H.L. Quist is a forecaster and a financial advisor with a very good track record…some of his thoughts need to be considered.  You might find this interesting…

A Real Estate Anomaly – A real estate boom has begun! Conventional wisdom says, the real estate market will not rebound for 3 or 4 years. H. L. Quist says, there is an anomaly occurring that has already created a boom and will drive real estate prices much higher in the next 2 years.

Michael Douville, Commercial and Investment Broker with Realty Executives in Phoenix, Arizona, explains one reason that portions of the Phoenix Housing Market may be very undervalued and potentially an excellent long term cash flowing investment. Investors may consider these cash flowing rental properties as a diversification, Michael Douville can be contacted at michael@michaeldouville.com or at his Scottsdale office…480-451-9339

These former homeowners generally remain locally; if they cannot buy, they rent. These former homeowners are flooding the rental market; though their credit is flawed, the maturing experience of home ownership makes them potentially well above average tenants. The current Lender underwriting requirements predict multi-year tenancy with little turnover.

This is the Year of Accumulation for Real Estate Investors. Locally The Cromford Report has proclaimed a bottom mitigating much of the downside risk, continuing exceptionally low long-term mortgage rates, and an abundance of prospective tenants in a rising rental environment makes Residential Rentals potentially an exceptional investment.

I am available for consultation, please keep me in mind.

This is todays Arizona Republic’s Article… Courtesy of Catherine Reagor http://www.azcentral.com/arizonarepublic/news/articles/2011/05/18/20110518phoenix-rental-housing-market.html

The penalty box is full! Fannie Mae (OTC: FMCC.OB), owner of upwards of 90% of the conventional home loans in the United Sates, has restricted new loans to troubled borrowers. Distressed home sellers liquidating their properties either through a gut-wrenching foreclosure or a sale with a negotiated settlement via the “Short Sale,” are prohibited from re-purchasing for 24 to 84 months depending on loan default status.

Distressed sales comprise upwards of 65% of current sales in the Sand States of California, Nevada, Florida, and Arizona. The buyers that fueled the bubble of 2005-2007 are liquidating their underwater properties. This segment of the population is huge. Everyone was buying at least one property in the 2005 to 2007 span, and 65% of those buyers fell into trouble in the 2008 to 2010 period. They are now contributing to the distressed sales flood. 

“65% of potential home purchasers cannot buy now.”

Let me make my point clearly here: 65% of potential home purchasers cannot buy now. There is a vacuum, a void being filled by savvy and return driven investors able to purchase these greatly discounted properties. There is a quantum difference between the manic buyers of the bubble and today’s buyers. Today’s buyers are looking for “Investment Return”. Today’s buyers are purchasing to generate current income, visible immediately after closing, unlike a possible gain years from now; consequently, a much tougher and discerning buyer exists.

Investment buyers are estimated to comprise 40-60% of all real estate sales. Current profit is the only motive; there is no emotional tug by backyards with swings, or homes close to family or schools, or wallpaper to match the baby’s blanket. It’s about profit! If one investor pays $100,000 for a property, the next investor down the street wants to pay less! The components necessary for a balanced market are absent. The adage for value: “A fair price is what a non-distressed seller is willing to take and an educated buyer is willing to pay,” has become obsolete at the moment. The “Housing Clearance Sale” continues. Distressed sales have taken the leading edge of the pricing trend, and until the traditional buyers return, price appreciation and economic activity will continue to be muted in real estate related industries.

In a normal sales year, a homeowner sells their home and re-purchases a different home. In the transaction, capital changes hands and there is a “velocity of money,” as loans are originated, commissions are paid, and titles are insured. Further, home improvements are planned, painting and accessories are bought, and typically new furniture and electronics are bought to update the new home; thus the economy greatly benefits. This chain of events has been interrupted; jobs have been lost that are structurally not available. Roofers and framers need to be retrained; retail furniture space needs new utilization; loan officers, escrow officers, and real estate agents need new career paths for the next 12-24 months.

Furthermore, the relaxed underwriting standards of 2005-2007 have been replaced with guidelines that are far more stringent than may be necessary, as loans originated after 2009 have the lowest default rate in decades. Many underwriters are concerned a bad loan may be construed as an illegal loan, and credit score requirements have continually crept higher and higher – raising the bar to home ownership. Verifying information has always been sound business practice, however, the knee-jerk reaction from the far-too-relaxed standards of the bubble years may have driven far too stringent standards in today’s lending practices.

