in markets that really overshot down during the recession (like in Arizona, Nevada and Florida, which are specifically mentioned in the article as still carrying a lot of underwater properties). Nevertheless the rising prices create a sense of success (not to be trifled with) and in some cases, more options and room to maneuver assets.


Here is the article:

4 million homeowners climb out of negative equity

More owners transitioned from negative equity into positive territory last year, a good sign for the economy overall. But many remain underwater on their mortgages.

By Kenneth R. Harney
March 16, 2014, 5:00 a.m.

WASHINGTON — The economy may be growing at a frustratingly slow pace, but one piece of it is booming: American homeowners' equity holdings — the market value of their houses minus their mortgage debts — soared by nearly $2.1 trillion last year to $10 trillion.

Big numbers, you say, and hard to grasp. But look at it this way: Thanks to rising prices and equity levels, about 4 million owners around the country last year were able to climb out of the financial tar pit of the housing bust — negative equity.

Negative equity gums up people's lives and the real estate marketplace as a whole. It makes it difficult or impossible for many owners to refinance out of a higher-cost mortgage into a more affordable one. It makes it painful to sell — you've got to bring cash to the table to pay off what you still owe to the bank. Plus almost no one wants to lend you money, at least not at reasonable interest rates secured by your real estate, when you're deeply underwater. So you're likely to spend less and invest less, and you're probably not going to buy another house. Nor will potential new buyers be able to purchase yours.
So when 4 million owners manage to transition out of negative equity into positive territory, that's significant news not just for them personally, but for the economy overall.

Two statistical studies released this month offered a glimpse of where the country is in terms of homeowner equity, seven years after real estate began to tumble and crash. The first was theFederal Reserve's quarterly "flow of funds" report. Among many other segments of the economy it toted up, the Fed found that homeowner equity has rebounded to its highest level in eight years — though it's still not quite back to the $12 trillion it was during the hyperinflationary high point of the housing boom in 2005.

The second study, from real estate analytics firm CoreLogic, focused on the flip side — the impressive shrinkage of negative equity. According to researchers, nearly 43 million owners with mortgage debt have positive equity. Roughly 6.5 million owners are still in negative equity positions, however, down from more than 10 million a year ago and 12 million in 2009.

Who are they and where are they? Not surprisingly, they are heavily concentrated in areas that saw the wildest price run-ups, the heaviest use of toxic loan products and the steepest plunges during the crash. In Nevada, 30.4% of all owners with mortgages are underwater. In Florida, the percentage is 28.1%, and in Arizona, it's 21.5%. Still, all three areas have improved sharply over the last two years.

Although non-costal California markets suffered some of the most dramatic declines in property values during the bust, researchers found that the state as a whole is nowhere near the top of the latest negative equity list. With 12.6% of mortgaged homes underwater, California has a lower overall negative rate than the national average (13.3%), and has relatively fewer underwater homes than Maryland (ranked 10th worst in the country with a negative equity rate of 16.2%), Ohio (19%), Illinois (18.7%), Rhode Island (18.3%) and Michigan (18%).

Among the best markets if you're measuring for positive equity: Texas, where just 3.9% of owners are in negative positions, Alaska (4.2%), New York (6.3%), Oklahoma (6.4%) and the District of Columbia (6.5%.) Higher-priced houses generally have lower rates of negative equity compared with houses in lower-priced areas, many of which saw construction booms for entry-level, low- and moderate-cost homes in the suburbs of major cities during the boom years. Just 8% of mortgaged homes worth more than $200,000 have negative equity, compared with 19% of homes under $200,000.
Having positive equity is one thing, but do you have adequate equity? Or are you, as CoreLogic refers to the phenomenon, "under-equitied"? Researchers define under-equity as mortgage debt that is in excess of 80% of your home's resale value

This is important in practical terms, they say, because having less than 20% equity makes it more difficult for you to pursue potentially helpful financial options, such as refinancing your primary home loan or obtaining an equity credit line. About 21% of all mortgaged homes nationwide are currently in this situation, and 1.6 million owners have less than 5% equity.
Distributed by Washington Post Writers Group






Tuesday, March 11, 2014

Home Price Appreciation Creating Attractive Rentals For Investors

In yesterdays Wall Street Journal there was an article (below) by Nick Timiraos regarding the effects of home price appreciation on affordability. As the article states, rising interest rates, a dearth of housing stock in many market, still-tight lending criteria and a slow builder’s resurgence, create a real difficulty for many people  to buy their first home. Needless to say, investors reap a certain benefit from this situation by enjoying an expanding demand for rentals. Since many investors have the means and sophistication to buy homes, the expanding rental pool actually improves the investment situation.

