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TRENDS IN REAL ESTATE & INTEREST RATES

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Advanced Technical Analysis of the Financial Markets 

This past Thursday I had the distinct pleasure of spending 4 hours with Stan Harley, the publisher of The Harley Market Letter. He shared some interesting insights in two canary in the mine real estate markets – Los Angeles and Phoenix and further detailed what can be expected for interest rates in the future. What was astonishing to me is just how powerful market cycles are and how they can be used to hedge one’s bets and to be proactive and not just reactive. Many of the seasoned real estate investors understand there are cycles to all business activity, but few understand simple analysis can be utilized to avoid game changing and unexpected shifts in the market place. Mr. Harley believes that even external events really have no bearing on the math.

Most business strategists and real estate professionals failed to identify the key pivotal turns for the housing market in 2006 and 2012.  Market timing –  as  most are well-aware –  is an extraordinarily difficult task.   The foundation  which underlies the basic principles of his analytical methodology is that market behavior can be described  (and predicted) through a combination of  simple cycles of differing periods.  Cycles are the essential factor in determining how long a trend should run and when to expect reversals.

 

“The knowledge and exploitatin of cycles embodies one of the most powerful analytical tools available for identifying trends and forecasting their reversale.”    Stan Harley

CASE-SHILLER HOME PRICE INDEX

The Case-Shiller home price index tracks the value of residential real estate  in 20  metropolitan   regions across the United  States. There are multiple Case-Shiller home price indices: A national home price index, a 20-city composite  index,  a 10-city composite index, and twenty individual  metro  area  indices. The index is published on the last Tuesday of each month, with a two-month lag. The graph  above depicts home  price data from 1890  through  the present. The lower graph reflects data for the Phoenix, AZ area region through Q3 2016.

Data for the Phoenix region is somewhat limited compared to the national data as well as data for the southern California region. Because the economies of Arizona and Southern California are inextricialby linked – and the cyclical funcitons for both etch-out similar wave forms – a detailed analysis of the Los Angeles region can tell us alot about the market timing functions for the Phoenix area region. A cyclical analysis of the Los Angelia area region, the largest in the United States, is depicted below. Data for Phoenix  and the rest of the country are very similiar.

(Editors note: I forwarded  slides from the local AZ Real Estate Investors March market presentation(some of which were from the Cromford Report). Mr. Harley was not surprised they matched up.)

 COMPOSITES ARE BACK TO THEIR WINTER OF 2007 LEVELS

 

Editors Comment–The Canary is in the coal mine.

HOME PRICES ARE PEAKING

Since his last review of the Case Shiller index Mr Harvey has revised his cyclical modeling to the numbers shown in the box above. The baseline cycle appears to be 196.8 months or 16.4 years. Notice  how  this  cyclical  function  defined  the  June  1990  – Sept 2006 peaks and the March 1996 – February 2012 lows.
The analysis points to a peak for the Los Angeles area – as well as the National Index overall – in the December 2016 time period.  Because of the two month lag in the publishing of the data,  we won’t  know whether home prices have peaked for several more months.  He also noted a narrowing in the range of the monthly price bars  –  a phenomenon that also occurred at the prior cyclical highs. However, based on the updaded data from the AZREIA slides for the period ending February, 2017, the trend is esclating.

At this point Stan Harvey is predicting a minimal drop of 12% in housing prices.

The Harry Dent team is suggesting a drop of 20% in housing prices.

Personally, I have noticed Days on Market are increasing. One of the local reps of a national title company here in Phoenix suggested they have seen a dramatic slowing in pricing for homes in central Phoenix.

Another title company rep noted their March has been VERY slow. A sales rep from a large local lender said their applications for March are way down.

Long term, Mr. Harley is predicting the big one in February, 2023

INTEREST RATES

Mr. Harley made one basic statement on interest rates. They will come down. Period.

HOW DOES THIS IMPACT NOTE BUYERS?

For note buyers keep your powder dry. Only buy notes with a strong equity position behind them. Another words be patient, and  buy notes with a loan to value of less than 70%, preferrably less than 65% – all of which is subjective to mitigating factors. If one maintains that cardinal principal, then even with a potential property value drop of 20%, the chances of a payor walking are minimal.

HOW DOES THIS  IMPACT NOTE SELLERS?

Make sure you get at a minimum of 10% down, preferrable 15% – 20% down from your buyer. Continue to require at least an 8% interest rate on your note from your buyer–preferrable 10%, but stay in line with the Dodd-Frank Act requirements. There are multiple posts regarding The Dodd-Frank Act on this site.

