Lesson 13: Multifamily Residential

Review:

• Location, Location, Location
• Strategies
• Enroll in ECON 320 Geography of World Economy
• Guest Speakers on Tue: Gary Miller and Casey Edwards

Presentation:

• Types of multi-family
  • Duplex, Triplex, Fourplex
  • 5-units and more require “commercial” financing
• Advantages of multi-family
  • vs office, retail or other commercial
  • vs single-family
• Valuation of multi-family residential
  • Price per unit
  • Gross rent multiplier
  • Cap rate
• Search for Multifamily
  • http://www.usamls.net/pueblo/
  • http://www.loopnet.com/
• Story of the Cree Terrace Apartments
  • Before:
    

    

  • After: Current Street View
  • 8-unit apartment building
  • Low-end rentals
  • Dealing with evictions
  • Adventures in bats, cockroaches, pets, guests and carpeting
  • Importance of “Santos and Bob”
  • Headache to revenue factor
  • Financials
    • Purchase Price: $182k
    • Beginning Monthly Rent: $495/month + electricity
    • Ending Monthly Rent: $650/month, all utilities included
    • Selling Price: $256k
  • Lessons:
    • 1 bedroom apartment better than 2+ bedroom
    • Rent drives value and utilities are a hassle (including utilities was a good move)
    • Go big (10+ units) or stick w single-family
    • Beware of the “nickel and dime” buyer while under contract

Assignment:

• Prepare questions for Gary Miller and Casey Edwards

Lesson 12: Location, Location, Location and Strategy

Review:

• Exam 2 Results

Exam 2 Results

Review for Exam 2

Review:

• Culprits
• Naive and greedy borrowers were the only culprits punished
• Exam 2 on Thu, Oct 11

Topics:

• Jeremy Grantham
• 2008 Housing/Mortgage/Financial Crisis
• Monetary Policy
• Federal Reserve
  • Alan Greenspan
  • Ben Bernanke
• Securitization and Derivatives
  • Mortgage backed securities (MBS)
  • Collateralized Debt Obligations (CDOs)
  • Credit Default Swaps
• Subprime Lending
  • Low-income borrowers
  • Predatory lending
  • Loan origination fees/bonuses
• Deregulation
  • Laissez-faire capitalism, Reaganomics
  • 1999 Gramm-Leach-Bliley Act – repeals 1933 Glass-Steagall Act
  • 2000 Commodity Futures Modernization Act – prevents regulation of most derivatives
  • 2004 SEC proposes “voluntary regulation” and lower capital requirements
• Mortgage Meltdown
  • Skyrocketing default rates
  • Dropping property values
  • Strategic default
  • Neighborhood deterioration
• Crisis Culprits
  • Banks’ Excessive Leverage
  • Subprime Lenders
  • Federal Reserve Low Interest Rates
  • Rating Agencies
  • Secondary Mortgage Market
    • Fannie Mae
    • Freddie Mac

Assignment:

• Study for Exam 2

Lesson 11: Crime and Punishment on Wall Street

Review:

• Recovery and Affordability
• Exam 2 on Thu, Oct 11
• Sign up (upstairs) for group advising

Presentation:

• Mortgage Crisis – Key Culprits
  • Wall Street Banks selling MBS and CDO securities
    • Losers: Bear Stearns, Lehman Brothers, Merrill Lynch
    • Winners: Goldman Sachs, Citigroup, JP Morgan, others
  • Subprime Loan Originators pushing ARMs and other non-traditional loans on low-income borrowers
    • New Century Financial
    • Countrywide Financial
  • Federal Reserve
    • Keeping interest rates too low for too long
    • Failing to regulate mortgage market and derivatives
  • Rating Agencies issuing AAA ratings on low quality MBS and CDOs
    • Moody’s
    • Standard and Poor’s
  • Professional Investors/Hedge Funds
    • Increasing volatility through use of excessive leverage
  • Fannie and Freddie
    • Purchasing subprime loans in the secondary market
    • Providing liquidity for ongoing subprime lending

• Fannie Mae and Freddie Mac
  • Fannie Mae = Federal National Mortgage Association (FNMA)
  • Freddie Mac = Federal Home Loan Mortgage Corporation (FHLMC)
  • Government Sponsored Enterprises (GSEs)
    • Fannie chartered by congress in 1968
    • Freddie chartered by congress in 1970
    • President of the US appoints 5 of 18 member board of directors
    • Treasury is authorized to purchase securities from Fannie and Freddie
    • Regulated by Dept of Housing and Urban Development (HUD) and Federal Housing Finance Agency (FHFA)
    • Implicit guarantee of federal bailout
  • Secondary Market for mortgage loans
    • Provide liquidity to loan originators
    • Gives lenders flexibility
    • Monopoly for Fannie and Freddie issuing securities
    • Monopoly ended when Wall Street joined the party ~2000
    • When Fannie/Freddie market share decreased (after 2000), they began purchasing and guaranteeing subprime loans
  • Government Rescue: Conservatorship
    • Losses piled up in 2007
    • FHFA placed Fannie and Freddie under govt control on Sep 6, 2008
  • Federal Housing Administration (FHA)
    • Increasingly competitive between FHA + Fannie/Freddie

• Why was no one punished?
  • No consequences = incentive to repeat
  • The Untouchables (Frontline video)

Assignment:

• Study for Exam 2

Lesson 10: Recovery and Housing Affordability in US Markets

Review:

• Eviction
• Affordable housing
• Guest speakers
  • Gary Miller and Casey Edwards (10/23)
  • Sarah Mize (11/1)
  • Bob Root (11/13)
  • Lee Meisner (TBD)
• Exam 2 on Thu, Oct 11

Presentation:

• Recovery
  • Warren Buffett interview with Charlie Rose
    • Economic Recovery [@ 06:30]
    • Housing Recovery [@ 07:00]
    • Fiscal Policy [@ 10:00]
    • Buffett Rule (Higher tax on income over $1M) [@14:00]
• Housing Affordability
  • Affordability by US market
    • US Markets
    • Inventory Affordability
    • Rent Affordability
• Fiscal Policy
  • Follow up on discussion from previous class
  • What fiscal policies might improve housing affordability?

