Bill Schramm and Bethany Siwicki scoured property listings for three months before agreeing to see a home in Round Lake Beach, even though its online pictures didn’t look promising.

“It looked like a piñata blew up in there,” Schramm said. Every room was a different color, and the only way to tell the carpet once had been white was looking at the furniture marks.

But the home they visited bore little resemblance to the pictures. The walls were white, new carpet had been installed, and repairs made. The recently engaged couple immediately submitted an offer and are waiting to close on their first home purchase.

Sprucing up a home to sell it faster and for more money is a strategy frequently advocated by real estate agents. In this case, though, the seller is Wells Fargo Bank, and the home Schramm and Siwicki are buying is a foreclosure.

There are still plenty of dilapidated foreclosures on the market marred by water damage, mold, broken windows and missing plumbing fixtures, properties that hold little appeal except to investors and professional rehabbers.

But as the quality of foreclosures and the communities where they are located has improved, so, too, has interest in them by consumers. To entice those buyers and lessen their inventory of real estate owned foreclosed homes, commonly known as REOs, banks are spending thousands of dollars on some foreclosures. In addition to new paint and carpet, floors are being refinished, old windows are being replaced, and leaky roofs are being repaired.

The strategy benefits the banks and home buyers, who otherwise would have trouble securing mortgages on homes that a lender could term “uninhabitable” because of needed repairs. At the same time, it helps the broader real estate market because while the foreclosures still sell at a discount, it is not at the fire sale prices of unlivable properties.

For traditional home sellers, the trend of banks plowing money into foreclosures means they will have to be more realistic in their pricing, because the foreclosure for sale down the street may look a lot more inviting to prospective buyers.

“Foreclosures used to be fewer and far between,” said Ray Millington, an agent at Century 21 Roberts & Andrews. “The problem is, we say we’ll concede that sale, but what happens when another one pops up. It becomes an ongoing thing. It’s not like you have only one in the subdivision anymore.”

Real estate agents say they are having the same conversation with banks that they have with any seller, and it starts by identifying the target customer for a property. If the answer is an owner-occupant, agents recommend fixes that can range from a few thousand dollars of paint to $25,000 of kitchen upgrades. In the past, banks rejected such suggestions, viewing them as throwing good money after bad, but now some are heeding the advice.

Last month within the city of Chicago, 207 of the 472 single-family detached homes that sold were foreclosed properties. An additional 62 were short sales, transactions in which the homeowner sells the home, with the lender’s permission, for less than the amount owed on the mortgage. Combined, distressed properties in February accounted for 57% of all single-family detached sales and 46% of all condos, according to the Chicago Association of REALTORS®.

Fannie Mae repossessed more than 262,000 single-family homes nationally last year, and as of Dec. 31, its inventory of single-family REOs was almost 163,000.

Under its “first look” program that began in September 2009, Fannie Mae will only consider offers from owner-occupants or buyers like nonprofits during the first 15 days a home is on the market. Fannie sold nearly 29,000 homes to consumers under that program during its first year.

Buyers are jumping on the best REOs, and keen interest can lead to multiple offers. “The ones that are in good shape, people are snapping those up,” said Mike Stodola, an agent at Koenig & Strey Real Living. “The ones that are left are ones that need major work.”

Despite about $30,000 in improvements, the house Schramm and Siwicki will buy for $125,000 still needs work. The couple’s first project is to remodel the kitchen. “It’s probably the most hideous livable house you’ll see, but I can fix it,” Schramm said. “Nothing even comes close to this house in terms of value per dollar. There’s a ton of houses out there that cost less than $125,000. Do I want to buy them and move into them? No.”

It’s not just the house and the neighborhood that help lenders decide whether to make presale investments. It’s also the potential risk of vandalism. “There’s no sense of putting a furnace in there if it’s going to walk away the next day,” said Abe Rabah, of Great Street Properties.

In Barrington Hills, Ill., down the street from one well-appointed home listed for $890,000, is another property, a foreclosure that went on the market at $525,000. The Tudor-style home attracted some foot traffic but no serious consideration.

The house was removed from the market and almost $20,000 of updates and repairs are being made before it’s relisted. “We’re doing everything that is going to make the property look better, but also make it financeable,” said Connie Ritchie, an agent at RE/MAX Suburban. “When you walk in now, you say this is nice and clean. This is something I can work with.”

