Realtor Coaching & Training: real estate industry
Winning The Shortsale Game.
Have you noticed the flurry of Short Sale articles and news over the last 90 days? (we have).
Long time HREU Coaching Students have been doing Short Sales successfully for years. Many of our students have become ‘Short Sale Gurus’ in their own right. Just in the last 90 days we have had HREU Agent Short Sale Secrets student featured in the New York Times, CBS Evening News.
So, here is the challenge.
The real estate industry has finally accepted the fact that Short Sales should now be considered mandatory learning for every agent. But, what is happening (in many cases) is that agents with NO short sale training…no previous short sale experience…are listing homes and trying to ‘do short sales’. We applaud them for at least trying but, for the sake of the housing markets, our economy and YOUR sellers…please get the proper eduction how to do short sales.
The short sale horror stories that we hear about are 90% AGENT created. You read that right. One of the top reasons short sales don’t close is because agents don’t know how to work with the lenders to close the transactions.
Fellow Realtors please understand this next point. YES, your first 2-3 short sale closings will feel like a lot of work. But, the next 20+ will be easy. Why? You have to learn how to do them. Its a skill set. Many of the top listings in the country are making a fortune from listing and selling short sales. Look around in your own market. Chances are the top selling agents have taken the time to learn how to correctly list and sell short sales…
Now, its your turn. Watch the FREE Agent Short Sale Secrets video and download the FREE Agent Short Sale Secrets book.
Source: RISMEDIA, May 11, 2009-(MCT)-Short sales are making up a larger percentage of distressed home listings in several of the more harder hit markets around the country, such as Las Vegas, for example. And local real estate agents there say banks continue to drag their feet on approval. Although short-sale listings, or homes offered for less than the mortgage owed, have climbed steadily since January, short-sale closings declined to 7 percent of all resales in March from about 10 percent in August, Frank Nason of Residential Resources said.
During that same time, foreclosures increased to 80 percent of all sales from 70 percent.
The median price of a short sale in the first quarter was $184,250, compared with $139,900 for a foreclosure, Nason reported. On a per-square-foot basis, short-sale prices were 18.4 percent higher than foreclosures.
Agents…did you catch that….short sales sell for 18.4% HIGHER vs foreclosures!
“Why aren’t the banks and the Feds trying to expedite and enhance the number of successful short-sale transactions instead of losing more than one-fifth the value of the property?” Nason asked. “That’s not even taking into account the continued financial beating they take while the foreclosure process transpires.”
There were 246 short sales completed in Las Vegas in April, a 27.5 percent increase from the previous month, Rob Jenson of The Jenson Group reported. Short sales on the market increased 4.3 percent to 8,119 units.
Distress sales, which include foreclosures and short sales, accounted for 86 percent of all sales in April and has been in the 80 percent to 90 percent range for the last seven months, Jenson said.
Ok, that is an impressive number…..up to 90% of ALL SALES IN LAS VEGAS are short sales and foreclosures. So, if you are an agent in Vegas and you are not listing and selling shortsales….and you are not a REO listing agent…..what exactly ARE you doing? Learn how to easily list and sell short sales. Watch the FREE Agent Short Sale Secrets Video and Download the FREE Agent Shortsale Secrets book.
Nason said he usually encounters mass confusion and exhaustive delays at a bank’s loss-mitigation department. Most real estate agents generally avoid short sales because of the “brain damage” sustained from dealing with financial institutions, he said. “More often than not, the transaction falls apart because of the extremely long period of time it takes to get any meaningful response from these institutions,” Nason said. “Or they decide to change the agreed-upon terms at the last minute.”
Given the current state of the housing market, especially in Nevada, short sales are cropping up more than ever as an option for avoiding foreclosure, said John Mechem, spokesman for the Mortgage Bankers Association. That taxes servicers who are set up to receive and process mortgage payments, not manage and approve home sales, he said.
“Short sales are complicated and take time,” Mechem said. “It’s not like submitting a bid to a private owner. The servicer has to do its due diligence, both for its own purposes and on behalf of the investor or the entity that actually holds the note or owns the mortgage on the property.”
