The Greatest Investment Opportunity Of Your Lifetime Is Here

It's been some time since I've written an article for my blog. I felt like there was a bit of redundancy after 60+ articles, and I wanted some new factual data to inspire me. We are now in our 4th year of the real estate market correction, and I have found factual evidence that supports my assertion that this is the greatest investment opportunity of a lifetime but not in the way you might think, based on the majority of my posts. Although buying real estate is still my primary investment focus, I'm going to highlight the reasons why you should now be buying homebuilder stocks.

Before I get to the facts, I'm sure you are hearing or reading, on a daily basis, that the recovery in the real estate market is going to take years to get back to some sort of normalcy. High inventory, due to foreclosures and short sales, has been the leading reason that's given for the negative outlook. On the surface, that would seem to be a prudent position to take. The law of supply and demand would seem to support this hypothesis, but you have to look below the surface to see what will drive the next appreciation cycle. It is in looking below the surface, that I have uncovered facts that are history making and will impact the real estate world in the very near future in a positive way, at least from an investor's perspective.

Homebuilders contributed to the high inventory of homes by overbuilding during the housing boom. In 2005, there were 2,068,000 housing starts. In contrast, if you average housing starts between the years of 1980 through 2010, you get about 1,454,800 starts per year. It's clear to see, that there was definitely a huge increase in the number of housing starts during the boom, that contributed to the excess inventory. But lets dig a little deeper into the stats. Between 1980 and 2005, the lowest number of housing starts occurred in 1982 (1,062,000) and 1991 (1,014,000). These two periods in time had a lot in common with the depressed market conditions we're facing now. In 2009, there were 554,000 housing starts and in 2010, we are on pace for approximately 540,000 housing starts, which marks the LOWEST housing starts in 30 years. Now what makes this even more potent, is that the population today is about 25% greater than it was during the depressed housing market in 1991. Can you say "supply and demand"? To recap, in 2010, we have about 1/2 the homes being built than we had in the early 1990's but an increase in population by 25%. At this rate, once the inventory of foreclosures are eliminated from the banks books, we may actually have a SHORTAGE of homes if this depressed level of building continues. Inventory will not be able to meet the populations demand for housing which will lead to rapid price increases and massive profits for the public homebuilders that stand to take their market share.

Many of the private homebuilders have gone into bankruptcy. The land they once owned has gone into foreclosure and is being purchased for pennies on the dollar by the bigger publicly traded homebuilders like Pulte, KB, Lennar, D.R. Horton, and MDC Holdings (Richmond American). What this means for the investor willing to buy these homebuilders' stocks now is great appreciation in future stock value. Almost all of the fore mentioned homebuilders I've listed here, are trading at a fraction of their 2004 & 2005 values. I believe the potential for 300% to 500% returns on your investment in homebuilder stocks is not only possible but probable due to the current population growth and record low housing starts. You want to invest in sectors that are the most depressed, if you want to invest in sectors that have the greatest upside potential. Remember, the key to investing is to buy low and sell high. I believe there is light at the end of the tunnel for homebuilders within the next 1 to 2 years, so I'm making my investment buys now.

3rd Year Aniversary

Wow, it has been 3 years already. I haven't been as prolific as I would have liked, but the information is still relevant, and there has never been a more exciting time to buy real estate. We are in a very rare period in history, where interest rates are at a 50 year low coupled with real estate being sold for pennies on the dollar. Enjoy this opportunity, because it may be a once in a lifetime opportunity.

The Train Is Leaving The Station...Are You On-Board ?

We've been in a real estate market correction for just over 3 years now. My prediction has been that the market will correct for 4 years before it starts to appreciate again. The typical real estate cycle appreciates for roughly 5 years and then corrects for about 2... a kind of 5 steps forward, 2 steps back scenario. Since we had an extraordinarily long appreciation cycle this time around (1996 -2006), it shouldn't surprise real estate cycle followers that 4 years of correction is proper and in line.

Signs of investor bottle-necking are here. Multiple offers on foreclosures are now the norm, especially aggressively reduced REO's looking to clear themselves from the books. The laws of Supply and Demand dictate the climate of offers, whether it be few to none or a dozen offers on one listing. I've witnessed the latter being the case, finding offers of a few thousand or more over asking price being the norm rather than the exception. This domino effect leads to the bottle-necking I was referring to, where everyone has the same subdivisions and homes in their sights with only one to emerge the victor. Is this the proverbial, "The train is leaving the station...are you on board?". I think it is, and it is important that you give it some consideration if you've been sitting on the sidelines waiting to make an investment move. Timing is everything in investing, and this period of amazing opportunity to buy real estate for pennies on the dollar is quickly eroding away.

