Vivante - Punta Gorda, Florida 

Luxury Resort Real Estate - Prices So Low it is Like Stealing!

The Florida coast in the USA has a long tradition of accommodating vacation seekers and second home real estate owners.  In recent years, many of the ocean-front locales have experienced surges of development and as a consequence have lost a bit of their small town, “off-the-beaten-path” charm.  Through it all one area that has been able to grow thoughtfully while maintaining its quaint, boutique feeling is Punta Gorda, Florida. 

Vivante - in Punta Gorda, Florida is a newly completed (end of 2006) luxury resort real estate community located on the peaceful shores of Charlotte Harbor that stands above the rest of the resort real estate in Punta Gorda.  Mediterranean themed architecture, large residences, luxury resort-style amenities, and desired water-front position made this resort real estate community a “must-own” during the pre-construction sales period.  All (342) residences in both communities pre-sold quickly to desiring owners at prices as high as $1.2M. 

When it became time to close and take ownership of the Vivante residences, the “perfect storm” was in full effect in the real estate market of Florida.  Unfortunately, some of the prospective owners were no longer able to close and take ownership of their reserved residence. 

As a result, the limited availability residences have been placed back on the market at “near-cost” prices so low that it is almost hard to believe.  I know that sounds a bit like an infomercial but once we saw the new pricing we did a double take to confirm it.  The discounted prices are real, and have created an exceptionally significant opportunity for those that are ready to act and have been looking for their second home paradise in one of Florida's last remaining true small, ocean-front towns.

Contact Us for the rock bottom pricing now being offered to close out Vivante in Punta Gorda, Florida.  The pricing is so low they will not let us post it on the webpage!

The Effects of the Global Economic Crisis on New Construction

Luxury Investment Real Estate

One would have to look back to the US depression of the 1930’s to find an economic crisis that has caused such rapid asset value depreciation, wealth evaporation and meaningful tremors that have shaken the very base of the world’s financial system.

Frozen credit markets have brought global banks and businesses to their knees and have left leveraged organizations gasping for air and the ability to satisfy operational necessities such as payroll.   

Finally, Federal Reserve actions put into place to thaw the credit markets, stem increasing foreclosures, bring buyers back into the market, and ultimately bottom the real estate market is starting to show some signs of progress. 

Because we specialize in the world’s finest pre-construction resort real estate, we maintain an overall macro-economic view of the economy and a firsthand experience of many local real estate markets.  What has been occurring in the luxury pre-construction resort real estate market as a result of the economic squeeze is interesting and  is leading to the ultimate example of Darwin’s theory “The strongest will survive and win…” in this luxury niche segment of the real estate market. 

Most of the pre-construction luxury resort real estate projects are currently in one of the following statuses:

Cancelled or Postponed:

Many planned new resort real estate projects, even some planned with the best brands, have been delayed for a period of time until the market gets a bit more strength and credit becomes a bit easier to obtain. 

Average projects that have broken ground but never had the proper brand support, project plan and/or where fully leveraged against a credit option based on pre-sales, have mostly gone under due to lack of financing.   The exposed projects, no matter the pre-sales successes, were forced to abandon or postpone the project indefinitely as credit restrictions tightened.

Funded but Pace Slowed to Match Sales:

Many of the stronger projects are still building and sales continue to move forward albeit at a pace that models the pace of slower sales to limit exposure and capital outlay in slower times.  These projects are well-branded and well-capitalized and are in the strong position. 

Sourcing Funding and Slowed Building Pace

Some projects are in building phases of well sold phases and have the funding to complete and deliver.  Many are now sourcing additional funds in preparation of future phases and launches.  These projects are also in a strong and superior position. 

Looking Forward:What This Means for Buyers

New construction luxury resort real estate is much like most other industries in that it will obey the laws of Darwin’s theory and the strong will survive and prosper.  The strongest communities being built today are in an excellent position to prosper long term. 

What many buyers were presented with as viable alternatives and competition is getting eliminated and postponed.  The strong will be the first to complete, deliver and build long term value for their owners.  This will give the strongest real estate projects the ability to lead and direct the development of their specific locales.  With the elimination of weaker and less viable real estate alternatives, the strongest resort real estate communities will be the centerpieces and most desired addresses of the exclusive locations in which they have been created.  This will lead to the maximum opportunity for long term, mature appreciation and owner enjoyment.   

