Calling the bottom
It never caught on of course, but I thought my idea for a new game show wasn’t bad. Named it Call The Bottom. Contestants would be assigned various markets around the country and then asked to predict when the bottom would be found. Dumb idea? You bet. As dumb as some of the silly financing rules we face in the real world? Not even close.
I too, tire of the phrase
Before continuing let’s all agree on what common sense is, in this, our new normal. (You as tired of that phrase as I am?) On one hand we have FHA still allowing credit scores not thinkable in more prudent times. On the other hand we have rules denying Gold Standard borrowers the ability to borrow money to buy real estate. What? Huh?
FHA underwriting is fairly well known, at least to the extent its perception is one of relative ease in qualifying. When buying property as an investor however, objective standards are often the Holy Grail — longed for, but never found. Let’s be specific.
Principles that cannot change
There’s something I’ve called the physics of economics — certain principles that subjective belief cannot change, outside of brute force. The simplest example would be the economic law of supply and demand. If there’s strong demand for a product or service in low supply, the price is driven upward. The obverse is also true. If gold was as easily found, as useful and plentiful as a dirt clod, it wouldn’t be worth more.
Fast forward to the supply/demand for housing
There’s all kinds of supply, and not enough (qualified) demand. Banks are holding on to foreclosures as if they expect them to morph into disguised oil wells. Investors are out there in force, buying what they can afford, sometimes what they can’t.
Some of those investors, maybe not a large percentage of the demand pie, but a very sizable percentage if measured in terms of available capital, are exceptionally qualified. Many of them have $250-500,000 and more, available for immediate investment into residential real estate. This usually translates into 1-4 unit properties.
My company is only a two horse operation, small and inconsequential by any objective measurement. Yet, we have investors from all over the country (that’s all we do, investment) who could literally buy $3 million worth of well located 1-4 unit properties, sometimes more, far more.
“I want to buy $3M in investment properties.” “No.”
Why don’t they? Cuz they wanna borrow money — often up to 80% of the purchase price. What evil creatures they must be? For every client who’s able to do this, but can’t due to Fannie/Freddie lunacy, I can point to half a dozen more investors to whom I’ve talked, who’re rowin’ the same boat and are seething.
According to the rule makers, they’re far too qualified and experienced.
I realize that reads as dripping sarcasm, but I mean it literally. The profile of the clients to whom I’ve referred is impressive:
- Credit scores in the range of 750-805.
- Job incomes of $100-800,000 a year.
- An investment portfolio of 6-35 properties, sometimes more.
- Available liquid reserves in six figures, sometimes seven.
- Cash flow from real estate of $3-20,000 — wait for it — monthly.
- ‘Back end ratios almost too small to mention. (Just had one the other day whose back end ratio was single digit.)
Please tell me that’s not the platinum standard for a borrower.
The lending rule in question
The rule in question is one allowing no more than four loans (including one’s primary residence, go figure.) for any one investor. That rule was it for awhile till even ‘they’ saw the inevitable folly. They then allowed as how ‘qualified’ investors could have up to 10 loans, but with tightened underwriting and other requirements.
Seriously? There are literally hundreds of California investors alone, conservatively speaking, who own a simple duplex or three, who could trade their current, battered net equity for a dozen such duplexes in another state. They’d be going from 0-50% LTV to 70-80% and still be increasing their bottom line cash flow.
Then there are those who already own many properties, 10 or more of which have debt.
They’re long time, long term real estate investors with invaluable experience managing property. Most have the ability to pay off 30 year loans in 8-12 years — and often do. They’re smart. They understand their ability to prudently leverage well located real estate, then free them of debt as soon as possible would lead them to a solid retirement. What an original idea. Gonna write than gem down.
Artificially restrained demand
All over the country there are 1-4 unit properties, SFRs, townhouses, condos, and 2-4 unit ‘plexes’ remaining unsold due to this irrational policy. The irony is the powers that be frame this rule as a safety precaution. If underwriting is back to when I got into the business, 1969, or at least the 1990s, then those qualifying should be allowed to borrow.
Furthermore, given that lenders are willing to lend, and investors are willing to buy the loans — without any form of mortgage insurance — what’s the problem for Heaven’s sake?! I only make mention of MI to underline the fact there’s more than enough initial investor equity (Skin in the game?) to make the groups buying these loans very comfortable. 20-50% down works.
That brings us to the present
Also, consider the economic conditions in force now.
- At or near the bottom for price.
- Historically low fixed interest rates.
- 5-10% or more cash on cash returns immediately for property investors.
What’s not to like?
These investors are found in every market. It’s like dying of thirst in the desert with an endless supply of water sittin’ next to you. When outside forces interfere with the physics of economics, silliness is often the result.
Actually, silly’s not the word we’d like to use, is it?
Is the real estate industry endorsing Carson’s nomination to HUD?
(BUSINESS NEWS) Ben Carson’s initial appointment to HUD was controversial given his lack of experience in housing, but what is the pulse now?
NAR strongly backs Dr. Carson’s nomination
When President-Elect Donald Trump put forth Dr. Ben Carson’s name as the nominee for Secretary of Housing and Urban Development, NAR President William E. Brown said, “While we’ve made great strides in recent years, far more can be done to put the dream of homeownership in reach for more Americans.”
