(II) The reverse mortgage today

28 June, 2010 No Comments

Once the general description of what legally constitutes a reverse mortgage, I would like to get deeper on this subject from the practice.

In fact, we are trying to see the possibility that home ownership to be a source of income for retirement, because the properties are usually one of the main assets for people during their retirement age.

This type of mortgage assures the owner will receive a monthly amount in exchange for his home, keeping it as a place of residence to his death.

Normally, is possible to earn a starting spot sum, to pay the expenses resulting from the completion of the contract and the reforms that have to do, etc. Since that time, periodic amounts are charged; depending on the financial entity, they can reach 90% of the initial appraisal.

The operation can be canceled at any time, but typically would receive the income until the death of the holder, when the heirs will receive the property and their loads. This leads, today, that some reverse mortgages are being made on second homes, as a way to dispose of apartments that are not selling in the market.

On the other hand, the initial idea of a reverse mortgage, which originated about the year 2005, was to have a high valuation of the property and thus receive a higher monthly income. But now, valuations are lower, that’s why the income that can be achieved with the same property are much lower than those obtained earlier, due to a fall of the housing market.

There is another element that can create uncertainty for the bank to make reverse mortgage: life expectancy is now set to reach the 80 years in many cases. The bank wants to make sure income, which adds costs to the operation to avoid reaching what the financial market is called “negative equity”, which means that the debt exceeds the property value.

To eliminate the obstacles that appear to have the reverse mortgage at the moment, there is the idea that in Spain, “who has an apartment has a treasure”. Therefore, older people think well before taking a reverse mortgage to offset income his small pension. Furthermore, the sons are not yet aware that this house belongs to their parents, and so they are not obliged to let them it in heritance.

Why + who + what + how to invest in real estate today?

2 June, 2010 No Comments

We have been seeing for several months, studying, analyzing past, present and future problems of housing market.

Rarely could be made an optimistic forecast about it. But maybe today I would at least contribute something more positive after having reflected on past crisis.

… And considering some of the ideas of Warren Buffett, the Oracle of Omaha, which broadcasts to their customers / shareholders, where:

• It makes the anticipation that the U.S. housing market in 2011 will be out of the crisis, although prices are not still the ones of 2005.
• Advises that people always has to have a good cash position to take advantage of investment opportunities when they arise.
• Indicates that it is much better to invest in business models, which are easy to understand. 

ABOUT HOUSING, if we make a historical note that after previous downturns, people in general turned to buying a house or brick, whether to make a safe investment, have wealth in their old age, leave a legacy or make a donation their children.

For any reason whatsoever, prices are now falling. The problem is not to know if we bought an appartment or brick which is purchased from a market price today and is well bought, or bought only half right, since it is difficult to set prices in today’s market, in recession, because today taxation prices for sure in a month or two are no longer valid, and in most cases should be aware of the offer that makes you a potential purchaser to come to negotiate.

The good idea is to have purchased at the time the market price was low, so that in time, as happened after the other crises, we may see that real estate property will be worth double or triple.

I’m just speaking from the point of view of the experiences had during the time and that is expected to be repeated within + / – long time, as the housing market is cyclical, plus being one of the engines of our economy.

But always thinking in case that a real estate purchase has been made with an accouracy study, for example, in a city like Barcelona, buying in any of the areas that usually have been easy to sell, foreseeing that in future there will still be enough demand (in streets such as Passeig de Gracia, Diagonal, etc.).

ABOUT CONSTRUCTION OF HOUSES, reflecting the thinking that makes Garcia-Montalvo, economics professor at 23.05 Vanguardia, whether it is right to build in a place where there are many houses to sell, the immediate response that comes to the head is not.

But he believes it, and the example is Las Vegas, where despite having a large portfolio of empty houses, and prices suffered a decline of 60%, construction has doubled. And the trick? since the fall of the price of land and construction costs of the new homes are very competitive against surplus product already on the market.

This is a warning to Spanish developers who have not reduced prices below the mortgage value.

… Let no one take it as a council to follow, since it is only my view … a feeling + the history of past crises + the pulse of the street + how to invest today for wealthy + opportunities market price + Euribor down + …

Spain vs England in real estate investment

4 December, 2009 No Comments

The “real estate crisis” has affected several countries. We can make a comparison between Spain and the UK to see the evolution in each of these housing markets.

Referring to the residential housing market:

• In the UK, prices have fallen more quickly than in Spain, as sellers have assumed that without this prices decrease, the sale would not expedite. In addition, must take into account that the actual price drop by the devaluation of the pound, prompted investors to find properties with a discount of up to 50%. It has made that the real estate market in England is now already beginning to recover.
• In Spain the price reduction has been much lower and in the segment of luxury homes, this reduction has barely noticed. It is anticipated that the recovery in Spain will start between 12 and 18 months.
• Unlike the office market (see below), in the housing market there is a glut and excess debt; the worst is behind us yet. Even so, as discussed in the article of 26/11/09 La Vanguardia, in Barcelona and Madrid real estate begins to pick up.

About office market:

• In Spain, the real estate market is about to bottom out, as it has been noticed some cuts in prices for office, sometimes exceeding 40%. But this is clearly a market that has always had a shortage of supply.
• The office market in Spain has suffered the fall in rents, which has been linked to changes in the economy. When the rents are lowering, there is more risk for investors. If the economy recovers, rising consumption and improved incomes. Potential investors must be, therefore, very attentive to the evolution of the Spanish economy.
• Rental contracts in Spain are normally 3 to 5 years, unlike England, where contracts are much longer.
• Spain remains an attractive country for investment. A German investor particularly like to invest in Spain.

 The Spanish financial entities, and we talk about banking in general, seems unwilling or unable to dispose of their property, at least at current prices. The big question would be: Why should I sell now if within 8 months I get a 15% – 20% more? The answer is given: If these entities sell now, will always be at a price lower than that recorded in its books and, therefore, prefer to wait until the market recovers a bit.