By Amanda Gengler, writerApril 1, 2010: 10:37 AM ET
(Money Magazine) -- The drama is nearly over. After a decade of extremes -- the ebullient highs of the real estate boom, then the devastating lows of the bust -- calmer forces are beginning to prevail in the housing market.
The big fall-off in home values, which has taken the median price of a house down almost 30% since 2006, looks to be in its final stages in most places: Three-quarters of the nation's 384 metropolitan areas will see prices down less than 5% a year from now, according to projections from Fiserv and Moody's Economy.com; 10% seem poised for modest increases. Meanwhile, Uncle Sam is lending a steadying hand with programs designed to prop up the market -- at least for a while yet.
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In this quieter environment lie new challenges and opportunities for homebuyers, sellers, owners, and investors. For the first time in years you aren't completely at the mercy of market forces: You can really affect how much you make (or lose).
To come out on top, though, you need to understand the key trends shaping the shifting market. You'll find them outlined below, along with smart moves that should help you exploit them.
1. Distressed properties will keep prices under pressure.
For a while last year it might have seemed as if the long-awaited housing recovery was just about here. Home prices stopped falling in spring, and have stayed fairly stable since, according to the Case-Shiller housing index. Sales rose from their recessionary lows, and inventories came down from their highs.
But the pickup turned out to be short-lived. Sales of existing homes dropped sharply in January from the previous month, and inventories crept back up. Economists predict that the national median price for a single-family home will dip another 5% to 10% before finally bottoming by year-end or early 2011.
Place much of the blame squarely on the glut of distressed properties spilling onto the market. More than 3 million homes are expected to get foreclosure notices this year, according to RealtyTrac, a foreclosure listing website, as job losses strain with their mortgage payments.
In addition, one in every four homeowners with a mortgage now owes more on that loan than the house is worth. A growing number of these owners are making a strategic decision to default -- 18% of delinquent borrowers were purposely behind, according to a recent study by Experian and Oliver Wyman. They're choosing to walk away rather than pour money into a home that will take years to regain its value.
0:00 /3:10Homeowners walking away
Meanwhile, short sales -- when a lender agrees to let a homeowner sell for less than he owes -- are also expected to spike, reports Moody's Economy.com. Contributing to the jump: a streamlined approval process and a new government program that gives servicers financial incentives to arrange short sales instead of foreclosing on a troubled property.
Your move.
If you're in the market for a new home, you may be tempted by the low prices on bank-owned properties, which are going for about 30% less than seller-owned homes. But be prepared to come in with a hefty down payment (at least 20% to 25%) to compete with investors offering banks all-cash or significant cash deals.
Be aware too that many of these homes need serious repairs, and you don't always have a chance to check them out before bidding. If you can't get a thorough inspection, walk away. And don't focus on short sales if you have to move quickly. Last year such transactions often took as long as six months. While some banks have streamlined the process, you can't count on a speedy deal.
But you don't have to take on the risks of a distressed property to nab a bargain. If you're shopping in an area with a growing number of foreclosures, use that fact to wring price concessions from owners anxious to sell. And ask the homeowner to fix anything wrong with the house flagged in the inspection, or to give you a discount to account for it.
Hoping to sell your house this year? Don't try to compete with repossessed properties on price. Instead, play up your advantages: a home in move-in condition (get your house inspected and do the repairs before you list it) and the possibility of a quick deal. To reassure prospective buyers that they're not getting a lemon, advises Pat Lashinsky, CEO of the online brokerage ZipRealty, toss in a one-year home warranty that will pay to fix problems like a broken furnace or hot-water heater. Cost: about $350.
2. Big homes are lagging small ones in the recovery.
Rushing to take advantage of what was then the expiring federal tax credit for first-time buyers, newcomers accounted for 50% of sales in October and November vs. 31% a few months earlier. That's helped stabilize prices on smaller, more affordable homes.
But the market for larger, more expensive homes is hurting. The inventory of homes for sale priced at $750,000 to $1 million is now 20 months, vs. 11 months for homes in the $100,000 to $250,000 range, the National Association of Realtors reports. Many people don't feel comfortable making a large financial commitment these days, and fewer can meet stricter standards for the jumbo loans often needed to buy these homes. Shifting tastes are also a factor.
"If you asked someone 10 or 15 years ago what they wanted in a house, the reply likely would have been 'space, space, space,' but not anymore," says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard. In response to dwindling demand for bigger residences, the median size of a new home shrank to 2,100 square feet in 2009, down from 2,300 three years ago, the National Association of Home Builders says. Size typically dips in a recession, but Retsinas believes this time the trend will stick beyond the recovery.
"Americans now view their home primarily as a place to live, not as an investment," he says. "They're willing to give up some room for shorter commutes and lower energy bills."
Your move
Trade-up buyers who want bigger houses will find the best deals this year. The big question is when to make your move. Act swiftly if prices are already stabilizing in your area (go to cnnmoney.com/realestate2010 for price projections for the country's 384 metropolitan areas). Otherwise, hold off for a few months if you can, in anticipation of further price drops, since the high end of the market will be especially hard hit.
Whenever you make your move, base your bid on comparable sales over the prior 60 days rather than the home's list price. Coming in 5% to 10% lower than the comps is a smart starting point, says Ellen Klein, a realtor in Rockaway, N.J.
If you want to sell a big house, try to unload your property quickly before prices dip further. Setting the right price at the outset is key: If you go too high, many buyers won't even look, knowing you'll probably have to go lower later. "One price reduction is okay, but when you start to see multiple reductions, it raises a red flag," says Ken Shuman of Trulia.com.
