BluefoxToday blog : August 2007

If you want to make money investing in residential real estate, you have to do it the old-fashioned way, you have to earn it. There really are no shortcuts.

Now, if you sit down and watch late-night television when fake real estate experts hawk their half-baked theories and believe that they are the answer, think again. These people can be very convincing, and persistent, too, but is there anything concrete behind what they are saying? Let's examine the story a little bit.

John T. Reed is a long-time investor and an newsletter publisher who has followed the industry for many years, including keeping an eye on the gurus who make a living peddling real estate seminars, books and tapes. He is totally dismayed at the practice. Please click the link in this paragraph to read the full article.

Maybe it is. If you consider taking a polished-brass elevator down to the casino, then proceed purposefully to a craps table and there lose your next five mortgage payments, or more, in less than half hour an adventure, then it must be. Or, let's say your feet take you to the Forum Shops at Caesars Palace, from there promptly to the store alley at the Venetian and on to the merchandise wonders at Wynn Las Vegas and your purse somehow lightens significantly at every stop, can that be called an adventure? Again, it depends.

Seriously, though, Vegas is now ranked the nation's top adventure town according the National Geographic Adventure magazine. To earn that title has very little to do with the entertainment industry the city is so famous for around the globe. It's all about the outdoor activities you can do here, which are plentiful, yet so seldom referred to in the media. Up until now, it appears.

The three-hour driving perimeter around Vegas includes such heavyweights as the Grand Canyon and Zion and Bryce Canyon national parks. Besides them there are millions of acres of national forest, 13 state parks and a couple of national recreation areas. All that ought to keep you busy for a while.

Locals like to add that we are among the tops in the entire world in rock climbing, mountain biking and canyon exploration offerings. Some of the places you can visit and touch under an hour's drive from town are Red Rock Canyon, Mount Charleston, Hoover Dam and Lake Mead.

More importantly, the entertainment segment is slowly embracing the idea that the thus far much ignored outdoor opportunities should be included in its product mix. I'm all for it. The Red Rock Resort has already created a position to address it, an adventure activities manager. 

Photo by buoux

It's a delight to be able to report some good news, for a change. So far it has been just about everything else but them, so let's get right down to it. Before the tide turns. The soft real estate market continues to keep us steady company in most regions of the land, but there actually is at least one benefit to it. It's a basic principle of real estate economics, namely that as prices fall, housing becomes more affordable.

A national study was done on the issue for the second quarter ending in June, 2007, and it found that the affordability index grew to 43.1%, up from 40.6% for the same time last year. That is a solid improvement. The survey was conducted by the National Association of Home Builders, or NAHB, together with Wells Fargo Bank. Declining home prices and slightly better incomes are responsible for the upturn, an encouraging sign for the overall economy.

The study looks at the median income of households, on one hand, and the sales figures of new and existing homes in each sample market plus the current mortgage rates, on the other, and then arrives at its ratings. To be considered affordable, housing expenses cannot exceed 28% of income.

From the large metro areas Indianapolis got the top spot with an 86.8 rating, meaning that only about 13% of the homes over there were out of reach for the average family. Detroit's number was 86% and Buffalo's 84.8%. California cities dominated the least affordable places, Los Angeles leading the way with only 3.0%. In other words, 97% of the homes were off limits to your typical households. No wonder Californians are packing up and moving to neighboring states, including Nevada.  

The word subprime mortgage has lately been one of the most used words in national headlines. To a point that you get vertigo seeing it. It has been featured in the print media, on the Internet, on TV, across the lips of consumers, on talk shows, just about everywhere. It has become a revered celebrity. Unfortunately most of that celebrity flavor has been negative because the media has largely highlighted borrowers who have had a less than stellar credit history, to put it mildly. The ones who have been foreclosed on or will potentially face it down the road.

Yet, on closer look, the subprime borrower comes from a much wider audience than that. And, according to the latest figures from the MBA, or Mortgage Bankers Association, 78% of these loans actually are current, which is a pretty nice share of the total. Let's now go over some of the other, less publicized categories under that banner.

First-time buyers often don't have enough credit background or down payment to qualify for anything but the subprime product. Even their employment history could be too short. This group accounts for about a third of them, reports the MBA.

Second/ vacation home buyers and investors form an important, but much smaller contingency. They could readily be classified as borrowers in good standing, yet had to use the subprime route to get financing for this type of purchase. 

