If you think ALL is good, where are you getting your info?

by Eddie Speed, Colonial Funding

If you grew up reading MAD magazine, you know the famous quote by Alfred E. Neuman: “What, me worry?” He never worried because he never knew what was going on. Unfortunately, there are real estate investors who are following his example.

They’re not worried because they look around and see title companies are busy. Real estate is moving. Hard money lenders are back making loans. Wholesalers have investors ready to buy. Mortgage lenders are bustling. The sun’s shining and the birds are singing. What is there to worry about?

If you think things are fine, I encourage you to seek out information from the industry’s top experts. That’s what I do. I always try to make decisions based on data instead of a wet finger in the breeze.

John Burns is one of the world’s smartest real estate consultants. He says that right now, the real estate industry seems to be in the middle of a dead cat bounce. We’ve been through some slow months, and now we’re seeing a bounce from pent-up demand. If you drop a dead cat from a skyscraper, it’ll bounce—but it only bounces once. And not very high.

Right now, title companies, and particularly mortgage lenders are busy because they’re doing deals for perfect buyers with perfect credit—most of which are refis. There are so many refis that loan processing times are now months, not weeks. Overall, about 65% of loans being done right now are refis, and only 35% are home purchases. That’s pretty much the flip-flop of a normal market. And it’s giving us a false read of the condition of the mortgage lending world.

According to the Mortgage Bankers Association, refinance applications are up 100% from one year ago, but purchase applications are up only about 10% from a year ago. The influx of refi applications is causing a log jam with lenders when it comes to processing loans.

So, what should the real estate industry expect in the next several months?

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I’m not saying I’m a genius, I’m definitely not a data geek, or scientist; but I do have experience. I’ve learned to pay attention to data and information from the most reliable sources. In order to be a real estate visionary, I go looking for their opinions, and this is often information other people aren’t paying attention to. When you listen to people who are smarter than you are, you make smarter decisions.

Right now, industry heavyweights like the National Association of Realtors, the National Home Builders Association, Fannie Mae, Freddie Mac, and CoreLogic are all predicting a decline in home prices in 2020 and 2021. They can’t agree on what the percentage drop will be, but they all agree that prices will drop.

I’m not the one making the prediction; but all these sources are saying the same thing, and they know what they’re talking about. I’ve learned to gather information from people who gather and analyze data all day, every day. I seek out their opinions and so should you.

You might not notice that the market is changing, but change is around the corner. What does this mean to your business, and how will you react to it? A surfer can’t direct the wave, but if he knows what he’s doing he can get a good ride from whichever way it’s heading.

In the late 90s, I was doing a lot of deals in the manufactured housing industry. (You know, mobile homes.). A dominant lender in the category was making extremely aggressive loans to anybody who could fog a mirror. It was straight up, “Have you lost your mind? Who would make a loan to this guy?” lending. To compete, the other lenders followed the same unrealistic lending criteria. But the wheels came off the mobile home business because all this aggressive lending left the industry with credit availability problems and excessive defaults. This led to a massive inventory of foreclosed mobile homes. By 2000, 80% of the sales centers were out of business because they couldn’t sell new homes when there was no mortgage money left and an oversupply of super cheap repos.

In 2004, ’05, ‘06, it was déjà vu all over again. I saw the same storm clouds forming over the residential real estate industry. I didn’t have to be an economist to see the identical disaster shaping up with the subprime lending industry; I only needed a decent memory. It sounded eerily familiar. Extremely aggressive lending to people who aren’t going to successfully pay their loans back results in repos and foreclosures. It was obvious to me that the situation was illogical and unsustainable because I’d seen it before. I told people the industry would blow up in their face and they thought I was crazy because business was booming, and everybody had both hands filled with money. When things started to unravel in 2008, I can’t say I was shocked. I had been predicting it would happen but didn’t know when. When the bottom dropped out, there were people who thought it was only going to be a speedbump. (But it was a speedbump as high as a mountain.)

Many REIs as well as other people in residential real estate were caught off guard in 2008 because they weren’t paying attention to all the market conditions. In this case it was caused by extremely aggressive lending. And they weren’t making data-driven decisions—they were making emotional decisions. They were like the doofus who keeps betting on his home team to win simply because it’s his favorite team while ignoring the fact that it’s a lousy team.

Because I was one of the few who had gone against the grain and accurately predicted the bottom dropping out of the industry with all the foreclosures and defaulted loans, I become known as the go-to guy for advice in the REI world. That’s funny, because what’s a note guy doing telling REIs the “weather” conditions? I was asked to speak at more than a hundred state-of-the-industry events in the aftermath of the collapse. I made them aware of important information that was available, but just wasn’t on their radar.

I hammered home the importance of studying the data and drawing your own conclusions. I’m doing the exact same thing today. Lots of REIs are “people people” and they need to listen to “numbers people.”

Here at our family of Colonial companies, my executive team comes from the loan servicing / mortgage banking world. They’re constantly diving deep into the numbers that tell us what’s coming down the road. The steamroller we’re seeing headed our way is a shortage of available mortgage money.

Shortage of money always affects real estate! And it always affects it in a bad way.

Very few people buy their homes with cash; most buyers have to borrow money. When money isn’t available to borrow, the supply and demand balance gets derailed. Deals can’t close without money.

A new industry buzzword has been launched in 2020, and we’re hearing it all the time: “Fractured closing” It’s the term title companies have been using when a real estate agent has a house under contract with the sale pending, but it doesn’t close because the mortgage company turns down the loan. If there’s no money to fund the deal, the buyer can’t buy, and the seller can’t sell. That’s a direct result of credit tightening. Remember about 35% of the people who get a mortgage in January 2020 can’t qualify for one to today, they have been left behind.

The good news is entrepreneurial-minded note investors can fill this huge gap by understanding how to architect seller financed notes and use other creative financing techniques that we teach at NoteSchool. (BTW, our training classes in the last few months have been busier than ever. It’s no wonder why.)

I’m not a weatherman, so I listen to what the weatherman says. I also listen to the experts in the real estate industry and you should, too. I encourage you to pay attention to the research from the most reliable sources, it’s out there. Let data drive your decisions not optimism. What happens if you watch the weather forecast and you don’t believe the weatherman when he says it’s going to pour down rain? You’ll probably get drenched.

In my opinion, there’s no such thing as bad weather. There’s only the wrong clothes! If you know the storm is coming and you’re prepared when it hits, you won’t get soaked like everybody else.