Feb222016
Three calculations every real estate investor must know
The three main measures of financial performance for rental real estate are capitalization rate, cash-on-cash return, and internal rate of return.
When people buy a personal residence, they often solace themselves that the high prices is warranted because the property is a “good investment”. Novices generally assume that anything they sell for more than they paid is a good investment without any understanding of what a good investment really is.
It’s not enough to merely make a profit, the amount of profit relative to the amount of money spent matters. If someone brags that they made $100,000 on a resale home investment, it’s much more impressive if their initial investment was $100,000 than it is if they invested $1,000,000.
It’s not just the initial sale that matters either. The actual initial cost is the sales price plus any costs of financing, transaction closing, or renovation prior to move in.
There are long-term costs as well. If someone bought stocks, the ownership of that stock didn’t cost them any money in taxes, maintenance, and upgrades. People tend to forget about those costs as they write it off mentally as consumption, but those are costs they would have avoided had they rented instead.
Further, the amount of time it took to obtain that profit is also critical. There are people who bought $1,000,000 homes in 2004 who can finally sell and make a $100,000 profit (forgetting about transaction costs, of course). It took them 12 years, and they endured 10 years of being underwater, but they made money, so it was a good investment, right?
To really measure whether or not an investment is a good one, the investor needs to measure a rate of return on the amount of money invested. Since the timing of these outflows and inflows are often separated by years, and since borrowed money is often employed, we need different financial measures of the rate of return.
The return on real estate is measured in three ways: capitalization rate, cash-on-cash return, and internal rate of return. Each of those is described in detail below.
Calculating capitalization rates
The basic calculation I perform is the capitalization rate, the net operating income divided by price. The capitalization rate is the return an all-cash investor would obtain from the property. This is the simplest calculation because since no debt is involved, the return on investment is the performance of the property.
I believe evaluating capitalization rates is important because extreme leverage — and most real estate transactions have extreme leverage (75% to 80% typically) — exaggerates the returns of nearly any investment and disguises the underlying risk. For example, most people believe real estate provides a great return because the amount of equity gained from a small down payment can be very large. This looks great when house prices rise, but the perils become obvious when house prices fall — and they can and do fall.
The income from the property either is actual rental income or a measure of comparable rents, with my automated system, it’s the latter. The expenses include those costs incurred by owners that are not incurred by renters: property taxes, Mello Roos, insurance, and HOA fees. The net operating income (NOI) is the rental income minus all the expenses, forming the basis of all return calculations.
Example calculation
I chose today’s featured property because it’s the kind of property I personally like to invest in. It’s a small 3/2 with a 2-car garage.
- The small size makes for smaller repairs when it’s necessary to replace carpets and repaint the house.
- A three bedroom and two bath house is the easiest to rent as it provides the most options for use.
- A working two-car garage is always preferable, so I tend to filter out those properties without it.
These are just my criteria, and there is a plethora of properties without these characteristics that provide even better cash returns — at least on paper. In properties lacking the standard criteria, vacancy is inevitably a bigger problem, particularly in an economic downturn. I leave those to other investors.
The capitalization rate on today’s featured property is 4.8% using the automated assumptions of the system.
In this particular instance, the automated rent is probably very close. A large number of similar properties rented for about $1,150, the automated value my algorithm came up with (click for larger version).
After pulling comps on over 1,500 properties while working in Las Vegas, I noticed certain methods of estimating comparable values worked better in some circumstances than others. I also noticed that if you averaged all these methods, it generally provided the most intuitively accurate method of establishing value. Although it probably would be frowned on by statisticians, I use this method because in my experience, it produces better results.
Cash-on-Cash return calculations
The cash-on-cash return is more important than capitalization rates for the average investor who uses debt to acquire real estate. The cash-on-cash return compares the acquisition costs (down payment, renovation, closing costs) to the cashflow remaining after interest is paid (includes positive cashflow plus amortization).
