Plan for the Worst and Expect the Best

Article 1

From DailyFinance: “Many commentators have focused recently on an index produced by the respected Economic Cycle Research Institute (ECRI), which suggests that the U.S. economy is slowing. The ECRI's proprietary U.S. Long Leading Index (USLLI), which goes back to 1919, is signaling a slowdown. However, analysts at ECRI don't think this is a sign of the dreaded "double-dip" recession. In their view, a decline in growth after a sharp post-recession growth spurt is to be expected.”
See full article from DailyFinance: http://srph.it/9Lfm9K

Article 2

Consumer Confidence in U.S. Falls More than Forecast June 29 (Bloomberg) – “Confidence among U.S. consumers declined in June more than forecast as Americans turned pessimistic about the outlook for the labor market and the economy. The Conference Board’s confidence index slumped to 52.9 this month from a revised 62.7 in May, figures from the New York-based private research group showed today.” Bloomberg's Mike McKee reports. (Source: Bloomberg)

Why would I continue to post articles on a projection about a complex topic most experts are most often wrong about? Simply because we have to be aware of the national trends and decipher how those trends will impact our local markets and businesses. Certainly, the job and housing markets have yet to show signs of improving. And, if the overall economy remains sluggish or is trending down, how will you position your business to weather the storm through 2010 and beyond?

Mark Bardo says “Plan for the worst and expect the best”. This is good advice.

2010 - Half Empty or Half Full?

As a 6-month revisit of a challenge issued in December 2009, I am re-posting the three legs of success setting yourself or your business apart from your competition.

We have to do
What we do
Differently

Innovation – we must individually create innovative business strategies defining new ways to promote and market our expertise. The new norm for ANY business has or will change during 2010 because of the social media phenomenon. Either spend the time to stay current with technological change or stay on the sidelines.

Reinvent – each of us will need to reinvent the wheel regardless of profession, business, trade or hobby! Do not rest in comfort but discover new ways to do what you have been doing for many years.

Rebrand – change your image, your approach and your goals to match your reinvented tools of the trade marketed innovatively through social networking.

Change is good. We must use our talents, education, and experience in a different way to be successful. However, to achieve positive results, you also must re-energize you!

The second half of 2010 – will it be half empty or half full for YOU?

Diverging Diamond Interchange

From Wikipedia, the free encyclopedia
A diverging diamond interchange is a rare form of diamond interchange in which the two directions of traffic on the non-freeway road cross to the opposite side on both sides of the bridge at the freeway.

The construction of a diverging diamond interchange in the US in Springfield, Missouri at the intersection of I-44 and MO-13 began the week of January 12, 2009 and opened on Sunday, June 21, 2009, making it the first of its kind to be opened in the United States. This interchange was a conversion of an existing standard diamond interchange.

http://www.youtube.com/watch?v=WF9Cx0pMsbI

Cornelius, North Carolina a suburb of Charlotte is currently under design to construct the first diverging diamond interchange with some modifications that will address future traffic volumes for many, many years. Finally, there is a local municipality taking a leadership role in properly planning infrastructure improvements matching future growth. I travel over I-77 where the diverging diamond interchange will be constructed and it will work fantastic.

What’s Up with the Upper End Market?

There has been a lot of conversation recently about the first time homebuyer’s tax credit and its effects on the market. Housing starts decreased 33% in May. But what about the upper end of the market, specifically homes priced at $750,000 and above?

To understand the current status, we need to review what impacts buyers and sellers in this part of the market:

• Ability to get mortgages
• Inventory of homes on the market
• Consumer confidence

While the same 3 factors affect all buyers and sellers regardless of price point these trends affect the high-end buyer a little differently. Let’s take a look at how this group specifically has been affected.



The buyer’s ability to get mortgages: Referred to as “jumbo mortgages” (amounts over $417,000 in most of our markets), these mortgages essentially dried up during the mortgage industry meltdown and readjustment over the past 2 years. Without the ability to borrow money, regardless of financial viability, buyers were unable to purchase unless they were paying with cash. The end result was a significant decrease in demand.

