Real Estate - Credit Crunch

The Dynamic Wealth Report
December 14, 2007

Denied A Home Loan on $300,000 A Year?

Nothing makes me more mad.  Yes, I’m mad.  I hate it when informative data is announced to the market and the talking heads on TV and other “expert commentators” don’t understand what they’re saying.

Just this week the National Association of Realtors (NAR) announced that the Pending Home Sales Index rose from September to October.  The shouts of joy were heard all over Wall Street, celebrations were planned, parades organized, babies laughed and smiled.  We have reached the bottom of the real estate crash!

Wait . . . . before you rush out to buy a party hat, let’s take a closer look at the numbers.

What NAR announced was a 0.6% increase month to month.  That’s right, a less than 1% increase in current home sales.  Remember, we're down more than 18% from October of last year.  This is nothing to get excited about.  But wait, it gets better.

The chief economist for NAR said . . . and I quote “The broad trend over the coming year will be a gradual rise in existing-home sales, but because sales are exceptionally low in the final months of 2007, total sales for 2008 will be only modestly higher than 2007.”

Great news, home sales will increase next year, an increase is better than nothing . . . right?  Well, let’s look at the accuracy in these statements. 

Last year at this time the chief economist of NAR put out a forecast for 2007 and this is what he said . . . "Most of the correction in home prices is behind us, but general gains in value next year will be modest by historical standards."  Does that seem like an accurate prediction?  Clearly he was off just a bit.

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Maybe NAR is right, maybe they're wrong.  What really got my attention was the news buried deep in the announcement about new home sales. NAR expects new home sales to hit 693,000 in 2008 . . . not a bad number unless you remember 2006 when new home sales were at 1.05 million.  This is a 30% correction.

A big part of the problem in the real estate market is being caused by the banks and lenders themselves.  Mortgage lenders are scrambling to stay afloat and desperately searching for new customers.  Problem is, lending standards have tightened to the point where people can’t get a loan!

I have a colleague who experienced this issue first hand.  To keep it brief, he makes very good money (over $300,000 a year) and has a credit score that 98% of Americans would be jealous of.  He owns some real estate as rental property and has done very well for himself.  He knows one particular neighborhood very well and has decided now is the time to put in some lowball offers to buy some new rental property.

He went to his bank (it’s one of those really big ones) and they said no. He went to a mortgage broker and was cautioned not to bother filling out the paperwork.  The money just isn’t available.

He went a step further.  He looked at buying the home for cash and then placing a mortgage on the property.  He heard “no” again.  Finally he got an offer from another mortgage broker who said it would be a struggle, but if he would put 20% cash down and agree to a 9% rate they might . . . might be able to get him some financing.

“When people with perfect credit and lots of cash can’t get a loan, it makes you wonder who can?” my friend said.  I have to agree with him. It is stories like these that make me all the more nervous about the real estate market.

My thoughts at the time are very straight forward.  More and more homes are on the market, foreclosures are sky-high, and the government bailout is only going to lead to more problems.

The real estate market has not bottomed out due to a measly 0.6% increase in sales.  The homebuilders and most of the economy that are tied to real estate find themselves in the middle of a correction.  I believe it will take 12 to 18 months to work out these issues.  Position your portfolios accordingly.

•  Jet Blue (JBLU) received an upgrade from Bear Stearns on news that the company had received a $300 million investment from Deutsche Lufthansa.

•  Citigroup downgraded Washington Mutual (WM) from a hold to a sell after the company announced a major restructuring and a cut in the dividend.  Banc of America followed suit just a few days later.

•  UBS initiated coverage with a sell rating on Vulcan Materials (VMC) a building materials provider.

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