Post crisis real estate investing

by Dan Krell ©2012
DanKrell.com

horseWatching an interview of Chef Bobby Flay this week, talk about the possibly of buying a horse at the Fasig Tipton Yearling Auction in Saratoga Springs, NY, I heard him say, “I’m actually looking at this like buying a building, literally…it’s like buying a really expensive piece of real estate…”

Well, why not buy that expensive piece of real estate? Some experts are still saying that real estate is still one of the core investment assets. For example: Brad Case, of the National Association of Real Estate Investment Trusts®, in his June 2011 article in Financial Planning (“School is in”; 41, 3), discussed the importance of real estate as an investment class. Case stated that, real estate is a “basic” investment class. He continued by quoting some of the most influential financial experts on real estate investing: “…Burton Malkiel, the Princeton professor and former member of the Council of Economic Advisors who wrote the famous investing manual, A Random Walk Down Wall Street, said, ‘There are only four types of investment categories that you need to consider: cash, bonds, common stocks and real estate.’ Mark Anson, who led the largest pension funds in both the U.S. (CalPERS) and the U.K. (British Telecom), completely agreed: ‘Equity, fixed income, cash and real estate are the basic asset classes that must be held within a diversified portfolio’…”

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Ann Marsh, in her may 2012 article “Real estate’s rehabilitation” (Financial Planning, 42, 56), also agreed. She stated that not only are financial planners urging their clients to buy into real estate investment trusts (REITs), some planners are urging the “outright” purchase of individual buildings.

Of course, when thinking of real estate investing, most people think about residential real estate – in particular flipping homes or owning rental properties. Investors looking for rental properties tend to look at long term value (appreciation) as well as having a positive cash flow; while home flippers are interested in renovating a home and selling for a quick profit.

commercial real estateResidential real estate is not the only opportunity for investors. Some real estate investors look for deals in commercial buildings; the market downturn has added to the possibilities too. Investors in commercial properties tend to look for development opportunities as well as long term retention.

Another way to invest in real estate is through a real estate investment trust (REIT). The REIT investment structure has been around for many years, and may provide the real estate investor access to investments they might not otherwise purchase on their own. There are many types of REITS, some invest broadly in many types of real estate; while some are focused on specific types of properties (e.g., shopping centers, storage centers, apartments, etc).

Clearly, there are many risks involved in real estate investing. Of course there are financial risks, but there also a time investment required. Additionally: cash flow can become an issue when tenants stop paying rent, or unexpected maintenance issues need attention; rehab or development costs can skyrocket when unexpected obstacles are encountered; and when selling, you may not realize the sale price you initially estimated due to market fluctuations, bad appraisals, etc.

Although some real estate investors are successful; many real estate investors lose money. Before you decide to invest in real estate, you should consult investment, financial, real estate, and other professionals to assist you with the research and due diligence.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 6 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

What can Congress learn from the real estate bubble and bust?

The drama that has been unfolding on Capitol Hill this week is not the usual production that is played out by the theater of Congress. While it seems as if everyone has something to say about debt ceiling issue, it’s no surprise that the National Association of Realtors® (NAR) also issued a statement.

A statement released July 29th by NAR president, Ron Phipps (Realtor.org) urged Congress to resolve the debt ceiling issue. Phipps stated; “…Until a resolution is reached, Congress will be unable to address the myriad issues facing the nation’s families, communities, and economy. The indecision in Congress is paralyzing progress on other fronts, and it is harming home buyer confidence and negatively affecting home sales…”

Although it is a convenient opportunity to point the finger at Congress for eroding home buyer confidence; by many accounts, the housing market has been affected since spring.

Given that June is typically the height of the home buying season, it comes as no surprise that NAR’s June pending home sales report (homes under contract but have not yet settled) indicated a 2.4% increase in nationwide pending home sales. Local June data corroborates a slight increase in pending home sales, however, the number of contracts actually going to settlement is decreasing. Montgomery County single family home sale data compiled and reported by Metropolitan Regional Information Systems, Inc. (MRIS.com) and the Greater Capitol Area Association of Realtors® (GCAAR.com) may reveal that momentum in the local housing market may have been losing steam since April; the number of settlements in April, May and June of this year decreased compared to the same time the previous year.

Much like the bipartisan group who appear to be contrarian to the status quo of a brokered calm after the debt ceiling storm, some housing experts are looking to correct the spinning rhetoric of housing data. The housing status quo was challenged earlier this year when CoreLogic, a real estate data company, called into question NAR’s housing data and methodology as being “overstated.” Naturally, the NAR refuted the allegation and quickly posted answers to their questioned methodology.

Also, akin to the confusion of mixed issues in the recent debt ceiling debate, housing issues also continue to be mixed and confused. Even though the debt ceiling discussion was (appropriately) tied to deficit spending and the national debt, the bigger picture was substituted for a shortsighted thumbnail focused on the status quo. Meanwhile, a fragile housing market continues to languish; albeit bits of positive statistics that are used to spin hope and rationale to buy a home and maintain a status quo. The result is that a new home buying paradigm may be eluding experts; a new approach to home ownership and motivation for buying a home that may be uncovered when the numbers and statistics of arcane housing reports are stripped away.

Since housing is a large sector of our economy, then comparisons may be fitting. The reality that seems lost to some is that just because “you can” buy a home may no longer be the reason to do so. Unlike the characteristic home buyers, who in the last decade, leveraged themselves to the hilt to buy a home; many current home buyers are concerned about an uncertain future and their family’s welfare- and as a result have become austere in the current economic environment.

by Dan Krell
© 2011

This article is not intended to provide nor should it be relied upon for legal and financial advice.  Using this article without permission is a violation of copyright laws.

