8/14/11: August and the Economy Part 2 – Perspectives from Two Men Who Would Be President

So it’s not every day you get to sit down with a bona fide presidential candidate face to face and ask whatever you want.  In our case, we got to do it TWICE in one day!  Very fun.

Now whatever you political bent, the issue isn’t what YOU think SHOULD happen.  What we’re interested in is what the people who will be shaping the debate, if not actually running the show in 2013, are thinking.

Our two guests happen to be Republican candidates, so if you’re on the other side of the fence, just hold your nose and listen anyway.  The more info you have, the better you’ll be able to invest.  Again, you don’t have to agree, you just need to understand the possibilities.  And if you know a Democratic candidate who wants to be on the show, let us know!  All viewpoints are welcome. :-)

Behind the illustrious silver microphones in our spacious, upscale mobile studio (including folding chairs and table):

  • Your presidential host, Robert Helms
  • Your vice-presidential co-host, Russell Gray
  • Special Guest, Director of Economic Research for the Reason Foundation, Anthony Randazzo
  • Special Guest, Two Term Governor of New Mexico and current Presidential Candidate, Gary Johnson
  • Special Guest, Businessman and Presidential Candidate, Herman Cain

When you’re an elected official, you have a bazillion thinks to think about.  And you need a lot of help thinking.  It’s kind of like being a busy real estate investor.  You need to have a team of people who stay on top of changes in landlord law, taxes, mortgage guidelines, credit scoring, asset protection and estate planning – just to name a few!

So we kick off this show talking to Anthony Randazzo, a big brain whose job it is to study, think and advise on economic matters.  One of the things Anthony studies are GSEs (Government Sponsored Enterprises, like Fannie Mae and Freddie Mac).

If you’ve been paying attention, you know that Fannie and Freddie play a major role in U.S. housing (and the bond markets), were very much at the center of the mortgage meltdown, and have lots of people in Washington who’d like to see them go away. Kind of like how Ron Paul wants the Fed to go away.  It may never happen, but if it did it would change a lot things we take for granted as real estate investors.  So, it’s important to pay attention to what the big brains and the politicians (not that the two are mutually exclusive :-)) have to say.

Then we talked to Gary Johnson and Herman Cain.  We won’t paraphrase those conversations here, but you can be sure we asked about jobs and real estate.  And of course, we asked what they thought needed to happen to create more jobs. And unlike many shows, we let them talk.  We found it very interesting and we think you will too!

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

8/15/10: How Capitalism Will Save Us – An Interview with Steve Forbes

The Real Estate Guys™ sit down and talk with Steve Forbes about jobs, the economy and real estate.

We don’t know about you, but any time a billionaire, a CEO of a major company, a best selling author or a legit presidential candidate is willing to sit down and chat, our response is always, “Yes!”.   In this case, our special guest for this episode, Steve Forbes, is ALL of those things wrapped into one.  So we’re super jazzed to bring this exclusive interview to you.

In the broadcast booth at the Freedom Fest conference in Las Vegas:

  • Your Host and interviewer extraordinaire, Robert Helms
  • The just-happy-to-be-here Co-host, Russell Gray
  • Special guest, Forbes Magazine CEO, Steve Forbes

Mr. Forbes was the keynote speaker at the Freedom Fest conference and remained in attendance for the entire event.  In spite of a recent neck surgery, he was very accommodating and so Robert was able to sit down with Mr. Forbes for an impromptu interview.

Steve Forbes with Russ and Robert at Freedom Fest. Russ wrestled Steve into doing the interview, which broke Russ' glasses and injured Steve's neck. But the interview went well and we were all smiles afterwards.

We decided to ask him about his latest book, Why Capitalism Will Save Us – Why Free People and Free Markets are the Best Answer in Today’s Economy. Mr. Forbes’ thesis is that too much government is bad for business because it increases costs, diminishes productivity and takes too many resources away from creating jobs for an ever-growing population.  He calls for “sensible rules of the road” to provide a basic framework in which free people can conduct business.  Of course, the great debate is over what’s “sensible”.  His position is that less is more.