HOW DOES THIS IMPACT IRA INVESTORS?

It is all positive. Be conservative and positive. If market interest rates drop as forecasted, seller financed notes continue to be a rewarding investment alternative.

PS–It is all about being proactive and NOT reactive. Alot of money can be made in a down cycle–more than in an up cycle.

Why Are Note Seasoning & Verifiable Payments So Important

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There are several items a note buyer should verify before purchasing a note. Both are related to the Payor. A note buyer needs to confirm the payor will continue to pay. We are buying a dependable cash flow. To that point, they are foundational. Details the impoortance of both.

 

OP-ED~~ Loan Modification Re-Defaults

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Recently I attended the NoteWorthy Convention in Scottsdale. Kevin Shortle spoke of opportunities in the note arena specifically loan modifications and non-GSE foreclosures and modifications. The following article was an op-ed in MSN Money and is so on target. With the changing economics on the horizon, the re-default rate will increase and may very endanger the US mortgage and housing markets.

Wall Street and the news media have paid considerable attention to U.S. home mortgage modifications, but not much notice has been given to the growing problem of re-defaults on these modifications. Re-defaults are a massive problem — and endanger the U.S. mortgage and housing markets. Many of these loans were guaranteed by the FHA

What is a mortgage modification? In the midst of the housing collapse more than a decade ago, mortgage modifications were rolled out to enable millions of delinquent homeowners to avoid having their home foreclosed. In its latest report, the nonprofit Hope Now consortium — the major source for modification data  — estimated that 8.7 million permanent mortgage modifications have been implemented in the U.S. since the end of 2007……….The 8.7 million permanent modifications do not include the temporary fixes that lenders have provided.  According to Hope Now, roughly 17 million temporary solutions have been rolled out under what’s called “Other Workout Plans.”  The two most important ones are called forbearances and repayment plans. Under these plans, millions of delinquent borrowers were provided a temporary deferment or reduction of the payments due until their financial condition improved. These temporary solutions are not reported under permanent modifications.  Nevertheless, owners given temporary workout solutions are considered current on the mortgage……………………….

In its most recent report for the first quarter of 2019, the OCC noted that 21% of the most recently modified loans had re-defaulted within six months.

More than 3 million loans guaranteed by the Federal Housing Administration (FHA) that were in Ginnie Mae pools had been modified between 2008 and 2013.  A 2014 report found that they had performed badly. Roughly 57% of these modified loans had re-defaulted by 2013

Click Here To Read the Fill Article

 

 

Wall Street Banks Tettering on Limited Liquidity

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Two days ago a very close friend called me with a market alert. He said for the first time sine 2008, for 4 days in a row, the overnight lending market rate between banks utilized to keep bank liquid jumped to 10%. He asked me, “What is the normal hard money lending rate in real estate?” I answered 10%. To that point, that is a significant occurance. Does that mean banks liquidity is not there? Yes.

Then today I noticed an article on wallstreetparage.com discussing the very same topic.  In escense, the FED is buying up bank debt to keep up the banks liquidity. These are not small time banks–rather the big ones like Bank of America, Goldman Sachs, Citigroup, JPMorgan, Morgan Stanley.

Also, Deutsche bank is leading the pac of il-liquidity.

“The worst of it is that regulators on neither side of the pond have seen fit to rein in the dangerous interconnections that Deutsche Bank has as a major derivatives counterparty with mega banks on Wall Street as well as other European banks. (See After a $354 Billion U.S. Bailout, Germany’s Deutsche Bank Still Has $49 Trillion in Derivatives.)

According to a 2016 report from the International Monetary Fund (IMF), Deutsche Bank is heavily interconnected as a financial counterparty to JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America as well as to big European banks. The IMF wrote that Deutsche Bank posed a greater threat to global financial stability than any other bank as a result of these interconnections. When the IMF made that assessment in 2016, Deutsche Bank had tens of billions of dollars more in market cap than it does today.”

Bottom line for the reason of his call–watch what youpay for assets. Some hedge funds/banks are dumping assets to achieve liquidity.

Capstone has always been a value buyer, NOT  a speculative buyer. To that point, we only buy if there is a large safety net. THE WORD OF THE TIME IS–“SAFETY”

The following article is from www.wallstreetparage.com.

 

What Has Frightened Wall Street Banks from Lending in the Repo Market?