Are homes in your area affordable?
You may be able to expedite a sale with aggressive pricing, listing your home for slightly below what comparable homes have sold for in the past couple of months. Another ploy to attract more traffic: Offer a larger cut -- say, 3.5% vs. 3% -- to the buyer's agent. True, you'll pay a little more in total commissions. But that's preferable to having to lower your price by 5% to 10% later if your house doesn't sell.
As for smaller homes, investors and first-time buyers will have a tougher time finding deals. Homes in good locations are getting multiple bids and are often selling above the listing price, says Alan Wagner, a Sacramento realtor. So if you find a house you love, don't bid less than similar homes have sold for in the past two months. You can find the median difference between listing and sales prices in your area at zillow.com under Market Reports.
3. Mortgage rates will rise as Uncle Sam exits the market.
Say goodbye to the lowest mortgage rates in about 50 years. For the past 16 months the Federal Reserve has helped keep rates low -- around 5% for a 30-year loan -- by purchasing mortgage-backed securities. But that program was scheduled to end in March, and private investors aren't expected to step in to fill the void at the same low rates. As a result, the consensus among economists is that rates will climb to between 5.3% and 6% by year-end. "It will be a gradual rise," says Mark Zandi, chief economist at Moody's Economy.com. "If rates spike, the Fed will get back into the market."
One exception to the rising-rate outlook: Rates on jumbo mortgages (typically loans larger than $417,000, but up to $729,750 in some high-cost areas) are expected to hold steady at 6% or so. That's because the government wasn't propping up the jumbo market, so these loans won't be affected much by the Fed's exit.
Your move
Here's the dilemma if you're in the market for a new home: Do you move quickly to lock in low rates, or would you be better off waiting?
For anyone who is house hunting in the majority of areas where prices are expected to drop 5% or less, locking in low rates now will probably be more valuable.
See home price forecasts in your state
Consider this: Taking out a $300,000 30-year loan at 5% today will cost $1,610 a month. Wait until the end of the year, and maybe you can land the house for $15,000 less. But by then rates may have climbed to 5.75%, so your monthly payment will be $50 more, and you'll pay almost $34,000 more in interest over the life of the loan.
For homeowners, the decision is much clearer. If today's rates are at least one point below your current loan, or you have an adjustable rate and plan to stay put for at least five years, refinance pronto. On a $300,000 30-year loan, shifting from a 6% rate to 5% could cut your payments by $300 a month.
4. Financing for condos, second homes, and jumbo loans are especially tough to get.
To qualify for a new mortgage at the lowest rates, however, you'll have to meet some stiff requirements. You'll need at least 10% down or 10% equity in your home and a credit score of 720 or higher; your mortgage, insurance, and property taxes shouldn't exceed 31% of your gross income; and no more than 41% can go to paying debts of any kind.
Exceptions: You usually need only 3.5% down for an FHA loan, and can refinance with less than 10% equity through the HARP program. (Makinghomeaffordable. gov has details.)
The standards are even more onerous for anyone buying a condo or a vacation or investment home, or who will need a jumbo. Many banks will approve a condo loan only if the building is at least 70% occupied by owners, which is often problematic for new construction. Meanwhile, jumbo borrowers and investors must often put 30% to 35% down. "These loans are often riskier, so lenders make you jump through more hoops to get one," says Keith Gumbinger of HSH Associates, a mortgage publishing website.
Your move
Don't even think about shopping for a new home without being pre-approved for a mortgage. You don't want to fall in love with a house only to discover you don't have enough cash for the down payment the bank requires or you fail to meet some other requirement. Plus, most sellers and realtors won't even work with you unless they're sure you'll qualify for financing.
If a bank turns you down, try other lenders. Local banks and credit unions may be more lenient about whom they approve and often offer better rates than national banks. Can't prove income because you're self-employed or rely heavily on commissions? Apply at the bank where you have business or personal accounts; familiarity may help the lender get to yes. Buyers in the market for a condo should also make sure to research the association's financial health and the building's occupancy rate.
5. Buyers, rushing to beat the tax-credit deadline, will set off a flurry of spring deals.
One more reason prospective buyers and sellers may be tempted to move quickly: the looming expiration of valuable tax credits that have been dangled by Uncle Sam to spur sales.
Homeowners who move can get up to $6,500, first-time buyers as much as $8,000, as long as they have a joint income of less than $245,000 (or $145,000 for singles). But there isn't much time left to act because buyers must be under contract on the new home by April 30 and close by June 30 to qualify for the credit.
Look for transactions to pick up as the deadline nears. When the credit for first-time buyers was originally set to expire last November, sales surged in the three months before the cutoff. Experts expect a similar pattern this spring.
Your move
If you're looking to buy a home in an area where prices are still expected to fall more than 5% over the next year, don't rush to purchase just to get the tax break -- a substantial drop in home prices in your desired town could more than offset the value of the credit. Otherwise, strictly from a price standpoint, there's no reason not to house hunt in earnest in case you find a place you love and can afford by the government deadline.
But homeowners hoping to buy have to consider another factor: how long it will take you to sell the place you live in now, since the cost of carrying two properties would quickly offset the credit. To avoid that double whammy, you'd need to unload your house in less time than the 110 days or so that the average home is now on the market. (Find out how long it's taking to sell homes in your area at zillow.com; click on Market Reports.)
Of course, the anticipated pickup in traffic among prospective buyers does enhance the prospect of a quick sale. But you'll have to move fast to get your house listed, and be prepared to negotiate a speedy deal.
