Capitulation! Is it here?

Capitulation occurs when the sellers finally throw in the towel and sell at the market, “I’ve had enough!”  Right now,  I am seeing a number of banks take that exact approach.  They are selling their REO properties that they have had on their books for a long time for whatever they can get.  Couple that with banks that are going out of business, and the aggressiveness with which the acquiring banks are disposing of those toxic assets, it definitely feels like the bottom is near.  The good buys are now getting great.

When banks get aggressive with their selling, they set the new floor for the market.    They now force everyone else to sell at this new, lower market.  The banks that can’t sell because of reserve amounts and capital requirements just sit there until they get taken over, I call them the walking dead.  When the new bank takes them over, they immediately liquidate their REO for whatever they can get.  They say “it’s business as usual” but with the FDIC back stopping 80% of the loss, they just want out.  

The capitulation point is a little like the flushing of a toilet.  With one stroke of the handle, the entire market goes down, and then and only then can it fill back up. I hope this is it, this market has felt a little like a sailboat with no wind, drifting aimlessly with the currents.

Sex Sells! Even in real estate!

There is no disputing the fact that people are attracted to beautiful things.  Think about it, the models in magazines are all beautiful, you lust after the car that “looks cool”, and you want to live in the house that you fall in love with from the street. 

“Sex sells” applies to everything, even to real estate, and I have been reminded of that fact in this difficult market.  Occasionally, a foreclosure comes through our office that we fix up and sell.  In this market you have to make the house stand out and be memorable.  In the house we bought, we did the usual-paint, carpet, counters, but what really made the difference is when we decided to fully furnish the house!  It sold…. and it sold fast!   They say a picture is worth a thousand words, and when you furnish a vacant home, you are creating that picture for the buyers.  Think of it as a painted picture versus a blank canvas….a big difference.  In furnishing your vacant homes, you are creating something memorable, something that sticks in your buyers memory and will lead to more sales.  

Remember, we are attracted to things that are easy to look at and easy for our brains to make sense of, and in this market, you need to make it as easy as you can for buyers to visualize the home they are buying.

Why the Banking crisis will effect new business creation for some time to come, by George Hale

Extend and pretend is the name of the game with the banks http://online.wsj.com/article/SB10001424052748704764404575286882690834088.html?mod=ITP_pageone_0.  If they have a bad loan on their books, they would rather extend the loan and reduce interest so that the current borrower can make payments and so the bank doesn’t have to take the property back and take a loss.  This is like the girlfriend with the annoying habit.  At first, you just overlook it, but as you date her more often, the annoying habit cannot be overlooked.    Same is true  with the banks, and sooner or later they will need to purge their portfolios of all the garbage that has accumulated there.

The problem is there are so many banks with assets that are so far underwater, that to sell their assets would put them out of business.  So doing nothing and waiting for either the market to go back up, or to be taken over is their only option.  Even with the FDIC guaranteeing most of the losses, it takes a lot of time and energy for the new bank to work through all the problems when they take another bank over.  Now the FDIC is having trouble finding suitors willing to take on the challenge of a new bank.  So what is going to happen?  The Government should resurrect the RTC, pool all the bad loans, and dispose of them.  This  would be highly painful, but it would be like ripping the band-aid off quick instead of the slow torture going on now.

Until this happens, new loans to consumers and businesses will be next to nothing.  Most banks have so many problems that they have no capital to loan, and the ones that do have capital are too scared to put it out.  Until we fix these problems, unemployment will stay high and the real estate market will stay under pressure.  It’s starting to look  a lot  like Japan.

What will spur home sales?

So, we have record low-interest rates, we spurred home sales with a tax credit, the Government is buying mortgage-backed securities, and still real estate sales are barely above a flat line.   According to Robert Shiller http://www.moneynews.com/StreetTalk/Shiller-Jobs-Housing-Recovery/2010/06/30/id/363472  the only thing that will turn the market around is jobs.  Until unemployment comes down, prices will continue to fall.  New home construction is at a standstill, resales are slow, and we are only halfway through the foreclosure crisis.  Not until those forces start to correct will prices stabilise. 

The good news is, some of the people who are finding themselves unemployed are starting their own businesses.  They are looking at this as an opportunity to start something they have always wanted to do, but were never forced to move out of their comfort zone and make the change.  Take a friend of mine for example.  He found himself layed off from Nike golf, and decided to start his own golf bag company http://www.themckennongolfbagcompany.com/ .  He now has 3 full-time employees, a great product, and is having the best time he has ever had at work. 

We need more people to go for it and start businesses, and we need the Government and banks to help these people get started and solidify the foundation of job creation in our country through small business.  This will cure the unemployment problem and stabilise the real estate market, not Government handouts.

The Changing of the Guard in Real Estate, by George Hale

Every time real estate goes through a recession, two unique things happen.  One is that new people get into the business,  and the other is that styles and features of homes change.  

For example, I just bumped into one very influential real estate person, very successful, had a huge business and made tons of money.  He said he is never going back into real estate again, then proceeded to lift up his long sleeve shirt to expose the total tattooing of both arms!  Wow, he aint kidding.  Because of the market upheaval and prices coming down so much, it is letting new people get into the business and get started.  they come with new ideas, new energy and a new direction.  Where this takes the market is not better or worse, just a different direction

The second is the changing of the styles of homes.  Ever notice how there is a glut of homes built in certain time ranges and they are all so similar?  These groupings coincide with boom years, and the lack of certain eras, the bust years.  When building does resume. look for different styles and features that will define the next cycle.  A new trend that is sure to get traction is “green building” or making affordable  houses LEED certified.  Think  hybrid for your house.  We have them in cars, it would make sense to have them for your house.  Only time will tell.

When the market does begin to recover, look for new people in the business, some old veterans to be gone, and a change in housing styles.

Double Dip in Housing?

The latest sales data show exactly what everyone has been fearing, another dip in real estate sales http://www.cnbc.com/id/37463616 .  The expiration of the first time homebuyers credit did spur home sales, but all it did was to bring demand forward, not necessarily spur new buyers to enter the market.

So what is going to right the ship?   Simply put, jobs.  With 10% of Americans out of work, that translates to an enormous amount of people who just can’t buy houses.  With interest rates as low as they will be in my lifetime, it’s too bad more people can’t take more advantage of the incredible opportunity.

Hidden money to invest in Real Estate, by George Hale

Ever wanted to invest in something other than stocks and bonds with your IRA?  Well, now you can.  You can turn your IRA into what is called a “self-directed IRA”.  After going through the paperwork, you are essentially free to invest in real estate, PPMs and other investments that your traditional stock broker doesn’t have access to.  Some of the companies who facilitate self-directed IRAs are:

http://www.penscotrust.com/, http://www.1031exchange.com/, and http://www.trustetc.com/

It’s worth learning about self-directed IRAs.  Even if it’s not for you, everyone should know of the choices out there and how to best use the tools they have.  Warren Buffet has gotten fabulously wealthy by achieving a 20% compounded rate of return on his investments and by using self-directed IRAs  and not having to pay taxes,  it makes it much easier.