Thomas March's Real Estate Blog

Californian foreclosures up 22%

According to data released by ForeclosureRadar.com, foreclosures in California increased 22.24% from September to October.  Last month’s foreclosures increased 20.95% from October 2008, which were 42.56% below California’s peak month of July 2008.  But since then, the inventory of real estate owned (REO) properties has grown 131.36% in California.  “While we continue to see a steady stream of properties entering foreclosure, relatively few are completing the process and being sold at auction despite the increase this month,” said Foreclosureradar.com CEO Sean O’Toole.  “The bigger picture is that more and more homeowners are finding themselves upside down in foreclosure limbo,” O’Toole added, “some hoping for a loan modification or short sale, while others are just waiting for a knock on the door.”  The number of foreclosures initiated in October remained level with September levels but this is due in large part to recent legislation enacted in California
that will temporarily slow the foreclosure process. The majority of properties foreclosed on in October were originally purchased with mortgages originated between January 2005 and December 2007.

RCI finds short sales hurdles

According to the latest Realtors Confidence Index (RCI), one out of 10 recent home sales was through a short sale, but realtors are concerned about the hurdles buyers face in short sales.  The primary reasons that some short sales fail include an incomplete short sale package, an offer that is too low, and inaccurate appraisals. According to Lynn Madison of the National Association of Realtors (NAR), buyers who are good candidates for short sales are very patient – it can take some lenders four months or longer to approve a short sale – have their financing in order, and don’t have any contingencies in their purchase offer.  “Short sale buyers need to have the time to be able to wait for the lender’s approval; some lenders get several hundred contacts every day,” said Madison. “Buyers must also be willing to make an offer that has a reasonable chance of closing and take guidance from their agent. If the offered price is too low, there is a good chance the lender
  won’t approve the contract.”  Charles McMillan, President of NAR, says “As short sales become more commonplace, both buyers and sellers need the help of seasoned, experienced professionals to help them navigate the complexities of a short sale transaction."  Hey, that's why we're here!

Mixed news on retail sales

To hear the mainstream media tell it, today's retail sales report by the Commerce Department is all joy and happiness, but it's a bit more complicated than that. The good news is that total retail sales are up by a larger than expected 1.4% in October, much more than the 0.9% economists were expecting.  The bad news is twofold: when autos are excluded, sales only rose 0.2%, less than the 0.4% economists were expecting; and there was a sharp downward revision to sales in August, from a -1.5% decline to a -2.3% decline.  Sales at non-store retailers rose 1.0%; sales at restaurants and bars rose 1.2%, the largest monthly gain since February; and sales at clothing, department and general merchandise stores all rose modestly, by less than 1%.  Sales declines included furniture, electronic and building material stores (2.4%).  Lowes, for example, the No. 2 home-improvement retailer, said its third-quarter profit fell 30 percent as customers continued to delay large purchases amid a
  weak economy. Sales at sporting goods and hobby stores fell 1.2%, the largest decline since May. Gasoline sales were unchanged in the month. Over 2009, total retail sales are down 1.7% while sales excluding autos are down 2.6%.

NAR - issues with second home sales

According to the 2009 National Association of Realtors (NAR) Profile of Home Buyers and Sellers, 2 percent of recent home buyers own one or more vacation homes, 4 percent own two primary residences, and 8 percent own one or more investment properties.  There are 8.1 million vacation homes and 40.5 million investment units in the United States, compared with 75.5 million owner-occupied homes.  In 2008, vacation homes accounted for 9 percent of all sales while investment homes were 21 percent of transactions; 2009 data will be published next spring.  But the there are some problems evolving with it.  Second home specialists express widespread concern about appraisal problems resulting from the Home Valuation Code of Conduct implemented in May.

The increased use of appraisers from outside their area of expertise, who generally don’t have access to detailed local market information, often results in low valuations and cancelled sales. Another problem is jumbo loans in resort areas, with lenders requiring large downpayments and “over documentation” for well-qualified buyers.  Various local issues are also challenges, including laws prohibiting waterfront property development beyond the high water mark; valuation of boat docks; and points of sale enforcement codes that require various homeowner improvements, often related to energy efficiency and environmental impact.  Despite these challenges, demographic analysis indicates the long-term demand for second homes looks favorable because there are large numbers of people in the prime years for buying a second home. Annual NAR survey results show the median age of a second home buyer typically is in the range of 45 to 48.