Shadow inventory dictates direction of housing market

by Dan Krell © 2010

Housing markets are not out of the woods yet. To know where housing is headed, you need to follow the “shadow inventory.” It is estimated that the shadow inventory will be dictating the direction of the housing market for the next twelve to thirty-six months; and contrary to some recent optimistic reports, it could get ugly.

“Shadow inventory,” simply put, is the term used to describe properties that are not yet for sale, but is expected to be listed for sale. The term is loosely used and generally refers to homes that are already owned by banks as well as homes in the process of foreclosure. However, some analysts broaden the scope of the term to also include homes that have seriously delinquent mortgages and/or in the process of a short sale.

Alarms about a threatened housing recovery due to the nationwide shadow inventory have been ringing since early 2010. Although recent reports of increased sales have been undeniably due to home buyer tax credits, economists doubt that any gains in the housing market will carry into July (one qualification for the home buyer tax credit is to close by June 30th). Even Lawrence Yun, Chief Economist for the National Association of Realtors, stated in a May 24th NAR press release (Realtor.org) that although there was an expected increase in existing home sales in April, sales will “temporarily fall back” when the home buyer tax credit expires.

Although it is expected that home buyer demand will diminish in the absence of a home buyer tax credit, a sudden exponential growth of home inventory has the potential to erode not only home buyer confidence but home values as well. It is clear that such an inventory surge can wreak havoc, as evidenced by the foreclosure surge of 2007-2008; but analysts cannot agree on the extent of the problem. Estimates of shadow inventory range from a conservative 1 million units to an astounding 6 million units.

A Standard and Poors analysis published February 16, 2010 (The Shadow Inventory Of Troubled Mortgages Could Undo U.S. Housing Price Gains) made clear the correlation between property liquidation and home value depreciation. And although the reduced number of foreclosures in the past year was due in part to attempts in assisting home owners to keep their homes (through mortgage modification programs), the inevitability of liquidating $473.4 billion in loans (which is equated to 1.75 million homes) was temporarily delayed. It is possible that home prices may again begin to depreciate as these troubled loans are liquidated (standardandpoors.com).

First American Corelogic appears to concur (Home Price Index Report – April 2010) with the premise of the S&P’s report. Although Corelogic’s Loan Performance Home Price Index (HPI) revealed an increase from February 2009 to February 2010, the report states that market stabilization has been widely due to government intervention through foreclosure prevention programs, Federal Reserve purchases of mortgage backed securities, and home buyer tax credits. Due in part to the expected conclusion of Federal Reserve purchases of MBS and home buyer tax credits, the HPI forecast from February 2010 to February 2011 is projecting a decline (corelogic.com).

Housing will undoubtedly be affected by shadow inventory. However, the affects of shadow inventory disposition may largely depend on other economic factors and government intervention; which includes (but is not limited to) employment, interest rates and foreclosure prevention programs.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of May 24, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.

Commercial real estate bubble bust

by Dan Krell &copy 2009
www.DanKrell.com

If Wall Street is considered by some to be the “life blood” of the United States economy, then commercial real estate can be described as the economy’s lungs. If you can take a pulse of the economy by looking at Wall Street’s progress, then you can measure how well the economy “breathes” and thrives by looking at the state of commercial real estate. Even though Wall Street’s markets have somewhat rebounded from last fall’s correction, a bust in commercial real estate can correct Wall Street’s correction with another dip into the recession bin.

Owners of commercial real estate depend on cash flow to service their debt; this means that they depend on their business to pay their mortgages. For owners of retail and office centers, this means that the key to paying their mortgages is to collect the rents from businesses leasing space. When the economy is strong, vacancies are low and lessees pay their rents. As the economy slipped into a recession, vacancies increased and owners of retail and office centers found it more difficult to service their debt.

Commercial real estate financing is much different than residential real estate financing. Unlike residential mortgages, where typical terms are 30 years and underwriting guidelines are standardized for many programs; the terms and conditions of commercial real estate mortgages are often tailored to the risk level of the individual project or property.

Because commercial real estate mortgages are due in shorter periods (usually a balloon note), owners of commercial property are always looking for better rates and terms to improve their cash flow. As liquidity dried up in the last year due to bank fall outs and shake ups, some commercial real estate owners are finding it more difficult to refinance their notes that are coming due.

This double whammy is the reason for many real estate analysts’ predictions of a bursting commercial real estate market. As Lingling Wei and Peter Grant pointed out in their August 31st Wall Street Journal commentary (Commercial Real Estate Lurks as Next Potential Mortgage Crisis), delinquencies in commercial mortgage backed securities (bundled loans sold to investors such as hedge funds and pension plans) rose 600% to a delinquency rate of 3.14% in July 2009 as compared to the same time the previous year.

Wei and Grant also point out that an additional $1.7 trillion worth of commercial mortgage notes are being held by banks. As notes become due, bank losses are also expected to increase because of the inability to re-finance mortgages. Many commercial real estate owners and their lenders are finding that commercial properties are increasingly burdened by vacancies, making it more difficult to service the debt, while commercial real estate values are being driven down due to increasing defaults and foreclosures.

The good news is that like residential real estate, commercial real estate data is regional (depending on local market activity). Local commercial Realtor, Cory Hoffman (of Thur and Associates located in Mclean, VA) was optimistic when he said that “the commercial real estate market will get worse before it gets better…but the Washington D.C. commercial market will not be as hard hit as the rest of the country…” because of the strong government job market and stronger local economy.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 28, 2009. Copyright © 2009 Dan Krell