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coronavirus and real estate

How the Opening Back up of the Economy should affect Private Lending

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Image by Gerd Altmann from Pixabay

By Edward Brown

When the COVID-19 pandemic first hit the United States in March 2020, it was anybody’s guess as to how the private lending market would be affected. At first glance, one would presume that loan demand would have been negatively affected due to the expectation that borrowers were going to “hunker down” and not ask for, nor spend money, as we, as a nation, even the world, had not experienced a shutdown of this magnitude since the pandemic during WWI.

In the early stages of this effectual shutdown of most of the economy, this was the case. Borrowers were reluctant to take on debt, as the future was uncertain as to how they expected to pay back loans. However, as time went on, even though most businesses saw a large decrease in revenue, the lockdown/shelter in place, had another affect; many people were frustrated, feeling cramped where they lived, as a large part of the workforce had to work at home, and many households were not prepared to be at home 24/7. This put an undue hardship, emotionally, on people, as they tried to balance work with home life; especially if they had younger children who were not able to go to school.

Image by Alexandra_Koch from Pixabay

Since many businesses were closed, people were able to save money, as they had no place to spend it, so to speak. This lent itself to the thinking that this was the new norm – working from home. This thinking made people start to ponder the future regarding the work/home life balance, and many chose to increase their living space. This, culminating with the fact of no commute for most workers, produced increased prices of homes in the suburbs where one could buy a larger house than in metropolitan cities.

The frenzy that ensued for house purchases was a boon for private lending, as, not only were banks a bit gun shy due to the pandemic, but buyers were facing competition from other buyers and needed a competitive edge – quick closing offers. These two factors [banks slowing down on lending and the ability to provide capital very quickly], saw many private lenders having their best deal flow, by volume, in decades.

The question, for private lenders, is what happens after the economy eventually loosens up restrictions for most businesses, so they can get back to a somewhat normal cycle? There are those who believe that working from home will be the new norm for many workers.

The thought process is that companies that have been use to having workers work from home have proven that they can be productive over this past year. These same companies looking to cut costs will point to believing that they can shave off a lot of fat off of their income statement by lowering a large part of their expenses – rent. Since workers do not need to come into the office, and, with the technology of Zoom, rent expense can be significantly eliminated.

Image by Joshua Miranda from Pixabay

Case in point; SF Gate reported that Sales Force cut back 325,000 square feet of space it was planning on occupying in San Francisco after adopting a permanent remote work policy. Many companies have followed such as Drobox, Twitter, and Facebook. Rents in the surrounding areas have decreased as much as 20%; however, prices for homes have not seen such a decrease, and, homes that have more square footage command a premium.

However, there is the possibility that, once a vaccine is widespread and we have moved on from the pandemic, many companies will start to require workers report back to the office. Some companies are already requiring employees go back to working in the office, as they believe productivity will increase compared to at home workers. This may start to force a shift of people moving back to the city from the suburbs.

Image by hakan german from Pixabay

Interest rates are still relatively low, but they are starting to creep up. Many home buyers believe they should find something soon before the rates for mortgages go higher. The demand for capital is still strong and it does not appear that it will taper off anytime soon. Banks still have strict criteria regarding lending standards, and recent changes in the Dodd Frank rules did not dimmish these standards. In addition, borrowers who requested deferments from their lender may not have had their credit scores lowered due to these requests, but a memo recorded in the credit report has effectively prohibited conventional financing for them; at least, for a while.

Other reasons many believe demand for housing will continue is due to a housing shortage. Too many restrictions by city or county officials hamper housing starts, and costs of both material and labor have dramatically increased. This put an undue burden on builders, as their profit margin gets squeezed; thus, the law of supply and demand as well as low interest rates [that appear to be relatively stable] should keep housing prices strong. During the Great Recession, many homeowners lost their houses to foreclosure. Many Millennials remember how their parents lost their home, and this lent itself to many people choosing to rent instead of purchase. Over time, however, these [now grownups] are starting their own families and have healed from the wounds of the Great Recession to where they are deciding it is better to buy rather than rent. This, too, is expected to fuel higher housing prices.

Image by Nattanan Kanchanaprat from Pixabay

Many housing sectors are still seeing multiple offers or houses that are being sold in less than a week. This phenomenon puts the would-be buyers in a predicament as to how to put in an offer that will be accepted to a seller. This is where private capital is a huge asset to potential buyers, as they can use private capital to make their offer much more attractive to the seller in that they can close the transaction very quickly without contingencies. Mark Hanf, president of Pacific Private Money has seen these buyers come to him in droves for capital and reports that his company had its best quarter in the last quarter of 2020.

One of the main advantages to private capital markets is that they do not have to rely on asking for new appraisals in every situation. Each case is different, and, many times, a recent appraisal that the borrower provides to the lender or a broker price opinion might suffice. Banks need to follow FIREA guidelines where the appraisal process is much longer, and this lends itself to a lengthy process to which the borrower may not have the luxury of waiting.

How long will the demand for private capital last? As long as banks continue to drag out the lending process, demand for housing stays consistent, and borrowers desire to purchase before interest rates and housing prices increase beyond where the borrowers feel comfortable, there should be a steady flow of requests for the foreseeable future.

ABOUT EDWARD BROWN

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company.

Additionally, Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.

