Smart Real Estate News & Commentary by Chris McLaughlin, May 31, 2010
Filed under: become a real estate investor, creative real estate investing, flipping real estate, make money real estate, real estate investment, real estate marketing
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It is foolish and wrong to mourn the men who died. Rather we should thank God that such men lived. — General George S. Patton
In honor of the fallen this Memorial Day. We give thanks for those who made the ultimate sacrifice so that we may live in freedom.
God Bless you and yours this Memorial Day,
Chris
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HAMP Modifications Have Just a 50% Success Rate: Moody’s
The most recent Home Affordable Modification Program (HAMP) report released by the U.S. Treasury shows “extremely low conversion rates” from trial to permanent modifications, with success just a 50/50 gamble, according to commentary from Moody’s Investors Service. As of the end of April, servicers participating in HAMP had converted almost 300,000 permanent modifications. However, they had also canceled 277,640 trial modifications. Moody’s says this represents approximately a 50 percent success rate. The report also shows 3,744 permanent modifications have been canceled. According to Moody’s, the biggest culprits keeping conversions low are insufficient paperwork and negative equity.
“We believe the low conversion rate is a combination of two issues: borrowers failed to provide the documents they promised, and the rate reduction and principal forbearance used under HAMP were not enough to motivate severely underwater borrowers to start paying again,” Moody’s analysts wrote in their report. Moody’s notes that the 56 percent of HAMP modifications, has been on GSE-held loans, as expected. However, more than a third, 35 percent, occurred in the non-GSE or “private-label” sector. “So far we assume that modifications will lower losses on pools backing private-label securities by approximately 5 percent,” they wrote in the report.
Diana Olick – End Mortgage-Interest Deduction: Cato’s Calabria
“Abolishing the mortgage-interest deduction, enjoyed by some 75 million homeowners, is a way to “end the subsidization of too much debt,” which was at the crux of the financial meltdown, a Cato Institute official told CNBC. It’s also a way to really tick off a lot of people. Americans who own homes, unlike those in other countries, have been enjoying this deduction for a century or so. “When you look at other countries, like Canada, that don’t have the mortgage-interest deduction, they have similar, if not higher mortgage rates,” said Mark Calabria, Cato’s director of financial regulation studies. “All it does is run up house prices [here in the US], which to me makes housing less affordable, not more,” he added. “It also increases the volatility of prices.” Congress is considering eliminating the deduction as a way to raise revenue and close the budget gap. This move would add an estimated $120 billion to the Treasury coffers. Calabria conceded the deduction could be kept in place for those who have, for instance, at least 30 percent of equity in their homes, but not those who have less. Not surprisingly, those in the real estate industry favor keeping the deduction in place. It means more business for them and higher commissions for agents. According to Lawrence Yun of the National Association of Realtors, “This will result in a massive distribution of wealth in America. It’s a bad policy.” And, he added, it sends the wrong message to the American public: “Fifteen US Presidents have been able to handle the budget situation without touching the mortgage-interest deduction. If the new political class decides to touch it that shows a level of weakness that they can not handle a grown-up budget.”
U.S. May Retail Sales Seen Up, Spending Erratic
U.S. retailers are expected to show a sizable increase in sales for the month of May, but erratic trends of consumer spending could grow more pronounced over a seasonally weaker period for shopping. Retail chains from Target to Costco Wholesale to teen retailer Abercrombie & Fitch are scheduled to report sales at stores open at least a year — an industry gauge also known as same-store sales — on Wednesday and Thursday. Analysts expect May same-store sales to be up 3.8 percent, compared with a decline of 4.8 percent last year, according to Thomson Reuters data. Standard & Poor’s sees a 3.4 percent increase, or 2.5 percent excluding gasoline sales. An early Easter had prompted many consumers to shift spring shopping to March.
So far this year, U.S. consumers have shown they are willing to open their wallets again for nice-to-have goods like clothes and furniture after focusing on the basics during the recession. But shoppers are still very selective about where and when they spend as overall consumer sentiment has remained roughly unchanged from February. S&P apparel retail analyst Marie Driscoll Driscoll said. “A real thing that could derail consumer spending is too much volatility in the stock market. The International Council of Shopping Centers cut its May sales outlook recently, citing slower traffic and less spending at discounters and apparel retailers as well as colder weather during the month.
House Votes to Eliminate Hedge Fund Tax Break
The House passed a bill on Friday that would end a tax break for executives of investment funds, leaving hedge funds, private equity firms and venture capitalists scrambling to ease the effects of the bill before it is taken up by the Senate next month. It seeks to change the tax treatment of “carried interest,” which is the portion of a fund’s investment gains taken by fund managers as compensation. Under current rules, carried interest is taxed federally at a rate of 15 percent because it is treated as a capital gain. That contrasts with the tax rate on ordinary income, which can be as high as 35 percent. The plan approved by the House, which overcame strong lobbying pressure from Wall Street, amounted to a compromise that would tax 75 percent of carried interest as ordinary income and 25 percent as capital gains.
