SmartGrowth Real Estate

Late to the party...

2011-05-19T14:19:00.000-07:00

For everyone that reads my blog they'll know this is old news...

http://blogs.forbes.com/morganbrennan/2011/05/19/dont-expect-a-housing-market-recovery-until-2014/

Happy 2011 Utah Real Estate!

2011-02-12T15:38:00.000-08:00

Sorry I've been MIA the past few months... but so has the real estate market!

Some really good things are happening with the economy... finally... but we still have a long way to go. IF you want to know whats happening in real estate here in Utah, then let me try to summarize:

Prices overall are still falling. REO inventory is a little flatter but still rising. Banks are holding on as long as they can. A few Utah banks have failed, but a couple that were on the chopping block were able to raise some cash and keep the FDIC at bay. I can't imagine the ROI being too great for many of the investors, but in the long run it should pay off just fine. Who wouldnt want to borrow money at 0% and invest risk free for 2 or even 4% risk free!

The Utah economy is relatively strong and the employment pool is deep. The next hurdle to overcome is realizing that wages here still need to come down. If you were making $80,000 a year in 2007 in the real estate/construction industry, then you will likely need to be happy making $45,000 in 2011. Sorry buds, but thats the truth. Everyone was overpaid a few years ago... even myself!

Distressed deals are out there, however there are lots of overly aggressive investors and trust fund babies who are trying to "do deals in real estate". Be careful and dont get emotionally attached to a project. Let someone else overpay, and you can buy it from them next year when they decide to take the losses. Also, dont pay more than 5% in broker fees. They are starving and usually dont add value to the deal.

Home builders who wisely saved their money during the boom years are reaping the benefits. Do not try to buy a distressed development project anymore. If it is a good deal, then a home builder like Salisbury Homes, Ivory, Perry Homes, or McArthur wouldve already bought it.

Be afraid of commercial deals... especially retail. Employment stinks and there is still a contraction to urban centers. There are some pearls out there if you get lucky, but after the bidding war you likely wont see high ROI. It'll look good on paper, but you actual yield will be lucky to get in the low teens.

Sorry for the brevity of this post. If you'd like me to elaborate please comment!

I warned you about the cont'd decline...

2010-09-16T08:05:00.000-07:00

http://www.cnbc.com/id/39192979/

As this article states, there are many local areas that wont see dramatic declines in the future. But for the most part we will see prices decline all over the US. It's gonna make a lot of the tax break buyers looks bad bc many of the homes will likely decline beyond the $8000 tax credit they received.

The winners over the next 12 months are the people who can afford to sell for the lowest price. Banks will continue to be slow about approving offers bc they wont admit the truth. Some of the big winners will be the home builders who have managed to get into DEVELOPED LAND for super cheap. A brand new home will always get the nod, if everything else is equal... and even if some things AREN'T equal! There are a few guys who can afford to build a home for 50-75 dollars per foot, and as long as they got the home site for a great price they'll be able to sell what they build. It may not be the absorption we saw a few years ago, but it will be steady.

The really good deals are pretty much gone...

2010-08-30T17:18:00.000-07:00

This article covers it. It's been awhile since I posted anything. This is why:

http://online.wsj.com/article/SB10001424052748704323704575461681180655898.html

I have seen some VERY aggressive buyers out there. Although to be honest I see about ten times as many aggressive offers as I do deals that actually close on the property. Definitely some dumb money out there just buying stuff for a management fee. If they can get 5% the investors will be happy they just dont lose their money I guess.

More downward pressure to come.

2010-06-11T10:20:00.000-07:00

http://www.sltrib.com/business/ci_15271636

Remember... its a great time to rent a large house. Do not buy unless you are in it for the LONG haul (10-15 years).

Zell tells it how it is

2010-05-15T08:50:00.001-07:00

This is a great short article. Zell is a smart guy and doesnt mince words. One point I really like is about the small banks. For the past several months I have been afraid that most good deals would be pooled together in large traunches for FDIC structured note sales. After seeing the high prices those assets are going for, I'm beginning to think that the small banks will still offer some decent deals. I especially like his point about "investing by committee" vs investing being done by entrepreneurs.

http://nreionline.com/news/Zell_ULI_0513/

CRE Delinquency above 8%

2010-05-05T12:31:00.000-07:00

The trend keeps on going... The following article shows that there is still a lot of trouble with commercial real estate. Keep in mind that these are only DELINQUENCIES and NOT foreclosures/workouts. Most banks are not in a position to write down the huge losses on these assets, so we will be in this mess for several quarters to come. While there is some good news of credit markets loosening up, I dont think it is the silver lining that developers/borrowers are looking for.

http://nreionline.com/news/cmbs-delinquence-rate-hits-record-0504/

I also like this short article about rating agencies. They are completely useless. Remember, theyre the ones that blindly marked all these debt packages as AAA so they were quickly sucked up by the investment groups. I think the same criticism can be made of appraisers as well. I have YET to look at a recent appraisal that is anywhere NEAR the fair market value for the asset in question.

http://www.cnbc.com/id/36961144

CMBS saga continues... what does it mean for Utah?