As I stated last month we have a tricky and rocky road ahead of us but we must never forget that our market is also very finite and we will sooner than later run out of foreclosed homes and short sales.  Again, some 50% of all homes are either free & clear or have very low loan balances. Let’s jump to the numbers and see what story the market is telling us.

January-March 2005 the market closed 780 homes in the first 60 days of the New Year.  Now fast forward to the first quarter of 2008 and we closed a mighty 372 homes! Q1 2009 and we saw 558 homes close escrow. Q1 2010 and we see 769 homes close escrow with the help of the buyer assistance program executed in 2009 pushing traffic.  So what about 2011 with no government help to push sales? January-March 2011 we saw 775 closed sales.  ONLY 5 LESS THAN 2005!

Pardon my sense of sarcasm but seriously, I am told every day by moneyed and knowledgeable people that we are hopelessly mired in our own manure.  I beg to differ with such knowledgeable people.

As of this writing there are 1,854 homes in the Reno/Sparks market for sale, which used to be nearly 3,000 when the “market adjustment” started.  But wait, how many homes are in escrow right now?  1,408 homes are pending sales.  Now before I go on I said we have a tricky and rocky road ahead of us, and we do.  Nowhere are prices stabilizing or even having a hint of growth but real estate is a long term product and never was and is not now going to show short term results.  Today’s buyers must buy for the long term (i.e. five years or more) and that should be the rule forever more, but sooner than later the tough lessons learned will be forgotten and we will see another day of runaway prices but not in this decade we can be certain of that.

Our inventory is no longer the hulking monster it once was.  Today when I show homes, my real issue is that the good homes are now really hard to find.  If a buyer wants to just buy a house and not a home, we have inventory but if you want a home, well get ready for a surprise. I could have said the exact same thing in 1990 or 1995, good homes are always in short supply. 

Buyers are starting to find that if they want value, location, amenities and good condition they need to be more realistic about what they want as the number of great cheap homes is dropping.  Short sales and foreclosures are alive and well, don’t fret, and we are not going to run out of either so if you have your heart set on a foreclosure or a short sale we have plenty.  

We have agents scrambling to find rentals in the better areas today, 18 months ago that was easy, but not today.  Before I go any further if the home is overpriced it is still overpriced.  Our market has zero tolerance for anything but priced on the money.  Have great value, location and amenities or the buyers will not even seriously look.  I need to say that before sellers start saying “how come no one is looking at my home if the numbers are getting better?”  Just a quick guesstimate but probably 70% of the non-distressed homes listed for sale today are overpriced and have about a 5% chance to sell at the sellers’ price.  Those are pretty awful numbers but that is not because of the market that is because sellers five years later do not want to give up on what once was.

If the trends continue, and it appears they will, 2011 can be our pivotal year.  2011 can be the year we turn the corner and opening the door to stabilize our market so in 2013 we can rack up an average growth of .05%-1.5% and possible by 2014 a possible 2+% growth.  Ok, ok, yes I know about the phantom inventory the banks have, I know about the current default numbers, yes I know about our short sales and yes, if you still believe that we are going to sit in the basement and the manure is going to get deeper, you are probably right.

I like the numbers we are seeing. Most people will not even read about these positive changes for six more months due to the lag in national real estate reporting.  And face it, bad news sells better than good news. I like the real numbers we are seeing of people moving to our area, I like the offers flowing into my office that say buyers are buying.  That I can work with, and so can you.

The next 60 days are going to be very important to all of us.  Sales need to keep pace with inventory or we will slide backwards. Let’s keep up the good work! 

Have a great spring!

Banks and investment banks played with the US economy and profited mightily at the expense of America on the whole.  Regardless if you were conservative and never played in the housing boom, you were used by the banking industry and are now worse off for it. 

On Saturday the Reno Gazette-Journal ran a front page story “Rescue may miss many who need it”. First, let me say in essence that the paper is correct.  Bank of America is recognizing that 45,000 very sick homeowners are going to lose their homes.  The real issue is that those 45,000 are the nearly dead and it is the 16 million homes underwater that need to be focused on and until all banks step up to the plate, housing is flying south for a very long and bitter winter. 