6. Going green this year can save you more money.
Hoping to save the earth and a few extra bucks while you're at it? Well, the payback on energy-saving home improvements recently got a whole lot sweeter, thanks to a government program that extended and expanded tax breaks that had been scheduled to expire for those upgrades. You can get a federal credit for 30% of the cost of products like highly energy-efficient heating and air-conditioning systems, windows, and insulation up to $1,500 for 2009 and 2010 combined. (For details on the available tax credits, go to ase.org.)
Your move
To figure out which upgrades will save you the most, do an energy audit to identify your biggest leaks. Ask your utility company if it offers this service free (many do) or DIY using the kit at energysavers.gov. Sealing leaks and adding insulation, including in your attic and basement, typically provide the best bang for your buck.
And keep your eyes open for other incentives from Uncle Sam. In March, President Obama outlined an idea for a new program that would give homeowners even larger rebates right at the cash register for renovations that boost energy efficiency. More greenbacks for going green could be a deal you won't want to miss
Sunday, April 18, 2010
Sunday, March 14, 2010
From Robert Kiyosaki's book Conspiracy of The Rich
The Root of All Evil
Is the love of money the root of all evil? Or, is it the ignorance of money?
What did you learn about money in school? Have you ever wondered why our school systems do not teach us much—if anything—about money? Is the lack of financial education in our schools simply an oversight by our educational leaders? Or is it part of a larger conspiracy? Regardless, whether we are rich or poor, educated or uneducated, child or adult, retired or working, we all use money. Like it or not, money has a tremendous impact on our lives in today's world.
Changing the Rules of Money
In 1971, President Richard Nixon changed the rules of money: Without the approval of Congress, he severed the U.S. dollar's relationship with gold. He made this unilateral decision during a quietly held two-day meeting on Minot Island in Maine, without consulting his State Department or the international monetary system.
President Nixon changed the rules because foreign countries being paid in U.S. dollars grew skeptical because the U.S. Treasury was printing more and more money to cover our debts, and they began exchanging their dollars directly for gold in earnest, depleting most of the U.S. gold reserves. The vault was being emptied because the government was importing more than it was exporting and because of the costly Vietnam War. As our economy grew, we were also importing more and more oil.
Is the love of money the root of all evil? Or, is it the ignorance of money?
What did you learn about money in school? Have you ever wondered why our school systems do not teach us much—if anything—about money? Is the lack of financial education in our schools simply an oversight by our educational leaders? Or is it part of a larger conspiracy? Regardless, whether we are rich or poor, educated or uneducated, child or adult, retired or working, we all use money. Like it or not, money has a tremendous impact on our lives in today's world.
Changing the Rules of Money
In 1971, President Richard Nixon changed the rules of money: Without the approval of Congress, he severed the U.S. dollar's relationship with gold. He made this unilateral decision during a quietly held two-day meeting on Minot Island in Maine, without consulting his State Department or the international monetary system.
President Nixon changed the rules because foreign countries being paid in U.S. dollars grew skeptical because the U.S. Treasury was printing more and more money to cover our debts, and they began exchanging their dollars directly for gold in earnest, depleting most of the U.S. gold reserves. The vault was being emptied because the government was importing more than it was exporting and because of the costly Vietnam War. As our economy grew, we were also importing more and more oil.
Saturday, February 27, 2010
Duck! Watch out for falling home prices
NEW YORK (CNNMoney.com) -- Despite signs that the real estate market might be lurching forward, prices are expected to fall further this year and next.
The average home price in the United States will fall by about 6% by September 2011, according to a joint report between Fiserv and Moody's Economy.com. And that's after plunging more than 27% in the past three years.
Most of the projected home price decline will occur during the usually slow summer months of 2010. After that, prices should begin to stabilize, according to Fiserv, and stay almost flat through fall of 2011.
The main reason for continued decline, according to Mark Zandi, economist and co-founder of Economy.com, is foreclosures -- the same thing that's plagued markets for the past three years.
"Foreclosure sales will pick up this spring as mortgage servicers figure out who can qualify for a modification and who can't," said Zandi.
He figures there are at least 4.5 million mortgage loans either in foreclosure or clearly headed in that direction. When that additional inventory hits the market, it will provide numerous choices for buyers and encourage sellers to drop their listing prices.
Check the home price forecast in your city
The end of two federal programs, which have been propping up markets, will also tamp down prices.
The Federal Reserve has been purchasing mortgage-backed securities since early 2009, scooping up as much as $1.25 trillion worth. That has dampened rate increases by providing a ready market for the securities. But the Fed's program lapses on March 31, when it cedes the playing field to private investors, who will almost surely demand higher rates.
Any resulting rise in rates will cause some buyers to withdraw from the market and others to look for lower priced homes. Either way, demand for homes drops and so do prices.
A month after the Fed bows out of the mortgage-buying market, the homebuyer tax credit will start to expire. To qualify for the $8,000 credit, homebuyers must sign a contract before April 30 and close by June 30. When the first date passes, many buyers are expected to vacate the market, weakening the demand for homes.
In a broader sense, home prices are ultimately decided by employment. "If [the job market] improvement is stronger than expected, prices will get better. If it's weaker than expected, prices will be worse," Zandi said.
Worst of the worst
The worst performing market will be Miami, Fla. Moody's projects prices there to drop a heart-stopping 29.2% by Sept. 30. That follows a 47.7% decline the metro area recorded in the past three years. Grand total: 64% drop.
Other disastrous performances will be turned in by the Hanford, Calif., metro area, where prices are projected to plummet 27.2% through Sept. 30, 2010 following their 36.9% drop for the previous 36 months. Ft. Lauderdale and West Palm will also register steep drops.