Here is the article as it appeared yesterday: 
 

Surging Home Prices Are a Double-Edged Sword

Affordability Troubles Grow, Especially for First-Time Buyers

 
March 9, 2014 4:35 p.m. ET

The U.S. housing market faces a challenge at the start of the spring sales season: higher prices.
It is hard to overstate the benefits of rising prices to the economy broadly and to homeowners, banks and home builders specifically after years of declines. Price gains have pulled more Americans from the brink of foreclosure and given home buyers more confidence that they won't get stuck with an asset whose value will decline.

But those gains have a painful edge, too, especially because prices have bounced back so strongly. The increases have rekindled concerns about affordability, particularly for first-time buyers, and could damp the gains of a housing rebound still in its early stages. The U.S. housing market faces an unexpected challenge at the start of the spring sales season: home prices are on a tear. Price gains have pulled more Americans from the brink of foreclosure and boosted demand from consumers no longer afraid to buy.

"Prices ran up so fast in 2013, it hurt first-timers' ability to become homeowners," said John Burns, chief executive of a home-building consulting firm in Irvine, Calif. "It's going to be a slower recovery than people had hoped because a number of people have been priced out of the market." Home values nationwide are up 11% over the past two years, according to real-estate information service Zillow Inc. and 14% below their 2007 peak. Mortgage rates, which jumped a full percentage point to about 4.5% in the past year, have sharpened worries over housing affordability.

Even as prices have increased, housing still appears affordable by one traditional gauge. Since 1990, American homeowners have spent about 24% of monthly income on their mortgage payments, according to data from Morgan Stanley. Today, that payment-to-income ratio stands at around 20%, below the long-run average. The problem with that view of affordability: It assumes borrowers have great credit and large down payments. The ratio isn't favorable for first-time buyers and others with lower incomes and smaller down payments, which increases their monthly financing costs. The payment ratio for first-time buyers was around 24% at the end of last year, in line with its long-run average, according to the Morgan Stanley analysis.

This pinch on first-timers is troubling because, so far, the housing recovery has depended to an unusual degree on cash buyers and investors. The relatively weak position of entry-level buyers could further suppress the homeownership rate—now off more than four percentage points from its 2004 peak—as more of them rent, said Vishwanath Tirupattur, a managing director at Morgan Stanley. Making matters worse, home prices are going up fastest in markets that are already expensive, such as San Francisco and Los Angeles. Just 32% of California households at the end of last year could afford the monthly payments on a median-priced home in the state of $431,510, assuming a 20% down payment, according to the California Association of Realtors. That was down from 56% of households that could afford the payments on a $276,040 median-priced home in early 2012.

Rising prices are only part of the problem for first-time buyers. Inventory shortages and tougher mortgage-qualification standards benefit buyers who can make large down payments and those who can forgo a mortgage altogether. Because many markets have low supplies of homes for sale, all-cash buyers have routinely beat out first-time buyers by guaranteeing a quick, worry-free closing for sellers.

Meanwhile, federal officials have repeatedly increased insurance premiums on loans backed by the Federal Housing Administration, which serves many first-time buyers because it requires down payments of just 3.5%. While mortgage rates at the end of 2013 reached their highest levels in more than two years, the all-in cost of an FHA-backed loan—due to insurance-premium increases—was closer to a five-year high.
Rising prices are less of a problem for current homeowners seeking to trade up because they can tap growing home equity to make their next home purchase. An index tracking housing affordability from data firm CoreLogic Inc. shows that homes were 17% less affordable for first-time buyers at the end of last year compared with the year before, while the index was down just 6% for existing homeowners.

Ideally, higher prices would stimulate more home construction, which would ease inventory crunches that are partly responsible for price increases while boosting job growth. But builders have been slow to ramp up production, skittish after being caught with too much inventory when the 2008 downturn hit. Last year, many focused instead on higher-end houses, while entry-level construction was subdued. Sales of new homes last year rose by 14% from 2012, but the number of homes sold for less than $150,000 fell by 28%. Sales above $500,000 grew by 36%.

The worry is "a situation develops where construction remains low and prices continue to outpace incomes before first-time buyers can get in, and the next thing you know, you have to" bypass standard mortgage-qualification rules "to get people into homes," said Thomas Lawler, an independent housing economist in Leesburg, Va.