I want to acknowledge just how difficult acting on the problem really is.  The banks have woven a web of curious networks between insurers, investors, servicers and others with protections, profits and liabilities that can be hard to understand.  Despite the problems we are facing, some are profiting from the chaos, not least the very assorted banks and investment banks that brought on the disaster to the American people.

On one hand the commonly held belief, still held by many, is to let the cleansing process work itself out.  Many homeowners that never bought during the boom, or have free and clear homes, are heard to shout this sentiment out and cast all that are in trouble as dilatants that have received their just rewards for not being smart like them.   Without a question in 2006-2007 tens of thousands of people lost their homes that should never have ever received a loan.  But now we are talking about 2010.   We are talking about people that bought homes in 2007, after the “bubble burst”, fully qualified for a home, put 20% cash down and today are underwater!  We are also talking about homeowners that purchased homes in 2001, well before the much talked about “bubble” and put 20% cash down and today have homes that are underwater.  Our market has rolled back well beyond the stupidity of 2003-2006, back to 1998-1999 values.

In the Saturday RGJ article titled “Rescue may miss many who need it”, University of Nevada, Reno economist Tom Cargill said of the new Obama plan “it’s a terrible waste of taxpayers’ money. It uses taxpayers’ money to support bad decisions made by people to buy homes they can’t afford.” Personally, I highly disagree.

We are looking at homeowners that now realize that they are $200,0000-$500,000 upside down in their homes. These were all qualified buyers, who all put down 20% or more and are underwater.  Mr. Cargill, please tell these tens of thousands of Nevada homeowners tough luck and that they made bad decisions.  Please tell them to forget that they owe more money than most and to go out and become consumers again and run up their credit cards and spend money so the economy can grow and the banks can profit and they just need to suck it up and in 7-12 years, if they are lucky, their homes just might, maybe have some equity in them.

What needs to be done?  I suggest the radical notion of the following:  protect the principal, protect the investors, encourage homeowners to pay off their principal loan balances.  First, work with all homeowners that have homes underwater and who are current on their payments.  Move all loans to a .5% interest based on a 15 year amortized loan.  Years 1-5 are at .5%, years 6-8 are at 4%, years 9+ are at 6%.

Example:  A $300,000 loan @ 5.5%/30 years has a P.I. payment of $1,703 per month.  .5% has a payment of $1,730 per month.  The point here is that many homeowners are short selling as much as they realize that it will easily be 10 years before they have equity but can make the payment.  With a 15 year loan not only do we have free and clear homes in 15 years in a mere 5-7 years, the loans will have been paid down so much that with no appreciation whatsoever in the housing market the homeowner will have equity. 

For those homeowners that are not current they can be offered 20, 25, 30 year loans.  In the same example the loan payment would drop over $800 per month on a 30 year loan.  If that does not save the homeowner then per Mr. Cargill they truly overbought or their income has been cut so much that foreclosure is their only option. 

 Drastic?  Not really.  Homeowners take homes off the market, principal is preserved, fewer homes for sale, better chance for stabilization.  Better stabilization and growth, better tax income for the city, better confidence in an individual’s personal financial position, the more likely they are to spend money. The more money they spend the more taxable income to the state, the more confidence homeowners have about themselves, the more likely to buy services, the more services they buy, the more companies can expand and hire. The more people that have jobs the better the economy and so on.

What about the federal government and the bailout money?  Well obviously .5% for 5 years is a bit painful for the banks so that money goes to give the banks/investors a 2% additional return for years 1-5.  When a seller sells in years 1-5 they pay to the federal government a percentage of the profits, if any, as a form of repayment.

Investors get their principal, banks stop write- downs, banks stop paying tens of thousands of employees to handle bad debt, banks save hundreds of millions of dollars on foreclosure costs and write-offs, homes come off the market and prices stabilize.

“Q: I am looking to buy my first home, and it seems like short-sales are priced much lower than regular sales. Are these prices negotiable, or are they the bottom line that lenders will accept?

