The Chasing Dirt Community

Well hello there kids!

I know it’s been awhile since my last post- I’ve been very busy with two of my development projects, and a new website for my development business that I’ll let you in on shortly if you’d like to see what that looks like. But first, I came across this article recently from BusinessWeek that I thought you might find interesting.

Essentially, the economists at Fiserv, a global financial services firm forecast that the housing market will bottom out in the second quarter of 2011, and they go on to predict which markets nationally will be the strongest and weakest between now and 2014. Obviously the further out you look, the less reliable any predictions are likely to be, but it’s interesting fodder for thought nonetheless…

Among the highlights:

• Bremerton, Washington, a Seattle suburb, is pegged to be the fastest growing housing market in the next four years, with appreciation estimates as high as 44%.
• The worst market in the country, according to Fiserv? Naples, Florida, where prices are expected to continue to fall over the next four years.

You can read the entire article on Yahoo here.

Talk to you soon,

-Josh

Cindy Terasme screams after seeing the feet of her dead 14-year-old brother Jean Gaelle Dersmorne in the rubble of the collapsed St. Gerard School in Port-au-Prince, Haiti, Thursday, Jan. 14, 2010. A 7.0-magnitude earthquake hit Haiti Tuesday. (AP Photo/Gerald Herbert)

The devastation is almost too much to fathom.

Like many of you, I’ve been following the cataclysmic tragedy in Haiti, and the stories and images are heartbreaking. Estimates are that over 50,000 people are dead, another 300,000 homeless, and countless more injured. All this in the poorest country in the Western Hemisphere.

At Chasing Dirt, providing shelter to others is at the heart of what we do as real estate investors. And I’ve always been a big proponent of investors giving back. You usually come here for answers to questions about the myriad ways and means of investing in property. But today I come to you with an appeal that is very simple and offers just one request: give.

A close friend called me in tears. She had spent the day volunteering to answer calls at Mercy Corps’ headquarters. The stories she heard were heartbreaking. The selflessness of people calling in to make donations was overwhelming, and when retired folks are calling in to donate part of their social security checks to help the victims in Haiti, we are all called to do more.

I’ve set up a fundraising page through Mercy Corps. I’d appreciate it if you could take just two minutes of your time and give whatever you can- even five dollars makes a difference. I know times are tough for many people right now, but I’m reminded of the old proverb that says, “I complained that I had no shoes until I saw a man who had no feet.”

http://www.mercycorps.org/fundraising/joshfuhrer

Please also post the link above on your Facebook, MySpace, Twitter and other social media profiles. The more we spread the word, the more lives we can save.

You can also text “HAITI” to “90999″ to donate $10 to the Red Cross — The US State Department very quickly put together this number to channel relief contributions directly to first responders who will be on the ground there. Your $10 donation will be added to your cell phone bill.

For Twitter lists of  information on the quake, try CBS News and NPR News.

We’ve heard for a few months how the housing market is starting to show signs of life, how sales are up slightly, and that things could be looking up in 2010.

Then, quietly, the Treasury Dept. put out a Christmas Eve press release. Before I get to what was in the press release, bear in mind that Christmas Eve is traditionally one of the slowest news days of the year.  Everyone is knee-deep in egg nog and last-minute Christmas shopping, and if you’re going to put out news you hope gets overlooked, you do it late in the day on the first day of a long holiday weekend. That way, it won’t get much attention.

So given how the news cycle works, the timing and content of the Treasury’s Christmas Eve missive is particularly disheartening for those who were hoping for a warming of the housing market in 2010. According to the Wall Street Journal, the U.S. Treasury will cover an unlimited amount of losses at Fannie Mae and Freddie Mac over the next three years.

In other words, Fannie and Freddie just got a blank check for Christmas.

I’m less interested in debating whether that was the right move or not for the economy from a macroeconomic perspective. What is interesting to me is the message it sends…

To date, the federal government has pledged to cover up to $200 billion in losses at each of the companies currently in conservatorship. At last check, Fannie has received $60 billion and Freddie another $51 billion in capital. Many analysts believe that the two companies will need less than the total $400 billion allocated to keep them afloat. If that’s the case, why would the Treasury lift the caps, pledging an unlimited amount of capital to the companies’ future losses? On Christmas Eve no less?

The message is pretty clear: there are a lot more losses (read: foreclosures) coming, and Treasury knows it. Why else would they need to give reassurance to the housing industry and investment markets in general in the form of an unlimited backstop? If things were getting better, they’d either hold the caps in place, or reduce them and reallocate those funds to other budget priorities. There can be louder statement from the government that they expect things in the housing market to get worse before they get better than the statement made Thursday night.

