Monday, July 31, 2006

California Foreclosures up 104.4%

The Los Angeles Daily News has come out with a new article about California foreclosures increasing 104.4% from a year ago. Granted the foreclosure rates were abnormally low over the last couple years, but nevertheless, it is the trend I am following. Follow the link below:

These are dangerous numbers that are trending upward at a rapid pace. Here is a perfect example of a mercenary in the article:

"While the nation's foreclosure rate has certainly shifted into a higher gear since last year, low unemployment and home price appreciation in most housing markets have held foreclosures in check," Saccacio said in a statement.
The company forecasted a slowdown in foreclosure rates in its first quarter report and now expects that if the summer delivers its typically high number of home buyers, rates won't increase too rapidly.

This mercenary Saccacio is the CEO of and guess where his interests are.... The spin that this fella tries to put on these horrible numbers is amazing. I think we already know what the summer has brought and that is less buyers and more inventory. Expect housing to continue its decline with a few hopeful bounces in the process. Unfortunately these bounces will only hurt more homeowners because it will give them the false reality of future increases.

A common question that I have come across is: "where do I get access to the foreclosure market" or "when is the best time to go after foreclosures?" Well my answer has been that you need to wait for a large sustained glut of foreclosure inventory. When I mean "sustained" it has to be at least 2yrs and when I mean "a glut of inventory" it needs to 5x larger then normal. Why? Well the reason people can make money on foreclosures is because the banks own the house. Banks are definitely not in the business of holding, buying, or selling property and will unload a house below a depressed market value. Right now house flippers and real estate "investors" have the foreclosure market relatively saturated because they see this as the next great thing. Go ahead and do a web search on foreclosures to get an idea of what I am saying. Remember in foreclosure auctions your buying the house as-is. There is some risk in this with termites, mold, foundation issues, etc that can make your new acquisition worthless.

Be forewarned!

Article Source: Los Angeles Daily News

Saturday, July 29, 2006

Increase of Minimum Wage = Even More Inflationary Pressures

Rumor has it that there are votes in the house for a potential increase of minimum wage from $5.15/hr to the proposed $7.25/hr. I know the intentions can be good, but this will have a major effect on the weakening economy in the form of slowing growth and fanning the flames of inflation even further. Legislation like this are what can be the straw that breaks the camel's back. I think the timing for this is very troublesome. Plus states like California already have increased their minimum wages and plans to further increase it.

High wage inflation can have devastating results when mixed into the economy as a whole. Especially during this time when we see inflation rising in almost every indicator: headline, core, CPI, PCE, unit labor cost, wage costs, ECI, etc. I hate to be so negative, but we are entering a time of Stagflation (stagnant growth - high inflation) and possible recession. Expect a bumpy ride for at least the next year, the question of how long and bumpy remains to be seen.

Thursday, July 06, 2006

Startling Numbers with Higher Interest Rates

There has been a lot of talk of the housing market bubble and when it will pop, etc. I do not have a crystal ball, but I will say this, the market in the next 2-3yrs in for a major correction. Unlike the liquidity of the stock market the housing market is slow to move and we will not see the repercussions until really 2007. We are seeing the beginnings with a massive increase in inventory. I have put together some numbers over the last year to show how the interest rates are going to contribute to this correction.
Last year at this time:
  • Fed rate was at 3.25%
  • ten year treasury bond was at 4%
  • prime was at 6.25% (Adjustable Rate Mortgage based on)
  • 30 year mortgage fixed rate was at 5.5%

Now today these numbers have changed drastically:

  • Fed rate at 5.25%
  • ten year treasury bond at 5.25%
  • prime at 8.25%
  • 30 year fixed rates at 7% (APR)

So what do these numbers mean to you? Unless you're a finance nerd like me, then this means absolutely nothing. So let's put it in terms we all can understand: How much is this going to cost me?

Last year if you were looking to buy a $500,000 home with 20% down:

  • $400,000 loan amount
  • 5.5% 30yr fixed
  • $2,271/mo

Now another way of looking at that number is what with today's rates of 7% would the payment of $2,271/mo get you house wise?

  • A $341,348 mortgage or
  • $426,685 house instead of a $500,000 house
  • That's a 15% decline in purchasing power!!!

Has your job given you a raise 15% in the last year? For most American wages have been stagnate over the last 5 years. If you have an ARM loan depending on several factors you're going to have 16-20% decline purchasing power. Let's see what happens if you go 100% financing:

  • $400,000 5.5% fixed loan
  • $100,000 6.25% Interest Only Equity Line
  • $2792/mo

With today's rates lets see what $2,792/mo gets you?

  • $341,348 1st mortgage
  • $75,758 2nd
  • $417,106 house instead of a $500,000 house
  • That's a 17% decline in purchasing power!!!

The market has yet to price this in to the real estate market, but when it does you can expect a minimum 20% decline over the next year or two. These numbers a just based on the increase of rates, they don't even take into consideration the froth of the market and the unusual appreciation over the last 5-7 years. The numbers don't lie.