At the time of nomination, the National Association of Realtors (the largest trade organization in the nation) offered a positive tone regarding Dr. Carson and said the industry looks forward to working with him. But does that hold true today?
The confirmation hearings yesterday were far less controversial than one would expect, especially in light of how many initially reacted to his nomination. Given his lack of experience in housing, questions seemed to often center around protecting the LGBT community and veterans, both of which he pledged to support.
In fact, Dr. Carson said the Fair Housing Act is “one of the best pieces of legislation we’ve ever had in this country,” promising to issue a “world-class plan” for housing upon his confirmation…
Job openings hit 14-year high, signaling economic improvement
The volume of job openings is improving, but not across all industries. The overall economy is improving, but not evenly across all career paths.
Job openings hit a high point
To understand the overall business climate, the U.S. Labor Department studies employment, today releasing data specific to job vacancies. According to the department’s Job Openings and Labor Turnover Survey (JOLT) for April, job openings rose to 5.38 million, the highest seen since December 2000, and a significant jump from March’s 5.11 million vacancies. Although a lagging indicator, it shows strength in the labor market.
The Labor Department reports that the number of hires in April fell to 5 million, which indicates a weak point in the strong report, and although the volume remains near recent highs, this indicates a talent gap and highlights the number of people who have left the labor market and given up on looking for a job.
Good news, bad news, depending on your profession
That said, another recent Department report notes that employers added 221,000 jobs in April and 280,000 in May, but the additions are not evenly spread across industries. Construction jobs rose in April, but dipped in professional and business services, hospitality, trade, and transportation utilities. In other words, white collar jobs are down, blue collar jobs are up, which is good or bad news depending on your profession.
Additionally, the volume of people quitting their jobs was 2.7 million in April compared to the seven-year high of 2.8 million in March. Economists follow this number as a metric for gauging employee confidence in finding their next job.
If you’re in the market for a job, there are an increasing number of openings, so your chance of getting hired is improving, but there is a caveat – not all industries are enjoying improvement.
If you’re hiring talent, you’ll still get endless resumes, but there appears to be a growing talent gap for non-labor jobs, so you’re not alone in struggling to find the right candidate.
Economists suspect the jobs market will continue to improve as a whole, but this data does not pertain to every industry.
Gas prices are down, so are gas taxes about to go up?
Do low gas prices mean higher gas taxes are on the way? Budgeting for 2015 just got a bit more complicated, if some politicians have their way.
Gas taxes and your bottom line
Many industries rely heavily on time in their vehicle, not just truck drivers and delivery trucks. Sales professionals hop in their vehicles throughout the day, as do many other types of professionals (service providers like plumbers, and so forth). For that reason, gas prices and taxes are a relevant line item that must be budgeted for 2015, but with politicians making the rounds to push for higher gas taxes, budgeting becomes more complicated.
Gas prices are down roughly 50 cents per gallon compared to a year ago, which some analysts say have contributed to more money in consumers’ pockets. Some believe that this will improve holiday sales, but others believe the timing is just right to increase federal taxes on gas. The current tax on gas is 18.40 cents per gallon, and on diesel are 24.40 cents per gallon.
Supporters and opponents are polar opposites
Supporters argue as follows: gas prices are low, so it won’t hurt to increase federal gas taxes, in fact, those funds must go toward improving our infrastructure, which in the long run, saves Americans money because smoother roads mean better gas mileage and less congestion.
Gas taxes have long been a polarizing concept, and despite lowered gas prices, the controversial nature of the taxes have not diminished.
While some are pushing for complete abolition of federal gas taxes, others, like former Pennsylvania Governor, Ed Rendell (D) tell CNBC, “Say that cost the average driver $130 a year. They would get a return on that investment” in safer roads and increased quality of life, he added.
The Washington Post‘s Chris Mooney points out that federal gas taxes have been “stuck” at 18 cents for over 20 years, last raised when gas was barely a dollar a gallon and that the tax must increase not only to improve the infrastructure, but to “green” our behavior, and help our nation find tax reform compromise.
Is a gas tax politically plausible?
Mooney writes, “So, this is not an argument that a gas tax raise is politically plausible — any more than a economically efficient tax on carbon would be. It’s merely a suggestion that — ignoring politics — it might be a pretty good idea.”
Rendell noted, “The World Economic Forum, 10 years ago, rated us the best infrastructure in the world,” adding that we “need to do something for our infrastructure, not in a one or two year period, but over a decade.”
Others would note that this rating has not crumbled in just a few years, that despite many bridges and roads in need of repair, our infrastructure is still superior to even the most civilized nations.
Regardless of the reasons, most believe that Congress won’t touch this issue with a ten-foot pole, especially leading up to another Presidential campaign season starting next year.
“I think it’s too toxic and continues to be too toxic,” Steve LaTourette (the former Republican congressman best known for his close friendship with his fellow Ohioan, Speaker John Boehner) tells The Atlantic. “I see no political will to get this done.”
Whether the time is fortuitous or not, and regardless of the positive side effects, many point to a fear of voters’ retaliation against any politician siding with a gas hike, so this matter going any further than the proposal stage is unlikely.
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