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Why government mortgage programs aren't working and what's feeding the supply of discounted real estate.
Welcome to the Real Estate Report with Chris Williams of Blue Sky Capital. This is where you can learn about what's happening in real estate and how you can make big money in today's real estate market.
Hello and welcome to the real estate report with Chris Williams. I'm your moderator, Tony Vignieri. On today's show, we'll be taking a look at what's feeding the supply of discounted real estate and answer the question of how long is it likely to last. With us on the show is real estate expert, Chris Williams, the CEO of Blue Sky Capital in San Diego. Hello, Chris!
Hi, Tony and as always, thank you for moderating the show.
Great to have you, Chris, and for our listening audience, some background on Chris and his real estate investment firm, Blue Sky Capital. Chris Williams is an expert in real estate investment, finance and syndications. In his 13 years in real estate, he has managed and directed real estate teams and handled more than 300 real estate transactions. He is the proud recipient of the Prudential's President's Award, an award he won nine years in a row. In 2011, Chris launched Blue Sky Capital, a private equity firm in San Diego. Blue Sky Capital is helping to rebuild neighborhoods through their systematic and disciplined approach to buying and selling distressed real estate. Chris, there is a large supply of discounted real estate out there and of course, we understand this is coming from foreclosed properties and short sales, but provide some more perspective here.
Oh, sure. Well, Tony you know, this is a long answer so bare with me. So in a recent report released by the Homeownership Preservation Foundation, it shows that telephone calls to the government HOPE hotline, which is a foreclosure avoidance hotline, and that we have callers who are current with their mortgages are up 70% this year and so...
Yeah, it's a big number. Of those that are counseled, half stated the "mounting instability" to continue payments could cause them to default and more than 75% of those current borrowers had credit scores above the subprime threshold when they took out the loan. So as a result of these, the number of foreclosure starts had increased significantly and Tony, we believe that this is the proverbial effect in shoe dropping for the housing crisis because we now have borrowers that were not subprime borrowers. They're some sort of an A-borrower who are now in distress and foreclosing. So, there's something else. What's further feeding the supply? Tony, here's the job situation, consider this. In a recent Reuters' article on college graduates who generally go on to become the biggest group of first-time US homebuyers, many of them now are graduating into a climate of falling wages, soaring rents and are members of the most indebted generation in history who owe an average of $25,000 in student loans by the time they graduate so then...
Tony, they then elbow their way into a labor market that is so rough that the number of people with jobs is currently at its 30-year low with health and retirement benefits that are shrinking and the young workers actually face a greater chance of losing their jobs than any generation before. So Tony, we believe that housing market improvement has really gotten as good as they can without more improvement in the labor market. See, housing prices and income usually move in lockstep. They are connected. But real median household income is currently stuck, get ready for this -- real median household income is stuck at the same level as during the Clinton administration in 1996 at about $49,000 a year.
It is. So what it means is that means the housing market, we think, we'll remain troubled really for an extended period of time, a long time, so all of the work that the government is doing to save the homeowner isn't working. What the government needs to do is to either create a program that works or get out of the way so that we can stimulate wage growth on our country. When we stimulate wage growth in our country, the labor market will change and therefore, the housing market will change.
I know. You mentioned government programs and bank programs, you know, that like there is -- Bank of America has a recent program that got a lot of publicity about reducing your mortgage payments for the homeowners, but they're not really effective, are they?
Well, they're not. You know, it's smoke and mirrors, Tony. Because the people that will "qualify" that program are the people that don't need it. To have this mortgage reduced, you have to never miss the payment. So the people that haven't missed payments that have jobs and are good to go or having their mortgages reduced, but the people that are in distress and not making their payment don't qualify, that's number one. The other reason it's not effective is because what they're doing is lowering payments by adjusting the term of the note or the interest rate, but it doesn't address the negative equity so homeowners are literally held captive in their homes. Get this. There are approximately 11,000,000 homeowners underwater right now that are in the foreclosure process with another two and a half million that are not in foreclosure but they have less than 5% equity, so what does this mean? If they have less than 5% equity, a market drop could put them short or if they have less than 5% equity, they can't sell because it cost more than 5% to sell your house, so none of them can sell. All these people are buried. The government and bank programs are not the solution.
I wanted to make a point. You started explaining this in the beginning. You know, it's going to take a long time to work through this and we hear reports almost daily about home prices are up slightly. It looks like the market has bottomed out. But in reality, we're not going to return to the way it was several years ago. Is there a false impression that people are thinking that, "Oh, it looks like it's bottomed out. Everything is going to go back to normal." Explain that a bit.
Yeah, sure. Well, many consumers are hoping it's going to back and look -- the real estate market will look like it is from 2000 to 2008, but that was the bubble of all bubbles. It was artificial. A healthy market never sees double digit increasing values year over year. So if we make it back to that, then we're back into a bubble. But Tony look, this is gonna last a long, long time, maybe another decade. The current uptick we're seeing in prices is unsustainable because the source of the uptick in prices is artificial. It's given by a bank-generated supply constraint. It's not given by -- the prices are going up because wages are going up which is what feeds price increases. See, the demand has stayed relatively flat, but the supply has dropped so you see an uptick. And by the way, this is the greatest risk to dragging out how long it will take. What am I talking about? The artificial bank created supply constraint is the greatest risk because it's creating an uptick in pricing and if prices go up, investors like my company will leave the marketplace or do a gut check.