The Rental Market Is Picking Up In A Major Way

I've never seen rental properties rent as quickly as they have been lately. With almost no vacancies to speak of, I find myself looking to add additional properties to the portfolio.

As I've mentioned before, investing in today's real estate market is setting the stage for phenomenal returns. Price appreciation will come in due time, but renting your investment property for profit has never been better if you've been buying distressed priced foreclosures and short sales. In the Arizona market, homes in the 1,200 - 1,500 Sq.Ft. range are selling for as little as $40,000. These aren't old fixer uppers either, these are homes that are only 3-5 years old. At that price, you could charge as little as $750 per month rent and still draw a 22% return per year or a 100% return of principal in just over 4 years.

Todays rental environment is very different from years past. In a normal rental market, there is a stable and fairly predictable movement of tenants in and out of rental properties. Today, the rental market has been flooded with families that have lost their homes due to foreclosure, short sale, and bankruptcy. This increase in renters into a once stable market has created a shortage of desirable rental properties (SFR's, not apartments), and it's not unusual to get a dozen or more calls within hours of a vacancy being advertised. Since foreclosures, bankruptcies, and short sales have the potential to tarnish one's credit report and FICO score for as long as a decade, the rental market for investors looks to be quite lucrative for some time.

Just Closed On Another Great Deal Today

I received a call today from the Title Company letting me know that the foreclosure I was buying had just closed escrow and had recorded in my name. This was a GMAC bank foreclosure purchase, and the process was quite smooth contrary to what you may have heard about buying bank owned properties. Escrow took about 4 weeks to close and there were no major hiccups to speak of.

This investment home is Approx. 3200 Sq.Ft., has 5 bedrooms, a den, loft, family room, dinning room, living room, 3 car garage, and kitchen with a pass through bar and Island. The original purchase price for this home in 2005 was $252,000. Over the course of just months, the home had reached an appraised value of over $350,000 as did most of the homes of comparable square footage in the neighborhood. Fast forward to today, the foreclosure purchase price was 50% less than the original purchase price. This was an incredible investment opportunity considering the home's previous values. Rental income should bring in Approx. $1,800 per month which is a R.O.I (return on investment) of 18% per year... not to mention the future appreciation value which will easily double in value during the next appreciation cycle . If the money used to purchase the home had been left in a Money Market account at today's interest rates, it would have had a return of Approx. $280 per month or $3,360 per year. That's a loss of $18,240 of potential income a year when compared to renting the home out.

Banks are simply liquidating homes at this point. You still have an opportunity to take advantage of today's foreclosure and short sale market. High returns and substantial appreciation value are yours for the taking. You just have to be proactive and realize that this is the time to invest in real estate if you want to maximize your R.O.I.

Today's Real Estate - Modern Day Gold Rush

Today's real estate market is our modern-day Gold Rush. Instead of setting up camp along the banks of the river to stake one's claim to potential ounces of gold yet to be found, investors are lining up to stake their claims on the bounty of foreclosures and short sales being offered by banks. Throw in a few Trust Deed sales and well oiled auctions, and the picture is complete; a real estate Gold Rush of a magnitude we haven't seen in more than a decade.

This real estate Gold Rush, however, isn't without it's flaws. The system that pushes these properties through is quite clogged. Agents and investors can be found pulling their hair out at times due to the frustrations a clogged system can bring. Long escrows and underwriting procedures can delay any hopes for expediency in the process, but the rewards are worth it.

Cash is still king in this kind of market. In my blog post, The Cash Investor vs. The Leveraged Investor...Who Wins?, I write about why I prefer the cash investing strategy over the leveraged strategy. In my opinion, this moment in time proves my point. The system is so backed up that the last thing you want to do is wait for a bank to approve your loan so you can try to buy a discounted property. Cash offers are given PRIORITY in this kind of market, and the leveraged investor just doesn't stand a chance when an offer is on the table. Sellers (often the banks in today's market) want to be sure the deal will close, and cash buyers give them that sense of security they seek to make things happen.

I'm currently working on several more deals in the state of Arizona. I believe there are phenomenal deals to be had that have huge upside potential and when I say upside potential, I mean profits that exceed 100% of the initial investment. It's up to you to participate in this modern day Gold Rush. This is the kind of market that will produce real estate millionaires...will you be one?