There's some good price news coming out of California's Central Valley for a change; prices will begin to emerge from their free fall toward the end of this year.
In Merced, for example, which crashed and burned by 71.8% in the past three years (through last September), they'll only fall only another 6.2% in the next six months before bouncing back with a rise of 10.1% by Sept. 30, 2011.
The average home price in the United States will fall by about 6% by September 2011, according to a joint report between Fiserv and Moody's Economy.com. And that's after plunging more than 27% in the past three years.
Most of the projected home price decline will occur during the usually slow summer months of 2010. After that, prices should begin to stabilize, according to Fiserv, and stay almost flat through fall of 2011.
The main reason for continued decline, according to Mark Zandi, economist and co-founder of Economy.com, is foreclosures -- the same thing that's plagued markets for the past three years.
"Foreclosure sales will pick up this spring as mortgage servicers figure out who can qualify for a modification and who can't," said Zandi.
He figures there are at least 4.5 million mortgage loans either in foreclosure or clearly headed in that direction. When that additional inventory hits the market, it will provide numerous choices for buyers and encourage sellers to drop their listing prices.
Check the home price forecast in your city
The end of two federal programs, which have been propping up markets, will also tamp down prices.
The Federal Reserve has been purchasing mortgage-backed securities since early 2009, scooping up as much as $1.25 trillion worth. That has dampened rate increases by providing a ready market for the securities. But the Fed's program lapses on March 31, when it cedes the playing field to private investors, who will almost surely demand higher rates.
Any resulting rise in rates will cause some buyers to withdraw from the market and others to look for lower priced homes. Either way, demand for homes drops and so do prices.
A month after the Fed bows out of the mortgage-buying market, the homebuyer tax credit will start to expire. To qualify for the $8,000 credit, homebuyers must sign a contract before April 30 and close by June 30. When the first date passes, many buyers are expected to vacate the market, weakening the demand for homes.
In a broader sense, home prices are ultimately decided by employment. "If [the job market] improvement is stronger than expected, prices will get better. If it's weaker than expected, prices will be worse," Zandi said.
Worst of the worst
The worst performing market will be Miami, Fla. Moody's projects prices there to drop a heart-stopping 29.2% by Sept. 30. That follows a 47.7% decline the metro area recorded in the past three years. Grand total: 64% drop.
Other disastrous performances will be turned in by the Hanford, Calif., metro area, where prices are projected to plummet 27.2% through Sept. 30, 2010 following their 36.9% drop for the previous 36 months. Ft. Lauderdale and West Palm will also register steep drops.
There's some good price news coming out of California's Central Valley for a change; prices will begin to emerge from their free fall toward the end of this year.
In Merced, for example, which crashed and burned by 71.8% in the past three years (through last September), they'll only fall only another 6.2% in the next six months before bouncing back with a rise of 10.1% by Sept. 30, 2011.
Sunday, February 21, 2010
Real Estate Looks Risky, but Less So for Bargain Hunters
By PAUL SULLIVAN
Published: February 19, 2010
EVEN a cursory glance at recent events in commercial real estate would make you think the next big collapse is upon us.
Skip to next paragraph
Chester Higgins Jr./The New York Times
Thomas N. Bohjalian of Cohen & Steers sees opportunities in real estate investment trusts.
Wealth Matters
Paul Sullivan writes about strategies that the wealthy use to manage their money and their overall well-being.
Chester Higgins Jr./The New York Times
David Frame of J. P. Morgan Private Bank tells investors to be sure that “ ‘bad’ is priced in.”
First, there was the default last month by Tishman Speyer Properties and BlackRock Realty on billions of dollars in loans on Stuyvesant Town and Peter Cooper Village, the huge apartment complexes in Manhattan. When the deal was done, in 2006, it was the biggest of its kind in American history.
And this week, Simon Properties tried to buy General Growth Properties, its shopping mall rival, for $10 billion, a price General Growth says is too low even though the company is in bankruptcy.
Yet in the midst of this, financial advisers are telling their wealthy clients that there is tremendous opportunity in real estate. What is equally intriguing is that these investors are looking again at something as illiquid as a building, which goes to show just how quickly people can reacquire their appetite for risk if it means higher returns.
“The trick with investing in commercial real estate is not knowing if something is bad, but knowing if that ‘bad’ is priced in,” said David Frame, global head of alternative investments at J.P. Morgan Private Bank.
The next few years are expected to be bad for commercial real estate largely because the rosy predictions made when the buildings were purchased in 2005 and 2006 have not come true. First, the values of those buildings have plummeted, as much as 45 percent in some instances. That is going to make it difficult for the owners to refinance their mortgages over the next few years. Second, the recession has reduced the rents and occupancy rates on which those inflated values were based.
But what’s bad for an owner may be good for an investor.
STATE OF PLAY The opportunities in commercial real estate run the gamut of risk, from buying undeveloped land to buying stock in real estate investment trusts, or REITs, which invest in property and mortgages.
Mike Ryan, head of wealth management research for the Americas at UBS Wealth Management, said while there were risks in commercial real estate, they would not be as bad as many bearish analysts had predicted and certainly not on the level of the residential real estate crash.
“The notion that the other shoe is about to drop and we’ll see a wholesale liquidation of property is overdone,” he said. But, he added, “We’re not saying people should plow in.”