What we’re really interested in is jobs. Jobs are where our tenants get their rent money.  It’s where home buyers get the income stream to make the mortgage payments that prop up the property values that create passive equity.  Jobs are near the top of our due diligence check list when evaluating a market to invest in.  It’s one of the reasons we like Dallas right now.  Among U.S. markets, it’s doing pretty well.  Ironically, another great job market is Washington DC, but if there’s a changing of the guard over the next couple of elections, that could change.  But we digress…

So Mr. Forbes shares his thoughts on the economy, job creation and the role of government in real estate, specifically Fannie Mae and Freddie Mac.  In his position as the CEO and editor-in-chief of Forbes Magazine, he gets to talk with many of people who shape, interpret and respond to public policy.  We really enjoyed our time with him and hope you will too!

On a side note, Steve Forbes is the nicest billionaire we’ve ever interviewed.  Actually, he’s the only billionaire we’ve ever interviewed.  But he’s still a very nice guy.  So, if you’re a billionaire and want to come on the show and be nice to us, just give us a call.  Our door is always open. :-)

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Real Estate Field Trip to Dallas Texas!

Why has Dallas become one of our favorite US real estate markets?

  1. Texas is ranked the #1 business friendly state in the US. Last time we looked, tenants have an easier time paying the rent when they have a job.  And landlords have an easier time paying the mortgage when tenants pay the rent.  Jobs are good.
  2. Dallas is the nation’s 5th largest media market. Hey, we are radio guys.
  3. Dallas is in the top 10 big US cities where it makes more financial sense to rent rather than own.  That means tenants stay tenants longer.  Less turnover means less expenses.  Less expenses means better cash flow.  Cash flow is good.
  4. Dallas real estate values have held up very well throughout the mortgage meltdown and the resulting unprecedented drop in real estate values across the US.  After the last two years of “Drop Zone”, a Merry-Go-Round sounds exciting enough.
  5. Dallas is only 2-1/2 hours from Belize. Does that count?
  6. The Real Estate Guys™ TV show is taped in Dallas (Addison actually, but it’s close enough).
  7. Most rental residential real estate prices are well within the FHA / Fannie / Freddie conforming guidelines. That means it’s easier to get loans.  It’s also easier for resale buyers to get loans.  Life is easier when you can get loans.
  8. Our friend, Ken McElroy, says Dallas is one of his favorite markets for the next 5-10 years.  And we think he’s well qualified to have an opinion.
  9. Infrastructure! Centrally located in the US, a huge airport, a great freeway system, on the path from Mexico to the North and Northeast, a big labor force and good higher education.  Plus they have an amazing $1.2 billion football stadium.  That’s infrastructure, isn’t it?
  10. Big and diverse economy. Dallas is home to lots of huge companies.  But for every huge company, there are lots of little ones that support them.

We could go on, but you get the idea.  But why take our word for it?  Come to Dallas and check it out for yourself! Reading blogs and looking at stats on the internet is interesting in “student mode”.  To get to “investor mode” (where you actually buy, own and manage real estate), you need to visit the market.  How long does it take to learn a new market?  A lot longer if you go it alone!

Invest a weekend with us in Dallas and we’ll help you compress time frames. We’ll help you get the lay of the land (literally!), explore various sub-markets, meet local experts and service providers; plus we’ll introduce you to some of our key contacts.  And no one is going to ask (or pressure) you to buy anything including the next “boot camp” or any specific property.  That’s not the way we roll.  But if you find something or someone that interests you, you can follow up when you’re ready.  Sound fair?

For more information, about the next field trip to Dallas, click here.

2/21/10: Commercial Property Update – Woes, Recovery & Opportunity

Many people think that the residential real estate crisis and its impact on banks and the secondary mortgage market have set the table for an even bigger implosion in commercial real estate.  But if you believe that opportunities often come dressed as problems wearing work clothes, maybe that isn’t so bad.

In studio today to take a look at the State of Union in commercial real estate are:

  • Your President and host, Robert Helms
  • Co-host and teleprompter operator, Russell Gray
  • Our Speaker of the House, the Godfather of Real Estate, Bob Helms

With so much focus on the residential real estate and mortgage markets, which is of much greater interest to the main street consumer and news outlets which cater to them, we thought it would be interesting to take a look at the commercial side of real estate.  Many observers think that there are dark days head for commercial properties, but what are the current trends?  More importantly, where are the best opportunities today and in the future?

We start out by taking a look at the sales and pricing trends in retail real estate.  What affect is the soft economy and subdued consumer spending having on retail occupancies, rents and cap rates?  Will money be available to purchase and refinance these properties?  Will there be buyers?  Inquiring minds want to know!