Although similar attempts to increase taxes on carried interest have died in the Senate for three consecutive years, concerns about the nation’s billowing debt are so great that Senate leaders say they expect to pass a measure resembling the one approved by the House. Douglas Lowenstein, president of the Private Equity Council, said he and other lobbyists were also trying to scale back a provision in the bill affecting what they call the “enterprise tax.” That provision would require the founders of hedge funds to pay ordinary income tax rates on proceeds they received from selling their firms. The real estate Roundtable also tried to negotiate an exemption for real estate investment trusts, arguing that the higher tax rates would hurt the recovery of the real estate market. As the bill moves to the Senate, lobbyists say they are focusing reaching a further compromise that would lessen the sting of the change. One proposal would lower the amount subject to ordinary rates to 60 percent, from 75 percent.
Home Owners Are Losers – The Hard Truth About Residential real estate
If you believe housing is on the rebound, take a very hard look at the numbers. There are 140 million personal residences in the US. Today, there are 26 million homes either directly or indirectly for sale. According to a survey by Zillow.com, a real estate appraisal website, 20 million homeowners plan to sell on any improvement in prices. Add to that, 4 million existing homes now on the market, 1 million new homes flogged by companies like Lennar (LEN) and Pulte Homes (PHM), and 1 million bank owned properties. Another 8 million mortgage owners are late on their payments and are on the verge of foreclosure, bringing the total overhang to 34 million homes. In all there are 35 million who are underwater on their mortgages and aren’t buying homes anytime soon, nor are the 35 million unemployed and underemployed. That knocks out 50% of the potential buyers. Add to this, the reality of 80 million baby boomers retiring at the rate of 10,000 a day. Assuming that they downsize over time from an average 2,500 sq ft. home to a 1,000 sq. ft. condo, and eventually to a 100 sq. ft. assisted living facility, the total shrinkage in demand is 4.3 billion sq.ft. per year, or 1.7 million average sized homes. That amounts to a shrinkage of aggregate demand for a city the size of San Francisco, every year.
As the state and federal first time buyer tax credit, disappears, long term capital gains taxes and state and local property taxes take a jump and diminish property’s appeal. And the last straw could be reduction of home mortgage interest deduction. Add it all up, and there is a massive structural imbalance in residential real estate that will take at least a decade or more to unwind. Not much left for a home owner?
Now on to our real estate education section…
Impact of the Oil Spill On the real estate market
Just when you thought the Gulf oil spill couldn’t get any worse, a new forecast by Housing Predictor has many experts fearing the worst; coastal real estate and condos throughout Florida, Louisiana and Mississippi dropping as much as 30 percent or more in response to what is already being termed the worst natural disaster in the history of the United States.
Specifically cited properties expected to be hardest hit include:
Beachfront vacation homes and condos: Not only have many of these properties been overbuilt in recent years but high vacancy rates, troubled Homeowner Associations and rising fees have contributed to escalating prices and declining resale rates. The added burden of tar covered beaches combined with poisoned water could be the straw that breaks the proverbial camel’s back.
Worker related neighborhoods: Undoubtedly the oil spill will adversely impact workers in the fishing and tourism industries as massive blobs of oil pollute the waterways and ocean. Out of work fishers, tour guides and others displaced by the oil spill will be hard pressed to replace their earnings with unemployment rates already in the double digits for many parts of Florida, Mississippi and Louisiana.
Riverfront homes & wetlands: Although it’s too early to tell for sure, environmental experts believe the oil and other pollutants are likely to make their way inland via freshwater deltas resulting in further damage to environmentally sensitive wetlands, marsh areas and even rivers throughout much of the Southeastern United States.
Double Trouble
The timing couldn’t be worse; real estate has declined by as much as 65 percent in many of these areas including the Florida panhandle, with official unemployment rates well into the double digits. Not only is the BP oil spill dramatically impacting tourism, the oil industry and the local ecology…the main sources of income for an already struggling region…but this crisis is expected to have profound impact on the economy for years – if not decades – to come. Already nearly 70 percent of the $40 Billion dollar summer bookings have been cancelled, resulting in one of the most severe losses in recent history for a state that is facing severe fiscal shortages…without a drop of oil even having reached the shores yet.
What to Watch
Unfortunately, the worst may not be over. As BP continues to encounter difficulty in sealing the leak, weather patterns and the gulf stream are expected to make matters even worse. As the hurricane season officially begins, the weather service is calling for an above average years in terms of storm related activity; activity that could easily worsen an already fragile situation by distributing oil over an even larger area of land and sea. Of even more immediate concern is the observation that the oil spill is now reaching the gulf stream which circulates ocean waters from the gulf around the bottom of the state and then north via the eastern coastline potentially impacting more than 75% of the Florida’s coastline. With BP’s most recent announcement suggesting the spill may continue running until at least August, experts are bracing for the worst even while hoping for the best.
See you at the top!
Chris McLaughlin
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About the author:
Chris McLaughlin is widely known as America’s top
real estate Attorney and investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner of one of Florida’s largest real estate firms,
running 4 different offices, supporting over
400 agents, uniquely positioning him to help
thousands of investors make money in the
biggest market opportunity ever!
* Highly sought-after speaker, consultant, and
seminar leader for current trends and hot topics
in real estate Investing, Entrepreneurship, and
Wealth Building
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