2010-04-01T22:16:00.000-07:00

Before reading this, just remember that Utah usually lags behind the national trends in almost everything from fashion to real estate. Notice the high amount of delinquent multifamily. After these properties hit the "reset button" and come back online, we will see the new owner dropping rents like a rock in order to get maximum occupancy. This means cheaper rents and better terms for the renter. Before investing in multifamily, make sure the revenue assumptions are realistic for a declining market, as well as considerations for high capital improvements and maintenance. After a few months (or more) of vacancy the buildings really start to fall apart.

From NREIONLINE.com:

The delinquency rate for commercial mortgage-backed securities lose sharply in March to more than 7%, according to New York-based data and analytics firm Trepp LLC.
Troubled commercial real estate and construction loans are contributing to higher bank failure rates, Trepp reports. The researcher projects that 200 banks will fail in 2010.
Many of the failures to date have occurred in Florida, Georgia and California, as well as in the rust belt markets of Illinois, Wisconsin, Minnesota and Michigan.
The banks are already feeling the effects of the highest delinquency rate in CMBS history at 7.61%. The percentage of loans 30 or more days delinquent, in foreclosure or REO, jumped 89 basis points, according to the new report.
The March figure includes the $3 billion Stuyvesant Town multifamily loan in New York, which drove the March rate up by about 40 basis points.
Researchers had been optimistic that delinquencies were leveling off, because the rate in February was the smallest in nine months. However, the steep increase in March showed that the delinquency rate has not yet peaked.
The percentage of loans seriously delinquent, or at least 60 days past due, in foreclosure, REO or non-performing, rose 69 basis points to 6.66%, according to Trepp.
A year ago, the delinquency rate was less than 2%. The year-over-year increase in March 2010 represents a 400% rise over March 2009.
Among property types, the highest delinquency rate occurred in the hotel sector, reaching nearly 17%, up from 15.65% in February, Trepp reports. A year ago, the delinquency rate in the lodging sector was just 2.19%.
Meanwhile, delinquencies in the multifamily sector rose to 13.19%, up steeply from 9.87% in February. The multifamily sector recorded a delinquency rate of 3.86% in March 2009.
The office sector had the lowest delinquency rate in March, 4.73%, up slightly from 4.33% in February.
Meanwhile, as the delinquency rate rose, overall CMBS spreads dropped 40 to 45 basis points for March, according to Trepp. For the first quarter of 2010, the highest-rated CMBS bonds saw spreads drop 105 to 115 basis points over the last 3 months.

Supply and demand

2010-03-23T11:20:00.000-07:00

http://www.cnbc.com/id/36003528

lots of homes on the market, and increasing. Any of you who have tried to buy a home lately will notice that the sale is always "subject to 3rd party approval". As the "holding power" of these 3rd parties continues to weaken, we will see lower prices being approved and values drop. Again, If any of you have bought a home in the last year I'm sure you got a good deal, just dont pay attention to the other sales on your street for a few years. As long as you bought with the intention to stay for ten years or more, you'll be just fine.

I continue to believe that we will slowly drop another 5-10% along the Wasatch front through 2011.

Still not at the bottom...

2010-03-11T08:46:00.000-08:00

Utah foreclosures up 90%!!! And they havent even started selling them yet!

http://www.sltrib.com/business/ci_14649910

It's All Rigged I Tell Ya! (Well, a lot of it anyway)

2010-02-20T10:33:00.000-08:00

Not sure I agree 100%, but it brings up some good points. Great article by Matt Taibbi in Rollingstone gace me this excerpt on BIG BANKS and the lack of fundamentals in trading:

"One of the most common practices is a thing called front-running, which is really no different from the old "Wire" con, another scam popularized in The Sting. But instead of intercepting a telegraph wire in order to bet on racetrack results ahead of the crowd, what Wall Street does is make bets ahead of valuable information they obtain in the course of everyday business.