If the economy continues to improve, consumer debt will continue to be reduced, lenders’ reserves will grow, and eventually standards will loosen – qualifying more and more potential buyers to enter the housing market. The time restrictions mandated by Fannie Mae will expire and millions of buyers will become eligible to buy. Look for flat prices through 2011 and abundant potential properties through the second quarter. However, as properties are slowly cleared, fewer will enter the market. Toward year end, the first wave of penalized buyers will start to become eligible and will compete with investors for properties. By 2012, enough former home owners may become buyers to squeeze the investors out of market dominance. When owner occupied sales regain their dominance in mid-2012, true appreciation should result with prices recovering until the next recession.

Thank You Mr. Bernanke

Published Feb 18, 2011

Thank God for Ben Bernanke! There is a black hole in the Sands and Chairman Bernanke is keeping the event horizon at bay. Lenders are bleeding capital in the Sand States of California, Nevada, Florida, and Arizona. These are the lenders that provided the money for buyers to feed the Real Estate Bubble; they are guilty of “excessive exuberance”.

Many of the loan programs in hindsight were pure folly; guaranteed to fail. However, the lenders lent the money. They did not: recommend or guide the borrowers to any particular loan program from a full menu of loan products; they did not suggest the borrowers misstate their income or outright lie; they did not recommend owner occupied loans when the property was an investment purchase. They just lent the money. The ultimate lenders never met the borrower, they just lent the money.

Thousands of properties are sold each month with a huge loss to the lender. Investors are reaping enormous potential rewards at the expense of the lender. Many homes are bought below replacement prices; prices so low the builders and Housing Starts are struggling because they are finding it difficult to compete with distressed properties. Lenders need to clear the balance sheets and rid themselves of non-performing or at-risk loans. They are looking toward the future. Astute investors are also looking toward the future while they collect their monthly cash flow.

A typical short sale transaction involves a property sold at 40-60% of former value… a terrific bargain. The short sale property was probably sold by a seller that may have scraped together 3-10% of the 2005-2007 purchase price as down payment; the lender provided the balance. A home sold today for $80,000 in Surprise, Arizona, a suburb of Phoenix, is typical. The home was likely purchased for $200,000 in 2005 with a loan balance of $180,000. The lender will not only lose the difference between the loan amount and the new purchase price, but also has incurred all of the cost of sales, which usually nets the lender about 80% of the new discounted sales price… a net of approximately $64,000. That’s a loss of $116,000 in just 5 years. That money disappears! There is no velocity of money from that transaction. Instead, it is a contraction of credit. Capital is lost! This is only one transaction of thousands structured the same way.

This is a Capitalistic Economy; money is the fuel. Banks and lenders have lost huge sums of capital through this correction in value. How is this money replaced? Billions upon billions of dollars need replacing. The Federal Reserve has: allowed the lenders to borrow at less than 0.25%, and lend to borrowers and even back to the Federal Reserve at 2.5% to 4%; been buying US Treasuries and earning interest; replacing lost capital and re-liquefying the system; and expanding its balance sheet. Without this extra capital, the US Economy and the Global Economy would have failed. The correction is still unfolding and thought by many to be two-thirds to three-quarters of the way through.

Beyond 2010 will be the recovery in prices; probably a slow recovery for the next 18-24 months to correct the excesses in housing. There should be no statistical inflation until the correction has run its course, as the losses in housing offset rising prices elsewhere. No one will know the day the correction ends until well after the fact. The Federal Reserve will continue adding liquidity to ensure the recovery, adding until inflation ignites. In 18-24 months, the credit contraction will have run its course and the capital will start to flow.

Once the losses start to diminish, there will be velocity of money as surpluses start to develop. There should be inflation in other segments of the economy such as food and energy, services, taxes, etc., before housing prices start to rebound. Rents should start to rise prior to any recovery as supply tightens. With housing starts at such low levels, any sign of recovery will fuel higher rents as household creation expands. Many believe there has never been a situation where a central bank has been unable to cause inflation. It is a matter of time, and housing will benefit greatly.

There is probably another wave of properties yet to be liquidated. As employment finally starts to gain traction, there will be fewer. However, there still exists a window to position a portion of a portfolio as a wealth strategy or hedge against future inflation. Single family homes are in a clearance stage. Rents allow for a steady cash flow after all expenses and may be poised for a substantial increase. Should inflation ignite, which appears to be the ultimate goal of the Federal Reserve, housing in recovery mode will reward a patient real estate investor. Buy a rental or a vacation home and thank Mr. Bernanke.