Inventory of homes on the market: Supply increased exponentially with sellers deciding to downsize due to job loss, property devaluation, inability to make hefty mortgage payments or relocation because of a new job. Oversupply was further increased as a result of new construction, which has an extended delivery time in this price point. Builders may have started when the market was more vital, but couldn’t deliver before the market slowed down.

Consumer confidence: With declines in the stock market and the overall economic dissatisfaction, confidence dropped significantly among buyers and sellers in this group. The high end will take time to recover and home builders of quality luxury homes - what will happen to them and their trade?

The Housing Market:
Beyond 2010, builders will emphasize pricing and the move-up market will be tied to mixed use neighborhoods and communities. The high end will always be there. The custom home market will again flourish because of "dreams" and unique locations. Remember - "it is all in the land".

Credit Scores & Mortgages

The pendulum continues to swing toward more regulations affecting the ability of someone to buy a home. Lenders use a graduated scale basing mortgage interest rates on a consumers credit score. A higher the credit score will result in a more favorable loan and interest rate. Lenders have raised the bar (credit score) to now eliminate consumers from the home buying process by classifying them too risky – simply based on their credit score. This approach is now spilling over to the rental market as landlords scrutinize applicants using credit scores and the sliding scale of worthiness.

Each recession creates its own set of new regulations governing our ability to do what we want to do. Now, lenders have added another step in the mortgage/loan process. Once a borrower has been approved for a loan and just before closing, lenders will again pull the credit score to investigate any significant changes. If there are changes, the loan will be sent back through underwriting and the closing delayed. And, the worst case scenario, the borrower does not qualify for the loan based on a new credit rating.

Thus, buyers should not buy the refrigerator until after they close. In fact, borrowers should not do anything from contract to close that will affect their credit rating.

The following article discusses seven ways to improve your credit score. This article is by Liz Pulliam Weston for MSN Money. http://bit.ly/9P8qcp

It is estimated that if someone went into foreclosure (which is happening at an alarming rate) or filed for bankruptcy, their credit score would lower by -100 to -200. If the rental market is now using the same approach as the mortgage industry, what will be the ramifications as foreclosures continue to rise? Credit worthiness has always been an issue but the pendulum has and will continue to swing toward tighter restrictions and more regulations.

 

Let’s see if I have this correct and please correct me if I am wrong or missing a step:

• Lenders ignore financial sense and issue mortgages to marginal borrowers
• Borrowers are filing for bankruptcy or their home is being foreclosed by the lender
• Government bails out lenders and they pay back the government amazingly quick
• Government and lenders impose stricter regulations on loans through credit scores
• Lenders have stopped or slowed down issuing credit and the process is lengthened
• Lenders are making more money now than before the crisis

Where do we go from here?

 

Fannie Mae & Freddie Mac – A Movie?

If you directed a movie starring Fannie Mae and Freddie Mac, what type of movie would you produce – horror or comedy? The following facts may influence your selection process.

They are 80% owned by the “public” – us the taxpayers!

They have been delisted from the US stock exchange since their shares were trading at $1 per share

They guarantee over 50% of the $10.7 trillion in residential mortgages

As of the March 2010, borrowers were late on about $340 billion in residential mortgages.

They have an unlimited credit line with the federal government to fund their operations

Let’s recap so I can understand.
We the taxpayers own the majority of Fannie Mae and Freddie Mac but what we own is seemingly worthless to us and we the taxpayers continue to give them money.

We the taxpayers have little say in the financial management of these two companies – although we own 80% - that used to be a majority!

We the taxpayers will continue to bailout our stars which could reach a record $1,000,000,000,000.

We the taxpayers are in favor of financial reform but WHY isn’t our company part of the scrutiny?

We the taxpayers should demand a company leadership change, a full accounting of the operations and restructuring – just like any other company which doesn’t have their act together!

Don’t you agree there is something wrong with this movie script?