The message behind the government’s move is backed up by the numbers: sales of new homes dropped 9% in November. Sales of existing homes went up slightly, but 1/3 of existing home sales are foreclosures, so the number of non-distressed, owner-occupied sales is down considerably. According to Realtytrac, 2008 will have seen 3.9 million foreclosures, up from 3.2 million in 2008. And with unemployment still over 10% and showing little to no improvement, the housing market picture doesn’t look like it’s going to reverse course anytime soon. And Treasury’s Christmas Eve memo acknowledges that. If you’re an investor hunting for bargains, the message here is to take your time- the market isn’t turning around anytime soon.

Interestingly, the Treasury made the move to lift the cap on assistance to Fannie & Freddie by amending the terms of an agreement reached between the government and the two companies in September 2008. The agreement allowed the Treasury to make changes through December 31, 2009 without Congressional approval. Changes made after Dec. 31 would involve a very long and public struggle with lawmakers.

In other news, Fannie & Freddie disclosed (again, on Christmas Eve for the same reasons as above) the pay packages for executives at the two companies. At Freddie, annual compensation will total as much as $4.5 million for Bruce Witherell, chief operating officer; $3.5 million for Ross Kari, chief financial officer; $2.8 million for Robert Bostrom, general counsel; and $2.7 million for Paul George, head of human resources.

Now given that you want to attract the best talent to deal with the crisis at hand, these amounts may not be excessive for the people tasked with turning the companies around and limiting losses. But $2.7 million for the head of human resources?!?! Really? Big dollars for the CEO, CFO, legal counsel, sure- I get that. But human resources? Why is the head of HR at Freddie Mac a $2.7 million position? Since when is HR at the policy table or testifying on Capitol Hill? Seems to me there are a lot more people qualified to fill the role of head of HR at Freddie than there are the CEO. Maybe I’m missing something, but $2.7 million of taxpayer dollars for an HR director at a company in conservatorship seems a bit high to me.

Merry Christmas!

I’ve been in active in real estate since the mid-1990’s. I’ve seen ups and downs, and I’ve seen investors come and go. Some have been very successful, while others have made crucial, easily-avoidable mistakes that have cost them their time, money and pride.

What’s the difference between the ones that succeed and the ones that don’t? Well there’s no single answer, but there is a common pattern: people make the same mistakes over and over again and don’t even realize it.

So let’s get right to it… here are 10 of the biggest, most common, career-killing mistakes new real estate investors make:

1. Not talking enough. Real estate is a relationship business- whether it’s your relationship with your banker, Realtor, mortgage broker, tenants, partners, contractors, title agents, buyers, sellers, or other investors, the quantity and quality of your business relationships are the lifeblood of your business. If you’re just starting out, forget about looking for deals just yet. Instead, spend your time meeting as many people as you can for the first 10 weeks. If you meet 10 new people a week for 10 weeks, that’s an army of 100 people out there in the real estate world who can help you find and do deals that you’d otherwise never even know about.

So get out to events, meet people, ask them about their businesses, what they do, how they help people, and start creating those all-important relationships. Talking to people costs you nothing, and the returns are infinite. Don’t worry that you don’t know enough or don’t have any money- others are looking to build relationships, too, and not every interaction has to end in an exchange of money for it to be profitable.

2. Not thinking for themselves. All too often I talk to people who want to invest in real estate, but for whatever reason, something holds them back. For many of them, it’s the fear of making a mistake because they don’t know enough.

So they rely on the advice of Realtors, mortgage brokers, and other real estate professionals to make their decisions for them. Instead of doing their own market research and crunching the numbers themselves, they blindly accept what the professionals tell them is the best way to go.

The problem is that the agent or broker they’re working with is in business to earn a commission. That commission is usually based on the price of the property. So the higher the price the buyer pays, the more money the broker makes. Can you see how this situation might run counter to your interest in getting a good price?

My advice, then, is to seek input from others, but don’t base your decisions solely on someone else’s opinion, especially if you’re paying that person a commission. Realtors and brokers can be extremely valuable to your business, but it’s your job to take what they give you and make your own decisions. You know your goals and tolerance for risk better than they do. And it’s your money on the line. If you want to be successful, you have to listen to the advice you get, but do your own critical thinking and make your own decisions.

You do that by understanding the market and knowing how to run numbers. Income minus expenses equals profit. Math is your friend… learn how to add and subtract and your life will get a lot easier.

