If you want to see the back-end of the credit crisis and how the FDIC did the hand-off of IndyMac assets to OneWest Bank see the following links… enough to make your blood boil.
Here’s a visual explanation: TBWS video blog
Last week, for the first time since 1996, Federal Regulators warned Banks to check their portfolios and give themselves “stress tests” to ensure they can handle a rise in interest rates. The guidance was meant as a reminder for the Banks to watch their risk exposure to higher rates but also confirms our thoughts that eventually (probably within the year) the Fed will begin a series of rate increases. Most experts think that kind of action would not be likely until unemployment rates get under 9%. We’ll see…
Read more at: Link to article in Washington Post
Outlook 2010
Well…It’s crystal ball time! Last year I wrote a very long dissertation on my thoughts for 2009 and the feedback was that it was great information but simply too long. So, here’s the synopsis for 2010 in my humble opinion:
The Bad News.
InventoryI get the Lis Pendens and the foreclosure reports and there is still a substantial amount of distressed properties forthcoming. In particular the neighbor islands and West Oahu seem like they will be negatively impacted by increased foreclosures and short sales.
EmploymentAdditionally, the employment numbers don’t look good and they also don’t take into account that in Hawaii, many people work multiple jobs. We are still going through furloughs for the State employees and cutbacks in the private sector.
TourismLocal experts are anticipating that tourism will continue to be slow in Hawaii for 2010 while our mainland visitors put off their Hawaii vacations to stay closer to home this year. In addition, the Japanese are still coming but spending less…even with the Yen’s strength over the Dollar, overall spending is substantially down when compared to the last time the Yen was sub-100 against the Dollar. Everyone has a wait-and-see approach towards the anticipation of a Chinese tourism boom. So far the boom has not come. It’s still very expensive to come here relative to their vacation alternatives but, as I was recently reminded, with the sheer numbers of potential visitors from China we only need a very small percentage for a very big impact! Sign up for your Mandarin lessons now!
TaxesI think we will see higher taxes in 2010 both State and Federal and less allowable deductions. This will take more money out of consumer’s pockets and lead to less consumption. After all…someone has to pay for all this stimulus spending right?
The Good News.
Interest Rates
The good news is we have really really low interest rates! Historically these rates are exceptional…and they are artificially low due to the government buying mortgage-backed securities via Fannie and Freddie. The risk, however, is that when they discontinue their buying spree, rates will likely move upward as the open market requires a higher yield on those mortgage bonds.
InflationWhy else should you buy now? Well… inflation. I have been preaching this for all of 2009, but if you believe that inflation is the end result of the government printing a trillion dollars and the currency being devalued against every other major currency, then you should buy real estate. Get a fixed mortgage at these rates and pay it back with 60-cent dollars in the future. In other words…the price of milk may fluctuate but your mortgage stays at a fixed payment, regardless of inflation.
Government SpendingGovernment spending on “shovel-ready” projects should spur the construction sector which will help the economy by offsetting some of the employment weakness. Whether you believe in the long term benefits of development/mass transit or not, the short term benefits are likely to be jobs.
NeighborhoodsCertain neighborhoods are hot right now! Remember that the real estate market is made up of neighborhoods and not all of them rise and fall together. Look at Hawaii Kai during the Japanese Bubble burst…hardly a noticeable dip. My call… markets like Aina Haina, Mililani Mauka, Pacific Palisades are showing strength, might be a good bet if that’s an area that works for your budget and lifestyle.
Tax CreditThe First-Time Home Buyer tax credit has been extended through April 2010. A genuine credit of up to $8,000 against what you owe Uncle Sam. Even if you owned before or bought last year you may be entitled to some credits so check it out: Home Buyer Tax Credit Information
Who is buying right now?
This is a largely organic market where the Buyers are locals who live and work in the Hawaii. Right now they are living with their family members and are looking to have a place of their own. The investors are dipping their toe in the market for certain types of properties but financing for commercial, multi-family and condo-hotel properties is still difficult.
Conclusion
I think that real estate prices will drop another 6-8% in 2010, but interest rates might trend upward in the second half of the year so, if you are a Buyer, it becomes a decision between a low fixed rate or a small pricing discount (which ultimately boils down to the question of “how long are you going to own the property?”). I generally think it’s a good time to buy but I would be looking to buy properties with all the same attributes that we look for in all our purchases…mainly a good value in a good neighborhood. If you are a Seller this year…sell sooner, not later.
First Time Homebuyers and not-so-first-time Homebuyers may qualify for a tax credit!