Gone are the days of under-funded amateur real estate hopefuls, borrowing their way to throwing up a bunch of repeatable condos near a highly desired locale and calling it a well positioned luxury resort real estate project. The less important and average quality real estate projects would sell mostly on lower prices and hopeful expectations and weren’t the type of projects that were ever going to make an important, positive difference to the locales in which they were established. 

The best resort real estate projects are strategically planned in the most desirable locations with the appropriate supporting brands, and amenities.  They are comfortably capitalized, are often supported by the local governments, and are recognized for the positive growth and contribution they will make to the landscape, and macro-economic fabric of the area. 

Although buyers could have less real estate projects to choose from in the near term with respect to the number of newly developed resort real estate projects, buyers will be in a long-term advantaged position if they choose to acquire the right pre-construction residence in an important real estate project. 

Due to the globally weak macro-economic environment and slower sales, the most well-branded, luxury real estate projects have not been able to increase prices as much as desired during the construction phases.  Thus, buyers will be able to purchase resort real estate that is in the process of being built, for pre-construction prices so they won’t have to wait as long for residence delivery, which will enable them to enjoy their second home residence sooner. 

Also, the pre-construction unique and rare real estate projects will be delivered to owners in the future time frame in which many experts predict that the macro-economy and real estate market will be on much more stable and growing footing.  This will put owners in an excellent position for long term appreciation as their luxury resort real estate has become much rarer and thus valuable to an increased supply of desiring buyers in a fresh real estate market of increasing financial optimism and stability.  This future imbalance and lack of supply against increased demand for the finest, best positioned luxury resort real estate could put strategically acting owners in the advantaged position of long term value and appreciation in years to come. 

Which of the world’s finest resort real estate is the best to satisfy your needs and goals?

Wondering which of the world’s finest resort real estate is best positioned and moving forward?

Contact Us….We are Happy to Answer All of Your Questions!

Spotting Signs of a US Residential Real Estate Bottom:

30 Yr. Fixed Mortgage Rates at 4 - 4.5%...Here's How!
by Paul Mraz

If saving 7-9 million people from foreclosure via the Obama Housing Plan isn’t enough to bottom the US residential housing market, what will it take to bottom this real estate market and turn the tide toward growth?

Spotting Signs That a Real Estate Bottom Is Coming

In addition to taking action to help stem the growing tide of foreclosures, the Fed’s focus needs to turn toward increasing the bank’s ability to lend. With initial TARP liquidity injections, the Fed was able to reduce the LIBOR and two year swap spreads significantly, and created enough liquidity in credit markets that banks are lending again, albeit at prohibitive quantities and at higher than necessary costs.

Banks still cannot lend as much or as inexpensively as desired due in great part to the “toxic” assets still residing on their balance sheets. The “toxic” assets are mostly composed of over-leveraged investment instruments (i.e. CDO’s, SIV’s) that were acquired by many global banks, pension funds and corporations. At their core, most of these structured products are groups of mortgages (based on residential real estate) that were packaged, securitized, and then sold as debt investments.

The toxic assets were supposed to be addressed at the forefront of the $700B TARP. However, due to the urgency of liquidity needed on the equity side of the bank’s balance sheets, addressing this issue was delayed. The toxic real estate assets are causing a major clog in the financial system and are one of the key issues preventing banks from being able to issue more and less expensive loans.

The Fed needs to act soon on their promise to purge the liability side of the bank’s balance sheets so qualified and responsible lending can resume. There continues to be much speculation and opinion around whom and how the toxic real estate assets should be acquired, held, and sold. Solid options with historical merit and success such as a “bad bank”, a public-private partnership, and/or liquidation company much like the RTC of the 1980’s has been discussed. However, even though time is of the essence, no clear structure, direction, or details have been put in place at this time.

How to appropriately price the toxic real estate assets has become a major sticking point delaying the plan’s release. Asset pricing is a paramount concern of any proposed plan and needs to be done properly if the plan is going to work. It is a struggle because it isn’t possible to price and sell the distressed real estate assets at a natural, market-determined price (for the Level II & III assets) because the market for these assets has all but dried up. To maximize their position, bank’s using internal value models are asking for more than private capital buyers using “market” based value models will pay. In both instances it is likely that the banks prices are too high and the “market” pricing models are too low. We now look to the Obama Administration to step in and provide a clearly structured plan and effective pricing direction that clears this major hurdle and re-ignites the critical lending our economy so desperately needs to function.

