Wednesday, June 24, 2009

The White Paper - Commercial Real Estate Update – (It Never Ends)

First, Extended Stay Hotels filed for bankruptcy, now its Red Roof Inn that defaulted on their mortgage debt last night. In addition, if you look at hotel occupancies in Asia, they’re at 35%. Can their defaults be far behind? Oh, by the way, the brains behind the Red Roof Inn deal, of course, was the same financial group that’s trying to justify a 50% increase in salary for top executives. In my opinion, another green shoot that has become a weed.

Some media “experts” are advising that the recently bailed out financial groups are now “the buys of the century.” Didn’t they say that before?

Caveat emptor – buyer beware!

Till next time,

Bill

P.S. – Here comes the oversold bounce in the market, and end-of-quarter window dressing. Let’s all put a smile on our face.


>>>>>>>>>>>>>>>>>>>>>

A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Tuesday, June 23, 2009

The White Paper - Housing

A few years ago, when I first started writing about housing and the problems that were developing, most people thought the word subprime meant a prehistoric species from some long ago period. But quickly, it was learned that subprime meant a mortgage loan given to someone with questionable credentials, and an even more questionable ability to pay the loan back. We also learned that if you could breath, you qualified, and the bankers, mortgage brokers, and any one else associated with housing, including politicians, were more than happy to help you get into the house of your dreams. Unfortunately, you know how the story played out. The Bible says a house built on a foundation of sand (debt)…well, you get the idea.

Now the pundits tell us we are at the bottom. Housing, both pricing and sales, are smoothing out, and in the not too distant future, the real estate asset class will once again be the catalyst for great wealth. Many of you believe this story. DON’T!

Subprime was just the first shot in the salvo of creative mortgage financing. In fact, the Federal Reserve and the U.S. Treasury may have expended all their tools on the mortgage industry’s opening act. Consider this scenario. Imagine if you sat down to a five course dinner, thinking all that was being served was the first course. You gorged yourself, feeling satisfied, and actually contented. So what happens when course two, three, four, and five, are served? Uh oh! For the mortgage markets, the next course is the option adjustable rate mortgage. (ARM) The problem is not interest rates or “resets.” The problem is “recasts,” which usually happens when you either reach 125% of the original loan balance on a negative amortization basis, or 5 years pass, whichever comes first. These loans were pushed (I mean sold), as “affordability” products to people who could not afford to buy the house they wanted. The lender expected the borrower would either re-finance with a new ARM, or sell the house before the recast. Worst case, the house would appreciate faster than the indebtedness, allowing them to pay it off. It didn’t happen. Appreciation occurred, but the borrower with the encouragement of the lender, refinanced again and again, pulling money out to buy SUVs, kitchen make-overs, or once-in-a-lifetime vacations. All things that gave a false sense of growth to our economy.

The pundits, including our political administration, are saying that if they can just keep interest rates low, all will be well. Au contraire. Here’s an example: For a $750,000 house purchased five years ago, even if you get a 4% interest rate based on current “adjustable rates,” you must amortize the 4% over the remaining 25 years. (average) The house is only worth $400,000 in today’s market, and could go lower. So the possibility to refinance into a conventional loan is zero, unless you have the $350,000 difference just “lying around.” Also, your payment goes from $1,000 per month, to $3,945.62, a near quadrupling overnight. Can you say…walk away.

Here’s more bad news. Most of these billions of dollars of mortgage recasts have not happened yet. They are scheduled for the latter part of 2009, 2010, and 2011. Keep in mind, the financial institutions almost blew up when a small portion came due. What happens when the majority shows up on the doorstep? Couple this with alt-a, prime, and agency paper, and you have the makings of one good brouhaha, making the zombie banks of Japan seem like the life of the party. Factor in the inevitable collapse of highly-leveraged traded real estate investment trusts, and you have a story line that could only be scripted in the mind of Steven King.

The collapse of real estate is not near the end. In fact, in the parlance of musical theater “the overture has just concluded, and the curtain is about to go up.”

Till next time,

Bill

P.S. - Next: Emerging markets and China.


>>>>>>>>>>>>>>>>>>>>>

A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Monday, June 22, 2009

The White Paper

Two years ago, I wrote a lengthy white paper (one man’s personal opinion and exposé) on the significant topics confronting all investors. Given both the economic and political crossroads that we find ourselves at today, it would seem that now is the perfect time for another WHITE PAPER. Topics to be discussed will include housing, (un)employment, healthcare, emerging markets (and China), taxes, and the stock market, among others.

