March 7, 2010 Josh Cantwell (8) This Week’s Topics: Fannie Mae Looking for More Money Delayed Evictions Let Many Live for Free Homeowner Tax Credit Not Helping Home Sales Five Factors That Will Impact the Future of Housing Top Ten Cities with the Biggest Rent Drops Vacant Second Homes Means More to Sell Rentals Mean Long-Term Profits Fannie Mae Looking for More Money Fannie Mae announced that it needs another $15.3 billion in federal assistance, and indicated that its losses would continue through this year and they would probably be asking the Treasury for more money later in the year. That brings the total federal bailout amount so far to more than $75 billion. Couple that amount with the money that sister-company Freddie Mac received and the total is $126 billion. Last year the government agreed to cover their losses through 2012, removing the $400 billion cap that was in place. Freddie Mac is expected to ask for additional money later this year, as well. Freddie Mac and Fannie Mae own or guarantee about half of all American mortgages (31 million home loans worth $5.5 trillion) and play a vital role in the mortgage market. Loose lending standards during the housing boom, however, left them reeling from the consequences. Delayed Evictions Let Many Live for Free Despite being months behind in mortgage payments or even having received eviction notices, homeowners around the country continue to stay put, living rent free. Pressure from the government on banks to modify loans and allow homeowners to stay in their homes, and an excess of housing inventory has led to this trend. In addition, allowing the homeowners to stay in their homes protects the (now) bank’s assets – there is less chance of vandalism when someone is still living in their home. The number of loans where there has not been a payment in 90 days or more but the homeowner is not in foreclosure is 5.1% nationally. Couple that with a long foreclosure/eviction cycle (averaging 229 days in California), and homeowners can remain where they are for many months. Will this amnesty period lead to some homeowners getting back on their feet and avoiding eviction? Some experts think so. Most agree, however, that the free living can’t last forever, as banks find it advantageous to reach foreclosure and sell the delinquent properties. Homeowner Tax Credit Not Helping Home Sales Despite an extended deadline and expanded qualifiers, the government homebuyer tax credit is not helping home sales, due to a number of different factors: National unemployment remains at about 10%. Consumer confidence is low. Home prices have stabilized in some markets, but are still below 2006 levels. Existing homebuyers are stuck in their homes as values have dropped. Harsh winter weather has kept people at home. For first time home buyers, it’s more about taking advantage of the lower housing prices than the tax credit. In theory it seems like a great idea to give people $6,500 to buy a new home. Even better give $8,000 to anyone who hasn’t owned a home for three years. But the impact on home sales has been minimal. The housing market remains vulnerable, and the Mortgage Bankers Association index of loan applications hit a 12 ½ year low. Spring, traditionally the busiest time for home buying, should prove interesting this year. Five Factors That Will Impact the Future of Housing Every week we hear from various industry experts about when the housing market will make its big turnaround. There are five factors to consider before this will happen. Together, these factors will likely keep home prices low for the coming years. Household formation – High unemployment and underemployment rates means more people are moving back home, doubling-up or renting, particularly in the 25-34 year old age group. Overbuilding and housing starts – Right now there is a massive inventory of housing, thanks in part to too many houses being built to meet demand. Housing formation rates are around 1.2 million, but building is closer to 2 million. Thanks to tighter loan standards, there are also fewer qualified buyers out there to meet the demand. Single family home sales – As a result of the amount of distress sales, price-conscious home buyers are gravitating towards foreclosure re-sales and short sales where prices are lower to better suit their new household economics. More expensive new homes with big price tags no longer are in hot demand. Home prices – Home prices have to reach a level where people can afford their mortgages once again. Homeownership rates – Homeownership rates will continue to drop due to toxic mortgages and foreclosures and high unemployment. Top Ten Cities with the Biggest Rent Drops Unemployment and an oversupply of vacant homes are having another effect on the housing market – a decrease in rental prices. Across the country, cities are seeing a decline in rental rates and also a change in the rental unit landscape, according to AXIOMetrics, an apartment market research firm. For example, rent in the Seattle area dropped by 13.8% in 2009 as a result of high unemployment and an even higher cost of living. The top 10 cities for rent drops are: Seattle (-13.8%) Reno-Sparks, NV (-13%) Las Vegas – Paradise, NV (-12.4%) Tacoma (-12.3%) San Jose-Sunnyvale-Santa Clara, CA (-12.3%) Phoenix-Mesa-Scottsdale, AZ (-11.2%) Salinas, CA (-11.1%) Salt Lake City (-10.3%) Oakland-Fremont-Hayward, CA (-9.7%) Palm Bay-Melbourne-Titusville, FL (-9.5%) For those who used to spend half their income on rent, alternatives were needed. So rather than single-unit apartments, two-and three-bedroom units became more attractive for renters because of having someone with whom to share the rent. High-end luxury apartments are experiencing a similar fate. Add to that the glut of homes on the market and apartments are competing more with new construction, condo and home rentals. There are signs that the decline in rental prices is stabilizing. In January, AXIOMetrics found that 55 of 88 markets actually had an increase in rent, the first since July 2008. Occupancy rates remain flat, but landlords are scaling back concessions. Recovering rent levels will depend in large part to unemployment recovery and job creation. Still, it’s going to be a long road back. Vacant Second Homes Means More to Sell It should come as no surprise to learn that the majority of new and refinanced mortgages into risky loans are happening in the coastal regions of the country. Why? Well, who wouldn’t want to live close to the water? It’s seen as the ultimate in luxury, but comes with a very high price tag. The percentages of new and refinanced mortgages into loans with finance options are highest in California (ranging from 25% to 40%), with states like Nevada (20%-25%), Washington, Arizona and Florida close behind. Census figures show that homeowner vacancy rates are at an all-time high. People who own(ed) second homes are now often not able to afford them, so they put them up for sale and move out, leaving a wave of vacant homes. They’re not even waiting to find a seller first. The result is a ghost town, particularly in areas such as Arizona and Las Vegas, as brand new homes sit in wait for new owners to come along. Will that change any time soon? Not according to the numbers. Rentals Mean Long-Term Profits If you’re working with a property that you find you love, and you know you can get it cheap from the lender, it may be worth your time to keep that property for your rental portfolio. Rentals, through a buy-and-hold strategy, can represent solid long-term income for a real estate investor. The monthly income that you receive from your tenants can be used to pay the monthly mortgage costs on the property. The key is to make sure you’re purchasing a property at a low price, so the cash flow generated from the rental is more than the expenses associated with owning it. Some possible tenants to consider: The “Average Joe” – someone who is looking for a house to rent for any number of financial or life-circumstance reasons. College Students – If your property is located in or near a college, students may be your target tenant. In this case, you’ll often have a group of students that rent the property together. Lease Option Renters – The person renting is someone you hope will be the ultimate buyer of the property. They don’t have their own house yet, most likely because of bad credit. Section 8 Low Income Renters – Providing housing to those who qualify for Section 8 low income housing does involve some government paperwork, but the upside is you are guaranteed your rental income on time every month, and the tenants have an incentive to keep the property in good condition – if they don’t, they risk losing their housing voucher. Real estate rentals represent a smart way to create long-term, sustainable wealth for any real estate investor. Having multiple rental properties in your portfolio, in companion with other investment strategies, represents a steady, continuous stream of income. Hope your week is filled with real estate investing success. Until next time… ~Josh Are you ready to learn about more ways to increase your profits? Take the first step to building your real estate investment business by registering to become a Real Estate Rebel today.