The good news here is two-fold. First, it finally seems that this critical area has the attention of our law makers, and that they are focused on putting an appropriate program in place to clear the credit and lending system clog. If they could just move a bit faster!

Second, it is important to recognize that there is private capital demand for the toxic real estate assets. Despite what everyone hears everyday via almost every media outlet, maybe real estate is not as hated and useless as it is portrayed. Private capital wants to buy these assets in bulk because they believe, and are willing to put large sums of money behind, the notion that real estate will be a highly desired asset again, and that they will profit greatly from this venture.

Expected Results: 30 Year Fixed Mortgage Rates Hit 4 % - 4.5 %

If the plan is structured appropriately and is put into action quickly a meaningful amount of toxic real estate assets will be wiped from the bank’s balance sheets. Cleaner balance sheets combined with near 0% overnight fed fund rates, and lower spreads on 10yr treasury bonds could create an environment in which the US may enjoy 30yr fixed mortgage interest rates between 4% - 4.5%. This would be the lowest recorded mortgage interest rates in at least the last 50 years of lending. Low rates should act as a catalyst to help further stem foreclosures and create massive re-financing for real estate owners.

Record low mortgage rates combined with residential real estate prices down 30% - 40% in many markets could become a significant demand catalyst and the opportunity of a lifetime for many to thoughtfully consider buying real estate again.

Help More! Waive the Appraisal Requirement for a Mortgage Refinance

To ignite massive amounts of debt re-financing and more stopped foreclosures the Fed should institute a waiver of the appraisal requirement on existing home re-finances. Many argue vehemently against this suggestion as it seems to directly oppose the theories of “mark to market” and present asset value accounting. However, this waiver would allow real estate owners suffering from the deadly combination of increasing adjustable rate loans, and home prices that have deteriorated past acceptable loan to value ratios to take advantage of what could be the lowest fixed rates of their lifetime.

The appraisal waiver would allow real estate owners to modify their loan based on the home value at the time of their last appraisal or when the note was issued in a purposeful oversight of the market’s recent decline, allowing a much greater portion of home owners to carry more affordable mortgages. This move would also satisfy banks because more foreclosures would be avoided and loan principles would not be decreased or forgiven.

Finally: A Real Estate Market Bottom and Brighter Days Ahead

With these actions, the real estate market will bottom, and is close in some areas without it. Many well-known economic experts predict the bottom of the real estate market to occur in June 2009.

However, the longer it takes to deliver and implement a clear, effective government action plan, the worse the residential real estate market could get because buyer demand will wait to act due to confusion and uncertain forward market conditions.

Keep an active eye out for the plan, how it is constructed, and position yourself to take advantage of the right opportunities before the demand surge that will lead to the real estate market bottom, and brighter days ahead.

Best wishes,

Paul

Is 2009 the Time to Run or Invest in Real Estate?

Part I: Is The Obama Housing Plan Enough?  

As we look toward the future and attempt to project the landscape of luxury investment real estate over the coming months and years we need to examine the planted economic seeds for progress.

The good news is that in the places the Federal Reserve has acted, they have achieved positive results. They have at least temporarily stemmed the crisis of the financial institutions. Solvency issues with some banks is still an issue but no longer are we going to bed wondering which investment bank will blow up tomorrow, and whether our investments are physically safe. The Fed has been able to reduce the LIBOR and two year swap spreads significantly, and has created enough liquid in credit markets that banks are lending again, albeit at prohibitive quantities and at higher than necessary costs.

The above is not enough and the global recession continues. Real estate and equity markets are stuck in a depressed deflationary spiral. There doesn’t seem to be a growth catalyst anywhere in the world except for the US government and their endless balance sheet of liquidity.

The Federal Reserve has committed, by any means necessary, to saving the US economy and financial system. Further, the Obama administration is just as committed to the cause of job creation and economic growth. There are several large, sweeping actions that need to be implemented, in 2009, across key areas to bottom the deflating US primary residential real estate market, and to put the economy back on a track of growth and prosperity.

Below is a review of the US government’s first step, announced 18-Feb-09, designed to directly attack one of the core issues affecting the US primary residential real estate market.

Problem #1:
US Primary Residential Real Estate Foreclosures

The rate of foreclosure in the US primary residential real estate market is too high and is increasing. The foreclosure rate needs to be decreased drastically and restored to a normalized pace.