Up-and-comers are those who decided to sign up for subprimes, are diligently working to improve their credit scores by making timely payments and when there, will refinance to a lower-rate prime mortgage. They did have a prior stain they are now determined to fix up.

Ex-primes are the ones with one-time solid credentials but went through life-changing events that at least temporarily thrashed their credit. It could mean a loss of a job, a serious illness or a hostile divorce. One missed mortgage payment in a year can drop your credit score up 160 points, says Experian. That's huge.

As you can see, subprime has a much wider, more credit-worthy appeal than what is normally perceived.

While the mortgage and real estate industries are trying to find solid footing in this soft market, Capitol Hill in Washington is getting ready to unveil this fall wide-ranging legislation that would address climate change, more specifically the reduction of carbon emissions. The goal is a cutback of 60 to 80% by the year 2050, an ambitious endeavor. It is to be achieved by raising taxes on gasoline and eliminating the mortgage interest deduction on homes over 3,000 sq. ft. The so-called McMansions.

Everybody is aware about cars and the pollution they produce, but houses, too, are large greenhouse-gas emitters. It happens through cooling, heating, building materials and power usage, areas that many of us don't really consider that harmful.

Soon after the legislative draft was circulated, the building and real estate industries found all sorts of problems with it. Home builders are reminding everyone how green they have gone over the last several years. That homes today are the most energy-efficient in recorded history. It's true that advances have been made in appliances, materials, building techniques and windows, for instance. Perhaps they pace should be quickened, though.

NAR, or National Association of Realtors, has quickly produced various statistics showing how doing away with the mortgage interest deduction for properties over 3,000 sq. ft. would negatively affect the overall market. This write-off removal seems to have generated the most comments. Supposedly prices would decline and foreclosures would rise. It's difficult to prove these claims either correct or incorrect. It actually appears to be kind of posturing from an interest group that has its own spoon in the soup.

The important thing here is that a draft will be introduced and then the debate can begin. The matter is to be taken seriously. Some are arguing now that this legislature would just inflame the current turbulence in the marketplace, but that's unlikely. If this action ever becomes a law, it'll take a couple of years, minimum. Large initiatives like this just don't get done in a month or two. By then the troubles are over and the real estate market is back on a solid ground again.

If anything, the Southern Nevada real estate market is staying on the same path from last month. It's on a slow and steady downward slide. Hopefully not too much longer, though.

Home Builders Research reports for July that sales at the resale sector declined over 40% from a year ago and for new homes the figure is almost the same. As you can see, the distress is pretty evenly divided. From June to July the drop was much gentler, an encouraging sign. The news are somewhat better on the price side. Existing home values gave up only 4.3% from last year to $276,500, while new homes held the slide to 2.6%, down to $327,790.

How far does the real estate market have to go before the recovery starts? To read the full article, please click on the link in this paragraph.

The mixed-use project right on the Strip is coming steadily off the ground as we speak. The construction site is full of activity and some of the buildings have already reached up to about 15 stories. It will include several hotels, 2,650 high-rise condominiums, a casino and a huge retail, dining and entertainment venue. The cost of this massive development is pegged at $7.9 billion and it's expected to open late in 2009.

MGM Mirage, the owner of the development, has decided at this stage to sell half of the project to Dubai World, a holding company for the state of Dubai. This is another joint venture for MGM Mirage, something that has lately become its preferred investment strategy. Dubai World is a high-end, well-financed entity that will help open the door for MGM Mirage to access international markets where it doesn't have a foothold yet. And compete abroad with Las Vegas Sands, the owner of the Venetian Resort and Casino and Venetian Macao, Harrahs Entertainment and Wynn Resorts, owner of Wynn Las Vegas and Wynn Macau.

The deal is estimated to put $3.9 billion in the company's bank account, a neat sum indeed. That will lower its risk factor on CityCenter and allow the casino operator to pursue more vigorously some of the other projects already sitting on the drawing board.

The latest trend in the casino development at least here in Vegas appears to shift toward mixed-use projects, like the CityCenter is. It makes perfect financial sense when you have luxury condominiums included in the mix. According to calculations, the CityCenter will balance out about $2.7 billion in construction expenses by the sales of its condo units. Huge advantage. And the residents from those on-site homes form a customer base you can easily tap into. Great business idea.

Many scientists are convinced that global warming is for real and we should take immediate action to deal with it, or it's just going to get progressively worse. It appears that they have a good point. Natural disasters across the world are getting more frequent and powerful. Southern Nevada is very familiar with a prolonged drought currently affecting our water supply. How about Katrina's recent assault on New Orleans? And the list goes on. More wildfires out West, strong blizzards in the Midwest. Besides the science community, the insurance industry has also taken notice of the looming threat.

