Global Financial Crisis

[propertymanager]

Just two weeks ago, the DOW hit an all time high and I heard all the talking heads say that we were headed to 18,000!  The credit crunch was just a side issue without legs, because the economy was doing great. 

Today, I turned on CNBC and the headline is GLOBAL CREDIT CRISIS!  It's amazing how things have changed in only two weeks.  People all over the world must have finally read Pete's post about a credit crunch.   I wonder what's going to happen when they realize that real inflation is many times the 2.7% the government has hyped, or that oil is at an all time high, or that the US Dollar is just about worthless?  Worse yet, what happens when the American middle class discovers they are broke and stops spending?

Mike

[NJREstudent]

what happens when the American middle class discovers they are broke and stops spending?

This is the straw that may break the camels backs.  Once middle class americans realize they dont really have any disposable income, and stop spending, the relatively good corporate eartnings we have seen will halt.  Good corporate earnings are a good indicator of consumer sentiment and the economy as a whole.  The disposable income created by LEVERAGE will cease to exist. 

Not to toot my own horn, but i called equities going down when they hit a high.  What do i think from here?  More downside to equities/real estate/economy. 

One more thing... Bear Stearns in the news again.  Another Hedge Fund is halting withdrawals, which signals there is a good chance of going under.  Whats interesting to note about this one?  Well, its an Asset Backed Mortgage Fund-- NOT subprime.  So what?  Means that this is possibly not "contained" and can spread to other sectors. 

[petemfa]

The BEST part of this whole show for us is the $900 BILLION in ARM's set to re-adjust in 2008!!!!!!!

Think about it.......the mess we're in now was partially created by the re- adjustment of "JUST" $200 billion in 2007.

NOTHING slows consumer spending more effectively than watching FORECLOSURE signs pop up like weeds in YOUR neighborhood!

I think (other than readers here)  very few people grasp the severity of what this country is facing right now.  The implications can not be understated. 

The little guy is ALWAYS the last to see it coming.  Add to that ALL this consumer DATA that Wall St. is looking at is LAGGING info. (meaning it's old news) and the stage has been set for these people to get HAMMERED.

I've said it before and I'll say it agian.  WINNING in this market will amount to PRESERVING your CAPITAL.  When Wall st. goes, and it will, the housing market is SCREWED.   No better way to tighten lending than the SOURCE of that lending losing BILLIONS.

[motivatedceo]

LOL - that is funny Mike. I just ignore silly comments like that in the news. Remember October 16th 1987? On "Black Monday" the DJIA plunged 22.6% in one day ----- the worst drop since the 1930s.

But guys like you & me...we have no worries. We're smart enough to not be affected by minor fluctations in the economy. I know you are that smart too - as I have read all your postings and your book. Your a great businessman.

Like you, I make cashflow - tons and tons - and I'm good enough at what I do [managing my business & investments] I'm never worried.

[motivatedceo]

I think it's great. Let those ARMs go up. Those adjusting ARM loans will create more wealth for us real estate investors, when we buy those same houses for $0.50 to $0.75 on the dollar!
   

The BEST part of this whole show for us is the $900 BILLION in ARM's set to re-adjust in 2008!!!!!!!

Think about it.......the mess we're in now was partially created by the re- adjustment of "JUST" $200 billion in 2007.

NOTHING slows consumer spending more effectively than watching FORECLOSURE signs pop up like weeds in YOUR neighborhood!

I think (other than readers here)  very few people grasp the severity of what this country is facing right now.  The implications can not be understated. 

The little guy is ALWAYS the last to see it coming.  Add to that ALL this consumer DATA that Wall St. is looking at is LAGGING info. (meaning it's old news) and the stage has been set for these people to get HAMMERED.

I've said it before and I'll say it agian.  WINNING in this market will amount to PRESERVING your CAPITAL.  When Wall st. goes, and it will, the housing market is SCREWED.   No better way to tighten lending than the SOURCE of that lending losing BILLIONS.

[DCS_TX]

Hi all,
 Just read that 2 Bear Stearns hedge funds have filed Ch. 15 BKCY last night, on top of the 3rd fund that's halting redemptions today, as mentioned by NJREstudent.

 I posted a link a few days ago to a FoxNews.com article referring to the "Subprime Katrina" storm infecting the larger economy. Below at bottom is another link from the same source re: "Is This The 'Big One?'" Deals w/ the huge issue of derivatives creating leverage and the squeeze play on the credit markets.

 Mike is right re: the real inflation number is way higher than what's widely reported. The number we hear is a "political" number as it has implications for debt and entitlement spending limits. The Fed is at a helluva point in that it should raise rates to ward off real inflation and defend the sagging dollar, but lower them to ward off a recession. If it does nothing, stagflation such as in the 70's might rear its ugly head.