3. Not having a written plan. Once you understand the dynamics of the market you’re investing in, you can begin to plan your investing activities. This is the “looking inward” part of the process, and it begins with an assessment of your investing goals and access to capital.

Your investing plan should be specific, and I recommend writing it down. Here’s what it should include:

1. Your investing goals
2. Your plan for accessing capital
3. Your target property types
4. A general investing strategy for creating value and extracting profit

Let’s take a closer look at each of these…

Read the rest of this entry »

Lana's rack.

I just finished a lovely dinner with my old friend Lana (old as in known her for a long time, not old as in she’s geriatric), and she asked a question over her rosemary herbed rack of lamb that I thought I’d share with you. And no, I’m not sharing the lamb or the pinot noir that came with it- just her question…

Lana is trying to refinance her condo, and wanted to know what I thought she should do.

She lives in an historic building with only three units, converted from an old estate into condos in 2000, all sold with residents living in them. She’s owned her unit since 2006, and just wants to refi to get a lower interest rate. She’s not looking to take cash out, and has applied at her local credit union for an FHA loan. Because of FHA’s recent rule changes about what they will and won’t lend on, getting an FHA loan on her unit has become a bit more challenging. The loan officer at her credit union suggested that they apply for a waiver from FHA due to the fact that her condo had been fully occupied for years, she has excellent credit, and she’s not looking to pull cash out. That was in September. She’s still waiting.

She wanted to know if I thought she should look elsewhere, as in a non-FHA loan.  

The short answer is no. If she goes to a non-FHA loan program, she’ll be required to have significant equity in the property the same way the buyer of a new property would be required to these days- in most cases, that’s around 20%. Even the though she has excellent credit and stable income, the value of her condo has remained about what she paid for it three years ago, if not dipped a little. She got 100% financing when she bought it, so her equity position isn’t very strong.

Plus, the interest rate she’d get from a non-FHA loan would probably be a bit higher than an FHA loan, negating much of the benefit of the refi in the first place.

My suggestion, though it wasn’t the brilliant brainstorm she’d hoped for, was to continue pressuring the credit union to get an answer from FHA on her waiver and approval. The way FHA has changed their rules lately, first making them more strict about six weeks ago, then relaxing them somewhat a week later, tells me that heaven only knows what their regulations will be three to six months from now. With a little patience, she may well get her FHA refi. But it might take awhile, as the lending landscape is still rocky and unpredictable. But unfortunately, she doesn’t have a lot of options in reaching her goal other than to wait and be persistent.

Oooh… here comes dessert! I think there’s chocolate involved… gotta run!

In an effort to reduce the number of foreclosures in the US, the FDIC may soon require banks who take over the operations of failed financial institutions to cut principal off mortgages instead of simply forbearing a portion until a later day or lowering interest rates.

The FDIC, which has taken over 124 failed banks this year, may seek to have lenders that sign loss-sharing agreements when acquiring the assets do more than cut interest rates or defer the loan’s principal, FDIC chair Sheila Bair told Bloomberg last week.

“Now you’re in a situation where even the good mortgages are going bad because people are losing their jobs. So you have other factors now driving mortgage distress. We’re looking now at whether we should provide some further loss-sharing for principal write-downs,” Bahr said.

Sheila Bahr, FDIC Chair

In 2004 to 2007, billions of dollars of pay option ARM loans were written that allow borrowers the option to temporarily pay less than the accrued interest each month. This causes the principal balance on the loan to grow, and with property values falling in many areas, many homeowners with these loans owe more than their properties are worth.

A principal forgiveness program will help to keep these borrowers in their homes by reducing the amount of their loans to an amount at or below the market value of their homes. For the borrower who is having trouble making their payments and is deeply underwater on their mortgage, principal reduction in theory should help to motivate the homeowner to stay in the home and make smaller payments. The losses on a loan with the principal reduced are far less than on a loan where the homeowner just walks away.

The scary part is that many borrowers with these loans haven’t even reached their recast date yet.

Most pay option loans have a cap on the amount of negative amortization you can accrue. When the negative amortization reaches a preset limit, the lender raises the minimum payment. The new minimum payment is typically the 30-year fixed-rate amortizing payment. This is called a recast cap. It kicks in when the loan balance reaches between 110% and 125% of the original loan balance.

If you hit your recast cap, the change in minimum payment can be significant. For example, let’s say you have a $200,000 loan at 7.5%, with a recast cap of 120%. The interest-only payment is $1,250 per month, but the specified minimum payment is only $1,000 per month.

If you make too many minimum payments, the loan balance will rise. Once the balance reaches $240,000 (120% of the original loan amount), the 30-year amortizing payment of $1,678 per month becomes the new minimum payment. That’s quite a jump from $1,000 per month, and it can make keeping up with payments very difficult if you need the lower payment.