Say you're working for the commodities desk of a big investment bank, and a major client — a pension fund, perhaps — calls you up and asks you to buy a billion dollars of oil futures for them. Once you place that huge order, the price of those futures is almost guaranteed to go up. If the guy in charge of asset management a few desks down from you somehow finds out about that, he can make a fortune for the bank by betting ahead of that client of yours. The deal would be instantaneous and undetectable, and it would offer huge profits. Your own client would lose money, of course — he'd end up paying a higher price for the oil futures he ordered, because you would have driven up the price. But that doesn't keep banks from screwing their own customers in this very way.

The scam is so blatant that Goldman Sachs actually warns its clients that something along these lines might happen to them. In the disclosure section at the back of a research paper the bank issued on January 15th, Goldman advises clients to buy some dubious high-yield bonds while admitting that the bank itself may bet against those same (crappy) bonds. "Our salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research," the disclosure reads. "Our asset-management area, our proprietary-trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research."

Banks admit this stuff openly, despite the fact that there are securities laws that require banks to engage in "fair dealing with customers" and prohibit analysts from issuing opinions that are at odds with what they really think. And yet here they are, saying flat-out that they may be issuing an opinion at odds with what they really think."

Zion's Bank DOWNGRADED? Centennial Bank saved?

2010-02-05T21:55:00.000-08:00

Here are some notes on Utah banks:

Zions Bancorp (NYSE: ZION), a regional bank based in Utah, was downgraded by Keefe, Bruyette and Woods (KBW) to "underperform" from "market perform". The firm said the bank would need to raise as much as $700 million in common equity to repay its TARP bailout funds.

LINK: http://www.benzinga.com/node/111251

While I refuse to believe that Zion's will go under, this just goes to show that they're not quite the exemplary bank as portrayed in local media. Firstly, they NEEDED the TARP money they borrowed. Secondly, the executives made more than a few bad acquisitions of community banks over recent years, and someone should lose their job over that. I don't see how some of these bankers keep their jobs when the bank is losing hundreds of millions of dollars each quarter. If they borrowed the TARP and actually BROKE EVEN then maybe I can justify keeping some management around.

If you want to learn more about Zion's troubles look at my post last summer titled "Zion's: Lipstick on the Pig?"

One last note: I read an article that states Ogden's Centennial Bank is near to closing a deal for re-capitalization with a Orem Company Vision Bankcard. LINK: http://www.standard.net/topics/business/2010/01/29/ogden-based-centennial-bank-nears-joint-venture-utah-e-commerce-firm

Last I checked, Centennial was already operating under an FDIC cease and desist order and on the verge of collapse. They have a TON of bad real estate loans! Why would anyone put money into a failing bank? The FDIC says they have $27mm defaulting loans out of a total loan amount of $171mm... about 16%. Bankrate.com says that default number is more like 25% which would be $42mm!!! (LINK: http://www.bankrate.com/rates/safe-sound/financial-statements.aspx?fedid=2560526

So, let's say that that out of the defaulting loans Centennial has to write down an average of 40% of the note value (this is pretty realistic for commercial real estate and construction loans nowadays). That means the bank would have to set aside $16.8mm in order to cover those loan losses! So why would any investor put that kind of money into a bank? Much less when the money you invest can't even be used to generate a return on equity! It just seems like this deal wouldn't pass the Vision Bankcard smell test. Maybe I'm wrong? It's been known to happen...

This Says It All... that's a lot of bad loans!

2010-01-17T14:54:00.000-08:00

How long will the economy be flat? What will happen to the number of bank failures? Read here: http://nreionline.com/news/underwater_cre_loan_maturities_0115/

This hits the nail on the head. We could either see a mass consolidation of banks during the next 5 years, or we will see even more massive government (taxpayer) investment/nationalization of most of the banking system. The only way we could avoid this would be through huge government tax cuts across the board and reduction of government spending... unless you believe in more socialism.

New Year... Old Problems

2010-01-01T21:37:00.000-08:00

Happy New Year! This is the 2nd year for my little blog! I hope these discussions will help readers prepare for the future and avoid mistakes with their real estate investments. I promise that I'll try to emphasize positive data, but I have to come across any. The best news I have for people is that interest rates are still quite low, and that any long term financing should be taken care of sooner rather than later.

I'm gonna highlight a few points from this article: http://nreionline.com/news/Realpoint_CMBS_delinquencies/

I have been asked by some people about investing in real estate, especially multifamily and hotels. BEWARE! Most CRE values are still spiraling downward as vacancies have not flattened and more layoffs are expected. My home town (Pleasant Grove) could really use a new major hotel to start construction (it has been on hold for almost two years I think). Despite an announcement that it SHOULD'VE started in September-October 2009, I think it will go vertical in 2011 at the earliest...

