Welcome to Michel Roy Real Estate Blog

Property values are falling. If you read my blog regularly you know that I see this as an opportunity for investors and I encourage them to make a move now before they miss out on a golden opportunity. For those of you familiar with my views this article may come as a surprise because I am going to encourage caution, not too much, but enough to recognize a potential pitfall and plan accordingly. I am talking of course about unemployment and how it affects property values.  

As a real investor myself, I see two things happening right now: 

1. Foreclosures are on the rise
2. Buyers are lining up to buy these foreclosed properties

I also know the following from doing a little bit of research:  

• Between January 2008 and February 2009 the state of California lost 637,400 jobs
• The national unemployment rate is currently 8.5%
• The national commercial office vacancy rate is 15.2%
• 43% of all jobs created since 2001 are connected to the building and housing industries

How is it possible that statement number two in my first list can be accurate while all of the statistics in my second list are true also? The answer is government intervention. The Obama administration put a moratorium on foreclosures from Freddie Mac and Fannie Mae and they are keeping interest rates artificially low to give everyone a chance at the “American Dream” of owning their own home. The only problem is that with rising unemployment homeowners will still not be able to pay their mortgages and the foreclosure rates will go up even further. 

Unemployment in the state of California in the month of March was a staggering 10.1%, and that wasn’t even the highest in the country. That distinction belongs to the state of Michigan, coming in with a mind-boggling 11.6% unemployment rate. The top four is rounded out by South Carolina at 10.4% and Rhode Island at 10.3%. Puerto Rico, an American territory, has a 13% unemployment rate. In the month of February alone the United States lost almost 700,000 jobs. Those numbers are leaving thousands of homeowners without the financial means to pay their mortgages. As the trend continues, and it appears that it will for a while, properties go into foreclosure or are abandoned and property values go down even further. 

All of this makes it currently a great time to buy real estate because of extremely low prices, tax credits and record low interest rates but erosion of jobs and rising unemployment rates will make those property values continue to plummet. The good news is that it will turn around, but it will most likely take a lot longer than any of us imagined. Vice President Joe Biden recently told Americans while being interviewed on Sixty Minutes to not expect economic recovery until 2011. 

From 2001 up until the crash in 2008 there was a building boom in the United States unlike any we have seen since immediately after World War II. The result of it was the creation of thousands of jobs in the construction and real estate industries that are now becoming statistics not unlike the positions being lost in the auto industry. A good portion of the jobs lost in California are the result of the building boom coming to a crashing halt. Much of the commercial office vacancy rate can be attributed to this also. 

The Obama administration has taken some steps to create new jobs and stem the tide of foreclosures but it is too little too late for many homeowners. Even with the moratorium on foreclosures by lenders like Fannie Mae and Freddie Mac debt to credit ratios and the inability by unemployed property owners to pay their mortgages will lead to more foreclosures and lower property values before we start to see any type of economic revival. When the moratoriums are lifted there will be a surplus of properties up for sale. The sale prices and the value of these properties will be extremely low, making them prime investments for those who can withstand the lean years ahead.  

If you are an investor then my advice to you is the same as always, take action now but proceed cautiously and be patient. There is a lot of real estate coming back and even though things look bleak now, they will eventually turn around. If you are out there buying real estate make sure you have adequate funds-reserves because unemployment can affect you like the rest of Americans.

Investors will Profit from General Growth Losses

Back in 2004, when General Growth Properties Inc bought Rouse Co and became the second largest mall owner in the United States, there was no credit crunch and the recession that we are dealing with right now wasn’t on anyone’s radar. The purchase gave General Growth control of some premium commercial properties including Faneuil Hall in Boston, the South Street Seaport in New York, and the Woodlands in Houston. The final sale price was $14.2 billion, a number that was all financed new debt for General Growth but justified because they outbid Simon and picked up what was termed “five years worth of acquisitions in one fell swoop” by Chief Executive Officer John Bucksbaum.

In 2008, commercial real estate values fell 15%. Unemployment has climbed to 8.5% nationally and retail sales have dropped reciprocally as that number has risen. General Growth’s debt has risen in the past five years to over $27 billion and they have been trying to sell off assets to stay afloat. On April 16, 2009, General Growth Properties of Chicago, Illinois, facing a global credit freeze and a debt-to-asset ratio of 92%, filed for Chapter 11 bankruptcy protection. According to most experts this is only the tip of the iceberg.