Sticking with the discussion of concerns about the availability of funding, we delve into a discussion of what’s happening in multi-family where government subsidized money has been plentiful.  With the pressure on Fannie Mae, will multi-family residential funding remain available?  What if it dries up?

Another side effect of a soft economy is financially weak or insolvent tenants.  Are commercial tenants starting to walk away from leases like homeowners are walking on upside down mortgages?  And how likely are they to accept rent increases?  It seems to be a tenant’s market right now.

Now there are lots of facets to commercial real estate and we can’t possibly cover them all in one show, so we decided to wrap up with some talk about office – and what’s happening to vacancy and rental rates in today’s “jobless” recovery.  If that isn’t an oxymoron, it should be.  It’s like saying “reliable copier”.

Of course, we can’t talk about all the challenges without remembering that problems often bring with opportunity – for those willing to think independently and outside the box.  As always, there are no magic formulas or one-size-fits-all solutions.  Challenging markets require courage, creativity and the kind of capital that comes as much from time, talent and relationships as it does from credit lines and cash deposits.  The good news is that when the going gets tough, most of the competition goes off and follows the herd to “greener” pastures.  If you believe the real estate “grass” will grow again, then it might be a good time to stake out some new territory.

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Sign, Sign, Everywhere a Sign

Here we are the end of the first decade of the new millennium.  For old geezers like us who remember when George Orwell’s 1984 and Stanley Kubrick’s 2001: A Space Odyssey were speculations into the future, just saying “2010″ is weird.  And if you’re not in the geezer group, you might not even recognize the title of this blog as the opening verse of an old 60′s rock song.  What does that have to do with real estate?  Nothing really.  The point of this blog is that as we enter this new decade, more and more positive signs keep popping up.  We’re here to help make sure you don’t miss them.

A December 19th Wall Street Journal headline says, Down Payment Standards Eased.  Well, that certainly caught our attention.  The gist of the article is simple:  Mortgage lenders and mortgage insurance companies are beginning to loosen their lending standards.  This, the Journal says, is a sign of increased confidence in housing.

You can read the article yourself, so we won’t repeat it here.  But we do want to point out a couple of ideas we think are worthy of consideration.

First, the looser standards are being applied on a market by market basis.  This acknowledges the obvious truth that real estate values are local.  This fact creates both opportunity and challenges for an out of area investor.   How do you know which markets are recovering and which ones are still declining?  While knowing what to research to figure this out is one thing, actually having the time and resources to do it is another.  How convenient when huge companies have already done some of this work for you!  So, it seems to us that any market where the looser standards have been applied might be of better-than-average interest.

Also, the article talked about the toughening of lending standards by Fannie Mae, who they say just raised its minimum credit score from 580 to 620.  That alone just took lots of people out of the running to buy a home.  While that might seem negative toward new buyers driving up values, it also means more people will need to rent.  As a property manager, if you’ve been running credit reports on prospective tenants, there might be an opportunity to pick up new customers in the 580 to 620 range.  Of course, you take more risk when you lower your standards, but unlike these automated underwriting engines that just lop people off the list at a specific point, you can be a little more personal.  There are a lot of people in this economy whose once pristine credit is tarnished because of unemployment or strategic mortgage default.  This doesn’t mean they will be poor credit risks when renting a place to live from you.

The landscape continues to change.  With every shift, problems and opportunities are created.  The signs are all around you, so keep your eyes open.  Think about what you are seeing.  Form hypotheses and develop action plans to take advantage of the shifts.  When we’re at the end of the next decade looking at 2020, where will you be?  The actions you take in this next year will be the foundation for the answer to that question.

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Part 1: Report from the National Association of Realtors Conference

This is Russ. I just got back from 3 days in beautiful San Diego where I attended the NAR Annual Conference.  Robert drew the short stick and had to go to Belize to handle some business. Poor guy.

In case you don’t know, the National Association of Realtors is the world’s largest trade association, boasting well over a million members. Pretty good for an industry that’s been at the epicenter of the “world financial crisis”.

I noticed the AP reported on FHA Commissioner David Stevens’ speech at NAR.  They said that Stevens told the Realtors “that concerns the agency is headed for the same financial trouble that snared Fannie Mae, Freddie Mac and the subprime sector are unwarranted.”

Really?

I didn’t hear the speech because I was more interested in what people on the front lines were thinking and feeling about the market.  Besides, we’d already commented on our observations about FHA in two previous blog posts: Are We Going to Lose our Fannie? and Hey FHA! Your Fannie is Showing. You can find those in the Clues in the News category.