Yet Mr. Frame said he saw the coming refinancing crisis in commercial real estate as a continuum of what has been happening with other securities in the last 18 months. “Our job has been to look through the capital markets and identify where there’s been a scarcity of capital,” he said, meaning where investors sold their positions quickly and fearfully. The first opportunities to take advantage of a turnaround were with convertible bonds and private equity. “Now,” Mr. Frame said, “we think the opportunity in real estate is much broader than it was 12 months ago.”
OPTIONS So how are people seeking to profit in commercial real estate? This depends on whether they are passive investors, who want to allocate some money to real estate, or entrepreneurs seeking to buy buildings.
Many investors who did not make their fortunes in real estate remain cautious. “You have to help them view real estate as private equity because you’re locking up your money for some period of time,” said Joanne Jensen, a private banker at Deutsche Bank Private Wealth Management.
But if they’re going to invest in real estate, they want the security of high-quality investments. “I’m speaking to a lot of real estate investors, and what they’ve been telling me is there’s been a bifurcation between the ‘A’ quality buildings and everything else,” Ms. Jensen said.
One intriguing strategy is to buy the underlying mortgage debt of buildings whose value was inflated. The debt is now trading at a deep discount. This may sound risky, particularly if the owner walks away from that debt, as happened with Stuyvesant Town. But Mr. Frame sees it as a way to make either a little or a lot of money.
He described one possibility: a building was purchased for $100 million in 2006. It is now worth less, but the underlying mortgage is still $50 million, and it is coming due next year. The owner is probably going to have a tough time refinancing the mortgage without putting in more money. That uncertainty is reflected in the price of the debt.
“Say it’s 70 cents on the dollar, or $40 million for the first-lien mortgage,” he said. “If, in the next year, I get paid off, I get a 12 percent return. If not, I own the building at 60 percent off the original purchase price.”
In many cases, he said, clients are hoping they do not get paid back because the return from owning the building could be far greater. But the risk is they may have to hold that property for at least several years.
Some of his other ideas carry the same caveat: they require time. In this category, he included buying land prepared for developments that have stalled or buying loans from the Federal Deposit Insurance Corporation. The agency acquired these from banks and has bundled them into packages to be sold off.
Hotels are one area in which the investment turnaround could come faster. Their occupancy rates plummeted in the recession, and many were further hurt by having too much debt. “The most upside can come from hotels, if we get an uptick in the economy,” Mr. Frame said. “But the risk is high.”
Still, he said he believed that all these seemingly risky investments were actually predicated on caution. “We’re not taking an optimistic view of the recovery,” he said. “As long as it doesn’t get dramatically worse, we’ll be O.K.”
REIT stocks are a more liquid alternative. They went through their own steep decline last year. In March 2009, REIT stocks were down 75 percent from their February 2007 high, according to the leading REIT index. The index had rebounded to half of its peak, but REIT stocks slid again after the Federal Reserve raised its lending rate to banks on Thursday. This is not necessarily a bad thing for long-term investors.
“We think REITs are trading roughly at the net-asset value” of the properties they own, said Thomas N. Bohjalian, a portfolio manager at Cohen & Steers, a real estate investment firm. “And that is not the ceiling; it’s the floor.”
What is more significant than stock price, he said, is Cohen & Steers’s prediction that dividends on REIT stocks will grow by an average of 12 percent over each of the next five years. REITs are legally required to pay out 90 percent of their taxable income annually. In flush times, they were paying out a good portion of their cash flow as well. As income from REIT-owned properties rebounds, so will the dividends.
CAUTION All these investment ideas are predicated upon patience and a healthy stomach for risk. With REITs, for example, Mr. Bohjalian said he did not expect double-digit dividend growth to start until 2011.
This patience works two ways. Ms. Jensen has several clients who have made their fortunes in real estate but have struggled to find properties at the discounts they expected. “They’re not willing to do a deal that doesn’t make sense,” she said.
That may be a good mantra for any investor.
Published: February 19, 2010
EVEN a cursory glance at recent events in commercial real estate would make you think the next big collapse is upon us.
Skip to next paragraph
Chester Higgins Jr./The New York Times
Thomas N. Bohjalian of Cohen & Steers sees opportunities in real estate investment trusts.
Wealth Matters
Paul Sullivan writes about strategies that the wealthy use to manage their money and their overall well-being.
Chester Higgins Jr./The New York Times
David Frame of J. P. Morgan Private Bank tells investors to be sure that “ ‘bad’ is priced in.”
First, there was the default last month by Tishman Speyer Properties and BlackRock Realty on billions of dollars in loans on Stuyvesant Town and Peter Cooper Village, the huge apartment complexes in Manhattan. When the deal was done, in 2006, it was the biggest of its kind in American history.
And this week, Simon Properties tried to buy General Growth Properties, its shopping mall rival, for $10 billion, a price General Growth says is too low even though the company is in bankruptcy.
Yet in the midst of this, financial advisers are telling their wealthy clients that there is tremendous opportunity in real estate. What is equally intriguing is that these investors are looking again at something as illiquid as a building, which goes to show just how quickly people can reacquire their appetite for risk if it means higher returns.
“The trick with investing in commercial real estate is not knowing if something is bad, but knowing if that ‘bad’ is priced in,” said David Frame, global head of alternative investments at J.P. Morgan Private Bank.
The next few years are expected to be bad for commercial real estate largely because the rosy predictions made when the buildings were purchased in 2005 and 2006 have not come true. First, the values of those buildings have plummeted, as much as 45 percent in some instances. That is going to make it difficult for the owners to refinance their mortgages over the next few years. Second, the recession has reduced the rents and occupancy rates on which those inflated values were based.
But what’s bad for an owner may be good for an investor.