Others fret that low interest rates have allowed prices to rise too fast relative to incomes, which have stagnated. While homes are still affordable on a monthly payment basis because of cheap financing, homes no longer look like a bargain when comparing prices to incomes. For the past few years, policy makers have focused on breaking a vicious downdraft in home prices. Now, it wouldn't hurt housing to see price gains flatten out, especially if income growth remains tepid. If not, the housing market's roller-coaster ride will continue.

Write to Nick Timiraos at nick.timiraos@wsj.com.

Wednesday, March 5, 2014

The Sun Still Shines in Florida!

Florida has emerged as the “Go To” state in 2014.

While Arizona and Nevada are excellent; Texas, Oklahoma and a slew of other states, are relatively stable. It's Florida that embodies the post-recession sweet spot.

The home prices in Florida markets are still way below the bare construction costs. Even though there is steady price appreciation, values are still very attractive relative to new homes. We have already touched upon the reason: the foreclosure process in the state of Florida is judicial and has been extremely slow. As a result, the flow of homes into the marketplace is more steady than in Trustee Sale markets.

Despite the great demand, this balancing out of the supply of homes has created a more tampered growth environment for the state of Florida. Many great markets will emerge after the recession effects wear off. For now, the sun shines on Florida!

Don’t forget to visit us at our incredible 1-Day Expo THIS SATURDAY, March 8th, near the San  Francisco Airport. Details are on our website: www.icgre.comWe will have rare speakers, tons of education, lots of Q&A and many experts present. In addition some of the hottest markets in the nation will be represented. A day not to be missed!

Looking forward to seeing you on Saturday!

Tuesday, March 4, 2014

Where to buy now?

Some of the markets that had gone down significantly, have registered great price improvements, especially between Q1 2012 to Q3 2013. Phoenix led the pack followed closely by Las Vegas and many California cities. Florida has provided steady appreciation but did not go crazy (most likely due to the slow judicial foreclosure process which modulates home supply into the market and helps avoid spikes).

It is important to bear in mind though, that even in Phoenix and Las Vegas the prices, even after appreciation, are still low. In most cases the prices reflect just a small premium to construction costs and are certainly very far from the peak (although that is a somewhat nebulous standard). This would be the time to remember that real estate is a classic investment, especially when powered by a 30-year fixed rate loan.

It is now almost a consensus that interest rates will rise (most say significantly) in the next few years. Needless to say, anyone who has the ability to qualify for a good low-interest rate 30-year fixed rate loan should get one! These are 100% inflation-proof. In fact once you have these loans inflation becomes your “best friend” by eroding the loan since the loan is not inflation-adjusted.

Florida still supplies a steady diet of below-construction-cost homes. That would be a place to explore purchasing. However the power of getting a fixed low rate becomes such that as long as you buy in a decent market with decent demographics, it is not bad to “get moving” and do it. 

New homes by builders are still not that popular among investors but in some markets they are not that much above the used-home fray AND they provide certain peace of mind related to their very newness, warranties and so on. Many builders help out with the loan in some way (buy down the rate for example) so that may add to the attractiveness.

All in all 2014 should be a year to be active and purchase, especially if a 30-year loan can be had.
Should you go for a somewhat lower rate on a 15-year loan? I believe the 30 year loan provides important extra flexibility. You can always choose to pay a 30-year loan in 15 (or 14 or any other number you choose), but you cannot go the other way. You also retain the flexibility to revert back to the 30-year amortization schedule if cash flow becomes tight.

Happy buying!


Tuesday, January 28, 2014

Two Mini Real Estate Investment Expos in Seattle, Wednesday February 5th & Thursday 6th!

We are excited! ICG Real Estate Investments (International Capital Group) are going up to Seattle to put on a mini-version of our quarterly Real Estate 1-Day Expo that is usually held near SFO in South San Francisco. As most of you know, we have been doing these expos for 20 years and there is always so much information. I personally return home more knowledgeable every time, as everything in real estate and real estate investing changes weekly, if not daily it seems. I am putting information about his event in a blog, as I want to share it with many new people as possible, and I know I will be connecting with many new folks on LinkedIn as well.

I have not spoken in the area for about six years, and it is going to be great to re-connect with so many that I used to connect with on a continual basis. Building relationships is what we are about and the excitement is mounting! It will be like a family reunion. (Hopefully that is a pleasant thought to most of you!) Based on demand we are looking forward to two evenings, that will allow folks to attend twice or pick a day that works best for their schedule.

