Is there much we can do besides wait?
Could $5 gas arrive with summer? As of April 6, U.S. retail gasoline prices were up 20.15% YTD; on that date, AAA’s national survey had the price of regular unleaded averaging $3.94 per gallon. So what happens this spring and summer – traditionally when Americans tend to hit the road?1
A new Christian Science Monitor/TIPP survey of 900+ adults finds that the average American expects pump prices of around $4.75 a gallon come July. That’s about 20% above where prices are now.2
Is that perception cynical, or realistic? It depends on whether you think the latest price spike will eventually moderate according to the historical pattern.
Will the classic pattern hold? Short-term price jumps in retail gasoline are often partly tempered by lessening demand. That is, the price of gas climbs to a certain point where consumers simply decide to cut back on their driving. As demand drops, prices finally follow.
This could easily happen; it may happen soon. Yet when we look at the macro view, we have not been following the classic pattern. American consumer demand for gasoline has declined slightly in every year since 2007. (Before the recession, sales of big SUVs represented 20% of U.S. auto buying; now they account for 5% of it.) In fact, the federal government’s Energy Information Administration (EIA) believes that U.S. gasoline consumption will drop by another 7% over the next 25 years.3
Who is to blame for the soaring prices? The Christian Science Monitor/TIPP survey asked for opinions. Close to a quarter of those polled put the blame on the oil industry; about 20% pinned the blame on speculators in the commodities market. Coming in third and fourth: the Obama administration (14%) and Congress (9%).2
As the world is a global village, our gas prices are most influenced by the world oil market. Recently, the factor exerting the biggest influence has been the threat of supply disruption in the Middle East – but that’s not the only factor weighing on the market. We are using less oil and gasoline, but China and India and other emerging economies are using more – in fact, 10 million more cars hit the roads in China during 2010 alone.4
In addition, the U.S. has become a net gasoline exporter for the first time in more than five decades as a consequence of key oil refineries along the east coast and in the Caribbean ceasing production. Also, many of our refineries can now produce gasoline for less than it would cost at Latin American or European supply points.4
Basically, we are competing with the world for our gasoline – and the world oil market causes the big ripples in the equilibrium. This is why boycotting gas stations in your area for a day has little more than symbolic effect.
What could America do? The Obama administration could try some quick fixes, but some might not be popular. Releasing some of the inventory in the Strategic Petroleum Reserve could help – and in fact, announcing the release after the fact could potentially affect oil prices more than publicizing it beforehand.
To crimp speculators, the government could request that the New York Mercantile Exchange and Intercontinental Exchange (on which NYMEX crude and Brent crude get traded daily) boost margin requirements, a regulatory move which would discourage speculators from working with borrowed money. It could ask states to strictly enforce a more fuel-efficient, 55-mph speed limit on our nation’s highways, which would not please the trucking industry or the typical driver.
It seems every year we are tested by spikes in gas prices. As we transition (however gradually) from fossil fuels to other forms of energy, we may still have several of these episodes in our lifetimes.
Citations.
1 - money.msn.com/market-news/post.aspx?post=d8808e5a-07d2-477c-aa6e-0497b6d7402b [4/5/12]
2 – www.csmonitor.com/USA/Politics/2012/0406/Americans-spread-blame-for-high-gas-prices-foresee-4.75-a-gallon [4/6/12]
3 – www.npr.org/2012/03/22/149061105/whats-making-americans-less-hungry-for-gasoline [3/22/12]
4 – www.npr.org/blogs/thetwo-way/2012/03/23/149220383/why-gas-prices-are-rising-even-as-demand-is-down [3/23/12]
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
Tuesday, April 10, 2012
Monday, April 2, 2012
WILL RENTING OUT FORECLOSURES HELP THE HOUSING MARKET?
Is this the initiative that could turn things around?
Another big idea – with a big opportunity attached. No magic wand will repair the sluggish housing market, yet the idea of converting foreclosed homes into rental properties has opened eyes – especially the eyes of private equity firms.