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305 E. Wickieup Ln | Phoenix | $64,900
3 Bedroom | 1.75 Baths | Currently Leased $950/mo.
MLS#4539421

Inflationary Expectations

While inflationary expectations pervade, deflationary forces are still at work in the United States. The housing bubble, particularly evident in the “Sand States” of California, Nevada, Arizona, and Florida, has driven housing price decline of as much as 50%. In some areas, home values have declined to below replacement cost. Foreclosures have soared, and families as well as businesses have been disrupted and dislocated due the resulting huge loss of capital.

The housing correction has had consequences beyond just home values. As the values for homes have declined, many related factors have been affected. Insurance companies have lowered premiums for Homeowner and Landlord Policy Coverage due to lower labor and materials costs, as well as valuation changes of as much as 50%. As valuation has deteriorated, County Tax Assessors have reassessed properties, and cash starved governments are receiving lower tax revenues, exacerbating the local recession effects; conversely, individuals will benefit from lower real estate taxes. As the economy has cooled and the Federal Reserve aggressively lowered short-term rates to almost zero, intermediate-term rates collapsed, and long-term rates have dropped to historically low levels.

Fixed income investors experienced much lower income, yet consequently, any adjustable rate mortgage that has recently re-set has adjusted downward, resulting in lower monthly mortgage payments; any fixed rate re-finance has also benefited. The long-term rates for 30-year fixed rate mortgages have dropped from 6.5% to mid 5% or upper 4%, and with the base indexes of 1-Year Treasury, MTA, CofF, and LIBOR all under 1%, the typical margin is 2.75%. The new rate for adjusted and re-set loans will be the typical limit down of 2% below last adjustment rates. This brings a huge savings for the consumer and adds to the availability of spendable income.

Along with these savings, the actual cost of home ownership has dropped dramatically. As an example, a home purchased for $400,000 in 2006 can often be found today for $225,000. The monthly loan obligation has dropped from approximately $2800 to an unbelievable $1350; that’s over 50% savings! This reduction has also impacted residential rentals, as rental housing prices have followed the correction down. Rental rates never exploded with the bubble excesses of 30-60% price gains, but did enjoy consistent annual increases of 3-5%, loosely tracking the price of housing but lagging by 12-18 months. The recent developments have resulted in a decline in rent revenues, but the decline has been partially offset by the decline in taxes, interest rates, insurances, and material and labor costs. The economy is adjusting.

The deflation of oil prices and the adjustment of housing is a huge stimulus for the economy. The deleveraging of lenders has been underway for 18 months, and the loss of capital has been staggering. The Treasury and the Federal Reserve, along with most of the world’s central banks, have committed to a policy of replacing this lost capital and have increased the supply of money. The economy is adjusting; it is recovering! The new cycle is starting from a much lower and much better basis. Many of the excesses have been wrung out of the system.

“The economy is correcting… the economy is adjusting… it is healing…”

Unemployment is a lagging indicator and typically is an issue for 12-18 months after the economy has bottomed and started to recover. Many economists believe that point was reached in the May/June time frame of 2009. Although housing foreclosures will be an issue for the next 12 months and beyond, the brutal correction is working. I fully expect home price stabilization and population growth will bring the “Housing Crisis” to an end by the 4th quarter of 2010. The economy is correcting… the economy is adjusting… it is healing…

A new business cycle, although in its infancy, has begun, and by many accounts, less than 20% of the $13.6 trillion dollars of stimulant is in the system. The surprise to the economy should be the strength of the recovery, as banking system reserves are filled and lenders look for places to lend the extra trillions of dollars earmarked for the system. The new cycle will change concerns from deflation to fears of not 2% or 3%, or even 5% inflation, but pervasive double-digit inflation that will require investments that are different from today.

Just as rain is welcome to a parched and drought stricken region, capital and money supply is welcome and necessary for any economy to function. First the rain is first absorbed by the dusty earth, and then the deep aquifers begin to be replenished. As the rain continues to fall, the shallower wells begin to fill; trees sprout buds; and “green shoots” appear. The rain continues, and the “drought” is termedofficially broken. Farmers rejoice and fields are sown with crops. The aquifers are full; the wells are full; the large reservoirs are full. The drought has broken, much as deflation will give way to inflation. The forecast is for more and more rain… Commodities, tangibles, and real estate will give shelter from the “RAIN”.

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