Journal

It is time to say Goodbye

David Levin — Thu, 17 Apr 2008 01:13:33 +0000

Dear friends and readers:

I will be bringing our blog to a close this month. I have decided to embark on a new career. I have been accepted into the Rabbinical Program of the Hebrew Union College- Jewish Institute of Religion. This is quite a change in direction if I say so myself. There are many out there thinking that now is a great time to be moving OUT of real estate. But in reality this passion of mine has been something I have wanted to pursue for a long time.

I have enjoyed real estate immensely and it has been a good career. Although the market is certainly challenging, many opportunities exist in the marketplace. It is essential to operate from a position of knowledge. And it has been my hope that our website, blog and radio shows have provided the information and insight to assist both our readers and listeners in understanding real estate. I want to thank all of you for being able to provide this service to you.

Keep striving to acquire knowledge in order to make informed decisions. Best of luck in all your endeavors!  

All the best,

David

An extraordinary moment in history

David Levin — Sat, 12 Apr 2008 10:20:44 +0000

The housing market is reeling. Inventories are at all time highs and demand is very sluggish. Mortgage loans are exploding like land mines and foreclosures are at historic levels and increasing. Foreclosures further increase the housing stock helping to further depress markets. Lenders are shell-shocked and new lending activity is being curtailed as borrowers and properties are ever more closely scrutinized. And yet, homelessness remains with the number of people living without adequate housing at extraordinarily high levels.

There must be an opportunity to work together and alleviate some of these problems. I am not advocating just giving people homes or curtailing foreclosures. However, it seems somehow logical that providing housing to those in need is better than waiting for the market cycles to run their course and provide savvy investors opportunities pick up properties from the desperate or from the lenders. Now is the time for innovative, creative and aggressive action.

I am not advocating government step in and bail out bad deals. Rewarding bad behavior, the moral hazard issue, should be avoided. But if those deals are bad deals anyway, might there be a way to use the housing stock, the financial resources, lenders and government agencies to create rental programs, or rent-to-own programs and keep some homeowners in their homes? It is not easy, but there is an extraordinarily opportunity for social good and even market stabilization that can come of something that is currently a huge problem with no end in sight.

This is an extraordinary moment in history. Let's not squander it.

A Case for Principal Reduction and the FHA Guarantee

David Levin — Wed, 02 Apr 2008 12:32:46 +0000

There is much comment and opinion as to whether the proposed principal reduction for distressed homeowners advocated as one fix to the housing mess is good. This idea is currently working its way through the Congress and is endorsed by the Administration. Critics claim that this effectively rewards the moral hazard and forces the lenders to take a hit (loss) they would otherwise not have to take. In point of fact this is not true and this idea, what I call an Insider Short Sale, actually has real merit.

If the lender can expect that the borrower will not be able to sustain the mortgage payments, then there is a quantifiable cost based on a probability and risk assessment that can be calculated. The bank needs to weigh the anticipated total costs associated with taking back the property and reselling it under the usual procedures against the cost of doing the deal now with the current borrower. The lender also picks up an FHA guarantee of the remaining debt; a significant boost to the credit at a time the lender can use it.

Someone (maybe that fabled guy with a green eyeshade) sits down and calculates the probability of the house being taken back, the total cost of doing that (everything from legal fees, time, fix-up, agent sales fees, closing costs, etc.) and the anticipated sales price likely to be received when the house is actually sold back into the market. If that loss is greater than or equal to the proposed “Insider Short Sale”, then the bank would be better off taking the hit now and accepting the “Insider Short Sale”.

It is not charity, nor is it forcing the bank to take an unexpected loss. The bank realistically is poised to take the loss regardless. The bank benefits by taking its “best first loss” immediately, freeing itself to move on to other issues. This Insider Short Sale has the added benefit of keeping a family in its house, sparing the painful dislocation that is part of the process.

Please Just Shut Up

David Levin — Sun, 30 Mar 2008 23:17:54 +0000

This is a desperate message to Lawrence Yun, Economist for the National Association of Realtors (NAR). You, like your predecessors, have spun, twisted, contorted, colored, manipulated and fabricated data from the marketplace to created fictional interpretations of what is happening in the residential real estate markets. For a while you were a source of amusement in the industry. We all enjoyed the entertainment value of the absurd conclusions you would draw since the rest of us were getting pretty gloomy. However, you are no longer amusing, you are no longer funny. Long ago your misdirection effectively discredited the NAR as a source of leadership. And these consistent concoctions even make us suspect of the data you use, let alone their interpretation-even when you actually might be correct.

