Archive for February, 2008

America’s most miserable cities
Add high rates of violent crime and unemployment to income taxes, commute times, weather and pollution and what do you get? Detroit.

By Kurt Badenhausen, Forbes.com

Imagine living in a city with the country’s highest violent-crime rate and second-highest unemployment rate. As an added kicker, you need more Superfund dollars allocated to your city to clean up toxic-waste sites than just about any other metropolitan area.

Unfortunately, this nightmare is a reality for the residents of Detroit. The Motor City grabs the top spot on Forbes’ inaugural list of America’s Most Miserable Cities.

Measures of misery

Misery is defined as a state of great unhappiness and emotional distress. The economic indicator most often used to measure misery is the Misery Index. The index, created by economist Arthur Okun, adds the unemployment rate to the inflation rate. It has been in the narrow seven-to-nine range for most of the past decade, but peaked over 20 in 1980.

There also exists a Misery Score, which is the sum of corporate, personal, employer and sales taxes in different countries. France took the top spot (or perhaps bottom is more appropriate) with a score of 166.8 in 2007, thanks to a top tax rate of 51% on personal incomes and 45% for employer Social Security.

But aren’t there other things that cause Americans misery? Of course. So we decided to expand on the Misery Index and the Misery Score to create our very own Forbes Misery Measure. We’re sticking with unemployment and personal tax rates, but we are adding four more factors that can make people miserable: commute times, weather, crime and that toxic waste dump in your backyard.

We looked at only the 150 largest metropolitan areas, which meant a minimum population of 371,000. We ranked the cities on the six criteria above and added their ranks to establish the Misery Measure. The data used in the rankings came from Portland, Ore., researcher Bert Sperling, who last year published the second edition of “Cities Ranked & Rated,” along with Peter Sander. Economic research firm Economy.com, which is owned by Moody’s, also supplied some data.

And the, ahem, winner is …

Detroit in the top spot, with its sister city Flint ranked third, is probably not a great shock. “If Detroit were a baseball team, we’d say they are mired in a slump,” says Sperling. Both Detroit and Flint have suffered tremendously from the auto industry downturn. Flint’s plight was immortalized in the Michael Moore movie “Roger & Me,” which chronicles Moore’s attempts to meet with then-General Motors Chief Executive Roger Smith.

Crime and unemployment are closely linked, according to Sperling. Our three most miserable places bear that out (Stockton, Calif., ranks second). All three are among the eight worst cities in terms of both unemployment and violent crime.

The United States’ two biggest cities both induce a ton of misery. New York was the fourth-most-miserable city by our count, while Los Angeles clocked in at sixth. The Big Apple has the longest commute times (36.2 minutes) and the highest tax rates (10.5%) in the country. As the financial capital of the world and home to write-down kings Merrill Lynch and Citigroup, New York appears poised for more misery in 2008.

The people of La-La Land have some of the best weather in the U.S. (it’s ranked seventh) but scored poorly when it came to commute times, Superfund sites and taxes. And we did not even factor in air quality, where Los Angeles is the worst in the nation by far, according to Sperling.

The 5 most miserable cities in the U.S.

*Misery Measures are derived at by ranking the 150 largest metropolitan areas on six criteria — income tax, violent crime, Superfund sites, commutes, weather and unemployment – and then adding their ranks. For example, New York ranked worst (150^th) for commutes, 150^th for income tax, 99^th for unemployment, 78^th for number of Superfund sites, 105^th for violent crime and 86^th for weather, which add up to its Misery Measure of 668.
See Forbes.com’s full slide show of most miserable cities.

An ugly surprise

The biggest surprise on the list is Charlotte, N.C., which is ranked ninth. Charlotte has undergone tremendous economic growth the past decade, while the population has soared 32%. But the current picture isn’t as bright. Employment growth has not kept up with population growth, meaning unemployment rates are up more than 50% compared with 10 years ago. Charlotte scored in the bottom half of all six categories we examined and ranked 140^th for violent crime.

So take heart, Detroit, you are not alone. After all, misery loves company.

Another article, this time from the Associated Press. I have added the emphasis.

Detroit had top foreclosure rate in ‘07
By ALEX VEIGA, AP Business Writer
Wed Feb 13, 6:28 AM ET

LOS ANGELES – The Detroit area, hit hard by the double-whammy of unemployment and a slumping housing market, had the highest foreclosure rate in the nation last year, with several cities in California ranked close behind, an analysis of foreclosure activity in the country’s largest 100 metropolitan areas shows.

Some 4.9 percent of the households in the Detroit metro area were in some stage of foreclosure in 2007 — 4.8 times the national average, according to the study being released Wednesday by mortgage research company RealtyTrac Inc.

