Foreclosures May Define Declining Cities

declining citiesA study analyzing the Great Recession and the unprecedented number of foreclosures we are experiencing comes to some chilling conclusions. Funded by the Mortgage Brokers Association and Wells Fargo, it identifies the short and long-term risks associated with job and population losses.

Very few in the multifamily sector did not experience high vacancy factors from 2007  to 2009, although the worst seems to be over for a few select (rebounding) urban markets.  Unfortunately, there are many areas still struggling with historically low occupancies and continuing high rates of foreclosures.

As vacant properties proliferate – often accompanied by a lack of maintenance on the owner-lender or private owners’ part – deferred maintenance takes over like a metasticizing cancer.

Here are a few of the frightening conclusions reached by these researchers:

  • The empirical evidence on declining cities strongly confirms widely varying experiences among submarkets of metropolitan areas that experience persistent and negative shocks to housing demand. Indeed, some of these neighborhoods and submarkets experienced declines so severe that their future viability seems questionable or, at a minimum, that the road to recovery will be protracted.
  • The vacancy evidence also suggests the importance of moving beyond the standard definition of vacancy – no one occupying the unit at the time of an interview – to one that incorporates information about the duration of the vacancy.
  • There will be and already have been substantial threats to the viability of certain neighborhoods. This, I think, is a critical point that will likely be well understood by potential home buyers and lenders, who will want to avoid places plagued by high foreclosures, vacancies and a deteriorating housing stock due to deferred maintenance. The flip side of this prediction is that potential buyers and lenders will favor those markets where information about the neighborhood’s future vitality is readily available.

The report has many other conclusions and a full copy of the 84 page (pdf format) report can be accessed with this link. It is very clear, however, that property managers and owners need to think beyond an immediate neighborhood concern. Where leadership efforts and support are needed, long-term strategies and goals need to be encouraged for the preservation of whole communities.

There is no place in today’s economy for petty neighborhood competition between owners. Protecting the value of a property investment has to include a broader vision. If you haven’t joined a local apartment association, now is probably a good time.

Creative strategies to beautify publicly-maintained areas, improve local schools and increase the kind of infrastructure that attracts businesses, the arts and cultural organizations are critical to a healthy, vibrant economy. Reducing prolonged property vacancies and deferred maintenance and propertycare are also critical to preserving a neighborhood’s vitality.

Appraisers and lenders are creating the usual problems for potential home and apartment buyers with an additional complicating factor making it even more difficult in some hard hit neighborhoods. Professional appraisal standards require the appraiser to identify the ’status’ of an individual property’s neighborhood.

If in the appraiser’s opinion the property is situated in a ‘declining’ neighborhood, the lender will generally be unable to re-sell that loan to a HUD-related lender like the FHA, Fannie Mae or Freddie Mac. Hence without a community reinvestment agency (CRA) loan in a previously federal-government-targeted area, even a ‘perfect’ borrower will be turned down.

This can disproportionately impact those neighborhoods which contain substantial populations of minority households. It also puts lenders in an untenable position. If they decline a loan based on a prediction of a future ’substantial decline’ in that particular neighborhood, their decision may be challenged under the Community Reinvestment Act which prohibits ‘red-lining’.

Unfortunately, without public sector investment and support, these fragile communities may face even further decline. Property owners in these at-risk neighborhoods – which appear to be any neighborhood with high unemployment, excessive numbers of foreclosures, increasing percentages of vacant properties and slipping sales prices – need to take aggressive actions to turn these neighborhoods around before the decline becomes intractable.

Strategies should also be developed to minimize vacant housing in collaboration with local government, property owners, lenders and the business community. Passing new regulations or enforcing those already on the books to require absentee owners (and lenders) to maintain lawns and similar appearance minimums can prevent an impression of neighborhood blight.

This recession is unlike any most people living today have experienced. The vitality of some communities may not recover if they become embedded in the public psyche as deteriorating locations.

This study emphasizes that neighborhood choice may become an even more “important component of housing decisions”, certainly one no property owner or manager can afford to ignore.

Investments for Beginners

investing for beginnersAfter you’ve begun to accumulate some savings, what do you do with it?

Although there’s no one answer that’s perfect for everyone, here are some ideas that will simplify matters for you.