A:Many lenders negotiate prices for short-sales [The lien holder is NOT the owner and cannot negotiate the price of the home],  in which the seller is offering the home for less than is owed on the mortgage. But traditionally the only way you could find out was to submit a below-list offer and wait—often for many months—for a response. If the bank made a counter-offer, you knew you were in the ballpark; if they didn’t respond at all, you were too low [The author missed the point.  The bank is NOT the seller and does not "counter the buyers offer". The short sale process is first and foremost to confirm that the lien holders will approve of a short sale for the seller.  That in fact the seller is approved to do a short sale.  Then the lien holders negotiate with the seller on terms acceptable to the lien holders/investors on what they will accept.  The lien holders are looking only at the costs of the sale or the HUD-1 settlement sheet]. By then, you may have lost all interest in buying the property.  [Lien holders are looking at what is best for them.  Is a foreclosure more profitable?  Is the offer within acceptable range to approve of a short sale for the investors without the expense and risk of a foreclosure?  It is all about the net.  Lien holders do not respond to offers per se, they respond to the owner of the home and a low offer only creates a barrier whereby the foreclosure route is the best way for the lien holders to go, thus a decline of the short sale.]

The good news is, on April 5, this frustrating system will change at least for some buyers and sellers. That’s when the federal government will begin to provide financial incentives to lenders to do more short sales. The rules also help standardize the process, so your chances of negotiating a distressed property bargain will increase.  [No, in fact we really do not know what to expect but the author is still thinking that a short sale and a foreclosed home are one and the same.  It is my opinion that in fact the author is right in the fact that more "bargain" sales are on the way but not for what is being said.  In reading the new directive it appears that the banks may well use the short sale process to circumvent the expenses of a foreclosure.  Only time will tell on this.  Until a home is foreclosed on the banks do not own the home and the owner is the seller.  Sellers today are finding that to approve of a short sale they must agree to financial terms on some form of loan payment.  That does not happen when a home is foreclosed, though the banks have the legal right to pursue the owner for lost monies, but that is another subject.]

Under the old practices, when a financially-distressed seller brought a potential buyer who was offering less than the amount owed on the loan, the bank would order an appraisal or broker’s price opinion (BPO) and then decide whether the offer was acceptable [Correct, the banks are looking at fair market value, as a buyer looking for a "bargain" this is where they go wrong.  Fair market value is what the home is worth].  Under the new federal rules, banks will order a BPO before the property is listed for sale, and will share information on the minimum net proceeds they’re willing to accept with the sellers. If they then bring in a buyer whose offer is equal to or greater than this pre-approved amount, the lender must accept it within 10 days.  [This is correct, but actually seeing the lenders adhere to such a time line will be interesting to see.  The new process if done correctly (something I have been asking for for two years) would be huge.  By placing a home on the market that can close in a near normal fashion, we can slow down and even stop the falling prices, therefore the question on bargains we hope will also be coming to an end as well.]

Not all sellers are eligible for this program, called Home Affordable Foreclosure Alternatives (HAFA) (for the requirements see Help for America’s Homeowner’s Supplemental Directive 09-09). But since the process is likely to go so much smoother for those who buy and sell under HAFA, I suggest you wait a bit until the program goes into effect and concentrate on finding these “pre-approved” deals.  [Agreed.  In fact, based on what I know now many homes will fall outside of this program.]

Of course, when you do find a property you like, you may not be the only person bidding on it. [The days are long gone where only one buyer bids on a home.  Today any buyer writing a low offer is pretty certain to fail, unless they are trying to buy a home that NO ONE else wants and that is also another story for another time.] To improve your chances of winning, make sure your offer is “clean,” with as few contingencies as possible (though I would never fore go a home inspection). Include tax and credit records, and a mortgage pre-approval letter. If you can afford to pay cash, that will put you in an even stronger bargaining position [This is not different than any offer, at any time, these are in fact standard items that any offer should include].  Still, in your eagerness to win the property, don’t forget that distressed properties often come with added financial burdens. Although under HAFA, the seller is supposed to provide clear title, to protect yourself your, your contract must make it clear that you will not be responsible for any of the seller’s unpaid property taxes, liens or second trusts.  [Here we go again, the author is confusing short sales and foreclosed homes, what she says is true on foreclosed homes but on short sales the home is still owned by the owner and in most states the law says that the owner is still responsible for full disclosures] . Also, cash-strapped homeowners often stop paying taxes and homeowners’ association fees during the time between when the house is listed and the deal is closed. To make sure that you’re not on the hook for these expenses, Leonard P. Baron, professor of finance at San Diego State University, recommends that you ask that the bank escrow at least six months worth of taxes and HOA fees, to cover any potential shortfall.  [We call this clear title and in areas that useescrow and title companies all recorded liens must be paid or the escrow cannot close.  Again the difference here is short sales versus foreclosures.]

