Global Financial Crisis

General Real Estate Investing
1

Just two weeks ago, the DOW hit an all time high and I heard all the talking heads say that we were headed to 18,000! The credit crunch was just a side issue without legs, because the economy was doing great.

Today, I turned on CNBC and the headline is GLOBAL CREDIT CRISIS! It’s amazing how things have changed in only two weeks. People all over the world must have finally read Pete’s post about a credit crunch. I wonder what’s going to happen when they realize that real inflation is many times the 2.7% the government has hyped, or that oil is at an all time high, or that the US Dollar is just about worthless? Worse yet, what happens when the American middle class discovers they are broke and stops spending?

Mike

2

what happens when the American middle class discovers they are broke and stops spending?

This is the straw that may break the camels backs. Once middle class americans realize they dont really have any disposable income, and stop spending, the relatively good corporate eartnings we have seen will halt. Good corporate earnings are a good indicator of consumer sentiment and the economy as a whole. The disposable income created by LEVERAGE will cease to exist.

Not to toot my own horn, but i called equities going down when they hit a high. What do i think from here? More downside to equities/real estate/economy.

One more thing… Bear Stearns in the news again. Another Hedge Fund is halting withdrawals, which signals there is a good chance of going under. Whats interesting to note about this one? Well, its an Asset Backed Mortgage Fund-- NOT subprime. So what? Means that this is possibly not “contained” and can spread to other sectors.

3

The BEST part of this whole show for us is the $900 BILLION in ARM’s set to re-adjust in 2008!!!

Think about it…the mess we’re in now was partially created by the re- adjustment of “JUST” $200 billion in 2007.

NOTHING slows consumer spending more effectively than watching FORECLOSURE signs pop up like weeds in YOUR neighborhood!

I think (other than readers here) very few people grasp the severity of what this country is facing right now. The implications can not be understated.

The little guy is ALWAYS the last to see it coming. Add to that ALL this consumer DATA that Wall St. is looking at is LAGGING info. (meaning it’s old news) and the stage has been set for these people to get HAMMERED.

I’ve said it before and I’ll say it agian. WINNING in this market will amount to PRESERVING your CAPITAL. When Wall st. goes, and it will, the housing market is SCREWED. No better way to tighten lending than the SOURCE of that lending losing BILLIONS.

4

LOL - that is funny Mike. I just ignore silly comments like that in the news. Remember October 16th 1987? On “Black Monday” the DJIA plunged 22.6% in one day ----- the worst drop since the 1930s.

But guys like you & me…we have no worries. We’re smart enough to not be affected by minor fluctations in the economy. I know you are that smart too - as I have read all your postings and your book. Your a great businessman.

Like you, I make cashflow - tons and tons - and I’m good enough at what I do [managing my business & investments] I’m never worried.

5

I think it’s great. Let those ARMs go up. Those adjusting ARM loans will create more wealth for us real estate investors, when we buy those same houses for $0.50 to $0.75 on the dollar!

6

Hi all,
Just read that 2 Bear Stearns hedge funds have filed Ch. 15 BKCY last night, on top of the 3rd fund that’s halting redemptions today, as mentioned by NJREstudent.

I posted a link a few days ago to a FoxNews.com article referring to the “Subprime Katrina” storm infecting the larger economy. Below at bottom is another link from the same source re: “Is This The ‘Big One?’” Deals w/ the huge issue of derivatives creating leverage and the squeeze play on the credit markets.

Mike is right re: the real inflation number is way higher than what’s widely reported. The number we hear is a “political” number as it has implications for debt and entitlement spending limits. The Fed is at a helluva point in that it should raise rates to ward off real inflation and defend the sagging dollar, but lower them to ward off a recession. If it does nothing, stagflation such as in the 70’s might rear its ugly head.

REI-wise for me…Am sitting tight and not intending to do anything unless and until an absolute steal is to be had, as in 50% and preferably lower discounts. I have a feeling steals won’t be terribly uncommon - even in San Antonio - w/in 6-9 months. Pete, what say you?

http://www.foxnews.com/story/0,2933,291590,00.html

Thanks,
David

7

I say at THIS point in the correction, the longer you wait the better the deals will be.

The stock market, as we’ve seen today with the likes of Beazer Homes volatility, can drop like a rock VERY QUICKLY. Homes on the other hand are NOT VERY liquid. This means housing prices drop like a ballon with a leak. It is a slower price correction.