Another problem is that borrowers aren’t talking to their lenders first. Instead, they’re working only with real estate agents and then presenting a short-sale offer “cold” to the bank, Mechem said.
Many of those offers come in absurdly below fair market value, he said. Each offer must be evaluated, which clogs the pipeline and slows the process.
“Oftentimes a buyer will see a short sale and mistakenly think that the bank will sell it far below list price because the bank doesn’t want to own the property, so they make an offer significantly under value,” Mechem said. “While it’s true that the bank may not want to own the house, the bank still is not going to sell the home far below what it has determined as the true market value of the property.”
Lenders are being inundated with short-sale offers that are 20 percent to 40 percent below market value, he said.
Right…there ya go. Thats what I was talking about at the start of this post….
Agents who have really no idea how to correctly list and sell shortsales mucking up the transactions. Agents, you simply must learn how to correctly list and sell short sales. For the sake of your sellers, your community and yourself…learn now how to easily list and sell short sales. Learn the process from the nations #1 Agent Short Sale Coaching and training program. Watch the FREE Agent Short Sale Secrets video and download the FREE Agent Short Sale Secrets book.
By approving more short sales, banks could save money and spare people the mental anguish of losing their homes, Nason said.
A short sale will hurt the consumer’s credit, but not nearly as much as a foreclosure, which can reduce a credit rating by more than 250 points. Short sales appear on a credit report as “preforeclosure in redemption,” not as “debt discharged due to foreclosure.”
It would help solve some of the problems associated with foreclosures such as deteriorating landscaping, declining property values and lost revenue for homeowners associations, Nason added.
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Banks Stress Test Revealed
All the talk about ‘Bank Stress Tests’ can be a little confusing….well, here is a great article from HERE that explains what all of this means to the real estate industry.
Here is what I want you to pay special attention to…note what he has to say about foreclosures. (and upcoming opportunities listing REOs)
It’s a train.
The “rumor” floated over the weekend and this morning was that some of the banks might need $10 billion under the “stress” scenarios.
That they might be able to raise, and it has been part and parcel of fueling the rally.
Not so fast, grasshopper.
S&P yesterday afternoon stuck virtually the entire sector on Credit Watch Negative and that was just the start.
There are now some independent analysts out there with their own numbers on “required capital”, and they’re ugly.
Friedman Billing Ramsey came out and said they believed that Bank of America needs $60 billion all on its own, while Egan-Jones piped up and said the number was $100 billion!
SNL Financial, a research firm, thinks the number is $50 billion each for Citi and Bank of America – minimum – and might be closer to $70 billion for Bank of America.
Nor does it end there. Wells is projected to need $66 billion and JP Morgan needs $33b, according to these folks.
But if you think those numbers are a horror show, the real ugliness isn’t found there. It is in fact found in all the foreclosed-but-unsold and not-yet-foreclosed “but will be” housing stock. Through the nation I am getting reports, some hard and some anecdotal, that lenders are sending out NODs (default notices) and then sitting on the process intentionally.
Why would they be doing that?
Simple: Most lenders who have these notes either in a security or as “whole loans” they were unable to pawn off on someone when the securitization market collapsed are holding them at “par” – the total amount outstanding.
If they sell they are forced to realize the loss; so long as they have a “reasonable belief” it will perform or be bought out (e.g. a government-sponsored and funded refinance) they can carry it this way if it is held to maturity. This of course makes their books look much better than they really are when you’ve got $500,000 in cash out against collateral that the market values at $150,000!
Realtors: All indications are that the best opportunities for becoming a REO listing agent are still ahead of us. Watch this FREE Agent REO Secrets Video now and then Download The FREE Agent REO Secrets book. Get started now learning how to become a REO Listing Agent.
Then there is the Option ARM inventory and, most troublesome, the HELOC’s (mostly seconds used for purchase and cash-out transactions) behind them.
There have been opinions floated that the “ARM” decimation is mostly a nothing, since short-term rates are so low and will remain that way for a reasonable amount of time.