Problem Effect:
Continued Cycle of Real Estate Price Erosion

Increased rates of foreclosed homes adds inventory to the already huge glut of primary residential real estate (approximately 12.2 months inventory), causing a sustained supply imbalance against demand. This causes continued price erosion and foreclosure increases.

The Obama Housing Plan released on, 18-Feb-2009, is designed to provide relief for up to nine (9) million home owners. The plan is composed of several parts and is aimed at the modification of conventional mortgages for a select few real estate owners that are current with their mortgages, and many in default status. The exact detail of how the plan will be executed has yet to be communicated, but the main objective is clear. First, allow defaulting real estate owners to modify their current mortgages to lower fixed rates at a level not to exceed 31%-38% of their income regardless of their current situation with respect to loan to value ratios and price depreciation.

Second, allow real estate owners that have been “playing by the rules” and paying their mortgages consistently and on-time to refinance their higher interest loans to ones with lower interest rates and at a lower principle. Only if the owner has a mortgage owned by Freddie or Fannie they will be eligible to have an appraisal of the property and receive a new mortgage written for up to 105% of the market appraisal.

For example, Frank buys a house in 2006 with a $400,000 mortgage. He wants to refinance the house to take advantage of lower available rates but the house is now only worth $300,000 (25% decline). With the new plan, Frank will be able to refinance up to $315,000 for his new mortgage. The $85,000 of debt from the first mortgage is wiped out. The plan lacks any clarity as to what happens to the $85,000 or if there are any future penalties to Frank for accepting this debt forgiveness.

Banks, especially those that are receiving TARP money will likely be forced to comply with the new plan. The thought is that although the bank will be receiving less money via the interest on a specific loan and forgiven principle, this “loss” will be more than off-set by a much reduced number of foreclosures. It is still not clear if the plan stipulates a specific interest rate to serve all real estate owners or if any further stipulations or restrictions exist that would prohibit anyone from taking advantage of this plan.

Expected Result of Obama Housing Plan:
Less Foreclosed Homes

Although the Obama Housing Plan seems geared to most serve those that are in default status or close to it, if fully successful, the plan could save at least seven (7) – nine (9) million real estate owners from foreclosure. This is at least half of the 13.8 million (27% of nearly 52 million US homeowners with a mortgage) people that according to Moody’s economy.com currently own a mortgage that is worth more than their home. The plan doesn’t include provisions for defaulting jumbo loans, people with multiple mortgages (i.e. second homes) nor is it clear what happens to the forgiven principle...but this is a first step.

We will have to wait and see how the rules and regulations look and exactly how it will be executed before the plan effects can be accurately measured. Please stay tuned for more on this.

Another Result:
Indirect Economic Stimulus

Is It Enough?

The Obama Housing Act alone will not bottom the US residential housing market. At the onset, the plan isn’t all-inclusive enough or broad enough to bottom the market alone. However, if the proposed Obama Housing Plan is able to lessen the tide of foreclosures and keep millions of soon to be foreclosed real estate owners in their homes, it will certainly be a step in the right direction. There are tons of questions to be answered and much of the plan’s success will depend on its final rules, regulations and its execution.

To get the primary residential real estate market to bottom and to get back on the path of growth and prosperity we will need further drastic action with respect to job growth as well the ability of our financial institutions to lend capital more freely and less expensively to all qualified parties.

Our next e-letter will focus on the expected upcoming actions that will be aimed at addressing these critical economic components.

                                                                                       Happy Reading!

A Look Back At the Year That Was

2008

Right now, it seems the world is mired in a cycle of asset deflation and recession more severe than anything seen since the Great Depression of the 1930’s.  2008 was a year of financial strain and over-leverage so dramatic that the financial system of the US and the world was shaken and pushed to the point of failure.  Without the many liquidity injections and equity stake interventions of the Federal Reserve, hundreds more of world’s most celebrated financial and “main street” institutions would have stayed insolvent, and crumpled underneath the weight of over-leverage and toxic balance sheets.  The result was extremely rapid asset deflation and balance sheet de-leveraging that took about 30-40% out of most asset classes.  The result has been a decade worth of losses in many asset classes over a few short and very painful months.

