I had stumbled upon this great little video a while back, and have been sharing it with many of my students, particularly those new to real estate and the secondary markets. It provides a very entertaining, yet fairly factual account of the events that led to the collapse of the financial markets toward the end of 2008. It was created by Jonathan Jarvis, a design student out of Pasadena, as part of his graduate thesis. Perhaps a tad simplistic, but still conveys many key points. I particularly get a kick out of the “subprime family” caricatures. I hope you’ll enjoy it as much as I do.
As we wrap up winter quarter at UCLA, I thought I’d leave my departing students with some takeaways to remember years after their passage through my ”Intro to Real Estate Finance and Investments” course. There may be some lessons in here for all of us, so I thought I’d share:
My Dearest Students,
After a marathon grading session, I think this is the first class in the history of mankind where final exams and projects for 103 students were turned around, and final grades issued, within 24 hours. HUGE thanks to Natalie and Greg for their amazing efforts in helping to make this happen, and for being such great TAs this quarter (electronic round of applause). I hope you feel like the outcome matched up with your performance. But more than anything, I hope you feel like you received a great real estate education, were challenged, and had fun in the process. If you love me and hate me at the same time, I’ve done my job.
Stepping back, remember the lessons of this class apply to all fields of business outside of simply real estate, and that you’ll get tripped up much less infrequently if you grow your ventures/portfolios/companies slowly and wisely. Even if you forgot everything in this class 5 minutes after the final exam, always remember the following takeaways:
1. Et tu Debtus?: Leverage is your best friend but can turn on you if you abuse it. Real estate success is all about staying power, the ability to weather the cycles and come out on the other end without losing your shirt. After all, because I levered up conservatively, I’m still in business while many of colleagues are at FedEx/Kinko’s updating their resumes.
2. Deal Sourcing: You make money when you buy real estate, not when you sell it. Buy wisely, and you’ll have less exposure to market volatility. And don’t be afraid to walk away from a marginal deal. There is enough room for emotion in other aspects of life; don’t carry it into business decisions. You will never lose money on that deal you didn’t do.
3. Market Inefficiency: Real estate is a heavily fragmented market, so use your local knowledge and initiative to find untapped opportunities. If you don’t have local knowledge, pick a community that interests you and go get it. If you don’t have initiative, marry rich.
4. Portfolio Management: Try not to put all your eggs in one basket, but if you do, make sure you do so knowing the risks, and walk slowly. Remember that it’s harder to keep money than to make money, so once you get a nice nest egg, make sure you are vigilant towards preserving capital and reputation. If you’re a high-flyer and just want to grow at all costs, admit that to yourself and then learn to have a tough stomach so you can weather the ups and downs.
5. Time and Risk: Remember that finance is all about adjusting for time and risk. Coincidentally, so is life. Time is our most precious resource, something we can never take back. And the risks you take, the rewards you seek, will carve much of your path in business as well as just about everything else in life. Take risks when necessary, but know the stakes. Or, as my dad likes to say, “There are old pilots and there are bold pilots, but there are no old, bold pilots.”
6. Common Sense: Above all, use the numbers as a tool, but go with your gut and intuition when it comes to decision-making. Perhaps the most underused tool in life is intuition. Give yourself that power, listen to it, it’ll set you apart.
Okay, so that’s it for now. I truly had a wonderful time teaching and getting to know all of you over the past ten weeks. I am having a tough time getting over the fact that it’s time to move onto another quarter, but I wanted to make sure to ask you all to stay in touch with me and let me know what you’re up to as you graduate and embark upon your successful and rewarding careers. Kick butt out there. Or as Rodney Dangerfield said in Back to School: “Look out for number one, but don’t step in number two.”
Today the Treasury released the February 2010 Making Home Affordable (aka HAMP) Servicer Performance Report, which depicts very informative statistics on the success of the program to date. I decided to do a little digging, since the academic quarter at UCLA ended today and I had a bit of free time…
If you look at page 4 of the report, you will see that we have reached a cumulative total of 1,094,064 trial modifications through the end of February 2010. The success of this program, however, is dependent largely on the percentage of trial modifications which are converted to permanent modifications, a step which requires 90 days of solid borrower performance under the new modified terms. Thus, we need to evaluate those trial modifications which are at least 90 days old, taking us back to November 2009. At that time, there were 822,075 trial modifications. Of those, 32% have achieved permanent status. I did a little math to get the breakdown: 168,708 (20.5%) are “permanent modifications” and 91,843 (11.2%) are “pending permanent modifications.”
That’s great, so what about the remaining 68%? I bet it’s safe to say that this is the redefault rate. A bit of fishing may help out. Hmmm…on page 6, they tell us that a WHOPPING 54% of modifications were made due to loss of borrower income! So what difference does it make whether the interest rate is 7% or 2%? Out of work borrowers still can’t make the payments, and this is the fundamental drag on today’s housing market. No window dressing can ever hide the fact that incomes are the only real cure for an ailing housing market. Link below:
At last, a bit of good news on the hotel front. RevPAR (Revenue Per Available Room) increased for only the third week in the past 18 months. For the week ended March 6, 2010, RevPAR was up 0.9% to $52.75. More importantly, this was the first such increase that wasn’t holiday related. RevPAR is a key measure of revenue generation and is calculated by multiplying ADR (Average Daily Rate) by occupancy percentage. For example, a hotel charging an ADR of $100 with 60% occupancy would yield a RevPAR of $60.
While it is too early to tell whether this is indicative of a larger trend, the news is notable because of all real estate product types, hotels have the highest level of sensitivity to economic conditions. In fact, I’ve always referred to hotels as the “canary in the coalmine” of real estate. Link below:
David Haldane’s piece in this week’s Los Angeles Business Journal discusses the continuing decline in local median home prices. Haldane quotes me fairly liberally, and then in the end, pits my views against my good friend and colleague Chris Thornberg. And all along I thought I was the pessimist. Link below: