Clues in the News – Market Peaks, Credit Scores, and Student Loans

This edition of Clues in the News is coming to you from Bozeman, Montana, where we just wrapped up an insightful weekend at the Red Pill Expo with thought-provoking author G. Edward Griffin and other amazing speakers.

Perhaps the mention of this conference provokes skepticism. Why attend, you ask?

We’ve learned that as real estate investors, it’s crucial to examine information from all sides instead of taking a single account at face value.

That’s why we found the expo so exciting. It’s also why we read the news every day … and then examine it with a critical eye to see what lies between the lines.

In this all-new edition of Clues in the News you’ll hear from:

  • Your at-the-helm host, Robert Helms
  • His (tired of being kicked in the side!) sidekick, Russell Gray

Listen




Subscribe

Broadcasting since 1997 with over 300 episodes on iTunes!

real estate podcast on itunesSubscribe on Androidyoutube_subscribe_button__2014__by_just_browsiing-d7qkda4

 

 


Review

When you give us a positive review on iTunes you help us continue to bring you high caliber guests and attract new listeners. It’s easy and takes just a minute! (Don’t know how? Follow these instructions).

Thanks!


The rise (and fall?) of short-term vacation rentals

We find it helpful to look at the real estate investing world from both a big-picture perspective and a smaller local perspective. Often, local news gives us helpful insight into currents running underneath the big waves that make national headlines.

That’s why we took a look a Bozeman’s local newspaper, the Bozeman Daily Chronicle, where we found an interesting article about short-term vacation rentals.

Short-term rentals are a craze that has been sweeping across the nation over the past couple years … and local governments have responded in various ways as these rentals have risen in popularity.

Although Bozeman isn’t a large town, many residents and businesses are concerned about this issue.

Why? Well, think about who’s threatened by rentals offered through companies like Airbnb. Hotels.

A pragmatic investor or businessperson is aware they may meet resistance to their business model … and that’s what’s happening in Bozeman.

Companies threatened by these smaller rentals are taking the issue to local politicians … who are backing them up.

Think about it … who has a bigger influence on local economics, and thus a bigger say in local politics? The one-property Airbnb owner, or the hotel operator?

Investing is more than just making deals. An important piece of being a successful investor is being aware of the local political environment, including tenant-landlord laws and local issues that may affect you.

The lesson? It’s great to be optimistic and hope for sunny skies, but always pack an umbrella in case you run into rain (or resistance).

Market peaks continue to soar higher

When we took a step back and zoomed out to see the nation as a whole, we noticed a trend we’ve been seeing for a while … escalating home prices across the board.

Although home prices continue to rise, there’s a lot of variation in different markets. A close look at the data in Harvard’s Annual Housing Report tells us that while home prices in the 10 most expensive metro areas have risen a whopping 63% since 2000, while prices in the 10 cheapest areas have grown by only 3%.

That’s a big difference!

We think it’s important to dig deeper and find the over-performers. Looking at information at the macro level is great … but it’s up to you to take that information and move toward the micro.

Look at the nation … then examine your specific town. You may find surprising disparities, even between different neighborhoods in one city!

We zoomed out even further to see if the housing boom was a U.S.-only trend and found an article from an Irish newspaper that stated the average cost of buying a house was €338,000 (about $384,000).

That amount is nine times the average Irish salary!

Big, overheated markets aren’t a problem specific to America. They’re a worldwide trend.

As this trend becomes more obvious, journalists are taking note and coming up with their own interpretations of the data to satisfy the curious public.

We find it helpful to remember news isn’t hard data, and it isn’t the answer … it’s really the question.

The news gives you a starting place to ask yourself: Does this topic affect me? And what does this article really mean? How can I dig deeper?

We went through this process with a CBS article that contained advice for home buyers in the current market.

Many of the article’s statements were simply the opinion of the journalist. And although the journalist offered some helpful advice, we often find professional journalists don’t have the buy-in to catch some of the most important dynamics active in the marketplace.

