An Investment Alternative

To say the investment market is unsettling is an obvious understatement. The market is up, then down 8% in the last ten days and the news suggests that this roller-coaster ride may continue for awhile!

Preservation of capital is probably today’s most important investment consideration (especially for those enjoying or nearing retirement) and making a profit would be a bonus. Of all the conventional investment alternatives like stocks, bonds, mutual funds, gold, commodities, CDs and annuities, housing could be one the best asset classes in America.  I always say that I’m a great believer in investment real estate: you use other people’s money (a mortgage) to handle the major part of the purchase of an investment, the tenants’ pay off that mortgage (albeit slowly), you immediately enjoy the available cash-flow + realize the lowered principal balance/equity accrued caused by the tenants paying down the mortgage!  So, even if there is NO appreciation in the housing marketplace (which I think we can expect in the short-run, but eventually our economy will recover and natural appreciation will begin), you win!!  I certainly can’t say that about my mutual funds!!

Homes have had a 30% to 40% price correction in the past four years. Mortgage rates are at near all-time low rates with 30 year terms available for investors. Rents have increased significantly over the past two years while vacancy rates have decreased. People will always need a place to live.

Five year certificates of deposits earn a little over 2% but rental properties are yielding much more than that. Income properties are tangible assets that have benefited dramatically in inflationary times. Cash assets can be devastated by inflation and diversifying into income properties could provide some protection.

Single family homes, duplexes and multi-plexes offer investors the opportunity to borrow large loan-to-value mortgages at fixed rates for long terms on appreciating assets with tax advantages and reasonable control. Investing in rentals can provide a high rate of return!

July 2011 Portland Metro Real Estate Update!!

Despite the fact that summer refuses to join us this year, our Portland real estate market marches on.  Nationwide, 2011 thus far is the worst year for home sales in history!  However, locally it doesn’t necessarily feel that way.  Closed sales were definitely down in June 2011 compared with June 2010, but pending sales jumped compared with last year.  And inventory is the lowest it’s been since July 2007!  At the current rate of sales, the Portland Metro area has only 6 months of inventory!!  Builders broke ground on more new homes than expected last month and U.S. housing starts reached a 6-month high according to Reuters News. Which indicates some optimism on the part of home builders. Of course, our lack of inventory is two-fold, I believe.  In part, we are seeing reduced homes on the market due to pricing getting to the point where buyers are willing to venture into the market and absorb the existing inventory.  Low numbers are also a result of less homes being willing and able to go on market due to lack of equity!  Are we at the bottom in the Portland marketplace?  Some areas are definitely still dropping, some appear to have stabilized somewhat.

SELLERS:  What does this mean for sellers?  I have never been a big proponent of “losing” money on real estate.  However, if life changes demand the sale of a home where equity is non-existent, keep in mind that you may lose money on your sale but you will gain on your purchase.  Homeowners are still having trouble accepting just how much the values of their properties may have fallen, says a new report from the Zillow real-estate site. Current sellers who bought their homes in 2007 or later, an analysis of the site’s home listings shows, are overpricing their properties by an average of 14 percent. Sellers who bought their houses before the bubble, and those who bought during the big run-up in home values, also are overpricing their homes, but not by as much. Those who bought before 2002 are pricing their homes roughly 12 percent over market value, while those who bought from 2002-06 price them about 9 percent over market value.  Keep in mind these are national statistics and real estate varies neighborhood by neighborhood!  But, it’s not just sellers.  As a Realtor, I find pricing correctly and low appraisals to be my biggest current challenges!

BUYERS:  What does this mean for buyers?  Mortgage rates continue at record lows and opportunities definitely exist!  There are definitely tougher lending guidelines but more loan products are being slowly introduced (or re-introduced) into the mortgage marketplace.  FHA gives many buyers options like a low 3.5% down payment and the option for seller-paid closing costs. You can even set up your Bridal Registry with a bank and use the funds for a down payment.  VA financing still offers 100% financing to qualified veterans.  Don’t labor under mortgage misunderstandings, it’s free to find out if and for what you might qualify.  If interested, you might as well inquire…last I heard the worst they could do is say “NO” (they can’t shoot you, you know).

INVESTORS:  What does this mean for investors?  The local rental market continues to be hot, hot, hot (even tho’ our weather is not, not, not)!!  I’m in the midst of another duplex remodel and already both sides are rented, tho’ only one side is ready!  Financing for investment properties can be a challenge, especially for the self-employed (like myself).  A lot of patience and perseverance is required!!  A home or investment property is a “leveraged investment”! Leverage is the ability to control a larger asset with a smaller amount of cash through the use of borrowed funds. Paying cash is not always “King” when figuring your yield on an investment.  Leverage is not a dirty word, it’s a be-U-tiful thing!

How do we begin to feel good about wanting less?  The “Less is More” branding is a phrase that actually first came out of a poem written by Robert Browning in 1855, “Andrea del Sarto”:

Who strive – you don’t know how the others strive
To paint a little thing like that you smeared
Carelessly passing with your robes afloat,-
Yet do much less, so much less, Someone says,
(I know his name, no matter) – so much less!
Well, less is more, Lucrezia.

and further embellished and adopted  by Architect and furniture designer, Ludwig Mies van der Rohe.  The term “minimalist” is often applied colloquially to designate anything which is spare or stripped to its essentials.  Of course, “essentials” being the operative word and that concept being VERY different for different people!!  For a great many of us, the challenges of the last couple of years have been loss of perceived or real value of investments, or loss of jobs, or loss of homes, or loss of income, or loss of security and more.  So, how do we “roll with the punches”?

I read a quote on my Facebook feed:  “If a problem can be solved by money…it’s not a problem”.  I’m not sure I totally agree, but I “grok” the basic concept.  If all it takes is money to solve the problem, how bad can it be?  Well, I’d have to turn to clients that lost their homes to foreclosure or short sales to get a complete read on that sentiment.  Because money or a job or an opportunity could have alleviated a great amount of stress and grief for those people and their families!  But, none the less, the real estate market and the economy “is what it is” and making lemonade out of lemons might be the next step. 

You hear and read a lot about being “grateful”.  Who can argue with that?  Of course, being grateful for what we have and appreciative of those things that really have true and authentic meaning in our lives is essential to happiness, health and well-being.  But, maybe we add a more pragmatic approach and actually research what would really give our lives meaning and how can we accomplish these things for the least amount of money spent?  Always in real estate I’ve encouraged buyers to ”spend the least you can spend and still be happy”.  There is a different “set point” for accomplishing that for each individual, for each family situation and for each station in life.  Since the economic conditions have given us a set of challenges, we might as well have fun planning the solutions.

Check out the book on the weird and wild side of Portland in “Fugitives and Refugees”by Chuck Palahniuk and join him on an adventure through the parts of Portland you might not otherwise believe actually exist.  There is also a web site page on www.about.com regarding the “Top 9 Free Things to do in Portland”:  Free Stuff.  I’ve been recently enjoying spending some of my free time in Forest Park ( Forest Park ), at the waterfront and the Saturday Market ( Tourist in Portland ) and have shared my photos and experiences in recent Blogs!  And, then on www.uptake.com you can read about “Portland Oregon, Cheap and Free Things to Do & Attractions” at Cheap or Free .  On the www.virtualtourist.com site you have a list of Portland Things to Do .  In 2007, the New York Times described Portland as “a full-fledged dining destination” currently enjoying its “golden age of dining and drinking”.  In an effort to do our part for the local economy without breaking our pocketbooks, you can visit www.urbandrinks.com for a list of Happy Hours and what’s included at the discounted price.  What’s your favorite Happy Hour and why?  (I’m always looking for new ideas)!  Or what are other free or inexpensive venues in the greater Portland area?  I’m looking at this as an opportunity to get to “visit” my town like a tourist and “vacation in my own backyard”.

2008 was the first year on record when U.S. house sizes actually stopped growing. This shift is indicative of a trend toward greener and more economical living.  Maybe we can enjoy this opportunity and make it good for us, good for the earth and good for our pocketbooks.  We can get healthier by spending more time outdoors or springing for an inexpensive gym membership.  We can shop in our own closets.  We can watch for sales and clip coupons.  We can carpool, walk or ride a bike.  We can curtail our energy consumption.  We can revel in the challenge rather than wallow in the disappointment?  Well…we can try anyway….

I’ve had multiple clients attempt loan modifications without any cooperation from their various lenders.  So, where do you go from there?  One possibility is to put the home on the market and attempt to negotiate with the lender or lenders involved to sell short of what is actually owed on the home.  This takes some extra paperwork and extreme patience.  But, this type sale can minimize the damaging impact to your credit and can lessen your financial exposure and liability.  A foreclosure can remain on your credit for up to seven years while a short sale usually gets reported as a “settled debt” and is significantly less damaging.  With a short sale, your FICO score will not be as negatively impacted as it would be with a foreclosure, and you will be able to get into a new home sooner.  As with foreclosure, there are several potential tax and liability considerations when doing a short sale or loan modification, however, they are typically less severe than they would be with a foreclosure.  Seeking qualified advice from your CPA or tax attorney is suggested.

