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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.

Note Investor Forum Meetup ~~~ December 2019

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MEETING TOPICS –Why Invest in Notes or Why Invest in Rentals
Which is better and when to invest in either. When to sell.
How do I structure a seller finance transaction on my rental property?

If there is time we’ll discuss implementing title holding trusts in the purchase/sale process.

RESERVE YOUR SPOT ON THIS SITE
Attendance capped at 55

Full buffet lunch. In advance $16.83

EVENTBRITE TICKETS @

R U INTERESTED IN INVESTMENT GRADE PARTIALS?

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QUICK QUESTION………..

Do you have an interest in buying
INVESTMENT GRADE PARTIALS?

TO BE ADDED TO OUR PREFERRED CONTACT LIST 

CLICK ON THE MORE INFO BUTTON

Capstone only buys and Capstone only sells
Investment Grade Notes.
FIND OUT WHY HERE

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Watch a Short Utube Video Overview

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Note Investors Forum Meetup – Phoenix

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The Next Note Investors Forum Meeting will be

              Wednesday, November 6th 11:30am-1:30pm
La Famiglia Restaurant, SE corner of Dobson & Guadalupe, Mesa

TOPICS:      Trends In The Note Industry
Highlights from the NoteExpo
Scatter Shooting
Case Studies

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

 


What The Heck Is My Note Worth Anyway?

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Factors Affecting the Value of Mortgage Notes

When you start the process of selling your mortgage note it’s important to keep in mind that how much a mortgage note sells for mostly comes down to risk. Typically, the less risk involved in the note, the greater its market value.

Value of Property

One of the first things a note-purchasing company looks at is the value of the property that serves as collateral on the note. The current market value of the residential or commercial real estate listed on the note can increase or decrease the note’s market value.

Keep in mind, the amount listed on the mortgage typically is not the same thing as the current value on the property, or the amount for which the property was last purchased. Real estate values can fluctuate over time. If you’re not sure of the current value of your property, online resources such as Zillow can provide a rough estimate. During the note-selling process, a more precise quote is given.

A factor which affects property value is the actual type of the property. Typically single family dwellings maintain higher values than other property types like condos or manufactured homes.

Equity from Buyer

The equity the real estate’s owner has in the property factors into the value of the note. This includes the amount of the down payment, as well as payments already received from the property owner.

When a payer has invested a significant portion of his or her own assets into the real estate, the payer has a vested interest in the real estate and is less likely to default on the loan. Thus, a mortgage note with a significant level of equity from the buyer presents a lower risk.

The more equity the homeowner has, the more money a note seller is typically able to get for the note.

Property Owner’s Credit Score

The mortgage note owner’s creditworthiness does not factor into the sale of the note, but the property owner’s creditworthiness does.

The higher the credit score of the property owner, the higher the value of the note. More creditworthiness in the owner means the person purchasing the payments is taking on less risk. Because the buyer of the note is assuming less risk, that money is passed on to the seller.

A low credit score does not automatically mean the note can’t be sold. Other factors such as payment history on the note, and the payer’s equity in the property, can help in cases where a low credit score hurts. Still, a lower score means more risk and thus degrades the note’s value.

Payment History on Note

Payment history on the note also determines how much a mortgage note is worth. This concept is often described as notes either being “performing,” meaning having regular payments, or “non-performing,” which means the payments have not been paid on time.

Being able to show a strong payment history from the property owner can make your mortgage note more valuable.Most private mortgages are not reported to credit bureaus, and so the payments do not influence the payer’s credit score. Thus, positive credit history on the mortgage note can help compensate for a payor having a weaker credit score.

Recourse vs. Nonrecourse

If the payer on the private mortgage is a corporate entity, trust or nonprofit, it helps to have an individual listed as the personal guarantee of the payer. By having a guarantee, it means the note has recourse in the event the entity, trust or nonprofit stops making payments on the loan.

The term “recourse” means the note has someone with whom recourse could be taken in the event the loan is defaulted upon. Though it does not bar it from being saleable, a nonrecourse note has significantly more risk, which degrades its value.

Other Factors

Interest rate and the length of a loan also help determine the value of the note. A higher interest rate and shorter loan term make for a more valuable note.