That’s why as an astute investor, YOU have to be prudent and pay attention.

Rising home prices may mean it’s time for you to take some chips off the table. Depending on trends in income versus rent prices and other numbers, they may mean something else.

Either way, it’s up to you to do the math!

The cost of renting versus buying

If you’re a landlord, you know it may not make sense to buy rental properties in areas where tenants can afford to buy homes.

We found this infographic eye-opening. Although it only cites average numbers, it’s obvious that today buying a home is more affordable compared to renting than it ever has been.

What does that mean for you? It means you have to watch your numbers.

Analyze your own tenant base. Ask yourself the following questions:

  • What is the income-to-price ratio?
  • How affordable is your housing for your tenants?
  • Do you have tenants with high credit scores who will be able to get easy loans?
  • Do you have a competitive advantage over other housing options?

The overall idea is to find tenants that have income durability, but won’t skip when they can buy a house. One option is to invest in rent-to-own properties.

Finding that balance can be tricky, but if you’re paying careful attention to your numbers, it’s doable.

Rising mortgage rates and plummeting credit scores

Credit rates affect new homebuyers’ abilities to get loans and buy houses. In a recent article, we read that for every increase in mortgage rates, credit scores go down.

As real estate investors, we always want to understand the ratios of mortgage rates and interest rates.

We have no control over these rates … but they definitely affect what we do as investors.

So what do these changing numbers mean? Is there any correlation? We don’t necessarily think so.

What we do know is when lenders lower barriers to entry by decreasing the credit score required to get a loan or nudging the required debt-to-income ratio, it can be a warning sign credit markets are starting to get desperate.

When you start to see lenders giving borrowers up to 50% of their income, that’s when you know something problematic is happening.

A dimming outlook for brick-and-mortar retail stores

We’ll look at this next issue with the assumption that with the rise of mega-sized online retailers (think Amazon), retail is not the greatest place to be right now.

With this dimming retail outlook comes a push for shorter leases.

When retail tenants consider their options, they ask themselves a basic question: Do I pick a longer lease for more stability, or a shorter lease I can get out of sooner?

The trade-off of choosing a longer lease is that the landlord decides what the future 5-10 years will look like in terms of rate increases, even if those don’t match up to reality.

Retail tenants also have to consider how the location they choose will drive traffic.

If big-box stores pull out, can smaller retailers expect the same regular traffic? Uncertain about the future of these stores, more smaller retailers are pushing for shorter lease terms.

If you’re not in the retail business, you may be wondering how this affects your residential properties. Ask yourself, How many of my residents work at these stores? What will happen when local retailers shut down and my residents are out of work?

Big sea changes for retailers can also mean big changes for you. Retailers typically choose to close stores in places that are weak for core drivers. If you have a tenant demographic similar to the store’s shopper demographic, it may be insightful to look at where stores are shutting down, and why.

As an outsider, you’re not privy to why the big dogs do what they do, but you can observe what they’re doing and come to your own conclusions.

New options for homebuyers with student debt

We all know student debt is increasingly becoming a bigger issue amongst millennials.

This younger generation often forgoes buying homes due to high amounts of student debt.

An article in the Wall Street Journal reported on a new option backed by Fannie Mae that allows homebuyers with student debt to refinance and convert their student loan debt to housing debt.

This program gives younger buyers collateral … and may make them more likely to choose to buy a home.

The program could also drive home pricing in your area, depending on the makeup of the local population.

If you don’t have student debt, this program may not seem relevant … until you stop to consider the bigger picture.

That’s it for now until next week, when we talk about a major disruption in real estate markets!


