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Hey Everyone, Josh here. I hope you all had an awesome weekend. Between spending time with my family and absolutely LOVING how my girls belly-laughed while playing together yesterday, I did come across some attention-grabbing news articles. So check them out – I think you’ll find them interesting!
April 26, 2010 - This Week’s Topics:
- The Great Housing Recession Goes On
- 103 Months to Clear Housing Inventory
- Treasury Seeks Public Input on Freddie, Fannie Plans
- New Federal Lead Paint Rule Could Impact Home Repair Costs
- The Buy vs. Rent Debate – Is Buying Taking the Lead?
- Texas is Ahead of the Game, and Much of the Country
- Giving the Initial Presentation
The Great Housing Recession Goes On
The most recent downturn in the housing market is far greater than during any other recession in our recent history – 1981, 1990, 2001. While there are glimmers of an upturn thanks to a slight turnaround in delinquencies and total foreclosures, the state of the housing market as a whole is still grim. As you can see by the chart below, the percentage increase in foreclosures over the past recessions paints quite a picture. In less than a year, the percentage increase in foreclosures since the previous peak was more than double any other recession.
This housing crisis is not limited geographically, as has happened in the past. It is being felt everywhere. Several factors contributed to result in this “perfect storm” of foreclosure rates. Falling home prices, which led to a negative equity position, combined with dramatic and sustained job loss, which means more instances of default and foreclosure. The loss of jobs (as opposed to the number of people without jobs) and the length of unemployment spell trouble. In a recession, unemployment duration rises. The percentage of the work force unemployed for at least six months rose to 4.3% of the total labor force, up from a previous high of 2.6% in 1983. The $75 billion government program designed to help distressed homeowners has had little impact so far, in part due to poor design. We’re on pace to exceed 3.7 million foreclosures this year. The rate of secondary default is very high because unemployment is still a looming issue. There’s still a long way to go to get out of this “Great Housing Bust.”
103 Months to Clear Housing Inventory
At the current rate of sales, experts predict that it will take 103 months – nearly nine years – for all the foreclosed homes in bank inventory, plus those likely to end up there, to sell. As of March, banks had an inventory of 1.1 million foreclosed homes, up 20% from the previous year. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, creating a shadow inventory. This number is up 30% from a year ago. Banks could accelerate their pace of home sales, but the added strain of distressed homes would weigh heavily on prices, thereby boosting their losses. While the government is trying to help, the number of loan modifications under the HAMP program that are being cancelled continues to grow, as borrowers are still unable to pay their mortgages. According to Goldman Sachs, 68,000 were cancelled in March. So it seems little can actually be done to stop the inventory of distressed homes from rising.
Treasury Seeks Public Input on Freddie, Fannie Plans
Just about a week ago, the Treasury finally began the process of overhauling Freddie Mac and Fannie Mae, 19 months after seizing the mortgage-finance giants in the costliest bailout of the financial crisis. Their plan involves asking the public seven questions about how to remake the nation’s housing-finance system. Their questions ask about things like the value of homeownership versus rentals, the role of government in providing funding for home loans and taking on risks, how government policy should account for differing needs for home loans across regions and income levels, among other topics. The Treasury Department began their process in response to the outcries from lawmakers on both sides of the aisle to begin the debate of the housing-finance issue. Comments will be gathered on http://www.regulations.gov/ and other scheduled public forums. They are aiming to present their legislative proposal early next year, after failing to meet a deadline of earlier this year on their ideas for reform. Critics of the Treasury’s survey claim that while their goal is to be transparent, it’s abundantly clear that the administration has no real plan for the housing-finance reform.