Edward Brown, Host
The Best of Investing on KTRB 860AM
The Answer on Saturdays at 8pm
and Sports Econ 101 on Saturdays
at 1pm on SiriusXM channel 217
21 Pepper Way
San Rafael, CA 94901
[email protected]

The Effects from Covid on Reverse Mortgages

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By Edward Brown and Mary Jo LaFaye

With the Covid crisis still looming, much attention has been focused on conventional loans where monthly mortgage payments are required. Recently, laws have been passed on both local and national levels to ensure homeowners are not evicted for non-payment on FHA loans.

Relatively little attention has been geared toward reverse mortgages during the Covid virus. Why is that? At first glance, the simple answer is that no monthly payments are required for reverse mortgages; thus, there is no risk for a foreclosure for non-payment of a mortgage. However, one needs to go deeper to understand that there could be a potential risk to the homeowner of losing their house in certain circumstances but for the foreclosure moratorium.

Image by fernando zhiminaicela from Pixabay

Under normal circumstances, the borrower on a reverse mortgage does not have to worry about foreclosure by the lender because no monthly payments are required; the loan balance just keeps increasing as interest accrues over time and is only required to be paid back upon the death of the last remaining borrower, move out by the borrower, or death of the non-borrowing spouse if the borrowing spouse predeceased them. The borrower’s only requirement for yearly payments are real estate taxes and insurance, HOA dues if applicable, plus maintenance and utilities. If the borrower fails to pay these, technically, they are in default and the loan may be called. This could lead to a foreclosure. In addition, the house may not be left vacant or abandoned.

For those borrowers who take a lump sum reverse mortgage and whose income is estimated to be too low to maintain the real estate taxes and insurance, they may be required to have a Life Expectancy Set Aside [LESA]. LESA is similar to an escrow account that is set aside for future real estate taxes and insurance and is based on the life expectancy of the borrower. These future expenses are deducted from the lump sum provided by the reverse mortgage company and held by them. The funds in the LESA become part of the loan balance once the lender disburses them to pay the property charges on behalf of the borrower. Thus, those borrowers who have LESA, for all intents and purposes, would not typically face foreclosure during their expected lifetime.

Image by Olga Lionart from Pixabay

Many conventional borrowers have requested deferments from their lending institution as they fell on hard times with the loss of income during Covid. The need for deferment requests are all but eliminated for reverse mortgages.

There has been a tremendous push toward applying for reverse mortgages by homeowners. There are many reasons for this; historically low interest rates mean that a borrower can obtain a much larger reverse mortgage, as the interest that gets added to the mortgage every year is less than in a high interest rate environment. Thus, the lower the interest rate, the better it is for the homeowner and, consequently, the less risk for the mortgage company.

In addition, many older homeowners have lost their job during the virus, and their largest retirement asset, by far, is their home equity from which they can draw upon. These same homeowners not only may not qualify for a HELOC [Home Equity Line of Credit], they may not want them after considering the benefits of a reverse mortgage (HECM) vs. a HELOC. For one, HELOCs require monthly mortgage payments. In addition, unlike a reverse mortgage (HECM), the bank can freeze [or reduce] the HELOC line and not allow access to it. This puts the homeowner in a precarious position of having debt against their property [as the HELOC is recorded against the property for the maximum potential draw of the line] without any benefit. Such was the case during The Great Recession in the mid-late 2000s when $6 billion of HELOC credit was frozen in June of 2008, and the freezing continued for some time. Why? The answer lies in the fact that the fastest way for a bank to shore up its balance sheet is to freeze HELOCs, so they do not have to set aside reserves. During The Great Recession, banks were facing write downs and write offs of loans as the loans that they had previously written took a downturn when borrowers, during the credit crisis, were unable to pay their mortgage. When a bank makes loans, they use depositors’ funds. The government requires reserves [loan loss reserves] be set aside to ensure the return of those depositors’ funds. If a bank has existing loans outstanding, they cannot just call in those loans [unless borrowers default]; however, a HELOC is a “potential loan” as the loan technically only exists as the borrower draws upon it. In this situation, if they freeze [or reduce] the line, the bank has not lent the money yet and can stop it before the borrower accesses the money that was available to them.

Image by Queven from Pixabay

Most major banks have seriously curtailed the issuance of HELOCs during the current Covid crisis, and those that continue to offer HELOC’s have imposed stringent qualifications to borrowers.

Many borrowers are realizing reverse mortgages offer advantages over HELOCs in this regard. There are limited income and credit qualifications to obtain a reverse mortgage. Reverse mortgage (HECM) lines of credit cannot be frozen or reduced, and, since there are no monthly mortgage payments, the risk of foreclosure [even after the moratorium] is slim.

A new situation has arisen due to Covid and that has to do with nursing homes. Once considered an alternative to in-home care [which is usually two to three times the cost of a nursing home], many stories have been published about the increase in deaths surrounding Covid and older Americans in care facilities. Most people would like to be in their own home instead of a care facility given the choice, but, unfortunately, many people cannot afford the [around the clock] care required to stay home and be cared for. Loved ones, especially during the virus, are looking for a way to keep their elders in the safety of their own home and receiving the quality and quantity of care they needed. Many are looking toward a reverse mortgage to fill this need. Many people have enough equity in their homes, especially as real estate has tremendously rebounded since The Great Recession, to allow them a large enough reverse mortgage to afford the costs associated with in-home care.