High Investment Returns Blossom In Today's Market

Profits of 10% to 15% are becoming commonplace in today's investment rental market. Investors are gobbling up properties in the sub $100,000 market as fast as they can, putting them in a position to capitalize on fair market rents that command very lucrative returns.

Consider the following: Investment rental home purchased for $85,000 (In Arizona); fair market rent on rental home = $850 per month or $10,200 per year; total 12 month return on investment property = 12%. How many investments do you know of that are paying that kind of return? There are also tax benefits that come with rental properties like depreciation that can keep more of your profits out of the hands of Uncle Sam. And by the way, the cherry on the cake is the future appreciation of the property that could easily double in value during the next appreciation cycle. The name of the game has always been to buy low and sell high, but investors are riding out this correction period with decent returns from the rents their properties are bringing in.

2nd Year Anniversary

It has been 2 years, to the day, since my first Blog post. There have been a little over 4,750 site hits which is about a 40% increase in hits over the 1st year...not bad at all! I'd like to thank those of you who have written to me over the year. Keep the comments coming.

First Court Eviction...Not As Bad As You'd Think

Well my friends, I finally had to file a Forcible Detainer (eviction) with the Justice court to rid myself of tenants who failed to pay their rent and wanted to remain in the home. I've never had to evict a tenant before and took great pride in that fact. You see, if you screen your tenants properly, eviction will be a rarity and not the norm. "What went wrong with these tenants?", you may be asking. Well, a big heart often makes for a big target and in this rare instance, I let my heart make the wrong decision of accepting these tenants instead of my usual method of using hard core numbers and prerequisites.

The tenants were in their late 50's early 60's and owned their own business. What struck me as unusual was their lack of reserves in their checking and savings account. They only had enough to cover 2 months rent if they had to stop working for whatever reason. This was a major red flag to me, but those close to me thought that their reserves were more in line with the average family than not, and thought that I was being a bit harsh when I was preparing to reject their application. The tenants promised they would not have a problem paying the rent, and that they were getting ready to start on a major contract that would bring their reserves up to 6 months worth of rent. They were so sure they would be fine, they entered into a lease with option to buy and paid a small non refundable lease option fee. Against my better judgment, I accepted their application and let them move in.

About 8 months into the lease, they were late on their rent. A few days later, they paid the rent plus the late fee. The following month, they were late again only this time they were 4 days late. This late paying behavior now became the norm and the delinquency in payment grew longer and longer to the point that I was now posting a "5 Day Notice" on the premises almost every month while waiting for payment. Then in May of this year, I was not paid the rent after serving the tenants with the procedural 5 Day Notice. After several attempts to rectify the delinquency with the tenants failed, it was clear to me what the next step would be...EVICTION!

Eviction can be a long, arduous, time consuming process depending on the state your property is located in. Certain states also tend to be somewhat biased on the side of the tenant. Arizona, where this eviction took place, is just the opposite. Arizona, in my opinion , is very pro-landlord and has a very expeditious procedure to evict non paying tenants. The process in Arizona is so fast, as a matter of fact, that it only takes about 17 days from start to finish to regain control of your property.

I made the decision to file the Forcible Detainer Complaint and Summons myself rather than use an attorney. I found the process very clear and easy to understand and would not hesitate to represent myself in any future court hearings. All of the necessary court forms and instructions were on the county website which allowed you to fill the forms out and print them. The tenants did not show up to the hearing, and as a result of their no-show, a Default Judgment was awarded to me. The Default Judgment included all past due rent owed, late fees, court costs, and a 10% penalty per year until the tenants have paid the judgment in full.

I hope I never have to evict anyone else again in the future but as an investor / landlord, it comes with the territory. I will definitely not make the same mistake I made with these tenants during the screening phase again. Decisions have to be made using objective criteria and not with emotion. In my blog article titled, "Picking Good Tenants Requires Some Discipline", you will find the tools I've used to minimize the possibility of having to go through the process of evicting your tenants.

Investing Sentiment In Real Estate Is Changing Rapidly

I got a call the other night from a fellow investor friend of mine. He was calling from a very crowded Real Estate auction in the Tempe, AZ area. He seemed a bit frustrated as he relayed what was happening at the auction. According to him, just about every property he had an interest in was selling for 25% or more than the auction list price. As a result, he was basically shut out of the bidding and by the end of the night, he had left the auction with nothing. I've also had multiple conversations with Realtor friends who work in California and Arizona. In those conversations, it was clear to me that things were beginning to change in a price appreciation kind of way. Multiple offers on properties are making a come-back, and the days of making a low-ball offer are beginning to wane.