With this in mind, remember a lot of people still think I’m wrong here. I know a LOT more people now see the correction for what it is. But the real drop will occur when EVERYONE finally realizes that there is new reality in real estate.

Patience.

8
REI-wise for me...Am sitting tight and not intending to do anything unless and until an absolute steal is to be had, as in 50% and preferably lower discounts. I have a feeling steals won't be terribly uncommon - even in San Antonio - w/in 6-9 months. Pete, what say you?
I don't know if anyone here has read [b]Never Cry Wolf[/b] but I will be acting like the wolves in the story and only going after the seriously ill elk. Forget chasing the healthy elk (non-motivated sellers), I'll be going after the 40-50 cents on the dollar elk that NEED TO SELL their home. In a boom market that doesn't really exist and motivated sellers looking to sell can still get top dollar for their homes. In the coming years if someone isn't completely motivated and willing to GET RID OF THEIR PROBLEM no ifs ands or buts I'm not even looking. I think what's going to be in store for us is not a buyers market but something much worse for the sellers, it is going to look like an all out salvage yard.

My predictions:

Foreclosures are currently up 500% in many places now, if not more. I see 5-6 (maybe more) times as many in '08 compared to '07.

I’m predicting a DOW correction of 2000+ points over the next few months.

I’m predicting the weaker 50% of home builders will fold, the remaining 50% of builders will seriously downsize or slowdown just to keep the place running until things correct themselves.

I don’t see the bottom until mid to late 2009 at best. With 4 times as many ARMs adjusting in 2008 we won’t start seeing the biggest default numbers and foreclosures until at least early '09, then the REAL discounts won’t even be fully in place until the lenders have held those REOs at least another 6 months. With things as they are they will be moderately desperate when they first take possession but I’ll bet they don’t really get desperate and mark things down until at least 6 months later. Of course every time another home ends up as an REO and every time that REO gets discounted the entire market gets adjusted down even futher due to increased supply and lower comps caused by the reductions futher spiraling things. Couple all of this with increased intrest rates slowing things down even further and reducing affordability prices will dip even more. Think about it, we should probably see what at least 2 points+ higher on interest rates just to begin absorbing losses…you think that isn’t going to impact prices? Higher interest = higher payments so those buyers have to buy ever smaller homes or the homes have to sell for less. With interest rates going up do you see a flood of buyers buying? Hell no, the ones that are in homes they can afford now (not talking about the ones forced to move because they can’t afford it) are sitting tight with their current loans in the high 5’s low 6’s. Plus with lenders tightening their practices how many people are now unable to qualify? Hell most that could qualify for a $250k house last year couldn’t get a doublewide with a cosigner now. This is going to ripple BIGTIME across everything.

401ks and pension plans- Going to see a big hit, I forsee a lot of folks that won’t be able to retire on schedule.

Interest rates on everything including car loans, credit cards, mortgages, etc will probably go up.

Banks that wrote a lot of risky loans will fold.

A lot more hedge funds will fold, I think what we’ve seen is the tip of the iceburg.

As money dries up spending will slow, this is going to cause retailer stocks to drop and retailers will reduce payroll to get through it. All of the now even broker Walmart, etc employees will certainly be spending even less and probably will start collecting more state/federal aid such as foodstamps. Of course this is going to cause budget problems for state governments, etc. These people will also probably end up defaulting on many of their obligations that were previously being paid on time, obviously more turmoil for banks. And of course now that there is more money going out to state aid there will also be less coming in thanks to reduced spending causing less income to be made on sales tax.

And all the while the dollar is weakening, that can’t be helping ANY of this.

Oh and lets not forget China, how much business do we do with them? What’s going to happen when that house of cards falls? As our economy gets weaker so does theirs and vice versa, ouch.

================================

I’m very close to bailing on my apartment, ignoring all of my debts, etc and just moving to goddamn Idaho and living in the hills off the land until this all blows over. This is going to be UGLY. Not ugly like a little ugly, ugly like that girl in your highschool that guys literally RAN from.

9

Is your business suffering much [e.g. do you have a high occupancy in your rentals, do you have ARMs yourself!]? What is your REI or other business niche? I’m suprised. This market downturn is not going to do anything but make me money.

I'm very close to bailing on my apartment, ignoring all of my debts, etc and just moving to goddamn Idaho and living in the hills off the land until this all blows over. This is going to be UGLY. Not ugly like a little ugly, ugly like that girl in your highschool that guys literally RAN from.
10

I’m just joking, it’s just some scary stuff we are heading into. I’m going to do my best to ride it out and get RICH during the next few years. Maybe own everything in my county…

11

I’ll be honest, I’m scared.

