According to data compiled by ZipRealty, inventory of homes -- single-family homes, condominiums and town houses listed on local multiple-listing services -- in 27 major metropolitan areas rose 4.2% in February from a month earlier. The inventory in February dropped 19% year-over-year. The figures compiled by ZipRealty may not present the exact level of supply since half of foreclosed homes are not included on multiple-listing services at any given time on account of such homes awaiting repairs or being subject to litigation. Ivy Zelman, chief executive of Zelman & Associates, a research firm, says the average increase in home inventory in February has been 3.4%, over the past 27 years. Analysts say the housing inventory could be much higher than what is reported, and a large supply of unsold homes could hit market recovery. David Moon, president of Moon Capital Management, says the housing inventory data does not account for “properties on which the loans are seriously del
inquent and those that already are in the foreclosure process but not for sale. Banks often have houses in their real estate owned portfolios that aren't yet on the market.”

Will foreign investment help commercial real estate?

"A wave of commercial real estate loan failures could threaten America's already-weakened financial system ... and... trigger economic damage that could touch the lives of nearly every American," according to a recent Congressional Oversight Panel report. As troubled loans running into billions of dollars come due in the next few years, the industry is facing the prospect of a huge wave of defaults. A recently proposed legislation seeks to attract foreign investment to the commercial real estate sector to provide the much needed liquidity for the sector. In January, Joseph Crowley, a Democratic congressman, introduced the Real Estate Revitalization Act of 2010 which seeks to eliminate certain taxes that were part of the Foreign Investment Real Estate Property Tax of 1980 (FIRPTA). FIRPTA requires foreign investors to pay as high as a 55% tax on capital gains from the sale of U.S. real estate or shares in real estate investment trusts. Supporters of the bill say that by repeal
ing the tax, the country would attract significant foreign investment. "We're talking about bringing in foreign investment to be on equal footing if they invest in real estate versus non real estate," says Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a real estate think tank. Many property owners are now facing debt calls on account of property prices having fallen about 40% from their peak, and the commercial mortgage-backed securities market has dried up. Real estate loans to the extent of $1.4 trillion will come due between 2010 and 2014, and about 50% of those loans are currently "underwater." If the bill is passed, Real Estate Investment Trusts could benefit significantly.

Bair says consumers did not understand subprime mortgages

Sheila Bair, the chairman of the Federal Deposit Insurance Corp. (FDIC) has said there is “ample evidence that consumers did not understand the consequences of the subprime and nontraditional mortgages that were sold to them.” In a speech to the National Association of Business Economics, Bair has called for greater consumer protection in financial services and said the information flow among the different market participants should significantly improve. “Economists understand a great deal about the effects of asymmetric information, and how it can prevent markets from existing in the first place or from operating efficiently,” Bair said. “In this light, I think there is a strong case to be made that basic consumer protections help markets function better by reducing information gaps between lenders and borrowers.” Commenting on failures of large financial firms, Bair said the typical resolution should not be a bailout using public money, but should be a mechanis
m which would ensure that shareholders and creditors take the losses.

Small business optimism slips

According to a survey conducted by the National Federation of Independent Business (NFIB), its index measuring sentiment among small business owners dropped 1.3 points to a reading of 88.0 in February, from January. Incidentally, a value of 90 in the index indicates an expectation of positive growth. The index has remained at 90 for 17 straight months, and below 90 in all but 4 months since January 2008. The survey said small business owners cited weak sales as their biggest concern. The poor outlook on demand is driving small business owners to liquidate inventories and go slow on ordering new stocks. "Something is preventing owners from ‘pulling the trigger,’ said William Dunkelberg, chief economist for NFIB."Very few owners felt that growth opportunities were solid enough to warrant expansion.'' Only about 9% of the respondents said they were hampered by lack of credit. “Credit access is not a major factor holding up economic growth, at least the kind of growth we wa
nt,'' said Dunkelberg.

Hiring outlook worsens

According to a quarterly survey by Manpower, a consultancy, employers in the U.S. are less willing to hire workers in the coming 3 months than they were 3 months ago. Some 17 million Americans are currently unemployed and the survey results do not indicate any optimism on employment. The survey is based on interviews with 18,000 managers responsible for hiring workers and measures the difference between those who say they will add to their workforce and those who plan cuts. About 73% reported no change in their hiring outlook, matching last quarter's record. "There is some demand, so (employers) won't let people go, but not enough confidence to do hiring," Manpower Chief Executive Jeff Joerres said. According to Joerres, the U.S. economy is caught in a vicious cycle – companies will not add capacity and hire workers until demand improves, while consumers will not buy until unemployment falls and incomes improve. Joerres argued for continued government stimulus until the eco
nomic situation improves. "A snail's pace recovery is (equivalent to) falling back," Joerres said. "A very slow recovery is dangerous."

Now on to our real estate investing educational section...

Complete the Picture - Addressing Negative Equity Issues

It's no surprise that negative equity has become a major issue in the current housing market; experts report nearly one of every four mortgages being higher than the current value of the underlying real estate. Unfortunately, that doesn't tell the entire story. Short sale investors, real estate agents and homeowners alike need to understand the full impact of negative equity in order to make the best decisions regarding the current plan of action for any property.

Problem #1 - Under-Reporting of Negative Equity

Although the media is filled with statistics regarding the number of under-water homes, it still manages to under-report the full impact of the problem. This is due to several reasons; first of all, the numbers used to compile these averages are based upon the overall decline in value for a given area rather than a specific home. Many financial distressed homeowners have failed to maintain adequate maintenance or allowed taxes, insurance and other lien payments to lapse.  The actual amount of negative equity for any given property is often far in excess of the official estimates.

Problem #2 - Counting Transaction Costs

In addition to the one out of every four homeowners that are currently upside down on their mortgage, there are literally millions more that are "borderline"; basically their current mortgage more or less equals the value of their home....at least on paper. Unfortunately, that status can quickly turn negative if they decide to actually sell.  Sales commissions to real estate agents and brokers easily average seven percent while local taxes or closing costs frequently add another two to three percent. A ten percent premium above and beyond the current mortgage/market value is well within the average range quickly transforming a "break even" property into a negative equity position.

Problem #3 - Taxes, Taxes, Taxes

Investor owned properties often face even greater costs including depreciation recapture and Capital Gains taxes. Combined, the total tax hit combined with items like depreciation recapture can transform a borderline property into a negative equity situation. Add in transaction costs such as real estate agent commissions and closing costs and the average investor owned property often needs to price a property 20% to 35% above the asking price just to break even.

Problem #4 - Second Loans & Other Liens

As if the situation wasn't bad enough, a recent study conducted on behalf of BofA found a significant increase in the percentage of underwater loans when the primary mortgage as well as secondary loans and liens were compared against the full value of the property. In fact, only 45% of Prime borrowers were found to have any remaining equity in their homes.

Bottom Line - Walk the current homeowner through the actual numbers required in order to determine if a property is in a negative equity position or not; don't simply rely upon the paper estimates to determine the value of a property. In addition to the one out of four mortgages that are clearly in excess of the current value of the home, millions of other Americans face a "hidden" negative equity position when attempting to sell a home rather than hold for the long term.