This is true but misleading – with Option ARMs the nuclear destruction does not come from a reset of the interest rate but rather the recast when the loan ages or reaches (typically) 110% of the original principal value.
At that point what was either an interest-only (or even not a full interest) payment is forced to a fully-amortizing payment on the balance of the original time. For many of these loans this is set to happen at either three or five years post-issue, which means we’re just starting to see the loans written in 2006 turn into many-headed hydra about now.
The importance of this event is that the increase in payment is absolutely insane – it is not at all unusual for payments to double, and there are few if any of these loans where the jump will not be at least 50%.
The IMF says there’s roughly double the embedded loss in the system compared to what has been recognized and written down. I think they’re conservative – my original estimate for housing market losses was somewhere around $2.5-3 trillion for residential alone.
So far the tally is up in the high hundreds of billions, meaning that there are a lot more cockroaches still to be found in the banking system – and they’re doing their best to hide from the light.
Can that succeed? Not a prayer in Hell.
Those Option ARMs and any seconds behind them are doomed. There is no possible way to refinance them as most are over $100,000 underwater. The seconds written on top to get around conforming limits or avoid PMI are in fact worth nothing as the first has priority in a foreclosure action and there’s not enough there to even satisfy the first!
To put this in perspective there are condos out in Las Vegas that sold for $500,000 that now can be had for $50k or so. You’d think that’s a great deal. You’d be wrong, because half the complex is foreclosed, the association is on the verge of bankruptcy and as a consequence the special assessments will be rolling in soon – and they won’t be small!
Now add to this the basic business model in the consumer credit sector – jack up everyone’s credit card interest rates. This is effectively an attempt to cost-shift those who cannot pay and are defaulting onto those who (still) can. It is doomed to fail because those who can pay off the card will immediately do so and close the line, while those who can’t default under the increased burden. This looks good for a little while but the math is never wrong, and this sort of path forward either collapses under its own weight or eventually will draw a strong government regulatory response.
Either way what the banks are doing can’t work; 36% interest charged against someone who is paying zero because they defaulted is still zero, but all your customers who can pay it off and leave will do so to avoid being bent over the table.
The continued refusal by our government to put these financial institutions where they belong – in front of a bankruptcy judge where priority is honored, the capital structure is crammed down and the assets sold off for whatever the market will bear – is leading us inexorably toward economic Depression. Both President Bush and now Obama are proceeding under the (false) hope that if they can hold things together for a little while the economy will turn and it will all be ok.
The “green shoot” people are all predicting positive GDP in the 3rd and 4th quarter. What they’re not talking about is what the real number was for the 1st Quarter – there was a trade balance shift credit in there worth nearly 3%; take that back out and we weren’t -6% annualized, we were -9%!
The bad news is that the trade balance shift is actually bad for the economy and signifies extreme weakness yet it shows up as a positive contributor to GDP due to how the math works. Nice eh?
But that was likely a one-time change, which means the second quarter could get real interesting.
Here is the reality folks:
- Until continuing claims start to come back into a reasonable range and the U-6 “frustrated” employees find work, the consumer credit picture cannot materially improve in terms of default rates on all sorts of credit. The consumer is 70% of the economy.
- When that happens we will still be left with an economy that is missing the “pulled forward” demand represented by home equity extraction and rabid, unsustainable granting of all forms of credit. This is likely in the 3-4% of GDP range, and that adjustment will be permanent!
- The excess debt in the system not only hasn’t been flushed it has to a large degree been hidden and/or shifted to The Federal Government! Defaulting it there doesn’t do anyone a damn bit of good – in fact, it spreads the damage to everyone instead of keeping with the people who made the bad bets on both sides (borrower and lender.) This is pure insanity, but it is what our government has done because we “the sheeple” keep believing we can have something for nothing.
