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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Are We Going to Lose our Fannie?

Sorry.  Can’t help all the Fannie puns.  They’re just too good not to use.

Today the Associated Press published a report “Fannie Mae seeks $15 Billion in US Aid after 3Q Loss”.   In case you’re keeping score, Fannie and her brother Freddie Mac have gobbled up about $111,000,000,000 ( we showed you all the zeroes for dramatic effect) in the last 14 months since regulators seized them.

“So what?” you may ask.  “I’m just a small time investor trying to find a property that will cash flow.”  Great!  You’re in luck because there’s lots of those out there right now.  That’s one of the big benefits of this recession.  Great properties are on sale.

But when you read the AP article, you’ll see they quoted “Fannie Mae” herself as saying, “There is significant uncertainty regarding the future of our business, including whether we will continue to exist, and we expect this uncertainty to continue.”

Wow! Where did THAT come from?  We went digging and found it actually came from page 20 of the 10-Q (you’re welcome…sorry, another stupid pun) Fannie filed with the SEC.  You can find it on Fannie’s web site.  It’s 241 pages.  In case you don’t know, companies issue press releases and say how wonderful everything is, then they file the 10-Q with the SEC in which they need to be much more straight forward.

You may recall it wasn’t too long ago that the now-former Fannie Mae executive team was telling us, “Liquidity problem? What liquidity problem?”  Obviously, Fannie Mae is in trouble today.

Again, so what?

Remember, appreciation is a product of supply, demand and capacity to pay.  In terms of housing in the US, we have builders slowing way down while our population continues to grow.  Last time we looked, people like to sleep under a roof, so we’re guessing that demand is persistent and growing.  The big monkey wrench is capacity to pay.  People without jobs don’t have much capacity to pay.  People whose credit was ruined while they were out of work or who decided to sacrifice their credit to get out of a bad loan can’t really borrow right now.  For the remainder of buyers, Congress is extending a first time home buyer’s tax credit.  Somewhat helpful, but not the big horse that’s been pulling the cart down the road.

As we’ve been commenting on for some time, most of the lending going on is through Fannie, Freddie and FHA.  To the extent that there is capacity to pay in the market right now, it is largely propped up by these three.  If they go away, then what?

In the short term, prices would likely drop. Why?  Less loans mean less buyers.  Duh. In the long term, new players would step in to fill the void.  How do we know?  In a capitalistic society, no problem lingers in the market place for too long before some “greedy” entrepreneur figures out how to solve it for a fee.  Ironically, the thing that keeps many of these “saviors” on the sidelines is they don’t want to compete with the government, who seems to take pride in driving the profit out of everything to “help” people, right up until the private sector collapses.

Oops. Our opinion is showing.

You don’t have to agree.  This isn’t even a matter of how it should be.  It’s simply a matter of how it is and what are you going to do about it.

For now, prices are good relative to cash flows.  Loans are cheap and readily available if you (or your investment partners) have good credit and documentable income.   We think the argument could be made it would be a good time to buy, but plan to hold for 10 years or more .  Remember, the key to control is cash flow.

If Fannie  goes away, we’ll wish we got those good loans when they were here.  An investor can never get enough cheap money.

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