The federal government and major lenders are now putting that idea into action. Inventory abounds – between them, Fannie Mae and Freddie Mac are saddled with about 180,000 foreclosures, and the Federal Housing Administration has about 32,000 REOs. RealtyTrac says banks own more than 600,000 REOs by themselves.1,2
In Q4 2011, home ownership hit its lowest level (66%) in 14 years. The rental market is red-hot right now, and private equity firms see some amazing potential profits within their short-term reach.2
How catalytic could this effort become? Karl Case (yes, the Case in Case-Shiller), who co-created this proposal, thinks that “the seeds to a recovery are being planted” via this program. Accompanying visions of recovery, there is genuine excitement: a principal at a California private equity firm told Bloomberg that “this will be a new institutional asset class in the next 24 months.”2
Trial programs launch in April. As a first step, the Federal Housing Finance Agency (Fannie and Freddie’s parent) is auctioning off almost 2,500 downtrodden residential properties this month in eight metro areas. They will be offered to institutional investors in bulk (for example, 99 properties in Chicago and 572 properties in Atlanta) and investors must agree to rent them out for X number of years (the number has not been determined).3
In the private sector, Bank of America is launching a program this spring with a slightly different slant. It will give 1,000 homeowners in Arizona, Nevada and upstate New York a chance to stay in their homes as renters as the foreclosure process plays out. BofA plans to sell these REOs to investors within three months (or as soon as the occupants surrender ownership and start paying rent). Borrowers can’t apply for the program themselves, but they can alternately ask BofA to cancel their mortgages via a deed in lieu of foreclosure and then contractually agree to rent the same home for up to 36 months at or below market rates. This program could go national if it succeeds.4
Could the ROI go through the roof? One private equity firm thinks it can package its envisioned portfolio of converted foreclosures into a public REIT with an internal rate of return approximating 25% within three years. Reuters recently cited other institutional investors with more cautious visions of ROI of 8%-15% from their efforts. Still, that looks pretty rosy next to current yields from 10-year Treasuries and CDs. If the housing market perks up, perhaps it may prove true.1
What about the ethics of this? Not all economists think this is a great idea. Detractors ask: should hedge funds become landlords? Should homes owned by Fannie and Freddie be sold to institutional investors at deep discounts? Is this another example of the 1% benefiting from the misfortunes of the 99%?
Other proposals were up for consideration. Some of the ones not chosen by the federal government could be copied in the private sector. Dean Baker, co-director of the Center for Economic and Policy Research, pitched the idea that Fannie and Freddie could offer borrowers the chance to stay put in their foreclosed homes and pay market rent. Morgan Stanley lobbied for special loans to institutional investors and tax breaks on rental income.5
Is this the cure for the housing blues? These public and private foreclosure conversion programs boast intriguing potential: a possibility of sizable profit, and a chance to fight blight. A Morgan Stanley report notes that by 2016, circa 7.5 million homes with a present market value of $1 trillion will be liquidated via foreclosures and short sales. This could expand the total of rental homes in America from the current 20 million to 27.5 million. Morgan Stanley reminds investors that single-family homes operated as rentals have yielded annual returns averaging 8.1% since 1990.2
Citations.
1 www.reuters.com/article/2012/03/21/us-usa-foreclosures-investors-idUSBRE82J12M20120321 [3/21/12]
2 www.fa-mag.com/fa-news/9855-foreclosures-draw-private-equity-as-us-sells-homes.html [1/31/12]
3 money.cnn.com/2012/02/29/real_estate/Fannie_foreclosure_homes/index.htm [2/29/12]
4 articles.latimes.com/2012/mar/24/business/la-fi-home-rental-20120324 [3/24/12]
5 www.washingtonpost.com/blogs/ezra-klein/post/can-a-new-plan-to-rent-out-foreclosed-properties-actually-work/2011/08/10/gIQAO0YA7I_blog.html [8/10/11]
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
Another big idea – with a big opportunity attached. No magic wand will repair the sluggish housing market, yet the idea of converting foreclosed homes into rental properties has opened eyes – especially the eyes of private equity firms.
