Newsletter Fall 2009

FALL 2009

INSIDE THIS ISSUE Lender’s View page 1 Remember TARP? page 2 Strategies page 3 Summary page 4

CENTURY 21 NEW MILLENNIUM | THE PATH HOME

DEAR NEIGHBOR, “Real Estate is Great at CENTURY 21 New Millennium!” We greet every caller with this message. Each email we send concludes the same way. We now wear buttons which invite all to “Ask us Why” Real Estate is Great. Why, you ask? In our market, when measured against the last four years, and viewed relative to the rest of the country, Real Estate is indeed Great!

Amy DeBok Realtor® 6641-A Old Dominion Drive McLean, VA 22101

Office: 703-556-4222 [email protected] http://amy.debok.c21nm.com

Recessionary periods typically have a more moderate, less sustained impact on the Washington DC Metropolitan Area than the country as a whole. Make no mistake; it’s been very tough, but consider Detroit, where foreclosed homes are being sold in lots of one hundred for about fifteen hundred dollars per. Of course in Michigan, unemployment has topped seventeen percent and continues to climb. Unemployment in the Washington DC Metropolitan area is relatively stable at around six percent.

Compared to here, decline in Florida values have been considerably more abrupt and only now are beginning to show any sign of recovery. How bad? In many Florida markets, lenders are just not willing to lend on condominiums; period. While lending standards have tightened considerably across the country, for us, financing is available on all property types. The absence of financing severely limits the buyer pool but creates a significant opportunity for those with cash. Those qualified to purchase continue to have an incredible opportunity. Locally, our market has become much more competitive for buyers. Within lower price ranges, multiple offers are common and sellers should be encouraged by a trending increase in values. While in many areas, the majority of sales continue to be foreclosed or short sale properties, “like” properties are selling at considerably higher prices than they brought at the beginning of this year.

703.618.2601

GOVERNMENT INTERVENTION AND THE LENDER’S DILEMMA Most would agree that this recession began when

value adjustment of over fifty percent, it is clear how

deemed to have failed. Ordinarily, the government

the housing bubble burst. Certainly, this is why banks

exposed those holding the second mortgage are.

steps in, takes over the failed bank and completes an

became stressed. The steep decline in property

orderly liquidation. Because real estate values fell so

value is further complicated by preceding years of

Federal regulations require banks to maintain spe-

far, so fast, this time the potential for failure was

relatively lax lending standards with high loan to

cific capital ratios. Capital ratios simply measure the

systemic and even the largest institutions were at

value ratios. When leveraged, even a modest decline

relationship between a banks assets and liabilities.

risk. Government intervention via TARP legislation

in a home’s value will erase an owner’s equity posi-

“Mark to market” accounting regulations required

bought banks time but did not touch the “toxic as-

tion. This leaves the lender increasingly exposed

institutions to value their loans (assets) at their cur-

sets.”

when the homeowner is unable, or unwilling to pay.

rent market value. This valuation is likely considerably less than face value of the asset when acquired.

Few anticipated the potential for such significant

A myriad of government programs are now in place; each intended to encourage real estate acquisition

revaluing of real estate. The most common method

Why? In the case of a bank holding a twenty percent

and minimize inventories. Banks will not become

for applying leverage to a purchase was the

second mortgage on a home that is now worth less

fundamentally healthy until the value of their collat-

“Piggyback” loan. The purchaser would obtain a

than eighty percent of the purchase price, the value

eral, residential property, improves. The “toxic as-

conventional first mortgage for eighty percent of the

of this non-performing asset would be zero. In harder

sets” remain toxic and on the books of the banks.

home’s

hit markets, the value of the eighty percent first mort-

value.

They

would

simultaneously

“piggyback” a second mortgage for an additional

gage has diminished considerably as well.

twenty percent, or the balance of the purchase price. Considering that many markets have experienced a

Banks unable to maintain required capital ratios are

1

MARKET TRENDS | UNDERSTANDING THE BIGGER PICTURE

REMEMBER TARP...IS IT WORKING? TARP , the “Toxic Asset Relief Program” was an early, bold and large scale government intervention to avert the systemic failure of banks. It’s intent was to purchase “toxic assets”, (under collateralized and non-performing mortgage loans), and get them off the books of banks. Instead, TARP morphed in to a program using taxpayer dollars to restore bank’s capital ratios by acquiring equity stakes in undercapitalized banks. Subsequently, “Mark to market” regulations were relaxed, effectively lowering the standard a bank must meet to be considered compliant. While effective in stabilizing participating banks, TARP left the toxic assets on the balance sheets of at risk banks. This treated the symptom, not the disease. Banks holding nonperforming loans are no longer required to price these assets at “fair market value”, unless an event occurs which diminishes the face value of the loan. Foreclosure and short sale transactions are two such events, thus requiring banks to record the actual loss. Loan modification keeps the borrower in the home and in most cases, will allow the bank to keep the asset on their books at face value. Legislators expect TARP banks to place priority upon modifying loans rather than foreclosing. This expectation will have a limiting effect on inventory levels, support value restoration and improve the position of at risk homeowners and banks. Every dollar of home price appreciation is one less dollar of “toxic asset.”

DEFINING YOUR STRATEGY Real property is a commodity. Values are determined by the pool of ready, willing and able buyers; not sellers, not REALTORS®. The greater the number of homes on the market, the more

property is only realized when sold. We are well off the bottom in most regional markets and

pressure buyers will impose upon prices.