It appears to me, that the signs of changing sentiment are just about everywhere you look. People are slowly but surely coming off the side-lines with the belief that the market has reached a bottom. This is a crucial part of any plateau and future appreciation cycle. When fear in real estate investing begins to go away due to changing psychology in the potential profit expectation, you can believe with certainty there will be a resulting effect that reduces the available inventory of homes as investors and soon to be homeowners start making purchases in mass.

Low interest rates are still available and will definitely help contribute to reducing inventory, but I do think their days are numbered. I still believe, as I mentioned in an earlier blog , that mortgage interest rates have the potential of reaching 18% as they did in October of 1981. I also believe this probable rise in rates may hasten the next appreciation cycle as home buyers scramble to buy before the rates reach double digits. We are already seeing credit card companies engage in the practice of raising rates, so I don't think my prediction of 18% mortgage rates is too far off the track. Time will tell, but I think all of the fore mentioned points in this blog show the tide is beginning to turn and that's a good thing for home values.

California Home Sales Up 83 Percent

According to the California Association of Realtors, California home sales were up 83% in February 2009 over the previous year. Statewide sales numbers in CA hit 620,410 in February. According to C.A.R. president James Liptak, “Home sales in California continue to be considerably stronger than the nationwide sales figures...The market will continue to register large, but diminishing year-to-year percentage gains in the coming months, as current sales are compared against the extremely low numbers that prevailed during the early months of the credit crunch.”

In February 2009, the state's unsold inventory index was 6.5 months, compared to 15.3 months in February 2008. It took a median of 51.5 days to sell a SFR home in February, compared to 69.3 days in February 2008. The inventory index tells you how many months it would take to deplete the current inventory. A 3 month inventory index signals an appreciation cycle, so we can conclude at the very least, we are in a plateau phase with a hint of appreciation brewing in the not so distant future.

Investors know the signs of a turning market. If you are new to investing, know that the window of opportunity is slowly closing on deals of up to 70% off of 2005 list prices. Make your offers now because the unsold inventory index is slowly but surely shrinking.

Enormous Wealth Will Be Generated By Investors Who Buy In This Market

Between foreclosure auctions and short sales, some homes are being sold for no more than the cost of a typical luxury car. Some AZ Home builders are even advertising newly built homes for as low as $70,000. The huge drop in home values presents a unique opportunity for investors to make a lot of money. Unfortunately, everyone will not be able to participate in this wealth building moment in time due to a variety of reasons including bad credit, job loss, bankruptcy, or the lack of savings for a down payment.

Investors who have kept a generous cash position in their portfolios will be in a great position to take advantage of current real estate prices. I've had several conversations with fellow investors wanting to know if I'm buying now and whether or not it's a good idea to add to their current inventory of properties. My reply has been, "How can you not buy at these prices?". Opportunities to buy real estate come and go but opportunities to save up to 60% on real estate are rare. In future years, investors will look back on 2008 -2009 as one of the greatest buying opportunities they've ever experienced. Real Estate profits reaching 200% - 500% of the purchase price will be the norm as we approach the top of the next appreciation cycle. Risks in real estate investments taken now will be greatly rewarded over the next decade, and I believe the profits will exponentially out pace the stock market and retirement accounts that have seen massive losses.

Walking Away From Your Mortgage May Be One Of The Biggest Mistakes You'll Ever Make

While out-and-about, I'm hearing more and more conversations about real estate than I've ever heard before. Whether at the gym or standing in line at the grocery store, real estate appears to be the topic of choice. The recurring themes are centered around property values, neighborhood foreclosures, and who's going through a Short Sale. Those kinds of conversations are innocent enough, but there is a far more insidious kind of conversation that takes place that gets me a little hot under the collar every time it comes up. Many people talk about walking away from their mortgages even though they can afford them and even though they had not planned on selling their homes anytime soon. They somehow feel they have been financially screwed, and the resolve will come in the form of abandonment of their responsibilities.

Ignorance, defined as the lack of knowledge or education, as it pertains to real estate is running rampant through all classes of people. There is a huge difference between buying a home to live and raise your family in and buying an investment property to flip and make a buck off of. Unfortunately, many homeowners have blurred these reasons to buy a home which has contributed to their pretense of losing money. If everyone who could afford their mortgage would spend as much time researching real estate cycles and trends as they do coming up with all the reasons they should shun their financial commitments, they might find that their time line to live in their home is long enough to see the next appreciation cycle which will reward them handsomely with increased equity.