More From The Real Estate Guys™…

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

04/26/15: Clues in the News – China’s Latest Attack on the Dollar…and YOU

In this edition of Clues in the News™, we take on the biggest story most real estate investors are ignoring…and discuss why we think it matters to real estate investors…

In the studio to discuss China’s latest moves and the potential impact on U.S. real estate investors…

  • Your clued in host, Robert Helms
  • His clueless co-host, Russell Gray

The world is in constant flux.  There are SO many variables moving around out there. It can make your head spin…even more than a thick, frosty imperial IPA. 😉

To make sense of it, we try to take all these events we read about in the news…and put them into major categories.

In this case, today’s episode is really about the future of the U.S. dollar…specifically as the world’s reserve currency…and how a change might affect every day real estate investors on Main Street.

So let’s start with the Big Picture…

Out with the Old and In with the New

Virtually all active real estate investors today only know one financial world.  The U.S. is the dominant economy and the dollar is the world’s reserve currency.

This means that interest rates, job creation, access to capital have always stood on the foundation of U.S. financial dominance.  And not just in the U.S., but around the world too.

BUT…this has been slowly changing…and the evidence is right in front of you IF you take the time to look at it.

There hasn’t been anyone for the U.S. to be accountable to for decades.  Uncle Sam can just go into debt and wage war endlessly. No one can stop him.

Understanding Economic Cones

When it comes to your real estate investing, the LOCAL economy is what really matters.

Of course, your local economy may be VERY much connected to macro and even global factors.  To figure all that out, you need to understand the concept of an economic “cone”.

A “cone” or Primary Driver in any geographic market is something that brings money into the region from the outside.

Think of Google or Apple.  They’re based in Silicon Valley, but bring in revenue from all over the world, which creates jobs, incomes and spending in Silicon Valley.  Google and Apple are “cones” that funnel outside money into the local region.

Now think about Walmart or Costco.

Sure, Walmart and Costco sell all over the world…but each location only sells to local customers.  That means the income is generated in the local community.  So when the people who work in the local store spend they wages in the local economy, it’s simply a recycling of local money.

The idea is that when a Walmart or Costco is located in a place like Silicon Valley, the OUTSIDE money is funneled into the local economy through the employees who work at Google or Apple is then spent at Walmart and Costco.

In other words, if Google or Apple went away, it’s likely that business at the local Walmart or Costco would decline.  That is, the overall region would have LESS prosperity because they only would be trading among themselves…instead of pulling in money from around the world.

Make sense?

So think about how the U.S. government affects the flow of money into the local communities where YOU invest in real estate...and what would happen if the government was no longer able to go deeper and deeper into debt just to keep on spending.

What happens to YOU if Uncle Sam’s credit card is cut off?

Military

If you own properties near military bases or defense contractors, you’ve been an indirect beneficiary of Uncle Sam’s blank checkbook.

Money flows through those operations into the local community…directly as wages which are spent on rent…and indirectly when the military, its contractors, their suppliers and employees all trade with each other locally.

Are YOU invested in an area where many of the employers are directly…or INDIRECTLY…nursing on Uncle Sam’s…checkbook?

Section 8

If you own Section 8 housing, you’ve been a direct beneficiary of government subsidies.  How often do you worry about your Section 8 check bouncing?

But if Uncle Sam is forced into “structural reform” and “austerity”….with is geo-political jargon for shutting down spending programs and cutting costs…what happens to YOU if the Section 8 program gets a big haircut…or completely shut down?

College Loans

What about college towns and student housing? There’s been hundreds of billions of dollars of government subsidized student loans which feed the college towns.

Your student tenants might be using their loan proceeds to pay their rent.  Or maybe Mom and Dad are using the tuition savings to pay the rent on behalf of the kids, while the student loan pays for the tuition.

And of course, if you’re renting to employees of the school and they depend on tuition paid by student loans and the student loans stop…then what?

How exposed are YOU to austerity in student loans?

Social Security

What about senior housing? Do you have tenants who are collecting social security and using it to pay the rent?

Disability, Food Stamps

There are RECORD numbers of people on disability and food stamps in the U.S. right now. But Uncle Sam already admits that the disability fund will be insolvent in 2016.