Once the vast number of pay option loans in the market hits their recast cap points in the next 12-18 months, the FDIC’s principal reduction program will be essential to avoid another wave of residential foreclosures.

As of yet, there are no details about the proposed percentages or amounts of principal reductions in the FDIC’s plans, except to say that the aggregate reduction amount will be around $45 billion. Time will tell if that amount is enough to keep borrowers who have yet to have their payments adjusted up in their homes. But stay tuned- this story will likely get more attention over the coming weeks and months.

By now you’ve likely heard the news from Dubai- that the state run Dubai World and its development subsidiary Nakheel are unable to repay the billions in debt they borrowed to fuel the construction boom there of the last 10 years. There is even talk of a “national bankruptcy” that could trigger another worldwide financial crisis. Thanks to worldwide investment in Dubai World, a default by the Emirate would have substantial ripple effects in virtually every economy across the globe.

“Just a few weeks ago, at the beginning of November, the emirate’s ruler, Sheik Mohammed bin Rashid Al Maktoum, insisted at an investor conference that Dubai and its government-run businesses were in good shape. Those who were claiming otherwise should “shut up,” he said in an unusually blunt outburst.

And now the emirate is unable to come up with a sum which was, at least by Dubai’s standards, not that large. What is happening in Dubai is “unbelievable,” says Eckart Woertz, chief economist at the Gulf Research Center.

The request to delay debt payments shocked the entire Arabian Peninsula and triggered deep concern throughout the global financial world. Stock prices on Asian and European exchanges plunged. The Dubai stock market fell by more than 7 percent on Monday, the first day of trading since the Eid al-Adha holiday, while Abu Dhabi markets slid more than 8 percent.”

