July 2007 - Posts
I've been meaning to comment on the real estate market, which is going up or down depending on which financial publication you read or TV news channel you watch. I'm not sure we're out from under the sub-prime lending mess, but real estate prices seem to be stabilizing and that's good news for homeowners everywhere.
One area that people keep asking me about is foreclosures. Specifically, some folks think it's a great investment opportunity. Let's take a look. According to the real estate data firm RealtyTrac, the total number of foreclosures on homes in the U.S. skyrocketed 90% from May, 2006 to May, 2007. In the latter month alone, foreclosures totaled 176,137, up 19% from April, 2007. Those numbers are showing no signs of slowing down. Those numbers should spell opportunity. "After a barely perceptible dip in April, foreclosure activity roared back with a vengeance in May," James Saccacio, chief executive officer of RealtyTrac, said in a statement.” Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year," Saccacio added. "Certainly not every community nationwide is seeing an increase in foreclosures, but foreclosed properties are becoming more commonplace and adding to the downward pressure on home prices in many areas." RealtyTrac said there was a national foreclosure rate of one foreclosure filing for every 656 U.S. households during May. California, which saw its foreclosure activity rise by 30% from one year earlier, Florida, Ohio, Arizona, Georgia, Michigan, Indiana and Connecticut were at the top of the list of states hit by foreclosure increases.
So how does the average Jane or John Doe get in on the foreclosure action - - especially at a time when so many opportunities are available in the foreclosure market? First off, getting involved is easier than you might think. Some people seem to think you need tens of thousands of dollars in down payments, pristine credit, and/ or a real estate license to get involved in real estate in general, and foreclosures in particular. Not really. In my personal experience – and I’ve made some good money in real estate -- foreclosures are both simple to understand and easy to execute as an investor. In fact, you can use as little as a few hundred dollars to buy foreclosure properties and resold it weeks later for a huge profit. Not always, but a lot of the time. Plus, the people you're buying from need to cut a deal. Why? Because, among other things, you’re dealing with motivated sellers, a negotiation atmosphere tilted in your favor, and a targeted market that is fairly simple to learn and understand.
Here’s the skinny:
- Great deals. There is no better way to buy a property at a deep discount. I’ve seen thousands of foreclosure properties that were offered for as low as 50 percent below market value.
- Extremely motivated sellers: With foreclosures, folks have to sell -- today. Consequently, with such a short deadline to sell before lenders step in and take over the property, sellers will accept a significantly lower price.
- Quick deals: Lenders are in the business of making loans and not holding real estate, they want to cut a deal - - and fast. And, because you got such a great deal on the property, you'll have little problem flipping it quickly and easily.
- Odds in your favor: Do your due diligence, i.e., knowing the local property values, and check out the house before you buy, you are well positioned to turn a profit with your foreclosure property.
- Rise in foreclosure listings: As I listed above, the amount of foreclosures is rising fast. Consequently, there are many free foreclosure listings available, many of which are updated very frequently. Focus on web-based foreclosure listings, local real estate agents, and local newspaper listings.
- Quick, easy credit: The banks and homeowners are looking for buyers for pre-foreclosure and foreclosure properties, even if some folks don’t have a great deal of upfront capital or strong credit. A bonus: because you can flip the house so quickly, you may not even need to take out a mortgage.
- Low or no commissions. Foreclosure investors normally do not have to deal with a real estate agent, thereby saving more money – how about several thousand dollars in commissions?
On the negative side, you really have to be diligent and investigate properties you may want to buy. And you'll also need some avenue to financing - - either yourself, another private investor, or a professional lender. Oh, and if you are the type who can't sleep at night when your money is at risk, foreclosures may not be for you. Otherwise, foreclosures have potential for smart investors. While the real estate market is strong in many areas, no corner of the market is stronger than foreclosures. Motivated sellers, low entry costs, great deals, and little or no commissions? What’s not to like?
I'm a big fan of great cities on the water.
New York, Boston (my home town), San Francisco and Miami here in the U.S., and Venice, Hong Kong, and Sydney, among others, overseas. I love visiting all of them.
That's why I want to talk about another port today, one that I believe holds a lot of financial promise over the next decade. It's Dubai and, as commercial investment centers on the water, it's getting bigger and better all the time
The United Arab Emirates, and especially Dubai, have skillfully groomed their strategically located ports for many centuries—a factor that has contributed to the country’s (and Dubai’s) growing financial strength. In 2006, the total trade exchange in the UAE (including imports, exports, and re-exports) reached Dh530 billion.