These two evenings will not be easily forgotten, and we are available to talk before or after and even during the events, as well as meeting over the phone, well after the event. The Mini Real Estate Expo (s) are a great way to start out the new year with hard-hitting information you can use to be a better investor. This action packed event will be held from 6-9:30pm on two nights, Wednesday February 5th and Thursday February 6th. This way, busy Seattleites have two options to work the event into their schedule. Many of you requested that I have the event in two different locations for added convenience, so we have provided that. You can also come to both nights if you desire!

Patricia Wangsness and Adiel Gorel will be the expert presenters, and you will hear from expert loan sources and learn from market teams across the country that will be flying in to tell you about the hottest markets and the proven methods to use for success. Here is a taste of what you can expect:
  • How to identify the best markets for investments
  • How to invest when you are "too busy to invest" (step-by-step)
  • Learn how your properties can be rented and managed well from afar
  • Pay for your children's college education using real estate (or for your own education)
  • Secure a powerful retirement using real estate
  • How to benefit from recession prices in 2014, and where to do it
  • Learn how to acquire loans you did not know you could get
  • How to benefit from special market situations few people know about and how to use it to your advantage
  • There are ways to successfully own multiple properties and manage them--we will show you how
There will be extensive Q & A time. There will also be teams there in person to meet with you one-on-one; they will also be speaking about the hottest markets in the U.S.

This will be one of the premiere networking events in 2014 so far!

Date and location of the mini expos:
  • Wednesday, February 5, 2014 - Redmond Marriott Town Center - 7401 164th Ave. NE, Redmond
    Phone: (425) 498-4000
  • Thursday, February 6, 2014 - Verity Credit Union in Northgate - 11027 Meridian Ave. N Suite 102
    Seattle, Phone: (206) 440-9000
Click here to register! If you have any questions prior to the event, please call Adiel Gorel at (800) 324-3983 or (415) 927-7504.

Any additional questions about the venues or if you have trouble on the day of the event, please call our public relations pro, Lynette Hoy on her cell (415) 694-3004 or at her office in the Seattle area (206) 455-9366. Lynette will be at both events, so please call her cell phone between 4-9:30pm on those nights if you need assistance.

Look forward to seeing you there. I can't wait!

Friday, January 17, 2014

5 Things to Watch in Housing in 2014


In an article in the Wall Street Journal by Nick Timiraos on January 7, 2014 an attempt at predicting various scenarios for housing at large in the U.S. for the year is made. Of course, the 5 points are general. I personally believe (and am actually seeing) that markets that are still reflecting post-recession pricing (like Florida) and where houses can easily be bought under bare construction costs AND the future demographics are promising - should show a far more bullish trend this year versus other markets. Here is what
Mr. Timiraos says:

"For housing, it was a tale of two halves in 2013. During the first half, unusually low supplies of homes and low rates spurred bidding wars, pushing prices up sharply. During the second half, the frenzy cooled amid a sudden spike in interest rates. While more markets are now reporting increases in inventory, the number of homes for sale remains quite low."

The bull case for 2014 goes something like this: those low inventories will support rising prices. Below-average levels of household formation, the argument goes, must ultimately pick up, boosting construction. Mortgage rates, while higher, are still historically low. Credit standards will stop getting tighter, and might loosen as home prices rise. Finally, mortgage delinquencies are dropping. While some states still have elevated foreclosure inventories, the worst of the distressed-housing problem is in the rear-view mirror.

The bear case, meanwhile, says that the recovery is a mirage built on the back of the Federal Reserve’s stimulus that has done little more than inflate asset values, including home prices. Record low interest rates, the argument goes, unleashed demand from both borrowers and all-cash investors seeking returns on something—anything—with a decent return. These investors built large rental-home companies that remain untested at scale. How can first-time buyers take the baton from investors at a time when prices are up almost 20% in two years and when interest rates are rising? 

Other problems loom: Mortgage rates could jump, choking off housing demand and curbing new construction that remains mired at 50-year lows. Investors could unload their homes if the rental-home thing doesn’t pan out. And don’t look for much help from mortgage lenders that face a cocktail of new regulations, which could keep credit standards stiff.

So which view will carry the year? Here are five wild cards to watch this year:

(WSJ: 7 Jan 2014 By Nick Timiraos)
1.  WILL INVENTORY RISE?
Prices have risen largely because of shortages of homes for sale. While there is growing evidence that inventories hit bottom last year and that some markets are moving back in favor of buyers, the number of homes for sale remains relatively tight still. Foreclosure-related listings have plunged, and traditional buyers haven’t flocked to list homes—at least not yet. New construction, meanwhile, won’t be back to normal historical levels for years. The consensus view is that price growth continues at a somewhat slower pace, but that consensus view could be wrong—for the third year in a row—if there aren't more homes for sale.