 REI-wise for me...Am sitting tight and not intending to do anything unless and until an absolute steal is to be had, as in 50% and preferably lower discounts. I have a feeling steals won't be terribly uncommon - even in San Antonio - w/in 6-9 months. Pete, what say you?

http://www.foxnews.com/story/0,2933,291590,00.html

Thanks,
David

[petemfa]

I say at THIS point in the correction, the longer you wait the better the deals will be.

The stock market, as we've seen today with the likes of Beazer Homes volatility, can drop like a rock VERY QUICKLY.  Homes on the other hand are NOT VERY liquid.  This means housing prices drop like a ballon with a leak.  It is a slower price correction. 

With this in mind, remember a lot of people still think I'm wrong here.  I know a LOT more people now see the correction for what it is.  But the real drop will occur when EVERYONE finally realizes that there is new reality in real estate.

Patience.

[Rich_in_CT]

REI-wise for me...Am sitting tight and not intending to do anything unless and until an absolute steal is to be had, as in 50% and preferably lower discounts. I have a feeling steals won't be terribly uncommon - even in San Antonio - w/in 6-9 months. Pete, what say you?

I don't know if anyone here has read Never Cry Wolf but I will be acting like the wolves in the story and only going after the seriously ill elk.  Forget chasing the healthy elk (non-motivated sellers), I'll be going after the 40-50 cents on the dollar elk that NEED TO SELL their home.  In a boom market that doesn't really exist and motivated sellers looking to sell can still get top dollar for their homes.  In the coming years if someone isn't completely motivated and willing to GET RID OF THEIR PROBLEM no ifs ands or buts I'm not even looking.  I think what's going to be in store for us is not a buyers market but something much worse for the sellers, it is going to look like an all out salvage yard.

My predictions:

Foreclosures are currently up 500% in many places now, if not more.  I see 5-6 (maybe more) times as many in '08 compared to '07. 

I'm predicting a DOW correction of 2000+ points over the next few months. 

I'm predicting the weaker 50% of home builders will fold, the remaining 50% of builders will seriously downsize or slowdown just to keep the place running until things correct themselves. 

I don't see the bottom until mid to late 2009 at best.  With 4 times as many ARMs adjusting in 2008 we won't start seeing the biggest default numbers and foreclosures until at least early '09, then the REAL discounts won't even be fully in place until the lenders have held those REOs at least another 6 months.  With things as they are they will be moderately desperate when they first take possession but I'll bet they don't really get desperate and mark things down until at least 6 months later.  Of course every time another home ends up as an REO and every time that REO gets discounted the entire market gets adjusted down even futher due to increased supply and lower comps caused by the reductions futher spiraling things.  Couple all of this with increased intrest rates slowing things down even further and reducing affordability prices will dip even more.  Think about it, we should probably see what at least 2 points+ higher on interest rates just to begin absorbing losses.....you think that isn't going to impact prices?  Higher interest = higher payments so those buyers have to buy ever smaller homes or the homes have to sell for less.  With interest rates going up do you see a flood of buyers buying?  Hell no, the ones that are in homes they can afford now (not talking about the ones forced to move because they can't afford it) are sitting tight with their current loans in the high 5's low 6's.  Plus with lenders tightening their practices how many people are now unable to qualify?  Hell most that could qualify for a $250k house last year couldn't get a doublewide with a cosigner now.  This is going to ripple BIGTIME across everything. 

401ks and pension plans-  Going to see a big hit, I forsee a lot of folks that won't be able to retire on schedule.

Interest rates on everything including car loans, credit cards, mortgages, etc will probably go up.

Banks that wrote a lot of risky loans will fold.

A lot more hedge funds will fold, I think what we've seen is the tip of the iceburg.

As money dries up spending will slow, this is going to cause retailer stocks to drop and retailers will reduce payroll to get through it.  All of the now even broker Walmart, etc employees will certainly be spending even less and probably will start collecting more state/federal aid such as foodstamps.  Of course this is going to cause budget problems for state governments, etc.    These people will also probably end up defaulting on many of their obligations that were previously being paid on time, obviously more turmoil for banks.  And of course now that there is more money going out to state aid there will also be less coming in thanks to reduced spending causing less income to be made on sales tax.

And all the while the dollar is weakening, that can't be helping ANY of this.

Oh and lets not forget China, how much business do we do with them?  What's going to happen when that house of cards falls?  As our economy gets weaker so does theirs and vice versa, ouch.