Why should you care about FHA? As quoted in the AP article, Stevens said it best, “Without FHA there would be no (housing) market, and this economy’s recovery would be significantly slower.”

The surest sign there’s trouble is when a bureaucrat comes out and tells your there isn’t  (“Pay no attention to that man behind the curtain!” ).  Especially when all evidence says there is.  It’s even worse, when the “no problem” evidence provided is (again, from the AP article), “the agency has $31 billion in capital – $3.5 billion more than it had a year ago.”  But (and it’s a big one), how does that compare to the number of loans insured?  The AP article says that FHA has insured nearly a quarter of ALL new home loans made this year.

Consider these recent FHA related reports:

11/10/09 MiamiHerald.com – “FHA moves to boost condo market – The FHA recently announced more lenient, albeit temporary, underwriting guidelines for condo projects”

11/12/09 DSNews.com (reports to the mortgage default servicing industry) – “The FHA told Congress and reporters Thursday that its cash reserve fund had deteriorated to $3.6 billion – the lowest it’s been in the agency’s 75 year history.”

11/13/09 Wall Street Journal – “The FHA’s Bailout Warning – Whoops, there it is. – Critics of Fannie Mae & Freddie Mac were waved off as cranks and assured that the companies would not need a taxpayer bailout right up until the moment that they did.”

11/14/09 AP – “FHA Boss: FHA is not the new subprime” (this is the article written at the NAR conference that I opened up talking about). Hmmmm……I’m having déjà vue all over again…again.

Not to be redundant (okay, maybe a little redundant), but Supply and Demand only work when there is capacity to pay.  If 100 people are starving and there’s only 1 Big Mac for sale, one would think that the price would get bid up, right?  But that assumes (dangerous word) that those people have the capacity to pay. If they don’t, the price won’t rise.

The lesson?  Stevens is right (for now) that FHA money is a BIG part of housing.  If it goes away or is tightened, then there will likely be a dip in prices as less people can compete for available properties.  Does that mean stay away?  Not necessarily.

Eventually, private money (and there’s lots of it!) will make its way back into mortgages. Why? Because it’s profitable and real estate is real and the demand for it is forever. But until the sands stop shifting, private money will stay away. It’s no fun to play a game when the rules keep changing. As long as private lenders think they will have to compete against government (taxpayer) subsidized non-profit lenders, and/or that legislators will impede or negate their rights to recourse under the contract (i.e., stop a foreclosure or force a modification), then private money is going to stay away.

And who can blame them? But, (oops, my opinion is showing), even though all this government tinkering is designed to lessen the pain (ironically caused by government tinkering), it will also prolong it.  But I guess private money is coming to the rescue one way or the other, since taxes take private money and funnel it into housing through the government via bailouts.  Not my first choice, but that’s the way its working right now.

For joe schmo investors like us, bread and butter properties in highly populated markets with good transportation, education and economic infrastructure still make sense – as long as they cash flow and you’ve got reserves to allow you to own for 10-20 years.  Because when private money does come back and is added to all the new money we’ve added through stimulus, it’s very conceivable that prices will go up.  But if you have positive cash flow, amortization (pay down of today’s cheap loans over time), and tax breaks, you will still look good in 20 years.  And who doesn’t want to look good in 20 years?

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Hey, FHA! Your Fannie is Showing

Today,  The New York Times ran a story headlined Concerns Are Growing About FHA’s Stability.  Hmmm…that’s interesting.  Especially since a major chunk of the loans funding the fledgling housing recovery is coming from FHA.

Caution: This is a long post.  BUT, if you stick with it, it’s not just food for thought.  There are some practical tips, so power on!

Back when sub-prime collapsed, we were hanging out with a lot of the top dogs in the mortgage business and the mantra was “FHA is the new sub-prime!”  Wow. Be careful what you wish for.

So the mortgage industry re-tooled.  It took some time, but eventually the industry got good at FHA and went out and sold it silly.  Only 3% down!  Cheap rates!  Go! Go! Go!  And there’s NOTHING wrong with that.  It’s their job.  Just like it was when the private sector made cheap and easy money available.  Wonder if the evil mortgage brokers will get blamed if FHA goes down?  But we digress….

What? Me Worry?

The NY Times article says that FHA Commissioner David H. Stevens “assured” lawmakers that FHA would NOT need a bailout and was “taking steps” to manage its risks.