According to real estate research firm Foresight Analytics, $814 billion of commercial mortgage debt is expected to mature over the next two years. General Growth may be the largest to go under but they won’t be the only ones. Despite assurances from management that a fire sale will not be necessary competitors like Simon are lining up to snatch up properties for what they are sure will be rock bottom prices. What is already being seen in the housing market may quickly become the norm in commercial real estate. There are those who are suffering tremendous losses as a result of the recession and the credit crunch but there are other smart investors who are seeing this as a golden investment opportunity.

The day that General Growth filed for bankruptcy protection they owned over 200 United States malls in forty four different states. They are looking to restructure and have received a $375 million investment commitment from Pershing Square Capital Management LP to keep them afloat but the bankruptcy court will no doubt require some type of liquidation with their debt-to-asset ratio being what it is. If this triggers the type of fire sale that many experts expect then commercial property values will go down even more. Add this to maturing commercial mortgage debt in the hundreds of billions range and you have … opportunity. Don’t let it pass you by.

General Growth properties in Southern California include the Burbank Town Center, Fallbrook Center in West Hills, Northridge Fashion Center and the South Bay Pavilion in Carson.

For additional information on the General Growth bankruptcy filing visit:

http://news.yahoo.com/s/nm/20090416/ts_nm/us_generalgrowth_bankruptcy

http://www.bloomberg.com/apps/news?pid=20601087&sid=awd7cutxI554&refer=home

On April 9, 2009, Yahoo Real Estate posted an article written by Maha Atal at Forbes.com (http://realestate.yahoo.com/promo/riskiest-places-for-us-homeowners.html) that was titled “Riskiest Places for US Homeowners”. It was another one of those very informative “gloom and doom” articles about the rising rate of foreclosures in the United States. Did you know that the national foreclosure average was 3% and that it could be as high as 13.9% for sub-prime mortgages that will reset this year? If you didn’t then you haven’t been paying attention. These statistics are coming out in headline articles all over the country every day. 

Let’s try something a little different. Homeowner foreclosures are a terrible thing if you’re the homeowner and many of the sub-prime mortgages were given to people with less than perfect credit so buying another home could be difficult, at least for right now. If you are an investor these numbers that seem so horrible to many are actually great news. Areas where foreclosures are high mean that there are blocks of property just waiting to be bought up for the lowest prices in decades. Property values may be low right now but they’re not going to stay that way.  

The “risky” areas targeted in Yahoo’s article include cities in California, Florida, Texas, and Michigan. Mission, Texas leads the list due to the number of lay-offs in the oil industry and Detroit, Michigan is running a close second because of the turmoil in the American auto industry. The California cities on the list are Vallejo, Fresno, Modesto, Stockton, Visalia, Bakersfield, Lancaster, Palmdale, San Bernardino, Riverside. These are areas where investment opportunities abound, quality properties that were sold to non-qualified home buyers using sub-prime adjustable mortgages. Many of those mortgages are being foreclosed on, the property values are plummeting, and the upside for the investor is huge right now.

In Florida the situation is a little different. Foreclosure rates are rising rapidly but most of them are on second homes that were bought with the intention of “flipping” them for a profit. With property values now decreasing, many investors are walking away from these second homes, even some who can still afford to pay them. The sale of these properties for rock bottom prices is causing other property values in the state to decline even faster. Once again, it’s a nightmare for the homeowner but a tremendous opportunity for the investor.

There’s a silver lining in every cloud. Read and watch the news everyday and you’ll see the cloud clearly enough. Bad news always makes headlines. If you read between the lines and see the opportunities that this economic crisis presents, then you could come out of it with a healthy bank account and some real estate that you got for a steal because you saw the upside when no one else did. The time to buy is now. Don’t hesitate and wonder later why you didn’t make a move when the opportunity was there. 

For all of you who are hoping to buy up an REO before the well runs dry you can relax just a bit. The latest numbers reported by Fannie Mae and Freddie Mac show that the number of foreclosed and pre-foreclosed properties is likely to go up despite the new Home Affordable Refinance and Modification program that is part of the economic stimulus bill passed by Congress earlier this year. Some homeowners are just too far behind for any kind of assistance to matter at this point.

Fannie Mae reported at the end of January that the number of single family homeowners over ninety days delinquent is up to 2.77% from just 2.42% in December. Freddie Mac reported a similar rise between January and February this year from 1.98% to 2.13%. In January of 2008 both of these mortgage giants had serious delinquencies at or less than 1%. Between these two government-sponsored entities there are currently over five trillion dollars in mortgages written for nine million homeowners.

If you do the math you can clearly see that there will be plenty of opportunities to buy REO properties at rock bottom prices, but that doesn’t mean you should put off getting a good deal right now. There are thousands of foreclosed and pre-foreclosed properties available today that are already being sold for far below what their market value will be in just a few years. An investment right now could lead to a huge profit in a relatively short period of time.

These new numbers will pressure mortgage companies holding real estate to sell as quickly as possible. Finance companies need liquid capitol, not property, if they are going to survive. Fannie Mae and Freddie Mac may be under government supervision but they still have to do business as usual. Their need to be solvent leads to an opportunity for you, the investor, to get a better deal.

The number of seriously delinquent mortgages and foreclosures is directly related to the rise in the unemployment rate, currently at 8.5%. Neither number looks like it will improve anytime soon but there are indicators that the recession is over. As Wall Street begins to make steady gains and sales of new homes and hard goods increase your window of opportunity as an investor begins to slowly close. The upside if you buy now is about as high as it’s going to be, so don’t wait.

In addition to the numbers reported by Fannie Mae and Freddie Mac, there are also over 1.5 million sub-prime mortgages that will reset to higher rates this year. These mortgages, typically targeted to people with less than perfect credit, will no doubt increase the number of REO properties that become available. Property values are still dropping in many areas of the country so the prices you can buy these homes for are getting lower, but not for long. Make your move now and you’ll be sitting pretty in a few years.

Ready for some more good news? In case you haven’t heard, mortgage rates are getting even better. From the AP:

“Fixed mortgage rates in the U.S. fell to a record low for the second consecutive week, Freddie Mac (FRE: 0.7169, 0.0169, 2.41%) announced Thursday, a sign that Federal Reserve Chairman Ben Bernanke’s recent move to spur the housing market is working.

The 30-year rate dropped to 4.78% from 4.85% a week earlier. The current rate represents the lowest in Freddie Mac’s records dating back nearly four decades.

The average rate on a 15-year fixed mortgage also hit a record low of 4.52%, down from 4.58% a week ago, the McLean, Virginia-based Freddie Mac said.”

—

What does this all mean? The short answer is “Buy now!” (or if you prefer the use of a proverb, “Strike while the iron is hot.”) These measures are all designed to jump-start home buying, and any time mortgage rates get lowered, it’s akin to putting gasoline on a fire.

Are you still thinking about whether or not to buy? Let’s look at the key points here:

-Inventory: Right now, you’ve got just about the best selection you’ll ever find. From foreclosed homes to people trying to get rid of investment property, the volume of available homes is unbelievable right now. It’s not necessarily picking the exact one you want but in real estate, it’s as close as you’re going to get.

-Price: The housing bubble, of course, was one of the key factors in the recession. With values falling drastically over the past 6-9 months, you could call it a market correction or you could call it a great opportunity.

-Mortgage rates: Getting back to our original point, the Federal Reserve made news with the lowest 30-year-mortgage rate ever. If it gets better than this, it’s not going to be much, and playing the waiting game right now for a better deal is unpredictable.

Remember, when demand rises and inventory shrinks, prices go up. All of these factors drive demand, and with signs that the economy has nowhere to go but up, people are stepping away from the fears and making purchases again. With the Fed making its own push to increase demand, now is the time to buy — do it before everyone else catches on.

President Obama, as one of his first orders of business when he took office, proposed a $787 billion stimulus package which was passed by Congress in record time. Part of that stimulus bill is a $75 million program called Home Affordable Refinance and Modification and it is designed to keep people in their homes and stem the tide of foreclosures.

How does it work? There are a few requirements that you need to meet if you are going to take advantage of this landmark program. First off, your mortgage needs to be owned by one of the failed financial giants that started this whole crisis: Fannie Mae or Freddie Mac. The property has to be owner occupied (not an investment property) and the first mortgage on it cannot be worth more than 105% of the current value of the home. If you qualify and take advantage of this program to refinance your mortgage and get lower payments you cannot take any cash out from the new mortgage to pay other debt.

As you can see by the guidelines of this program it is designed to help homeowners who are at risk of losing their primary residence. There are a lot of hard working people out there who pay their mortgages on time and are unable to refinance because the value of their home has gone down dramatically in the past six months. Mortgage rates today are lower and offer them a way out but refinancing is not always an option.