The calculation for cash-on-cash uses the capitalization rate calculated above and magnifies it — both up or down — based on the financing terms. The lower the down payment, the greater the returns are magnified. This is why speculators were keen to use 100% financing when it was made readily available during the bubble. Returns were infinite, and the risk of loss was passed on to the lender.
The fulcrum point of leverage is the interest rate. The interest rate must be lower than the capitalization rate for debt to have a positive effect. This was one of the key mistakes investors made during the bubble. People were buying properties with 4% capitalization rates using 6.5% debt. That’s crazy. No sane investor would apply debt that is more expensive than the capitalization rate — insane speculators do this all the time, but the moment prices go down, and the property cannot be sold for a profit, the negative cashflow of inappropriately leveraged real estate eats people up.
Since the capitalization rate is higher than the expected mortgage rate, this property has a magnified cash-on-cash return.
Internal Rate of Return
Current cashflows are not the only ways investors profit from real estate. The housing bubble was characterized by an overly exuberant opinion of future appreciation, and I have consistently decried considering appreciation as a reason to buy real estate in direct response to the foolishness of bubble-buyer attitudes. However, real estate can and does appreciate, and resale at a higher price in the future does have value. The best way to calculate this value is through a discounted cashflow analysis. When examining the rate of return of real estate, the internal rate of return is the best method available.
I won’t attempt to walk anyone through the math of the internal rate of return calculation. Like everyone else in finance, I use a spreadsheet to calculate it for me. The concept of internal rate of return is not nearly as difficult to understand as the math used to calculate it.
Imagine you are buying a house for $123,000 you believe will be worth $215,000 10 years from now. What is the current value of the $93,000 profit you will obtain in 10 years? It depends on the interest rate. That calculation is what finance people call net present value.
Now Imagine you could put $123,000 in a bank account earning a high interest rate (I know you can’t today, but just imagine). What interest rate would be required to have your $123,000 grow into $215,000 at the end of 10 years? That interest rate would be like the internal rate of return on the property that increased in value by the same amount over the same period.
Internal rate of return considers more than just the lump sum at the end. Internal rate of return compares the amount and timing of all the cash inflows and compares it to the initial investment amount to compute an overall rate of return on the investment.
Internal rate of return is the most accurate measure of the financial performance of real estate. Unfortunately, it is also nearly impossible to measure accurately. Why is that? Because computing the internal rate of return requires forecasting the future. You must estimate how much the property will appreciate, and you must estimate how much expenses will go up. Most people get this disastrously wrong. The capitalization rate and the cash-on-cash return do not require any forecasting (except perhaps “forecasting” current rents from comparables).
So which is best?
Since most investors are financed investors that had hard money loans from dfwinvestorlending.com the go to source in Dallas. The proper evaluation of returns is cash-on-cash because it provides the rate of return on the actual cash outlays put forth by the investor. The capitalization rate is the cash-on-cash return of an all-cash investor. The capitalization rate is a useful tool for evaluating markets and screening large numbers of properties, but investors should refine their estimates of renovation costs, maintenance costs, and rental income when making their final selection.
The internal rate of return is the most accurate, and it is the one favored by sophisticated investors analyzing complex deals, but residential rental properties analysis need not be that complex, and many people who start projecting the future based on growth rates and such end up deluding themselves into believing the investment will perform better than it really will — that’s why I don’t bother with internal rate of return when evaluating rental properties.
Thursday night event
I will be speaking Thursday evening about real estate investing. Do you have questions you would like to ask? Come out Thursday evening. After the presentation, I will stay and answer questions about any aspect of real estate investing. I hope to see you there.
There is definitely a lot to learn when it comes to the real estate market, we highly suggest to read the Landmark 24 Realty content to find out more about real estate investing opportunities.
To register for this event, please click here.
[listing mls=”CV16030681″]
26-story condo tower proposed for O.C. Museum of Art site
NEWPORT BEACH – With the Orange County Museum of Art eventually moving to a new home in Costa Mesa, a developer is proposing a 26-story condominium tower for the site in Newport Center.
The project by Related California Urban Housing LLC would involve demolishing the 23,000-square-foot museum at 850 San Clemente Drive over a period of two months, according to a report prepared for the city. Construction would take 26 months, the report said.
The tower would have 47 two-bedroom, 2.5-bath condos and 53 three-bedroom, 3.5-bath condos ranging from 1,750 square feet to 4,950 square feet, the report said. Most would have private balconies.
City officials will hold a meeting at 6 p.m. Monday to get public comments on the scope of the environmental report they should prepare and environmental issues that need to be addressed. The meeting will be in the Civic Center Community room at 100 Civic Center Drive.
As proposed, the condo tower would be 295 feet high – making it one of the tallest buildings in Orange County.
A nearby office tower at 520 Newport Center Drive is 315 feet and the City Tower in Orange is 302 feet. The Irvine Co.’s 20-story office tower at 650 Newport Center Drive, the headquarters for bond trader Pimco, is 295 feet – the same height as the proposed condominium tower.
Councilman Ed Selich, who represents the area, said he hasn’t seen much information on the project. He said he could imagine the city and residents asking that the environmental report look at such issues as height, traffic, air quality and shading for other structures.
“I was at a meeting this morning, and people were abuzz,” Selich said.
The Orange County Museum of Art – built in 1977 and expanded in the 1990s – in 2008 announced its intention to move to the Segerstrom Center for the Arts, next to the Renee and Henry Segerstrom Concert Hall.
Great that should bring more affordability, as long as you will be able to afford the $1-$2.5M price range
This project could easily become another OC condo debacle.
Elimination of the AMT and a top rate of 25%. What’s not to love about Trump?
http://www.fool.com/investing/general/2016/02/21/donald-trumps-income-tax-brackets-how-much-would-y.aspx?source=eogyholnk0000001&utm_source=yahoo&utm_medium=feed&utm_campaign=article
it would be great to eliminate the AMT or at least raise the threshold considerably to people earning over $1M per year.
Also it would be make real estate in upper brackets an even more attractive investment.
He would probably pay for it by closing loopholes and curtailing deductions like the HMID.
a “real estate mogul”…. LOL doubt it
but it’s all a moot point since we all know Billary is what the powers that be want
Hillary’s surtax on income exceeding $1M achieves a similar result. The AMT hits a sweet spot right now. If you’re in a high income tax state and making $150K-$350K, you’re likely paying AMT every year. However, once you start getting above $350K, your regular federal income tax gets so high that it tends to pull you out of the AMT.
I thought this comment by political consultant Roger Stone summed up Trump’s appeal nicely:
The anti-establishment vote, which is repudiating the foreign policy, immigration policy, trade policy, fiscal policies of the Bush wing of the Republican party is in a majority, which is why Trump will ultimately be the nominee.
http://www.realclearpolitics.com/video/2016/02/20/roger_stone_trump_will_be_the_nominee_if_he_can_unite_the_anti-establishment_vote.html
OC Register informercial
Is the dining room back? Home builders in Irvine are offering a special space for family dinners
The dining room, an architectural victim of the Great Recession, may be back.
When homebuilders gained the nerve to start building anew after the housing bubble burst, brash home designs gained quick popularity. Developers rolled out models in lower- to mid-price ranges that were missing several new-home standards, most notably the formal dining room. This winter, however, several noteworthy new-home communities are offering homes with a more obvious dining area.
Why the apparent yo-yo for the formal dining area?
For starters, industry research revealed for too many years that many buyers lost interest in certain “traditional” parts of a home. Dining rooms and living rooms no longer met changing lifestyles and household budget pressures.
Yet selling a new home was too easy for too long for developers, so it took a dramatic industry downturn for change that now seems obvious. I mean, when did you last use your dining room table … for dining?
You see, today’s frantic family schedules leave little time for lengthy meals, creating limited use for square footage dedicated to formal dining. Ever-escalating home prices nudged house hunters to value every square foot, placing lightly used amenities on the endangered species list. And emerging patterns of longer ownership allow buyers to focus more on what fits their own lifestyle needs, and worry less about what a future buyer might want when it comes time to sell.
MORE…
Walk-in closets in every room…
2 walk-in closets in the master bedroom
enough room in the great room for a 120 inch projector screen
space is needed for commercialism not family time
And a third garage stall that’s a tandem so people can store more crap in their garages….
Hey… I resemble that remark! I spent yesterday installing a storage rack on my garage ceiling to store all the baby stuff my wife isn’t ready to let go of yet. ;0)
I must channel George Carlin again.
https://www.youtube.com/watch?v=JLoge6QzcGY
“A house is a pile of stuff with a cover on it”
Will OpenDoor Make Real Estate Brokers Obsolete?
Maybe when sellers become content with much smaller checks at closing
Need to move quickly? Turning to a real estate broker to sell your house can take time – time you may not have. So what is a seller to do? Turning to internet startup companies like OpenDoor Labs Inc. to do the selling for them is what some have found quick, convenient and successful.
OpenDoor pays cash for homes and sells those homes, sometimes in as little as a month, for a profit. The company is armed with data scientists and software that believe they can identify the right prices on homes. After a seller fills out an online form, OpenDoor performs a quick market analysis and makes an offer. If accepted, the company sends an inspector to verify the home’s condition. The company may request repairs at the expense of the seller, who can still back out of the deal. The seller selects the closing date and receives cash for the house with OpenDoor charging 7% to 12% in fees.
Phoenix resident Luke Dalien was able to sell his home to OpenDoor in just two weeks. The house sold for $290,161 in August and OpenDoor pocketed an 8.5% fee, paying him roughly $265,000. Dalien estimates he would have paid 6% of the sales price to brokers anyway had he sold the house himself.
OpenDoor flipped the house a month later for $300,000, but likely collected closer to $285,000 after factoring in various selling costs, according to property records and the company. Dalien said he could have made more money selling his house himself, but the convenience of setting the closing date while not dealing with open houses or buyer mortgage approvals made the cost worth it. He recommended the service to two friends who have since sold their houses to OpenDoor.
OpenDoor’s unique approach includes 24-hour self-guided open houses, made possible by special door locks that people can open by texting the company, and cameras inside the home to monitor visitors.
“To make [selling] seamless and convenient like that, I think it’s the future of real estate,” Dalien said.
OpenDoor owns all the homes it lists for sale, instead of solely running a marketplace that matches buyers and sellers. As a result, OpenDoor’s strategy is very risky, potentially backfiring if the economy takes a downturn.
Through mid-December, OpenDoor had bought and sold just over 200 homes. It paid an average $230,000, reselling them within 90 days for an average of $245,000. The company made an average estimated profit of between $10,000 and $15,000 on these homes, when including the 9% in fees it earns from the seller, and subtracting costs to resell the home, such as renovation costs and broker commissions.
“We’re introducing liquidity to a marketplace that doesn’t have any,” said the company’s co-founder, Keith Rabois, a venture capitalist.
The San Francisco housing market and tech bubble: Will a correction in the technology sector impact Bay Area home prices?
I was up in the Bay Area in the fall and people love talking about real estate just as much as they like talking about the latest startup. Housing values in the Bay Area make Southern California look affordable. The median price for a sold home in San Francisco is $1.2 million. And the market still seems to have momentum. A lot of money that has flowed into San Francisco has come from foreign investors but also wealthy tech households. Tech has been on fire since the last housing bust. While some people want to believe tech and Bay Area housing are decoupled, there is evidence that there is a deep connection between the two. Rents certainly adjust based on market forces. Depending on how deep the correction, there is likely to be an impact on housing. They always say a financial bubble is only visible once it is popped but there are clear signs when you are in one.