The fallout has been financially nuclear and it feels worse.  Although most expert economists feel strongly that a second depression has been avoided, the economy is in recession and many figure has been since December 2007.  Recently released unemployment statistics show US unemployment at (7.2%) which is higher than average or desired.  Jobs are being lost at a rate of over 500,000 per month.  Due to the magnitude and speed of the real estate and equity market declines much wealth has been evaporated in the wallets and portfolios of individuals and corporations globally.  There is still a twelve month inventory glut of primary residential real estate around the country focused mainly in areas like Las Vegas, California, Arizona, and Florida.  This glut continues even though existing sales prices in those markets on primary residential real estate have tightened 30-40%.

Worse than that, very few are willing to move forcefully into any asset class including real estate.  Despite the efforts of the Federal Reserve, credit although improved is still much tighter than norms.  This is making it difficult for small businesses and individuals to create new lines and extend existing credit facilities.  According to (http://www.bankrate.com) 30 year fixed mortgage rates have decreased significantly and currently hover around (5.13%) which is historically low.  Foreclosures continue to pile higher as folks can no longer or choose not to pay for their homes. 

Most people are “shell-shocked” and are sitting on the sidelines to watch what happens.  Nobody can question anyone for waiting to do anything at a time like this.  After all, the above sounds like the financial apocalypse right?  Many have given up all together in complete capitulation, general disgust and mistrust in the financial system of their country, and those that run it.  It seems right now that there will never be another dollar enjoyed in real estate appreciation or rental income.  The only risk most people see is to the downside and that the catalyst to real estate ownership has vanished forever.  This lack confidence can be seen in the horribly low confidence numbers released in the University of Michigan monthly confidence reports.  We are currently in grim economic times globally…sad but true. 

It is great to know what has happened and where we are today, but what is most important and what decisions should be based upon is where are we going from here?

Our next few letters will focus on the present and our belief of how things could and will play out in the secondary luxury real estate market moving forward now and over the next few years.

Happy Reading J

 Why Buy Real Estate Now?

The LRC Client Theory…

We ask our clients that choose the present as the proper time to buy, why they feel comfortable doing so.  So far, they have consistently responded with the following ideology.

Future Inflation:

Inflation increases the value of assets across the board…especially real estate.  As the inflationary actions that the Fed has thrust into place begin to work, the markets will bottom, inflation will ensue, and real estate values will increase.  Also, although mortgages in theory could also go higher, the underlying assets are worth more, and although credit is tighter, 30 year mortgage rates continue to be historically very low.  It may take some time to see this occur, however, those buying now do not have a very short expected time frame…they are not short term real estate “flippers.”  Also, since most purchases are pre-construction it takes about 18-24 months for the property to be delivered anyway, giving the cycle some time to form a bottom and for outlook on real estate in general, and especially the finest real estate to change.  

Real but Delayed Demand:

Buyers that are acting today believe that demand trends are real, and that they have just been delayed.  Buyers believe and it has been documented by many censuses and third party studies that for example, in the next ten years over six (6) million Americans and Canadians will acquire second home/ investment real estate in Mexico.  Similar demand projections exist for millions of Americans, Canadians, and Europeans to acquire second and investment homes in the Caribbean, and most desired Latin American countries.  If the demand is real, and delayed by fear, credit restrictions, and an economic downturn, it is critical to notice and move before it is restored.  For once the cycle turns positive, pent up demand will flourish, the herd will be back, and prices will be going higher once again.  Many buyers choose to engage and position before this move so that they can maximize their long term rate of return and real estate capital appreciation.

Supply of the Finest Real Estate is Finite

Although there seems to be an infinite supply of repeatable primary residential housing available, the same is not true for five star, new construction resort real estate, located in the world’s finest locales.  Real estate project cancellations, and delays make the best and approved projects that are moving forward even more unique, rare, desired, and less risky now and in the future.  The best projects that are moving forward no longer have to compete with lesser competent real estate ventures, and many benefit from the lack of new originating projects. 

The projects getting built and selling consistently will also benefit because the right real estate will not be just another development, and will not have to be concerned with over-crowding in a particular area.  These projects will become the most desired addresses and will help define the communities in which they reside.  They will be the hubs of their locales and once credit again becomes available, resort real estate developers will get back in the game to satisfy all of the pent up demand, but they will do so around and behind the leading, delivered communities.

Purpose/Timeline:

The buyers investing their hard earned capital into the finest pre-construction real estate opportunities globally right now ARE NOT the storied flippers using leverage to pick up as many $200k condo’s as possible and hoping for a quick buck upon delivery.  That type of irresponsible speculator has been washed out of the marketplace and can no longer use the leverage model with no capital to finance and flip their way to riches. 

