FL Foreclosures | Will FL Foreclosures Double in the Next 24 Months?

I try to keep my mind free of negative thoughts as much as possible. Negativity is not beneficial in almost any form – especially if you are trying to run a successful business investing in FL foreclosures amidst some of the most dire economic times we’ve ever known. That being said, I tend to only allow myself to watch just enough of the news in order to identify any coming trends that might make a major impact on my business in the 6-12 month range.

Truth be told, I’m quite amazed at all the positive economic outlook stories that have been floating around of late. It just seems like everyone wants to spin a story about some figures here and an earnings report there and spew about how all the “experts” are saying that it looks like the recession is behind us and that a slow and shaky recovery is now in sight.

Oh really?

Does anyone but me wonder where they get this idea from? And does anyone realize that the people staking these claims are the same ones that failed to predict the coming economic collapse back in 2005 and 2006? And why do those providing these positive outlook stories always tack some kind of disclaimer on the end of their statement? Could it be that they have no confidence in what they are reporting?

Let’s start talking about facts. Let’s start talking about major trends and start using the term that everyone is trying to avoid…

Double-Dip Recession

I was driving around the other day, inspecting a few FL foreclosures that I’m thinking about putting a bid on and I’m listening to the radio. Surfing through the channels I hear this investment advisor say

…I’ve told all of my people to move their money out of the market immediately. We’ve advised them to take positions in gold, precious metals, and other less risky investment vehicles. In fact, we’ve advised some of our clients to short the market.”

Now this caught my attention, because I’m short on the market myself. He went on to list a number of the same factors that have me convinced that the stock market is in a state of “phantom” recovery. It’s simply not real. No more real than the so-called “end of the recession”. Let’s review a few of the reasons why this should be obvious to anyone.

First of all, there was a ridiculous run-up in home values starting around 2002 with a sharp jump seen vividly between 2004 & 2006, especially in states like Florida, California, Nevada, and Arizona. This entire thing was of course fueled by ridiculously lax lending rules which enabled everyone to buy as many houses as he wanted regardless of his or her credit. FL foreclosures as well as foreclosures in other states were very low at this time and only states like Michigan, Ohio and others that were dependent on the auto industry were floundering in their own brand of financial meltdown.

The access to easy credit caused home prices to balloon to unbelievable levels. Those who sold raked in huge profits, those who did not sell leveraged the peak sales prices of their neighbors to pull out huge amounts of cash or consolidate mountains of credit card debt with refinance mortgages.

Funds from these cash out loans went back into the economy and rolled into company coffers causing an uptrend in the stock market that didn’t end until the DOW crested at 14,164 on Oct 9th, 2007.

Now we all now know that the recession kicked off in late 2007. I remember clearly that the report came out about a year later in the fall of 2008 that said “We’ve already been in a recession for at least 11 months…”. I don’t know why it takes so long to figure that out, but it did. Now before we move forward in outlining what brought financial devastation and mountains of unsold FL foreclosures to our state, lets look at some of the major events in the change-point year of 2007.

The subprime meltdown was the first major agitant. It came in two parts, an initial shockwave in Feb of 2007 and the full collapse in August of the same year. This should have been seen coming from a mile away, but the lust for profits drove the mortgage banking divisions of banks large and small into a type of feeding frenzy so they plowed ahead regardless of the warning lights flashing in their face.

Now something we don’t really talk about is the fact that the Alt-A Loan phenomenon didn’t come into it’s own really until the end of 2006 and early 2007. Alt-A products of course included negative amortization loans and pick-a-payment Option-Arms (which were really negative am loans in disguise) and other exotic products developed for good credit customers. They were, in essence, a trap of similar design as sub prime loans but targeted at people with good credit and marketed very successfully in high-dollar states like Florida and California.

It’s almost like the sub prime loans were financial intercontinental ballistic missiles which were launched against our nation. Just before impact, a second, bigger and more deadly wave in the form of Alt-A loans was launched. So while our state was dealing with an acutely high number of foreclosures that just began to truly be realized in September of 2007, the second wave of missiles has just crested the halfway point in their journey and had just begun the final descent. Air raid warnings of the Alt-A holocaust started to enter the blogosphere in early 2008 with Mr. Mortgage being one of the most ardent prophets of doom as seen in this video posted on YouTube on April 16, 2008.

In the chart below you can see that the stock market followed a traditional 1-2-3 pattern before the crash in the fall of 2007. The market tested the resistance point in April of 2008 before succumbing to a total collapse a few short weeks later.