Image by Tumisu from Pixabay

The National Reverse Mortgage Lenders Association [NRMLA] reports that there have been significant increases in draws [on the HECM reverse mortgage line of credit]. Those retirees who lost their part time jobs and need to make ends meet, helping family affected by Covid, and those who are just generally concerned about their future finances. NRMLA states there has been a 55% increase in the number of draws and 14% in the size of the draws. In fact, they notice that some borrowers who had never previously drawn on their line of credit are fully drawing the line now.

As Covid gets more impactful on the economy and on peoples’ lives in general, we should expect reverse mortgages to grow, and now seems to be the most opportune time to obtain one – before interest rates increase.

Edward Brown

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.

Economic Update

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By Lloyd Segal

It’s 2020; a crazy C-R-A-Z-Y year. We are in the land of the unknown. Things are happening for the first time that none of us have ever seen before. You must take it for what it is and adapt as best you can. But ask yourself, when this pandemic is over (and it will be inevitably) will you be able to look back and be proud of what you accomplished during this incredibly difficult period? With that in mind, let’s wash our hands, put on our facemasks, and get under the hood…

Pending home sales.

Pending home sales continued to rebound across the country in June as Americans rushed to buy homes despite the pandemic. The index of pending home sales rose 16.6% in June as compared with May, the eternally-optimistic National Association of Realtors reports. The increase comes after pending home sales experienced the largest monthly rise on record last month. Compared with a year ago, contract signings are up 6.3%, a sign of how sharply the market has rebounded from its coronavirus-related low. Consumers are taking advantage of record-low mortgage rates resulting from the Federal Reserve’s maximum liquidity monetary policy. The index measures real-estate transactions where a contract was signed for a previously-owned homes but the sale has not yet closed. The continued rebound in pending home sales suggests that the real-estate market is thriving in spite of the continued rise in COVID-19 cases across the country. Two main factors are driving the surge in home-buying activity. First, many buyers appear to be entering the market looking to make up for lost time. As such, the rise in sales is a reflection of the delays caused by the coronavirus outbreak. Second, historically low mortgage rates have created a sense of urgency among Americans looking to purchase a home and lock-in those low rates. Nevertheless, there’s still a shortage of homes available for sale as some sellers continue to stay on the sidelines rather than list their properties for fear of exposing their homes (and themselves) to infection. This supply limitation will inherently limit how many deals close in the months ahead.

Gross Domestic Product.

In case you haven’t heard, the U.S. economy just suffered its worst quarter (April–June) in our nation’s history, with GDP falling a historic 32.9! The Commerce Department report highlights how deep and dark the hole is that our economy cratered into this summer. Sharp contractions in personal consumption, exports, inventories, investment, and spending by state and local governments, converged to bring down GDP, which is the combined tally of all goods and services produced by our economy during the quarter. Personal consumption, which historically accounts for about two-thirds of all activity in the U.S., subtracted 25% from the Q2 total, with services accounting for nearly all that drop. Spending also slid in health care and goods (such as clothing and footwear). Inventory investment drops were led by motor vehicle dealers, while equipment spending and new family housing took hits when it came to investment. Prices for domestic purchases, a key inflation indicator, fell 1.5% for the period, compared with a 1.4% increase in the first quarter. Bottom line: the numbers are alarming but all self-inflicted, with about half the quarter reflecting the sudden shutdown and the other half the slow re-opening. That said, GDP reflects the hole out of which we must now climb out of as we rebound in the remaining months of this bizarre year. Neither the Great Depression, nor the Great Recession, nor any of the more than three dozen economic slumps over the past two centuries, have ever caused such a sharp decline over such a shockingly short period of time. Ironically, this particular tumble, unlike previous declines, owes to a very different source than any of its predecessors: a government-induced shutdown aimed at combating a pandemic

Case-Shiller Index.

Home-price appreciation maintained a steady pace in May amid the pandemic, according to the Case-Shiller 20-city Price Index. The index posted a 3.7% year-over-year gain in May, down from 3.9% the previous month. Phoenix continues to lead the country with a 9% annual price gain in May, followed once again by Seattle with a 6.8% increase. Tampa, Fla., came in third, with a 6% uptick. But a look at the individual cities in the 20-city index shows that home-price growth could be slowing. Overall, the pace of price growth only increased in three of the cities Case-Shiller analyzed. Home prices have remained mostly insulated from the pressures of the coronavirus pandemic thus far. Falling mortgage rates have boosted the demand for homes among buyers, as the record-low interest rate environment has made purchasing properties more affordable for many people. At the same time, though, the supply of homes for sale nationwide remains severely constrained. Many home sellers have stayed on the sidelines and held off from listing their properties because of infection fears related to the coronavirus. But even before the pandemic, the country’s housing inventory was falling well short of demand. For years, the formation of new households exceeded the pace of home-building, creating a shortage. That gap between the demand for homes and the country’s inventory has pushed prices higher. And that gap explains why home prices continue to rise even if the job market takes another hit from the pandemic. There are some signs though that prices could end up falling. The house price index released last week by the Federal Housing Finance Agency indicated that home-prices nationally fell 0.3% on a monthly basis between April and May, despite a 4.9% annual gain. Finally, the godfather of the Case-Shiller index, Robert Shiller, predicts that home prices may decline in urban cities across the country as the pandemic accelerates buyers shift toward suburban and rural areas.