- There is no way to “fix” the bank balance sheets without massive dilution. Either you convert preferred to common, you issue new common, or you sell performing (cash-flowing) assets. The first two dramatically dilute everyone holding the common stock and the latter takes a pole-axe to the earnings side of the balance sheet, having the same effect on shareholders as the first two. The recent runup in bank stock prices, doubles in many cases or more, is not only unsustainable it is something right out of The Three Stooges.
To those who think that the banks will “all be ok” and “we will muddle through and have economic recovery in 2010″ I politely suggest that you’re smoking something legal only in California.
Bluntly, the excessive debt must be flushed from the system, and since we can’t pay it down the only option is to default it through bankruptcy, as I’ve said since this mess began.
Until that happens any “recovery” will be fleeting at best – and a false hope.
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Housing Bubble Part 2?
Talk about a double edge sword….sure, Realtors want the FHA to have more lenient lending standards so more people can qualify to buy a home. Makes sense. After all, we are in the business to help folks buy and sell homes.
Of course the other side is that Realtors are suffering from the housing crash in a very real and personal way. Not only has the real estate industry contracted (and incomes along with it) but, agents own homes have also lost value. Talk about a double whammy!
Now, the FHA may be following the a perilless path that could cause the national housing mess to languish.
Read this article from the Wall Street Journal, share your comments….
Everyone knows how loose mortgage underwriting led to the go-go days of multitrillion-dollar subprime lending. What isn’t well known is that a parallel subprime market has emerged over the past year — all made possible by the Federal Housing Administration. This also won’t end happily for taxpayers or the housing market.
Last year banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100% taxpayer guarantee. Many of these have the same characteristics as subprime loans: low downpayment requirements, high-risk borrowers, and in many cases shady mortgage originators. FHA now insures nearly one of every three new mortgages, up from 2% in 2006.
The financial results so far are not as dire as those created by the subprime frenzy of 2004-2007, but taxpayer losses are mounting on its $562 billion portfolio. According to Mortgage Bankers Association data, more than one in eight FHA loans is now delinquent — nearly triple the rate on conventional, nonsubprime loan portfolios. Another 7.5% of recent FHA loans are in “serious delinquency,” which means at least three months overdue.
The FHA is almost certainly going to need a taxpayer bailout in the months ahead. The only debate is how much it will cost. By law FHA must carry a 2% reserve (or a 50 to 1 leverage rate), and it is now 3% and falling. Some experts see bailout costs from $50 billion to $100 billion or more, depending on how long the recession lasts.
How did this happen? The FHA was created during the Depression to help moderate-income and first time homebuyers obtain a mortgage. However, as subprime lending took off, banks fled from the FHA and its business fell by almost 80%. Under the Bush Administration, the FHA then began a bizarre initiative to “regain its market share.” And beginning in 2007, the Bush FHA, Congress, the homebuilders and Realtors teamed up to expand the agency’s role.
The bill that passed last summer more than doubled the maximum loan amount that FHA can insure — to $719,000 from $362,500 in high-priced markets. Congress evidently believes that a moderate-income buyer can afford a $700,000 house. This increase in the loan amount was supposed to boost the housing market as subprime crashed and demand for homes plummeted. But FHA’s expansion has hardly arrested the housing market decline. The higher FHA loan ceiling was also supposed to be temporary, but this year Congress made it permanent.
Even more foolish has been the campaign to lower FHA downpayment requirements. When FHA opened in the 1930s, the downpayment minimum was 20%; it fell to 10% in the 1960s, and then 3% in 1978. Last year the Senate wisely insisted on raising the downpayment to 3.5%, but that is still far too low to reduce delinquencies in a falling market.
Because FHA also allows borrowers to finance closing costs and other fees as part of the mortgage, the purchaser’s equity can be very close to zero. With even a small drop in prices, many homeowners soon have mortgages larger than their home’s value — which is one reason FHA’s defaults are rising. Every study shows that by far the best way to reduce defaults and foreclosures is to increase downpayments. Banks know this and have returned to a 10% minimum downpayment on their non-FHA loans.