The NAR should be providing its membership, the industry as a whole and the general public with honest assessments of the marketplace so we have effective tools to try to conduct business. This consistent abuse of the NAR’s bully pulpit is not only pathetic, but it has marginalized the Association at the very time when the Association is needed more than ever. Enough already; Please Just Shut Up.

Nazis Baathists and Mortgage Brokers

David Levin — Thu, 27 Mar 2008 01:52:44 +0000

When we decided to rebuild Western Europe after the end of World War II, we did something rather controversial: We used former members of the Nazi party to help in the rebuilding process. We used them because they were the people who knew how things ran and how to get things done. And despite their former affiliations they became critical to the extraordinary success that was the reconstruction of war-ravaged West Germany. In Iraq, we tried a different tactic. We purged everyone in the involved in the Baath Party, the group that ran Iraq under the former dictator. De-Baathification as it was known is also known for its failure to bring working systems or reconstruction to a war-ravaged Iraq.

Now here come the Mortgage Brokers. Sharp criticism has been leveled that those who were at least partially responsible for the sub-prime mortgage meltdown are now setting up shop to work with borrowers in trouble. Many are outraged that we are letting the very people who made the mess have the chance to profit from fixing the very problems they helped to create.

The response to this is simply that a pragmatic approach to solving the problem is more important than the principals some think have been violated. No doubt many people out there peddling assistance to homeowners in trouble are the very ones that pushed wrong products on the wrong people. However, the problems in the marketplace loom large. Government agencies are studying the issue, weighing, considering, pondering, but not actually helping. The market continues its harsh correction and people are losing their houses.

We need the professionals involved helping to renegotiate bad loans. And by the way, we also need regulatory oversight to keep charlatans from abusing the people in trouble. So let the former participants who helped create the wreckage help those people in trouble. They may be the best equipped to actually work through the issues and the opportunity to make a buck is their incentive to do it. It may offend some sensibilities, but now is the time for a realistic and practical approach to fixing the problems that exist.

In Florida its not so hard to be Green

David Levin — Wed, 12 Mar 2008 19:20:59 +0000

With all due respect to Kermit and our Governor, it is not so hard being green as long as you are smart about what you attempt to control. With all the initiatives and lofty talk, the extraordinary 400 pound gorillas in Florida’s room are automobile usage and smart development. The combination of poorly maintained cars and urban sprawl are easily the most environmentally unfriendly combination in the state, dwarfing all other carbon footprints or any other pollution measure you care to use. Were we to require cars and trucks to be tuned and burn fuel efficiently, we would reduce emissions by tons and increase fuel efficiency on the roads by tanker loads.

We also need to promote urban infill. This is where developed areas, that already have infrastructure in place, are permitted to creatively add density and combine living, working and retail environments. Such infill should be combined with further expanding public transportation systems in intelligent ways such as buses. The need for cars diminishes further reducing emissions and gasoline consumption.

Light rail systems and the like can be studied, but they require a substantial investment in infrastructure at a time when funds are just not available for such capital investment. Before we begin some new quest to "green" the state, spending millions to explore new programs, let us work on the things that are already out there before us that will improve the quality of all our lives in tangible meaningful ways in the near term.

Real Estate and The Titanic

David Levin — Mon, 10 Mar 2008 11:13:21 +0000

What is the difference between the current real estate market and the Titanic?

-The Titanic had a band.

A variation of an old and a bad joke to be sure. But it underscores the current situation. The real estate market is going through a very painful part of the cycle. There is nothing anyone can do to stop this inexorable juggernaut called the market.

The calls for government intervention or for the Fed to come to the rescue ignores two facts- the problem is still growing, its magnitude yet to be fully determined, and no one really knows what is the “fix” to the problem. Everything that can create a more difficult situation is working in concert against problems easing any time soon. Housing inventories continue to rise, access to credit has become harder, equity requirements have gone up, interest rates have risen, house prices continue to fall and all are combined with an economic slowdown affecting every aspect of the real estate and credit markets.

The truth is that this ship is sinking and realistically that cannot be stopped. What we don’t know is how far is it to the bottom and what happens once we get there.

More thoughts on that at another time.

In Real Estate Desperation usually trumps Principal(le)

David Levin — Fri, 07 Mar 2008 22:37:53 +0000

Although we all believe Thou Shalt Not Steal is an inviolate commandment, when your child is hungry and you do not have money for food, stealing a loaf of bread, most would agree, seems to be okay.

