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Flipping over 1031 Exchanges

September 14, 2005 | 10:09 pm | |

According to an interesting article in today’s WSJ article “A real estate speculator’s surprise,” many real estate investors don’t understand the proper use of 1031 exchanges [Note: Pd. Sub.]

A person who sells real estate can defer capital gains obligations by rolling their gains into a similar piece of property. Also called a like-kind exchange.

The problem is that many investors are flipping their properties so frequently, especially in certain markets like Miami and Las Vegas, that the IRS can interpret their activity as a business, and therefore subject to other taxes. This could catch many of these investors by surprise, especially if the boom cools and the margins on flips evaporates.

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Riding The Storm Out: Housing Boom May Continue For A While

September 5, 2005 | 11:19 am | |

There was a great article in the New York Times today that provided some logic as to why Katrina could extend the housing boom further.

There have been signs lately that the intensity of the housing boom was waning as outlined in a WSJ story [Note: Paid Sub.] or could it simply be because its August? 😉

The shortage of building supplies and rising fuel prices as a result of the storm are thought to temper the economy, dragging down long term rates as inflation threats are diluted. The outlying areas around the devastated region are already seeing a surge is rental demand as people were displaced from their homes.

We can already see a damper in mortgage rates, which dropped sharply last week.

In another good article in last week’s New York Daily News [no, not because I was in it] that provided similar logic. Higher costs are keeping a damper on inflation, which keeps long-term mortgage rates low.

What I find so fascinating about all this is how different the economy is today as compared to the last oil crises in the early 70’s. Bond investors see a slowing economy as the answer to keeping inflation in check. Corporations are forced to absorb much of the higher operating costs that come along with rising fuel and material costs due to foreign competition. That in turn keeps a reign on hiring and payroll.

There is already speculation that the Fed will not raise short-term rates in their next session due to concern that the economy could slip back into a recession.

And the housing market keeps going…

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The Numbers Are In: Advisors More Confident Than Consumers

August 29, 2005 | 8:18 pm |

numbersarein

For the fourth month in a row, the Advisors Confidence Index (ACI) showed an improved outlook. The ACI provides a measurement of the US economy and the stock markets. The Advisor Confidence Index is based on a survey of 150 independent registered investment advisors.

The quotes from the advisors provide interesting insight. They touched on the main factors that will provide the most impact on the direction of the markets and the economy: Oil & Housing. The next 6-months appear to look better than the following 6-months.

However, this conflicts with consumers perceptions of the state of the economy. The University of Michigan Consumer Confidence Index fell sharply in August, further than analysts projections, the second drop in the past two months.

Apparently investor advisors are more optomistic about the future than consumers are.


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Katrina & Oil Prices: The Perfect Storm

August 29, 2005 | 7:23 pm |

katrina

Late last week, as the hurricane threat to the Gulf of Mexico increased, the oil futures market became concerned that production would be affected. Futures traders bid up the price of oil and gasoline due to the perceived future constraints on supply and now oil seems headed for $70 per barrel. The futures market seems hyper-sensitive to any threat to oil production these days.

refinery2



How can this impact housing prices?

Simple. Higher Mortgage Rates.

As this and other inflationary factors gain momentum (if they do), bond investors would likely become concerned about the inflation risk in the long term, which eventually translates into higher borrowing costs. Higher borrowing costs generally translate into lower home prices.

Then again, thats just one theory of many. Lets ride the storm out.


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PMI Gets You In The House: Now Get Rid Of It

August 28, 2005 | 12:41 am |

percent Homeowners can save thousands by canceling private mortgage insurance [PMI]. PMI is an insurance on the top 20% of the loan so the lender is assured that they will get the full 80% or balance of the funds outstanding if the property goes into foreclosure.

The Homebuyers Protection Act was passed by Congress in 1998 requiring lenders to notify homeowners when the equity in their home reached a level where PMI was no longer required.

