First, force lenders to relax their standards in order to make everyone a homeowner, whether they have a down payment, good credit and a steady job – or not.

Once the loans start going bad because the people can’t pay, launch a massive PR offensive that casts defaulting borrowers as victims and banks as villains. Encourage more defaults in this way. Keep this going relentlessly for five years.

Launch a major legal and regulatory offensive to block foreclosures and encourage more borrowers to default by providing government mandated benefits if they do. Let the log jam of distressed properties pile up to the sky.

Sue the villains and extract billions to spread around to the victims. Reward defaulting borrowers with cold cash to reinforce that the stigma of mortgage default has been completely removed.

Create a government program to convert the massive log jam of foreclosures into rentals. Offer institutional investors a sweetheart deal with discounts and attractive government financing. In return, require investment funds to convert the foreclosures into low income housing and Section 8 (government subsidized) housing 

Further reward the foreclosed borrowers with rent controlled housing in the same neighborhood where they owned. (Maybe even rent them the same house they defaulted on. That would be perfect!)

The (Intended?) Results:

Lenders will exit the home mortgage business. If they can’t take foreclose, they can’t lend. If they can’t rely on a borrower’s sense of obligation to repay, they can’t lend. As the basic social contract of personal responsibility to repay debt is broken, all historic underwriting algorithms become obsolete. They can’t lend.

Rental rates will be undercut by government rent controls in cities with a high concentration of foreclosures. This will drive private investors out, and cause home prices to decline as it become much cheaper to rent than to own in those markets.

Create the largest government controlled and subsidized housing project in American history, complete with a million loyal voters.

Brilliant!

I covered some of this on radio recently…

Greg Rand discusses a wide variety of topics:”Why didn’t the Great Recession happen ten years ago today?”, areas of interest for investing, lending standards, Jacksonville, FL and the concerns of negative equity on investments.

There are a lot of ways to invest your money, but which strategy is the right one? Think of the various investment approaches as existing along a continuum. At one extreme we have day traders and at the other extreme we have wealth managers.

Day traders want almost instant returns and are willing to take greater risk to get it. They also try and trade on the vibration of the market. Whether a stock is trending up or down, whether the company is growing or shrinking, is less relevant than whether the price is volatile. Find a quirky situation that causes price fluctuation and ride the roller coaster. It works, as evidenced by the number of successful hedge funds that create billions in wealth based on this concept.

Wealth managers are on the other end of the spectrum. They accumulate assets. Slow and steady. Boring but reliable. The objective is to build a large pile of money over a lifetime. It works, as evidenced, by the number of individuals who secure retirement with this approach.

Most people find themselves seduced by the immediate gratification of the former and simultaneously know they belong in the latter.

In real estate, the equivalent to day trading is buying a foreclosure and flipping it. People do make money doing that, but it is more of a trading business than an investment strategy. Unfortunately, too many investors fall into this approach by default. I’m not sure if it’s simply human nature, or if all those late night infomercials have made an impression. The bottom line; it is not the way most real estate wealth is created.

In truth, day trading is a total mismatch for the housing market. The pace is wrong. The expectations are faulty. It’s like driving a dragster in the Indy 500. It’s like asking a sprinter to run a marathon. It’s like trying to microwave a pot roast. It’s just not a good fit.

Wealth management, the concept of building something huge over time, is a perfect fit for housing. More and more of the investors I meet get this. They are not trying to buy low and sell a little higher. They are trying, and succeeding, at getting wealthy over time.

They understand a few key fundamentals:
• Buy low and sell high by timing your buys when the market is down and selling when it is up.
• The American economy will come roaring back at some point.
• People who own a bunch of houses are rich.

Patience has become a virtue again. This is a very good thing, so don’t worry that your buy-and-hold business strategy is a little boring. Boring is the new sexy.

Please follow the link below to take a brief survey on your attitude toward real estate as an investment. I will compile the results and post them here. Thanks!

CLICK HERE FOR THE SURVEY

greg

Do you think a few billion dollars of fresh new demand in the housing market would help resolve this housing crisis?

More than any government policy, advocacy campaign or uptick in the economy, a massive untapped reservoir of buyer capital will stabilize prices, which in turn has a cascading effect on all other troubled aspects of our marketplace.

Upward pressure on prices due to a rush of new demand causes consumer confidence to improve by putting optimism on display. It causes the next phase of negative equity to get stunted because prices stop falling. It burns off the shadow inventory by literally buying it up. It maybe even causes the federal government to stop getting involved with surgical strikes that cause more harm than good, by proving that the free enterprise system actually solves market problems. This is simple. We need buyers, and REITs will be the biggest buyers in industry history.

But why now? REIT’s have been in existence for decades, and there are exactly none that are invested in the single family home sector. Why are they so interested all of a sudden? The answer is very simple:

1. Upward pressure on rents. 4 million new rental households have been created during this recession, plus mortgages are harder to get than in previous years. All of this translates into strong demand for rentals, and increased rental rates.