Stay tuned, and be ready to take notes. Class will be in session shortly.

Till next time,

Bill


>>>>>>>>>>>>>>>>>>>>>

A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Thursday, June 11, 2009

Headlines as We Approach the Second-Half Recovery

“The Federal Reserve lost $5.25 billion in the first quarter on the securities they acquired with last year’s bailouts of Bear Stearns and insurer AIG, according to a report issued Wednesday.”
- Reuters

“More than 600,000 seniors are delinquent in their mortgage payments, or already in foreclosure.” - USA Today

"The National Delinquency Survey from the Mortgage Bankers Association found foreclosure activity was at an all-time high in the first quarter of 2009, when the delinquency rate, which excludes homes already in the foreclosure process, hit 9.12%.”
- Newsmax.com

“The number of first-time claims for state unemployment benefits fell 24,000 to 601,000 in the week ending June 6th, the Labor Department reported Thursday.”
- MarkewWatch.com (Stated another way: “601,000 new people filed for unemployment, bringing the four-week average of continuing claims to a record 6.75 million people”)
- Bill Tatro

“U.S. sales of retail stores increased 0.5 % in May, but much of the seasonally adjusted increase reflected higher gasoline prices.” - U.S. Commerce Department

“Watches synchronized? Good. Because three weeks from today, the second-half of the year starts. That’s when the economic recovery is supposed to get underway, according to Bernanke, Geithner, Obama, Cramer, Kass, Kudlow, economists, money managers, and other associated pundits.” – MarketWatch.com

Once again, it’s lonely being on the other side of the argument.

Have a nice day.

Till next time,

Bill


>>>>>>>>>>>>>>>>>>>>>

A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Thursday, June 4, 2009

Same Old, Same Old

Who am I to disagree with National Association of Realtors chief economist Lawrence Yun, who said: “We expect greater activity in the months ahead.” This quote came this week after it was announced that the number of U.S. homebuyers who agreed to purchase a previously occupied home in April posted the largest monthly jump in nearly eight years. The news immediately made the talk-show circuit. It was declared the housing market bottom was in, and that price appreciation could be following right behind. Unfortunately, having observed this declaration many times in the past, I viewed this commentary with strong doubt.

Housing in many parts of the country is bottoming for three reasons. First, it’s the normal Spring-early-Summer selling season. Second, median prices are down in excess of 40% over the past two years from the peak, thereby making the LOW-END affordable. Third, and perhaps most important, foreclosures have been cut dramatically through moratoriums, thereby reducing supply.

However, the moratoriums have ended, short-sales are in disaster, and the number of pending foreclosures is massive. The backlog is gaining ground everyday, and could eventually become overwhelming. Notice of Defaults are at record highs (sorry, green shoot enthusiasts), and Notice of Trustee sales are back to nine-month highs. These escalating foreclosures are not only from the LOW-END (sub-prime alt-a), but also up to several million dollars in present value (prime.)

The latest housing numbers are showing strength in the ultra-low to mid-low range. As the foreclosures escalate in the upper range, the imbalance should crash the mid-to-upper priced properties. Early season hard data has already proven this. However, false bottoms with cash bonuses, and have-to sales, could prove illusory.

How will this play out? The red-hot LOW-END housing market will ultimately cool, as participants cannot, or will not, step up to the next level. For years, move-up buyers have been the life-blood of home sales, but now they are becoming extinct. That leaves the first time buyers to carry the bulk of the sales. Good luck on that one since all the incentives are being used up now. The mid-to-upper bands could experience additional declines of 40%. Investors who have been buying all the way down could get hurt on two fronts. First, falling rent rates, making their properties less attractive, and second, greater risk of default as supply enters the market.

It could get worse. A few years down the road all the loan adjustments and modifications which have been used to postpone the inevitable will start coming to fruition. These include teaser-rates, leverage, 1.5 times LTV, and balloon adjustments. You might call it Mortgage Implosion Armageddon Part II.

Remember, the demise of the LOWER-END of the housing market created ALL the economic havoc that we are currently experiencing. What happens when the MID-TO-UPPER housing market experiences the same precipice fall that happened in 2007?

You ain’t seen nothin’ yet.

Till next time,

Bill


>>>>>>>>>>>>>>>>>>>>>

A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.