When we find ourselves with our financial backs to the wall, we also find we are willing to do whatever we need to do to fight our way out of the corner, sometimes ethics notwithstanding. In this market the people who bought at the top may find themselves underwater for decades. They will be willing to go to great lengths to protect their financial position. In this gray area is the following anecdote, which is based on a story I originally saw last January in Seeking Alpha:

The market is falling apart. A house bought in 2005 in a subdivision of similar houses for $750,000 with zero down is now worth $450,000- $500,000- if it can be sold at all. The subdivision is filled with foreclosures and short sales yet no buyers have stepped up to start filling the vacancies. A homeowner in the neighborhood approaches the bank that holds the mortgage on a house a few doors down. The bank is willing to sell the house for $450,000. The homeowner gets approved for a mortgage on the new $450,000 house and moves in. He immediately stops payment on the old house and gives back the keys though a deed in lieu of foreclosure. The old bank is left holding the bag. The new homeowner has a much lower level of debt that is manageable. Although he now also has a big ding on his credit report, he has his house and until he needs to buy a new car on credit, he is sitting pretty.

Sobering thoughts for a market yet to find a bottom.

Real Estate Flippers and Joni Mitchell

David Levin — Mon, 03 Mar 2008 14:14:13 +0000

I’ve looked at life from both sides now
And only after that can I make an informed decision.

Although Joni Mitchell never expected to be singing about understanding real estate, she was right. There are two ways to look at a property before you can make a decision on what you are willing to offer to purchase it.

Single Family investors often look towards the 65% of As Repaired Value (ARV) as the target maximum offering price, less any costs to improve or repair the subject property. In other words, if the value of a property when it is ready for sale is $100,000, then the “flip” investor will be willing to offer $65,000; if $10,000 in repairs is required to make the property market ready, that number would be reduced to $55,000. This gives the investor room to carry the property, sell the property and ultimately make a profit in the process. However, if you intend to hold the property as an income-producing asset, the analysis is different. And in a market where sales do not always materialize, a “Plan B” is a wise and necessary consideration.

Now you are measuring cash flow. A proforma income statement must be developed based on rental income and operating expenses to establish a Net Operating Income. Based on the appropriate capitalization rate, the investor then knows how much he/she believes the property is worth. Then the investor must also factor in the cash requirements of a mortgage loan. So the investor knows how much to pay based on his/her required return as well as the cash flow of the investment. Investors do not rely on assumptions that include appreciation in price to get them out of a hole on the back end. As many are now learning, this appreciation does not always materialize.

Only after these two ways of looking at the property are reviewed can the investor/flipper know if he or she has adequately covered his bases and is prepared to take on the project.

The Portal of Change in Florida Real Estate

David Levin — Mon, 25 Feb 2008 13:43:53 +0000

The current issue regarding the future of space flight from Cape Canaveral is representative of the larger challenges facing Florida.

We have always assumed that we are the portal to space. Sure the Air Force has a place to shoot stuff into the sky (Vandenberg). But Cape Canaveral, the Kennedy Space Center was the epicenter. Now we are being told that in fact there are other potential places such as Virginia from which to launch ourselves to the heavens.

The state has historically enjoyed a unique position in the country. Our wonderful climate, the beaches, easy accessibility and, last but not least, the affordability of Florida made it the natural, and we thought the only, destination for everyone from the North. And now we are realizing that it is not true.

It is not the hurricane threat, although certainly they are not fun. I would rather be on Disney’s Mr. Toad’s Wild Ride than having lived through Wilma, or Katrina, or Jean. Instead, people have changed, other places have changed and so have we. These things all act together to make Florida a less natural, less attractive place to come. And we must realize that to effectively promote our State as a still terrific place to be in order to effectively compete.

People are generally healthier. They enjoy the sun and warmth, but not to keep the rheumatism from affecting their frail bones. From here on out, active people come. Bike Trails, the surf, tennis courts and the like are the attractive amenities rather than shuffle board and early bird specials. People have broader choices, as healthier more active lifestyles last longer.

Other destinations have realized this and are capitalizing upon it. Active communities are being created throughout the country- from sea to shining sea- and everywhere in between. Even the places that traditionally have seen the older people leave are working to keep them in their familiar surroundings.

Lastly, Florida has changed. The quaint, old Florida is quickly being lost to a newer more modern State. Slow, relaxing and inexpensive lifestyle is being supplanted with density, urban sophistication and a much higher cost of living.

There are substantial opportunities for us to grow and prosper. But we cannot forget what makes us unique and attractive. We need to capitalize on our strengths while addressing the issues that confront us to continue to make Florida a great place to live.