Mortgage Rates.

According to Bankrate’s latest survey of the nation’s 20 largest mortgage lenders, the benchmark 30-year fixed mortgage rate is 3.090% with an APR of 3.380%. The average 15-year fixed mortgage rate is 2.740% with an APR of 3.060%. The 5/1 adjustable-rate mortgage (ARM) rate is 3.300% with an APR of 4.040%. APRs and rates are based on no existing relationship or automatic payments. For these averages, the customer profile includes a 740 FICO score and financing a single-family residence (with 20% down).

Office Rents.

California office spaces are expected to keep getting emptier (and their rent prices will likely keep declining) as the fallout of the pandemic persists, according to a new survey of commercial real estate developers and financiers by the Allen Matkins/UCLA Anderson School. With efforts to slow the spread of the coronavirus forcing offices to shut down, companies have adapted to a decentralized model in which employees increasingly work from home. Even when they’re eventually allowed to reopen, offices still won’t resume business as usual. They will be required to follow safety protocols that can be expensive, putting additional strain on budgets stretched thin by the pandemic-ravaged economy. Besides, many workers won’t even want to return, for fear of catching the virus. As a result, demand for office space has tumbled. Last quarter, office leasing in Los Angeles County was at its lowest point since the Great Recession! One-third of builders surveyed said they’re cutting back plans for new office developments by more than 15%, and three-quarters said they were experiencing stress related to current tenant leases. Retail space is taking an even more severe hit. For retail properties, the survey suggests no light at the end of the proverbial tunnel. The current view is that retail properties will be generating significantly lower rents indefinitely. Why? Because the pandemic has accelerated a trend toward online shopping and away from in-person shopping. So, retail spaces (i.e. brick and mortar stores) are really going to suffer. Industrial real estate, on the other hand, seems to be in a much better position due to the rise of e-commerce. People staying home during the pandemic are a boon for warehousing development (in order to handle the increased distribution to consumers). The industrial space market will continue to build to handle the increased volume. In Southern California, 60% of the surveyed developers said they are planning at least one industrial development in the next year, and 39% are planning multiple projects.

Consumer Confidence.

Consumer confidence swooned in July amid a rash of new coronavirus cases in many states. The index of consumer confidence fell to 92.6 this month from a revised 98.3 in June, the Conference Board reports. The level of confidence is still above its pandemic low of 85.7, but it’s likely to be a long time before it returns to its pre-crisis peak. For example, the index stood near a 20-year high at 132.6 in February before the pandemic struck. This index signals a rocky economic recovery in the months ahead. It suggests that the recovery has shifted into a slower gear, as consumers become more cautious about the outlook as virus cases continue to escalate. Consumers have grown less optimistic about the short-term outlook for our economy and remain subdued about their financial prospects. Such uncertainty about the short-term future does not bode well for our recovery, nor for consumer spending. Thankfully, massive federal aid and other measures to prop-up our economy have helped stave off worse financial straits for millions of Americans already struggling to survive. More than 30 million people are receiving unemployment benefits. And hopes for a quick economic recovery from the coronavirus have been dashed by an explosion in new cases in Texas, California, Florida and other hotspots. Our economy will likely continue suffering regular ups and downs until the virus is brought under control or a vaccine is discovered.

Durable Goods.

Durable goods orders continued to recover in June, rising 7.3% on the heels of May’s 15.1% jump. The increase in orders in June was led by consumers buying automobiles and companies buying fabricated metal products. Orders for new cars and trucks leapt 86% last month as auto makers made up more lost ground after getting slammed early in the pandemic. On the other hand, aircraft manufacturers posted a whopping 462% decline in bookings. Boeing has seen demand for its planes dry up after a plunge in global travel during the coronavirus outbreak (see Boeing story below). That said, durable goods still have a long way to go to make up the massive declines in March and April, with overall orders remaining 16.0% below February. Fabricated metal products registered the largest improvement, up 4.5%, followed by primary metals (+3.6%), machinery (+2.7%), electrical equipment (+1.2%), and computers & electronic products (+0.1%). While computers and electronic products showed the smallest improvement in June, the category has been remarkably stable throughout the coronavirus contraction. Orders are up since February (pre-pandemic), probably reflecting extra computer equipment needed to help people work from home. But remember, while the second quarter was bad – terrible in fact – activity turned a corner in June and continues to recover. The third quarter (July, August & September), which we are roughly 1/3rd of the way through, is on track to see continued growth.

Federal Reserve.

The Federal Open Market Committee left interest rates unchanged last week and noted that economic activity and jobs “have picked up somewhat in recent months” while pledging again to use its full range of tools to support further improvement. “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year,” the Fed said in a statement after two days of talks. But economists are worried because the latest unofficial data suggests the U.S. economy is sagging again. In a unanimous decision, the Fed voted to keep its federal funds rates close to zero. The central bank again said it would keep rates near zero until employment recovers and inflation picks up. The central bank also kept the pace of asset purchase steady at $120 billion per month. The Fed is buying $80 billion of Treasurys and $40 billion of asset-backed mortgage securities to support the economy. Further, the Fed is expected to tie any future interest rate increase to higher inflation. Jerome Powell says the central bank will not consider raising short-term interest rates until inflation is seen rising above its 2% target. But many economists think the Fed has already informally adopted this approach.

