Thursday, May 11, 2006

Stanley Cup playoffs

I warned you way back at the beginning that I would throw other topics in at random, and here is an example. Last night the Edmonton Oilers played the San Jose Sharks in Edmonton. The Sharks led the series 2-0. In the second period Gary Smyth caught his teammate Chris Pronger's 90 mph clearing pass right in the pie hole, losing six teeth and about a pint of blood. An injury like this would knock a baseball or basketball weenie out for the rest of this season and most of next. But this is hockey. Smyth was back on the ice with his NEXT SHIFT. He played the rest of a triple-overtime game and fed Shawn Horcoff the assist for the game-winning goal. Today, Smyth is undergoing 6 hours of surgery to put his face back together.

All you NBA and MLB wussies take note: THAT'S the way a professional does it.

I hereby create the Gary Smyth Award, for displays of weapons-grade cajones.

Tuesday, May 09, 2006

It's NOT Joe Albertson's Supermarket

Well, with the FTC's approval of Supervalu's purchase of Albertson's, we may keep a chain alive for a change (Anyone else remember when there were Safeways and Alpha Betas in Utah?). For those who are waxing nostalgic about Joe's supermarket, this was the only way for it to survive against Kroger's, WalMart, etc. "Mega" is the name of the game. And I just realized that "mega" and "game" are anagrams.

Now THIS is Funny... a sick sort of way. The federal regulators finally woke up to the problems of creative financing and how an army of sleazoids have been preying on the most vulnerable players in the market and proposed some regulations. The response was predictable. The large lending associations screamed bloody murder about over-regulation (I should note that not only consumer groups but the small lenders who can't afford to play this game applauded the regulations.). The lender leading the screaming was Countrywide Financial, a company that has consumer complaints stacking up so fast you need wings to stay above them.

Oh Boo Hoo

Then there's the other end of the scale from those who are about to be broken by increasing rates. Some people have seen such appreciation in their houses that their gains exceed the $500,000 capital gains exemption. First, remember that this is a windfall and that you didn't EARN it. You got lucky, so pay your taxes and enjoy the rest of your gift. Second, regardless, you shouldn't have to pay more taxes than you owe by law, so go get a good CPA. It's worth it. And you'd better not cry to anyone about the tax bite if you don't. Penny wise and pound foolish is a cautionary tale, not grounds for sympathy.

For Those of you who Used Creative Financing... are now getting what you paid for. Those ARMs are going through the roof. Some of you are already at 9.5%, and it's still rising. Those of you who got really creative and went for interest-only loans are probably now facing the big hits or maybe a balloon. Either way, you're looking for a refi.

First, IF you can get one, it's going to cost more. Second, partly as a result of the increased cost and partly as a result of the softening market, you'd better be ready to live with the house and your new financing for awhile.

First, understand you're not alone. There are about $2 trillion in ARMs coming up for adjustments in 2006 and 2007. Second, if you are honestly going to deal the house in the next three years, just bite the bullet. No refi will pay for itself in that time.

If you still want a refi, take some serious steps. Get some education about real estate financing. I suggest you go to the Home Learning Center. Find out your credit report and fix it. Try using this site. Try The Mortgage Professor to see if a refi actually pencils out for you. Find a reputable mortgage company as opposed to a sleaze factory. Try Ripoff Report for this information. Shop rates. MyFICO is one place to look.

Do the homework, do the financing right this time, and you'll have something you can live with for the long run.

The Current Finance Market

It seems that homeownership is now exceeding the grasp of an increasing number of people (I can't imagine why. Just because rates are rising and prices are over the moon....). According to the Census Bureau, homeownership was 69% in Q4 2005, down from 69.2% a year earlier, and the first time since 1994 that a year hasn't ended higher than the year before.

Still planning on buying? I'd recommend you plan to do it the old-fashioned way. Save up for a down payment and closing costs. Buy what you can REALLY afford, not what some mortgage jockey says he can get you into. Creative financing will bite you in the bum. Interest rates are rising, so any ARM will just go up. Interest-only loans have balloons, and if the market softens, that balloon will just go "pop." Plan on being in the house for awhile, 7-10 years. And don't forget all the incidental expenses of home ownership. For example, you'll need insurance, and insurance rates are rising dramatically (You didn't think the insurance companies were simply going to eat their hurricane losses, did you?).