Rich, I think you nailed it… wait it out in the mountains. I don’t know where to go because I’m in the middle of a divorce, and my soon to be ex spouse is CLUE LESS about what is about to happen (to us)…

My thoughts? …um… ‘depression 2007,8,9’

Yes, what does happen when people stop watching the simpsons movie and realize wth is going on? job losses, chaos? ok, maybe chaos is excessive, but I remember hearing stories about people jumping from windows during the depression.

I’m about to become a renter with 3 kids to protect during this crisis. I’ll be calling the rental agency to move us to a 2nd or 3rd floor.

couple a weak dollar, a struggling infrastructure, and oh yeah, china’s efforts to poison us slowly with tainted food, and lead-laced toys…a negative savings rate, a party, cocky attitude, and the THOUGHT of a terrorist attack I believe you have conquered your enemy.

Forget REI, here come the foreign investors. Oh, I forgot, already (been) here.

Time to turn off the boob tube people. save what you can, listen to the REI elders, and protect your families.

Boy, I need to relax.

12
I'll be honest, I'm scared.

I do believe that we’re in for a MAJOR downturn as Pete and NJRE have said, but the question to ask yourself is what can you do to benefit from it? Unfortunately, there isn’t a great answer to this. If you have a bunch of cash, you could preserve it for later use. You could stop whatever your doing and wait until “it” is over. You could wait until later to start investing when the risk is lower. You could build a bomb shelter in the backyard and never come out!

In my opinion, the probability that we’re in for a major downturn is the best reason to become as self-sufficient as possible. We all know that employers are not loyal to their employees (nor should they be). The best insurance that you’ll do well is that you control your own destiny. I am continuing to buy rental properties, but simply buying at a bigger discount than normal. Even in a crisis, people will need a place to live, so I think rentals are a basic service that will do relatively well in a significant downturn.

Mike

13

I agree, Mike. I am a believer of solutions. I’m going through 2 of the 3 greatest life stressors: divorce and moving. I have every confidence we’ll be fine.

I am intensely studying, and attending rei meetings. Cutting my living expenses, padding the cash, networking with lenders, and once we’re moved and I’m divorced, buying the heck out of 2 key areas I’m eyeing.

I went to an REI meeting last night, got a concentrated education, some great tips and contacts, valuable stats about foreclosures in MD, and fuel for the enthusiasm fire.

Not only will the housing market be ripe, but the stock market will be as well, I believe. I look at greed as a coupon! The stock prices of several companies will drop, housing will drop… buy, and as Pete says, “do Nothing.”

14

I’m also thinking about buying some stocks at a discount also, they will take a few years to come back fully but the return will be high.

15

I think Mike nailed it on the head. This is a great opportunity to buy. But, it really depends on your strategy. I had been pursuing wholesaling, with the intention to rehab eventually. In light of whats going on, no freakin way. There will be too much supply on the market to compete with. What I want to do is be the ultimate end buyer. Whats my strategy now? Buy rentals. I think its the only way now to consistently make money. I dont want to compete with all the other sellers… there are too many. I want to be one of the few buyers, with little competition. There is no reason to be scared of this-- if you buy with much bigger discounts and buy something that cashflows very well, you will be ok in the long term.

16

I thought about it last night and I think my ultimate $ goals for the next 2 years are $1-2 million in aquisitions in 2008, $2-3 mil in 2009. In my market that amounts to quite a few 4 families with each costing around $150k at 50 cents on the dollar.