“Your home falls under this act if you purchased, constructed, or refinanced your single-family home after July 29, 1999, and your loan is not a government-insured FHA or VA loan. If you purchased your home before July 29, 1999, your lender is not required to cancel your PMI when you reach 20 or 22% equity, but many lenders will do so if you ask.”

How to Cancel PMI Here’s a great article on removing PMI from your loan by Chip Wagner, an accomplished appraiser in the Chicagoland area. Most lenders require and approved and state certified appraiser to perform the evaluation.

Here’s how they do it in Minnesota. I suspect it is not much different than other states.

Note: Check with your lender for specific instructions.


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Live From Wyoming: Low, Risk Premiums

August 27, 2005 | 2:09 pm | |

hills

Greenspan spoke this week at symposium, held in Jackson Hole, Wyoming, sponsored by the Federal Reserve on the legacy of his 18 year era. He took the position that the housing market now suffers an imbalance.

The Federal Reserve is paying closer attention to the rising values of assets such as stocks, bonds and homes, as low interest rates encourage more risk-taking, Fed Chairman Alan Greenspan said.

Low “Risk Premiums” (A new mantra?) This trend reflects what Mr. Greenspan said was the increased willingness of investors to accept low “risk premiums, a willingness based on a complacent assumption that the low interest rates, low inflation and strong growth of recent years are likely to be permanent.”

tightrope

His concern is when (bond) investors become more cautious, yields will rise, lowering housing values and then selloff of bonds that caused rates to drop in the first place. “This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.”

Other notable Greenspan-speak, etched in the public conscience are:

A Conundrum – An inverted yield curve appears to loom on the horizon.

A Frothy Housing Market – “The Fed feels it needs to squeeze more air out of the market – the housing market in particular, although the Fed has stressed that it’s not targeting housing with interest-rate policy.”

Irrational Exuberance – Greenspan first used the phrase in 1996 several years before the stock market corrected in 2000 but it came to define the rapid run up in stocks in the 1990’s. The analysts that missed the dot com bubble now seem to be the ones warning us about the housing market boom’s eventual conversion to bust.


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Turning the Bond Market Upside Down: Inverted Yield Curves

August 27, 2005 | 10:01 am |

yieldcurveinverted According to Investopedia.com an inverted yield curve is a “Usually a chart showing long-term debt instruments that have lower yields than short-term debt instruments. It is sometimes referred to as a negative yield curve.” But they are cause for concern: “History has shown that inversions of the yield curve have preceded the last five U.S. recessions. The yield curve can accurately forecast the turning points of the business cycle.”

invertedyieldsign

Why would investors accept lower long terms rates than short term rates?

According to SmartMoney.com “The answer is that long-term investors will settle for lower yields now if they think rates — and the economy — are going even lower in the future. They’re betting that this is their last chance to lock in rates before the bottom falls out. Inverted yield curves are rare. Never ignore them. They are always followed by economic slowdown or outright recession as well as lower interest rates across the board.”

Perhaps this is an indicator that the economy will stall, and rates will go down even further. Stay tuned.

See previous post Yield Curve Enters Kitchen Table Talk


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ARM’ed But Ready To Get Fixed

August 24, 2005 | 11:00 pm | |

scale

As the yield curve flattens, that is the spread between long term rates and short term rates is negligible, homeowners are considering making the move from ARM’s to Fixed mortgages [Note: Paid Subscription].

As the supply of fixed mortgages increases when people shift from ARMs because of the flat yield curve, it could mean upward pressure on mortgage rates (ie bond prices down, yields up). Why borrow at a rate for 1 or 2 years when you can have the same rate for 30 years? The effect of the shift in the market is greater in moving from ARM to fixed since roughly 70% of fixed rate mortgages are securitized and 25% of ARM’s are.

But wait! There’s more potential confusion.

The demand for mortgage-backed securities from foreigners is still strong since their yields provide a greater return for investors than treasury notes generally do. Higher demand, means higher bond prices, means lower yields, means long term rates could stay at low levels for a while.