In a rational world, Congress and the White House would tighten FHA underwriting standards, in particular by eliminating the 100% guarantee. That guarantee means banks and mortgage lenders have no skin in the game; lenders collect the 2% to 3% origination fees on as many FHA loans as they can push out the door regardless of whether the borrower has a likelihood of repaying the mortgage. The Washington Post reported in March a near-tripling in the past year in the number of loans in which a borrower failed to make more than a single payment. One Florida bank, Great Country Mortgage of Coral Gables, had a 64% default rate on its FHA properties.
The Veterans Affairs housing program has a default rate about half that of FHA loans, mainly because the VA provides only a 50% maximum guarantee. If banks won’t take half the risk of nonpayment, this is a market test that the loan shouldn’t be made.
These reforms have long been blocked by the powerful housing lobby — Realtors, homebuilders and mortgage bankers, backed by their friends in Congress. They claim FHA makes money for taxpayers through the premiums it collects from homebuyers. But keep in mind these are the same folks who said taxpayers weren’t at risk with Fannie Mae and Freddie Mac.
A major lesson of Fan and Fred and the subprime fiasco is that no one benefits when we push families into homes they can’t afford. Yet that’s what Congress is doing once again as it relentlessly expands FHA lending with minimal oversight or taxpayer safeguards.
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The Great Real Estate Shift
This was posted on our ActiveRain blog attracting dozens of great responses……
Chances are you are like most Realtors…you are sensing a need to change but, not sure which direction to go. You could always stay on the same old path you have been on….But, you know that you must make a change.
Simply put, you intutively know….you can feel that there is a shift taking place. A shift in our society, a shift in our economy…a shift in how people look at homes and being homeowners. Perhaps, a wholesale change in the very fabric of our nation.
Know this, you are not alone.
We are living in historical times. Our industry, our country is in the midst of a social and economic shift that historians will look back upon as one of the most significant turning points ever.
There have been historic times like these before…
During those times there were those whom embraced the opportunities that the changes created and those who couldn’t (or wouldn’t) evolve.
The end of one era marks the beginning of another.
Every week we provide literally tens of thousands of Realtors with coaching. Many of you are already involved in a Harris Real Estate University program.
From all of those agents we have noticed a decisive shift taking place. For many this shift is marked by a powerful feeling of longing for something better. Something more complete. These feelings can be exciting and for others is down right terrifying.
First lets take a closer look at the massive changes happening in the economy.
The Stock Market Crash of 2008-2009, which is now wiping out trillions of dollars of wealth, is, like the Crash of 1929, likely to mark the end of one era and the onset of another. Millions of Americans are seeing their life savings greatly diminished or in some cases completely wiped out.
For millions of babyboomers the colossal loss in retirement savings will mean never being able to retire…at least not tradiational sense.
The new era will see a more sober and much diminished America. The “Omnipower” and “Indispensable Nation” we heard about in all the hubris and braggadocio following our Cold War victory is history. Our country is going to have to rethink how we interact with the rest of the world. Maybe being the one and only ‘Superpower’ isn’t all that its cracked up to be.
Seizing on the crisis, some will tell you we are witnessing the failure of capitalism.
This is nonsense. What we are witnessing is the collapse of Gordon Gecko (”Greed Is Good!”) capitalism. You know what I am talking about. Chances are you have lived this “lifestyle”.
Many of us have benchmarked our lives by the ‘buying of stuff’ lifestyle. For example, why is it that so many of us think that its our right…perhaps our purpose to be constantly “upgrading”. Do you mark your progress on this earth by the car you drive or the neighborhood you live in? Is your definition of a truly successful person someone who has many material things…the homes, the cars etc?
That’s 8 track thinking in a MP3 world.
Now, its time for you to think about what YOUR definition of success is.
You define what makes you successful. I bet once you think about this you will find that the very ‘things’ you have been spending your life paying for…in hopes that those things will make you feel successful…..have been a complete waste of your life’s energies.
You have been sold into believing that more stuff, different stuff will somehow make you feel successful. Think about who benefits from you believing that more stuff, being in debt is the preferred way of living.
