Real Estate Investing

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. 

While we all know that a bear market is not a good thing, you get the feeling today that it was the bull that just came up from behind you and horned you in the rear-end.  With Wall Street giant Lehman Brothers filing for bankruptcy, the “Lynch”-pin Merrill Lynch sale to Bank of America, and giant insurer AIG gasping “ARG” (like a caveman, not a pirate), then you know the piper is now being paid from the overly enthusiastic investing of the companies these last few years.

The Wall Street Journal has a solid summary of what’s happening this Black Monday.  And let me just say I hope we don’t see stock market investors and other money managers begin to leap out of windows like they did during the Great Depression.

Who’s to blame?  Fingers are being pointed directly at real estate…. well on real estate investing, anyway.

Lehman Brothers, a 158-year-old bank burdened by $60 billion in soured real-estate holdings, filed for federal bankruptcy protection in U.S. Bankruptcy Court after attempts to rescue firm failed.  … The demise of the independent Wall Street institutions comes six months after the collapse of Bear Stearns and 14 months after the beginning of the credit crisis, sparked by bad mortgage finance and real estate investments.

Ouch that.

I won’t argue that these investment firms took too many risky loans.  But my question comes from a different angle and I’m talking bigger picture here.  As firms like Lehman Brothers fall, what happens to the states that have money invested in them?  I worked for an organization once upon a time that served state finance officials and I can tell you that states invested BILLIONS of dollars in different companies throughout the world.  States take their extra funds and investment both in long- and short-term products.  Because if two million dollars can make just $2000 overnight, for example, why not?  It definitely serves the best interest of taxpayers. 

So I’m wondering how much state money is tied up in these financial giants.  In Florida, the State Insurance Pool has $400 million invested in Lehman Brothers.  Last week, they lost about $84 million.  If other states lose this kind of money, what kind of trickle down effect will that have on everyday people?  Will school funding be slashed more than it already is?  How about roads and bridges?  Programs to help the uninsured?  These giants could cause major quakes in state finances as they fall hard, but I’m hoping that most state treasurers and chief financial officers have invested with the wisdom of the word “DIVERSIFY” in mind.

Photo from NatGEO.