On July 5, 2008, I authored a Blog post (on this site) titled, "Real Estate Cycle Trends Can Be Your Friend". In my post, I detailed the increase of the median home price from 1960 through 2006. The median price of a home based on year was as follows: In 1960 $15,000; 1979- $50,000; 1987- $75,000; 1997- $100,000; 2000- $125,000; 2002- $150,000; 2004- $175,000; 2005- $200,000, and in 2006- $230,000. In between many of these median price increases were corrections that gave back a percentage of the appreciation gain, but that correction has always leveled off and made way for higher highs in the following appreciation cycle. The only irregularity to today's real estate cycle is that the correction cycle and plateau of property values will be approximately 4 years in length instead of 2. The reason for the extended correction cycle is because we're coming off of one of the longest appreciation cycles in history. Because we benefited from 45 year lows in interest rates, the normal 5 year appreciation cycle was replaced with an unprecedented 10 year appreciation cycle. Anyone buying into the 6th - 10th year of this past appreciation cycle was playing with fire because the chance of buying at the top (which you never want to do) grew with each and every year beyond the 5th year. If you were buying in late 2005 thinking you were going to see a huge profit in a few months to a year, you my friend didn't do your due diligence when it came to researching real estate trends and cycles. On the other hand, if you bought a home to live in and raise your family in and bought a home you could comfortably afford (meaning you didn't lie on your mortgage application), and you plan on living in your home for 7 to 10 years which is the national average, you my friend will do OK and will probably make a profit on the sale of your home after weathering the storm.

Another appreciation cycle will come, and when it does, it will exceed the price values of the former cycle. The question you need to ask yourself is, "will I be a homeowner getting to enjoy the ride to the next value peak or will I be renting an apartment while the home I walked away from makes someone else a sizable profit?". You see, if you ruin your credit, you probably won't get the opportunity to participate in the next housing boom. Don't make ignorant decisions that can affect the rest of your life, especially when it's preventable. If you like your home and can afford it, don't worry about it's current "on paper value" because it's value can change on a dime as soon as home value perception turns optimistic. The population is growing exponentially and thousands of young, new homeowners are entering the home buying market everyday. The current inventory of homes will diminish over time and when it does, hold on, because the market will be poised to take off like a rocket. Don't believe me?...take another look at those median home prices again and ask yourself how that happened decade after decade with the same economic and unemployment stress' we have today.

New IRS Tax Rules Will Have Negative Tax Consequences For Investors

With the housing slump being as bad as it is, you would think our government would try to provide incentives for investors and buyers of second homes to help reduce the massive inventory of homes. Instead, new IRS rules are making it less tax friendly to profit from the sale of a second home or rental property. As of January 1, 2009, due to a provision of the Housing Assistance Act of 2008, owners of 2 or more properties will reap far less profit when selling their second home or investment property. As it was before, and as it stands now, owners may still sell their primary residences and not pay any capital gains on up to $250,000 of profit (if single) or $500,000 of profit (if married) if they have lived in their home for 2 of the last 5 years before the sale. This is known as the Primary Home Sale Exclusion. The old rules would allow you to sell your primary residence tax free up to the fore mentioned limits and move into your second home or investment property (for 2 years) making it your new primary residence which when sold, would allow the same tax benefits your previous primary residence offered. Technically, under the old rules, you could move into each investment property you own for a period of 2 years per property and sell them at a profit of up to the 250k & 500k profit limits without paying a dollar in capital gains. Sadly, those days are over.

As of January 1, 2009, second homes and investment properties that you later move into and convert to a primary residence will now be subject to capital gains tax on the percentage of time the house was owned by you but wasn't considered your primary residence. For example, if you owned a second home or rental property for 10 years and you converted it to a primary residence during the last 5 years of the 10 year ownership and you sell the home at a $100,000 profit, you will now have to pay capital gains on 50% of the profit since half the time you owned it, it wasn't your primary residence. Example 2: You owned the rental property for 10 years but only lived in it the last 2 years. You would have to pay capital gains on 80% of the the profit since it was your primary residence only 20% of the time you owned it before selling it.

Why is the government doing this you might ask. It's simple...MONEY! The old rules kept millions of dollars out of the hands of the U.S. Treasury every time an investment property or second home was converted into a primary residence for 2 years and then sold. This new rule is estimated to put Approx. 1 1/2 billion in the hands of the treasury over the next 10 years according to the Senate Finance Committee.