Have you ever noticed that the very things you have pined away….the new car or country club home…have now become a burden. Are you fighting to maintain this ‘Lifestyle of Stuff’? Losing sleep over what might happen if you have to downgrade your S class Mercedes to a Honda? Would doing that mean you have failed?
Chances are if you have any of the above thoughts you need to take a seriously hard look at how you are spending your time on this earth.
What we are witnessing is what happens to a prodigal nation that ignores history and forgets and abandons the philosophy and principles that made it great.
Focus on what you are here to give… not what you are here to take.
The new era will be embraced by those who understand that our purpose on this earth is to be of service to others. Plan and simple. If you aren’t living the life of your dreams, if you don’t have the security and excitement in your life that you deserve its simply because you are not serving enough people at a high enough level.
There is a wonderful quote from one of our founding fathers Thomas Jefferson that is as relevant now as it was hundreds of years ago….
“At some point in every Man’s life he must decide to stand for the few or for the many”
You must start by making yourself free. Take a serious look at how much time and energy you are spending on serving debt and your ‘stuff’. Seriously, that boat that you are shoveling out money for every month…and rarely use. Is that boat worth the hours of your life’s energy? Is that 6000 square foot home really worth the time and energy it costs to pay for it every month?
Think about this. Why did you buy all of that ‘stuff’ in the first place?
Perhaps your new definition of success should be cherishing prudence and believing in fiscal responsibility. Live from a balanced budget and be self-reliant. Believe in saving for retirement and a rainy day, in deferred gratification. Stop buying on credit what you cannot afford, in living within your means.
Yes, that means a radical shift in the way you relate to money. For most of us who will move towards this new paradigm there will be a new sense of freedom…and success.
The only true hope for homeowners is….caring, competent and skilled Realtors. Realtors are at the front lines of fixing this mess. We are the first responders to homeowners when they are in crisis.
The Government is NOT coming to save us. Don’t be fooled by all of these politically motivated ‘bail outs’. In all reality all these ‘plans’ are doing is pushing off the inevitable.
“Government must save us!” cries the millions of Americans. But, who got us into this mess if not the government — the Fed with its easy money, Bush with his profligate spending, and Congress and the President Obama seem to be carrying the same torch.
But, you (and me) we agreed to all of this. We could of said NO to the easy credit, the constant debt. We knew better, didn’t we?
For years, we Americans have spent more than we earned. We save nothing. There is an joke that an Americans idea of saving is shopping at Macys vs. Neiman Marcus. Americans don’t save. We have been spoiled (and fooled) into thinking that we didn’t need to save because there was always easy credit to be had. Another home sale to be made.
Last year on our blog www.TimandJulieHarris.com we helped to break the news story about HELOCs being canceled or reduced. The lenders quietly and with lightening speed summarily smashed millions of Americans ‘piggy banks’…their home equity lines of credit.
Credit card debt, consumer debt, auto debt, mortgage debt, corporate debt — all are at record levels. And with pensions and savings being wiped out, much of that debt will never be repaid. Millions of small businesses will fail. Millions of families will go broke.
Our standard of living is inevitably going to fall. For foreigners will not forever buy our bonds or lend us more money if they rightly fear that they will be paid back, if at all, in cheaper dollars.
Here is something fun I read not too long ago. One of the last rounds of ‘economic stimulus’ that the government arranged for our country….whereby millions of Americans received $600 checks in the mail. You will never guess where that money came from? Here is a hint..the US Government (remember, that’s you and me) had to…borrow it. From….any guesses? Yep, that’s right…we borrowed that money from the Chinese.
Here is the part I really like.
That borrowed money was then sent to millions of Americans…..what did they do with that money? The spent it on ‘stuff’ made in…..China.
The easy credit, greedy way of living is OVER.
So, what comes next?
Will you be part of the Great Real Estate Shift? How will you change so that you are not merely ‘relevant’ but, you become one of the leaders of the new emerging consumer lead real estate movement. Dont kid yourself. Business as usual is dead. Your real estate clients will expect you to represent a new set of values…they will expect you to possess a new set of skills.