Last Friday the Federal Reserve Bank of New York made it clear that its interventions in the overnight repo lending market were going to be a longer-term action. Call it what you will, the Fed has effectively returned to quantitative easing (QE) where it buys up Treasuries, Federal agency debt and agency mortgage-backed securities (MBS) from financial institutions in exchange for loans.

According to the New York Fed, the program has now been extended to at least October 10 and likely thereafter in one form or another. The Fed will be pumping in $75 billion daily in overnight repo loans while infusing $30 billion in 14-day term loans three times this week for a total of $90 billion in term loans.  Click Here For the Full Article

 

 

 

Appraisals will no longer be required on certain home sales less than $400,000

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This article was just posted on Housing Wire.com.

Interesting remifications for the Seller Finance business and the Note Buying business.

Draw your own conclusions.

Federal Reserve signs off on appraisal rule change, making change official

For the first time since 1994, certain home sales of $400,000 and under will soon not need an appraisal after federal regulators approved a proposal to increase the threshold at which residential home sales require an appraisal.

Last November, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve released a proposal that would increase the appraisal requirement from $250,000 to $400,000, meaning that certain home sales of $400,000 and below would no longer require an appraisal.

The agencies deliberated the rule for nearly a year, taking into consideration the more than 560 comments the agencies received about the rule change.

Last month, the FDIC and OCC signed off on the rule, but were still waiting on the Fed to approve the rule change as well.  Read More…

 

Most Important~~Yield / Investment to Value / Loan to Value

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This past weekend I was the keynote speaker for the Saturday NoteWorthy Convention. My goal was to demonstrate to the attendees just how simple notes can be.  Just how easy and simple it is to get started in the note business as either a passive investor or an active  investor.

To JUMP UP TO THE NEXT LEVEL.

I was able to articulate that the basics can be broken down into how one buys a note with a sense of security in mind.

What that means is focus more on Investment to Value (ITV) and Loan to Value (Loan to Value) vs just the ROI(Return On Investment) aka—yield.

An investor should focus on acceptable ITV or yield, WHICHEVER IS LOWER.

LTV tells a note buyer how much “skin in the game” the mortgagor has, or how much monetary or emotional attachment they have in the property.

ITV, on the other hand, tells the note investor how much he or she will invest in the note in relation to the value of the property. Yield is determined by the best and safest use of the note buyer’s money.

The amount of the mortgagor has invested, along with the value of the collateral and their credit score, will determine the ITV of the note buyer. Yield is the rate of return a note buyer demands when considering mortgagors’ credit, property value, and mortgagor’s equity and other risks.

When applying LTV, ITV and yield to the purchase of a note, all three are important and should be tied to one another. In other words, the down payment, credit score, value of the property, equity in property should be tied to the ITV and yield a note investor demands.

The more risk an investor incurs because of high LTV, the lower must be the ITV, and the yield must be higher. The note buyer will offer the lesser of the ITV vs. yield.

So, which is most important, LTV, ITV or yield?

The answer is that all are important and interrelate to one another.

Yield is determined by the best and safest

use of the note investor’s money. BUT….

        YIELD IS NOT REALIZED UNTIL THE NOTE IS PAID OFF.

 

Note Investors Forum Meetup October 2nd

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The Next Note Investors Forum Meeting will be
              Wednesday, October 2nd 11:30am-1:30pm
La Famiglia Restaurant, SE corner of Dobson & Guadalupe, Mesa

TOPIC:      Notes Made Simple

 

We’ll drill down with case studies into a simple strategy of Risk vs Reward, aka Risk Tolerance when looking at the options / variables available to both
new or seasoned note investors.

At the end of the meeting you’ll say, “Yep, I get it!!”.

Price $16.84 with online registration
$20.00 @ the door
Includes lunch, beverage, information and networking
EVENTBRITE TICKETS @

NoteWorthy Convention Scottsdale, AZ

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NoteWorthy Convention 2019

Scottsdale, AZ
September 20-22

      SPECIAL COMPLIMENTARY INVITATION I am honored to speak at the Saturday session.
You as a current/past attendee of the NOTE INVESTORS FORUM are invited to attend as my GUEST the Saturday NoteWorthy session, FREE, on me with my
speakers pass.To attend FREE—
Email   Aaron Halderman
aaron@notetools.comIn addition to networking opportunities with Note Professionals from around the country, here’s a peak at what you will get at the Convention:

