BFP Management Blog

Archive: November 2009

The Smartest People in the Room

In discussing economics with academics, hedge and pension fund managers, business owners and government officials, consistently the most grounded and sensible people are apartment owners. They understand not only how to read a profit and loss statement but also how to raise the income side of the ledger and lower expenses. They have a good understanding of debt and rarely have I seen an experienced apartment person overleverage. They also know the tax laws both in how property taxes are calculated and how to avoid capital gains through tax deferred exchanges.

 More often than not, these people live below their means and are not ostentatious. They know that even in the Great Depression, everyone needed a place to live and thus their investment in housing might require more management focus but will remain in demand.

 I have found that most are fiscally conservative, wanting their government to spend their tax money the way they do, smartly and with a purpose. When I invite people to charitable fundraisers, landlords have always been the biggest benefactors and are consistently the most generous.

While levels of formal education vary greatly, the real world running of an apartment building has taught great lessons in economics that is not theory.

When speaking at real estate functions or writing articles and reports for real estate owners, I know that the audience will come to their own conclusions on the data and predictions that I present. The most informed comments and questions consistently come from those who have passed their trial by fire in the apartment industry.

The politicians (no matter the side of the isle) who are the most pragmatic are the ones who own rental units. They know how government affects a housing providers ability to function and know that for the most part, landlords do their very best to keep their residents happy so they enjoy high occupancy. They also know that it isn’t easy being a rental property owner given some of the legal landmines out there along with negative economic cycles that hit every decade or so.

For your review are some eye opening charts and graphs. Why aren’t the lenders foreclosing and do we have a tsunami of REO’s coming?

Figure 1

 Blog 1109 #1

Orange County Register

In Figure 1 showing Orange County delinquencies foreclosures, the percentage of homes that are owned by the banks (REO in yellow) has held steady for the fourth straight month. Yet the percentages of some kind of foreclosure filing (maroon) and 1st Trust Deed loans that are 90 days late (purple) continued to rise. The 6.7% of all loans being late is a new high.

Figure 2

 Blog 1109 #2

Orange County Register

Figure 2 shows that foreclosures went from making up almost 50% of sales earlier this year to approximately 25% in August.

Figure 3

 Blog 1109 #3 E

In Figure 3, we see that home values (as measured in Case-Shiller’s composite of 10 and 20 US cities) appear to have started up in a “V” curve. My question is: has housing found a bottom or will lenders foreclose on the vast number of delinquent loans and turn the future Figure 3 into a “W” curve?

 At September’s “IMN Distressed Real Estate Conference” in Los Angeles, several real estate economists estimated that at least 50% of REO’s have been purchased by investors. Increased foreclosures mean more shadow rentals competing for tenants with apartments.

 In future issues we’ll discuss whether the answer was a “V” or “W” curve and the ramifications.

Kyle Kazan

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