“What am I supposed to do now?” ….. Why this question? With the deepening of the recession and the national political shift from capitalism to socialism, the “investment and property model” for real estate has definitely changed and can remain forever. What has worked well in the past may not work as well in the future.
The confusion of real estate investors will continue until a new and effective real estate investment model is developed, and then proven to work by applying a deep recession.
This presentation is divided into three parts:
First part: Factors that changed the real estate investment model
How the train accident began
Part Two: The real estate investment market in the Pacific Northwest
Were we now?
Part Three: What should I do now?
A study of the fundamentals of real estate investment.
How to start forming a viable real estate investment strategy
FACTORS THAT CHANGED
REAL ESTATE INVESTMENT MODEL
Period: 2004 to 2007 – The real estate boom and its origins.
1. The stock market has lost the reliability of investors. The stock market collapsed and continued to perform poorly. Many investors have relied heavily on actions such as the backbone of their retirement portfolio. Many stock-based retirement portfolios have lost about 40% of their value during this period. This was a real cold shower for several people who were on the verge of a comfortable retirement.
2. Market call for lost bonds. The bond market had lost much of its appeal to the stock market. As the uncertainty moved further away from the stock market, bonds were not attractive, as bond yields continued to decline with the fall in interest rates on public bonds.
3. Real estate market: “The only game in the city”. The real estate market has become the “favorite of the investment portfolio”. If investors have three tables for dinner, real estate has become the only attractive table that seems safe for dinner.
Stock market investors, injured by the march, flocked to the real estate market. They bought the duplex around the corner and the house next door. The buying pressure contributed to the price increase.
The mantra of the real estate investor was clearly:
Buy, buy, buy! Then sell and negotiate with deferred taxes on a larger and better property; or
Buy it, fix it and then send it to those with less “repair capacity.” Then repeat the process as quickly as possible. There have been gains in almost all movements. If you make a mistake, wait, the market will restore it.
For one strategy or another, clearly “Borrow as if there were no tomorrow”. Rates are low and yields are high. It is an investor’s dream come true. The only mistake was not entering the game.
4. There were many mortgages. The availability of long-term money in the capital market remained high and rates were low.
The newly created loans were immediately sold in the secondary mortgage market. The secondary mortgage market consolidated loans and sold securities backed by commercial mortgages (“CMBS”) to pension funds and institutional investors. They were attracted to the performance and security of the underlying mortgage bloc. The default rate of the mortgage was extremely low. There seemed to be virtually no risk.
The mortgage lender process: make a batch of loans as quickly as possible, then sell them quickly in cash in the secondary mortgage market.
The secondary market had a strong appetite for CMBS offers.
The secondary market (mainly Fannie Mae) would then cut the CMBS into parts of the offer. Then they would sell each tranche or tranche with a priority according to which the tranche would be reimbursed first in case of foreclosure. Certain sections were the most risky and would be sold to generate the highest return for the investor. These lower risk tranches were sold for lower returns, and so on until the full offer was sold completely.
Secondary market players have been enriched with profits. As Robert Zeckendorf discovered in the 1950s, a property could be sold in pieces whose accumulated value of the pieces exceeded the value of the set. Sell pieces and get abnormally high profits. Like Zeckendorf, they would discover the cost of failure, if a part of the offer failed.
Huge benefit for the mortgage lender: using the mechanisms of the primary mortgage market and the secondary mortgage market, the mortgage lender would never run out of money to lend as long as the secondary mortgage market remained willing to buy newly created mortgages.
What system was created! … Lend and never run out of money!
This is exactly what happened when lenders in the mortgage market rushed to develop new mortgage loan programs. His loan strategy was:
Develop a new mortgage a little more attractive than that of your competitors.
It is easier and faster to obtain a mortgage than your competitor.
The lender’s mantra: “Choose me, choose me!”
The lender received loan fees and loan processing fees. The lender often received a “downstream” repayment when the loan was sold in the secondary market.
A loan administrator is responsible for collecting the monthly payment and distributing it between property taxes and insurance, then allocates the balance to interest and then to capital to repay the loan.
For loan service, they received “loan service rates” which often amounted to up to ½% of the loan.
It was like the nurse who married the funeral home: they came and went.
5. Facilitation of mortgage standards. Under the new loan program, loan standards have relaxed considerably.
The “credit rating” has become king. The lender has come to rely heavily on the Fair Isaac credit rating model. The credit rating system has become the main criteria for qualifying for a mortgage.
What is it? Your credit score is a three-digit expression of how you have handled credit in the past.
What was the premise? If you have had good results with credit in the past, you can do so in the future.
If your credit score was high enough, the loan terms were so attractive that almost anything with a good credit score was offered the most liberal loan terms.
You can remember the television commercials that boasted to lend 125% of the value of their property. Had the world gone mad? What security could exist for the lender if there was no guarantee behind at least 25% of the loan granted?
6. Real estate values appreciated at a high rate. Easy loans and a high demand for real estate investment gave the illusion that you really couldn’t pay too much for real estate.
If you have paid too much, wait. The market will reach it soon and everything will be fine again.
It was not uncommon to find appreciation rates of 15% to 30% per year. Regions such as Las Vegas and Phoenix have experienced even higher appreciation rates.
Recent market data shows that the most overheated markets that shot at the fastest rates fell at even faster rates.
Examples: Bend – Redmond in Oregon, Las Vegas, Phoenix and parts of California are excellent examples of “fast and fast” markets.