See a few links here to answer some of your questions:
** Please remember to consult a tax professional for advice on your individual tax related circumstances**
Here’s an interesting look at the credit crisis:
http://www.crisisofcredit.com/
I apologize for missing a few blog entries. My tech gurus tell me I am supposed to stay consistent with the blogging but sometimes we get busy! And this summer was busy (thank God!). Summer is normally a busy time for residential real estate as Buyers start to consider a move prior to the school session re-starting so they can make the adjustment without disrupting the kids. This summer, however, was also helped along by four additional motivations for Buyers:
1) Return of consumer confidence. For many, the rebound in the stock market seemed to signal a forward-looking rebound in the economy and so…people felt better about their lives, jobs and stability.
2) Lower prices. Real estate prices, depending on neighborhood, have fallen considerably and many bargains exist!
3) Lower interest rates. Interest rates have been bouncing around between 4.5-5.5% all summer and that is phenomenal. (Don’t forget to read my blog entry “DE or IN…flation that is” which discusses the advantages of being in a fixed rate mortgage in inflationary times!)
4) $8,000 first-time homebuyers tax credit. Free stimulus money from Uncle Sam for first time homebuyers gives you a December 1st closing deadline so that adds compression to the summer sales cycle.
So what’s the effect in the trenches? The summer rush probably moved some inventory and slowed the downward pricing pressures but stay tuned for Q1 of 2010…we may need more government stimulation if #3 and #4 on the list above end without broad based organic recovery behind it. (Ill save that for the next blog)
SINGLE FAMILY HOME SALES
August 2009 August 2008 % Change Year over Year 2009 Y-T-D 2008 Y-T-D % Change Y-T-D
Sales: 247 255 -3.1% 1,619 1,919 -15.6%
Median Price: $566,000 $635,000 -10.9% $579,000 $629,000 -9.4%
CONDOMINIUMS August 2009 August 2008 % Change Year over Year 2009 Y-T-D 2008 Y-T-D % Change Y-T-D
Sales:351 345 +1.7% 2,058 2,868 -28.2%
Median Price: $290,000 $328,000 -11.6% $305,000 $330,000 -7.6%
Wall Street seems to think the worst of the recession is over… 48 straight days of increasing oil prices and increasing interest rates likely means that consumers will limit their discretionary spending at a time when we need an increase in spending to revive the economy. The sick thing is that oil demand is not excessive, it’s just speculators again…and the Fed lending rate to the institutions is still at zero so it’s the bond investors driving yields (rates) up also. In my opinion Wall Street is way ahead of the curve in anticipating the worse is over and starting the unwinding on its own…
Just ranting today…!
As of June 1, 2009 Fannie Mae and Freddie Mac will no longer accept leasehold loans. What does this mean for the market? Well. for the US as a whole it’s probably not that big a deal but for Hawaii is a BIG deal. Hawaii is a unique market where there are several large Trust organizations that own huge tracks of land.
So here’s the history in a nutshell… Many of these large Trusts actually date back to the original “Great Mahele” in which Hawaiian royalty divided up the lands amongst their relatives or favored advisors. Well, historically these Trusts have often been tasked with creating income for the organization’s charitable causes without actually selling the underlying asset (land). So the answer was to lease the land to developers to construct buildings etc. Many of these leasehold buildings were developed in the 60’s and 70’s during the construction boom of Honolulu and most were on 75 year leases. That means many of them are about halfway through their lease terms. So there still exists hundreds, if not thousands, of indivdually owned leasehold units that no longer qualify to refinance or sell their units to buyers that want to get conventional financing. That shrinks the buyer pool considerably!
A buyer can still get portfolio loans or FHA approved loans provided the lease expiration is at least 10 years longer than the loan term and meets a half a dozen other restrictions… probably a tough one!
So in the end… if you live in a leasehold condo and your Lessor offers the fee for purchase… BUY IT!
I heard a quote recently that was attributed to Sam Zell…perhaps the greatest real estate investor in modern times. He is credited with saying, “Dear God please give me one more recession, I promise I won’t waste it this time.”
I think that adequately sums opportunities that abound in a market like this when combined with the correct outlook and attitude. I don’t think we can argue that the US financial system, despite recent setbacks, is still the best system built yet, and the ingenuity and acumen of American business remains intact.
Couple that with an increasing population base (unlike Japan), a more global economy with more travel access, a finite supply of land in Hawaii and a potentially inflationary market in the near future and one might start to recognize that while we cannot call a bottom to this market…it may not be such a bad time to get in!