The Mortgage Bankers Association (MBA) released its Weekly Mortgage Applications Survey — a measure of mortgage loan application volume — for the week ending May 1, 2009, and it showed an increase of 2.4 percent compared with the previous week and 43.7 percent compared with the same week one year earlier.  The Refinance Index increased 1.2 percent to 5169.3 from 5108.2 the previous week and the seasonally adjusted Purchase Index increased 5.0 percent to 264.3 from 251.6 one week earlier.  The Conventional Purchase Index increased 5.5 percent while the Government Purchase Index (largely FHA) increased 4.4 percent.

The four week moving average for the seasonally adjusted Market Index is down 6.0 percent, the four week moving average is down 3.1 percent for the seasonally adjusted Purchase Index, and down 6.7 percent for the Refinance Index.  The refinance share of mortgage activity decreased to 74.4 percent of total applications from 75.3 percent the previous week.  The adjustable-rate mortgage (ARM) share of activity remained unchanged at 2.1 percent of total applications from the previous week.  Refinance still dominates the mortgage market, but new purchase applications are starting to pick up.

Vacancy leads to declining home prices

The Associated Press conducted an analysis on data from the U.S. Postal Service and Housing and Urban Development, and determined that as of March 31, three percent of U.S. homes had been empty for 90 days or more.  Experts say that vacant houses lead to declining property values and falling tax revenues — as the neighborhoods begin to look increasingly shabby from inattention, there are fewer interested buyers and that leads to more vacancies.

“It becomes a vicious cycle,” said Jennifer Vey, a researcher with the Brookings Institution.  The ten counties with the most vacancies are: Franklin, Ohio (Columbus); Hamilton, Ohio; Berkeley, S.C. (Charleston); Wayne, N.C. (Goldsboro); El Paso, Colo. (Colorado Springs); Yuba, Calif. (near Sacramento); Cook, Ill. (Chicago); Montgomery, Ohio (Dayton); Marion, Ind.; and Baltimore City, Md.

More “good news” on the job front

Two private reports released today say -you guessed it - the rate of job cuts are slowing.  Automatic Data Processing, a payroll-processing firm, said private-sector employment decreased by 491,000 in April, a 31% improvement from the revised 708,000 drop in March, and Challenger, Gray & Christmas Inc. reported that the number of layoffs announced in April shows an improvement of 12% from March’s 150,411 cuts.  It was the lowest total since last October, according to Challenger, but the April figure was still 47% higher than job cuts announced in the same month a year ago.

John Challenger, chief executive officer of Challenger, Gray & Christmas, said that employers have announced 711,100 job cuts so far this year — 145% percent higher than the 290,671 job cuts announced in the first quarter of 2008.  ”Job cuts are still at recession levels, but the fact that they are falling is certainly promising and may suggest that employers are starting to feel a little more confident about future business conditions.

Hopefully, the next few months will bring further relief, as we tend to see downsizing activity slow during the summer months.”  Joel Prakken, an ADP spokesman and chairman of Macroeconomic Advisers, LLC adds, “There’s a sense here of a turn, which is good news,” but the job market “is likely to decline for at least several more months, although perhaps not as rapidly as during the last six months.”

Stress test — BOA needs $34 Billion more

The official numbers won’t be out till tomorrow, but several news sources report that Bank of America (BOA) needs an additional $34 billion in capital, according to the results of the much ballyhooed “stress test.”  BOA wouldn’t necessarily need to raise $34 billion in new capital, because it can raise the capital by converting the government’s preferred share stake into common stock, although doing so would severely dilute the bank’s existing common shareholders.  Oddly enough, shares rose more than 10 percent on the news, focusing on the importance of getting clarity to the numbers and a sense that BOA could use other means to raise capital that wouldn’t necessarily be dilutive to shareholders.

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Combating the Big Threat of Small Stakes

The new I-Bond rate was recently released for the next six months…the new return is a negative -5.56 percent. Not only did this take many “safe” savers by surprise by wiping out the fixed base-rate of return for nearly all I-bonds released in recent years but it demonstrates one of the most insidious threats facing investors today…the big threat of small stakes.
Consider this, if how much do you need to put into federal bonds to get a meaningful rate of return? With the current negative inflation component, the only benefit to be derived is a return of your primary capital invested…you can’t “loose” money at least on paper since you will get the face value of your investment back but even during decent times is the return worth the effort?

Let’s assume you are a regular working Joe without a lot of extra money sitting around. You get a fat tax return or bonus now and then plus have a little extra money at the end of each month to invest with…at the end of each year you manage to set aside $5k, !0k or maybe on a good year $20k…at a 5% return that is chump change. Five percent of $5k is only $250 a year and today even that has become tough to get. Five percent of 20k is still only $1,000 or a bit less than $20 per week. Whew…don’t spend it all in one place!

But what about stocks? Historically they have delivered a return of 10 percent - if you happen to guess right and are able to consistently time the market. Otherwise you are more likely to join the millions of Americans who have watched their portfolio shrink 20 to 40 percent in recent months…or worse, those that have actually lost money in the market. So, in addition to the risk of your capital…let’s assume you are able to retain that 8 percent average on that $5k investment…what do you have to show for it at the end of the year? A whopping $400 pre-tax. Not exactly a life-changing event.  Bump it up to reflect your return on $20k to earn $1,600 each year or just over $30 per week prior to paying taxes.

So, what about short sales? If you were to take that same $5k to $20k and sink it into short sales what type of return can you realistically expect to earn. Consider this, many short sale properties are discounted by 20 to 30 percent or even more. You are able to use leverage to purchase properties with a much larger value than you may otherwise qualify for when buying stock on margin (and forget treasury bonds) so even a modest 10 percent return on the entire property can easily lead to 100 percent returns on your out-of-pocket investment.  What does this mean in a “real life” situation? Let’s assume you are a modest investor starting at a relatively small scale. You put together $5k to make your first modest deal with the goal of doubling your money in 30 days. Essentially you want to buy, fix and sell the property while making only $5k profit then do it again. What happens to your profit if you did just one deal per month…

Month 1 - $5,000 investment and $5,000 profit. Pay back the original $5,000 and re-invest the $5,000 profit. Total out of pocket…zero.

Month 2 - $5,000 investment and $5,000 profit. Total out of pocket…zero. Total profit $10,000

As you can see, within less than three months you can easily generate more profit than a decade’s worth of bond or stock investments using very modest means and extremely conservative numbers. Don’t fall into the mindset that small returns are safe - nothing is farther from the truth. Small returns are not safe, they are some of the most financially dangerous and risky actions you can take with your hard earned income. Instead, focus your attention on generating enough profit to make a meaningful impact on your budget; whether you pay down a big bill, establish an emergency fund or set aside an income for long term investing short sales provide the leverage, flexibility and returns to make a meaningful contribution to your financial future.

Real Estate News & Commentary by Chris McLaughlin, May 6, 2009 (Keller Williams Realty Broker-Owner Lakeland/Tampa)