It shouldn’t come as a surprise that rents are deeply correlated with the health of the overall economy. In San Francisco, a large part of the economy is tech connected. It is interesting to look at some data on this because it does highlight a rather strong connection between rents and the NASDAQ.
Take a look at this chart:
http://www.doctorhousingbubble.com/wp-content/uploads/2016/02/sf-rents-and-nasdaq.png
This chart is a bit outdated since rents are now at record levels but so is the NASDAQ (a bit off recently) relative to the bubble that occurred in the late 90s and early 2000s. Since then, we’ve added many more tech companies with substance (just look at the market cap of Google, Apple, and Amazon relative to what it was then). So there is real wealth and companies here, no doubt. But we also have a massive amount of venture capital chasing after the next big hit. This has been going on for a few years now and insiders are starting to see the echoes of the past.
Bay area is rocking and rolling still… seeing 12+ offers and closing prices $50K to over $100K over asking price in the best school district suburbs
Job market is still scolding hot and stock options and VC cash flowing
Federal Open Market Committee January Meeting – Who To Believe?
The minutes from the January meeting of the Federal Reserve’s monetary policy setting committee, the Federal Open Market Committee (FOMC), a more detailed account than the statement released immediately following the meeting, and traditionally released three weeks after the meeting, indicate an increase in the uncertainty surrounding current economic conditions and their implications for economic growth, labor market improvements and inflation over the medium term.
A range of labor market indicators including strong payroll gains, an unemployment rate at or in the range of normal, as well as declines in other indicators of underutilization point to current strength in the economy. However, a slowdown in the growth of domestic economic output in the fourth quarter, a strong dollar restraining trade, concerns about the ongoing drag from the energy sector both domestically and in energy economies overseas, and related turbulence in global financial markets, highlight the downside risks to the outlook, and in particular the prospect of inflation moving toward the 2% target over the medium term.
While maintaining the 25-50 basis point target range for the federal funds rate, announced in the statement following the January meeting was widely expected, the minutes reveal some erosion in confidence regarding further progress in 2016 since the December meeting. In response to the weak performance of economic growth in the fourth quarter analysts have been pushing predictions for the next increase in the federal funds rate deeper into 2016 and lowering expectations for total accumulated increases for the year. The minutes from the January meeting will only add to the downward revisions.
The Young and the Economically Clueless
Looking at the popularity of Sanders and Trump among younger voters, The Wall Street Journal ran an opinion piece Friday night, The Young and the Economically Clueless, that questioned why Sanders and Trump were so attractive to Millennials.
The commentary, by Daniel Arbess, a member of the Council on Foreign Relations, posited that support for these candidates was misguided, since both represent a stifling of the free market.
These young voters seem not to realize that the economic policies they find so resonant are the least likely to promote the growth and the social mobility they desire. They deserve to be lead from the discredited backwater of equalizing outcomes, forward with policies that instead help eliminate barriers frustrating their access to opportunities.
That charge sticks for Sanders, who would certainly like to upend the financial system applecart, but is less clear when it comes to Trump, a billionaire who has profited from this very system. The article made solid points about the languishing labor market and weak economic recovery, but seemed truly tone deaf when describing the populist sentiment against Wall Street excesses:
Both Democrats and some Republicans keep blaming it all on “Wall Street” (Bernie Sanders’s all-purpose boogeyman) for “getting away with murder” (Donald Trump on hedge funds). Don’t they realize that the financial markets are the lubricant of the entire economy—that Wall Street’s capacity to provide liquidity and to broker capital is the lifeblood of American companies? History will probably judge the misguided post-crisis regulations like Dodd-Frank and retribution against Wall Street to have sown the seeds of the next financial crisis. For now, the vilification of Wall Street in the presidential campaign is irresponsible.