Stockton, Calif., ranked second with about 4.8 percent of its households in some stage of foreclosure, while the Las Vegas metro area was third with a 4.2 percent rate.

Irvine, Calif.-based RealtyTrac determines the ranking by comparing the number of households in a metro area with the number of foreclosure filings, which include notices of default, auction sale notices or bank repossessions.

In all, 72,616 filings on 41,273 properties were reported in the Detroit metro area, which includes Livonia and Dearborn. The foreclosure rate represents a 68 percent jump from 2006, RealtyTrac said. Michigan has been in a protracted economic downturn and has led the nation in unemployment, a combination that has caused many homeowners to fall behind on mortgage payments.

Another Michigan metro area comprising Warren, Farmington Hills and Troy was ranked 17th, with 2.1 percent of its households facing foreclosure.

“As expected, the number of properties entering some stage of foreclosure in 2007 was up in the vast majority of the nation’s 100 largest metro areas, with 86 metros reporting increases from 2006,” James J. Saccacio, chief executive officer of RealtyTrac, said in a statement.

In California, where home values more than tripled since 1995, plunging home prices and tighter lending standards chilled the market, leaving many financially strapped homeowners — some facing steep payment hikes from mortgage rate resets — with few options.

The slump has been steepest in inland regions that experienced a run-up in home prices and new construction toward the end of the housing boom, so it’s not surprising that several of the six cities in the state that ended up ranked among the top 20 metro areas are located in the Central Valley and inland counties in Southern California.

In Stockton, 22,184 foreclosure filings were reported on 10,608 properties last year, up 271 percent from 2006, RealtyTrac said. The Riverside-San Bernardino metro area east of Los Angeles was ranked fourth, with 102,506 filings on 51,739 homes, a rate of 3.8 percent. Sacramento was ranked fifth, with 3.1 percent of its households reporting late payments.

The other California metropolitan areas in the top 20 were Bakersfield, ranked seventh; Fresno, ranked 14th; and Oakland at 16th. The Las Vegas metro area, which also includes Paradise, Nev., reported a total of 59,983 foreclosure filings on 30,375 properties in 2007. Ohio, which has also been wracked by high unemployment, had four metro areas among the top 20, including Akron at 12th, Dayton at 15th and Toledo at 19th.

The metro area comprising Cleveland, Lorain, Elyria and Mentor was ranked sixth, with some 2.9 percent of all households in some stage of foreclosure, RealtyTrac said. Miami ranked eighth with a 2.7 percent rate, the highest among all metro areas in Florida. Fort Lauderdale was 10th and Orlando was 20th.  The other areas in the top 20 were Denver-Aurora, Colo., at No. 9; Atlanta-Sandy Springs-Marietta, Ga., at No. 11; Memphis, Tenn., at No. 13.; and Indianapolis at No. 18.

I read this article this morning. I was surprised by it because I’ve been thinking just the opposite over the last six weeks, because I’ve been seeing homeowners actually giving up and throwing in the towel because they’ve finally realized the harsh reality of this market. This article demonstrates, though, just how much further we have to go before things turn around.

From CNNMoney.com . . . .

Home Prices in the State of Denial
Thursday February 7, 5:58 pm ET
By Chris Isidore, CNNMoney.com senior writer

Despite numerous reports showing home values in historic decline, more than three out of four homeowners believe their own home has not lost value in the past year, according to an online survey.

The survey was conducted by Harris Interactive for Zillow.com, a Web site that gives estimated home values.

The survey of 1,619 homeowners found 36% believe their home has increased in value, and another 41% believe their value has stayed the same. Only 23% believe their home has lost value.

“This survey reveals that despite the data to the contrary, people either aren’t paying attention to their housing market or are in denial about their own home’s value,” said Stan Humphries, Zillow.com vice president of data & analytics.

Zillow’s own estimates are that home values declined 5% on average last year, with many markets posting much steeper declines. Humphries said that even in markets where new homeowners owe more on their mortgage than their house is worth, “most people are not really affected by declining values unless they absolutely must sell or need to immediately refinance or withdraw equity.”

Figures from the National Association of Realtors show that the median price of an existing home sold in 2007 fell 1.4% from 2006, the first decline in that key price measure the trade group has ever recorded. The Realtors released an economic outlook Thursday that forecast another 1.2% decline in prices in 2008.

And those price readings under represent declines in the nation’s weakest markets, which have taken a big hit to sales volume.

The S&P Case/Shiller, a closely watched index that tracks home values of all homes in the nation’s largest markets, not just those that are sold, showed about an 8% drop in home values in November compared to a year earlier, the worst on record.

