Any Real Estate Guru's on board?

[ryson]

Team Jack,

With all of the ARM?s coming due in the next couple years (believe its 1.5 trillion due next year) I wanted to get some of your opinions regarding real estate as an investment vehicle. I have been saving cash to bail out people in trouble (getting them to sell short etc.). It seems to me that the real estate market is going to be similar to the .com bust, perhaps not to the same magnitude but getting back to a traditional business model (fixed loans etc.). The reason it reminds me of the .com bust is because during that time VC?s were throwing money @ any concept and not tangible businesses and mortgage lenders seem to have been doing the same with exotic home loans to people who cannot afford them. Is anyone else monitoring and going to execute a similar strategy, I would love to hear your feedback.

 

[s_dooley24]

This was my viewpoint a little over two months ago and I have pretty much the same sentiment

People and Pundits have been equating the real estate market to the NASDAQ or tech market bubble of the late 90s. These are two totally different asset classes and are not comparable. Lots of new tech startups had never turned a profit and were trading at ridiculous p/e ratios (thus they would have to meet unrealistic growth expectations to justify their stock price). On the other hand, is the real estate market over-priced?..most would argue yes and I would tend to agree. However, it has been cooling off. Simple analogy... the air is being let out of the real estate market balloon, while the balloon of the tech market popped. The reason being two fold:

1. Liquidity and turnover
-you can log onto your e-trade account and dump your portfolio in a matter of minutes, ever had an open house or been to closing?

2. Intrinsic Value
-people inherently have more trust in real estate, be it their home or investment property because they can physically see it/use it. And often in the case of the investment property it produces regular income (how many tech startups paid dividends?)

Also, interest rates are still relatively low if you look from the viewpoint of a historical context.

 

[ryson]

Thanks for the insight!

 

[Northern Star]

I work in the mortgage industry. The ARM product is not going to be the down fall of the real estate industry. Many of the clients are seeing arm that have adjusted and have higher rates and payments. They can probably refinance these into a fixed rate or a new arm and keep their payments similar to their current payments.

The loans which have potential to cause problems are the option arm loan, Countrywide had 18% of all their mortgages in this product. They have the ability to amoritize negatively. We are seeing people that had no idea of how they worked. The other dangerous arm is the client that did 100% financing.

Home price are flat and the don't have the added equity to refinance without pay for their costs. This is particularly bad in new housing developments where the builders are hurtiing and selling the same house for less than someone who bought from them 12-24 months before.

I think we see no appreciation for 24-36 months until some of the new housing market "models" have disappeared.

In regards to buying bargins. It is definitely out their. I get a couple of calls a week of clients that need to get out. They just are not in a good position and can't sell their homes. One we wiil probably do something with has a house listed for $575K which is upper bracket in our market. Originally had it listed for $629K anf they still can't sell it. The owe only $300K. They closer it gets to the sheriff's sale the lower they will take on the property. If they sell it, we will purchase a new one and let them put a chunk down and buy it contract for deed. A low risk scenario with an almost guaranteed profit.

I would recommend searching out bargins and avoid anything that could be construed as flipping. The appraiser I work with got 9 appraisal orders in the last two days. 7 were for foreclosures. Bidding real low for foreclosures and have the ability to pay cash could be profitable, especially if they have been on the market for a period of time. Banks don't want to be sittng on those.