How many of your tenants are depending on these subsidies to survive?  What happens to their ability to pay you rent if their benefits are cut off?

Real Estate Loan Subsidies…Fannie, Freddie, Ginnie, VA, FHA; plus down payment assistance

For decades, homeowners and real estate investors have benefited from cheap mortgage money.

In fact, the risk premium (interest rate) on those funds wasn’t enough to compensate for the risks, and that’s why these programs always teeter on insolvency. Fannie, Freddie have both been bailed out by Uncle Sam…with BORROWED funds…because Uncle Sam doesn’t have any savings.

It’s Greek to Me…

So…what happens if the U.S. can no longer go into endless debt?  What happens when the U.S. is accountable…say…like Greece?

Right now, Greece is broke. Their Prime Minister came right out and said, “We’re broke and we can’t pay the ECB (European Central Bank)”.

How many times has the U.S. said, “Hey, we’re broke. We can’t pay our debt?”

Okay, so they SAY it…but it’s never been an issue because they can always…

Raise the Roof!

Actually, the U.S. has threatened to “default” a few times…but then Congress simply raises the debt ceiling.

In other words, they just borrow more. It’s like applying for a new credit card every time you run out of money…rather than deal with the fact you have a spending problem.

How is it the U.S. can do that and Greece can’t?

It’s because the U.S. gets to print the world’s reserve currency, the U.S. dollar.

And when places like China produce more than they consume and produce excess, they keep their saving in U.S. Treasuries.

In other words, the world “saves” by loaning money to Uncle Sam.  What a deal for the U.S!

How did the U.S. get this sweet deal?

Way back in 1944… in a place called Bretton Woods… the world “agreed” to allow the U.S. to be the world’s banker.  And why not?  Uncle Sam had the biggest army and biggest stash of gold.

Because…back then, gold was money. And U.S. dollars were redeemable for gold…

Well, not by citizens.  Because in 1933, Franklin Roosevelt used an Executive Order and took away the right for citizens to own gold.

But other countries COULD turn in their dollars for shiny yellow metal.

So all international trade would be settled in dollars, and then the holder of those dollars could go the U.S. and redeem those dollars for physical gold.

The ability to redeem dollars for gold kept the United States accountable to not printing too many dollars…at least that’s the way it was supposed to work.

But it didn’t.

Handed a virtually unlimited credit line, the United States began spending like crazy…the same way we do today…on endless wars and social programs.  In the 60’s it was the Vietnam War and Lyndon Johnson’s War on Poverty…also known as the Great Society.

So the U.S. printed billions of dollars (which was a lot back then) and as they made their way around the world, holders would come and redeem them for gold.

Before long it was apparent that the U.S. was running out of gold.

So on August 15, 1971 President Richard Nixon announced to the world that he was “temporarily” suspending the redemption of dollars for gold….and…we’re still waiting for the “temporary” ban to be lifted.

In the next few years after that, the dollar crashed (gold went from $35 per ounce to $850), interest rates soared (and creative real estate was born)…as the world figured out how to conduct business in this new financial environment.

But they did figure it out.  People are amazingly resourceful.

Along the way some people got rich. Other people got wiped out. That’s what happens when financial systems re-set. People who are prepared and paying attention do well. Those who aren’t…don’t.

Right now, the wheels are in motion for a changing of the global financial guard. We’ve been monitoring this for the last couple of years and wrote about it in our Real Asset Investing report.

EVERY DAY IT GETS CLOSER.

You may have seen these headlines…

March 17, 2015 NPR – European Allies Defy U.S. in Joining China-Led Development Bank

FOUR key allies…Germany, France, Italy and the UK (“one of American’s staunchest allies”) all got on board the new Asia Infrastructure Investment Bank (AIIB), despite U.S. opposition…

“The Obama administration opposes the AIIB and has pressured allies such as South Korea, Japan and Australia not to join…says there’s no need for another international lending institution.”

