August 1982
Vol 4 No 11
The housing industry has been dealt two blows which may be portents of more to come. The $3 Billion interest subsidy bill was defeated, depriving the marketing and construction people of needed affordable financing. The Supreme Court joined the fray with its ruling that home mortgages containing clauses which limited their assumability by subsequent buyers of property could be enforced by Federal Savings & Loan Associations even when State courts ruled they could not. Federal law preempts State law in this case.
In a few short weeks we’ve seen our government make decisions which will change many of the fundamentals of the real estate market. Homeowners and investors are going to have to come up with new ways to buy and sell houses. People just now entering the market may have to settle for far less. They’ll face hard choices between their dwelling place and their lifestyle. More than eve, National policy is going to affect our lives through manipulation of the credit markets.
Maybe be standing in the other fellow’s shoes we’ll be able to get a perspective on what the future holds. Let’s start with the Administration. Reagan promised us a tax cut, less government interference, and a balanced budget. In our December 1980 letter we prophesied that we’d have “business-as-usual” and we stick by that forecast. He’s failed to deliver and he knows it. And the elections are only 3 months away. His administration is going to get the blame for the gigantic budget deficit, unemployment, inflation and an ambiguous foreign policy. He can’t support subsidized housing directly for fear of losing his supporters. But he can quietly support the banking and thrift industry by permitting them to “swap” low interest rate loans for securities issued by FNMA, GNMA, and “Freddie Mac”. Then he can permit “creative accounting” whereby lenders avoid having to admit their assets true value is often below their true liabilities. Ergo: Federal control of credit.
What’s happening to the lenders? They’ve learned a hard lesson: Long Term Loans can be a disaster! The Federal S&Ls won a tremendous victory in the Supreme Court. It is almost certain to spread to State chartered S&Ls by way of existing State law (Florida) or by action of State Legislatures and Courts. Or S&Ls may change their charters to become Federally chartered. Even HUD is now considering making their FHA loans non-assumable without modification of interest rates. Henceforth, we’re going to see a lot of “new” mortgage loans which will all share a common trait: they’ll pass the risk of inflation on to the buyer. These loans will effectively remove property appreciation from the owner and transfer it to the lender! Avoidance of these loans is going to be the key to our future.
What about consumers of credit? Government, Industry, Investors, Speculators, Builders, Developers, Home buyers, Entrepreneurs? They’re going to have to learn how to survive in a volatile short term credit environment – and to compete for money. First in line will always be the Government. They’re already consuming more than 75% of available credit and the proportion is growing. Everyone else is going to have to adapt if they hope to meet their own financial goals. Rising inflation and interest rates are a virtual fact of life for the near term future. They’ve already started back up. They’ll keep rising!
Given the above scenario, there is opportunity as well as calamity for those who actively seek it out. Traditional “safe harbors” such as Bonds, Blue Chip stocks, land, gold, gems could become traps. So could real estate income property. Salvation will come to those who maintain a nimble stance and an informed perspective. The ultimate disaster hedge has always been an alert mind – and a willingness to abandon one ship for another.
AND THE GOOD NEWS IS . . .
People continue to ask me whether or not to continue to invest in single family homes. The answer is an emphatic YES. But these houses must be well located, feasibly financed, priced at the mid-point of the market and held for long term income. Houses react like Gold or Diamonds to supply and demand dynamics. High interest rates act just like a building moratorium; hence the SFH is becoming relatively rarer at a time when inflation continues to drive up the cost of reproducing it. Let’s look at demand.
Demographically, housing is astride a powder keg! We’re forming HOUSEHOLDS faster than we’re forming families, according to the 1980 Census. (Break down of Census data by City, County, State can be obtained by writing Customer Services, Data User Services, Census, Washington, D.C. 20233.) Our single youngsters, divorcees, empty nesters as well as investors are entering the SFH market in record numbers. Everyone is climbing onto the bandwagon in the light of single family house performance in this dismal season.