Things wont get better until they stop getting worse. CRE delinquencies continue to increase and likely will not bottom until late 2010 or even 2011 (it all hinges on when banks get their act together... see my previous posts for more info). The delinquent unpaid balance for CMBS loans climbed to $37.9 billion in November from $32.55 billion in October, a 16% spike, according to Realpoint LLC. The multifamily sector accounted for 26% of the $37.9 billion delinquent unpaid balance for CMBS in November, followed closely by retail (25%), office (16%), and hotel (15%). Conversely, the industrial market accounted for less than 2% of the delinquent unpaid balance for CMBS during the same period. Health care properties represented less than 1%. Realpoint projects the balance of delinquent CMBS loans to grow to between $50 billion and $60 billion by mid-2010. A loan is considered delinquent when it is 30 days or more past due. After these loans are past due they can easily take a year to get through the "special services" departments.

Here is where it gets scary...

The number of CMBS loans newly transferred into special servicing totaled 324 in November (JUST November). The current balance on those loans is $8.64 billion. Among the transfers were 177 loans issued from 2005 to 2007 — the height of the bull market for commercial real estate lending. These 177 loans have a current balance of $7.46 billion.

The average loss severity — the amount written off as a loss and expressed as a percentage of the unpaid balance plus related workout fees — also is on the rise. In November alone, an additional $254.6 million in loan workouts and liquidations across 52 loans were reported with an average loss severity of 46%. This means if a bank foreclosed on a property that had a $10 million balance owed, then the bank would have to discount the asset $4.6 million in order to attract a buyer! And these numbers are rising!

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Banks better look out for 2010

2009-12-11T13:19:00.000-08:00

"The Financial Accounting Standards board (FASB) is expected to unveil a new proposal in first-quarter 2010 that would require all financial instruments, including loans, to be measured on the balance sheet at FV. Based on Fitch's review, if the proposal for loans was adopted in the third quarter of 2009, it would result in a decrease in shareholder's equity of $130 billion (approximately 14% of the combined total equity of all the 20 banks reviewed)." Fitch Ratings

If the FASB changes to "fair value" accounting, then the banks would have to drop billions off of their balance sheet. Based on their OWN analysis this is what some major banks would look like if that happened:

Regions Bank (classified as "well-capitalized by the FDIC)- Check out the footnotes to Regions Financial Corp.’s latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion.

Bank of America- Bank of America Corp. said its loans as of June 30 were worth $64.4 billion less than its balance sheet said. The difference represented 58 percent of the company’s Tier 1 common equity, a measure of capital used by regulators that excludes preferred stock and many intangible assets, such as goodwill accumulated through acquisitions of other companies.

Wells Fargo- Wells Fargo & Co. said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank’s Tier 1 common equity, by comparison, was $47.1 billion.

Keep checking the headlines for these new FASB rulings. Additionally, I bet these banks are using more recent appraisals to estimate these losses. Any appraisal I saw in 2009 was still over-priced by at least 20%, so in reality the losses could be much higher. Be aware that if accounting moves to FV, then the stock market could be in for a long summer as more banks are forced to shut down.

Thanks to Bloomberg.com for much of this info!

Barometer for Utah Business and Banks

2009-11-24T09:32:00.000-08:00

Nice link here: http://online.wsj.com/article/BT-CO-20091123-711818.html

I dont think Zions is going anywhere, but it looks like they are preparing for a rough road ahead. The stock made a jump yesterday, and I suggest selling if you own any. Next year they'll start reporting more losses (they dont expect to be profitable until 2011) and as the Commercial RE assets continue to drop in value as a result of high unemployment, etc you will see the stock get beat down.

Zions is not alone. Most of our local banks will have their hands full as they deal with worthless assets on their books. The question is: will the banks be able to sell them at market value? or will those assets bring down the banks?

FDIC doesnt have a clue.

2009-11-11T22:57:00.000-08:00

Click: http://nreionline.com/news/new_fdic_bank_rules_1104/

It looks like bank regulators still don't know what they're doing. Recently the law was adjusted so that a bank doesnt have to report/classify a loan as a "bad" loan, even if they know it is under water. So if you own a strip mall that is worth less than the loan balance, the bank will work with you after your loan matures, as long as you are covering the payments. More than half of the $1.4 TRILLION in CRE loans that mature by 2014 are upside down. These new laws simply allow banks to delay the inevitable... a foreclosure and significant write down of losses for the banks. With so much bad debt out there, we will surely see many more bank closures.

I think we should rip the band aid off quick and start the healing process. All this tinkering with the system just complicates the matter and delays the inevitable. Banks are more confused than ever and are looking less and less like true "banks" and more like real estate property managers! If they go out of business, so be it.

It's a great article and I suggest you read it.