Stock Market Crash Pattern 2007

A significant clue as to what was about to happen (aside from the ridiculous and obviously unsustainable run up) was the fact that there were fully 3 Hindenburg Omen signals in mid-2007. They came on June 13th, June 21st, and June 22nd respectively. More came before the end of the year. It should have served as a significant warning.

Hindenburg Omen Signals

Of course we know now that businesses across the globe began to feel the initial pinch around the same time which began to be reflected in the stock market which declined steadily from Oct 2007 onward.

Now we start getting to the interesting stuff.

FL foreclosures quickly began to dominate the news with more and more stories being dedicated to the subject. News about corporate struggles took a back seat, I suppose because people that watch the mainstream news are more concerned about what is happening in their own back yards vs. what’s going down on Wall Street.

So bank struggles and heart-break stories of people pressed out of their homes were front and center as the media focused on pumping out as many doom-n-gloom foreclosure stories as they could even as it became apparent that other industries were seeing significant changes to sales and revenue. Fear had gripped the nation and American wallets and purses began to snap shut. The resulting stock market crash was, of course, inevitable.

Now we know that not all market crashes are tied to recessions, so some held out hope that other factors would keep us out of one. Then, at the end of 2008, the report came citing the fact that everyone pretty much already knew from the get-go. The country already WAS in a recession, and had been for about a year. Nice. Queue the never-ending procession of “recession based” news to accompany stories about mounting FL foreclosures.

It makes sense that the number of foreclosures in Florida in particular continued to expand at an alarming rate. Many homes in FL are bought as vacation properties and when people are in a panic about all things financial, buying a vacation home doesn’t seem very appealing.

The good news, of course, was the we saw what appeared to be a rather rapid recovery. At least to the stock market which hit a bottom point in March of this year and quickly rebounded. In fact, the DOW was back above the 10,000 milestone on October 12th, 2009…almost two years to the Day following the initial collapse.

So all is good in the world, right? After all, the recovery is in full bloom, is it not? Stock market is up, profits will soon follow (even if it is at a slower pace) and all is well on the horizon. Before you know it we’ll be sipping margaritas on the back porch with our friends and all those ugly, vacant FL foreclosures will be a thing of the past.

Well friend, before you break out the Champaign just yet, make sure you examine some of these hard, but true facts:

1) The Stock Market Recovery Is Fake – stocks pretty much go up based on earnings and profits news. The news was deemed good enough through the end of 2008 and continuing through this year in spite of the negatives (job losses, foreclosures, general chaos) that it has managed to follow V-shaped recovery. This is NOT good because…

2) The US Economy Has Been Shedding Job – every month since November of 2007, hundreds of thousands of people have lost their jobs. The reason that companies have been able to show stats good enough to entice investors to sink their money back into the market over the last 12 months is the fact that profits levels have been satisfactory in their eyes regardless of the recession. But those profits were realized by cutting both job costs and resource acquisition costs. After all, if you are XYZ Co. which specializes in selling widgets and you are selling less widgets these days, you need not buy as much material to make said widgets.

3) Customers Take a While To Catch On – the inevitable truth is that if you as a company make staff cuts so significant that they can change profit figures on earnings reports, customer service or product quality is going to degrade. It’ll be either one or the other, possibly both. It takes a while for customers to realize that their favorite widget supplier isn’t doing such a good job these days, so the same amount of funds (maybe a bit less) flows into XYZ Co while at the same time jobs are being cut. This results in a phantom profit.

So let me tell you what’s going to happen from here…

The big banks have not made any significant progress in loosening up on lending guidelines regardless of being pumped full of cash from the Fed. This applies to mortgage lending as well as business credit. So businesses are having significant problems internally with their financials. Couple that with the fact that unemployment is at record highs and you have a recipe for disaster.

If I was looking in my crystal ball, I’d say that once the holiday figures come in worse than expected (and the bar isn’t set that high in the first place), the bears are going to start clawing down the market. Probably within 8 weeks of the end of the holiday season, maybe sooner. After all, without enough revenue, profits are going to plummet. You pretty much get to a point where you can’t lay off any more workers without bringing your company to a grinding halt, so companies can’t expect to see mountains of pink slips saving the day this time.

Oh, and while we’re watching this bonfire grow, let’s go ahead and throw some gas on the flames.

Starting in late 2008 local municipalities began to put the kibosh on processing FL foreclosures in an attempt to force lenders to open loan modification discussions with their borrowers. This happened all across the nation, not just in Florida. Then Fannie Mae and Freddie Mac felt that it would be compassionate to put a moratorium on foreclosures prior to Christmas and to leave it in place for a full three months. These events brought the numbers of foreclosures being reported down, giving the impression that the things on the FL foreclosure scene were not as bad as we all though. It appeared that things were getting better. In reality these actions only served to delay the inevitable.

