Hey everyone, are you capitalizing on your “power time” each day? Everyone’s power time may be different, but it’s basically the block of time where you’re at your most productive, your most alert. Make sure that you’re taking advantage of that burst and doing the things that need your attention the most during your power burst. Here’s to a good investing week!
July 26, 2010 - This Week’s Topics:
- Real Real Estate Concerns on the Gulf Coast
- Are Strategic Defaults Unstoppable?
- “Common Sense” Financial Reform Signed Into Law
- Homebuilders Losing Confidence
- Foreclosures Reduce Home’s Value by 27%
- HAMP Default Rate Less than 2% After 6 Months
- Know Who You Are
Real Real Estate Concerns on the Gulf Coast
As you would imagine, sales of beachfront homes and condos have plummeted since April when the Deepwater Horizon drilling rig exploded in the Gulf of Mexico. Property values are dropping, and apartment rentals are down by half. Drastic declines in business are felt by anyone connected to the real estate industry – from builders, real estate agents, bankers and lawyers to title agencies. Those who own vacation homes are watching their investments and rental prospects shrink. Experts are estimating that, over the next seven years, property value would drop at least 10% because of this oil spill. Brokers are seeing prospects back out of deals. They’re waiting… waiting to see what happens with the oil. The spill comes at a time when the region is already depressed, having been hit hard by the housing market crash. There have been signs of recovery, but those have all but been erased. The perception of oil soaked beaches is keeping away the tourists… and the investors.
Are Strategic Defaults Unstoppable?
Eleven million homeowners currently owe more to their lender than their house is worth. Many of those homeowners are voluntarily defaulting on their loan even though they could still afford to make their payments. They figure their homes will never regain their values. “During debate last week on a bill (HR 5072) to shore up the FHA’s mortgage insurance program, the House decided to crack down on such "strategic defaults." Lawmakers agreed to make those who strategically default ineligible for new FHA-insured loans.” It’s the right idea, but unlikely to have the desired effect of stopping strategic defaults. What’s the reasoning behind many of these strategic defaults? For many, it’s a rational response to owning a house that may never be worth what they are investing in it – they feel like they’re throwing good money after bad. “If they live in states that bar banks from recouping more from foreclosed borrowers than the value of their homes, defaulting may simply be a way to stop throwing good money after bad. The penalty these borrowers face is a precipitous drop in their credit ratings, making all forms of credit scarce and costlier. That's far more serious than the potential loss of access to FHA-insured loans, which ordinarily account for just a fraction of available mortgages.” Lenders are the ones to narrow the gap between the dropped home value and the mortgage amount, but with the trouble banks have writing down debt when the borrower can afford the loan, the strategic default trend will be hard to stop.
“Common Sense” Financial Reform Signed Into Law
Last Wednesday, President Obama signed the Dodd-Frank Act, calling it a “package of wide-range reform of the financial market and its regulation.” The law is designed to crack down on abusive practices in the mortgage industry so that people are better informed about what they are signing. Some are calling this the largest piece of financial reform since the post-Depression era. It will “weed excess risk out of the financial institutions before they pose a threat to the entire system.” Banks will be held accountable for the risks they pose and the mortgages they scrutinize, and will be prohibited from trading for their own profits,” explained the superintendent of the New York State Banking Department. There are still concerns that the bill does not address how to get Freddie and Fannie out of conservatorship.
Homebuilders Losing Confidence
Homebuilders are feeling more and more pessimistic about their industry, further evidence that the economic recovery is slowing down. The National Association of Homebuilders reported that its monthly reading of the sentiment about the housing market sank to 14 – any reading below 50 is considered negative against the market. Construction of new homes has been limited by high unemployment and increasing numbers of foreclosures. Conditions are not expected to improve any time soon, with housing expected to struggle for a while yet. The number of new homes for sale fell in May to the lowest level in 40 years. At the current rate of sales, it would take nearly nine months to exhaust that rate. “Each new home built creates, on average, the equivalent of three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities, according to the builders' trade group. The impact appears in multiple industries, from makers of faucets and kitchen appliances to lumber yards.”
Foreclosures Reduce Home’s Value by 27%
A recent MIT study found that a single foreclosed home can decrease the value of homes within 250 feet by an average of 1%. The study examined 1.8 million home sales in Massachusetts from 1987 to 2009. It found that the typical foreclosed home has its pre-foreclosure price reduced by an average of 27%. Here’s where it gets interesting. If a house sold after the death of its owner, the value drops 5-7%. Declaring bankruptcy? The drop is a mere 3%. Why such a big drop for foreclosures and not other types of distress situations? For two reasons – foreclosed homes are more likely to have been physically damaged during the foreclosure process, and financial institutions have more of an incentive to sell them quickly.
HAMP Default Rate Less than 2% After 6 Months
The US Treasury released new numbers last week on the redefault rate for the Home Affordable Modification Program (HAMP), and they are lower than projected, and well below the industry average. The redefault rate for homeowners in permanent modification for at least six months is 1.7%. Fewer than 6% of the permanently modified loans are 60 days past due. While it’s still early, the rate is still far better than industry norms. The redefault rate of mortgages modified by the 11 largest servicers is 57%. “A recent study by Fitch Ratings projects HAMP-modified loans will redefault at a rate of 55 to 75 percent. But Treasury officials say the program guidelines ensure restructured mortgage payments are truly affordable for participating borrowers, and as a result they stand a better chance of continued success.” Cancellations from HAMP trial plans are still high, as many who received temporary modifications were unable to verify their income or missed payments.
Know Who You Are
Wasn't it an ancient Greek philosopher who said, "Know Thyself?" Well, the same is true for your business. A key problem with real estate investors is that they don't know who they are as a business -- and this is a BIG problem when it comes to credibility. In other words, their promotional materials lack focus or rely on the common clichés in the industry that they've taken from the competition. Things get muddied as there's little differentiation from the other real estate companies in the area. So here are some basics:
1. Create a mission statement. Define the core values and your purpose as a company.
2. Develop a one-page explanation describing your company that can be used in marketing. Remember, no one cares that you were a boy scout, active in your church, temple, and mosque or belong to PTA. This is about your business: keep it on message.
3. Order business cards and keep them simple. Include the Better Business Bureau logo.
4. Memorize a one-minute elevator speech that captures the essence of the work you do. Too many investors stammer through impromptu explanations that lack cohesion and focus. Nail this down -- this is the most important item on this list!
Always stay on message. By following the above points, you will have done the work you need to quickly establish credibility.
Hope your week is filled with real estate investing success.
Until next time… ~Josh
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