Weekly Jobless Claims.

The number of Americans who filed new claims for unemployment benefits last week totaled 1.434 million, the Labor Department reports as the pandemic continues to ravage our economy. It was the 19th straight week in which initial claims totaled at least 1 million. But more disappointing is the fact that it is the second consecutive week in which initial claims rose after declining for 15 straight weeks. “Continuing Claims” — which are composed of those receiving unemployment benefits for at least two straight weeks — rose by 867,000 to 17.018 million for the week ending July 18. (Data on continuing claims is delayed by one week.) Thus, the level of weekly claims remains shockingly elevated and the rise in continuing claims definitely reflects the re-closings over the past few weeks that we’ve seen in some states where the virus has flared-up. For example, initial claims filed in our own California totaled 249,007. California is among the states that have seen a resurgence in coronavirus cases as state officials eased quarantine and social distancing measures. The stark reality is our economic recovery will be bumpy and uneven until we have a vaccine where most of the world’s population can be mass inoculated.

Boeing.

If you think you’ve had a difficult time this pandemic, consider Boeing. The airplane manufacturer lost $2.4 billion during the last quarter and has laid off 35,000 workers this year. Ouch, that would give anyone air sickness. But the news only gets worse from here, so fasten your seat belt because this is going to be very bumpy! Boeing’s revenues fell 25% to $11.81 billion from $15.75 billion a year earlier, and their shares fell to $166.01, down more than 50% over the past year. The commercial aircraft unit suffered the most with a 65% drop in revenue from a year earlier to $1.6 billion as deliveries of new planes crashed. Add all of that to their beleaguered 737 Max program. If you remember, Boeing was in crisis before the coronavirus because of the fallout from two fatal crashes of its 737 Max that claimed 346 lives. The resulting lengthy grounding of the 737 Max, along with the financial pain of airlines, has driven up cancellations and scared off new orders for new Boeing jetliners this year. The company only booked a single order in June and suffered nearly 200 cancellations! Worse, Boeing has more than 470 planes sitting on the tarmac that haven’t been delivered to customers, most of them 737 Max jets (that may never be delivered). And if all of that weren’t bad enough, Boeing is also ending production of its legendary 747, a plane that has been its primary money-maker for more than five decades and is credited with spurring the boom in travel worldwide. International demand has been particularly soft, hurting the outlook for Boeing’s widebody commercial planes, like the 787 Dreamliner. Boeing expects turbulence ahead as demand for new aircraft won’t return until the second half of next year, depending on the timing of a coronavirus vaccine. The International Air Transport Association, a trade group that represents most of the world’s airlines, says it does not expect global passenger air travel to take-off again until 2024. (Question: Did I incorporate enough aeronautical terms in this story?)

Monday Morning Quarterback.

Congress is currently debating a second stimulus package to help American families through the pandemic. The issue now is whether the $600 weekly unemployment benefits should be continued, slashed, or worse, discontinued. Some argue that paying laid-off workers $600 exceeds what they received in salary thereby discouraging them from returning to work. But that argument is specious for several reasons.

First, do you know anybody that is actually refusing to return to work because they are receiving $600 a week staying home? Didn’t think so. As any attorney will tell you, there is always anecdotal evidence to support any argument, but even this is far-fetched (particularly in California). I’m sure there is somebody somewhere relaxing right now on a chaise lounge sipping a pina colada because they’re receiving $600 a week? But really, for the millions and millions of unemployed American workers that weekly $600 is crucial to their survival (plus it injects money into our economy).

Second, whenever their opposition to the $600 weekly benefits is questioned, Senators proudly point to a May article in Barron’s entitled “$600 Unemployment Benefits are Keeping People from Returning to Work.” But that title is terribly misleading and a gross distortion of the facts. The source for the article is the Federal Reserve’s May Beige Book. But the Beige Book says nothing like that. The Beige Book actually cited three distinct reservations raised by reluctant workers, not just unemployment benefits. The Beige Book explained that workers were more fearful of returning to work for health concerns during a pandemic (getting infected at work) and the lack of child-care (while schools are closed) than losing the $600 weekly checks. The Federal Reserve of Philadelphia reported similar findings among its contacts, including the fear of infection (if they returned to work) and lack of child-care as the primary reasons for not returning to work, not the $600 unemployment benefits. The Federal Bank of Chicago’s survey went even further and found that unemployed workers (receiving $600 weekly benefits) searched for work more aggressively than those whose benefits expired or who have not received them at all. The study also found that once individuals exhausted their benefits their search efforts dropped precipitously. That would indicate that unemployment benefits enhance the desire to return to work rather than discourage it.

Third, the above findings make sense when you consider the hard numbers. $600 a week for 52 weeks is $31,200 per year. Over 98% of American workers earn more than $31,200 per year. So why would any worker in their right mind refuse to return to work (and get paid more) rather than staying home and receiving $600 each week ($31,200 for one year)? Even if you add additional state benefits, people can still earn more if they return to work. For example, the median income is California is $71,000 and 98% of workers earn more than $31,200 per year. Does anyone truly believe that workers are content staying home (with $600 per week) and not want to return to work and earn more? Does a worker really want to reject a stable job opportunity rather than receiving $600 a week that they know is only temporary? That simply defies logic.