 June Fletcher at fletcher.june@gmail.com”

  It went on to explain how to get a good deal and how the new government guidelines will address how short sales need to be handled from April on.  The general ignorance of the article was amazing and the lack of knowledge underscores the gap in understanding.  Later today we are going to post 60 graphs giving a update on what is happening in the Reno & Sparks Markets with the three dominate types of sales, short, foreclosed, traditional.

“As we work our way through the Great Recession, the discussion often sways between whether to expect inflation or deflation.  Deflationists mention the huge credit bubble that we are digesting, and often like to point out Japan’s experience over the last 20 years.  Inflationists point out all of the government spending and quantitative easing (essentially money printing) that may lead us to hyperinflation, mentioning episodes like the 1970’s Great Inflation, or even worse, Germany’s Weimar Republic. Who is right, and is the answer actionable for an investor?  In order to keep the brief discussion more interesting, I’ve decided to add a few quotes from John Maynard Keynes, the economist our leaders claim to emulate.

“It is better to be roughly right than precisely wrong” – John Maynard Keynes

Getting the inflation/deflation call seems very important. Inflation typically crushes fixed income, as higher rates can choke business, and pushes down the value of investor’s bonds.  Further, high interest rates make stock investments less appealing relative to bonds, and therefore stocks tend to fall in price until their dividend yields become more interesting to investors.  Hard assets can often make large gains during these periods, as falling currency values lose purchasing power, pushing up the nominal value of real assets.

On the other hand, deflation can cause investors to flock to bonds, which makes their values rise, and yields fall.  Business suffers as prices drop.  Wages also drop, as business slows.  People often save more and spend less, further deepening the deflationary spiral.  As business suffers, stocks typically drop.  A poor business climate usually leads to less use of commodities (hard assets), and their prices often fall.

It is easy to conclude that making a bold bet on inflation will be disastrous if deflation continues, and vice versa.

“Markets can remain irrational far longer than you or I can remain solvent.” – John Maynard Keynes

Even if an investor ultimately makes the right call on inflation/deflation, when does her/his thesis play out?  Remember, one of the best investors  of our generation called the debt bubble well before it happened.  George Soros (among others) mentioned the dangers of our enormous leverage in the mid 80’s, through the 90’s, and into the 2000’s.  He was spot on in his analysis, but acting on his forecast would have made one miss the greatest bull market in American history.  Imagine being short stocks as they rose 16+ percent a year from 1982-2000?

“Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally” - John Maynard Keynes

In order to avoid being out of sync, or even worse, loosing their investors, many “professional” money managers choose to follow the crowd.  They “manage” risk by hugging investment indexes, and feel it is ok to lose 49% of an investors portfolio, as long as the markets went down 50%.  Clearly, this may work for the stockbroker/financial advisor profession, but it doesn’t work for people who want to grow their assets and retire in comfort and safety.  We believe this mentality is destructive to most people’s savings.  The need to follow the herd is deep seeded in the human psyche.  To overcome this bias, one must first understand it.  Then, one must study history to see what people did well, and where they failed.  Most importantly, a rational investor must be willing to do things differently than the herd.  It is difficult to watch the neighbors make millions on tech stocks, or reap huge profits flipping houses and condos.  However, fundamentals eventually apply.  A rational investor will be called stupid, old fashioned, and jealous while bubbles expand.  She/he will be resented when the bubble pops.  In order to survive and thrive in an investment career, it would be wise to avoid “worldy wisdom”.

“A study of the history of opinion is a necessary preliminary to the emancipation of the mind.” - John Maynard Keynes

In the inflation/deflation debate, most people with an opinion attach their ideas to a specific guru or school of economics.  One theory is memorized, and doggedly followed, even when experiences dictate that things aren’t working as forecasted.  There is very little thinking and learning involved, only determined rooting for whichever “team” one has chosen to follow.  History is ignored, and few people open their minds to the idea that they might be wrong.  Instead of learning all sides of an issue, most observers start with a premise and assume that everyone else is wrong.  In our opinion, these debates are interesting, but only semi-relevant.   Often times, each school of economic thought offers a few nuggets of wisdom attached to much hubris.