Present buyers have very strong cash positions and are looking to invest their capital with at least a several year timeframe.  In many cases he/she is looking to enjoy some of their time at the residence once it is delivered and is happy to be patient.  Also, since most pre-construction real estate takes about 18-24 months from ground break to delivery, buyers are able to invest their capital at ground level pricing now and can wait for the market to correct and the cycle to turn before they ever even have to commit their final payments and take ownership of the property. 

In a couple of years, the cycle should turn and reward the patient buyer with a significant appreciation premium in the face of much pent up demand pushing prices higher.  In the end, sophisticated buyers will be in the desired position of choosing to sell for a significant profit or holding on for awhile to enjoy their luxury second home property. 

Summary:

Increased inflation causes increases in asset prices, especially the finest real estate.  This  combined with future increases in demand caused by real demand trends and pent up ability to buy, combined with shrunken supply that will eventually need to expand to meet demand will drive the next long term luxury second home real estate investment appreciation cycle.  Our clients that are buying now say that it isn’t if it will happen, it is when it will happen.  They feel that if they wait until the “all clear” sign and the global economy recovers to act, it will be too late and they will be forced to compete with increased global demand for the finest real estate… and the easy money will be gained without them. 

But it is hard.  It is hard in a chaotic world of bubbles, greed, system risk, and financial difficulty to summon the discipline and perspective to “zig” when everyone else is “zagging,” or hiding with their head under their pillow!  But as Warren Buffet said in his 10-17-08 NY Times article…. “If you wait until you see the robins to take action…you will miss the spring.”

Who is Buying Real Estate Now?

When Most Say Nobody Wants It?

Buying in many of the top-tier global pre-construction resort real estate developments remains strong because of the characteristics of its buyers.  The buyers are often in a position to execute the transaction without a mortgage or any other type of financing so there is no issue with a credit crisis.  In terms of value, the buyers understand that the property they are acquiring is the best real estate in the world, in the finest locations, is unique, and not easily duplicated.  For these and other reasons, sophisticated buyers see the current credit crisis as an opportunity to acquire the finest real estate which will both maintain its value now, and will more quickly appreciate over the longer term. 

Supply and Demand

The theory behind the sophisticated buyer’s purchase now decision, besides the means to execute, when it seems…at least that the media says….very few buyers are comfortable buying anything is reasonable and points back to the age old theory of supply and demand.  Most buyers agree that pre-construction resort real estate offers the best opportunity to acquire the most desired real estate at the lowest possible price because it is being bought pre-sale before the property is actually built, so pricing is typically under-market.  It is also generally agreed that the right pre-construction real estate projects are unique and hard to duplicate due to location, builder, amenities and other criteria.  Thus, this real estate is most likely to be the most desired which goes a long way in making it potentially the most valuable.

So..When is The Right Time to Buy Real Estate?

Assuming the ability to buy exists, the controversy and opinions arise when the question of when to buy surfaces.  In most cases, people are most comfortable moving in herds and with the popular asset class of the time.  This is easy to prove and is seen over and over again in the movement of popular assets class cycles…. debt (i.e. bonds), equities (stock), commodities (i.e. gold), and real estate…..residential, second home, commercial or otherwise.  Buyers of assets looking for create wealth via their investments through capital appreciation and yield seem often more comfortable investing and chasing the middle or end of a positive cycle higher, than strategically positioning in less popular asset classes for the future positive swings.  It must be psychological or have to do directly with one’s perception of risk tolerance.  Many feel most comfortable to invest the way everyone else is…because it is easily justifiable to everyone and themselves….even though by the time many actually “pull the trigger” and invest into the popular asset class, much of the move is over and the “easy money” has already been made.  So in reality, although it is perceived to be less risky to chase visible and popular winners, it is often more risky to do so. 

It has been our experience in working with our clients over time that that the most sophisticated buyers wait to invest their capital into the most high potential, most unique assets when nobody else seems to want them and it is perceived to be the worst time.  It takes mental strength and certain fortitude to act against the grain and to see opportunity and appreciate perspective through chaos, turmoil and “blood in the streets.”  But acting against the grain seems to create the most opportunities for long term gain and prosperity for those willing to move against the herd.