If the investor leaves the marketplace, sales will grind to a halt because a high percentage of the deals done in the marketplace today are done by investors like my company. So if they leave the marketplace, there is -- Tony, there is just not enough buyers that are non-investors to double up all the supply that needs to be doubled up. So the investor is critical to the recovery, but if prices get too high, if there's not enough discount, the investors will go elsewhere and that will just drag this on, who knows, maybe another decade.
And that's a very good point that you made about because we've seen the headlines, you know home sales are up. Well, the percentage of the home sales are up because of the investors, correct?
Absolutely. There are people out in the world that kind of demonized the investors. They just misunderstand the value that the investor plays in the market place. It's just a math or mathematics, there are more houses that must be sold or foreclosed then there are ready, willing and able buyers and as a result to that you needed an investor that will come in and buy it, however, the investor needs a discount and so you got to leave that discount in place so the investor can gobble it up. Now, it all goes through at the current phase -- let's say another 8 to 10 years all the supply will be consumed that the investor needs -- the investor will go on to other markets and then will be back to a healthy markets where we have the supply being doubled up by end-user homeowners, but until then the investor is critical which is why our company plays a critical role in the recovery of the housing market and frankly the national economy.
Right and that was my question from the standpoint of the -- it's an investment firm of you know explained Blue Sky Capital helped in all of this helping this matter.
Sure. Well, we help on all fronts. We help the homeowner that stuck in their home. We give them a dignified solution to get out from on to their home by managing the short sale form. We also helped with the investors on marketplace. There are -- well there is an enormous amount of distress in the market, there is also people that are well-positioned to make money. The investor with cash or an IRA and so if you are an investor that is looking to make some money, how are we part of the solution? We have developed a way to purchase properties that as far as we can tell no one else is doing. We're not go talk about exactly what that is because it's confidential and proprietary, but we have developed a way by properties, not at auction and not of the multiple listing service, where we can buy and steeply discounted, so the investor needs to find the right partner that can get them the deal, we believe that we're that company.
And that's actually great news. I know you said you can't get in to the details of that but that will actually help the whole process here, right? If you're able to security and get them on the market and rehab them and resale them and get new people in there.
Indeed, you know because look, I don't say this much about our process. We divide the way to purchase them directly from the banks which people talk about doing but actually getting it done is very difficult. We have devised the way to do that and so we're part of the solution because we're coming in and we're moving this distressed inventory off the bankbooks through the market getting the pricing set to market value and getting a good qualified borrower paying the bills in there. And so again, we're part of the solution by what we're doing.
And again it's being part of the solution -- another point is that you're really, really helping to rebuild neighborhoods throughout communities.
Yeah. We really are. You know, as I drive down the street in my neighborhood and different neighborhood in San Diego it is very evident who is in distressed. You can drive up and buy the house and you know, "Oh, they're in distress." They're either in foreclosure or something is going on. The house doesn't look well kept, the yard is dead, etc. When we come in and buy a house we do a significant rehab on the house. We make it a beautiful house both inside and out. So, we as a result, pull up the values in the neighborhood. We stabilized the neighborhood. There is some statistical modeling that says that one house being in foreclosure drops the value 10% of the neighborhood, one house.
And so when we can take a house out of foreclosure, get it sold, we then can be a part of the solution to housing stabilizing in this different markets.
That's great. Chris, only a few minutes left. Any parting thoughts for our listening audience, you know which bought our subject here and other things -- what's feeding the supply of this kind of real estate?
Yeah, sure. Well, for the consumer on the marketplace, things are not gonna get better. I recommend that you take drastic actions to get out from under that house if you're buried and you don't see yourself being able to sustain it. For the investor, I think that it's the greatest real estate investment opportunity in a hundred years and for the investor you wanna partner with the right group of people and we are that right group of people. Like many of our competitors, and I said this on our last show, we're frankly behind in our acquisition target right now; however, we've been very patient, Tony. We're a patient investor. We'll wait for the deal rather than jump at something that doesn't make sense. As a result of that patience, we are about to close on several deals and we're gonna make enormous profits for our company. We're excited about that and we foresee with our new acquisition model that we'll be able to provide steeply discounted real estate to the investors in the marketplace. So, whether you are a consumer or you are an investor, I invite you to give us a call or send us an email and we'll talk to you about your options.
That's great. Well, thanks. That's great information Chris and we should point out the Blue Sky Capital website is blue-sky-capital.com. That's one word, blue-sky-capital.com or you can call them at (877) 424-7479. That's (877) 424-7479. Easier way to remember that phone number is (877) 4CHRISW. Well, thank you Chris for all your insight on today's show.
Yeah. Thanks, Tony. Thanks again for moderating.
And for the audience, thanks for joining us on the Real Estate Report with Chris Williams. We're on the air weekly to keep you updated, to keep you informed about what's happening in real estate today. I'm Tony Vignieri. For Chris Williams and the entire Blue Sky Capital team, have a great real estate day!
Thanks for joining us on today's Real Estate Report with Chris Williams of Blue Sky Capital. Join us again next time and remember this is where you can learn all the insights about how to make big money in today's real estate market.
It's good to talk.