The blood is in the streets… and the money is in the air… Part III

What society realized is that real estate, under the norm, is not as liquid as stocks and bonds and the real estate market is a lot larger than equity markets. In the equity markets, liquidity is defined by the number of buyers willing to take ownership at a set price. In the real estate market, liquidity is determined by how willing the lenders are to lend money to buyers.

The fuel of the market boom was the availability of funding and the need to place it. Lenders created new products to introduce a new type of homebuyer- the subprime market, which would essentially increase the rate of homeownership. We saw the introduction of sub-prime option-arm loans (which were a bad idea from the beginning but no one raised their hand to question them). Today, many of these new-found homeowners are in an adjustable rate mortgage and do not have the income to cushion the anticipated fluctuating mortgage payments.

The over willingness of lenders to lend, and over lend, to the sub-prime market during this real estate boom along with the marketing practices of players, from mortgage brokers to direct lenders, caused irrational exuberance in real estate markets and real estate valuation. Today the real estate market is living with a “hangover” due to that behavior. Lenders are coming to the realization that the pendulum must swing in the other direction. There is a consensus in the residential mortgage industry that underwriting standards must be tightened to preserve the integrity of the overall industry and the valuation of U.S. residential real estate. The question today is: How far to the right must the pendulum swing?

The blood is in the streets... the money is in the air... Part II

The blood is in the streets… when did the leak start? Let’s go back in history for a better understanding of where the market is today.

Over the past two decades, Middle America became familiar with investments through the use of 401Ks and other types of retirement plans which introduced them into the stock and bond market. The equity markets were the new avenue to financial freedom and wealth.

However, because of the market corrections of the 1987 crash and the 1998 tech bubble, society was forced to become accustomed not only to the up’s and down’s of the market, but also to the extreme emotional distress of these market fluctuations.

Psychologically, those fears were reserved for those riskier types of investments and real estate was considered the new safe haven to asset diversification. Middle America started considering their own home as their investment with hopes in adding to their portfolio through purchasing a second, third, and so on.

Enter- the media. Books, tapes, DVD’s, seminars, Gurus, clubs, mentors, education- a new industry within itself- all with the common goal of showing society how they too can get rich in real estate… get rich quick.

Suddenly there was a high demand for property through the growing knowledge of how, where and when to buy. First it was California- home prices appreciating substantially by the week. Then followed Miami, Tampa, Phoenix, Las Vegas, until we got so bombarded by inventory in markets with double-digit appreciation that buyers were at a frenzy to make that $50,000 in two months.

What happened…?

To Be Continued...

The blood is in the streets and the dollars are in the air- Part I

The real estate bubble has burst. The nation has seen an overwhelming increase in residential foreclosures, markets have seen depreciation in home value, and developers are losing Millions in earnest deposits on land due to project fall-outs. Most of all, real estate speculators have returned to their rabbit holes leaving a nationwide surplus of inventory and lack of retail buyers. Oh, but wait- we’re not retail buyers. We’re investors. This is the introduction to a totally different story.

Working for a real estate investment company often has me defending my career from friends and family members who claim to be experts in the industry because they read Business Week and own their own home to know [think] that their home value isn’t going anywhere anytime soon. What they fail to know is that the “crash” of the real estate market is actually a good thing—for us investors at least.

This is the time to buy. There is a window for investors to purchase property while foreclosures are high, speculation is down, and lenders figure out how to fix their mistakes...