2. Normally a REIT would play the housing crisis by investing in large multifamily apartment buildings. This is in their wheelhouse. It’s commercial real estate with a residential end use. They are comfortable with that. BUT, values of large multifamily buildings rise as rents rise, diminishing the opportunity to produce great returns for the owner.

3. Single family homes, on the other hand, are not valued based on their rent rolls, CAP rates and internal rates of return. They are valued based on comparable sales, which are still declining in many markets.

The end result is a rare combination of upward pressure on rents and downward pressure on prices, but only in the single family, small multifamily and condo markets.

Morgan Stanley’s recent report Housing Market Insights – A Rentership Society details this phenomenon. One of the study’s leading authors, Oliver Chang, was interviewed recently on CNBC.

The main things holding REITs back are (a) some laws and regulations that need to be ironed out, and (b) a field operation that can select, acquire, rehab, lease and manage the portfolio.

Those real estate companies and individuals who ready themselves to be part of that infrastructure will see their business grow dramatically in the next few years as the competition among residential REITs heats up. This is bigger than new construction. Bigger than corporate relo. Bigger even than distressed property. This is billions in transaction volume. Do you think it is worth preparing for? If you are reading this in January 2012 and take action, you are ahead of the curve.

Writing a book is cool. You learn the publishing process. You challenge yourself to empty your brain of everything relevant on a subject, and infuse it with as much original research as you can. When you are done, you are left with the same feeling a painter has when he first turns the canvass around and shows the world what he’s been working on. In that moment, all you can think is, “Are they going to cheer or  barf?”

Then the book goes on Amazon and you get a chance to have that same feeling over and over, when you check out your newest reviews. (1=barf, 5=cheer). What’s so interesting about it, once you get past the butterflies, is why people who love it love it, and vice versa.

The bad reviews I received for my book Crash Boom! (there are only 2 so far) taught me something. They both didn’t like the book for all the right reasons.

The complaints seemed to be focused on my lack of a silver bullet – guaranteed to work – get rich quick technique or trick. I wasn’t able to satisfy some readers’ need for a secret that would help them find a property they could practically steal. In other words, the reason there are always people selling you get-rich-quick-with-no-money-and-no-credit programs is that there is an audience for immediate gratification products.  If someone is going to give me a bad review, I am glad these are the reasons.

That book, and my entire philosophy about building wealth in real estate is centered on the idea of building wealth, not stumbling on it by pure luck (or someone else’s bad luck). If you want real wealth, the kind that changes your grandkids’ lives, you need to think, plan, execute and be patient. Professional investors who are at the top of this craft build portfolios, they don’t make quick scores.

This process begins with picking markets, and asking a few simple questions: Where are people going to want to live for the next 20 years? Sounds like commons sense, and it is. Where are the demographic trends pointing? Where are the migration patterns ending up? Where is the government run in such a way as to attract companies and their employees? Where are people happy because they live in an awesome place, and will likely tell the world about it and attract more people who want to be happy like them?

If you can find such a place (maybe you live in one right now), then all you need to do is find a property that can be rented for more than the cost to own, and sit on it for a decade or more. If you can do this once over the next couple of years, it will change your life…in 15 years. If you can repeat it several times during this downturn in the market, it will change your grandchildren’s’ lives.

[This image shows the migration patterns to (black lines) and from (red lines) Charlotte, NC. Click the image to play with this tool, courtesey of forbes.com]

You’ve seen the headlines. The combination of lower prices, increased rents and a weak dollar are drawing investor capital from all around the globe and funneling it into American Housing. According to NAR, foreign investment is US real estate has increased by 20% in the 12 months ending march 2011, totaling $82 billion in just one year. What’s missing in most of these stories is why.

Why are overseas investors, who are standing thousands of miles away with little if any personal experience in US real estate, pouncing on this opportunity? Low prices and great exchange rates don’t explain it. If you hear of a stock that has plummeted, would you buy it based on that fact alone? Or would you want to understand the fundamentals of the company behind the stock. What do they produce? Who are their customers? Why should you believe this investment will pay off, as opposed to seeing the new low price as an accurate reflection of the value of the company? In other words, if it’s a piece of junk, you wouldn’t care how cheap it is.

I would suggest that the thousands-of-miles-away perspective is exactly right for the American housing market. What is exactly wrong is the short attention span, immediate gratification, “what have housing prices done this month” mentality that we seem obsessed with.

Too many people subscribe to that “throw the baby out with the bath water” attitude and can only focus on what has happened in the past five years, and they ignore what happened for the 85 years prior.

Stand back, like an overseas investor, and what do you see?

-          America is still the best place in the world to bring your work ethic and your dream.

-          America is still the best place in the world for entrepreneurs to bring their ideas.

-          America is still the best place in the world to acquire personal property and know it is protected by law.

-          Even though our politics are rabid these days, we don’t get stuck with a government we don’t like for very long.

-          People who are born here want to stay (except for Johnny Depp).

-          People who aren’t born here want to come here by the millions.

-          All of us want to live indoors, therefore demand for housing can be counted on for the next century.

Overseas investors get it because they see the stark contrast between the US and much of the rest of the world. They can’t take for granted what they don’t have.

