The New Business of Banks
Thursday, August 14th, 2008
By Michael Lombardi, MBA for Profit Confidential
Sometimes you start a business thinking you are in a certain type of industry, but things just don’t work out that way. If we take banks for example, we would think they are in the lending business. Turns out, in 2008, more and more banks are getting into the real estate business, and it’s not by choice.
Bank repossessions of homes in the U.S. just about tripled in July, according to RealtyTrac. And more than 270,000 notices of default were sent to homeowners in July.
According to Zillow.com, about one in three U.S. homeowners who bought their homes in the last five years presently owe more on their mortgages than their homes are worth. In a separate report, one of the largest U.S. mortgage lenders, Countrywide Financial, said home borrowers with about $25.0 billion in adjustable-rate mortgages owe about the same today that their homes are now worth.
Countrywide said its average borrower had a mortgage value of 95% of the value of his or her home as of June 30, 2008, up substantially from an average of the loan-to-home value of 76% when the loans were made. In my opinion, if you figure real estate commissions of five percent and closing costs, the homeowner is really “upside-down” right now.
A major bank, Deutsche Bank AG, is said to be set to foreclose on the $3.3 billion Las Vegas Cosmopolitan Resort & Casino. Rumor has it that the bank will not immediately sell the property and will try to operate the Cosmopolitan instead and wait for the environment in Las Vegas to get better (over the next few years) before selling. Deutsche Bank has its hands full with other problems. Early in 2008, it took over seven New York office towers after $7.0 billion in loans on the properties was defaulted on. Deutsche Bank is trying to sell those properties now.
After years of making billion-dollar profits, the big banks are giving back some of those profits. (My guess to date is that they have given back about half the money they have made in the past few years). They are unwillingly getting into the real estate business by foreclosing on so many properties they cannot sell.
The million-dollar question is: has the stock market discounted the worse for the banks and the U.S. real estate market? It’s really too early to tell. If we look at my favorite real estate chart, the Dow Jones U.S. Home Construction Index, we see a definite bottoming out of this index this past July and a strong rebound from there. Remember, the stock market is leading indicator. I’ll keep my readers posted on how this bellwether stock index fares over the next few weeks and if indeed it has signaled the bottom. (And if it has, this doesn’t mean house prices will start to rise. That could take years. What it will mean is that a return to normal conditions in the realty market could be near.)
NEWSFLASH – Today, Wal-Mart announced a 17% increase in its second-quarter profit, while raising its full-year forecast. Maybe the economy is not as bad as the media makes it seem.
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Tags: mortgage rates, real estate business cycle, real estate market, stock market
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