Hugh Moore, a principal at Guerite Advisors, a research and financial advisory firm, said he wasn’t surprised by the denial demonstrated in the survey results. He said research into previous housing busts shows homeowners are slow to accept that their home has lost value. “It’s a visceral reaction; you lock into the highest price you ever heard, and you’re going to hang onto it,” Moore said. “It’s a grieving process. First you go through denial and disbelief. Acceptance is the last step you get to.”

Moore said it’s important to remember that only a small fraction of homeowners try to sell their home in any given year, and unless they are trying to get new financing or a home equity line of credit, there’s no reason most will be confronted with the decline.

But he said the denial will make recovery from this current housing slump take longer and be more difficult because home sellers will be slow to adjust their asking price to the new market reality.

“Studies have shown stock markets have public markets that realign themselves rather quickly,” Moore said. “But housing busts affect the economy twice as much, because home ownership is so much more widespread, and they take twice as long to correct themselves.”

I’m in the process of doing another of my cash-out refis. I just bought it last Friday, and I’m trying to set a new record and do a cash-out refi based on the appraised value in less than 30 days. I just did two yesterday – one was 42 days and the other was 55 days.

My mortgage guy is top notch (Dave Geraghty at Centerone Mortgage), and he’s been keeping me abreast of the changes in the mortgage market. He’s been telling me to expect big changes, and we started to see them in one of these quick refis that I just completed. Due to the lack of sales, one of the properties had to have a field review by the lender’s in house review appraiser. The review appraiser (of course) knocked the value down, but not so much that I couldn’t still get just about all of my money out.

So I had Dave call the same lender and ask them about this new property. I wanted to strike while the iron was hot with these people, because this new property is exactly the same size and configuration and one block over and two blocks down from the property that had the appraisal knocked down.

Their reply demonstrated even more tightening of the guidelines:

All comps have to be in the last 90 days, the comps have to be identical to the subject, some square footage, bed room count, bathroom, foundation, exterior, everything the same.

There can be little to no adjustments on the appraisal. If your appraiser can do this then you may be able to avoid a review appraisal. The underwriter is always going to reserve the right to ask for one though, so you ought to expect it.

Wonderful. $400 for an appraisal and another $300 for a review appraisal. Again.

But do you know what? The math STILL works. And that’s the name of the game.

And the game is all about acquiring productive assets.

I received a couple of questions after my last post on Capital Deployment.

To address one of them – no – I won’t tell you Bluetooth convertible guy’s name. I haven’t heard from him since I wrote it though. I was wondering why my email spam traffic was down 30%.

The relevant questions were on this whole issue of capital deployment, so I thought that it made sense to discuss it further, especially in light of some new developments that I’m seeing in the areas that I’m tracking.

In a tight market where deals are hard to come by, an investor will scratch and claw to ferret out the deals, and many of the investors that I know, therefore,  will take on just about any deal that comes their way, because they don’t know where the next one is coming from. In a tight market that’s probably a smart strategy.

But, as we discussed previously, that’s not a problem now. In fact just the opposite has occurred – there are TOO many deals available. And that’s actually a BIGGER problem than not enough deals.

Why? Because no one can buy every good deal that’s out there because no one that I know has an unlimited supply of cash.

And that forces us to choose. And most people hate making decisions and as a result they’re really bad at it.

For example, in my last post I referred to two properties on the same street that had vastly different ROIs. But the cost was the same for the two. So on one hand you could spend your $65k and when you’re done with the rehab have a crappy property in a rent-heavy neighborhood that will give you renter headaches, a miniscule cash flow, zero appreciation, and a very low, although positive, ROI.

Or on the other hand, you could spend your $65k on a property that when you’re done attracts high-quality renters, premium rents, good cash flow, and a very strong ROI. And you might even get some price appreciation when the market turns around because you’re in a prime first-time-homebuyer neighborhood.

This really isn’t a hard decision, is it. But the scary thing is, with all of the decent properties out there, the crappy property in the above example went pending since my last post.

Which brings me to the point of my post – the flight to quality.

Quality has to be the driving force behind your decision-making when you have a limited supply of funds. You need to buy the best properties that you can, and adjust your criteria as the market changes.

For example, in the areas that I track, brick properties had been resisting the downward price pressure pretty successfully since the start of this downturn. Driving through the neighborhoods you’d see few houses for sale, and those that did come up for sale sold quickly for good prices in relatively short time-frames.

But just this week I saw the prices of three prime properties  - listed and occupied non-foreclosures – crash through the unofficial brick-price-floor that I had been observing. This now puts brick homes in play, and it forced me to change my criteria for everything, including the properties already in my pipeline.

Because I want the best quality properties available. Because I have a limited amount of money to invest.

When you don’t have “best quality available” as your #1 criteria, you end up with what’s left over. That’s so unnecessary in a market like this.