17 
 The two things that drive market prices more than supply and demand are greed and fear.  Many markets are overbuilt, and it would be good to avoid those neighborhoods when purchasing properties.  We cannot afford to allow fear to push us all into the status of economic destitution.
 I believe that really good investors can use panic markets to their advantage.  If my goal is to get rich in real estate, why would I want to pay top dollar for my properties?  Declining real estate prices, nervous investors and predictions of bleak outcomes are the best kind of markets to make savvy investors very rich.  The best thing that anyone can do is keep a cool head.  Watch the numbers.
 The biggest problem that people have is the inability to interpret what is going on.  We have had predictions of inflation, recession and stagflation all on the same thread.  Sorry folks, but all of those things simply cannot occur.  The efficeint market will not allow it.
 I predict that inflation is on the horizon.  There are several witching factors that will come together to make inflation inevitable.  The falling value of the dollar, thanks to unprecedented foriegn debt, the volitility of energy and food, and all time lows in personal savings of American citizens.
 The upside to a falling value of the American dollar is that foriegn investors will ultimately begin to purchase American real estate and American products.  The more the dollar falls, the cheaper our real estate and products are for purchase with currencies like the Australian dollar, the Euro or Canadian dollars.  Warren Buffet has predicted a fall in the value of the American dollar for some time.  The efficeint market prevails, though, and the more our currency falls, the more our trade surplus will rise.
 The Federal Reserve Board continues to discount food and energy when they consider the adjustment of interest rates.  Ultimately, this could be a big mistake.  Aside from house and car payments, the biggest cost that consumers have is food and energy.  Right now, oil futures are at an all time high, while the price of gasoline is falling.  Does it seem to intuitively make sense to say "milk is $6 a gallon and oil is $110 a barrel, but there is no threat of inflation."?
 We are up against a pattern of printing and spending money, and our gimmickry and debt instruments have finally revealed America's weakness.  The consumers in our country who do not know what they can afford.  A paper (prime mortgage paper) has demonstrated it's resilience against default, but our mortgage companies have blended A paper with B paper and C paper, and a few bad loans have spoiled the whole bunch.
 Ultimately, the Fed, in my opinion, will have to raise interest rates.  The contrarian reality, though, is that a falling currency will wipe you out financially if you have all of your money in cash.  True, rising interest rates will shake out all of the ARMs, and breifly cause an oversupply of real estate, but when the smart money starts to see interest rates rise, money will be poured into commodities, including real estate, with fixed interest rate debt instruments.  Then, by definition, the value of everything from guns to butter to condos will rise sharply.  That chart that keeps rearing it's head on this website (the value of homes from the 1890's to now with values flat until the last 5 years) has been adjusted for inflation.
 Just my opinion...
18

Funder brings up a lot of good points here.

I guess the bottom line is we’ll have to watch it. The one thing I’m very sure of though is we will see buying opportunities in real estate that won’t be around again for many years. As you all know I expect prices to fall substantially.

Funder was proven right this morning by Wells Fargo. They raised their interest rate on a FIXED 30 mortgage to 8%!!! and it’s not a rate for bad credit applicants, this is for top shelf scores. That may not sound like a big deal but the reason behind it IS. Usually banks follow the 10 year bond for their rates. Wells Fargo broke with that tradition and JUMPED their rates higher. The reasoning??? They’re losing so much money on their ARM and Sub-prime businesses. If they can markedly increase interest rates on TRADITIONAL mortgages, they can make more money to cover some of those losses. This isn’t something they WANT to do, they HAVE to do it. Banks have more exposure here than people think. The good and bad news for us is this will further depress housing prices, but it will also increase our financing costs to purchased those homes. Add it up and either way housing gets hurt.

As far as that housing price chart posted here, you can make numbers say what ever you want them to. But here’s some real world numbers from Southern New England…

1988… I build a spec home in a affluient neighborhood, before it was finished 3 people start a bidding war for it. Initial price was $225,000 it ended up selling for $300,000 and it all happened over 2 days.
3 years later (1991) the market pulls back (see chart) and the same owner had to sell due to loss of a job. The home sat for 11 months and finally sold for $200,000. That’s a $100,000 hair cut.

2001… I buy a small Cape in a nice blue collar neighborhood, 3 bed 1 1/2 bath, it needed some cosmetics, Purchased for $79K put $8K into it and rented it. total cost $87,000. Jump ahead to…2005
I’m watching the insanity of my market (people buying houses with no inspections, interest only loans ect) and remember how 1991 went. I decide to sell this and other rentals. Bidding war starts between 2 people, final sales price, $265,000 sold AS IS.

$87,000 to $265,000 in 4 YEARS!!! WHO THOUGHT THAT WAS SUSTAINABLE??? (PS that home is currently on the market for $199,999 along with thousands of others and a slew of foreclosures, who knows maybe I’ll grab it back in 2 years?)

The price drops around here will be just as dramatic as the increases were.

I’ve seen this movie before…you’ll LOVE the ending!!!

That 1900’s to present price chart for housing is 100% on the money IN MY MARKET. Not every place saw that insanity but I’ll argue that the majority did. It all ends the same. The difference THIS time is we should ALL see the writing on the wall.

I can’t for the life of me see how rising interest rates makes home prices go up from here. This mess will be a GLOBAL event. I wouldn’t count on Russian couples coming here and buying your flips from you any time soon.