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Millionaire Now! by Larry NusbaumThis blog is based on the organizational principles found in my new book, "Millionaire Now! - A Financial Toolbox with Seven Steps to Wealth". |
Random Thoughts About The Economy And Real Estate
Posted on 02/26/2007 20:53:12 | Link | Post Comment
I have written about real estate and housing a lot more than I anticipated when I started out. I am not at all upset about it and when I get nasty emails or am called names I take it that I may have struck a nerve with some.
For me and you there never was a housing bubble. I am not aware of any real estate bubble, so, I thought I would use this post to tell readers what I am thinking about.
But, first, I want to say that Roger and I first discussed what seemed to be an obvious credit bubble about a year back. My major beef with the (sub-prime) lending community was the lack of good underwriting policies. Specifically, I argued that all lenders should underwrite a person's income qualification based on a fully amortizing payment (6%) even if those borrowers chose to only pay the Option-Arm minimum payment, usually about half of the fully amortizing payment. And, that's it.
I have been an investor, realtor and lender for almost 20 years, so I pretty much have my heart and sole in the industry. However, for the life of me I never could understand why banks offer "Stated Income Loans" or "Low Documentation Loans". They created a breeding ground for fraud. One of their common responses has something to do with the nature of uneven monthly income streams from self-employed people. That is simply nonsense. Here's why: Income is just a snapshot in time based on the previous 24 months. Also, every single small business loan is made to a self-employed person and they are fully underwritten with full docs and income verification from tax returns and bank statements. It's their job!
Alan Greenspan became Fed Chairman when I was a broker at Lehman Brothers in 1987. It was just prior to the Market crash in October. Seems to me that everytime we have had a financial crisis in this country, the Fed just threw money at the problem. Busts and booms are normal, but Greenspan never allowed us to experience a "good" bust. As a result, today, as Pat Gorman said, "we are all bandaided up" with fiat money. Look for the Fed to start lowering rates this summer in an attempt to "band aid up" the housing market. Look out dollar.
Gold is up 230% since 2001, when the commodity cycle began, besting most asset classes, and our purchasing power is down about 60% since then. So much for stock market gains.
Why did I say above that "for me and you there never was housing bubble"?
For me and you there never was a housing bubble. I am not aware of any real estate bubble, so, I thought I would use this post to tell readers what I am thinking about.
But, first, I want to say that Roger and I first discussed what seemed to be an obvious credit bubble about a year back. My major beef with the (sub-prime) lending community was the lack of good underwriting policies. Specifically, I argued that all lenders should underwrite a person's income qualification based on a fully amortizing payment (6%) even if those borrowers chose to only pay the Option-Arm minimum payment, usually about half of the fully amortizing payment. And, that's it.
I have been an investor, realtor and lender for almost 20 years, so I pretty much have my heart and sole in the industry. However, for the life of me I never could understand why banks offer "Stated Income Loans" or "Low Documentation Loans". They created a breeding ground for fraud. One of their common responses has something to do with the nature of uneven monthly income streams from self-employed people. That is simply nonsense. Here's why: Income is just a snapshot in time based on the previous 24 months. Also, every single small business loan is made to a self-employed person and they are fully underwritten with full docs and income verification from tax returns and bank statements. It's their job!
Alan Greenspan became Fed Chairman when I was a broker at Lehman Brothers in 1987. It was just prior to the Market crash in October. Seems to me that everytime we have had a financial crisis in this country, the Fed just threw money at the problem. Busts and booms are normal, but Greenspan never allowed us to experience a "good" bust. As a result, today, as Pat Gorman said, "we are all bandaided up" with fiat money. Look for the Fed to start lowering rates this summer in an attempt to "band aid up" the housing market. Look out dollar.
Gold is up 230% since 2001, when the commodity cycle began, besting most asset classes, and our purchasing power is down about 60% since then. So much for stock market gains.
Why did I say above that "for me and you there never was housing bubble"?
- Because, we didn't buy a new home, with ZERO down, borrowing from a sub-prime lender, with a rising payment/rate and a huge pre-payment penalty.
- Housing, as a sector, (hotels, office, retail, apartments the other 4) is experiencing a painful glut of new builds due to overbuilding and drying demand. Did you know that new home builds comprise about 15% of the entire housing sector and that within the new home sector nationals such as Toll & KBH etc make up only 25%? The rest are little guys building a spec house on a lot in the hopes of selling it for profit.
- The other four sectors remain strong and vibrant. Apartment and office demand is high and inventory remains low from what I see and from what Sam Zell said this week on CNBC.
- Within the lending arena, sub-prime is the only sector experiencing a blow-up for the reasons mentioned above. Sub-prime loans account for between 10-18% of the market and home equity has never been larger ($55,000 average), even if the % of equity is lower today.
- To date, lenders are reporting no serious issues in the Prime markets.
- When prices are no better than flat at the moment, should we expect foreclosures to be way up stated as a % of last year or over 2005? Yes! Why would anyone need to foreclose when the market moved fast and prices moved up? They wouldn't. In the past 4 years if you got into trouble and could no longer pay your mortgage, you could sell your house at a profit a lot faster than the banks take to foreclose you. Today, prices are not going up and houses are taking anywhere from 2-5 months to sell, plenty of time to lose it to the bank or sell at a deep discount in pre-foreclosure.
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One last thought about so called risky loans or risky borrowers: Two people, with similar incomes and expenses are about to buy a similar house on the same street. The only difference is that one of the two sellers is distressed. Both houses appraise at about $400,000. The distressed seller accepts $320,000 to get out while the othe seller accepts $400,000. Both borrowers borrow $320,000. One is an 80% loan and the other 100%. The 100% borrower is no greater risk to the bank than the 80% borrower, he just made a better buy! But, the media will lump him in with their list of troubled borrowers just because he borrowed 100% and they would be wrong.
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