STATE OF PLAY The opportunities in commercial real estate run the gamut of risk, from buying undeveloped land to buying stock in real estate investment trusts, or REITs, which invest in property and mortgages.
Mike Ryan, head of wealth management research for the Americas at UBS Wealth Management, said while there were risks in commercial real estate, they would not be as bad as many bearish analysts had predicted and certainly not on the level of the residential real estate crash.
“The notion that the other shoe is about to drop and we’ll see a wholesale liquidation of property is overdone,” he said. But, he added, “We’re not saying people should plow in.”
Yet Mr. Frame said he saw the coming refinancing crisis in commercial real estate as a continuum of what has been happening with other securities in the last 18 months. “Our job has been to look through the capital markets and identify where there’s been a scarcity of capital,” he said, meaning where investors sold their positions quickly and fearfully. The first opportunities to take advantage of a turnaround were with convertible bonds and private equity. “Now,” Mr. Frame said, “we think the opportunity in real estate is much broader than it was 12 months ago.”
OPTIONS So how are people seeking to profit in commercial real estate? This depends on whether they are passive investors, who want to allocate some money to real estate, or entrepreneurs seeking to buy buildings.
Many investors who did not make their fortunes in real estate remain cautious. “You have to help them view real estate as private equity because you’re locking up your money for some period of time,” said Joanne Jensen, a private banker at Deutsche Bank Private Wealth Management.
But if they’re going to invest in real estate, they want the security of high-quality investments. “I’m speaking to a lot of real estate investors, and what they’ve been telling me is there’s been a bifurcation between the ‘A’ quality buildings and everything else,” Ms. Jensen said.
One intriguing strategy is to buy the underlying mortgage debt of buildings whose value was inflated. The debt is now trading at a deep discount. This may sound risky, particularly if the owner walks away from that debt, as happened with Stuyvesant Town. But Mr. Frame sees it as a way to make either a little or a lot of money.
He described one possibility: a building was purchased for $100 million in 2006. It is now worth less, but the underlying mortgage is still $50 million, and it is coming due next year. The owner is probably going to have a tough time refinancing the mortgage without putting in more money. That uncertainty is reflected in the price of the debt.
“Say it’s 70 cents on the dollar, or $40 million for the first-lien mortgage,” he said. “If, in the next year, I get paid off, I get a 12 percent return. If not, I own the building at 60 percent off the original purchase price.”
In many cases, he said, clients are hoping they do not get paid back because the return from owning the building could be far greater. But the risk is they may have to hold that property for at least several years.
Some of his other ideas carry the same caveat: they require time. In this category, he included buying land prepared for developments that have stalled or buying loans from the Federal Deposit Insurance Corporation. The agency acquired these from banks and has bundled them into packages to be sold off.
Hotels are one area in which the investment turnaround could come faster. Their occupancy rates plummeted in the recession, and many were further hurt by having too much debt. “The most upside can come from hotels, if we get an uptick in the economy,” Mr. Frame said. “But the risk is high.”
Still, he said he believed that all these seemingly risky investments were actually predicated on caution. “We’re not taking an optimistic view of the recovery,” he said. “As long as it doesn’t get dramatically worse, we’ll be O.K.”
REIT stocks are a more liquid alternative. They went through their own steep decline last year. In March 2009, REIT stocks were down 75 percent from their February 2007 high, according to the leading REIT index. The index had rebounded to half of its peak, but REIT stocks slid again after the Federal Reserve raised its lending rate to banks on Thursday. This is not necessarily a bad thing for long-term investors.
“We think REITs are trading roughly at the net-asset value” of the properties they own, said Thomas N. Bohjalian, a portfolio manager at Cohen & Steers, a real estate investment firm. “And that is not the ceiling; it’s the floor.”
What is more significant than stock price, he said, is Cohen & Steers’s prediction that dividends on REIT stocks will grow by an average of 12 percent over each of the next five years. REITs are legally required to pay out 90 percent of their taxable income annually. In flush times, they were paying out a good portion of their cash flow as well. As income from REIT-owned properties rebounds, so will the dividends.
CAUTION All these investment ideas are predicated upon patience and a healthy stomach for risk. With REITs, for example, Mr. Bohjalian said he did not expect double-digit dividend growth to start until 2011.
This patience works two ways. Ms. Jensen has several clients who have made their fortunes in real estate but have struggled to find properties at the discounts they expected. “They’re not willing to do a deal that doesn’t make sense,” she said.
That may be a good mantra for any investor.
Property owners were overcharged
ByMichelle E. Shaw
Published: Feb 18, 2010
Briana Henry-Frisby and Rae Anne Harkness both own homes in DeKalb County, and both suspect they’re paying too much in property taxes. The fact that both work in the DeKalb tax commissioner’s office doesn’t actually help.
“Now is not the time to leave any money laying on the table, or anywhere,” Henry-Frisby said.
But she may well be leaving behind a tidy pile of cash when it comes to property taxes.
A report to be released today concludes that property owners in the five core metro Atlanta counties overpaid their property taxes by an average of $244 in 2009. And people who live in areas hard hit by foreclosures, as do Henry-Frisby and Harkness, overpaid by even more, says an analysis commissioned by the Atlanta Neighborhood Development Partnership.
AJC findings confirmed
The Atlanta Journal-Constitution in December reported that tens of thousands of homes across metro Atlanta were overvalued last year by county tax assessors, who didn’t adjust values sufficiently after the historic real estate collapse. Homeowners, the newspaper reported, were being taxed on values their property no longer held. The report today tends to confirm the AJC’s findings and also, for the first time, calculates an average overpayment.