Credit cards, defaults down, delinquencies up

Several credit companies reported credit card defaults fell in October, but Capital One and Discover said delinquencies rose.  Capital One's charge-off rate for U.S. credit cards — loans the company does not expect to be repaid — fell to 9.04 percent in October from 9.77 percent in September, the company said in a regulatory filing on Monday.  Discover said its charge-off rate declined to 8.54 percent from 8.69 percent.  The drop in defaults sent shares of Capital One up 2 percent in premarket activity.  But delinquencies, an indicator of future credit losses, resumed an upward trend in August and climbed more than expected in September, signaling bad loans will rise in coming months and peak later than originally anticipated.  Credit card delinquencies rose as more Americans lost their jobs.  Capital One's late payments went up to 5.72 percent from 5.38 percent, while Discover's delinquencies rose to 5.72 percent from 5.57 percent.  Last week, Capital One Chief Executive
  Richard Fairbank forecast that charge-offs will keep rising and remain elevated throughout 2010, hurt by weakness in the housing market and job losses.

Too big to fail?  Fail anyway

Kansas City Fed President Thomas Hoenig says that the U.S. economy still faces "significant weaknesses" and urged policymakers to allow large financial institutions to fail if needed.  Data showed last week that U.S. consumer sentiment had soured in early November on grim job prospects while a larger-than-expected trade deficit had analysts scaling back estimates for third-quarter U.S. growth.  "As we look at reform and the way forward I think the most important think we need to do is to make first of all an accurate assessment of fundamental weaknesses in our financial system and then begin to create better foundations... Our institutions must be allowed to fail no matter what their size or political influence."  The Fed has drawn sharp criticism from some lawmakers for its handling of the financial crisis, particularly its controversial decisions to extend emergency loans to large firms such as insurer AIG, which it did not directly supervise.  "Our reluctance to deal with
'too big too fail' provides these largest institutions with important advantages over any competitors who are not seen as important," Hoenig said. 

Really?  You don't say!!

What’s Better – Short Sales or an Annuity?

As investors seek safety against a falling dollar and declining stock market, annuities are an option increasingly explored by fearful investors but are annuities all they are cracked up to be? Let’s take a few minutes to compare and contrast annuities versus short sales to see which makes the most sense.

Annuity Defined

An annuity is essentially an insurance product that pays an income for a specified period of time. In a nutshell, you hand over a lump sum and/or regular contributions to an insurance company that is able to use and invest that money in exchange for a guaranteed payment in the future.

Reward vs. Risk

The “reward” portion of an annuity is the ability to secure a reliable, steady source of income outside of your ability to work. This is one reason it is a popular option among retirees or others seeking “safety” from the prospect of outliving their ability to work without having to depend solely upon Social Security.

While superficially this sounds like a great idea, the actual reality is often not quite as advantageous as it may initially sound. This is due to several reasons including the inherent risk associated with dealing with an insurance company (indeed, nearly any company) over an extended period of time. If the near default and subsequent bail-out of AIG didn’t teach investors anything it certainly highlighted the potential for insurance companies to take on more than their ability to pay and remain solvent. While the AIG fiasco did not directly concern individual insurance contracts, the basic premise remains the same…there is a risk associated with total reliance upon a company over an extended period of time.

Unfortunately, this is not the only risk. The risk versus reward ratio in terms of actual returns falls short especially given the ultra-low interest rates in the current market. For example, consider the following example where you invest $100,000 into an annuity paying an annual interest rate of 5% for 30 years (roughly the same period of time you would finance an average mortgage). Annuity Payments ($ / Year). The annuity would pay roughly $6,200 per year or just over $500 per month for placing $100,000 in cash at their disposal.  At the end of 30 years you would have zero remaining – nada, nothing, zilch. Unfortunately, during that same period of time, the $6,200 would have lost value due to inflation; in fact, if inflation follows a historic average, that same $6,200 annually would be worth just about $2,000 in purchasing power.

Now, let’s see what happens if you were to purchase just one short sale property for $100,000 cash. You rent it out for 30 years and make the exact same $500 per month or $6,200 (remember, No mortgage!) plus you have tax write-off’s for depreciation. For 30 years you collect the same amount of money but at the end of 30 years instead of the payment stopping leaving you with absolute nothing…you still own a paid-in-full, income generating property.  Since real estate tends to keep pace with inflation, that same $100,000 property will be worth roughly $300,000 using standard historical estimates. Now, ask yourself one simple question…which would you rather own in 30 years? An annuity controlled by someone other than yourself that leaves you empty handed or a paid-in-full property that continues to generate income as long as you own it? Call us crazy but seems like short sale real estate is a clear winner.

To find out more about short sale investing go to:

http://in.thomasmarch.com/

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I will have the latest and some of the most interesting news and articles about real estate and real estate investing for you and I look forward to providing you with some great insight in today's trends.

Thomas March