Do you think this new IRS rule will help or hurt the housing market? Post your comment by clicking on the link at the bottom of this blog post.

Debt-To-Income Ratios Will be A Huge Factor In Determining How Much House You Can Afford

Banks have really screwed things up this time. Over the past 10 years, poor underwriting controls basically gave anyone with a pulse a loan. Banks have been known to throw caution to the wind when making money comes easy in a booming real estate market. In a seller's market, foreclosures are almost unheard of because home values grow so rapidly that a profit in selling is almost guaranteed. This is how the house of cards is built before reality comes in the form of a hurricane and unleashes it's furry on all that were irresponsible with their finances.

Improper lending standards have caused so much damage to the lending industry that lenders are now forced to change the way they do business. The great gatekeeper of prudent underwriting was the Debt-To-Income Ratio. This was used by lenders to keep the borrower from getting into financial turmoil. Unfortunately, this formula was altered to such an extent, that it no longer served it's original purpose.

Debt-to-income ratios are making a comeback and in a big way. There are 2 types of debt-to-income ratios. The first is the Standard or Front-End debt-to-income ratio which measures as a percentage, all of the costs associated with your monthly mortgage payment (principle, interest, property tax, homeowners insurance, PMI, etc...) against your monthly gross income. Your monthly mortgage payment should not exceed 28% of your monthly gross income.

The second type of ratio is the Total or Rear-End debt-to-income ratio. This is expressed as a percentage as well and includes all of your yearly debt (mortgage, car note, credit cards, alimony, student loans, etc...) against your yearly gross income. Your total yearly debt should not exceed 36% of your yearly gross income.

In figuring out how much house you can afford, use the ratios I've given above to give you a realistic idea of what today's lenders will approve. This is the method lenders should have chosen when making loans through the housing boom but they chose not to. Greed and a need to compete blindly with other lenders caused the deterioration of ratios and their usefulness in protecting not only the borrowers but the lenders and banks themselves. Debt-to-income ratios will be used as a main underwriting tool for current and future lending. This will translate into less house being purchased as a percentage of available income which will in effect keep more homeowners in their home and out of financial ruin. Isn't that the way it should be?

Definition Of Terms You'll Hear Daily During This Financial Crisis

Investing and financial terms are being thrown around in the media with very few people understanding what those terms mean. Many of you are left scratching your heads when you hear terms like "CDO's" and "Credit Default Swaps". I will explain these Financial Terms and others so you can clearly understand what is being reported by the financial and investment media.

The terms I will explain include: CPM-Commercial Paper Market, CDO-Collateralized Debt Obligations, Derivative, Securitization, LIBOR-London Interbank Offered Rate, Hedge Fund, CDS-Credit Default Swap, Equity, FDIC-Federal Deposit Insurance Corp., Basis Point, Debt, HELOC-Home Equity Line Of Credit, Leverage, MBS-Mortgage-backed Security, and Liquidity.

CPM- Commercial Paper Market: This is a low cost source of cash that companies take advantage of when they have short term financing needs. This funding source is preferred over bank lines of credit because it's a less expensive means of borrowing.

CDO- Collateralized Debt Obligations: This is a security backed by fixed-income assets and underlying bonds.

Derivative: A financial instrument whose value depends on its underlying assets, such as stocks, mortgages or any tradable commodities. Stock futures and Credit default swaps are types of derivatives.

CDS- Credit Default Swap: This is a contract that is a form of insurance that a debt security will be repaid in case of default.

Securitization: The practice of packaging hundreds or thousands of individual mortgages or other assets together and then selling ownership stakes to investors.

LIBOR- London Interbank Offered Rate: This is the rate that international banks charge for short term loans to each other.

Hedge Fund: These are privately held investment funds that gather investments from rich private investors, state retirement funds, pension funds and others and use techniques to try to produce high returns, usually with high levels of debt to increase leverage.

Equity: Current market value of one's home minus the amount the homeowner owes the bank on the mortgage. With stocks, it's the ownership in a company expressed in the shares of stock one owns.

FDIC-Federal Deposit Insurance Corp.: This is a government agency that insures deposits in banks and thrifts. The insured amount has temporarily been raised from $100,000 to $250,000 per qualified account.

Basis Point: A basis point equals One one-hundredth of 1 percentage point.

Debt: The money that a person or company owes a creditor through the use of bonds or loans.