Dubai’s economy is growing at breakneck speed, and given its tax-free benefits to foreign investors, it’s more than likely to keep on growing.
There are many ways of profiting from the soaring growth in Dubai and the Middle East are now experiencing. It’s common knowledge that the entire region is one big commodity market and that the one commodity is oil. Right, but times have changed. Oil is a vital commodity that is getting more expensive because oil is not renewable. On top of that, oil is becoming increasingly expensive to produce. In sum, higher prices at the pump mean higher profits in oil-producing countries.
But that’s not the whole story.
These oil riches are opening doors for investors like us who want to invest in breathtaking real estate opportunities below market or who are looking to find unique tax-free profit opportunities. How? You see more oil revenues mean governments’ need fewer taxes and wealthy citizens demand higher priced goods and services. The current oil bonanza finances thousands of offshore businesses and billion dollar real estate projects, as these countries steer towards locative investment projects that we all can share.
A good example is the $1 billion dollar project called Riverwalk—a recent freehold residential development financed by an American company. The largest capital foreign direct investment (FDI) to Dubai, this mammoth project developed by Capital Partners, an American Private equity firm, is leading the way for other U.S. companies. Phase One will cover 1.5 million square feet of commercial and residential space in Dubai Internet City.
W. Jonathan Wride, Managing Director of Capital partners FZ, LLC, said, “The real estate, leisure and hospitality sectors are booming in Dubai, and will continue to be instrumental in securing regional investment; meanwhile oil & gas, power, water and industry continue to show huge potential.”
Right now, foreign investment in the Middle East stands at less than 1 percent of world FDI funds. While the GCC managed to secure $1.81 billion of FDI in 2003, $7 billion was invested in the wider Arab region. Of that money $480 million was invested in the UAE, largely in its capital city Abu Dhabi.
Wride adds, “A successful case study like Capital Partners has already encouraged American firms to look to the UAE for investment opportunities. With all of the right mechanisms in place, including the support for private sector initiatives, high levels of transparency, and a commitment to FTA initiatives, American companies will set up operations here.”
Proposed changes in Dubai’s Company Law, which currently limits foreign investment to 49 percent will also improve upon an already attractive business environment for foreign companies. Changes in this law will automatically invite more foreign investment, by encouraging more Dubai businesses (especially family businesses) to go public without having to worry about losing their influence over their companies.
Let’s get to some numbers.
Dubai’s GDP per capita ($46,200) soared higher than any other country in the world during 2006. To put that number in perspective, this rate of growth, 16%, doubled that of China’s 8.5% rate, which was previously viewed to be the fastest growing economy in the world. Looking at Dubai’s numbers in regional contrast –most other GCC states achieved less than half that amount of GDP per capita— US$13,500.
Oil and non-oil exports were up by 79% to Dh442 billion in 2005 from Dh 330.8 billion in 2004. Mohamed Ali Alabbar, Director General, Department of Economic Development emphasizes that the key to Dubai’s financial success is its focus on long-term sustainability.
"At current prices, Dubai's GDP has recorded a significant increase and is estimated to reach Dh136 billion in 2005 up from Dh118.4 billion in 2004," said Alabbar. "When compared to Dh 62.3 billion in 2000 and Dh 44.7 billion for the year 1996, this puts the accumulated annual growth of Dubai's economy in the last decade at among the highest rate of growth in the world."
But investors understandably nervous about the erratic nature of oil prices, there is reassuring news. The non-oil contribution to the GDP grew by over 14% in2005, to Dh128.4 billion from Dh 111.7 billion in 2004. When you look at the 1996 reports, non-oil was just 38.17 billion. So, non-oil contributions to the GDP rose by 236 percent over that ten year period.
Or course, rising oil prices have also contributed to Dubai’s growth rate, a sector which grew by 18% over last year’s Dh 6.7 billion—and will likely come to 7.9 billion this year. Yet, the director of Economic Development in Dubai pointed out that the “contribution of the non-oil sector was 94.20% in 2005.”
Here’s some regional context. In the UAE oil revenues contributed to over 30% of its real GDP. Oil only contributed 6.1% to Dubai’s real GDP. In part, this is due to Dubai’s surge in construction and real estate.
