The real estate blog.

Now that major lenders, especially in the subprime space, have declared bankruptcy or shuttered operations, more and more people are calling for a bailout of American homeowners with adjustable rate mortgages or payment option ARMs with negative amortization.

How likely is this to happen on a wholesale basis? Nobody knows for sure, but I have a few ideas and already we’re seeing them come into play.

1. It’s about to get political -

With the 2008 Presidential race heating up, candidates and the sitting President, are turning to housing as a pain point. Senator Chris Dodd is lobbying the Federal Reserve to do all it can including raising the amount of loans Fannie Mae and Freddie Mac, the government sponsored enterprises that manage the bulk of home mortgages,
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Subprime, subprime, subprime. That seems to be all we’re hearing about in the financial news lately. Does this mean that people with less than stellar credit can’t get a home loan any more? Far from it actually. While it’s true the 100%, no income, no asset, sub 600 scores of the past few years are gone, probably forever, borrowers with bad credit can still get a loan.

An extreme example is in an email I received a little while ago. This particular lender will loan to people with a credit score as low as 440, with bank statement income, 60% debt ratio and a rate in the mid 9% range. What’s the catch? They’ll only loan 70% of the value of the home and only for a refinance. That’s the extreme.

Other lenders will loan 90% for purchases and refinances with credit scores down to 520. Where subprime has really tightened up is in the stated income or no income type loans. They simply don’t exist any more.
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In a dramatic, yet anticipated move, the Federal Reserve Board cut its discount rate by half a percent. The discount rate is the cost of money for banks and lending institutions that borrow directly from the Fed. The new rate is 5.75%.

The discount rate is different from the overnight lending rate which impacts short term mortgage rates, auto loans, credit cards and savings account rates. The Fed left the overnight lending rate steady in its last meeting August 7th.

Since that meeting the Fed has had to inject billions of dollars into the money supply to keep the overnight lending rate at 5.25%. This has been a result of banks across the country hoarding cash and diminishing the money supply. In Europe the same thing has happened with the European Central Bank injecting hundreds of billions of euros into the system.
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Despite greater pressure from the economic community and current economic trends, the Fed continued to hold short term interest rates at their current level, 5.25%.

The Fed is really in a tight spot right now because so much market movement is simply tied to speculation of what the Fed will do in the future. If the Fed begins to lower rates, that is an admission the economy is doing poorly and could spark huge stock sell-offs and further tightening of credit.

On the other hand, raising rates would signify inflation is a bigger concern than the struggling housing market and would also decrease the amount of buyers who could qualify for a home. Either move could set off an economic snowball that would be bad for everyone.

Right now the safe move and smart move
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One can hardly go a day without hearing about additional fallout from the subprime mortgage market that is now affecting prime loans for residences as well as, commercial and business credit.

The recent reaction by the Central bank of the European Union and the Federal Reserve of the United States even scare economic bulls like me.

In the case of Europe, an additional $130 billion was made available to the banking system and quickly gobbled up by banks to hold. After the FOMC meeting on Wednesday, the Fed pumped $24 billion in currency that was just as quickly consumed by nervous banks.

Meanwhile, fear of money drying up is causing Wall Street to move into speculative overdrive. The Dow has lost almost 800 points in the last three weeks.

What is
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Park City has to be one of the most amazing resort towns in the West. Like the rest of the West, this little resort town famous for it’s high altitude, skiing, legacy Olympic venues and the Sundance Film Festival has grown exponentially over the past decade.

Every year I like to come up for the Park City Arts Festival which closes off Main street for a weekend each August. Normally I pay attention to the art and food. This year, I focused on real estate.

The amount of construction, both commercial and residential is quite astounding. The two houses at the base of the mountain in the photo are newly built complete with heated driveway systems being installed.

As you may imagine, real estate here is not cheap. I looked at a decent sized condo in Kimball Junction last year that was priced at $500k for about 1700 s.f. Houses like these overlooking Main St. Park City are much more.
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This year has quickly passed us by and with the release of 2nd quarter house values today, I thought I’d revisit some of the predictions I made in January about the Utah real estate market.

Back then, a CNN article predicted that in the West, Albuquerque would be the highest city with appreciation. Year to date, it’s Salt Lake City.

The CNN and Moody’s article was very conservative, showing a high single digit appreciation rate in Salt Lake. I was a little more optimistic with a low double digit increase of 10-12%. Current numbers year to date show appreciation in Salt Lake in the low 20% range. In the second quarter, Salt Lake led the nation in both single family homes and condos with 21.9% appreciation.

What gives? Housing bears and commenters on this site
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I put a premium on making things happen and getting things done. If I compare a bunch of B+ deal that I can actually get done vs. an A+ deal that doesn’t close guess which one I prefer?

This is a philosophy that I’ve learned over time, and one that doesn’t really jive too well with my background as an Army officer and my academic training as an engineer – two disciplines where finding the right solution is pretty darn important. So this is something that I have to work at.

This extends to the way that I deal with people. Real estate, at the end of the day, is all about people. Yeah there’s financing, and strategies and technical know-how, but at the end of the day it’s all about you and the person sitting across the table from you – whether she’s a contractor, a Realtor, or a buyer.

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Real estate investors have a problem in that the general market is geared squarely toward the needs of the standard homebuyer; us investors often feel like square pegs trying to fit into round holes.

The relationship between investors and real estate agents is a weird one. I have a long-term relationship with an agent that’s based primarily on loyalty and trust; I know she’ll take care of me and get the details taken care of, and she knows I’ll be back. I don’t get a lot of useful advice and she never brings me a deal, but she helps make sure I get the work done. So, generally speaking, when I’m buying a property or looking for a tenant I’ll often work with her.

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The subprime meltdown, high energy prices and higher food costs have been dominating economic news lately. It was easier to dismiss when other indicators like the stock market and employment were doing well. Since last week when the Dow shed over 600 points, the negative news is starting to gain more traction.

While there are problems out there, the catalyst to a 1970’s style economic catastrophe, is interest rates. Do you know what they’re doing? They’re going down significantly. The benchmark 10 year bond market which is most closely tied to long term mortgage rates has shed over 30 basis points since last week. Like a golf score, the lower the bond rate, the better it is for borrowers. For investors, a lower yield equals lower returns.

Short term interest rates are
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