Some Effects of The Federal Reserve's Actions On

 The Luxury Second Home Real Estate Market

Over the past couple of months the Federal Reserve of the United States, and other Federal Reserve Organizations around the world have implemented and plan to implement unprecedented levels of liquid into the financial system of the United States.  These actions have been critical in abating and battling against a death spiral of broad asset deflation and investment de-leveraging.  To combat rapid asset deflation it makes sense to implement a broad array of inflationary measures.  In simple terms, when assets are deflating in a distorted manner due to system risks and a lack of confidence outside of normal economic cycles, at a speed that could cause an economic depression, every effort to stop it is necessary.

However, implementing inflationary measures of this size and scope is a tricky game as once the deflationary cycle is forced to bottom; global economies could be faced with an issue of inflation.  Inflation is a battle that the US Federal Reserve knows how to battle very well, and at this time would be a welcomed change.     

The effects of decreased credit and liquidity overall has had a dramatic effect of both the price and availability of real estate in many different sectors.  For the purposes of this post we will focus on the effects on global pre-construction luxury second home – investment real estate since this sector is our core business.

The immediate effect has been the lack of new mid-tier developments being launched in the countries in which we represent pre-construction real estate.  Developers that planned or had planned to embark on new real estate projects and were depending on bank financing and or leverage to be able to build have mostly postponed or cancelled their projects for the present time period. 

Because of stricter qualification levels and unfavorable lending terms it has become nearly impossible for many developers to secure available lines of credit and financing to begin a new real estate project.  If possible, many developers in the mid-tier level ($300k - $500k per residence) have decided and/or been forced to wait to begin pre-sales and real estate development until the credit markets open more and better financing becomes available. 

Real Estate project postponement and cancellation has happened less in higher end developments ($500k - $3M) and those that have already broken ground with secure funding.  These real estate projects are the highest end developments in the most desired locales globally, and continue with construction and sales at a consistent level.  Believe it or not, several of the real estate opportunities we represent outside of the US, have just implemented across the board price increases due to rapid sales and the launch of new phases.

Paulson Plan II

Federal Socialist Banking Positions?

What is going on now?

Although the rescue plan is likely to be effective in opening up the crucial credit markets it will take time to implement and deliver results.  It is taking the government weeks to award contracts to companies that will perform each of the plan’s functions and to ensure that the plan is most efficiently and effectively executed. 

Although taking a bit of time to get it correct is understandable, delay does nothing to address the overall credit market freeze, to get banks trading with each other, or to help the lack of general confidence in the financial system.  The truth is, even if the plan was in effect today it would still have taken time to see its positive impacts.

Unfortunately, US banks were out of time.  The frozen credit markets, sinking equity markets and lack of cash liquidity around the world were going to sink dozens of banks.  Going into the market close, last Friday (10-11-08), many professionals weren’t even sure if world renown investment banks Morgan Stanley and Goldman Sachs were going to be able to open for business the following Monday.  Still struggling from the fallout of the Lehman Brothers failure and fund redemptions by the billions, the system could not absorb additional financial strain and failure. 

In unprecedented fashion, the Federal Reserve of the United States begrudgingly took on an equity ownership position in many of the largest US financial banking institutions.  Basically, the US government has nationalized many of the largest most influential US domestic banks.  This move has received much scrutiny and appeal because it is socialist in nature, in the center of what is supposed to be a country based on democracy and capitalism. Unfortunately, the Federal Reserve had no choice and needed to adopt the “Marshall Plan” that was already being implemented around Europe.   As said by Secretary of Treasury Hank Paulson, “This is something that we would have preferred not to do, but it needs to be done to add strength to the system and the global credit markets.” 

Infusing capital into the balance sheets of the US banks has an immediate impact on the ability of companies to operate their businesses.  Available cash and credit will keep them afloat and functioning because the US Federal Reserve becomes both the lender and creditor of choice on both sides of the transaction.  This enables the Federal Reserve to back short term trading and lending between banks which will help un-freeze the credit markets and help operations of both Wall and Main street firms.  At this point, the Federal Reserve has basically reinforced every gap in the suffering banking system and has made substantial progress in creating liquid in the credit markets and overall operations of the US financial system.  Positive results have already been seen, credit liquidity has improved, and further efficiencies and operations will continue over time.  This undesired, socialist series of actions is proving effective and has all but eliminated the possibility of a 1930’s style repeat depression.

What is the Rescue Plan?

Without getting stuck on the intimate details of what was proposed in the initial plan by Treasury Secretary Paulson, that was eventually voted down earlier this week, the proposed plan is best described as one which is aimed at addressing the present critical weakness in the core credit  system of America.  