Commercial RE Article

2009-10-25T22:52:00.000-07:00

Great article that summarizes what is going on. The significantly long time periods to resolve these will only drop values even more. Special servicers are getting backed up, and I don't think many banks will stay open long enough to get the loan back.

Stay away from investing in any CRE like office and retail building anytime soon. Its only getting worse...

http://nreionline.com/news/troubled_cmbs_loans_skyrocket_1023/

How is the Dow Over 10,000?

2009-10-15T22:55:00.000-07:00

Who else is surprised at the stock markets performance? Who else can't explain why a profitable JPMorgan pushes everything higher? I dont know where all this money is coming from. Most people I talk to have got their money on the sidelines. So who is buying all this stock?

This is a excerpt from a good article about JPMorgan and other big companies that are showing good numbers... for now. I love the part about how JPMorgan didnt even make money from consumer markets... they made it SPECULATING. This bubble wont last. Get out of the stock market while you can.

Take all the people who are unemployed…who are working fewer hours…who have given up looking for work…whose positions have been downgraded…and add the family members who depend on them for their daily bread…and you have nearly a quarter of the population. How can companies expect to increase sales and profits with a quarter of the population forced to cut back severely?

They can’t. The earnings numbers are misleading. Most of the earnings that we’ve seen come from cost cutting, not growing top-line sales. How do businesses cut costs? By trimming employees! In other words, the earnings figures we’re seeing are contributing to the slump…not alleviating it.

You can see how, in the short run this can lead to increased profits. But it can’t go on for long. The more businesses cut costs the more their sales go down, because consumers (who are also their employees) have less money to spend.

And according to a Wall Street Journal report, with too much capacity…and falling sales, businesses “are hesitant to reinvest such profits into their businesses.”

That’s why business investment, as we reported two days ago, is falling even faster than sales. And it’s why people who are looking for a job are going to have a hard time finding one.

How did JPMorgan earn so much money in such a bad economy?

We begin with a bit of skepticism. After all, we know consumers aren’t borrowing.Consumer credit is going down. So they can’t be making money there. And we know businesses aren’t expanding, so they can’t be making money by lending to corporations either.

Wait a minute. JPMorgan is a bank, right? Don’t banks make money by lending money? Yes…that’s what we thought. Then who is JPMorgan lending to?

The only net borrower is the government.

The Financial Times confirms that Morgan’s “US consumer businesses continued to bleed, with its credit card unit losing $700 million in the quarter and its retail bank…barely breaking even.” It wrote off $7 billion in uncollectible consumer loans – more than twice as much as last year.

Its mortgage group lost money too. And it surely didn’t make any money helping US business build new factories and expand payrolls.

So what does that leave? All the components of the business that have to do with the real economy are losing money or barely breaking even. What’s left?

The news reports attribute the huge profits to “trading.” But trading is a broad category. And our guess is that if you look more closely you will find that JPMorgan made its money the old fashioned way – by ripping off the government.

‘You mean, JPMorgan took the feds’ money and now is showing huge profits because it is just lending money back to the people they got it from? ‘

Yes. But not only that. They’re also probably speculating on gold, oil and stocks…along with everyone else. The feds’ money has pushed all these speculative trades into profit.

‘And now, they’re going to pay themselves big bonuses, aren’t they?’

Yes. The papers tell us, “bonuses explode on Wall Street to a new record.”

‘So, then…when the next crisis comes…they won’t have any money in the banks, will they?’

Nope.

‘So they’ll have to get bailed out again.’

Yep.

‘But maybe the next time the feds will wise up and just let them go broke.’

Entire Article: http://dailyreckoning.com/the-jp-morgan-effect/

Commercial Real Estate Worries

2009-10-07T22:56:00.000-07:00

http://www.pbs.org/newshour/bb/business/july-dec09/realestate_10-06.html

Great little article/discussion about the shaky state of CRE. Notice the fact that they are tracking $5 Billion a month in defaults and foreclosures... and its not slowing. I think Utah will notice that any strip mall/complex that is not in an excellent location will certainly see increased vacancy next year.

From my discussions it seems quite a few smaller regional banks in Utah have quite a bit of exposure in CRE. Hopefully they can keep their head above water. FYI: Centennial Bank recently sold 80% of the company to a Provo Company in order to raise capital. 80%!!! More to follow I'm sure.

Goodbye 3.5% FHA loans

2009-10-01T15:00:00.000-07:00

Click: http://www.foxbusiness.com/story/markets/industries/real-estate/proposal-boost-fha-payment-requirement/

I will be the first to say that not everyone should own a home, but the government is getting ready to once again PUNISH the good credit keeping people of the nation by increasing down payment and refusing to finance closing costs.