The federal government and major lenders are now putting that idea into action. Inventory abounds – between them, Fannie Mae and Freddie Mac are saddled with about 180,000 foreclosures, and the Federal Housing Administration has about 32,000 REOs. RealtyTrac says banks own more than 600,000 REOs by themselves.1,2
In Q4 2011, home ownership hit its lowest level (66%) in 14 years. The rental market is red-hot right now, and private equity firms see some amazing potential profits within their short-term reach.2
How catalytic could this effort become? Karl Case (yes, the Case in Case-Shiller), who co-created this proposal, thinks that “the seeds to a recovery are being planted” via this program. Accompanying visions of recovery, there is genuine excitement: a principal at a California private equity firm told Bloomberg that “this will be a new institutional asset class in the next 24 months.”2
Trial programs launch in April. As a first step, the Federal Housing Finance Agency (Fannie and Freddie’s parent) is auctioning off almost 2,500 downtrodden residential properties this month in eight metro areas. They will be offered to institutional investors in bulk (for example, 99 properties in Chicago and 572 properties in Atlanta) and investors must agree to rent them out for X number of years (the number has not been determined).3
In the private sector, Bank of America is launching a program this spring with a slightly different slant. It will give 1,000 homeowners in Arizona, Nevada and upstate New York a chance to stay in their homes as renters as the foreclosure process plays out. BofA plans to sell these REOs to investors within three months (or as soon as the occupants surrender ownership and start paying rent). Borrowers can’t apply for the program themselves, but they can alternately ask BofA to cancel their mortgages via a deed in lieu of foreclosure and then contractually agree to rent the same home for up to 36 months at or below market rates. This program could go national if it succeeds.4
Could the ROI go through the roof? One private equity firm thinks it can package its envisioned portfolio of converted foreclosures into a public REIT with an internal rate of return approximating 25% within three years. Reuters recently cited other institutional investors with more cautious visions of ROI of 8%-15% from their efforts. Still, that looks pretty rosy next to current yields from 10-year Treasuries and CDs. If the housing market perks up, perhaps it may prove true.1
What about the ethics of this? Not all economists think this is a great idea. Detractors ask: should hedge funds become landlords? Should homes owned by Fannie and Freddie be sold to institutional investors at deep discounts? Is this another example of the 1% benefiting from the misfortunes of the 99%?
Other proposals were up for consideration. Some of the ones not chosen by the federal government could be copied in the private sector. Dean Baker, co-director of the Center for Economic and Policy Research, pitched the idea that Fannie and Freddie could offer borrowers the chance to stay put in their foreclosed homes and pay market rent. Morgan Stanley lobbied for special loans to institutional investors and tax breaks on rental income.5
Is this the cure for the housing blues? These public and private foreclosure conversion programs boast intriguing potential: a possibility of sizable profit, and a chance to fight blight. A Morgan Stanley report notes that by 2016, circa 7.5 million homes with a present market value of $1 trillion will be liquidated via foreclosures and short sales. This could expand the total of rental homes in America from the current 20 million to 27.5 million. Morgan Stanley reminds investors that single-family homes operated as rentals have yielded annual returns averaging 8.1% since 1990.2
Citations.
1 www.reuters.com/article/2012/03/21/us-usa-foreclosures-investors-idUSBRE82J12M20120321 [3/21/12]
2 www.fa-mag.com/fa-news/9855-foreclosures-draw-private-equity-as-us-sells-homes.html [1/31/12]
3 money.cnn.com/2012/02/29/real_estate/Fannie_foreclosure_homes/index.htm [2/29/12]
4 articles.latimes.com/2012/mar/24/business/la-fi-home-rental-20120324 [3/24/12]
5 www.washingtonpost.com/blogs/ezra-klein/post/can-a-new-plan-to-rent-out-foreclosed-properties-actually-work/2011/08/10/gIQAO0YA7I_blog.html [8/10/11]
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
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