Real Estate Vs. Da Stock Market – Part #3

8 March 2010 | talking about Real Estate, Stock Market

Overview


The point I am going to make in this post is you can use the different markets outside of Real Estate to help with timing your Real Estate transactions. Great timing can do wonders for your bottom line. I have to setup my point so read all the way through. I will put it all together at the end.

To continue my argument that I believe that at the very least if you are a Real Estate investor you should have an eye on different markets outside of the Real Estate world I am going to highlight Mortgage Back Securities and what it means for the common Real Estate investor.

First lets define what a Mortgage Back Security is, or MBS. More or less a MBS is a bond sold on wall street from the big government backed firms Fannie Mae and Freddie Mac. These loans are originated by banks we all know and love. Then the banks sell these loans off to Fannie Mae, and Freddie Mac in big pools (collections of mortgages). For example (and to keep things simple), lets say Bank of America lent out 100 thousand dollars to 10 people (total of 1 million dollars). Bank of America collected a bunch of fees for putting the loan together (from the borrower), also mostly likely will get to continue to service the loan (charge more fees for the service of collecting loan payments).

Now, BofA will sell this pool of loans to Fannie Mae or Freddie Mac. So the amount of loans BofA is willing to make each week/month/year is almost a factor of how willing Freddie and Fannie are willing to buy the loans.

Once the pool of loans are sold and out of the bank's hands, Fannie and Freddie then bundle the loans up into bigger pools and sells them off on Wall Street as bonds. So when you make your home mortgage payment you send the money to your bank, then the bank send your payment to Fannie and Freddie, and then Fannie an Freddie sends your payment to the owner of the bond. You can learn way more about this process at Wikipedia.

Why should you understand all this?


It is one big chain of influencers; The seller, the buyer (borrower), the bank, Fannie/Freddie, and the bond holder. Each phase of this chain relays on entity below it. So lets look at each phase.

  • Bond holder

    • The bond holder, often a big time money manager, has the job of gaining the biggest profit he can based on the investing principals of the fund. So there are times when MBS' really are an attractive investment relative to other options. If some other area with the same risk profile is starting to heat up and return more profit than MBS then the money manager is going to purchase this other asset. Lets say the dividends of stable blue chip companies are starting to increase then a money manager might buy stock in those companies instead of a MBS.



  • Fannie Mae / Freddie Mac

    • These guys are in the business of selling MBS to the money managers on wall street. If the money managers are in big demand for MBS they are selling tons of these things. If the money managers are interested in other asset classes these guys are not selling as many MBS.



  • Banks

    • Since banks sell many of their loans to Fannie and Freddie they can only lend out as many loans as Fannie and Freddie are willing to buy.



  • Home Seller (you)

    • You have two things you are worrying about, finding a buyer and finding that buyer at your price.



  • Home Buyer

    • All you care about is purchasing the home you want and being able to get the loan for that home.





Putting all this into context


Through the chain explained above the Real Estate demand is a factor of how willing a money manager is to buy a MBS. The more demand for MBS the more loans banks are willing to give. Further more the more standards the banks are going to have to be flexible on to keep selling loans to meet the money manager's demand. So the price I can sell my house for is in an odd sort of way determined by money managers on wall street.

Why is it important for me to follow all this? Lets use an example to explain. I purchased a house and am renting it out. Some day I want to kick the tenants out and remodel it and then sell it for a profit. The remodel is going to take 6 months. If I look at the wall street markets as a whole and see some hot sector starting to get everyone's attention (ie, the tech boom in the 90's) I might guess the demand for MBS' will go down because these money managers will be investing in what is hot. So from look at other markets I notice this and I realize that maybe home prices might not grow as fast in the near future (or even worst go down) because MBS' might not be in demand in 6 months. Meaning there will be less buyers able to get loans when I am done with the remodel and ready to sell.

Lets give another example. Lets say I notice blue chip stock prices are starting to raise, (make dividend decrease in yield). That is a sign, (I am only giving example not sure or not), that maybe new money entering the market might be more interested in MBS's because relative to blue chip stocks MBS' are more attractive. I might decide it is time to do the remodel and get my house on the market because there is going to be more buyers with more money to spend making real estate go up.

I believe you have to pay attention to this stuff to help with your timing of Real Estate transactions. Timing does have a big affect on bottom lines when it comes to Real Estate.
 

tags: property management, investing, investment style

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