================================

I'm very close to bailing on my apartment, ignoring all of my debts, etc and just moving to goddamn Idaho and living in the hills off the land until this all blows over.  This is going to be UGLY.  Not ugly like a little ugly, ugly like that girl in your highschool that guys literally RAN from.

[motivatedceo]

Is your business suffering much [e.g. do you have a high occupancy in your rentals, do you have ARMs yourself!]? What is your REI or other business niche? I'm suprised. This market downturn is not going to do anything but make me money.
 

I'm very close to bailing on my apartment, ignoring all of my debts, etc and just moving to goddamn Idaho and living in the hills off the land until this all blows over.  This is going to be UGLY.  Not ugly like a little ugly, ugly like that girl in your highschool that guys literally RAN from.

[Rich_in_CT]

Is your business suffering much [e.g. do you have a high occupancy in your rentals, do you have ARMs yourself!]? What is your REI or other business niche? I'm suprised. This market downturn is not going to do anything but make me money.
 

I'm very close to bailing on my apartment, ignoring all of my debts, etc and just moving to goddamn Idaho and living in the hills off the land until this all blows over.  This is going to be UGLY.  Not ugly like a little ugly, ugly like that girl in your highschool that guys literally RAN from.

I'm just joking, it's just some scary stuff we are heading into.  I'm going to do my best to ride it out and get RICH during the next few years.  Maybe own everything in my county.....

[realnew]

I'll be honest, I'm scared. 

Rich, I think  you nailed it... wait it out in the mountains. I don't know where to go because I'm in the middle of a divorce, and my soon to be ex spouse is CLUE LESS about what is about to happen (to us)...

My thoughts? ...um... 'depression 2007,8,9'

Yes, what does happen when people stop watching the simpsons movie and realize wth is going on? job losses, chaos? ok, maybe chaos is excessive, but I remember hearing stories about people jumping from windows during the depression.

I'm about to become a renter with 3 kids to protect during this crisis. I'll be calling the rental agency to move us to a 2nd or 3rd floor.

couple a weak dollar, a struggling infrastructure, and oh yeah, china's efforts to poison us slowly with tainted food, and lead-laced toys...a negative savings rate, a party, cocky attitude, and the THOUGHT of a terrorist attack I believe you have conquered your enemy.


Forget REI, here come the foreign investors.  Oh, I forgot, already (been) here.


Time to turn off the boob tube people.  save what you can, listen to the REI elders, and protect your families.

Boy, I need to relax.

[propertymanager]

I'll be honest, I'm scared.

I do believe that we're in for a MAJOR downturn as Pete and NJRE have said, but the question to ask yourself is what can you do to benefit from it?  Unfortunately, there isn't a great answer to this.  If you have a bunch of cash, you could preserve it for later use.  You could stop whatever your doing and wait until "it" is over.  You could wait until later to start investing when the risk is lower.  You could build a bomb shelter in the backyard and never come out!

In my opinion, the probability that we're in for a major downturn is the best reason to become as self-sufficient as possible.  We all know that employers are not loyal to their employees (nor should they be).  The best insurance that you'll do well is that you control your own destiny.  I am continuing to buy rental properties, but simply buying at a bigger discount than normal.  Even in a crisis, people will need a place to live, so I think rentals are a basic service that will do relatively well in a significant downturn.

Mike

 

[realnew]

I agree, Mike.  I am a believer of solutions.  I'm going through 2 of the 3 greatest life stressors: divorce and moving.  I have every confidence we'll be fine.

I am intensely studying, and attending rei meetings.  Cutting my living expenses, padding the cash,  networking with lenders, and once we're moved and I'm divorced, buying the heck out of 2 key areas I'm eyeing. 

I went to an REI meeting last night, got a concentrated education, some great tips and contacts, valuable stats about foreclosures in MD, and fuel for the enthusiasm fire.

Not only will the housing market be ripe, but the stock market will be as well, I believe.  I look at greed as a coupon!  The stock prices of several companies will drop, housing will drop.... buy, and as Pete says, "do Nothing."

[Rich_in_CT]

I'm also thinking about buying some stocks at a discount also, they will take a few years to come back fully but the return will be high.

[NJREstudent]

I think Mike nailed it on the head.  This is a great opportunity to buy.  But, it really depends on your strategy.  I had been pursuing wholesaling, with the intention to rehab eventually.  In light of whats going on, no freakin way.  There will be too much supply on the market to compete with.  What I want to do is be the ultimate end buyer.  Whats my strategy now?  Buy rentals.  I think its the only way now to consistently make money.  I dont want to compete with all the other sellers... there are too many.  I want to be one of the few buyers, with little competition.  There is no reason to be scared of this-- if you buy with much bigger discounts and buy something that cashflows very well, you will be ok in the long term.