I'll spend a few blogs in further discussion on Dubai (consider this one a table-setter). In the meantime, do your own research on Dubai and see if I'm not on to something. Bet you I am.
Richard Moody, like most economists, had his eyes and ears tuned to Federal Reserve Chairman Ben S. Bernanke in April, 2006 as he testified in front of the Congressional Joint Economic Committee in Washington, DC.
Before too long, Moody knew that Bernanke’s words would be greeted positively, if not with outright relief, by bankers as the Fed chief indicated that the string of consecutive interest rate hikes may be coming to an end.
"There is ... the possibility that if there is sufficient uncertainty, that we may chose to pause, simply to gain more information to learn better what the true risks are and how the economy is actually evolving," Mr. Bernanke told the Joint Economic Committee.
Within minutes of Bernanke’s comments, US Treasury yields began steepening, indicating that the long draught was over and that banks could expect to begin making some serious money again.
“There’s no doubt that bond market yield steepened after Bernanke’s comments,” said Moody later that afternoon. “When he hinted that the rate hikes could be over that fueled a steepening of the yield curve. For the first time in a long while interest rates are looking more normal than they have been.”
Why all the fuss about an innocuous comment from a just-getting-his feet-wet Federal Reserve chairman? And why would those comments have bankers dancing in the streets?
It’s simple, once you understand how heavily banks depend on a longer yield curve to make money. The variance between short and longer-term rates can significantly impact a bank’s profit margins. Everything from collecting deposits to credit-card operations to securities trading usually suffer when the yield curve trends flatter.
“What banks do is to borrow money at short term interest rates and lend them at long-term interest rates,” explains Moody. “Ideally, they want their assets to be of a longer duration than their liabilities. But when the yield curve is flatter – meaning that short-term interest rates and long-term interest rates have drifted closer together, it makes it much harder for banks to make money.”
“That’s how they make money . . . on that interest rate spread,” he adds.
In 2006 and through 2007, that spread has been narrower, and thus less profitable for lending institutions. In fact, early in 2006, the bond market recoiled after a rare “inversion” of interest rate yields, when short-term rates crossed paths with long-term rates, which historically has signaled an economic recession.
“Historically, an inverted yield curve has been viewed as an indicator of a pending economic recession,” says Jim McWhinney, an economist with the financial advisory web site, Investopedia. “When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor and that the yields offered by long-term fixed income will continue to fall.”
When the yield curve flattens, or inverts, as it did briefly in 2006, profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates, such as community banks. “Likewise, hedge funds are often forced to take on increased risk in order to achieve their desired level of returns,” he adds. “In fact, a bad bet on Russian interest rates is largely credited for the demise of Long-Term Capital Management, the well-known hedge fund run by bond trader John Meriwether.”
As yield curves narrowed, banks paid the price. Wyomissing-based Sovereign Bank recently announced that that its first-quarter net income fell three percent, with net income down $141 million from the previous quarter.
In a statement, Sovereign CEO Jay Sidhu pointed to "the prolonged flatness to slight inversion in the yield curve," as the primary reason for the bank’s sluggish performance.
Narrowing yield spreads hurt bigger banks, as well. While Bank of American boosted its net interest income to $30.7 billion in 2005, primarily due to its FleetBoston acquisition, its net interest margin, plummeted 33 basis points to 2.84% at the end of 2005 as the yield curve flattened. Analysts estimate that the narrowing yield spreads cost Bank of America several hundred million dollars in earnings.
Traditionally, bank managers treat a narrowing yield curve the way they would a nasty case of the flu – they suffer through it and try to wait it out.
“That’s pretty much all you can do,” says Richard Elko, CEO of the fledgling Conestoga Bank, which is set to open its doors sometime this summer. “The art of running a bank is matching up the maturities of your assets and liabilities and that can’t always be done perfectly.”
“Consequently, it makes crafting that at much harder to do when spreads are tightening.”
While banks have smartly moved into non-yield curve impacting markets, like fee-based asset management and merger financing, the need for heavily depending on those areas as profit centers is dissipating. Banks are now getting to the point where bond investors see the yield picture as normal. These things go in cycles and we seem to have carried through to a new phase in the yield climate.
Seems like Ben Bernanke might agree.