  • Where To Find More Notes: Performing, Re-Performing & Non-Performing, CFDs, Land Contracts, Residential, Multi-Family, Commercial
  • How to Broker Notes for Cash, Now
  • How to Quickly Analyze A Deal
  • State of the Union and Capital Markets Discussions
  • How to Hypothecate
  • How to Buy and Sell Partials

and much more…………

            WHERE
Hilton Scottsdale Resort & Villas
6333 N Scottsdale Rd
Scottsdale, AZ 85250
Saturday September 21st: 8:30a – 8:00p

See you in Scottsdale,

Dave

PERFORMING NOTE OF THE MONTH

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PERFORMING CFD
CHOUTEAU, OK
ITV  46%  |   LTV  50%
VALUE     $74,759
UPB      $37,881.73
INTEREST RATE     10%
P & I    $365.00
SEASONING 122 MONTHS
SOLID PAY HISTORY
REMAINING TERM  238 MONTHS

PURCHASE PRICE  $34,092

Additional Assets Available

 
Contact:
Dave Franecki
Capstone Capital USA, LLC
Dave@CapstoneCapitalUSA.com
www.CapstoneCapitalUSA.com/notevault/

Cities Most Likely to Tank During the Next Recession

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As a seasoned real estate investor, one who has felt the pain with the 2008 downturn, I found this article very interest and timely. Many of my older RE cronies feel the same way. Only time will tell. None the less a very interesting and perhaps insightful  article from marketwatch.com. Notice the ominous position Phoenix has in the rankings as well as California and Florida.

What does this mean?  Be conservative on what you buy. Watch the LTV(Loan To Value) and  ITV(Investment To Value) PLUS other DUE DILIGENCE FACTORS. CLICK HERE FOR WHAT TO CONSIDER

If investors have flocked to your town, keep a close eye on home prices. 

Some housing markets haven’t seen the notable price increases that others have in recent years — and that could be a good thing when the next recessions rolls around.

The Federal Reserve may not be currently forecasting a recession, but sooner or later the U.S. economy’s fortunes will turn for the worse.

And when that happens, home owners in Rochester, N.Y., can rest easy.

A new study from Redfin ranked Rochester as the city least at risk of a housing downturn during the next recession. Redfin RDFN, +3.83%  computed the downturn risk for the 50 largest cities across the country using the following metrics:

• Median home sale price-to-household income ratio

  •  Average loan-to-value ratio of homes sold in 2018
  • Home price volatility based on the standard deviation of home prices year-to-year• Share of home sales that are flips, i.e. sold twice within 12 months for a different price• Diversity of local employment based on the likelihood that two randomly selected workers are in the same field• Share of the local economy dependent on exports• Share of local households headed by someone age 65 or olderThese factors were all weighted differently, based on how likely each attribute was to contribute to a real-estate market downturn, to produce an overall score.

    Rochester had the lowest score of any city studied at 30.4%, followed by Buffalo, N.Y. (31.9%) and Hartford, Ct. (33.9%). Overall, the top 10 cities that were least likely to see a recession-fueled housing downturn were all located east of the Mississippi River.  (NOTE: PHOENIX, VEGAS AND MANY CALIFORNIA cities are where  they were in THE GREAT RECESSION) 

Rank Metro area Average home loan-to-value ratio Home price volatility Flips share of sales Exports share of GDP Overall score
1 Riverside, Calif. 65.3% 17.9% 6.3% 5.6% 72.8%
2 Phoenix, Ariz. 64.8% 17.7% 8.1% 5.4% 69.8%
3 Miami, Fla. 50.4% 15.2% 7.5% 10.1% 69.5%
4 San Diego, Calif. 65.6% 16.9% 5.9% 8.0% 68.2%
5 Providence, R.I. 70.6% 16.8% 4.4% 8.6% 67.1%
6 Tampa, Fla. 59.2% 17.1% 7.5% 4.3% 66.8%
7 Las Vegas, Nev. 61.0% 16.7% 8.3% 2.4% 64.6%
8 Los Angeles, Calif. 62.6% 15.7% 7.7% 6.1% 63.7%
9 San Antonio, Texas N/A 15.7% 5.8% 7.1% 63.2%
10 Orlando, Fla. 61.2% 16.0% 6.1% 2.4% 59.1%

https://www.marketwatch.com/story/this-citys-real-estate-market-is-the-least-likely-to-tank-during-the-next-recession-2019-09-09?mod=mw_theo_homepage

REAL ESTATE NOTE DUE DILIGENCE

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Due Diligence is key to successful and safe note investing. In this video Dave Franecki shares the 6 Key Factors of Note Due Diligence