Bottom Line: Over 30 million unemployed American workers are dependent on that weekly $600 check to feed their families, pay their rent and utilities, purchase medical supplies, and buy the necessities of life during the pandemic. And all of that consumer spending is the very lifeblood of our economy. Continuing these weekly unemployment benefits is a much more efficient way to pump money into our economy. So the imperative is for Congress to pass the second stimulus bill as quickly as possible and help American families survive and preserve our entire economy, rather than punishing them by cutting unemployment relief.

LAREIC Monthly Meetings.

As you know, we canceled our April through August meetings due to the pandemic, and now we must cancel all meetings until the end of the year (or the coast is clear). Our home at the Olympic Collection also remains closed. And, no, we’re not doing Zoom (for now). When California (and/or Los Angeles) terminate all restrictions, we will resume our monthly general meetings, Gold meetings, and real estate seminars. In the interim, thank you in advance for your understanding and for being a valued member and friend of LAREIC. We will keep you updated as the situation evolves and look forward to resuming activities as soon as we safely can. Please register on our website, www.LAREIC.com, for further updates.

Annual Los Angeles Real Estate Grand Expo.

Our annual Grand Expo is the largest and most exciting real estate event in Southern California. Last year we had 14 national speakers, 64 vendors, and over 800 investors and real estate professionals attending! (The Grand Expo is a joint production of the Los Angeles Real Estate Investors Club, Realty 411, and Sam’s Club). We originally scheduled this year’s Grand Expo for September 26, moving from the Olympic Collection to UCLA (to accommodate the huge crowds). But because of the pandemic, we were forced to postpone until November 14. We received word from UCLA that their entire campus is closing down until the end of the year. So we have officially moved our Grand Expo to Saturday, January 30, 2021. To get the latest updates, please register at www.LAGrandExpo.com.

This Week.

Looking ahead, investors will continue watching for news about medical advances, vaccine development, government stimulus programs, Fed monetary policy changes, and plans for reopening (or re-closing) our economy. Beyond that, the ISM national manufacturing index will be released today and the ISM national services index on Wednesday (8/05). But clearly the highlight of this week will be the monthly Employment report to be released this Friday (8/07). This data on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month.

For further information, comments, and questions:

Lloyd Segal
President
Los Angeles Real Estate Investors Club
www.LAREIC.com
[email protected]
310-409-8310

Back in Black/Airbnb is on the Upswing

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By Michelle Corsetti

At the beginning of the Covid-19 Pandemic, Airbnb occupancy rates dipped significantly as people opted to cancel their travel plans. Also, many counties put into place restrictions stopping Airbnb rentals from operating. Some counties restricted all but first responders and essential workers from renting Airbnb locations.

However, as of May 28th, there has been a 17.1% increase in occupancy rates. Overall, Airbnb is still down for the year but is hopeful as some restrictions are lifted. The good news is that places with smaller populations are gradually picking up the pace. People are venturing out to get rid of the lockdown blues.

According to Pittsburgh Action News, most rentals have been within 50 miles of home. Since traveling abroad has been halted to a standstill, people are having mini-vacations close to home.

While some people are optimistic about the increase in bookings and sales, others are opting for a more drastic change. CNN reported that some Airbnb hosts are giving up on their short-term rental properties and are proceeding to sell.

These hosts report that because of loss of sales and income, they are planning on selling not just their properties, but their furnishings as well.

Other hosts are changing from short-term term rentals to long-term rentals to compensate for the loss.

Only time will tell what the real impact of COVID-19 has on Airbnb and other short term rental platforms. As of now, while slow, things are looking on the upswing.

Holly Lynn is still very busy in business as a short-term rental expert and host. If you need your property rented– short-term or long-term, she can do for you what she does best–make you money!

For more information or booking, contact Holly at [email protected] or 415-317-6071.

Prepare for the Coming Greed Pandemic

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Protecting Your Assets Is MORE Relevant Post-COVID-19

By Randy Hughes

If you wondered about your need for privacy and asset protection before the Pandemic, it will be critical for you and real estate investors like you post-Pandemic.

The effects of the epidemic will be felt for years, not only financially but legally. If you have put off creating an asset protection plan, now would be a great time to start.

We have long known, as real estate investors, we are more inclined to be sued than most other occupations. Why? Because the average American assumes that ALL real estate investors are RICH! Therefore, we are good targets for frivolous lawsuits.

People with cash in the bank and no hard assets are not good targets for lawsuits because, unlike real estate, cash can disappear quickly . . . and buildings cannot. Furthermore, unlike deeds and liens, bank account balances are not available through public records.

Until you have been pursued by a contingency fee lawyer (and his or her deadbeat client), you might not feel the need to protect your assets. But, if you are going to stay in this game long-term, it is just a matter of time before the wolves will be at your door.

The paradox of our careers is the more successful we become, the more of a “target” we are for the nefarious characters in our society. These characters do not want to work hard (like us) to become wealthy. They prefer the “easy route” via our dubious legal system.

I spoke 33 times last year to real estate investment groups around the nation. I stressed the need to get titles to real estate out of personal names and into Land Trusts for privacy, asset protection, and estate planning purposes.