John O’Callaghan, ANDP president, said the report focuses on property tax values from 2009 for neighborhoods with the highest foreclosure rates in metro Atlanta.
“What this does is give a picture of the average homeowner,” he said. “Some are underpaying and others are overpaying by a larger margin. We hope this data and research will lead to changes in the system.”
Calvin Hicks, chief assessor in DeKalb County, balks at the idea that people have “overpaid” taxes.
“County services still cost what they cost,” Hicks said. “So maybe it is that property [valuations] should have gone down, but the millage rate should have gone up. That still may have equaled the same amount of tax money, but coming from different directions.”
Hicks said foreclosures affect neighborhood values in different ways and said county officials are working on the best way to reflect those properties in future valuations.
ANDP’s report, prepared by Robert Charles Lesser & Co., breaks out the three ZIP codes with the most foreclosures in Clayton, Cobb, DeKalb, Fulton and Gwinnett counties and the average amount homeowners overpaid their taxes for 2009.
The study took sales values from the second half of 2008 and contrasted those numbers to the value the county set on the same property.
Analysts then calculated what the tax assessment would have been based on sales figures, compared to actual assessments on the same properties.
Ammo for appeals?
In the 15 ZIP codes with the most foreclosures, the average overpayment for 2009 was $491, the report says. Here are the ZIPs and the total estimated overpayment in each:
? Clayton: 30238, 30274 and 30296, $17 million overpayment.
? Cobb: 30168, 30127, and 30126, $8 million overpayment.
? DeKalb: 30038, 30058 and 30032, $16 million overpayment.
? Fulton: 30310, 30315 and 30331, $24 million overpayment.
? Gwinnett: 30039, 30045 and 30044, $17 million overpayment.
In DeKalb’s 30058, Henry-Frisby’s ZIP code, the average overpayment in 2009 was $391.
“There is a lot I can do with that money,” she said.
Harkness said she doesn’t have much hope of getting back the $513 ANDP’s report says was the average overpayment in her ZIP, 30032.
“But it is good to know, and it gives me something else to work with when I appeal this year,” she said.
Both said that working in the tax commissioner’s office does them no good when it comes to their own tax valuations.
“No, I only work for the county,” Henry-Frisby said. “When it comes to my house and things outside of the office, I’m in the same boat as everybody else. I’ve got to call the same people they do and I’ve got to wait for them to call me back, too.”
Said Harkness: “The only advantage I can think of is I know how the system works and who to call, but that doesn’t help change my situation at all.”
Charles Bowman, a DeKalb teacher who lives in Gwinnett’s 30039 ZIP code, said he wasn’t surprised to hear homeowners in his area overpaid by an average of $503 last year.
“This information makes me feel more inclined to act and appeal my assessment than before,” he said of the report. “That money, had we gotten a refund from our escrow account, could have been used to do some badly needed repair on our home.”
Bowman, who has two children with his wife, Tamiko, said that money could have gone to a number of other things, including his Ph.D. studies.
“I think everyone everywhere is trying to be smart about how and when they spend money,” he said. “And right now it just hurts to think there may have been some money that could have been used differently, if we’d had the chance.”
Published: Feb 18, 2010
Briana Henry-Frisby and Rae Anne Harkness both own homes in DeKalb County, and both suspect they’re paying too much in property taxes. The fact that both work in the DeKalb tax commissioner’s office doesn’t actually help.
“Now is not the time to leave any money laying on the table, or anywhere,” Henry-Frisby said.
But she may well be leaving behind a tidy pile of cash when it comes to property taxes.
A report to be released today concludes that property owners in the five core metro Atlanta counties overpaid their property taxes by an average of $244 in 2009. And people who live in areas hard hit by foreclosures, as do Henry-Frisby and Harkness, overpaid by even more, says an analysis commissioned by the Atlanta Neighborhood Development Partnership.
AJC findings confirmed
The Atlanta Journal-Constitution in December reported that tens of thousands of homes across metro Atlanta were overvalued last year by county tax assessors, who didn’t adjust values sufficiently after the historic real estate collapse. Homeowners, the newspaper reported, were being taxed on values their property no longer held. The report today tends to confirm the AJC’s findings and also, for the first time, calculates an average overpayment.
John O’Callaghan, ANDP president, said the report focuses on property tax values from 2009 for neighborhoods with the highest foreclosure rates in metro Atlanta.
“What this does is give a picture of the average homeowner,” he said. “Some are underpaying and others are overpaying by a larger margin. We hope this data and research will lead to changes in the system.”
Calvin Hicks, chief assessor in DeKalb County, balks at the idea that people have “overpaid” taxes.
“County services still cost what they cost,” Hicks said. “So maybe it is that property [valuations] should have gone down, but the millage rate should have gone up. That still may have equaled the same amount of tax money, but coming from different directions.”
Hicks said foreclosures affect neighborhood values in different ways and said county officials are working on the best way to reflect those properties in future valuations.
ANDP’s report, prepared by Robert Charles Lesser & Co., breaks out the three ZIP codes with the most foreclosures in Clayton, Cobb, DeKalb, Fulton and Gwinnett counties and the average amount homeowners overpaid their taxes for 2009.
The study took sales values from the second half of 2008 and contrasted those numbers to the value the county set on the same property.
Analysts then calculated what the tax assessment would have been based on sales figures, compared to actual assessments on the same properties.
Ammo for appeals?
In the 15 ZIP codes with the most foreclosures, the average overpayment for 2009 was $491, the report says. Here are the ZIPs and the total estimated overpayment in each:
? Clayton: 30238, 30274 and 30296, $17 million overpayment.