According to the statistics presented at the US Senate hearings, the good news is that 95% of the US mortgage market is what is called “money-good.”  This means that 95% of the mortgages held in the marketplace are being paid on-time, in full, every month.  The issue is really with about 5% of the mortgage market made of those that are no longer paying, are late paying, are foreclosing, have foreclosed, or are preparing to do so.

In effect, the plan proposed by Treasury Secretary Paulson was basically to create a US federally backed US primary residential distressed real estate fund.  The goal of the plan is to have the US government purchase the distressed assets (i.e. mortgages) from the private and public companies that want to sell them at a discount to what they were worth.   Purchases would be made over time and would likely amount to about $50 Billion per month in the beginning with a cap at about $700 Billion, although it is doubtful that all of this money would be used.

The government would hold the assets and once the market recovered a bit would be able to sell them at a profit much like a distressed asset hedge fund or leveraged buy-out firm (LBO).  Proceeds of the operation would go to the taxpayers whose money is being invested to create the fund.  Of course there are many terms and conditions to the ideology of the plan that are being forced into bill by both democrats and republicans.  Regardless, the mission and object of the plan is the same.

Is the Plan a Wall Street Bailout or Main Street Rescue Plan?

Much of the US public thinks that Secretary Paulson’s efforts and proposed plan are an intention to bail out the Wall Street elite and to keep additional firms from suffering the same fate and some before them.  This would be true if the issue was just with Wall Street Firms and had not been proliferated and extended to many Main Street companies in the form of investment, and if there wasn’t a “Pearl Harbor” like seizure of the credit markets.  Because this has become an attack on the system, it is necessary for the last line of defense, the US Federal Government, to intervene and stabilize the financial credit system in the short and longer term.  For without a credit or lending system, there will be no inventory on retail shelves, cars in lots, money for payrolls, or in ATM machines.  The short term credit markets need to work without the fear and lack of transparency that exists today.  The failure of this system is not an option and its preservation is necessary for people everywhere to maintain a reasonable standard of life as many know it in the United States.  Further, in past instances where the government has intervened when the system has been threatened the plan has worked, achieved it objective and run operationally profitable.   

What will be the effect of the plan?

The effect of the plan will be a couple fold.  First, companies with securitized debt investment products on their balance sheets will have the opportunity to sell these products into the US Federal distressed asset fund, albeit for less than they bought them for.  This will provide these companies the opportunity to clean up their balance sheet and shed the “Anaconda” from their operations, putting them in a position to be able to do business and lend money out to those who require it a reasonable rates and requirements.

Second, the Paulson plan will bring stability and a forced bottom to the US primary residential marketplace. Needed liquidity in the credit markets will slow down and possibly halt the streams of US foreclosure requests that are originating daily by the thousands.  Many people will have the renewed opportunity to stay in their homes and satisfy the terms of a re-negotiated mortgage.   Confidence will return to the buy and sell side of the system and pent up demand (i.e. buyers) will have the confidence and the credit available to return to the marketplace and begin buying again.  Buying in the marketplace will reduce the inventory of homes available on the market and will stabilize prices, inventories levels, and will finally get the market to bottom with better prospects on the horizon. 

The third and equally important thing the plan will do it restore confidence and trust to the marketplace and the US credit financial system overall.  Much of what occurs in economic cycles is as based on trend confidence and momentum of the system itself and how people feel about what is going on and the prospects moving forward.  Right now, many are questioning the US credit system and a system and its ability to work.  Banks don’t trust each other and are afraid to lend each other money because they think the guy across from them will be the next to blow up, and everyone is scared to do anything because it feel like  you reaching out to catch a falling knife.  This is destructive because nobody makes money or makes the right decision in a state of panic, and when everyone is in a state of panic and fear, losses and down cycles extend more severely and unnecessarily.    

Implementation of the plan will relieve the fear in the system and will provide the much needed liquidity to the credit markets to get it flowing in an orderly fashion.  There will actually be an operational, systematic credit market once again in the United States.  At the same time peoples trust and confidence in the system will be re-established and banks will be able to lend to each other and to main street firms with confidence once again.  Once things return to “business as usual” the entire mood of the marketplace and business overall will be restored and everyone will be able to take a deep breath because they will feel better about the direction of things that are so critical to the way that they live their lives.  This will make a monumental difference in the length and severity of this crisis and US residential real estate downturn overall.