PHOENIX — The combined housing/economic crises are intertwined messes that will not be fixed for months to come.
That is the message from Patrick LaVoie, founder and fund manager for The Westward Fund, a private equity fund focused on the acquisition of distressed real estate. The Westward Fund is focused on the Sunbelt States (California, Nevada, Florida and Arizona), specifically the Phoenix market.
LaVoie told Credit Union Journal anyone who says the U.S. economy is in recovery or has seen the worst "has their head in the sand." He said the country still faces a "huge" credit crisis, as Americans are more in debt than ever before because they've had to.
"We have the five-year ARMs that are going to reset, and we saw what happened when the three-year ARMs reset," he warned. "B of A/Countrywide, one of the country's largest lenders, is just now starting to notify borrowers that are 14 months to 18 months behind as to start of foreclosure proceedings."
Another issue LaVoie said should be getting attention is a potential crisis in commercial real estate. "Many banks are setting aside an allowance, but I don't think it will be enough," he assessed. "There are builders who have built excess demand and do not have the percentage of leased space done in order to convert to a conventional loan, and many businesses are not going to be able to pay their rents."
Not only is the U.S. not in a recovery, LaVoie argued the economy is not quite at the bottom. He did add a caveat: he cannot say everything is in the same bucket and it is all bad.
"You have to segment the market," he said. "Houses at $150,000 or below, that were worth $300,000 two years ago, it is going to be very difficult for them to go down. The market has specific asset classes that must be stratified so there is intelligence behind comments rather than just emotion."
According to LaVoie, the media has played a role first by fanning negative sentiment unnecessarily, then switching to irrational optimism. He said there was a "fair amount of irresponsible journalism that led to a Chicken Little mentality" when things began going sour in late 2008. More recently, he continued, there has an anticipation of a recovery before it is really here.
"Everyone is flocking to the equity markets and the Dow is over 10,000, but I think that is ridiculously overpriced," he declared. "I think there will be a double-dip recession. There are going to be more foreclosures and people are doing whatever they can to stay in their house, but in the first quarter 2010 there will be more foreclosures. Throughout 2010 there will be more foreclosures."
Nevertheless, LaVoie said there is a lot of good news in the market, as well. He pointed to the Phoenix metropolitan area real estate scene, which has gone to a five-month inventory of homes from an 18-month inventory just a short time ago. The number of transactions in Phoenix has skyrocketed, and prices have gone up, but not across all asset classes. Homes in what he termed the "first-time homebuyer segment," at $150,000 or below, will be helped if government tax breaks pass.
A "real opportunity" to extend this positive is being hampered by a lack of availability of loans, LaVoie argued. He said lenders have tightened underwriting standards significantly ("which is a good thing"), but there is a large segment of the population that has been impacted on their credit.
"Lending institutions base their decisions largely on a system no one understands and needs to be modified. The FICO score as we know it today is not necessarily a good measure to lend on. People have lost their homes or their jobs, and there needs to be some intervention to standardize on a different format, a different methodology, to evaluate those borrowers."
As a private equity firm that specializes in buying distressed real estate, things are not bad, LaVoie said. His fund deals with many groups that have an "unrealistic idea" as to what the value of real estate is. The Westward Fund has been able to purchase assets at below market prices, but to do so it must "truly understand what the market bears."
Looking ahead, LaVoie foresees stabilization in western area real estate in 2011, with a possible uptick in late 2011/early 2012.
Prices will remain low for an extended time for several reasons, he noted. Unemployment continues to weigh on consumers' ability to buy, governmental programs have been a "short-term Band-Aid," and many banks have capitalization ratios that are out of whack.
And while many have pointed a blaming finger at mortgage vendors for giving away loans with little or no documentation, LaVoie insisted home buyers must look at themselves, also.
"There was culpability on the part of loan officers and lenders, but this crisis is on the borrowers as well. People signed a paper saying they make $10,000 per month and could afford an expensive house. All of these things are incredibly intertwined. There is no mutually exclusive thing that is going to fix this."
Credit unions traditionally have been very conservative, LaVoie acknowledged, meaning "they are counting their blessings these days. I would tell credit union presidents if they are not on a watch list, and if they have capital, this is a phenomenal opportunity to gain market share. Not all borrowers are horrible, and in fact many people who have long-standing relationships with institutions cannot get a loan. The most important thing is to get a real picture of the market, and that means more than just an appraisal. Start a relationship-building process by offering capital conservatively and by not sticking your head in the sand and saying, 'We're not doing it.'"