HELOC-Home Equity Line Of Credit: A line of credit secured by a home. Borrowers can draw on the line of credit, With limits set by the lender, for a fixed period, usually 5 to 10 years.

Leverage: The use of borrowed money to invest or finance operations by individuals or companies. The more leveraged a company or individual is, the more risk they take on.

MBS-Mortgaged-backed Security: A bond or security backed by a pool of mortgages which provides a cash flow based on the principal and interest payments of the underlying mortgages.

Liquidity: The more quickly or easily an asset or an investment can be sold, the more liquid it is. Checking and savings accounts are examples of maximum liquidity shy of money under the mattress.

I hope I've helped you a little in understanding what these terms mean. It can be confusing, if you're not in the financial field, to get a grasp on what's going on in financial and investment markets. We are in a full fledged recession that may have dire consequences to the average household. Education is still the key to help you navigate through this critical time in our economy.

Hurt Finances? Here's An Affordable Way To Invest In Real Estate

Many real estate investors have taken a major hit in their finances due to bad timing. These are investors who got greedy at the top of the appreciation cycle and decided to buy while home prices were at record highs. Now that they are upside down in their investments, many are walking away having lost thousands of dollars in down payments and other related costs. With so much capital being lost, it can be very difficult to take advantage of today's bargain prices.

So, how do you take financial advantage of a crumbling real estate market when your pockets are relatively empty? The answer..home builder stocks and REITs! Home builder stocks and REITs are at decade lows due to the depressed real estate market. Some builders have gone bankrupt and others are being gobbled up by bigger builders. This presents a fantastic opportunity to invest in the builders that will survive this market downturn.

The following is a list of my top 3 REITs and top 3 home builders I feel will not only survive, but will be stronger due to the elimination of some of their competitors:

REITs
1) VNO - Vornado Realty Trust - Dividend Yield = 6.34%
2) BXP - Boston Properties - Dividend Yield = 4.4%
3) SPG - Simon Property Group, Inc. - Dividend Yield = 6.65%

Stocks
1) NVR - NVRLP
2) MDC - MDC Holdings, INC
3) RYL - The Ryland Group

The above companies are trading at multi-year lows as are all companies in their sector, but these companies will survive presenting substantial upside stock and unit appreciation once the real estate market starts to stabilize. Many of them also offer very attractive dividend yields of as much as 6.65%.

Stocks and REITs are a relatively inexpensive way to participate in real estate market swings. You can buy as much or as little as you can afford without having to qualify for a loan, or deal with the expenses required to maintain physical property.

THIS IS GETTING REALLY UGLY

Whether you turn on the news or open the newspaper, it's clear there is an ever growing deterioration in the mortgage industry. Fannie Mae and Freddie Mac have been taken over and bailed out by our government. On Friday, WAMU or Washington Mutual became the largest thrift bank to fail in United States history. Remember, IndyMac Bancorp was recently seized by the FDIC and OTS a few months ago, and it was considered one of the biggest bank failures in U.S. history. WAMU, like IndyMac, did not have a problem with being well capitalized but rather they suffered a blow to liquidity after depositors withdrew BILLIONS in deposits in fear the banks would not be able to weather the financial storm.

I've talked about Fear and the damage it causes at length in my blogs, and it's clear it has reared it's ugly head again. A run on the bank, as seen with WAMU, is only considered prudent if you have amounts in excess of $100,000 that would not be covered by FDIC insurance. Depositors with $100,000 or less are fully insured by the FDIC and are not at all at risk of losing a dime. This ignorance of the deposit protection offered by the FDIC has again led to liquidity squeezes that no bank, regardless of size, can bear. Even Investment Banks like Bear Sterns and Lehman Brothers have collapsed as a result of panic withdrawal of funds.

Real Estate Investors Beware. The rules are changing as you read this sentence. If you intend to take advantage of short sales and foreclosures, know that the government is passing a $700 billion bailout for the banks to supposedly unfreeze the credit markets. You and I, the tax payers, have just been hit in the gut again by what is turning out to be a very socialist style of governing. The free market place which allows you and I to invest at prices the market will bear is about to be replaced with pricing the government feels is "fair". This basically means our government is going to buy up all of the wholesale properties from the bank's books with absolutely no other competition, at tax payers' expense. You, the real estate investor, will now have to buy at much higher prices because our government is now the "middle man" with plans to get its cut off the top. I really question the government's interference with free market capitalism.