Be excited! You have the historically unique opportunity to participate in reshaping the real estate industry.
Tim and Julie Harris are the founders of Harris Real Estate University(HREU). HREU is the nations largest online real estate University with nearly 40,000 Realtors participating in a HREU coaching program everyday. For more information on Tim and Julie and HREU visit their blog: Tim and Julie Harris or the main campus site Harris Real Estate University.
Thanks to Patrick Buchanan for inspiring this article.
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New Programs Wont Slow Foreclosures.
The new federal programs to aid the U.S. financial markets will likely not fend off the impending wave of foreclosures on U.S. commercial real estate loans, experts said.
U.S. Treasury Department officials unveiled this week more specifics of a program that will enable the federal government to help private buyers purchase toxic loans and asset-backed securities, including commercial mortgage-backed securities (CMBS).
While there is much public debate about whether it will get the banking industry back on its feet, many real estate experts said that it won’t prevent an approaching wave of defaults of current loans in the U.S. commercial real estate sector
“This isn’t designed to head off foreclosures,” said Thomas Barrack Jr, head of real estate private equity firm Colony Capital, which has $36 billion of assets under management. “This is designed to start the banks lending.”
Realtors, the massive wave for REO listings will require literally nearly every agent to know how to be a REO Listing agent. Learn now why REO listings are one of the best opportunites to make money now. Watch the FREE Agent REO Secrets video and then downloan your free Agent REO Secrets book.
The U.S. commercial real estate boom that started around 2004 and peaked in 2007 was fueled by cheap debt. Banks and other lenders were often willing to lend up to 90 percent or more of the purchase price. The loans often assumed optimistic rent growth and rising occupancies in the future.
Borrowers and lenders assumed that the loans, often interest-only, would be repaid by property sales or by new loans that would more than cover the principal due.
But the market began to collapse in the second half of 2007, when the credit markets froze. Now borrowers are finding themselves squeezed as older loans come due and there is little lending to support sales or refinancing.
About $814 billion in commercial mortgages — for apartment houses, office buildings, shopping centers, warehouses and hotels — are expected to mature this year through 2011, with $250 billion due this year, according to Foresight Analysis.
That means borrowers will have to raise more equity, which is expensive, or lenders will have to foreclose or extend loans, hoping values will rise again.
“The myth has been that commercial is far more solid than residential,” said Robert White Jr, president of Real Capital Analytics. “We were all patting ourselves on the back, that we weren’t overbuilding.”
AS BAD AS THE HOUSING BUST
Those cheery days seem long past.
U.S. commercial real estate prices are falling at a similar rate to residential, down about 17 percent year over year, according to Real Capital Analytics.
Sales volume for commercial real estate was down 80 percent in February because of the inability to get a loan and the wide gap between the prices buyers and sellers want.
U.S. commercial real estate prices may fall 35 to 45 percent from their peak, exceeding the declines of the painful downturn of the early 1990s, according to Richard Parkus, head of CMBS research for Deutsche Bank. Rent declines and vacancy rates may approach those of the early 1990s.
The aim of the U.S. Treasury plan is to get banks to start lending again by clearing away bad commercial real state loans. When pension funds, private equity firms and life insurance companies are able to sell off their devalued CMBS bonds, they will be willing to buy newer, better-quality loans.
The plan’s specifics sent the CMBS on a three-day rally, and helped boost the overall stock market.
“By clearing out some of the inventories, the theory is they will have more capacity to make new loans … probably,” said Fredric Leffel, senior vice president of the U.S. arm of real estate advisory firm Savills Plc.
But by the time the banks start lending again, they are likely to be more conservative. The loans will likely cover less of the value of the property to be acquired and that value is likely to be lower, leaving much of the expiring principal uncovered.
“The problem with the foreclosures is that anyone with any real estate today may own it at less than 50 percent of the value that it was two years ago,” Barrack said. “That problem isn’t going to go away.”
The delinquency rate among CMBS loans, which hit 1.8 percent in March, could rise to 3.5 percent by the end of the year, and 6 percent next year. CMBS loans comprise about 20 percent of the outstanding U.S. commercial real estate loans.