With all the talk about "stimulus" and "recovery" you'd think this would be thrown out, or at least adjusted. I am OK with increasing income and FICO score requirements, but don't make it more difficult for responsible people to buy a home. Subsidize people that have earned it!

Utah State Debt Increase- MASS TRANSIT

2009-09-10T09:02:00.000-07:00

Trib article here: http://www.sltrib.com/business/ci_13301940

Utah is selling $1 BILLION in debt... the largest in state history. I really don't have a huge problem with this, since the money isn't being used to cover operating expenses. However, it looks like a large portion of the money will be used to build bigger freeways and further encourage driving and burning tons of oil/gas along the Wasatch Front.

Why doesnt the state spend the money on improving MASS TRANSIT? I talk to people all the time who use the UTA bus to commute to SLC. They love it. You get free internet, not to mention a chair to nap in during that hour long drive. The only problem I have heard is that the buses get VERY CROWDED. I applaud Utahns for taking the bus, and the crowding seems to hint that even more people would use the UTA.

I have not done the research in detail, but from what I gather it is MUCH CHEAPER to invest in mass transit than to build roads. Why doesn't Utah spend the money on more UTA buses, more convenient schedules, and my personal favorite--- the UTA TRAX!

I wish the Trib would look into the cost/benefit and compare the money being spent on more concrete and steel that will be used about 3 hours per day with money for UTA mass transit... not to mention all the money we would save on oil! Decrease foreign oil dependency!

What are banks doing with foreclosures?

2009-09-01T12:39:00.000-07:00

Great little article here:

http://www.cnbc.com/id/32630317

I think a lot of bank responses are fluff, but this author is starting to sort through it all. The best point for us to all bring home is that more inventory is being put INTO the system than is moving OUT of the system.. i.e. banks aren't selling the houses fast enough.

This means we are still looking for the residential bottom. Still a great time to buy if you are looking to buy and live in more than 5 years for your family, though. Just don't be surprised if your value decreases a bit then slowly rebounds over next 5 years... cuz if you are happy with what you're paying each month, then who cares! Although I will say that I have considered RENTING for the rest of my life instead of homeownership. There are so many great deals out there...

RENTING IS NOT THROWING AWAY MONEY!!!

Utah Home Prices Not Yet Bottomed

2009-08-21T08:33:00.000-07:00

http://www.heraldextra.com/business/local/article_cc1028e3-42a2-5b10-a06d-b7fd8e648656.html

This article talks about the rising rate of delinquency and foreclosure in Utah. It is pretty straightforward. The conclusion they seem to stop short of is that home values in Utah are continuing to deteriorate. With unemployment rising and even PRIME fixed rate mortgages defaulting, it is evident that many people don't make enough money to pay their mortgage. As banks short sell or foreclose on these homes we will see median home values drop. In the 2nd quarter of 2009 the median home sales price in Utah was about $207,000... down from $215,000 in 2008.

Another stat to consider is average median income. I believe that home values will settle relative to median income levels. A good rule of thumb in home buying is this:

If you have a moderate amount of debt like a car payment, student loans, and a Nordstrom card then you should buy a house about three times your annual income.

If you have little to no debt you shouldnt go higher than four times your annual income.

In 2007 (before unemployment got high-- its probably 5-10% less now) the median income in Utah was about $54,000. If Utahns follow these rules, then the low level median home prices will be about $150,000, and the high end at $200,000. Based on this data, I think the median home price in Utah should settle in between these two price points, likely nearer to the $200,000 price point since Utahns typically have less debt nowadays... maybe.

Consider: In 2001 the median home price in Utah was $146,000. In the same year the median annual income was $47,000.

Maybe we can learn a little lesson from history. Before investing in real estate please consider these facts. I'm thinking the median value could settle around $185,000.

Tribune Vacant Land Article

2009-08-17T14:56:00.001-07:00

Click : http://www.sltrib.com/business/ci_13094690

Nice little article. Although I must say that their definition of "pennies on the dollar" is still substantially higher than what most land banks will pay for these homesites. Most of these 30-50% discounted deals from banks are OK for the consumer who is anxious to build their own home (which few are when you can buy existing for so much cheaper), but to a land bank (long term investor) we need to be more like 15-25% on the dollar.

It just depends on how long the bank wants to hold on to the REO property.

Zion's Bank: Lipstick on the pig?

2009-08-14T09:32:00.001-07:00

OK I am not a banker, but some news the past fews days has really got my attention. I will keep it simple...

A SL Tribune article on 8/12/09 reported that Zions will have to dip into their $675 million "checking account" in order to cover their $200 million debt service this year. They also say they have "adequate cash" on hand for the future.