In almost every gathering, someone asked the question, “Why do I need to protect my assets, won’t insurance take care of any claims?” My standard response was, “I believe in insurance and think you should buy all you can stand, but DO NOT RELY ON IT EXCLUSIVELY!

Insurance should be only one-leg of your asset protection stool. Why? Let me give you a recent example!

When the pandemic first arrived in America and almost every business was shut down, I called my neighborly insurance agent. Here is how our conversation went: “Hi Bob, I am calling because after 40+ years of paying you a premium for “business interruption” insurance, I need to make a claim.” Bob responded, “Sorry, but pandemics are excluded!” My response was, “Really? Forty years of premiums and now I AM NOT COVERED?

It is folly to rely solely on insurance to protect you when you need it the most.

As an aside, please read your policies. You will find LOTS of exclusions and often you are not even covered for “defense costs.” In other words, you can go broke just defending yourself (read: legal fees) from a legal challenge in which you are totally innocent.

What is a real estate investor’s first line of defense? DO NOT OWN PROPERTY IN YOUR NAME! I have been preaching this to my fellow real estate investors for more than 40 years. I have been a full-time real estate investor for 50 years, and early in my career I discovered the benefits of using a Trust to hold title to my investments. I have written about the benefits extensively in this publication and many others.

Some people “get it” and many do not. They live in a dream world assuming that THEY will somehow be spared the sorrow and expense of a frivolous lawsuit (or worse yet, an attack by an irate tenant on them or their family at their personal residence). Consequently, they risk years of hard work and their family’s safety and financial security because they are too lazy to fill out a few papers.

I can lead a horse to water, but . . .

What is YOUR net worth, worth? Is it worthy of protection? How much of a price have you paid for it in sweat and tears? Are your family’s safety and security important to you? Perhaps you spend hours each week watching sports? Would it make sense to spend a little bit of your valuable time learning how to create a trust to hold title to your investments? The answer is obvious, you just need to do it and DO IT NOW!

What does this rant have to do with the pandemic? Plenty. Contingency lawyers and their deadbeat clients will be developing new and creative ways to find someone to sue because of the virus and its effects on tenants, businesses, and anyone with assets they covet.

If you can believe there are elements of our society that will walk in front of a car to eventually receive a “paycheck,” then you can also believe that it is time for YOU to get OFF the title of all of your real estate investments (and NEVER buy property in your name again!). Use a trust, you will be glad you did!

Several times a year I hear from people who have heard me speak or students who did not act on what they learned from me. They tell me they failed to take my recommendation, and now they regret it.

Don’t be one of those people.

Randy Hughes, Mr. Land Trust

I encourage you to learn more by going to my FREE online training at www.landtrustwebinar.com/411 and text “reasons” to 206-203-2005 for my free booklet, Reasons to Use a Land Trust. You can also reach me the old-fashioned way by calling me at 217-355-1281. (I actually answer my own phone unlike most other businesses in America today!)

Could the Corona Virus provide the next Boon for Private Mortgage Lending?

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By Edward Brown

The Corona Virus had all but shut down conventional lending in late March 2020 and most of April 2020.

Although it now appears that many banks have loosened up, they are far behind in applications due to the shelter in place restrictions and lack of certainty in the market.

This situation may provide a boon to the private lending industry as it has done at times over the past 30 years; however, a cautionary tale might ensue should the perceived lockdown last for a few more months.

The main reason is that a prolonged economic decline can produce long lasting effects that may take years to recover, especially in certain markets such as restaurants, retail, and any place where people gather. Different economic interruptions have occurred over the past 30 years that, for the private lender, with foresight, fared better than just before the downturn in the market.

In the mid 1980s to the mid 1990s, the Savings and Loan crisis shuttered many real estate lending institutions. Almost one out of three Savings and Loans failed from 1986 to 1995. It was the most significant collapse since the Great Depression.

According to author, Kimberly Amadeo, “In the 1970s, stagflation combined low economic growth with high inflation. The Federal Reserve raised interest rates to end double-digit inflation. That caused a recession in 1980.

Stagflation and slow growth devastated S&Ls. Their enabling legislation set caps on the interest rates for deposits and loans. Depositors found higher returns in other banks. At the same time, slow growth and the recession reduced the number of families applying for mortgages. The S&Ls were stuck with a dwindling portfolio of low-interest mortgages as their only income source.

The situation worsened in the 1980s. Money market accounts became popular. They offered higher interest rates on savings without the insurance. When depositors switched, it depleted the banks’ source of funds. S&L banks asked Congress to remove the low-interest rate restrictions.

The Carter administration allowed S&Ls to raise interest rates on savings deposits. It also increased the insurance level from $40,000 to $100,000 per depositor.

By 1982, S&Ls were losing $4 billion a year. It was a significant reversal of the industry’s profit of $781 million in 1980.

Between 1982 and 1985, S&L assets increased by 56%. Legislators in California, Texas, and Florida passed laws allowing their S&Ls to invest in speculative real estate.

Amongst scandalous activity such as putting pressure on the Federal Home Loan Banking Board to overlook suspicious activity, the crisis pushed states like Texas into a recession. When bad land investments were auctioned off, real estate prices collapsed.”

In addition to the simple laws of supply and demand where the supply of money available for real estate purchases decreased due to the number of S&Ls closing, other conventional lending institutions became skittish and backed off; even for the more conservative loans.