Boom as in Baby

August 23, 2005 | 10:59 pm |

housejump

Scott Reeves contends, in an article posted on Forbes.com: Don’t Believe The Hype that the booming real estate market is driven by fundamentals including low mortgage rates, increased employment and demand (note: demographics). Its not driven by investors.

Although NAR indicates that 23% of home purchases in 2004 were made by investors, Freddie Mac statistics indicate that the length of homeownership has increased from 6.5 years in the first half of 1999 to 7 years in the first half of 2004. Although this argument doesn’t reflect the recent uptick in housing prices in 2005, it could infer that the market is not being determined by runaway investors aka speculators aka flippers.

babyboom

In fact, NAR says that no more than 3% of all purchasers sell their homes in less than a year.

This is consistent with…

the cascade of baby boomers in their prime earning years who are beginning to think about retirement. Many boomers, real estate agents say, buy a second home with the intention of retiring there–but most are more than happy to sell it in a few years if plans change or if the price is right.

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The Wealth Effect: Stocks vs. Housing

August 19, 2005 | 8:12 am | |

With the discussion today comparing stocks versus real estate, its worth taking another look at a research paper from a few years ago: Comparing wealth effects: the stock market versus the housing market [Note: PDF] written by professors Case, Quigley & Shiller. In their abstract they state:

We find a statistically significant and rather large effect of housing wealth upon household consumption.

The wealth effect is defined as:

The premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more.

The impact on consumer spending is more than double when tied to the value of their home rather than their stock portfolio. This has broad implications for the economy and is likely of significant concern to the Federal Reserve in their recent policy of reigning in the threat of inflation.

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Home, Sweet, Condo?

August 18, 2005 | 10:20 pm | |

According to this article from the Real Estate Journal [Note: Subscription], condo prices exceeded single family home prices for the first time ever in early 2005.

Condo Facts
* Condos leapt to prominence after the 1961 Housing Act enabled the FHA to insure mortgages on the units.
* 970,000 condos were sold nationwide in 2004
* 1 out of 7 existing home sales are condos
* national median condo sales price is $223,500
* national median home sales price is $218,600

Why are the overall condo prices higher than houses?

With the resurgence of urban areas and a decline in “nuclear” families (40% in 1970 to 24% in 2000), condos have increased in demand.



Areas of Concern
Now there is concern that the change is more than demographics, that condo prices are rising too fast [Note: WSJ Subscription] as a result of speculators and investors favoring them over housing.

With great investor concentration in condos, could infer that the single family housing market has the potential to be less volatile in a market down turn.

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Well, Maybe The Inflation Threat Is Not That Bad After All?

August 18, 2005 | 2:32 pm | |

Yesterday, the Bureau of Labor Statistics released the CPI figures for July and while core inflation was relatively flat, energy and housing saw large gains. The concern was that oil was threatening to fan the flames of inflation. The PPI Report

A day later that concern seemed a bit exagerated as…economists expressed little concern [Note: Subscription] that the higher prices producers are paying signal broad inflation.

Economists also pointed to Tuesday’s consumer-price report, which showed a modest 0.5% advance in July, with the core rate increasing a benign 0.1%.

In addition, the producer-price index for intermediate goods rose 1%, largely because of energy-cost pressures, and the core intermediate index fell 0.1%, the third consecutive monthly decline.

What is the Producer Price Index? In other words, CPI measure price changes to the buyer while PPI measures price changes to the seller.

Rising oil prices appear to be slowing economic growth and placing investor concerns of inflation at ease for now.

Economic stats seem to be more volatile than ever. For example, core cpi would have been even lower had it not been for the rise in auto prices, yet this does not correlate with recent record auto sales due to aggressive discounting. Economists have long complained about the reliability of auto sales and later revisions. Accounting for about one-sixth of US jobs, so the impact of these stats affects the reliability of the overall numbers significantly.

What does all this mean? Many believe the Fed has at least 3 more increases in it before the end of the year. This doesn’t seem to mean that mortgage rates are bound to increase.

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