2.  WHERE IS THE HOME-CONSTRUCTION RECOVERY?
While home prices have recovered strongly, new construction activity hasn’t. Part of this may have to do with the fact that home prices are still too low to justify construction, particularly given land, labor, and materials costs. For smaller builders, credit may also be harder to come by. Some economists say new-home demand could remain muted because many move-up buyers don’t have enough equity to “trade up” to that new home. Key issues to watch here: What happens to household formation, and do builders begin to throttle back price gains in favor of selling more homes in 2014?
















3.  WHAT HAPPENS TO MORTGAGE CREDIT?
Lenders could begin to ease certain “overlays”—or additional credit and documentation checks—that have been imposed over the past few years. Mortgage insurance companies are getting more comfortable insuring loans with down payments of just 5%. So don’t be surprised if, at the margins, it gets a little easier to get a mortgage—especially if you have lots of money in the bank.

Even if it gets easier to get a loan—by no means a given—borrowing costs and fees could rise. Banks also face new mortgage regulations that could keep most of them cautious. Borrowers with more volatile or harder-to-document incomes, including the self-employed or those who make a lot of money on commissions, bonuses, or tips, could continue to face tough sledding.



Bloomberg News

4. WHAT WILL INVESTORS DO WITH THEIR HOMES?
A handful of institutional investors have purchased tens of thousands of homes that are being rented out. These homes tend to be concentrated in a few of the regions that have been hardest-hit by foreclosures over the past five years. Investor purchases played key roles in stabilizing prices, especially because investors were wolfing up homes at a time when supplies were already dwindling. A key question now is what happens after the initial rush to invest subsides. More lenders and investors are extending debt financing to some of these property owners, which should help boost returns. Can owners perfect the expense management associated with maintaining and leasing tens of thousands of individual homes?
Can owners perfect the expense management associated with maintaining and leasing tens of thousands of individual homes?

5.  WHEN DOES HOUSING HIT A TIPPING POINT ON AFFORDABILITY?
Rising home prices are a double-edged sword, especially in pricier coastal markets such as San Francisco and Los Angeles. On the one hand, rising prices are giving many homeowners equity in their homes again—an extremely positive development to the extent it means these borrowers are less at risk of foreclosure.

But price inflation is making housing less affordable. This will be a bigger problem if cash buyers retreat from the market in 2014 and/or if interest rates rise in a meaningful way. Consider: In Los Angeles, prices have jumped by nearly 30% in the past two years, to a median of $448,900 in the third quarter. Assuming a 20% down payment, the monthly payment of principal and interest on the median priced home has jumped from $1,255 in the third quarter of 2011 to $1,823 in 2013—a 45% increase.

Thursday, December 5, 2013

Appreciation Rates Grind to a Halt

As you may have seen in the media lately, most of the best appreciating markets have seen a significant slow-down in the appreciation rate. Even more accurately, I get news from our teams in the field that this is the case. You can see it in some of the fastest appreciating markets like Phoenix, and even in Las Vegas (despite the upwards pull of the inventory-suffocating SB321 which came into effect on 10/1/2013 and is a very strong pull on home prices).

Many other fast-appreciating markets are also leveling off. California markets and even some Florida markets have eased up some in the past couple of months. One obvious reason is seasonal – this is traditionally the slowest period of any year. However the rising interest rates have been keeping some would-be buyers at bay, and the prices themselves, having become higher – have put other buyers off. Some investors are starting to feel that they missed the boat in places like Phoenix due to the 70% gain it displayed in the past two years.

Well even in Phoenix, after a 70% gain in prices and now on a “respite” from appreciation, the prices are not that much above construction costs. Builders are still struggling to beat the prices of existing homes, and the intrinsic value is excellent. The same holds true in Las Vegas. Florida was already an excellent value (recall we discussed the judicial foreclosure process in FL slowing down market absorption of foreclosed homes, thus damping supply shortages somewhat) and now is poised to produce even better deals. It is not hard to buy a FL property in Jacksonville or Orlando/Tampa for substantially less than construction costs.

For investors, there is good news in what is happening. Our limited “window of opportunity” seems to be extending more. It is an excellent time to pounce on attractive Single Family Homes. We will discuss this and lots of other relevant and important new market data at our 1-Day Expo THIS SATURDAY! We invite you to attend (free for you and associates if you mention this blog – just email us at info@icgre.com)We will also have an OBAMACARE expert to guide us through the maze, and outstanding expert speakers in addition to lenders, and market teams straight from the trenches. 

Looking forward to seeing you there!