“It’s believed China is prepared to put half of the initial $100 billion budget, probably giving it veto power, much the same as the U.S. has with the World Bank and International Monetary Fund.”

March 23, 2015 (Reuters) – China’s Premier asks IMF to include Yuan in SDR basket

SDR = Special Drawing Rights – it’s an international reserve currency made of dollars, yen, euros and pounds.  Now China wants a seat at the SDR table…

“China hopes to, through the SDR, play an active role in the international cooperation to maintain financial stability and promote the further opening of China’s capital market and financial area.”

The IMF’s Managing Director is reported to have said, “China’s yuan at some point would be incorporated in the SDR currency basket”.

The Reuters article concludes with “The yuan’s inclusion could be seen as diminishing the dollar’s standing internationally.

March 24, 2015 (Reuters) – UK Official says IMF inclusion of yuan a very live issue

The yuan is the world’s fifth most-used currency in trade, and Beijing has made almost weekly strides this year in introducing the infrastructure needed to float it freely on global capital markets.

“Almost weekly strides this year”!  In other words, things are happening FAST.

March 28, 2015 (Reuters) – More countries join China backed investment bank.

Russia, Australia and the Netherlands became the latest to…join the China-led Asian Infrastructure Investment Bank…adding clout to an institution seen as enhancing China’s regional and global influence.”

“Other countries such as Turkey and South Korea have also said they would join. Brazil, China’s top trading partner, said it would sign up.”

“China’s Finance Ministry said Britain and Switzerland had been formally accepted…Austria had also applied.”

The AIIB has been seen as a significant setback to U.S. efforts to extend its influence to balance China’s growing clout and assertiveness.”

April 6, 2015 (Reuters) – Larry Summers has a major warning for the US economy and everyone should be paying attention.

In an op-ed piece published in The Washington Post, former Treasury Secretary Larry Summers wrote, “This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system.

“So while the US has been the dominant global economic power of the last 50 years, the point is that now countries across the globe are seemingly falling over themselves to be more closely aligned with China.”

Summers said, “I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies, starting with Britain, to stay out.”

The article concludes, “The global economic tide has started receding from the US and moving toward China.

And what happens if the US loses its role as the “underwriter of the global financial system”?

The U.S. loses the ability to go into endless debt and it becomes more like Greece, dependent on the largess of global central bankers.

Up to now, the U.S. has been the dominant force in global banking.  The headlines say…along with Larry Summers…that that’s in the process of changing.

What will it mean for real estate investors?

We’re not completely sure…but you can bet we’ll be discussing it with the biggest brains we can find.

It seems like government spending will need to be reeled in, so if your real estate portfolio is heavily dependent on government subsidized tenants or industry, you may want to diversify.

Long term inflation is a very serious concern…even though it may not seem like it now. So long term debt (30 year fixed mortgages) seems smart, as does owning real assets…like cash flowing real estate.

The most important thing is to be aware things are changing…to watch carefully as events unfold… and constantly ask, how does this affect me? And where are the opportunities?

James Rickards said in his best-selling book, The Death of Money, that the SDR is the most logical choice for replacing the U.S. dollar as the world’s reserve currency.

Of course he said that years ago and now it’s making it’s way into the mainstream news.

We’re guessing more of this stuff will be popping up in the mainstream…which tells us that the changes are getting closer.

We’re EXCITED!

History tells us that most of the great opportunities are found in the midst of change. But the prizes go to those you are aware, prepared, nimble and fast to react.

So stay tuned for more insights as this important trend continues….

Listen Now: 

  • Want more? Sign up for The Real Estate Guysfree newsletter and visit our Special Reports library.
  • Don’t miss an episode of The Real Estate Guys™ radio show.  Subscribe to the free podcast!
  • Stay connected with The Real Estate Guys™ on Facebook!

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