I don’t know what history will judge, but this is not a sound rebuttal to the great anger that many people — and especially young people — feel about “Wall Street.” No one is mad because the financial markets provide liquidity or broker capital. They’re mad because Wall Street tanked the housing market for millions of Americans who make a middle class income, and laughed all the way to the bank. In fact, the article just underscores how out of touch the financial establishment truly is: If there had been any “retribution” against the people involved (and not just fines against companies) some of that anger would have abated by now. As it is, this kind of comment indicates the depth of Wall Street delusion.
What is so clear to me but seems so difficult for financial types to understand is the core feeling that drives both Sanders and Trump supporters is the same: The economic policies (tax, trade, etc) that have prevailed in this country since the early 80s have served to greatly exacerbate income inequality while middle and working class incomes have stagnated. Simple as that.
As an example, my parents went to college virtually for free. My dad paid for University of Illinois with a part-time job! No one had college debt. I thought college was expensive in the 90s when I went but I graduated with just a little debt that was paid off quickly. Today’s college students couldn’t hope to pay for college with a part time job. They’re drowning in debts that may never be paid off. I worry about how I’m going to pay for my young son when he goes to college.
This is the thing that is driving support for Sanders and Trump.
College prices will fall when more efficient teaching methods challenge the status quo. The accreditation process limits the way colleges can teach their students. There is no reason that colleges should be as expensive as they are. Most of the education doesn’t require specialized knowledge or even new materials.
One professor could record a lecture series that could be viewed by millions of students online over a ten-year period. What would the cost be per hour? Students could get their questions answered through chat groups by teaching assistants. No classrooms would be required.
On-hands lab work, where required, could be better funded thereby enriching the overall learning process. Entrenched special interests don’t want this to happen because they care more about their own interests than the students.
If the candidates want real change, they can start with changing the accreditation process from methods-based to performance-based. If the students are passing exit exams, then the school should be accredited, regardless of how the students learn the material.
If the students can learn 4 years worth of material in 2 years, pass the exam and start working, then costs will fall dramatically. Smarter students will be motivated to learn the material as quickly as possible to save time and money on tuition and room and board.
Also, if the student only needs 2 years worth of material to do the job, why is 4 years required to get the degree? A number of courses are required for a “rounded” education, which the student has no interest in. If I am getting a STEM degree, do I really need English lit? Why do I have to pay 15K extra for classes I don’t want, that have zero benefit to earning power?
I don’t disagree with you that perhaps post-secondary school should be re-examined. Most jobs today don’t really need a college education on a day-to-day basis, but you do need that piece of paper to be qualified. That is a different question, though. I certainly agree some serious thinking on what is the point of public education is called for.
My point wasn’t about college costs per se, but more about how many of the things working people need, like education, housing, and health care, are getting increasingly expensive relative to wages. A lot of people are angry and feel (rightly or wrongly) that they’ve been sold a bill of goods.
I think that is what is driving the current populism.
Carl,
In this instance, I think your simple explanation is the best one. Everyone is searching for nuance that isn’t there. People are pissed because the “haves” have too much relative to the “have nots”. Plus, the “let them eat cake” attitude of the rich feeds the anger. The fact that the rich don’t even understand why the poor are pissed contributes too. Nobody will solve a problem that isn’t recognized or acknowledged.
“History will probably judge the misguided post-crisis regulations like Dodd-Frank and retribution against Wall Street to have sown the seeds of the next financial crisis.”
Dodd-Frank regulates little if any of Wall Street. It’s a huge bill, so I’d have to review every section to confirm this. It regulates depository institutions (“banks”) and lending. We wait to judge? I’ll judge today! Dodd-Frank has made great progress is making it difficult for banks to make terrible loans to terrible borrowers, and it’s made it difficult to behave like hedge funds.
There’s been a hell of a lot of retribution against Wall Street… it is so sad, seeing these Hedge Fund managers living out of their Bentleys, carrying signs reading “Will Work for Bottle Service”.
It’s getting to where you can’t buy your own private island anymore. Sad..