So much for demand. What about supply? With a few exceptions in the Sunbelt, housing construction has fallen to a shadow of its 70s levels. Who can fault the builders? Only about 8% of our population can afford the average priced house at current interest rates. Would YOU build for this thin market if you were a builder? Thus, the current supply of houses will have to meet the needs of a growing number of users. Both prices and rents are surely going to rise as vacancy rates disappear. People will always buy shelter – and sacrifice whatever is necessary to do so.
Now, more than ever, is the time to commence to commence acquiring houses. Time is swiftly running out. In 1982 the foundations for huge fortunes will be laid by those who gain control of shelter. See if you agree with this logic. Housing costs can only be reduced by a housing panic, lowering of prices or interest rates, reduction of building and development costs. Let’s consider these one by one.
Unlike other “pure” investments, the SFH is valued by USERS. Regardless of the investment climate, people won’t part with their houses under normal market conditions if they can’t replace them with another house. Investors may panic and flee the market, but they comprise a tiny fraction of SFH owners. Even a local disaster such as the Love Canal didn’t drive out homeowners until they were compensated. How, people are trying to buy these same houses and move back into them because of housing shortages in the area.
Only the Government is big enough to subsidize the entire housing and mortgage industry. Where would Government get the money? If they taxed the population for it, the citizens would have even less money with which to buy houses, they’d therefore require even larger subsidies. If they just printed more money, resulting inflation would drive prices higher. A lower interest rate applied to higher priced wouldn’t have much impact.
Housing costs are a major component of many inflation indexes. The cost of a house is more or less the bottom line cost of land, development, materials, labor, money and government regulation to which are added costs of service agencies such as Brokers, Title Companies, Attorneys, etc. The cost of each of these elements would have to go down in order for housing costs to decline. That means that people in a wide segment of the economy would have to be earning less than they are now. That isn’t likely without a major depression. Historically, even in the 30's and 70's SFH prices continued to rise, not fall.
The best part of all is that there are still MILLIONS OF ASSUMABLE LOANS LEFT! Only about 25% of the outstanding mortgages and Trust Deeds are affected by the Due-On-Sale decision. FHA and VA loans comprise about 20% of the housing market. Conventional loans originated prior to 1977 often don’t contain FNMA clause #17. Almost half of all single family houses are owned free and clear. And in the case of some 400,000 loans which have been swapped or sold to Freddie Mac, clause #17 probably won’t be enforced. When you can keep your head while others around you are losing theirs, you can prosper. How might we respond to the changes being thrust upon us in today’s market? Read on.
GOLD IS WHERE YOU FIND IT! MAYBE CLOSER THAN YOU THINK. . .
Around the turn of the century a popular motivational speaker made a fortune with his lecture: “ACRES OF DIAMONDS”. In so many words he pointed out that opportunity lies inside each person rather than in a particular locale or situation. It’s so easy to lament the fact that we don’t have cash. Or that we don’t live in a place where we can find good deals. Or that interest rates are high. Or that loans can’t be assumed. As a practical matter, these are outstanding times for the innovative entrepreneur.
It’s still not too late to buy houses with assumable loans! But you have to get cracking. Here’s what you should start doing NOW. Hill-Donnelly Cross Reference Directories list telephone numbers for each house on a street in most towns and cities around the country. You can usually find your local supplier in your Telephone Directory. This Cross Reference Directory also lists the address and identification of occupants for each number in telephone number sequence. Start calling people and offer to buy their house! Don’t wait for an agent to list the property or for an owner to post a for sale sign. Take the initiative to canvass every house in an area where you’d like to buy.
Unless there are already too many ads offering to buy, run an ad in the paper. It might be an offer to buy houses. It might offer loans on houses. It might offer to buy mortgages or trust deeds on houses. It might offer to take houses in trade for a car, boat, motor home or jewelry. It might offer to lease the premises back to the seller. Try every combination you can conjure up and stick with the one that’s a winner. Remember, you’re trying to find assumable, low interest rate loans on houses with large equities which you can buy without using much cash. Next month we’ll work on formulas for buying these houses. This month, concentrate on locating them.