The Carrion Birds are Circling

Need any more evidence that the real estate market is slowing? How about this: The mortgage field services industry is heating up. These are the folks who protect the values of foreclosed properties pending sale, through maintenance and security. The industry had virtually disappeared over the last several years; rising prices allowed distressed borrowers to simply sell out. Now, though, with foreclosures and deeds in lieu increasing nationwide, they're back.

Softly, softly...

The housing market is broadly softening, although a few areas are resisting the trend (Seattle and Salt Lake are two of those areas, as is Dallas.). The real problem is that the speculators are starting to dump the properties they own and are not buying, in some cases walking away from existing purchase contracts. This indicates the margin has been squeezed out, and anyone buying in now had better be buying because they want to own real estate, not because they want to flip it.

Want hard numbers? The National Association of Realtors is expecting that existing home sales will decrease 4.7% this year, and new home sales will decrease 8.5%. Prices are expected to increase half as fast as last year. Accounting tricks can no longer keep mortgage rates down. Even Toll Brothers, builders for the rich and famous, is showing declines (Their net income was up 49% in the first quarter, but orders dropped 29%.).

This is not a market falling off a cliff, but the problem with a speculative market (and let's face it boys and girls, this is a speculative market) is that once the dominos start falling, they keep falling.

Park City

Took the wife and a couple of the kids out for a picnic and a hike Sunday. We ended up going through Heber and then Park City. The world has definitely found Park City since the Olympics. Loads of residential development in the $5 million to $15 million range. My wife keeps asking me who from around here can afford these. I keep telling her that most of these folks aren't from around here. Fly in from either coast to SLC Airport and in a half-hour, you're in Park City, ready to hit the slopes. You can't get that anywhere else, and a substantial number of people are paying top dollar for it. Where that leaves us mortals, though, is a good question.

Just Who's Making the Money?

Not your average real estate agent. In spite of hot markets and increasing commissions, the median annual income for agents fell from $39,300 in 2002 to $37,600 in 2004. The rush of new agents of the last, few years has driven the median down. As with any other business, a real estate practice must be built over time. Anyone who expects to get rich quick is heading for some serious disappointment. Many real estate investors would be wise to heed this.

Let's not Forget Commercial Lending

All the noise about residential financing has drowned out commercial financing in the public consciousness, but it too is showing signs of weakening.

Moody's has determined that the yield on real estate investments is the lowest since figures started being kept. The reason is that cheap loans have driven prices up, reducing yields. Moody's is also seeing a backlash against these prices: Buyers are borrowing only up to the property's value from five years ago, indicating that buyers are expecting a drop. If that is the case, a lot of owners will be in deep kimchi. Standard & Poors has seen a big increase in interest-only loans with balloon payments. That means there's a lot of quick flip expectation in the market. If resale prices can't pay for the balloons, it's going to be a bumpy ride.

Mall Wars

Strip malls and shopping malls showed the sort of divergence in Q4 2005 that is generally associated with a faltering economy. Vacancies went up a bit for both (more for shopping malls), but rent was up substantially for strip malls while remaining effectively flat for shopping malls. Why? Strip malls are inhabited by discounters and bread-and-butter retailers; shopping malls are inhabited by nonessentials. As an economy slips, demand for shopping mall products slips, whereas strip mall products are less discretionary. Add in the number of anchors that are going dark, and you have a lot of shopping mall retailers who 1) can't afford an increase and 2) have less revenue and so are paying less under the percentage clauses of their leases.

So why did strip mall vacancies go up? Because we're building more of them, a lot more. The demand is going great guns, though, and absorbing the new space. Big Lots is becoming a popular place.

Rich Get Richer?

Housing markets are slowing down, but the slow-down is far from uniform. As is always the case with real estate, it's location, location, location. Consequently, big builders like D.R. Horton, KB Home, and Lennar continue to post gains, due to geographic diversity, while more local builders such as M.D.C. are feeling the slowdown. M.D.C. showed steep declines in Arizona and D.C. and is pulling out of Texas entirely. The company is skating on increased business in California, Illinois, Utah, and Nevada, although the profit margin in Nevada has declined sharply. Steep increases in housing costs are apparently the chief villain in the declines.