Real Estate Investing

I grew up a military brat moving from place to place in what was mostly middle America.  Like the hobbits of middle Earth who were amazed at the new sites they saw as they returned the ring to the fires of Mount Doom, I am constantly astonished when I hear what people pay for real estate in other parts of the country.  A 900 square foot cottage in California for how many hundreds of thousands - and it needs some work!?   Ay yi yi.

Today, the news is out that values of apartments in Manhatten continue to climb though there are many job losses, causing concern that the prices will soon begin to erode. 

After the stock market crash of 1987, it took two years for Manhattan real estate prices to drop… When they did drop, the market became more troubled because the slowdown coincided with developers taking advantage of tax incentives to build thousands of new apartments. At the same time, thousands of rentals were being converted into co-ops. Many builders had concentrated on building only smaller apartments that were attractive to investors looking to rent them out. All of this inventory meant that it took until the mid-1990s for prices to recover from overbuilding.

Meanwhile, the average price of an apartment in Manhattan rose to $1.5 MILLION in the third quarter of this year.  I wonder what the price per square foot is there.

If you’re interested in finding an expensive place to live, Miami rates at #10.  Other cities include Seattle, Sacramento, Boston, Washington, DC, San Diego, Los Angeles, New York, San Francisco, and #1 is SAN JOSE. 

Of course, there are countless great reasons to live in these cities ranging from cultural to educational opportunities, recreation, entertainment, jobs.

And now that the massive bailout plan for the financial markets has passed and been signed into law today, perhaps people can again afford to buy homes.  According to Forbes, it’s unclear when credit-crunched banks can begin selling their troubled loans to the Fed.   Some of the fodder of the bill include,

–Provides the government with warrants to obtain an equity stake in companies. This helps ensure that taxpayers share in future gains of companies that are bailed out.

–Limits excessive executive compensation for some companies. Any firm that sells more than $300 million in troubled assets to the government is also subject to more taxes.

–Establishes an oversight board and special inspector general to act as a watchdog.

–Requires the Treasury secretary to regularly report to Congress the details of all financial transactions under the bailout.

–Allows federal agencies to modify troubled mortgage loans.

We’ll see the results of the bill flesh out in the coming months.  But for this next week, I’m going to try to forget about it all as I take a vacation to the white sandy beaches of Destin, Florida, sipping cold drinks and reading a good book.  See you October 13th unless I can find a wireless connection!

Home sales did worse than expected in August and signal that a housing market recovery could still be a distant dream rather than a short-term reality.  Not only did existing home sales drop 2.2 percent, but the median existing home price fell 9.5 percent to $203,100, according to FinancialTimes.com. 

Even more grim, the number of properties in a distressed sale is astounding,

“There has been no meaningful change in the level of activity since late last fall,” said Ian Shepherdson of High Frequency Economics.“The NAR estimates that 35 per cent to 40 per cent of all sales are of distressed property, so underlying private activity is weaker than the headlines and there is little sign of imminent improvement.”

Meanwhile investigations are underway into the cause of the subprime lending mess said to be the first domino to fall in the liquifying economy.

Federal investigators have expanded their investigation into the collapse of the subprime mortgage market to include Fannie Mae, Freddie Mac, Lehman Brothers and AIG - four companies at the heart of the market turmoil.

Enforcement officials are under growing pressure to hold companies and individuals responsible for the worst financial crisis since the Great Depression.

These investigations may help to satisfy some of the anger felt by many Americans over what appears to be a bailout for irresponsible financial management.  No matter the fault, however, the rescue plan may not be enough to give housing the boost it needs for a strong recovery.  MSNBC.com reports,

Despite the Bush administration’s historic and head-spinning $700 billion rescue of the financial industry, it will do little to ease lending standards so more homebuyers can qualify for loans, nor has it had much affect on mortgage interest rates so far.

Houses are sitting empty all across the country and the longer the homes remain dormant, the more value they lose.  Vandals, gangs, and mother nature tend to turn neighborhoods with high foreclosure rates into blighted areas.  The Christian Science Monitor recently told about a man arrested for building a new house made entirely of pilfered materials.  The story went on to say,

As the housing dominoes fall far from Wall Street, growing urban “ghost towns” of vacant houses are resulting in a costly crush of weeds, trash, and dereliction on a scale unseen in American cities since the Great Depression, economists say.

With all this brewing, I’m wondering why there isn’t more talk about a moratorium on foreclosures - at least for a month or two to allow the government and investigators time to sort through the loans, to keep homes from being abandoned and empty, and to allow everyone to take a deep breath and settle down a bit.

U.S. Treasury Secretary Henry Paulson placed the blame for the financial crisis and Wall Street meltdown on the “housing correction” yesterday, according to CNN.com.

“The root cause of distress in capital markets is the real estate correction and what’s going on in terms of the price declines in real estate,” Paulson said at a press briefing after the meeting. “So we’re coming together to work for an expeditious solution aimed right at the heart of this problem, which is illiquid assets on financial institutions’ balance sheets.”

Following the meeting, Speaker of the House Nancy Pelosi ironically used a term common in the real estate industry when she said,

“We hope to move very quickly - time is of the essence.”

One way the financial bail out - the largest ever surpassing even the S&L crisis of the 1980s - could occur is an auction type sale,

One way the agency under discussion could work is by setting up bulk auctions to buy mortgage assets from financial institutions. The auctions would be for set dollar amount purchases. Companies that want to offload the hard-to-sell assets from their balance sheets bid to sell to the government at a huge discount. The company willing to sell at the lowest price wins.

Clearly this financial rescue will bolster the economy, but how does it trickle down to help the little guy - homeowners and average joes?  The Miami Herald breaks it down in a great Q&A section,

In theory, this would help keep homeowners from foreclosure if it includes modifying loans that have been pooled into mortgage bonds. In such a scenario, there’d be fewer foreclosures, which would help prevent a deeper downturn in housing prices, especially in neighborhoods that already are experiencing more foreclosures. Again, however, details aren’t available yet.

Not all in Washington are thrilled with the bailout.

Conservative lawmakers and thinkers say they are alarmed by the growing trend of federal intervention. In addition to providing massive loans to prevent the complete collapse of AIG and Bear Stearns, the administration unveiled a bailout plan for the mortgage finance giants Fannie Mae and Freddie Mac earlier this month. Congress also passed a housing bill earlier this year to rescue thousands of Americans facing home foreclosure.

Free market experts agree the question that remains is whether the bailout violates free market principles and sets us up for further failure.

“It’s a dangerous trend,” said Walter E. Williams, an economics professor at George Mason University and a proponent of free markets. “When we bail people out, down the road they’ll engage in risky behavior assuming they’ll be bailed out.”

These are interesting times we live in, my friends.  Meltdowns of the stock market, mortgage rescue, housing in crisis, and a presidential election year make for riveting news coverage.