Among banks and other institutional lenders, the default rate was 1.8 percent in the fourth quarter of 2008, according to Real Estate Economics. The research firm expects that to jump to 3.9 percent by the end of the year, 4.7 percent by the end of 2010, and peak at 4.8 percent in 2011.
In addition to the refinancing problem, U.S. commercial real estate owners are wrestling with the recession and rising vacancy rates, lower demand and decreasing rents that have accompanied it. But those concerns, however great, are dwarfed by the shortfall funding available to refinance past loans.
“While obviously fundamentals have deteriorated, the much bigger problem is the maturity problem,” Leffel said.
So what will the federal program do for the commercial real estate industry?
“It will lessen the erosion of values,” Leffel said. “It will smooth things out, particularly if you can get financing back into the market, and to that extent it does help the industry.”
Source: Reuters
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HREU Massive Action March Action Plan.
Every March Harris Real Estate University conducts Massive Action March…
What exactly is Massive Action March?
1) We give you a fill in the blank Massive Action March production plan. (DOWNLOAD YOUR PLAN HERE)
2) Every weekday we send you a Daily Motivational Message. We will record a 3-5 minute audio message and email it to you. (Not signed up to receive your daily motivational message? GO HERE)
3) Every Friday we will invite you to attend the Friday Super Star interview. Listen in as we interview an agent who has become a true Superstar in the real estate industry.(Listen to past Superstar Interviews HERE)
Why are we doing all of this for FREE?
Simple, we will provide the motivation you need, the education you must have….YOU will provide the Action.
Now, download your Massive Action March production plan and join us this month taking Massive Action!
Free Realtor® Training Download Here
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Home Values Going Down The Drain.
Great article from Rolfe Winkler CFA.
Now that unemployment has kicked into a higher gear, more folks will be defaulting on mortgages, meaning house prices are likely to continue their slide in coming months. As they do, household and bank balance sheets will continue to deteriorate. Said another way, their leverage ratios will continue to increase as the falling value of their assets wipes out their equity.
Its clear that if Realtors are going to be relevant in the real estate industry they must know how to list and sell short sales. Short sales are one of the best opportunities for Realtors to help others and make money in this market. Watch the FREE Agent Short Sale Secrets Video now. Download the FREE Agent Short Sale Secrets crash course NOW.
The first chart includes data through Dec ‘08., which, if you look closely, extends to the right of the “Oct 08? label (Click on charts to enlarge):
The WSJ discusses the data:
Home prices continued their multiyear slide in December, according to the S&P/Case-Shiller home-price indexes, as both the 10-city and 20-city index posted record declines, making 2008 the second-straight full year of declining home prices.
The Sun Belt continues to be hit hardest, and nationally, home prices are at levels similar to late 2003…
Both composite indexes and 13 of the 20 metropolitan areas have reported consecutive record year-over-year declines since December 2007.
As of December, average home prices are down 27% from their mid-2006 peak. The 10-city and 20-city indexes have fallen every month since August 2006, 29 straight.
Both the 10-city and 20-city indexes fell 19% in 2008. December’s drop marks the 10-city index’s 15th-straight monthly report of a record decline.
The indexes showed prices in 10 major metropolitan areas fell 2.3% from November, while home prices in 20 major metropolitan areas fell 2.5% from November.
Yet again, none of the regions could stave off a decline from November to December. Month-to-month decliners were led by Phoenix and Las Vegas, which fell 5.1% and 4.8%, respectively, and Minneapolis, which dropped 4.6%.
And for the ninth straight month, no region was able to avoid a year-over-year decline. Phoenix and Las Vegas were again the worst performers, with drops of 34% and 33%, respectively, from a year earlier. San Francisco followed, with a decline of 31%. Phoenix is down 46% from its peak in June 2006.
Compared with a year earlier, Denver and Dallas again had the best relative performance, with annual declines of 4% and 4.3%, respectively.
The data in the charts is published by S&P Case Shiller here.
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