Charlotte – “New Heartland” of the Nation

A detailed study just released from the Brookings Institute entitled “The State of Metropolitan America,” offers a glimpse of what’s expected to be the results of the 2010 Census. Quoted from the article:

“Grouped into seven categories, the particular issues facing the nation’s 100 larg¬est metro areas become clearer, as do the places to which individual metro areas might look for common solutions:

• Diverse Giant                            

• Skilled Anchor

• Next Frontier

• New Heartland
• Industrial Core
• Border Growth
• Mid-Sized Magnet

The report names Charlotte as one of the country’s “New Heartland” cities - large metropolitan areas that offer the workforce a good quality of life and the kinds of jobs economists predict will move the U.S. forward in the years to come. "
 
   
Also, Charlotte has been recognized:


RelocateAmerica includes Charlotte in the Top 10 Best Places to Live in 2010

Charlotte as a “City of Aspiration” – cited as one city that could handle a significant population increase – April, 2010

Business Week provided a list of the Best Affordable Suburbs in America 2010 and Huntersville is listed. Huntersville is a suburb of Charlotte.

Housing Starts Down Again!!

Once the federal tax credit for home buyers ended, housing starts again trended down. The extension of time to close homes under the tax credit program will not stimulate new housing starts between now and the end of September. It will help a number of homebuyers. Wow to think that our Senators now are passing legislation to help those caught in the mountain of paperwork – they require!

17% unemployment rate and Senates are working to assist 80,000 homebuyers that were caught in their bureaucracy to close on their home!

The seasonally adjusted annual housing start rate in May was 594,000. Again, the Senate legislation will not help housing starts between now and October 1st. We need at least 1,200,000 housing starts to stay up with demand. Some analysts think we need 1,500,000 new housing starts to meet the pent-up demand and replenish the housing stock. We have pent-up demand – NOW.

The housing formula:

Jobs Growth + Household Formations = New Housing Starts = Economic Recovery
The only missing element of this equation is jobs growth. Shouldn’t we wage a “war” on our lack of jobs simultaneously with a war on the oil spill?

Homebuyer Tax Credit Provisions Extended

Senators Reid, Isakson, and Dodd introduced an amendment to H.R. 4213, a tax extension bill being discussed in the Senate. This amendment extended the current homebuyer tax credit closing deadline to September 30th. The original legislation called for qualified homebuyers to be under contract by April 30th and close by June 30th. This amendment would extend the closing date provision 3-months.

It is my understanding, last night the Senate approved the amendment.

Good or Bad idea?

This amendment would certainly help a number of qualified buyers receive the tax credit but in the long run, government is playing with home buyers.

Don’t you think new buyers will sit on the fence waiting for the next stimulus to help them buy a home?

If we can’t close a house within 2-months something must be wrong with the system – simply a mountain of paperwork.

In my opinion, government needs to tell the home buying public that this is the last hand-out. If you are in the market to buy a home, you should consider buying now before interest rates trend up!

Would this not be more helpful to the home building industry than the federal government playing with the minds of the home buying public??

Key Mortgage Issues!

The pendulum always swings away from problems but never in moderation. Obtaining a mortgage has become much more of an arduous proposition than years past. This is in response to lender practices of issuing mortgages to less than qualified borrowers. So because of their lack of professional discipline and perhaps ethical standards, the housing industry and those wanting to buy a home will suffer. Lenders will concentrate on six key areas which borrowers should know about and be ready:

1. Credit Score - know your credit score before applying; have a credit score above 700

2. Income & Assets – make sure you have documentation for all income sources and verifiable assets. Lenders will look closely at this information as if you were going for a top security clearance.

3. Information requirements – the financial industry is in a state of flux with new regulations imposed almost daily; regulations changing almost hourly; imposed on borrowers every second. Be flexible and respond to their requests quickly.

4. Appraisals – real estate is based on a seller willing to sell at a price and a buyer willing to buy at that price. Now appraisals are destroying the deal. If the agreed upon price is higher than the appraisal, the lender will not approve the loan. This causes a spiral effect that will be difficult to break. Lenders do not factor in the fact that families want to live in a home and the purchase is not an investment but a place to raise a family.