We recently represented a seller that had little interest in trying to keep their home. When we listed the property as a short sale in April, comparable sales suggested a value in the $130,000 range; the seller owed $195,000. We obtained

Real estate remains a local business. The economic challenges we face are global. Government programs intended to stimulate recovery are not surgical. They apply the same prescription to our market as they do Detroit and Florida. Obviously, we are much more prone to recovery. Consider the freefall we saw in the stock market; Index values declined over fifty percent from their high, but have now rebounded over fifty percent from the lows. Unless sold, the value of these assets are today’s market value. The same principle applies to our homes. Any depreciation or appreciation in the value of a

trending is positive.

and presented an offer to the bank for $135,000. To the banks credit, they offered the seller a loan modification, fixing their payment at 31% of the seller’s income for the term of the loan; the seller declined. In July, the bank declined the short sale because the most recent sale of the same townhome was $195,000 . This seller has now been foreclosed upon and the property is under contract with a list price of $205,000. The seller

Sustainable economic recovery requires that real estate values improve across the country. The fundamental cause of this recession is the decline in real property value. Government will continue to pressure lenders to modify loans rather than foreclose. Inventories will continue to shrink. Buyer side confidence has returned and demand continues to swell. We will benefit exponentially from Government Initiatives necessary to restore values in Detroit and Florida. If considering a purchase; do it now. If considering a sale, select your representation carefully and evaluate every alternative before acting. Values will improve and staying the course may be the best answer. I know; a REALTOR® doesn’t often say that.

made a mistake.

SALES VELOCITY

VALUE TREND

Obviously we have turned the corner in terms of the number of homes for sale as well as the number of homes being sold each month. The trend will continue to create a more competitive market for buyers, further diminish inventory and impose upward pressure on prices .

Declines in inventory and increased buyer activity are having a positive impact on values. This is good news for sellers, banks and taxpayers. Even modest gains bring some sellers back to a positive equity position

2

and reduce the toxicity of non-performing loans for banks.

This Orlando Condominium sold on July 6th, 2005 for $206,200. Following foreclosure, it was listed this summer for $38,900. It is now rents at $950 per month on an annual lease. MetroWest, an upscale Orlando golf community is located within twenty minutes drive time from the entrances to Walt Disney World, Universal Studios and Sea World. Location, location and location are the three most important aspects of real estate!

THE BUYER’S OPPORTUNITY | IT’S ALL ABOUT TIMING

MANAGING YOUR PORTFOLIO Earlier this year, we detailed in our newsletter a property in Manassas Virginia that sold in January for $120,000. The acquiring investor then rented the home for $1,500 per month. Three years ago that property sold for $430,000. Today, the market values that property at nearly $200,000. Many of our clients successfully added to their portfolios with

Lenders in many parts of Florida are not making loans secured by condominium properties. This lending standard limits the pool of qualified buyers, minimizes demand, and therefore significantly diminishes their value. When buyers are able to again secure financing, demand will surge and these assets should outperform the overall market.

similar purchases. Obviously, the Washington DC Metropolitan area is well on it’s way to recovery. There do, however, continue to be significant opportunities in distressed markets across the country. Florida, and other east coast resort areas, are popular retirement destinations and vacation prefer-

Many of our clients view this market cycle as an opportunity to secure retirement, investment or second homes at distressed pricing. The potential for capital gain is significant as are cash flow potentials when acquiring at these values. It’s very likely much more fun than owning IBM!

ences for those that reside in the Mid-Atlantic region.

ACQUIRING PROPERTY WITHIN YOUR RETIREMENT ACCOUNT There are stringent regulations that apply to owning real property within your self directed qualified plan. Obviously, we recommend that you consult your legal and tax professionals if considering this strategy. The concept, however, is fairly straight forward. Just as you choose which stocks and bonds you hold within your plan, you direct your plan custodian to acquire the property you select. The acquisition cost and all expenses must come from funds within the plan. If you choose to rent the property, all income must come back in to the plan. Using the condominium above as an example, let’s assume your plan purchased the unit for list price,$38,900, plus closing costs, paying cash. The plan’s monthly expenses for taxes, insurance and condomin-

ium dues are $550. Your plan then rents the unit for $950. Since all expenses and income stay within the plan, your plan now earns $400 per month of $4,800 per year; tax deferred. When you sell the property, the capital gain stays within the plan; tax deferred. If held within a Roth IRA, the income and capital gain are tax free. The annual return exceeds 10% without regard for a potential capital gain when selling at a later date. Owning real property within your qualified plan adds diversity to your portfolio. Real property has little potential to become worthless and today’s prices are attractive. While somewhat unconventional, the strategy itself is compelling. Please call me if you wish to explore this opportunity further.

3

CENTURY 21 NEW MILLENNIUM | REAL ESTATE NEWS

SUMMARY If you are considering a real estate transaction, thorough analysis and competent representation are essential. We are in a transitioning market. There is potential for profit, as is there risk of loss. If we understand the underlying facts, we can continue to make good business decisions; logically and without emotion. I am a real estate professional and accept responsibility for keeping my friends, neighbors and business community informed as to all aspects of things affecting the real estate portion of their holdings. If you are currently listed for sale, this is not a solicitation. If you have a real estate question, I will be happy to answer it, or find the answer. If you have a real estate need, I will appreciate an opportunity to compete for your business. Our team is very good at what we do...our results demonstrate that. Don’t settle for less. Sincerely,

Amy DeBok Realtor®

6641-A Old Dominion Drive McLean, VA 22101

Amy Amy DeBok

Office: 703-556-4222 [email protected] http://amy.debok.c21nm.com

703.618.2601

6641-A Old Dominion Drive McLean, VA 22101 Cell: 703-618-2601 [email protected] http://amy.debok.c21nm.com