Other note terms, such as a rider on the mortgage affecting the term, can also affect its value. For instance, some private mortgage notes have a balloon rider. This type of rider lets smaller payments be made for a time, with one lump sum due at the end of the term. This would be instead of evenly distributing the amount due over a series of payments. Any rider affecting the payment schedule can affect the value of the note.

Getting to Know ITV & LTV with Dave Franecki & Kevin Shortle

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Recently I was interviewed by Kevin Shortle for his podcast. I think you’ll enjoy it………………

What are LTV and ITV? In this episode, Dave Franecki of Capstone Capital USA, LLC explains what these terms mean and dives deeper on how we can use them in our note investment conquests. Having 30+ years of experience in various aspects of the real estate industry, Dave’s range of experiences includes real estate brokerage, landlord, rehabber, fix and flips, loan officer, credit repair, investor mentor, building and land development, and note investing. With people constantly getting confused with loan to value and investment to value, Dave helps us clear up this confusion by citing some real deal applications and examples……….

There’s something to be said about experience in the business. If you don’t have the experience in the business, there’s no better way to learn quicker than from people who do have that experience. If you’re in the Arizona area, check out Dave and go to his Phoenix Note Investors Forum  meetup group. If you’re down there in the Phoenix area, it’s a nice meetup group. You’re growing it like crazy

property values, investment to value ratio, loan to value ratio, performing notes, non-performing notes, note investment

Getting To Know ITV And LTV With Dave Franecki

I’ve got a repeat guest for this episode. I’ve known Dave for years now. We saw each other again face-to-face. It’s been a while since we’ve seen each other really face-to-face in person. We were at the Noteworthy Convention and was able to spend a little bit of time with him. He spoke on stage, I spoke on stage and afterward we realized, “There are some other topics people need to talk about.” Dave Franecki, welcome.

 

CLICK HERE FOR THE FULL TRANSCRIPT

 

Metro Phoenix Real Estate Overview

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I understand many of the folks reading this post are not from Phoenix. You may find this interesting for now, then let’s revisit in a year and compare. Just sayin.

For Buyers:
The news media is filled with short-term predictions regarding the economy and how it will, or will not, affect real estate prices.  It’s understandable for buyers to want their home to appreciate in value after they purchase, who doesn’t?  However, there is far too much attention paid to short-term influences and fluctuations these days and not enough attention paid to the long view.  Real estate is a long-term investment for many people.  Despite the euphoria of 2005-2007 and the nightmare of 2008-2011, on average homes are selling 81.6% higher today than they were in the year 2000.  That’s an average appreciation rate of 4.3% per year over the course of 19 years.  Smaller homes appreciated the most over time while larger homes appreciated the least.  Homes under 1,000sf have appreciated 122% since 2000, an average of 6.4% per year.  Those between 1,000-2,000sf appreciated 106%, an average of 5.6% per year.  2,000-3,000sf appreciated 68% at 3.6% per year.  3,000-4,000sf appreciated 49% at 2.6% per year and homes over 4,000sf appreciated 11% at 0.6% per year.

For Sellers:
Average asking prices per square foot are up 9% over this time last year and they’re continuing to rise. However, not one individual price range has risen 9% or more; confusing, right? That’s because the sharp increase in the average has more to do with a growing market share of luxury active listings over $500K as inventory has plummeted everywhere else. The highest increase is within $200K-$250K, where sellers are asking 5.6% more than they were last year. That’s followed by listings over $1M where they’re asking 4.2% more and $500K-$1M at 4.0%.  All other price ranges are just 1-3% higher.  But are buyers paying?  Actually, many of them are! In the $200K-$250K range, the average sales price per square foot is still 0.8% higher than the average list price; and between $250-$300K the average sales price is 6.8% higher than the average list per square foot. Things change over $500K.  Between $500K-$1M there’s a -6.3% gap between asking price and sales price and over $1M the average sales price is -15.1% below the average asking price.

 

Commentary written by Tina Tamboer, Senior Housing Analyst with The Cromford Report ©2019 Cromford Associates LLC and Tamboer Consulting LLC

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…