Enter the private real estate lender. For those who could think outside the box and use some creative thinking, loans were made that, in one person’s opinion “was like shooting fish in a barrel.”

An example of this was a loan I was privy to that, to this day, I cannot believe a conventional lender did not make; the property was in the financial district of San Francisco and was considered a prime office building. The building was 80% occupied and had tremendous positive cash flow from long term, stable tenants.

The buyer was getting a severe discount because the son who was given authority by his father accidentally accepted an almost insulting low-ball offer. Although the father tried to correct the mistake, the buyer refused to change the contract and threatened to sue for specific performance. By all accounts, the buyer needed a loan of 20% LTV. Unfortunately [or fortunately, depending on which side of the table you are], the banks were acting like a deer in headlights and would not commit to a loan; thus, the buyer had to turn to hard money [as it was called in those days].

The terms were 14% and 10 points for a three-year loan with a one-year minimum guarantee of interest. Although the buyer was not happy with the terms, he knew he was going to make a fortune on the building and be able to refinance once the economy got back to somewhat normal.

Then, in the late 1990s, we experienced the Dot Com bubble and burst. During the 1990s, more people were getting use to the World Wide Web. At the same time, a decline in interest rates increased the availability of capital. Add to that the Taxpayer Relief Act of 1997, which lowered capital gains tax.

These combinations made more people willing to make more speculative investments. Many investors wanted to ride the gravy train to invest at any valuation. Venture capital was easy to raise and fueled many companies that never had made a profit and probably never would.

In early 2000, the Fed raised interest rates, leading to stock market volatility. At the same time, Japan entered a recession. In April 2000, a judge ruled that Microsoft was guilty of monopolization and violation of the Sherman Antitrust Act. This led to a 15% decline in the shares of Microsoft.

On the same day of the judge’s ruling, Bloomberg News published a widely read article that stated, “It’s time, at last, to pay attention to the numbers.” Within two weeks of that article, the NASDAQ had dropped 25%. Many investors sold stocks just before April 15th in order to pay for gains they had realized from sales in 1999. This compounded the decline of the NASDAQ. In addition, investor confidence was further eroded by several accounting scandals and the resulting bankruptcies that ensued.

This spiral downward turned Dot Dom to Dot Bomb as it was known.

Although the Dot Bomb era was not real estate related, confidence in the economy was shaken. Soon thereafter, the September 11th attacks occurred and many borrowers were once again faced with conventional lenders who pulled back on their lending, not matter the asset or the strength of the borrower.

Again, enter the private real estate lender. During this period, real estate had not severely declined; maybe because the decline was more specific to the Internet rather than a global real estate credit crunch. People still had jobs and made their mortgage payments for the most part.

The supply of housing had not kept up with demand, so prices stayed relatively stable. However, whenever there is perceived uncertainty, banks typically pull back and usually to an extreme wherein even the most conservative of loans is not made.

The private real estate lender was given the ability to lend very conservatively at the same time as commanding a higher rate of interest than was normally attained in a more stable economy.

The next time the banks curtailed lending occurred during the Great Recession in 2008. This time, real estate was specifically cited as a major contributor due to the credit bubble and subsequent mortgage meltdown. Real estate prices fell precipitously, and although real estate declined in value, there were ample opportunities for private real estate lenders.

Many private lenders were curtailing their guidelines regarding LTVs, but they were making loans based on the then new, lower values and making a good living.

For example, Mark Hanf, president of Pacific Private Money, started his business in 2008. Normally, one would have thought starting a lending business in 2008 was the wrong time, but Pacific Private Money flourished, as they made loans to borrowers in need at conservative, newer, LTVs, and no client lost money during the continued decline through 2012 due to conservative underwriting.

Up next, the Corona Virus; although the pandemic has substantially hurt the economy regarding sales/profits, the underlying economic picture was strong prior to the virus, and there is compelling reason to think that it can be strong again after restrictions are lifted, as the various restrictions were created by governments rather than economic forces and can be undone when governments decide to disseminate them; especially if a lockdown is only for a few months rather than years. So far, real estate has not shown signs of collapsing. Sellers are unwilling to unload their properties at depressed prices.

Buyers still exist. Transactions are still being completed even if they are hampered by social distancing and more people working remotely. However, the banks are doing what they always seem to do during unsettling times; they pull back. They have less manpower via closed offices and less employees able to accomplish what is takes to make loans.

This, again, gives the private lender the ability to provide the oft needed financing for borrowers. Interest rates have gone up for these borrowers even when the Fed has reduced interest rates.

Less capital in the markets to lend means the demand for capital will raise the price for that capital. As long as the conventional lenders have basically stepped aside from real estate lending, the private lender should have the same opportunities that existed during the S&L Crises, the Dot Bomb Crisis, and the Great Recession.

Of course, nobody knows how long the virus will be around and how long governments will intervene rather than let the virus run its course on its own. A long, protracted shutdown would severely affect every economic situation, but it always seems that the best time to invest/lend on real estate is during the darkest hour.

The old adage of buy low, sell high seems to work better than buy high and hope it goes higher.

Even if we do not know how long an economic decline lasts, conservative underwriting can help weather tumultuous times.

As many investors claim, the time you make money is when you buy, not when you sell.

Edward Brown

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.