? Cobb: 30168, 30127, and 30126, $8 million overpayment.
? DeKalb: 30038, 30058 and 30032, $16 million overpayment.
? Fulton: 30310, 30315 and 30331, $24 million overpayment.
? Gwinnett: 30039, 30045 and 30044, $17 million overpayment.
In DeKalb’s 30058, Henry-Frisby’s ZIP code, the average overpayment in 2009 was $391.
“There is a lot I can do with that money,” she said.
Harkness said she doesn’t have much hope of getting back the $513 ANDP’s report says was the average overpayment in her ZIP, 30032.
“But it is good to know, and it gives me something else to work with when I appeal this year,” she said.
Both said that working in the tax commissioner’s office does them no good when it comes to their own tax valuations.
“No, I only work for the county,” Henry-Frisby said. “When it comes to my house and things outside of the office, I’m in the same boat as everybody else. I’ve got to call the same people they do and I’ve got to wait for them to call me back, too.”
Said Harkness: “The only advantage I can think of is I know how the system works and who to call, but that doesn’t help change my situation at all.”
Charles Bowman, a DeKalb teacher who lives in Gwinnett’s 30039 ZIP code, said he wasn’t surprised to hear homeowners in his area overpaid by an average of $503 last year.
“This information makes me feel more inclined to act and appeal my assessment than before,” he said of the report. “That money, had we gotten a refund from our escrow account, could have been used to do some badly needed repair on our home.”
Bowman, who has two children with his wife, Tamiko, said that money could have gone to a number of other things, including his Ph.D. studies.
“I think everyone everywhere is trying to be smart about how and when they spend money,” he said. “And right now it just hurts to think there may have been some money that could have been used differently, if we’d had the chance.”
Nearly 75% of all U.S. homes are affordable
By Les Christie, staff writerFebruary 17, 2010: 2:12 PM ET
NEW YORK (CNNMoney.com) -- An amazing turnabout in the U.S. housing market over the past four years has pushed home prices to near record levels of affordability.
The typical American family, who makes the nation's median income of $64,000 a year, could afford to buy 70.8% of all homes sold in the United States during the last three months of 2009, according a quarterly report from the National Association of Home Builders and Wells Fargo (WFC, Fortune 500).
That's off just a tad from the record 72.5% reached during the first three months of 2009, but up substantially from the second quarter of 2008 when only 55% of homes sold were affordable.
"Favorable mortgage rates and sliding house prices that have now started to stabilize nationally have both contributed to a record year for housing affordability in 2009," said NAHB chairman Bob Jones, a home builder from Bloomfield Hills, Mich.
The NAHB judges a home to be affordable if a family making the metro area's median income could devote no more than 28% of their take-home pay toward housing costs.
There was a huge variation in affordability around the nation. As a rule, Midwestern cities far outperformed coastal communities.
5 most - and least - affordable cities
All five of the most affordable major housing markets were in the Rust Belt, led by Indianapolis, which has been the nation's most affordable major metro area for more than four years. More than 95% of all home sold there were classed as within the budget.
Detroit was the second most affordable major market with 93.4%, followed by three Ohio cities, Dayton (93.2%), Youngstown (93%) and Akron (92.2%).
A few small cities surpassed even Indianapolis. In Kokomo, Ind., 98% of homes sold were priced low enough for median-income families to afford. Monroe (97.1%) and Flint (96.3%) both scored high as well.
New York was the least affordable market; less than 20% of homes met the criteria. San Francisco (22.3%), Honolulu (33.8%), Santa Ana, Calif.,. (34.5%) and Los Angeles (36.8%) filled out the bottom five.
The most unaffordable small market was San Luis Obispo in California, where only 32% of homes sold were attainable for median-income families.
NEW YORK (CNNMoney.com) -- An amazing turnabout in the U.S. housing market over the past four years has pushed home prices to near record levels of affordability.
The typical American family, who makes the nation's median income of $64,000 a year, could afford to buy 70.8% of all homes sold in the United States during the last three months of 2009, according a quarterly report from the National Association of Home Builders and Wells Fargo (WFC, Fortune 500).
That's off just a tad from the record 72.5% reached during the first three months of 2009, but up substantially from the second quarter of 2008 when only 55% of homes sold were affordable.
"Favorable mortgage rates and sliding house prices that have now started to stabilize nationally have both contributed to a record year for housing affordability in 2009," said NAHB chairman Bob Jones, a home builder from Bloomfield Hills, Mich.
The NAHB judges a home to be affordable if a family making the metro area's median income could devote no more than 28% of their take-home pay toward housing costs.
There was a huge variation in affordability around the nation. As a rule, Midwestern cities far outperformed coastal communities.
5 most - and least - affordable cities
All five of the most affordable major housing markets were in the Rust Belt, led by Indianapolis, which has been the nation's most affordable major metro area for more than four years. More than 95% of all home sold there were classed as within the budget.
Detroit was the second most affordable major market with 93.4%, followed by three Ohio cities, Dayton (93.2%), Youngstown (93%) and Akron (92.2%).
A few small cities surpassed even Indianapolis. In Kokomo, Ind., 98% of homes sold were priced low enough for median-income families to afford. Monroe (97.1%) and Flint (96.3%) both scored high as well.
New York was the least affordable market; less than 20% of homes met the criteria. San Francisco (22.3%), Honolulu (33.8%), Santa Ana, Calif.,. (34.5%) and Los Angeles (36.8%) filled out the bottom five.
The most unaffordable small market was San Luis Obispo in California, where only 32% of homes sold were attainable for median-income families.
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