5. Self employed – as long as you can verify your income, you might get your foot in the door!

6. Condominiums – many condominium associations are having financial difficulties because of owner delinquencies. Lenders now also have to approve of the association before approving the loan. In your search for a home, do your homework on the association as well. Pre-approved condominium associations by lenders are the best.

If you pass the above along, this may help those in their quest of being approved for a mortgage.

Know your Local Real Estate Market

As you all know from following my posts, I stress several key factors:

1. Look at trends rather than month to month or year to year percent changes

2. A national overview is important to know but your local market dictates

3. The real estate industry will significantly change as our economy recovers. Are you stagnant (reactive) or willing to ride the wave of change (proactive) by rebranding, reinventing and re-energizing your business.

The following illustrations show the lake Norman area which is a submarket of the Charlotte region. The data is from the Charlotte MLS.

Sustainable Land Development Seminar

This past Thursday and Friday, I gave my two day Sustainable Land Development seminar in Minneapolis. It was well received and I will make some adjustments for subsequent seminars. The open discussion seminar format encourages participation from the attendees. Four topics received full participation from the audience:

Land Development Industry Overview – I look back at our industry and the business of land development. I then look forward outlining changes in our industry as the economy rebounds.

Sustainable Land Development – Focus is on the importance of sustainable land development practices and what defines a project sustainable.

Social Networking – We exceeded the time allotment for this session by over 30 minutes! Attendees had limited exposure to social networking sites and the advantages of being active on LinkedIn, etc. I believe this session changed the mindset of some that we must do what we do – differently in 2010 and beyond.

Cluster versus a Standard Single Family Subdivision – This class exercise illustrated the profitability of each land planning approach. From the perspective on how land is used, I concluded by outlining the project financial results for the primary industry stakeholders.

What is your VISION?

120,000,000 more people in the United States over the next 40-years

By 2020 (in 10-years) - 44 % of the Population will be over 55 Yrs old

Where will they live?

Where will they work?

How will they work?

How will they think?

Warren Bennis, a noted writer on leadership, says:   "To choose a direction, an executive must have developed a mental image of the possible and desirable future state of the organization. This image, which we call a vision, may be as vague as a dream or as precise as a goal or a mission statement."

We have a pent up demand for housing – now. The demographics are there. Households will be formed, the population will age, and entrepreneurs will thrive.

Will you be part of the group that will react to change or will you be proactive and model your business plan on the changes that will occur as we rebound from this deep recession.

What is your vision to reinvent, rebrand and reenergize you and your business now and in the immediate future?

Negative Equity & What it Means To Us

The following is interesting but is it relevant in the overall scheme of things? I say no!

It does tell me that the economic outlook for NV, AZ, FL, and MI can only get better!

At the end of this post, I have added my opinion about this data and about other data outlined on my blog. This information is continuously reviewed at the national level. And now the data………………………….

11.3 million homes are now worth less than the mortgage

$7 trillion in housing value wiped out since 2006 thru 2009

24% of all homes in USA have negative equity
#1 is Nevada 70% of all homes have negative equity
#2 Arizona 51%
#3 Florida 48%
#4 Michigan 39%
Average amount of negative equity = $70,700

And now the consequences of the above……………………….

Equity loans are non-existent
Refinancing is impossible, which feeds default/foreclosures
Inheritances are wiped out, creating debt for next generation
Reverse mortgages are impossible so seniors can only live on Social Security – changes retirement planning
Generation Y will either rent or purchase lower-priced homes due to lower incomes/employment
Buy a home for savings account, tax write-off, investment vehicle, or place to live?
Relocation for job opportunities is impacted – difficult to leave for better opportunities

When will positive equity return? Predictions are 2015 thru 2020 depending local real estate market but a slow recovery

A strong local economy and lower unemployment will break this vicious cycle. Know your own local market.

Housing Prices and Costs

My last blog post addressed interest rate trends and predictions. In any case, as interest rates increase, the monthly cost for the same price home increases.

