Subprime Resets AND The Real Estate Investor’s Dream Of A Perfect Storm Is Reality
Posted @ 10:11 pm - Filed under Real Estate Investing, San Diego Property Owners, Real Estate Markets, Investment Lessons, Leverage, Predictions, Buyer's Market
As promised, the subject will be subprime in general and scheduled loan resets i particular.
Yesterday I was able to view a chart (alas, unavailable) showing a very interesting chronology of these resets. It showed an clearly obvious peak. This peak was hit in Dec. ‘07/Jan ‘08 — then they dropped of into the black abyss — a 75-80% drop. Seriously. This level more or less remained until the 3rd to 4th quarter of next year. In other words, the tsunami of resets has already happened. The market now has well over a year, and possibly 18 months before the next wave (much smaller) hits.
There are folks for whom even these historically low interest rates don’t matter. In fact, if 0% was available they still couldn’t refinance. No equity is no equity no matter how you slice it. Then there are the borrowers who can use the next 12-18 months to refinance before their loan resets. Or they can sell. Some, because of the way their loans work will be able to just keep on keepin’ on, ‘cuz the reset won’t put them in the poor house.
The system is working. Property will change hands, and lessons will be learned. As more and more buyers cast themselves off the fence, this process will inevitably gain speed. Before we know it, the cycle will have begun anew. Is the system about to serve us all up a big juicy burger? Hhmmm.
Let’s cut through this whole Bull/Bear stuff, OK?
It’s been my belief Bears have been doin’ their level best to ensure a significant downturn in the market. Duh. They’ve taken longer than I’ve predicted by many weeks now. Gotta give ‘em credit — they’re certainly committed. Each time they try and fail though, it’s another nail in what’s beginning to look like their latest coffin.
I realize I keep sayin’ this, but really, really, they can’t have more than a try or two left in them. Each time the Bulls emerge battered but ready for battle, the Bears lose a little more spirit. What I liked was how some of the Big Boys are buying large into the financials again. That means they’re being seen as a good bargain — never a bad thing, know what I mean, Verne? It also shows market confidence in a sector pretty black, blue, and bloody.
Take all the above info and apply it to your net worth — say in the five years. If you’re in an east coast market not doing as well as you know it should be, why are you sitting still? San Diego income property owners? I’m gonna come after you from a different direction today. Let’s talk perfect storm.
I’ve now seen four of these buyers’ markets. This is the first one however, that fits the pure definition of a ‘Perfect Buyer’s Storm’. Here’s the three storms, plus a bonus, combining to bring you the magic.
There’s quality inventory available in very attractive locations around the country Though a technically a buyer’s market — growth areas offer the best of both worlds Solid location, quality & available inventory, PLUS historically low interest rates Bonus: The ability to use prudent leverage in a buyer’s market completes the magic
In the mid-’70’s interest rates were 2-3 points higher than today. Leverage? Nothing approaching today’s opportunities. Same goes for the period ‘80-83. Rates even at the end of that buyer’s market were still easily in the double digits. Sure, relatively low prices, but at a high cost of initial capital expenditure. (love to write ‘expenditure’) I remember how excited I was in December of ‘83, when I was able to obtain a loan on 7 unit building under 12%. Thought I was pretty tough stuff for a few days.
As we emerged from the S & L Crisis of the early to mid-’90’s, interest rates (memory is cloudy here) were roughly in the low-mid 8’s.
Again, remembering even in ‘98 when a client was happy to get a purchase loan on a small apartment building for under 8%. The difference between that rate and 6% is over $4,500/year on a $300,000 loan. Back then that might as well have been a million bucks. It required a substantial down payment — about 30% if memory serves. His cash flow was, give or take, about a used Snicker’s Bar a month.
Of course he sold it for a huge profit just over four years later. But still, if he’d been able to borrow money at today’s rates, (25% less +/-) he’d of easily been able to acquire a small duplex in addition to his small apartment building. (6-8 units)
That’s why today’s scenario has me calling it my first Perfect Storm — Buyer’s Version.
It took me almost 40 years to experience this.
BawldGuy Prediction: Those for whom this opportunity was a reality will fall into two categories — those who jumped in and partook of the rewards laying on the table for the taking — and those for whom the words, “coulda shoulda and woulda” are not unfamiliar.
Make your move. And Bozeman? You’re gonna kick some major booty. 
This entry was posted on Thursday, April 17th, 2008 at 10:11 pm and is filed under Real Estate Investing, San Diego Property Owners, Real Estate Markets, Investment Lessons, Leverage, Predictions, Buyer's Market. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.