Then, just as soon as Fannie/Freddie began to fire up the foreclosure process again, the President came out with his new version of a homeowner assistance program aimed at expanding the number of loan modifications that were being performed (I can’t count how many homeowner assistance programs have been launched anymore) which caused the process of banks working through upcoming FL foreclosures to slow to a crawl across the board, not just on Fannie/Freddie loans.

Also, at the same time, news was coming out that a review of the loan modifications that had been initially setup in 2006-2007, it was determined that anywhere from 70%-80% of them were converting back to foreclosures regardless of the new terms of the loans!

Oh, yeah. Let’s not forget the Alt-A loans either. You remember them, right? They were the second wave of “ballistic missiles” set to impact in August/September 2008. Regardless of the fact that they were given to homeowners with good credit, a 700 FICO score is little defense when someone loses their job and can’t refinance their home that is now soaked in tens of thousands of dollars in negative equity.

Current reports are now indicating that we are now primed to see as much a 8.1 MILLION foreclosures across the nation over the next seven or eight years as these homeowner assistance programs fail and more and more people are forced into renting. To put that in perspective, you need to remember that just over 1 Million foreclosures have been processed since 2007!

All this adds up to the fact that at some point people are going to put two and two together and realize that the current level of the stock market makes no sense standing in the face of resounding and indisputable facts. You know what happens next.

So yes, I’m short on the market right now. I do believe that we are going to see another market crash in the very near future and I do believe it will erase the forward progress of the so-called recovery and lead us into a double-dip recession.

Really, it doesn’t make sense to take any other position at this point. It would be like going long in July of 2007. Sure, there might be six or eight weeks of life left, but who would really want to risk it? Pulling money out of stocks and putting it into gold and silver futures seems like a good idea to me right about now. And then it’s the watchful waiting for signals pointing to a market peak and the start of a descent at which point funds can slowly be moved back out of precious metals and into ETFs and Short Mutual Funds. Futures contracts that short the DOW and NASDAQ might make sense as well at some point.

Now this might all be well and good, but where does that leave us concerning FL foreclosures? Does it make sense to buy? Not to buy? What?

Let’s set the stage before answering that. First of all, flipping is OUT. Real estate is not a very liquid investment and even if you are a “pro” at buying, fixing, and selling you would have to buy at .25 cents on the dollar (as a percentage of TODAY’S prices) in order to be able to justify taking on the risk of getting caught in a descending market.

Rent-to-Own is risky as well. If you purchase a FL foreclosure property and then look to sell it on terms using a Land Contract (also known as a Contract for Deed) or with a Lease-Option, then you also must realize that you are really taking on the position of a landlord in most instances. Why?

Well to put it simply, we know that many people will not be able to make good on cashing out the home as agreed by the time they get to the end of their contract term. If at that time you choose to search for another tenant-buyer or extend the term of the current tenant-buyer, the value of your property might drop over time to the point where that whatever tenant-buyer you have in the house at the time cannot get a mortgage because the home will not appraise. Bottom line? Realize that you are a landlord if you are walking the tightrope of selling on terms.

Buy and Hold makes sense and will continue to make sense for the foreseeable future. See, the silver lining to 8.1 Million foreclosures coming down the pipe is that it represents 8.1 Million families that will be looking for a place to rent. If you have what they need, you’ll do fine.

Those who take the path of the landlord can expect to see rents increase as the demand for rental property increases. At the same time losses from this increase in foreclosures will continue to squeeze banks making it unlikely that they will become more open to lending more money to investors.

Let me be very clear on this! You do NOT want to let your mind shut down by saying, “Well, if I can’t get mortgages to buy and hold properties from my bank, then I guess I don’t even need to bother getting started investing in FL foreclosures…I won’t be able to find the money anyway.”

This is the type of self-talk that losers engage in!

The key to making big money will be in networking. Private money is the key to success from here forward. Developing the skills and systems to find people with money, build relationships with them, and then borrow money from them in greater and greater amounts in order to buy homes to rent out is going to be the focal point for the Florida real estate investor for a long time to come.

In the last 20 years, the things investors had to focus on were reduced to being able to find great deals and to be able to rehab those properties quickly and efficiently at low cost. Now homes are available all over at ridiculously low prices that need little to no work. Rehab skills are not essential anymore, but the ability to find money is.

It’s time to change your mindset and adapt your game plan. It’s time to switch from a zone defense to man-to-man if you want to win in the business of investing in FL foreclosures for about the next 10 years. Learn how to find Private Money, and you can make a killing during the Dark Ages of the Florida real estate investor.