Archive for 2009

There is no perfect measure for any broad financial market activity. Markets for stocks, bonds and other securities are the most widely reported and measured financial markets. It is relatively easy to measure activity in these markets because all sales are recorded at a few central exchanges and the “products” are uniform (one share of stock is equal to another). In contrast, real estate markets are much more difficult to evaluate. Real estate transactions are recorded into the public record in thousands of locations across the country. Keeping an organized database of these records is such a daunting task that the title insurance industry has taken this responsibility as part of its business model, and many people are devoted to the…[READ MORE]

The Time-to-Payoff is the amount of time it takes to retire the debt used to acquire the asset (house). It is a handy tool of those who use Accelerated Amortization. When people examine investments, they often look at rates of return to compare between asset classes. Rates of return are a valuable metric. When thinking about retirement finance, rates of return become less important than steady cashflow. We need a new measure of success for reaching your retirement goals: Time to Payoff. Today, I want to look at another feature of cashflow investing: debt retirement. In Real Estate, Cashflow Investment and Retirement I noted, "... you can take the excess rent and put it toward the mortgage paying off the…[READ MORE]

Most people realize their dreams of home ownership when they purchase a house. This is not ownership; it is debt slavery. You don't own the property until the debts are retired. Real home ownership is the reward for those who master paying debts faster. Affordability is a measure of people's ability to raise money to obtain real estate; it is a function of financing. During The Great Housing Bubble, financial innovations dramatically increased the amounts people were able to borrow; unfortunately, Affordability Products Make Prices Unaffordable. The affordability was short lived because the loan programs themselves were unstable. The collapse of these loan programs resulted in a massive credit crunch that removed affordability from the market; prices fell. During The…[READ MORE]

Cure Rate When a mortgage holder gets behind on payments, they often "cure" the deficiency -- well, at least they used to. The cure rate in early 2007 was 45%; It recently fell to 6.6%. The cure rate is the ratio of the number of loans cured divided by the number of delinquent loans in the system. It is a measure of the percentage of loans each month that leave Shadow Inventory. It is a direct measurement of one of the methods of exiting the system -- the other being foreclosure. When a property goes delinquent, what isn't cured is a foreclosure. Cure rates are very low right now because there is so much shadow inventory in the system that…[READ MORE]

Now that the high-flying real estate market of the Great Housing Bubble has crashed, let's look back to an investment style of yesteryear to provide for retirement. Cashflow investing is the idea that stable inflows of money can be captured and diverted to you for a price. If you accumulate enough cashflow, you can retire. Stable Sources of Cashflow In retirement, what determines the amount of money available to enjoy for lifestyle expenses? Is it your wealth? Is it the equity in your home? Not really. It is the stability of the sources of cashflow you control. Many are obsessed with being rich when what they really want is unlimited spending power. People who have attained great wealth may have…[READ MORE]

  Some say the world will end in fire, Some say in ice. From what I've tasted of desire I hold with those who favor fire. But if it had to perish twice, I think I know enough of hate To say that for destruction ice Is also great And would suffice. Robert Frost In order to discuss Shadow Inventory, we must define it. Shadow Inventory is the total of Preforeclosure Inventory, REO and some other sources. Preforeclosure Inventory includes all mortgages currently 60 days or more behind on their payments that are likely to become foreclosures but not yet REO. To understand these distinctions, review the foreclosure timeline below.     When a mortgage holder gets 60 days behind,…[READ MORE]

Cover Sheet Similar to the report we prepare for owner-occupants, the report cover sheet contains summary information including pictures, the address, and a few identifying characteristics. The first piece of summary data is the asking price, and this is followed by the Comparable Value, and the Likely Transaction Price. There is no IHB Fundamental Value. Cashflow investors are not interested in how we may value the property, they want to know what rates of return are available, and they can decide their own price based on the cashflow. We provide the necessary data to make this determination. Capitalization Rate and Cash-On-Cash Return One key concept for Investment Value of Residential Real Estate is capitalization rate. The Capitalization (cap) Rate is…[READ MORE]

Back in April I announced that we were forming a brokerage to help people buy and sell homes. Some of the comments were less than enthusiastic. Despite the few naysayers, we believe there is a need for the service we provide, so we have been working over the last few months to ready ourselves to take on this task. In September I am going to present a series of introductory posts describing how we will operate. I chose the song Take it Easy this morning because we want to provide peace-of-mind with the process. Part of making people be at ease is providing accurate information so people can make informed decisions. To that end, we have developed proprietary Property Valuation…[READ MORE]

Psychological Stages of a Bubble Once a bubble starts to form, it will go through several identifiable stages: enthusiasm, greed, denial, fear, capitulation, and despair. Each of these stages is characterized by different speculator emotional states and different resulting behaviors. There are outside forces that also act on the market in predictable ways in each one of these stages. Most often, these outside factors serve to reinforce the market's herd behavior and exacerbate changes in price. Precipitating Factor There is often a precipitating factor causing the initial price rally that pushes prices above their supported fundamental values. A bubble rally is usually kicked off by some exogenous event, but it may occur simply because prices have been rising and investors…[READ MORE]

I have been noticing a great deal of bullishness during this spring rally, and I was planning a post to put things in perspective, but Rich beat me to it. His analysis was so well done, that I want to acknowledge it here and add my own comments. Perspective on the Home Price Rally I noted earlier in the week (and incessantly before that) that home prices have a seasonal tendency to rise in the spring and summer even during the midst of a multi-year price decline. That sounds like a good enough excuse to make a chart. Below you will find a look at San Diego home prices, as measured by the Case-Shiller index, from 1990 through 1996. These…[READ MORE]

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