Two things.  First, let’s take a trip down memory lane.  For old times’ sake, we cracked open The Real Estate Archives and found a Wall Street Journal article dated 6/7/08 in which they reported that Freddie Mac’s then CEO Richard Syron said Freddie’s financial results for 2008 will be better than last year’s.  This was part of a conference call to investors where he assured stockholders, “We are quite confident that the positive changes will offset the negative.”  What fire?

A month later, a 7/8/08  CNBC.com article quoted James Lockhart, the Director of OFHEO (not a cookie – Office of Fair Housing Enterprise Oversight – you know, the folks that watch your Fannie Mae and Freddie Mac).   CNBC interviewed Lockhart and he said, “Both of these companies [Fannie and Freddie] are adequately capitalized.”

Just in case you didn’t believe Mr. Lockhart, MarketWatch reported on 7/10/08 (2 days later for those keeping track) that then Treasury Secretary Mr. Henry Paulson “moved swiftly…to defend Fannie Mae and Freddie Mac from critics who have called them insolvent” while testilying to the House Finance Committee.

Sorry, we know this is a blog post, not an encyclopedia, but there’s so much good stuff here.

On 7/22/09 (yes, that would be 12 days later), the Associated Press ran a headline “Congressional Analysts Peg Cost of Propping Up Fannie Mae and Freddie Mac as high as $25 Billion”.  That’s a lot of money, but as we’ll soon find out, if it was ONLY $25 billion, it would be cause to party (not that we need much of an excuse). ;-)

In an interesting aside, the same AP article said Republican Senator Jim Bunning (KY) criticized Republican administration official Henry Paulson (yep, the same Henry Paulson) for “trying to ‘ram down’ his proposal to shore up Fannie Mae and Freddie Mac, which Bunning said ‘smacks of socialism’”.  We tossed this side note in just in case you thought the Obama Administration were the only ones being called Socialists.

Anyway, back to Fannie and Freddie….

On July 27, 2009 (we were in Belize that day…it was fun), CNN Money reported “Efforts to use the troubled mortgage finance firms to fix housing market problems are likely to push the taxpayer bill for Fannie & Freddie above $100 billion.”  That’s slightly more than the originally projected $25 billion, in case you were getting dizzy.

The same CNN Money article went on to say that Fannie has actually received $34.2 billion and Freddie $51.7 billion.  Also, considerably more than $25 billion, but who’s counting?

Okay, so that was a long trip down memory lane.  But the points are:

a) when the head guys say “don’t worry”, worry – or at least take a peak behind the curtain;

b) the politicians will pay almost ANY price to save housing. Why? Because voters live in houses. This pressure, like it or not, helps protect real estate values;

c) history provides perspectives you don’t get if you only live in the current headlines.  That’s why The Real Estate Guys keep archives.

That concludes “thing #1″. Wait!  Don’t quit yet. Thing #2 will be much shorter!

Thing #2:  When the head FHA guys says, “We’re taking steps to manage risks”, it could mean tighter money: things like stiffer guidelines, lower limits – you know, the things that slow down a recovery.

For example, the FHA’s very popular Home Equity Conversion Mortgage (HECM) – the only insured reverse mortgage – has been widely reported as getting a “haircut”.   That means lower loan limits.  We’ll talk more about that on another day, but it makes you wonder what else FHA might do to “manage” its risks.  We’ll be watching….

So, what’s the takeway from today’s post?

Track what happens with FHA.   Like an over extended teenage shopper, who runs up one credit card and then moves onto the next, our policymakers have run up the tab on Fannie, Freddie, and now possibly FHA.  When all the cards are maxed, they call Mom and Dad.  In this metaphor, that’s you – the American taxpayer.  But you don’t have any money either, so they’ll get it by taking out new credit cards (in your name) from the Chinese or whoever has money, and then pledge the fruits of your future labors (and those of children and grandchildren) to make the payments.

We’re not saying Uncle Sam and his minions shouldn’t help housing, nor are we saying they should.  But it’s safe to say they will.  And when they do, HOW they do it will affect the values of YOUR properties, the interest rates and availability of YOUR loans, the jobs and salaries available to YOUR tenants, the size of YOUR taxes, and the value of YOUR dollar.

In all of this change, are many problems and many opportunities.  But don’t worry!  Work. Study. Learn. Watch. And when you see the opportunity, take action while others hesitate.

And keep listening to The Real Estate Guys – we’ll help keep you thinking!