Why would a lender agree to a short sale?  In most distressed mortgage situations, foreclosure is a last resort for all parties involved.  Both the homeowner and the lender usually want to avoid foreclosure at all costs.  That is why lenders have come up with various alternatives to foreclosure.  A short sale gives the lender the ability to cut its losses upfront, thereby avoiding the expense and time of a foreclosure and potentially greater losses.  Lenders want to make loans; they do not want to be in the business of owning and managing real estate.  In may cases, a short sale offers a better return on the lender’s investment than a foreclosure.

As a seller, you must first authorize your Real Estate agent to speak and negotiate on your behalf.  Next, some time should be spent composing a sympathetic “hardship letter” to explain the circumstances that force the sale.  This is your opportunity to appeal to them.  You will possibly be asked to corroborate your hardship with financial statements and other verifications.  Your Realtor should be experienced in the procedures and able to be your guide throughout the process.

Next will be the really hard part; that is divorcing yourself from the transaction and your attachment to the home or the “value” of the home.  This is going to be a sale that “sells short”.  The ultimate price that ”our present real estate market” will accept is not a reflection of the quality of the home or love and attention you once gave your home.  And, it is not a reflection on you, as a person.  You are simply another person who is traversing a new terrain.  One that, very often, was not precipitated by you…rather one that was created by outside circumstances!

We’ve had a marked improvement in the number of homes shown in April & May. The majority of the movement in the housing sector was in the 1st-time buyer price range with smart first-time buyers taking advantage of the $8000 credit, increased inventory and lowered prices.  But, this could initiate a trickle up effect into the higher price ranges.  Housing in the Portland metro area was at its most affordable point since December 2004 and inventory dropped to 11 months in April (down from 19.2 months in January).  See the full report at http://bit.ly/LocalMarketStats

Pending sales in Portland have continued to rise (13.6% in 2009 vs 6.8% in 2008 and -2.3% in 2007).  See graph at: http://bit.ly/PendingSales

The Associated Press released this article earlier in the week touting a trio of reports which they believe gave Wall Street a lift, with manufacturing activity shrinking at a slower pace in May, new orders with US factories rose 51.5% in May, construction spending rose .8% in May plus consumers trimmed spending slightly less than forecast.  Check out the entire article at http://bit.ly/Xe1P4

We still have an inventory of short-sales and foreclosures that are affecting the pricing in our local Portland Oregon real estate marketplace and unemployment remains an issue!  The higher interest rates are probably here to stay and are hovering right above 5%, but still historically VERY low!!

Existing nationwide home home sales increased in February, reversing losses in January.  Of course, the January figures could have been heavily influenced by weather!  However, overall sales are still soft.  The first-time home buyer credit is motivating a lot of buyers to come to the marketplace or come back to the home-buying market (remember if you have not owned a home for 3 years, you are considered a “first-time home buyer”).  I do believe there is a lot of “pent-up” buying energy out there, as many buyers wait for the “bottom of the market”.  Timing the bottom of any market is very difficult!  It’s like a tennis ball picking up speed as it falls towards the earth, and then “boink” it hits the ground and is on its way back up before you can “take a swing”.  You can only be certain where the bottom of any market lands as that market picks up momentum!

Lawrence Yun, NAR chief economist, said first-time buyers accounted for half of all home sales last month, with activity concentrated in lower price ranges. “Because entry level buyers are shopping for bargains, distressed sales accounted for 40 to 45 percent of transactions in February,” he said. “Our analysis shows that distressed homes typically are selling for 20 percent less than the normal market price, and this naturally is drawing down the overall median price.”

I was on the waiting list  for this very popular “City Club” presentation on the “State of the City” by Sam Adams, but thanks to help from a fellow weight-class participant at 24-Hr Fitness I was able to secure a “standing room only” (okay, I was sitting) entrance to the speech!  After a quick apology for the recent “distraction” to our city’s task at hand, our mayor plunged right into his admininstrations’ plans for Portland’s future.  Overcoming “fear & complacency” were immediate tasks at hand as well as working towards and realizing a “green economic dividend”!  Portland has definitely gotten a lot of accolades for it’s “green pioneering” and should reap some economic benefits (and already has).  He felt two big threats were “unchecked expansion of the urban growth boundary and active the active maintenance of our vehicular roadways”.  I do believe that our commitment to not allowing unchecked urban sprawl and development and emphasis on urban renewal has benefited our housing market in that our decline has not been as brutal as some.  Mayor Adam stressed that we must work for “sustainability and social equality” and that “we pay for lack of education one way or another. In California, they’ve done a study that if students are disenfranchised from education by the 3rd grade they are likely to end up in the penal system.  And, we pay 3.4 times as much for prisoners than we do for education”.  A very good argument, I might say, for sinking our $$$ into education rather than later been forced to support the prison system.  And, hey…did you know they will begin shooting the TNT show “Leverage” here in Portland this Spring starring Timothy Hutton?  You learn all kinds of things……