Click: http://www.istockanalyst.com/article/viewiStockNews/articleid/3410936

Hmmm.... just a few months ago Zions Bank claimed they didn't really need the TARP money, and that they were pressured to take it. Every article in the media touts of how strong Zions Bank is. I'm beginning to think that all the smaller banks they acquired are a bigger drain than they want to admit. Here is why: As far as I can tell, the $1.4 BILLION in TARP money they got last year went into their capital, or "checking account". The first half of 2009 the bank reported almost $900 million in LOSSES-- not to mention the big losses reported at the end of 2008. Zions spokesman James Abbott makes it sound like the $675 million in the "checking account" is simply retained earnings they have kept around for a rainy day, when in reality it looks to me like that "checking account" is 100% full of taxpayer's TARP money!

Further, another stock analyst believes that Zions will continue to write down their assets over $850 million in the next nine months b/c of commercial loan troubles. Click: http://www.tradingmarkets.com/.site/news/Stock%20News/2381511/

Writing down this $850 million requires Zions to move cash from their "checking account" into something called a Loan Loss Reserve account. You do the math. IT DOES NOT PENCIL. I am afraid that Zions is in bigger trouble than most Utahns think, and that they will SURELY need even more TARP money to stay capitalized throughout the recession.

This second article mentions that Zions has been loading up the loan loss reserve for several quarters, but something tells all is not well in Zion (forgive me, I had to say that). If anyone has more detailed info please discuss!

Existing Home Sales

2009-08-12T09:07:00.000-07:00

Why the big deal about existing home sales? The past 12 months we had 4.76 million home sales. In 2000 we had 5.11 million homes sales. We are still lower than we were ten years ago. Why the big stock market jump? Why all the excitement over sales data that simply says "People are still buying homes." If anything I think that around 5 million is a good number that we will likely stay at for the long term. During the "boom" we were at levels around 6.5 million.

I'm not trying to be Debbie Downer, but when the stock market jumps 1.5% in a single day based on this data, I get worried that its purely emotional.

UTAH Real Estate Opinions

2009-08-10T10:05:00.000-07:00

Many of you have asked me about the status of Utah real estate. Here are a few topics/predictions for the Utah market.

1. Residential prices are NEAR the bottom in most markets. Still a lot of inventory that banks have yet to approve short sales/REO sales on. This will bring us to the bottom in 4Q 2009, maybe early 2010. Now is a great time to get the pick of the litter, as long as you want to be there for at least 5 years. If you plan on moving the next few years, then just rent. In 5 years you would be lucky to have gained 10% appreciation on a home, unless you get a screaming deal (see #2).

2. If you are buying a house, you aren't getting a great deal unless the entire house is finished and you are paying less than $80 per foot. Try to make offers near $60 per foot with a solid pre-approval letter attached. The days of a SFR home selling more than $100 per foot are over. Maybe a few homes on the benches will get up there, but it certainly won't be as common as it was.

3. Prices for a nice 2 bedroom condo in an accessible market located near good amenities will probably settle around $135,000. 3 bedroom townhomes near $155,000. Nicer multifamily with 3 bedrooms will be around $180,000.

4. An entry level 2000 sq ft SFR in most "good" areas will start around $150,000. These will be stripped down to carpet, linoleum, lots of vinyl, and laminate countertops.

5. Subtract 10-15% for Saratoga Springs, Eagle Mountain, Payson, Bluffdale, Farmington, and areas that require longer commutes to urban centers.

6. Apartment rents will continue to soften statewide. Buyers market to negotiate contract terms. Renting is not a bad option. Lots of nice homes/condos out there.

Hope this helps. If there is a specific topic you would like me to post about, then please register and let me know! Thanks!

Fannie Mae

2009-08-07T13:30:00.001-07:00

This could quickly turn into a huge discussion, so I'll try to keep this brief.

Just a quick thought from an article I just read titled "Fixing Fannie Mae". From a political standpoint, remember that it was the democrats like Barney Frank and Nancy Pelosi who pushed the Bush administration into allowing more Americans to achieve the "American Dream" of homeownership. Bush tried to overhaul Fannie in 2003 with an investigation, but it was later blocked by Democrats in congress. A few years later we found that Fannie "overstated" it's profits by $9 BILLION in one year!!! The hypocritical thing is that now people like Barney Frank are quoted as saying "There are some Americans that shouldn't own a house". Who votes for these people??? Anyway...