Compare them to some people in our country by doing a little experiment. Put a video on YouTube that dares to profess a positive outlook for the housing market, and get ready for a backlash by a bunch of angry, bank hating, no perspective, “I love my computer, Ipad, free email and YouTube, but I hate capitalism” types. They are too close to the situation to see it clearly. They are safe, comfortable and anonymous, and therefore free to be angry and belligerent. They say “Because some people got hurt in the housing market by doing it wrong, all real estate is wrong”. They will look back, having missed the opportunity of their lifetime, and find someone to blame.

Don’t listen to them. Instead, watch what foreign investors are doing and follow their lead.

Residential real estate is not rocket science. We know that this housing crisis is:

1. Explainable – bad lending, mad speculation, wild expectations, government meddling;
2. Isolated – bad mortgages, negative equity, strategic default, government meddling;
3. Temporary – demand for housing always catches up to supply eventually.

Anyone with any experience and perspective will agree that this market will recover over the next 10 years, but what will this particular recovery look like? Since the root of the problem was unprecedented, the solution might be as well.

My belief is that renters are going to solve the housing crisis.

Homeownership rates have fallen by a few percentage points, which has translated into more than 4 million new rental households in just the past few years. According to the Census, 1.4 million between July 2010 and June 2011, so this trend is accelerating.

As a result of that, rental rates are growing at more than 5% per year, and that trend is accelerating.

As a result of that, investors are pouring capital into American Housing with a long term mindset, and that trend is kicking into hyperspeed.

This crisis will not be solved by enticing home buyers. Their confidence is waiting for unemployment to come down, and government to act responsibly. That could take a while.

But investors are confident right now! Why? Because they see the big picture. Rental demand = stable cash flow. So what can be done to encourage them?

How about eliminating archaic waiting periods on investors who want to buy foreclosures? How about eliminating waiting periods for investors who paid cash  and want to tap it with a refinance? Today they have to wait months to put that money back to work. Why not eliminate the overall bias against investors in FHA, Fannie Mae and Freddie Mac. just require big down payments to make it safe to lend, and lend.

Better yet, keep your eyes peeled for a private sector player to seize this opportunity to create America’s first national investor mortgage brand. The estimates are that a half a million investor loans close every year, and who owns that niche? No one.

The Martial Arts teaches you how to use the weight and momentum of your opponent against them (or so they say in the movies). This is the same thing. This drastic increase of rental demand is a by-product of the foreclosure crisis. Use it against the crisis by turning it into positive cash flow investments for those willing to be confident and take a risk in this environment.

Burn off that shadow inventory and create housing options for newly minted renters, which will in-turn stabilize rental rates, and everybody wins. Good credit renters and buy-hold investors will be the heroes at the end of this saga.

Everything!
The construction of the Panama Canal was completed in 1914 and became the key shipping conduit to connect the Atlantic and Pacific Oceans. A ship can knock over 13,000 miles off their trip by cutting through the Panama Canal instead of the long slog around the southern tip of South America at Cape Horn.

Throughout the last century, container ships were built to specifications that would fit (barely) through the canal. That standard sized ship, knows as “Panamax” has now been dwarfed by the “post-Panamax” ships that can carry 5 times the weight; a major advancement in efficient transportation of goods from the Far East. The only problem is they can’t fit through the canal. So, they have to either go all the way around South America, traverse the dangerous waters of the Straight of Magellan, or drop off their cargo on the West Coast of the U.S., like in Long Beach, CA and have it put on trucks and trains to get to the east coast. That’s all going to change in 2014.

A century after “The Big Ditch” was navigated by its first cargo ship, the Panama Canal will be widened to accommodate the post-Panamax mega ships. No longer will the choice be to go all the way around the southern tip of the Americas, or drop the cargo off in California and lose all that efficiency. Starting very soon, millions of tons of cargo will make their way through the canal and up I-95 to the greatest concentration of wealth and population on Earth: The Northeast US.

Where do you suppose they will hit landfall? Jacksonville, FL, Savannah, GA and Charleston, SC.
The first three deep-water ports on this side of the canal.

Job growth and the resulting household creation that follows such a shift in trade and commerce are inevitable. In fact, Jacksonville should see its population double in the next ten years as this trend takes hold.
All three of these cities enjoy a fantastic quality of life, low cost of living and lifestyle that make them attractive all on their own. With a surge of high paying jobs to add to their appeal, investors should be swooning. And they are.

Check out my recent radio interview below with Ed Forman, President of Watson Realty Corp in Jacksonville, FL as he explains the appeal, and the rush of investor activity that is taking place.

Remember, investing in real estate starts with picking the market. The old adage “all boats rise with the tide” is especially apropos here. Watch where the boats go, and place your bets.

A special thanks to Jim Heffernan of Capstone Residential for cluing me in to the Jacksonville-Panama Canal connection.

Greg Rand discusses a wide variety of topics: the federal government housing programs, areas of interest for retirement, Tampa Bay Housing Market, and the disadvantages/advantages of short sales.

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