Suggestion... buy now if you're able. I really think the profit in buying low and selling high is going to be a one man show( our government ) in the near term. The novice real estate investor is going to face a more difficult investing climate with profit deterioration on the front end of the purchase of government owned properties. Deals are available NOW...go get them before our government does.

Keeping Up With The Jones' Can Have You Living In The Dog House

Investors, as well as homeowners and renters, should live beneath their means to truly enjoy financial freedom. The problem is, many individuals and families do not, and they eventually find themselves in severe debt.

Have you ever heard of the saying "Keeping up with Jones' " ? It simply means that someone is constantly purchasing material things of equal or greater value than their neighbors, friends, or family. For example, if the neighbor across the street adds a 20 foot deck to their backyard, the individual trying to keep pace with his neighbor will add a 30 foot deck to his backyard. They are more concerned with how others perceive them financially than how financially able they are to purchase such expenditures. This kind of behavior in individuals can have catastrophic results to their bank account.

Unfortunately, I know too many people who are trying to keep up with the "Jones' " with dire consequences. These are good people with lovely families and good intentions but unfortunately "debt" could care less how nice they are. Some are losing their homes, while others are being forced to liquidate many of the adult toys they've accumulated like motorcycles, Quads, boats, trailers, etc... Many have credit cards that are maxed out and very little savings to live on. You see, "keeping up with the Jones'" is a very short lived lifestyle offering only temporary feelings of grandeur.

To avoid the pitfalls of living above your means, here are several rules you should follow:
1) You should have no less than 6 months of cash reserves (living expenses) in the bank for emergency situations like an illness or loss of employment.
2) 1/4 of your income should be used to build the fore mentioned cash reserve.
3) If you have a monthly mortgage payment, it should not be more than 1/3 of your monthly household income including any impounds attached to the mortgage.
4) With the exception of a home, you should use cash for purchases or if you use a credit card, you should pay it off in full each month. If you can't pay for things you want in full, then be patient and wait until you've saved enough cash to make the purchase.
5) Create a monthly expenditure spreadsheet. When you see what you're spending each month, you'll become more sensitive to your spending habits.
6) Invest in assets not liabilities. Assets will make you money while liabilities will cost you money.

A True Story That Raised My Real Estate Investing IQ

Back in the late 80's, I had my own business in the fitness industry before attending college. The income I was bringing in was not where I wanted it to be. I knew the Physical Therapy degree I would receive after college would allow me to expand my business and afford me the opportunity to live in a nicer home and community. While attending college, I was renting a 1,000 Sq. Ft. duplex in a lower middle class neighborhood in Los Angeles, CA. I couldn't wait to graduate from college, because I knew it would be my ticket out of the "hood".

Fresh out of college, I was looking to celebrate in a big way. I wanted a much larger home and wanted to live in a nicer neighborhood. To make that happen, I grabbed a newspaper, looked in the Real Estate Rental section and called several listings in the Hollywood Hills section. Having a celebrity clientèle, I thought I should live in the neighborhood I serviced. I found a home that appeared to fit what I was looking for and so I set up an appointment with Gordon, the owner.

When I met Gordon at the home, I was surprised at what I saw. The home was simply stunning. The home was a 4 story designer home built into the side of a mountain with a list of prior celebrity residents. I thought to myself, "how in the world did this young dude acquire this property...I need to pick his brain". I moved into the home with my girlfriend at the time and signed a lease with option to buy contract. I befriended Gordon knowing he could teach me more about investing than I already knew.

The Lease Option price for the home was $450,000. Gordon, appearing a bit embarrassed, admitted he had been offered over $800,000 for the home just 4 years earlier and didn't sell it thinking it would fetch a million dollars. Thinking it may have been a ploy to justify the $450k sale price, I investigated his story and found that indeed the home values in the area 4 years earlier were in his stated price range. When I asked him why he didn't sell the property when it fell below the 800k he had once been offered, he said, "I thought the fall in price was just temporary and that it would go back up...but it didn't...it's just continued to drop and drop". After a year of renting, I decided not to exercise my option to buy the home...a BIG mistake as you will see.

My talks with Gordon marked the beginning of my research into real estate cycles. In the process of researching cycles, my investing IQ increased exponentially. I eventually began investing using this research and profited handsomely as a result. My only regret was that I didn't exercise my option to buy Gordon's home. I kept an eye on the value of his home over the years and in 2005, the home sold for a whopping 2 million dollars.

Real estate prices go up and down in the short term, but the long term trend is always to the up side. It really pays to buy and hold real estate.