What Should You Do With Real Estate?
The Dynamic Wealth Report
October 20, 2008
Stop Paying Your Mortgage
Every day we’re hearing a few more details about the Government’s $700
billion rescue package for the banks. Last week, instead of buying up
the toxic debt held by banks, Treasury Secretary Paulson did an
about-face. He rounded up the heads of our largest banks in America and
forced them to take a Government capital infusion.
Do you know why he changed his view?
Paulson’s terrified of the flow of capital seizing up. As more and more
concern about the economy reaches the markets, investors become wary of
lending. Right now, banks are terrified of lending to each other. All
you need to do is look at LIBOR rates to see this. The higher the LIBOR
rate, the more fear of lending there is.
Banks are afraid to lend to each other. That means it won’t be long
before banks are afraid to lend to you and me, and the rest of “Main
Street.” Ask any economist, if lending stops our entire economy will
grind to a halt.
By putting more capital into banks it makes them more credit worthy.
This will free up bank lending and the flow of capital. But there’s
another problem.
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The real estate crisis is still running strong . . . and this package
does little to help.
Right now, more Americans than ever are underwater on their homes. That
means they owe the banks more than their houses are worth. It’s estimated
1 in every 6 homeowners across the nation is underwater.
It’s rare to find a part of America where the value of a home hasn’t
dropped. As a matter of fact, some parts of the country like Florida,
California, and Arizona have seen property values fall as much as 50%.
(This was where aggressive real estate speculation was the worst.) The
last time a real estate crisis of this magnitude hit, homeowners just
sent their keys to the bank.
It was called "Jingle Mail."
Everyday Americans just stopped making their mortgage payments. The
reasoning was simple. Why pay for a house when the value is
substantially lower? Compounding this problem is the softening economy.
Layoffs are starting to take hold and the unemployment rate hit recent
highs.
It’s looking bad.
Just today Federal Reserve Chairman Ben Bernanke told Congress we need
further economic stimulus. So, if you’re under water on your house
should you stop paying your mortgage? Should you send your keys to the
bank, or hope the government comes to your rescue?
To answer this question I spoke with a friend of mine who owns a handful
of investment properties in Arizona. He has something shocking to say.
“Stop paying your mortgage!”
His reasoning was simple. The more people who stop paying their
mortgage, the bigger the supply of bank owned homes. This causes the
price of real estate to fall even further. That lets this savvy investor
swoop in and buy more homes on the cheap.
That’s right, he’s looking to buy homes people leave to the bank.
For him, now’s a perfect time to invest. He can pick up homes for
practically nothing. And his competition’s very limited. That makes his
negotiations even easier. He’s going into the banks and offering them 50
and 60 cents on the dollar for prime real estate. These are levels where
any rental income will more than cover the cost of his mortgage.
Of course he’s happy for people to quit on their homes. It makes it
easier for him to make money.
What does this investor know that others don’t?
He knows the real estate crisis won’t last forever. In two or three
years, things will return to normal. And a few years later, real estate
prices will start going up again.
All those people who quit on their homes during the last crisis, would
have been “OK” just a few years later. All those who quit on their homes
now will be missing out on future growth opportunities. Never mind the
damage caused by bad credit and the moral issues of going back on a
promise.
Instead of quitting on your home mortgage, now might be the time to buy
another home as an investment property. I know today I’m going to start
looking.
• Aluminum Industry (down 53%)
This last month has been devastating to the Aluminum Industry stocks.
Commodity prices keep falling, a softening economy is dampening demand,
and high energy costs are squeezing margins. As a result, companies like
Alcoa (AA) and Kaiser Aluminum (KALU) are down significantly in the last
month.
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