“The difficulty lies, not in the new ideas, but in escaping the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.” John Maynard Keynes

While we understand the different schools of economic thought, and pay attention to their lessons, we choose to be open minded as to what may happen in the future.  History leaves a thick paper trail, and what actually happened to markets and asset valuations over time is more valuable to us than defending individual theories.  We want our clients to survive and thrive over their investing careers regardless of the direction that inflation goes.

Those of you that visit our office frequently know that while we religiously track current events, we also spend an enormous amount of time studying the history of the markets.  Often times, the parallels are chilling.

What we find is that most often, the bulk of the mainstream economists are wrong.  Most of our leaders appeared to be caught off guard by the collapse of the debt bubble, despite nearly twenty years of warnings by high profile investors, competent journalists, and the lessons of history.  Politicians typically follow Keynesian policies (stimulus spending to create jobs until the economy gets back on its feet), as this is often the school of economic thought most readily pushed on students at American Universities.  Further, Keynes’ prescription for recessions requires massive amounts of deficit spending and appeal to the populist mentality of “doing something to help”.  Our leaders forget that Keynes recommended government surpluses in good times, and government spending in tough times.  It seems that we either suffer from selective memory, or that we have chosen our theory because it allows our leaders to avoid fiscal responsibility, while feigning to follow a well known economist.  Historically, stimulus hasn’t worked well in solving recessions or credit bubbles.  Tough love (bankruptcies, assets price collapses, high unemployment) has worked faster, but has understandably wrought political unrest.  Our politicians don’t have the will to say “no” to their voting base, therefore stimulus will most likely continue until it creates massive inflation, high interest rates, and potential social unrest.  (Hey, no one said running a democracy is easy!)

We also find is that quality businesses purchased at low prices tend to thrive over all time and space.  The price of their stocks may swing with the ebb and flow of boom and bust cycles, but this really has little to do with the cash that these businesses earn and distribute to their shareholders.  Large, multinational corporations have the added advantage of doing business in different countries.  Some countries boom while others bust, creating some protection in the event of regional issues.  Regardless of the economic outlook, people still eat, drink, and wear clothes, and the companies that supply these products really don’t care if we are of the Keynesian or Austrian persuasion!

Further, when we buy a bond, we actually become a creditor.  Our thought process, when loaning money, is no different when buying a corporate bond than if we were loaning money to a distant cousin.  When do we get paid back?  Is there adequate cash flow to pay us timely interest and principle?  Is the interest rate we are charging enough in context of both the risk of the loan, as well as in regard to competing investments?  Only if these questions can be adequately answered will we invest.

By the way, these things also work for real estate investments, with an additional look at regional supply/demand characteristics as well as incomes and cap rates.

History shows that rational analysis of business and loans, as well as the proper pricing of these investments is more important to financial success than just looking at the economic backdrop prevailing at the time of investment.  To reiterate, the safety of an investment (whether it be a loan or an ownership position) is of paramount concern for an investor, but the price paid is nearly as important.  Money managers and individuals that got these two concepts right made money during the 30’s and 70’s, two difficult periods for investors.

“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”  John Maynard Keynes

As pointed out above, it is not only difficult to pinpoint the direction of inflation/deflation, but also the timing.  Credit bubbles tend to cause significant damage to an economy (see Reinhart and Rogoff’s This Time is Different) that takes years to play out.  Contrast this with the United States high debt, inflationary policies, and a fed Chairman that has stated he will “drop money from helicopters” before he allows deflation to take hold.

Instead of making a bold wager on one or the other directions, we think it is prudent to remain open minded and hedge our bets.  Housing and other big-ticket items that require financing to purchase are likely to continue falling in price.  Until incomes begin to stabilize, and even rise, expect other discretionary purchases to remain weak.

Keep in mind (thanks Dave Rosenberg of Gluskin Scheff) that some Americans are walking from their homes and freeing up their cash, which leaves more room for consumption, while further hurting banks, investors, and the fed which hold the mortgages on these properties.  If enough people strategically default, without retribution, consumption can recover quicker, although the losses will most likely be born by investors and by taxpayers in the form of more bailouts, with  higher government debt and rising taxes.