This is an excerpt from the article:

"The government "sponsored" Fannie and Freddie because expanding homeownership was, reasonably, deemed a public good: It fosters social and political stability. But in recent years, as the homeownership rate peaked near 70 percent, gains increasingly reflected the extension of credit to people who couldn't afford it. The rising homeownership rate proved not only unsustainable but -- as the current economic crisis has taught -- destabilizing.

A new University of Utah report suggests that homeownership will decline from the current rate of 67.4 percent to 63.5 percent in the next decade. In other words, we'll be back to 1985 levels. No doubt some will cite those figures to argue that government should once again pump up the mortgage market. But the policymakers in charge of redesigning Fannie and Freddie must stay focused on systemic risks. There can be as much, or more, dignity in renting a place you can afford as there is in buying one you can't. American society was pretty stable in 1985."

The percentages caught my attention. Most data I have come across says that around 7% of Americans (not just homeowners polled, but ALL Americans) either have or will default on a mortgage. Hmmm... the high was 70% homeownership, and the predicted ratio will be 63%. Looks like the American Dream has its limits... and the limits are simple economics. I think the same people that believe everyone should own a home are the same people that think 100% employment is attractive.

Just a few thoughts... even if my data isn't exactly correct, I think you get my point. Please don't hesitate to reply with comments or corrections.

Toxic Assets- May 2009

2009-08-07T13:25:00.000-07:00

Most of you know I'm not a licensed financial advisor, so take my thoughts for what they're worth... thoughts, not advice.

We have enjoyed a nice little rally in the stock markets the past few weeks. Personally, I think a large part of this uptick is a result of emotion rather than fundamentals. Our elected officials have curiously changed their apocalyptic attitude that we saw from January to March, and are now finding the silver lining in every report they can-- no matter how thin the lining is. While I am glad we are no longer being threatened with doom-and-gloom in order to get legislation passed in DC, it would be wise for the investor to take this into consideration:

Banks still have a TON of toxic assets on their books. A recent report showed that there was a 59% increase from Q4 to Q1 2009 in bank "special services" departments. This means that defaulting commercial loans are piling up and trying to be worked out. These debts will be foreclosed on, or the loan will be modified. Either way, the debt will be written down SIGNIFICANTLY by the bank. The financial sector can't hide these debts forever. As the writedowns occur, you will see the stock market follow suit. This has to happen in order for the economy to start healing. The wild card here is more government intervention like a "toxic bank", etc. (Note: Read my last email for more info on the CMBS research on default increase and forecasts)

Another consideration is that a few days ago after the US government auctioned off several billion dollars in bonds (in order to finance their spending). They couldn't sell the bonds for near what they expected, so the interest rate got pushed up. There will be several of these auctions as more and more money is spent, and as those bond rates go up we will likely see all interest rates follow suit. I'm not against higher interest rates. I believe that money should NOT be free, but I'm afraid that with all the tampering in DC we will shoot quickly past equilibrium.

I still believe that 2009 will see the bottom of residential real estate, and each day my conviction grows that commercial RE will bottom in 2010-2011. The bottoms will be long and flat, so plenty of time to make decisions. One of these days the banks will start lending again, but I give it a 50/50 chance that the next underwriter to review and approve your development loan application will be a government appointed employee.

I always appreciate any feedback or thoughts!

CRE and Maturity Defaults

2009-08-07T13:24:00.000-07:00

Hey y'all,

Most of you know my belief that Q3-Q4 of 2009 will be the bottom in residential real estate, and I think many of you agree. I have also shared that commercial property wouldn't bottom until 2010-2011. Many of you are involved in these transactions so I thought this information would be useful. These links basically illustrate the fact that CRE is just recently becoming delinquent, and they also talk about "maturity defaults" which I think will be a large problem for the next 2-3 years. I have expressed caution to many people about investing in CRE right now, even though there ARE some good deals out there. I would love to hear any feedback from you.

http://www.reuters.com/article/bondsNews/idUSN2651581920090327

http://www.scribd.com/doc/13659140/Deutsche-Bank-Commercial-RE-Q1-2009

I hope this is helpful. Let's stay informed as we all find a way through this RE funk...

First Post!

2009-08-07T13:17:00.000-07:00

A few of my friend have encouraged me to start blogging about real estate and the consulting issues that come up within my business. So... HERE IT IS. I will keep it simple and straightforward.

Anyone that wants to discuss topics like the economy, politics, real estate finance, distressed assets, banking, FDIC, interest rates, land planning, and a variety of other should add this to their favorites toolbar. Please visit frequently and tell your friends. I ask that you reply often, even if you strongly disagree with my views.

I will post some of my past emails that have been sent out, so feel free to review. One big miss I had was the stock market (Dow Jones) stopping at 8500! Whoops! Oh well, I still think it is overbought...