New Federal Lead Paint Rule Could Impact Home Repair Costs
New federal regulations that went into effect April 22 could potentially increase the cost of your next home rehab/repair project. This regulation is designed to guard against lead paint dust caused by repairs or remodeling to houses built before 1978. Nationwide, contractors assert that the precautions they will now have to take will drive up the cost of home repairs. Not to mention wearing protective outfits and respirators, using thick plastic sheeting and special vacuum cleaners with heavy-duty filters for routine jobs that involve replacing, sanding or repairing anything with lead paint. The new rule requires testing for lead paint if more than six square feet of interior space will be disturbed, and more than 20 square feet of exterior space. While this rule is specifically for homes with pregnant women and children under the age of 6, contractors must tell other clients that they can request lead paint testing. If lead paint is detected, extensive safety measures must be taken to contain the dust and paint chips created during the project. On top of that, the new Lead Paint Certified Program requires that contractors be trained and EPA-certified in handling lead paint. While most contractors and their trade associations support the program’s goals, they contend that there are not enough companies qualified to teach and certify them in each state, and that many independent contractors don’t even know about the rule. A spokesman for the EPA argues that worries, including those surrounding higher costs, are unwarranted.
The Buy vs. Rent Debate – Is Buying Taking the Lead?
In much of the country over the past decade, renting a home was a better financial move than buying. Renting would typically result in a savings of thousands of dollars a year. But now things are changing as the housing bust plays out around the country, making broad conclusions difficult. In some markets, home prices have fallen so much that buying can seem like a bargain compared to renting a home. Some first time homebuyers are taking advantage of not only the tax credit, which expires later this week, but also the foreclosure market. There are still pockets in major metropolitan areas around the country where renting is the smarter choice, including San Francisco, Seattle and Portland, parts of Manhattan and Orange County, CA. A simple way to compare renting vs. buying is to look at the rent ratio, which is the purchase price of a house divided by the annual cost of renting a similar one. A score of 20 is a rule of thumb: a ratio of 20 or higher means you should at least consider renting, whereas a number below 20 and the consideration should turn to purchasing. Surprisingly, in areas such as New York, Los Angeles, Chicago, Houston, Dallas, Atlanta and South Florida, the ratio is down around 16. But in San Francisco (30), Seattle (28) and parts of Manhattan (25), things like zoning rules and large numbers of affluent households willing to pay extra to own keep the ratio in favor of renting. In other areas, prices just haven’t fallen that much.
Texas is Ahead of the Game, and Much of the Country
While not entirely immune to the problems plaguing the rest of the nation, the Texas housing market, employment rate and overall economic growth are pretty strong. The state’s unemployment rate is 8.2%. While not low, it’s enviable for much of the country (California is at 12.5, Michigan, 14.1%). Texas entered the recession later than most – they were still adding jobs through August, 2008, and slowly started adding jobs again last fall. This is mostly due to their great position in the largely recession-proof energy industry. The delinquency rate for the Texas housing market is 5.78%, compared to 8.78% nationwide. The reason for this is partly due to relaxed zoning codes and abundant land which has kept both price appreciation and speculation down. This financial restraint and strong regulation kept the housing market under control. Texas has state laws that prohibit consumers from using home-equity lines of credit to increase borrowing to more than 80% of the value of their homes. Energy continues to drive the Texan economy, thanks to oil, natural gas and wind. The state has its own electricity grid, allowing for swift deregulation of power markets, new transmission lines and the pursuit of alternative sources. Wind energy is driving employment. Texas is also the largest exporting state. The Texas turnaround might just lead the turnaround for the rest of the nation.
Giving the Initial Presentation
You'll bring your own personality to the presentation you do on that initial appointment. Most people mistakenly rely on the strength of their personality without doing the necessary prep work. The basics of your presentation should be this: 1) Uncover or verify what the seller's non-financial emotional hot button is It's called non-financial because money is NEVER an emotional hot button and focusing on money won't help you close; 2) Any solution you have needs to address the seller's hot button. Here are some quick tips to keep in mind for putting forth your best effort when on that initial buy-call appointment:
- Hot Button Focus: Find it and focus on it, making sure to clarify how your solution will address this important need.
- Establish Rapport: You need to create and open channel of communication.
- Offer a Promise of Value: Make this a part of your repertoire - "By the time we're done, I'll either buy your home or I'll help you find a better solution. Fair enough?"
- Tour the House with a Plan: Avoid being critical about defects, instead, ask questions. This will lead to conversation and keep you in control.
Hope your week is filled with real estate investing success.
Until next time… ~Josh
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