As the government continues to add debt, and the Federal Reserve continues to monetize assets (print money), we put our currency at risk.  A floating currency means that the value of said currency is left up to the financial markets in theory at least. In practice, many countries manage the value of their currencies through market intervention.  If investors believe in the stability of the U.S. dollar, it’s value can remain high despite skyrocketing debt and quantitative easing.  If, on the other hand, investors panic, the results could be severe, and could happen almost instantly. The British Pound’s recent sharp drop should be a warning to developed countries.  We are a nation that imports more than we export.  If the value of our currency plummets, the cost of much of what we import will rise.

Tying it together, we think it is entirely possible to see, for example, houses continue to fall, while the cost of food and oil rise.

We could spend hours discussing other potential sources of inflation/deflation, but I think our readers get the big picture.  There are legitimate threats for both inflation and deflation.  Over time, our spiraling deficits will most likely lead to a weaker dollar.  Whether these trends play out over 2 years or 10 years, nobody knows. In the meantime, the collapse of a credit bubble tends to push prices down for years, slowly unfolding despite our impatient desire for “things to get better”.  In conclusion, we think it is entirely possible to see, for example, house prices continue to fall, while the cost of food and oil rise. There is no reason to believe that all prices must rise or fall at the same time.  If history is any guide, quality assets bought at cheap prices will provide protection from inflation and deflation.  By owning assets of this type, we believe an investor can both protect capital, and grow purchasing power.”  Courtesy of Ancorawest, Robert Barone

Bob says a lot in his writing but I feel that this is worth reading, and thought provoking as well.

David Morris

CRS, CRB,CLHMS, CDPE, SFR, ABR

Here is a quick note from Vince Lotito with PrimeLending, INFO THAT HITS US WHERE WE LIVE:

“There wasn’t a ton of housing news last week, but one can always find a few significant items. For example, foreclosure filings in February were down 2% from January and up just 6% from a year ago — their smallest increase in four years. Most significantly, in the six states that made up 61% of the national total for February, foreclosure filings were down 15% from a year ago. We’re definitely heading in the right direction. �

Here’s a chart showing that housing is a great long-term investment, not withstanding the last 3 years.”

Inventory is getting tight, I know that many of you will find this odd with prices still showing declines and, in some neighborhoods, a For Sale sign on every corner, but inventory is getting slim in select parts of Reno, Sparks and Carson City.

For the first time ever, we are seeing multiple offers on short sales, and the offers are no longer at the bottom of the barrel.  Encouraging signs and with 16 days left in March, this month may well prove to be a bellwether month.

As we move from 2009 into 2010 banks want homes sold using the short sale method if possble.  They still get their insurance and they get their write-offs but do not have to take possession of the property and all attendent costs.  As short sales have moved to the forefront of market activity the question is raised: what will a buyer be willing to pay to buy a home that can actually close escrow in less than 45 days? Homes with good certainy that the escrow will close, versus 180 days filled with uncertainty all the way?

To answer that question I have taken the time to break down our market by traditional sales, short sales and by foreclosed sales.

By March of 2010 in the greater Reno/Sparks market, 710 homes had closed escrow:

The average price was $212,878

Traditional: 180 sold with an average sales price of $283,923

Short sales: 246 sold with an average sales price of $190,363

Foreclosed: 224 sold with an average sales price of $189,419

We are seeing an area-wide, whopping 30% difference from a traditional sale to a distressed sale. Now taking a look at a specific neighborhood, such as Sommersett, we can see a more specfic example:

Traditional: 11 homes sold for an average price of $308,384

Short sale: 11 homes sold for an average price of $279,841

Foreclosed: 7 homes sold for an average price of $259,821

Therefore, to buy a home that will close, the market paid about a 10% premium.

What about pending sales?

Northwest Reno today has 100 pending sales, 8 traditional, 80 short and 9 foreclosed.

Traditional sales in escrow are averaging $244,616

Short sales in escrow are averaging $208,000

Foreclosed sales in escrow are averaging $183,938

That means that the market is adjusting about 15% for the ability to buy a home that will close escrow.

From these three examples it can be seen that sellers that will sell as a traditional sale can, in fact, sell at higher prices.  Conversely, the banks practice of short sales is costing the markets at least 15% in equities than a more sensible approach to the short sale process would result in.

Our markets have been rocked by the storm of the incredibly badly managed financial markets but without question, if leadership existed that was forward thinking, our markets could already be leveling out and even begining to move forward, but alas that has not happened and does not appear to be on the horizon.

On April 5th new guidelines will be released that may affect some of the above numbers, the question is going to be, in which way?