First, you need to have some idea of when you may need to use the money. If you’ll need it for college next year, you’re going to be limited to investments that make it certain that your money will be there when you want it.

If, on the other hand, you’re saving for retirement 15 years down the road, you can afford to take a little risk that you might even lose money in some years.

Your Risk Comfort Zone

Next, consider your ability to take risk. There are two components that determine how much risk you should assume. We just looked at one, how soon you will need the money.

If you don’t need the money for 10 years and your investment loses money one year but gains the other nine it’s not a big deal. If you’ll need the money next year you don’t have that luxury.

The other consideration on risk is your own personality. Some people are mountain climbers. Others prefer a day at the beach.

If you’re a cautious person you won’t be comfortable with a risky, high-flying investment. Even if the investment does well, the sleepless nights and money you’ll spend on ulcer medicine will make it unsuitable for you!

Sizing Up Your SavingsSizing Up Your Savings

Finally, will you have all of the money to invest at one time? Or do you plan on saving $50 a month? Also consider how you will ultimately use the money. Will you want it all at once to buy a house? Or will you be using the money a little at a time when you’re retired?

Knowing this will help you select the right investment. For instance, if you’re saving $50 a month don’t buy individual stocks – commissions will take all your money.

Certificates of deposit (CDs) aren’t practical, either. You should consider savings accounts, money funds, or mutual funds.

By comparison, if you’ve just received an inheritance of $20,000 and want to use that as a down payment for a house in two years you’ll be able to consider individual stocks, bonds, CDs, treasury bills, and notes.

All of these investments require a sizable investment to be made at one time and sold or redeemed in one transaction.

Now let’s talk a little bit about the vehicle for your investment. You must remember to separate what you’re investing in from how you’re investing in it. What does that mean? Let’s take a simple case that demonstrates how there can be confusion.

One of the things that you can invest in is ownership of companies. One way to do that is to open your own restaurant. Another way is to buy a mutual fund that buys common stocks.

In both cases you own either part or all of a business and would expect to benefit if the business does well.

On the most basic level, there are really only four kinds of investments:

1. Equity

You can be a business owner. You would expect to make money if the business prospers. Typically, you’ll find that this type of investment is best if you have a longer-term view.

Owning a piece of the action is called for if you believe in the future of a business, an industry, and/or the economy generally. For me, this is mostly online assets until recently, as I have begun diversifying and buying some “hard” real estate by buying up a few Houston Heights homes for sale nearby my current home.

2. Debt Instruments

You can loan your money to someone for interest. Here, you give them a dollar today with the expectation that they will give you $1.05 or $1.10 later. It could be a loan to your brother-in-law or a bond issued by General Motors.

When you consider a debt instrument (loaning your money) there are a number of important variables. Safety, for instance.

Money loaned to the U.S. Treasury should be safe. Your brother-in-law will not be so safe. Typically you can expect to earn more interest from a borrower who is less safe.

You’ll need to balance the interest you earn with the risk of losing your money.

A key variable is the term of the loan. A certificate of deposit is for a relatively short period of time, say a few months or years.

By comparison, a corporate bond could be issued for 20 or even 30 years. You’ll find that shorter-term loans are usually safer, but pay less interest.

Again, there are a number of different ways to make this kind of investment. You can buy individual CDs or bonds, or you can buy bonds through a mutual fund.

3. Cash Equivalentsmaking cash money

A similar category is called cash equivalents. That’s where you loan your money for a short period of time (usually one year or less) and expect that your principal will be there whenever you want it without risk of loss. CDs, savings accounts, and money funds are good examples.

4. Hard Assets

Hard assets are things that are usually found in the earth and/or that cannot be easily reproduced by man. Gold, oil, and real estate fall into the category. This type of investment will do better in inflationary times. Again, you can either buy ounces of gold or buy a mutual fund that invests in gold companies.

Beginner’s Plan of Action

Most beginning investors should begin with cash equivalents until they have a fund big enough to meet unexpected family expenses. After that, you’ll want to consider equity and debt investments. Finally, some hard assets for balance.

Although not the only good answer, mutual funds often are a good selection for beginning investors. Most make putting money in or taking it out in small amounts easy.

Many mutual fund companies have choices in each of the categories, making it easy to match your needs.