Develop a “door hanger” which you can deliver to each house. If you can find a reliable youngster, have them delivered to a couple of hundred houses each Friday in mid afternoon. Be sure they’re fastened to the door so they won’t blow off. You might put in some catch phrase such as “Instant Cash”, “Amazing No-Pay Back Loans”, “No Credit Checks”, “Get Cash today, move out when you’re ready”. Be sure to list a telephone which you can answer personally. If you must go out, leave a tape to get their phone number.
We’ve even arranged to have these door hangers placed into grocery bags at the convenience stores. We’ve put them in Laundromats. We’ve gotten paper boys to put them inside the newspaper when they deliver them. You’re fishing with a net and you’ve got to expect to throw a lot of your return calls away in your search for the house you want. Of course, you might find others who you could pass on these houses to in return for services. Rehab houses could be given to contractors in return for their services on the houses you want to keep. Or to Lawyers, Accountants, Realtors, Bank Loan Officers, etc. Don’t forget Managers, Appliance dealers, Landlords, Title Officers. All these people can return the favor in one form or the other if you offer them your “culls”.
In some instances you’ll be offered mortgages or trust deeds for sale at very high yields. For instance, we recently bought a 2 year mortgage which yielded over 40% at the discounted price we paid. The cash flow from this will help offset our expenses in houses we’ve bought. If interest rates through some miracle should subside, we’ll be able to resell it with a capital gain just as we would a Bond, thus it acts as a hedge. Meanwhile, we’ll continue to enjoy the high yield and cash-flow return.
Don’t be afraid to hire a “Buyer’s Broker” to increase your efficiency. I pay finder’s fees regularly as well as real estate commissions to people who find houses for me that I couldn’t find by myself. When you become known as an active buyer willing to pay for finder’s services good brokers will begin to call you first. Like the little girl with a curl, a good Broker is very very good. A bad one is horrid. And don’t forget the management firms. They are first to know when an owner is ready to sell or to lease with an Option. They combine proven experience with a specific house with a buying opportunity. They can be a rich source of investment houses which few people even think about.
MANUFACTURED HOUSING – THE NEXT BEST CHOICE FOR USERS AND INVESTORS?
Suppose you were setting up your first household. Besides the high prices for decent housing and you’d have to pay for furnishings. These can run thousands of badly needed dollars and additional monthly payments. In trading off benefits, it isn’t surprising that Mobile Homes and Pre-Fabs moved onto a rented site are gaining ground. Take a tour of a sales lot and you’ll be amazed at how much “house” you can get for the money. For around $25,000 you can buy over 1500 square feet fully furnished. Many of our young and not-so-young people are choosing manufactured houses rather than settling for rentals or older, smaller “starter houses”. And they’re getting good terms too.
For investors, here lurks another opportunity. Manufactured Houses (MH) don’t appreciate much by themselves because they’re so readily reproduced. But once they’ve been attached to a piece of ground the story changes. They begin to appreciate just like conventional houses. The key is the lot they sit on. If it is fully developed with the usual amenities of any other neighborhood, it has an appeal to a growing market segment. Even unfinished lots in areas in which MH zoning is limited appreciate due to scarcity.
Now might be an excellent time to get in touch with MH dealers, small loan companies, and impoverished land salespeople to see if you can’t put something together. One fellow I met developed his own MH lots at a cost of about $7000. He bought his MH directly from the factory for about $11,000 then sold the completed package on the lot via FHA financing for $39,000. FNMA has just recently started buying conventional MH loans, so financing is getting even easier. And more people can qualify for it.
Copyright Sunjon Trust All Rights Reserved
Quotation not permitted. Material may not be reproduced in whole or in part in any form whatsoever.
1-888-282-1882 www.CashFlowDepot.com