This is all fascinating to me, because the problems in The Gulf were predicted by Edward Hugh, a British economist based in Spain that I’ve followed for some time now. In an email conversation I had with him back in August 2008, he predicted a fall or correction in the Dubai economy 15 months ago:

~~~~~~~~~~~~

On Sun, Aug 10, 2008 at 1:57 AM, Josh Fuhrer wrote:

Edward,

Thanks so much for your thoughtful and reasoned response! I appreciate the analysis, and will certainly check out the EmergInvest site. Do you or anyone in your group have thoughts on Dubai and its economic future? It seems to be the next Hong Kong or Singapore, and yet prices are already otherworldly. Is their growth sustainable? Or will they continue to build into the foreseeable future with no concern about investment returns? It seems most of the developments by Nakheel and Emaar are about scoring style points rather than ROI, even if break-even takes hundreds of years to achieve (no exaggeration- the Burj Al-Arab is supposed to take over 400 years to reach break-even).

Again, I appreciate you taking the time to answer my questions, and I look forward to exploring more of your work on your site.

Thank you,

-Josh

His response:

—–Original Message—–

From: Global Economy Matters

Sent: Sunday, August 10, 2008 5:32 AM

To: Josh Fuhrer

Subject: Re: Opinion on global real estate markets

Hi Josh,

Well this is only me speaking personally, but I would be very careful with all of this Josh. I don’t know enough about Dubai, or the Middle East, but what has been going on in Dubai makes me very nervous indeed. And this is not any kind of prejudice, since I have Egypt, Turkey and Morocco all in my list.

Basically, I think it is more interesting to get in on prices when they are near the bottom (or after a bust) than it is when they over 75% of their ride up before a correction. That last 25% always looks so risky to me, but then I am a nervous type, and I only take risks with ideas. So, of course, Dubai could be interesting, but after the correction, ie, I wouldn’t be going in there over the sort of time horizon you mention.

But I emphasize I am not a sector specialist and my knowledge on Dubai is limited to the general macro debates which have been going on of late.

I think they have to get an unwind from the dollar peg and the surge in bank lending which has accompanied the construction boom. If they can unwind over a soft landing then they will probably be interesting, and if they get a hard one, then even more so, but let prices hit bottom first.

-Edward

So what does the future hold for Dubai? How will this affect the rest of the world’s economy? What happens if Dubai defaults on the roughly $60 billion in loans they hold from global institutions like Barclays, HSBC, and Abu Dhabi Commercial Bank? Will Arab investors pull the money they have invested in the rest of the world out of those markets to shore up their troubled neighbor? And what will that do to the world’s economy?

I don’t know the answers to these questions, but I’ll be following Edward Hugh’s blog to see what he sees. Remember, he called this 15 months ago, when others were saying as recently as last week that Dubai was stable. You can read Edward’s thoughts at http://edwardhughtoo.blogspot.com/.

The world’s wealthy see opportunity in real estate right now, according to this article from Bloomberg.com.

Barclays recently conducted a survey of wealthy people from across the globe about their feelings about investing in real estate. Individuals with more than $800,000 to invest plan to increase their property holdings because they foresee better long-term returns than from stocks and bonds.

Barclays Wealth surveyed 2,000 people. Forty percent were worth 500,000 pounds to 1 million pounds. An additional 40 percent were worth between 1 million pounds and 10 million pounds. Ten percent had assets of as much as 30 million pounds and the rest were wealthier than that.

Twice as many people plan to raise their investment in commercial and residential property as intend to reduce it, the Barclays Wealth unit said in an e-mailed statement today. The richer the individual, the greater the proportion of wealth is placed in real estate, the survey found.

Three out of four investors surveyed said residential property is looking attractive and two-thirds are keen to explore investing in commercial real estate, the survey said. The U.S. was the most attractive real estate market for investors outside their home country, the survey showed. The country was seen as having the highest potential for return on investment.

I’ve always heard that it said that if you want to build wealth, you have to do what the wealthy do. It appears that the world’s wealthy see opportunities in US real estate, as recent price drops mean the opportunity to buy low and sell high is there- or here- as it were.

The question is, where are they looking, and how are they financing their purchases? Clearly overseas money is about to become an even bigger player in US real estate markets. And you can bet that they’re looking in the areas hardest hit and with high tangible value- California, Arizona, and Florida.

If Vancouver, BC is any indication, these areas will bounce back more quickly than other areas. Vancouver has a population that is nearly 45% Asian, and sees significant investment from Hong Kong, Mainland China, and the Middle East. Their property values have already weathered the storm and are nearly back up to their 2007 highs and rising. Once foreign money starts investing in earnest in the states mentioned above, the rebound will be on, as domestic investors will soon follow. But by then, the best deals will be gone; the early bird gets the worm.

Well it’s been a few months since my last post, but now I’m back!

A lot has happened since my last post in June- we’ve been working hard to streamline the chasingdirt.com site, making it more focused, more safe, and full of great, easy to access content. I hope you’ll take a spin through and let me know what you think!

Personally, I’ve had a lot of great things happen, too! In July, I was appointed to fill a vacant seat on the city council in Gresham, Oregon. That’s been a real thrill, as much of my development skillset has carried over quite seamlessly to the work I do as a councilor. That means I’ve been able to jump in with both feet and hopefully add value to the conversation. And that feels great!

As a city councilor, I also get to serve on the Gresham Redevelopment Commission; the redevelopment entity of the city. We’ve already accomplished a lot- moved a street, reimagined the long-term development plan for the Rockwood Town Center, redesigned the Rockwood MAX light rail station, installed Plaza Del Sol, a children’s learning plaza on a once blighted area that used to serve as the site of a Fred Meyer store, and just today approved new boulevard improvements along Stark Street between 190th & 199th streets in Gresham.

I’m also pushing hard to create a new city-driven incentive program to help encourage small business to grow and expand in downtown. More on this later. 

All in all, it’s been a great experience, and I get to work with a terrific mayor and council, and a very skilled and forward-thinking city staff. I’m proud to serve my hometown in this way and look forward to tackling the significant challenges in the city.

But let’s get back to chasingdirt.com for a minute- I’ve tried to make it simpler and more user-friendly. I hope you find it to be of great value- and if you do, please share it with friends, as it’s greatest strength is in the experience of those who contribute to the conversation on the site.

If you haven’t already, be sure to check out the materials on the “Free Stuff” page of the site. There’s a lot of really useful resources there that can help you jumpstart your investing efforts.

I hope you enjoy the new and improved Chasing Dirt. I’ll talk to you again soon.

-Josh

Hello dear reader!

I know I’ve been a bit remiss in posting lately, but it’s not because I’ve dropped off of the face of the Earth… quite the contrary! I have a new development project to tell you about, and my crack team of websperts have been working feverishly to implement changes to the Chasing Dirt website to make it even better. In fact, you may notice things looking a bit out of whack for the next couple of weeks, but fret not! In no time at all, we’ll have transformed Chasing Dirt into a one of a kind investing resource that I know you’ll get a lot out of. We have some pretty cool stuff planned for our little corner of the internets, and I’m pretty sure you’ll enjoy it!

So stay tuned, and pardon our dust around here for just a little longer.  Good things are not far away.

I’ll talk to you again very soon,

-Josh