That quote about Dodd-Frank is one of the reasons this piece caught my attention. I think Dodd-Frank has been great. The only real problem, as you pointed out, is that it did not go far enough to reign in Wall Street.
The Newest Way Wall Street Screws the Poor
Investors who buy up distressed homes and then sell them under contracts in deed were scrutinized in a New York Times article published Saturday that calls into question the consequences to homeowners. More than 3 million people have these kinds of loans, according to the article, and they offer a way to get low-credit homeowners into houses. However, they can end up being a revolving door, as many homeowners are unable to make their mortgage payments and pay for the sometimes substantial repairs under the contracted timeframe and end up losing the house. From the story:
. Now, complaints are piling up in cities across the country, according to dozens of court records reviewed by The New York Times, as well as interviews with housing lawyers and home buyers in Ohio, Michigan and Minnesota.
. In Akron, some investment firms aim at residents “who do not have the financial ability to comply, nor the savvy to realize that they are being taken advantage of,” said Duane Groeger, the city’s housing administrator, whose office oversees code violations.
One company called out in the article, Harbour Portfolio Advisors of Dallas, often buys these homes for less than $10,000, then sells them for about four times that amount. And where are they getting a lot of their inventory? Fannie Mae.
. Harbour, which raised more than $60 million from wealthy investors, was the single largest buyer of foreclosed homes from Fannie Mae’s bulk sale program from 2010 to 2014, which the mortgage giant used to unload more than 20,000 homes that were hard to sell.
A Fannie Mae statement in the article noted that the company’s mission was to minimize losses to taxpayers by selling the homes, but it seems like a mixed message at best.
Neil Howe: The Global Economy Faces a Quadruple Whammy
Over the last couple of weeks, I have turned back to Neil Howe’s predictions more than once as his take on the year ahead has begun to look very prescient indeed.
In this New Year’s interview, Neil tells us that expectations of several more Fed rate raises this year are “delusional,” because “the global economy is in no condition to take this medicine. My very safe prediction is that the Fed will either stall or back down.”
Bingo. After scaring the pants off everybody in the world last year with their hawkish talk of a persistently isolationist monetary policy, the Big Dogs of the FOMC have been yapping like toy fox terriers the past couple weeks.
They want to make sure everybody hears the message: “… we are closely monitoring global economic and financial developments and assessing their implications for the labor market and inflation, and for the balance of risks to the outlook” (Board of Governors Vice-Chairman Stanley Fischer, Feb. 1, 2016).
Neil doesn’t stop there. He reminds us that the world geopolitical situation is deteriorating, particularly in the Middle East, and the US presidential race is a complete crapshoot.
At this point, the interviewer chirps in with “you sound a bit more downbeat than most.”
Neil responds,
Which leads the interviewer to quip, “I guess we can’t call it the dismal science anymore,” and to wonder at the reasons for the chronic boosterism.
Neil explains,
And with that, I think I’d better turn you over to Neil for the straight scoop on what is shaping up to be a watershed year.
His message here is a very fundamental, very important one.
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FHA Steals Fannie’s Thunder on Low Down Payment Loans
National Mortgage News, Feb. 19, 2016–Collins Brian
Fannie Mae’s low down payment product has fallen far short of expectations, the company acknowledged Friday. Federal Housing Finance Agency Director Mel Watt announced the initiative at the 2014 Mortgage Bankers Association conference, saying it would “increase access for creditworthy but lower-wealth borrowers.”
As I’ve speculated before, very-low-down mortgages are difficult to swallow because your real income must prove your ability to make the real payment, which grows as the downpayment shrinks. The less down, the lower the target price must be for the homes you’re shopping.
These products were not heavily utilized before they were eliminated, and now that they’ve been reintroduced… surprise, surprise… They are still not heavily utilized.
A few days rally, which means nothing really, has scared-away the perma-bears. Come back. Don’t let a little equities rally frighten you. Rest assured, we will have another recession…
If the market fizzles out and drifts down to new lows, they will come back.
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