Lesson 9: Eviction and the Affordable Housing Crisis

Review:

• Housing Collapse and Foreclosure Tsunami
• China Travel informational meeting
  • Thu, Sep 27
  • 3:30p-5:30p
  • HSB 108
  • Come and go as you please
  • Scholarships and fundraising assistance available

Presentation:

• Evicted: Poverty and Profit in the American City
• PBS Newshour Interview with author and Princeton Sociology Professor, Matthew Desmond
• Affordable Housing Crisis
• Group Discussions
  • Read NY Times article about Affordable Housing and HUD
  • Discuss potential solutions and consequences

Lesson 8: Housing Market Collapse and Foreclosure Tsunami 2008-2012

Review:

• Deregulation and the 2008 Housing Crisis
• Remarks regarding the Stock Market
• China Travel informational meeting
  • Thu, Sep 27
  • 3:30p-5:30p
  • HSB 108
  • Come and go as you please
  • Scholarships and fundraising assistance available

Presentation:

• Home Price Index (HPI): Bubble, Bust and Recovery

• Click for 10 Metro Area HPI Interactive Chart

• Mortgage Meltdown as reported on CBS 60 Minutes
  • US Mortgage Meltdown (May 2008; 12 min)
  • Walking Away from Underwater Mortgages (May 2010; 12 min)
  • Neighborhood Deterioration (Dec 2011; 13 min, start at 2 min)
• “Banks are Destroying America’s Neighborhoods” blog posts (2012)
  • Part 1
  • Part 2
• Some housing markets in the US remind me of Pueblo in 2009-2011.
  • Milwaukee WI real estate
  • Akron OH real estate

Assignment:

• Read State of the Nation’s Housing by Harvard Center for Housing Studies
• Prepare for discussion on Solutions to the “Affordable Housing Crisis”

Lesson 7: Deregulation and the 2008 Housing Crisis

Review:

• Monetary Policy
• Money for Nothing: Inside the Federal Reserve

Presentation:

• Deregulation of the Financial System
  • Reaganomics
    • Unregulated capitalism
    • Trickle-down economics premise
      • Reduce taxes
      • The wealthy will invest more
      • New industries and jobs will be created
      • Rising tide lifts all boats
  • 1999 Repeal of Glass-Steagall
    • Gramm-Leach-Bliley Act
    • Republican Congress + Democratic (Clinton) White House
    • Removed “firewall” between commercial banks and investment banks
  • Derivatives Market
    • $100 Trillion in 2001, over $500 Trillion in 2008
    • Completely unregulated in 2008
    • Still trying, unsuccessfully, to regulate now
    • Current value: $1.2 Quadrillion … whoa
  • 2004 Securities and Exchange Commission (SEC)
    • In reply to global investment banks asking for more freedom
      • Agreed to loosen capital requirements
      • Allowed fewer reserves and more debt
      • Enabled voluntary regulation and self-reporting
    • Christopher Cox, Head of SEC under George W. Bush administration
      • Former Reagan staffer and US Rep from Southern California
      • Facilitated lack of oversight
    • Contributed to 2008 Crisis
  • Short History of Financial Deregulation in the US
  • Déjà vu all over again
    • Savings and Loan Deregulation in the 1980s > Savings and Loan Crisis
    • Energy Deregulation in the 1990s > Enron
    • “You can’t overestimate what happens when you encourage regulators to believe that the goal of regulation is not to regulate,” said Joseph Stiglitz, a Nobel Prize-winning economist at Columbia University.
  • The 2008 Crisis Explained
    • video (referring to Big Short)
    • stick figures
  • Recent deregulation since Trump election
    • NY Times
    • Bloomberg
    • Washington Post

Assignment:

• Watch The Big Short

Lesson 6: Monetary Policy and the 2008 Housing Crisis

Review:

• Exam 1 Results

Presentation:

• Monetary Policy and the Housing Crisis of 2008
  • Historical context
    • Tech Stock Bubble (NASDAQ) bursts in Spring 2000
    • Tech job losses post-bubble weaken the economy
    • Bush II elected and takes office in Jan 2001
    • 9/11 and continued economic weakness
    • War in Afghanistan and Iraq
    • 2004 Election
    • Political pressure to stimulate economy
  • Federal Reserve
    • Central Bank for the US and, in some ways, the World
    • Alan Greenspan
      • Federal Reserve Chairman (1987-2006)
      • Free market champion appointed by President Reagan
    • Ben Bernanke
      • Federal Reserve Chairman (2006-2014)
      • Promised to continue Greenspan policies
      • At the eye of the storm in 2008
    • Kept interest rates too low for too long (2001-2004)
  • Housing Bubble
    • Began inflating in 2001
    • Low interest rate environment
    • Financial engineering of mortgage debt
      • Mortgage backed securities
      • Derivatives (aka “financial weapons of mass destruction” – Warren Buffet)
      • Subprime, NINJA
  • Money for Nothing: Inside the Federal Reserve

Assignment:

• Watch the remainder of Money for Nothing