This plan by the Obama administration is designed to help over nine million homeowners stay in their homes but it will not help everyone. If you’re an investor you’re pretty much on your own but if you’re losing your home due to a lack of income you do have some options. You can contact a HUD-approved housing counselor at the Department of Housing and Urban Development and explore the following options:

Forbearance: You pay only a portion of your regular payment or no payment at all for a certain period of time and make your regular payments after that plus an amount towards the payments you shorted or missed. This type of program works really well if you are currently laid off but certain you’ll be back to work within a set time frame.

Repayment: If you have missed payments and are under a threat of foreclosure your mortgage lender may help you make a plan to pay back the missed payments over a period of time.

Pre-Foreclosure Sale: Selling your property “short” of what the mortgage value is in order to get out from under. You can refinance the remaining amount and save your credit report from taking a damaging foreclosure hit.

Deed in Lieu of Foreclosure: Avoid the foreclosure process completely and simply sign the deed over to your mortgage company if they’re willing to take it.

There are other avenues you can explore with the aid of a HUD counselor including special mortgage relief assistance for active duty military service members. The important thing to remember is that there is help available for you and you do not have to lose your home. This assistance is free so beware of any foreclosure rescue plans where they ask you to pay a fee. Go to http://www.makinghomeaffordable.gov/ for additional information.

Is it possible that after all of the gloom and doom forecasts of the past few months that we are even asking this question right now? The term “recession”, once a popular buzzword and topic of discussion, seems to have lost a little steam to the ever more positive words like “stimulus” and “economic revival”. Could it possibly be that we have finally reached bottom and are on the way up again?

In an April 2nd article published by Yahoo News titled “New Signs Emerge that Recession May be Near Bottom”, Bank of America Chief Executive Ken Lewis is quoted as saying that he feels the recession is indeed “nearing its bottom.” He’s not alone in his thinking. There are a number of executives in the financial world and leaders in the US and abroad that feel we are very close to the end of what has been a seventeen month period of decline. There are a few reasons to be hopeful:

Home sales are up

Manufacturing orders are up

The stock market has been making steady gains

Money is starting to move around again, particularly in real estate

It’s time to start looking for opportunities, they are everywhere right now. Billions of dollars are currently being poured into the real estate market by wealthy investors and large institutions. This is another positive sign that the recession is almost over. Serious investors don’t buy real estate unless they feel the value is going to go up soon. All of this money being sunk into real estate means that analysts for these companies believe that we have finally hit bottom or close to it and its time to buy.

I prefer to look at the term “hit bottom” and view it as “largest potential upside”. If you buy now while everything is valued so low you will make a huge profit down the line when things improve. I see the light at the end of the tunnel by the end of 2009 and if you start doing your homework right now you can cash in on it. Are we at the bottom right now? If you wait will the deals be even better? It’s possible but I don’t recommend it. Deals right now are too good to pass up. If you start the process today by the time you pull the trigger you’ll be paying a rock bottom price and have the maximum possible upside in front of you.

This recession is coming to an end. Look on the internet and you’ll find that most economists agree that the worst is behind us. Many people are still without jobs and quite a few will lose their homes before it is completely over, but you can come out on top if you take action now. Don’t be the one sitting there when it’s all over thinking, “Why didn’t I listen and get into real estate when the prices were low?”

New signs emerge that recession may be near bottom

Is it a good or bad time to buy property? Things are still bad, but all reports are that they’re starting to get better. The recent surges in the stock market show that confidence is returning. If you’re fishing for the very bottom of the barrel, there’s still some unpredictability in the market. However, it’s hard to deny the sheer upside of today’s market.

Signs are pointing to further price softening thanks to recent decisions by a number of lenders to lift the foreclosure moratorium; this will lead to some further fluctuations in the market. For the standard Single Family Home, all the evidence is pointing to the fact that we’re pretty close — if not already at — the bottom. You can see it in the numbers: the right property at the right price sees many buyers (including standing-room only auctions). Not only are prices good, but any homes purchased in by the end of 2009 will qualify for a $8,000 tax credit.

Remember this: REO’s and bank-owned properties are limited in quantity. Almost all of the bad seeds have been filtered out. When those properties dry up, the market will begin its ascent. Home ownership is still part of the American Dream, and when people feel comfortable enough, inventories will shrink and appreciation will return.

So we return to the original question — is it a good or bad time to buy a property? I say yes. Sure, you could hope for a little bit better deal here or there, but the market’s not going to bottom out much further. Right now, you’ve got a strong combination of selection and price. Go for it!