As these devastating natural events have been damaging and outright destroying residential real estate, in their wake insurance claims filed by affected homeowners have been hitting new highs. The first reaction from the insurance side to that has been to hike the premiums they charge customers, an entirely anticipated move. Especially Florida and the Gulf states, the more vulnerable regions, have seen steep rate increases, but they are also going up all along the eastern seaboard, and elsewhere.

As things seem to be getting worse, some insurance firms have stopped writing policies altogether and pulled out, claiming that natural disasters have about doubled over the last five years and the culprit is clearly global warming. The level of risk has reached a point where they can't operate any more.

So, to fill the void, states are forced to step in and provide insurance coverage. It's debatable if you want to go that route. What it means is that the homeowner is paying out taxes with one hand and receiving insurance claim payments from the state with the other. At least Florida, Texas, Louisiana and Massachusetts are doing that now.

What can all this lead to? Living in certain high-risk regions becomes too expensive because the hazard insurance is too high? The coverage will always be available by some entity, but at what cost does it go beyond what people are willing to pay. That'll make you think. Banks won't lend mortgage money unless the property is covered by an insurance, so that'll complicate the issue. If homeowners aren't able to sell and buyers aren't able to insure and buy, how is that going to shape a particular real estate market vulnerable to natural upheavals?

Photo by greenmannowar.

Buyers like buyer's markets and sellers hate them. Isn't that the way it's supposed to be. Now it's the buyer's turn to rule the roost. Remember seller, only a few years ago you were in the driver's seat. So behave like a reasonable real estate expert when the market shifts and you have to give up some of the past value gains.

Let's examine some of the ways a buyer can negotiate a nice deal with a reluctant seller.

The very first step is to have the buyer get pre-approved for a mortgage loan with a lender you can count on. Establishing this up front will put a positive imprint on the whole low-end offer presentation.

The bid should be accompanied by a fact letter that explains why the buyer thinks this is a reasonable value for the house. The letter should have comparable sales in it and also what is right now on the market. If the for-sale inventory is high, prices are likely to drop in the future and it should be explained that the buyer is prudently taking that into account. It's hard to argue against facts.

A lot also depends on how motivated the seller is. If the house has been sitting on the market for months, there will be certain leeway in the price. That's a good sign for the buyer. Say, if the seller has already closed on another property, then he's carrying two mortgages and that will help soften his attitude. The seller being in the middle of a job transfer is another sign that he might consider taking a lower offer. There are other reasons, but you get the point.

As a buyer, be ready to receive a counter offer that might still make the deal worth your time. Sometimes the seller goes into a cocoon for a few months and then emerges with a new attitude, now willing to negotiate.

This development was entirely predictable. It'll eventually be a standard operating procedure when things like this go down. A few years ago a whole bunch of people were so excited about making money in residential real estate that they couldn't stand still. Then when the market turned sour, they froze on their feet, with lower jaw hanging to the floor in disbelief. After recovering sufficiently from that otherworldly development, they scurried to the phone and began with sweaty fingers dialing attorneys. And that signaled that the third act is on.

So far at least in one case, a couple has won a judgment against a lender that was accused of misleading them over the mortgage loan's terms. The loan was ordered to be cancelled and the judge added further insult to injury by certifying the lawsuit as class action. The borrowers thought they had signed up for a fixed 1.95% mortgage for five years and what they actually got was an option ARM with the first month at 1.95% and upward monthly rate adjustments from there on out. There is a big difference between the two.

During the go-go years the mortgage business attracted plenty of green originators dreaming about all the money they could now make. Even if they wanted to explain the loan details to the borrowers, they just didn't know enough to do so in a thorough manner. It was inexcusable inexperience. Then there were those who were on the ball but where engulfed in the boom atmosphere and would downplay potential hazards, like option ARMs resetting, because prices were rising steadily and the mortgages could be easily refinanced. So, there was very little to worry about. And the consumers readily bought these types of arguments.

Now, of course, some outright scammers were out there, too, hustling home loans and committing all sorts of underhanded deeds to make things happen. These are the individuals who are likely to get their lenders in hot water. And keep hoards of lawyers happily employed.

What about some of the borrowers who blatantly exaggerated their incomes on stated loan applications? They would put a well-researched figure down so they could comfortably qualify for their dream house. Could the lenders take them to court when they default?