However, if we are in a vicious cycle and house prices continue to decline due to the economy, etc., the near term (now through 2011 or 2012) may continue to be a buyer’s market. If jobs return and the economy trends up, significantly, the market opportunities will quickly disappear.


Buyers are waiting for home prices to decline even further. Waiting on further market decay for a better deal may not be the best strategy if offset by interest rates trending up. If you are on the fence thinking about buying a home or a real estate investment, you will not time the housing bottom and get hammered with interest rates. Your COSTS will go UP!

The above is an overview of the industry and the local market should rule your decision.

Let’s go along with the Case Shiller prediction as illustrated.

March 2010 Today’s Price at $159,000 @ 5.11%          Monthly Mortgage payment of $864.27

May 2011 Projected Bottom Price at $148,000       
Projected Interested Rate on May 2011 @ 6.26%          Monthly Mortgage payment of $912.22

So…….. WHY would someone wait over 1-year so housing prices bottom out and pay more per month because interest rates will trend up?????????

Interest Rates – Revisited

TARP Report to Congress 1/30/2010

“The Government has done more than simply support the mortgage market, in many ways it has become the mortgage market.”

 
 
 
 
 
 
 

 

The following series of illustrations on interest rates should provide you with a trend.

 

 

 

 

 

Experts are usually wrong but how

can interest rates not trend up?

Next week, I will again illustrate why it is a good time to buy a home. If you want to buy a home to raise your family, now is a good time to buy. If you are a real estate investor and seek opportunities, now is a good time to buy.  

JOBS – WHERE ARE THE JOBS?

Unemployment has created more stress for younger workers as those in the 16 to 24 age group have 19.2% unemployment rate. 2010 college graduates are having a tough time finding jobs – no matter what the degree.

Thus, more young people are living with parents, delaying purchasing or renting.

Number of American households dropped by 1.2 million between 2005 and 2008 even though the population increased by 3.4 million in the 80 largest metro areas. More families are combining households due to economy, including loss of home due to foreclosure

All of the above reasons illustrate why there is an excess supply in apartments and houses for sale – in every market.

Tony Jarrett, Regional Vice President, Allen Tate Company shared the following slide with me. He also provided many of the illustrations used in my blog over the next several days. This illustration shows the percent job losses relative to the peak employment month. I am not so sure about using the numbers but the trend lines for each recession are dramatic.

We are in the 27th month of the 2nd longest recession since the 43-month recession between 1929 and 1933.

Remember new housing starts have to be around 1,200,000 per year to meet the demand of new households being formed.

Pent-up demand is already here!

But will the housing industry as a whole be poised to handle the pent-up demand?

As the economy trends up, how fast will the market turn to a seller’s market?

How will you position your business to be proactive with this wave of change?

Upcoming Blog Posts

Over the next week, I will be revisiting several key topics:
Jobs - Unemployment
Interest Rates
Housing Prices
Negative Equity
Local Real Estate Markets

Since this is the “Peak of the Week” – I like to look back and see where we have been and look forward to new opportunities. For the above topics, nothing has significantly changed.

Where are we headed? There are opportunities in local markets! However, the Congress seems to not understand the “local” consequences of their actions. I think it is a generational problem.

Current Congress (Senate & House of Representatives)

Age                                 Number

80 yrs & older                      80

60 – 80 yrs old                   329

40 – 60 yrs old                   126

Tomorrow I will post an unemployment graph that puts it all into perspective.

Minneapolis Seminar June 10-11, 2010

I will be presenting my two day seminar -
“Sustainable Land Development – Ensuring Growth in a Green Economy”                              
on June 10 & 11. The seminar will be held at the Radisson University Hotel, Minneapolis, MN.

Join industry participants in a proactive forum outlining the future of the real estate development industry for residential and non-residential projects. Learn how the industry will change in the future and how best to be positioned to manage this change.

Also learn sustainable project design and program elements which will alter development patterns in the future. Practical business and profit center concepts and ideas will be highlighted. Contact me if you should want details. Future seminars are scheduled for San Francisco, Atlanta, Boston and San Antonio.