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This news will not come across as anything shocking to those that follow the real estate market. Existing home sales are down in 41 out of the 50 states for the second quarter of 2007 (April through June).

The article published on Yahoo! does indicate some local markets saw price increases, but these were more isolated instances - such as the 4.1% increase in sales for Iowa and the 2.9% gain in North Dakota. (Adobe PDF version of the Yahoo! article). The subprime mortgage woes and tighter lending practices are certainly having an added affect on an already soft market. The markets will continue to be slow if the Fed decides to lower interest rates and the few buyers that are out in the marketplace right now might start to hold off on making a purchase in hopes of getting a lower interest rate on their mortgages.

The Cincinnati and Dayton, Ohio markets continue to be stagnant. While we’re not seeing the huge declines in price that other areas of the country are seeing, more homes are taking longer to sell and prices have landed softly as opposed to rapid decreases.

As always, I welcome your comments and feedback…

I am pleased to announce that with the help of Aaron Forgue, we have launched a new website for Northern Pine Properties, Inc. As many of you know, Northern Pine Properties is the company that I founded for my real estate holdings, only to evolve into the company that I am using to launch additional ventures.

While the company website is still very static and will require additional work to fill in the content as well as adding additional features - such as a Contact page, etc., the “bare bones” are now in place and I appreciate any feedback or comments you might have. If you have an interest in real estate and/or alternative energy, the Northern Pine website is where I hope to update my activities in these areas - such as investing in land and my interest in solar power.

As always, I appreciate your comments and feedback…

Please note: I have posted this same article at Cinventure.com, a website devoted to entrepreneurship in the Greater Cincinnati, Ohio area.

Let’s face it - we entrepreneurs are all pretty optimistic people. I mean, we come up with these business ideas and we’re willing to tweak them until we can get them to work. Fortunately for the optimist there is a reality check that can be used to maintain a comfortable level between it’s a sure thing and that will never fly. It’s called an acid test, and most banks and seasoned investors will want to see one.

The Acid Test, also known as the Quick Ratio, is derived from the Current Ratio. Thus, we need to briefly discuss the Current Ratio first. Anyone that is currently running a business or is in the planning or startup phase will want to be concerned with managing the cash flows of the business.

The Current Ratio does just that. It is simply the ratio of the firm’s current assets divided by the current liabilities. The current assets are those that are the most liquid - namely cash, accounts receivable, and any inventory. Current liabilities are those bills that are due within this year (the current term). If your firm’s current liabilities begin to exceed the current assets, you run the risk of a cash shortage and could soon be facing liquidation just to meet your current obligations. You don’t want to be forced to go deeper into debt just to pay your monthly bills as this only makes it harder for your business to continue to survive.

If you take the inventory out of the Current Ratio you are now left with the Acid Test. This is basically a method used to determine the liquidity of the business, namely how much cash is on hand to pay the monthly bills. The acid test is also an excellent gauge when used along side the Burn Rate, which is simply the amount of money being spent in a given period during the startup phase of the business (or a period of less income than expenses - this could be an off season, such as a homebuilder in Minnesota during the winter).

If you know you’re burning through $3,000 per month and expect break even to be reached during the 7th month of operations, you know you need $18,000 to carry you over till you start to break even and turn an operating profit (6 months times $3,000).

If your Acid Test ratio is less than 1.00 you know your cash is less than your current debt and you are going to face a cash crisis soon unless you can turn things around. The Acid Test could be less than 1.00 because sales were not as high as expected (thus not as much cash in hand and you are holding more inventory - which as you know we do not include inventory in the Acid Test) or it could be that your business is taking on too much debt given the amount of money it’s bringing in (e.g. you owe $10,000 each month and only bring in $1,000 in sales). We don’t include the inventory in the Acid Test because, well to be quite frank, you’ve obviously not sold it yet and if your company is struggling it could be that no one wants the product! When a company has to be liquidated, it seems inventory is always sold pennies on the dollar. This is the reality check part of the Acid Test.

An Acid Test of 1.00 means your cash and debt levels are equal. Please don’t think that equal means optimal!!! The higher the ratio the better. What if sales dropped off and you start burning through more cash?! The ratio would quickly slip below 1.00.

One final note about Acid Tests, Current Ratios, and Burn Rates: these numbers are only representative of what is going on in the business today. I would be much less concerned about a startup with an Acid Test ratio of 0.80 that just landed a huge contract with a Fortune 500 company than another entity that has an Acid Test ratio of 1.20 and is in the business of making typewriters, payphones, or door-to-door sales of encyclopedias. I’m sure you all understand why that is. If your business and its industry has a bright future, it’s understandable that you are taking on additional debt now to get your operations up and running.

To sum it up: if you have an Acid Test ratio less than 1.00 your Burn Rate will be accelerating and you will see a more rapid depletion of cash in your business in the near future. An Acid Test ratio greater than 1.00 will generally indicate more cash coming into your business (this could be from increasing sales and/or a reduction of current liabilities) and is a rough indication of growth or growth potential.

As always, I welcome your comments and feedback…

Sure it’s not easy getting an idea from the drawing board to the shipping dock. And this is where successful entrepreneurs set themselves apart from those who are just dreamers. So when you come up with a great idea but lack the resources to launch the product or service, what do you do? Well, without tacking on that second or third mortgage onto the house or before you tell your children to kiss the thought of college goodbye, consider some thoughts on what I like to call economic resource rationing.

Here are five ways to help conserve cash during the start up phase. Each method is discussed in more detail below the list.

1. Scale it down.
2. Add non-cash equity.
3. Ask suppliers for more favorable terms.
4. Consider generic instead of name brand and shop around.
5. Invite enthusiastic and early suppliers and customers to become investors/partners.

1. Scale it down. Instead of manufacturing 10,000 wigits in the first year could you get the business up and running by making 5,000 of them. During this initial launch you could also be seeking out additional investors and demonstrating your new product to a select few customers.

2. Add non-cash equity. This option is great when you’re planning to go to the bank to ask for a loan, especially when you’re going to be offering an intangible product… namely some type of service. In a service company (like a law firm, doctor’s office, etc.) you won’t have a tangible product for the bank to repossess if you default on your loan payments.

Consider this: most people own a personal computer, some furniture, office supplies, a car, cell phones, printers, art work, digital camera, general purpose tools or tools of a certain trade, and so forth. While banks won’t want to see a list of every item you own (the shirt off your back so to speak), if you are funding the business with all of the necessary office equipment and tools you’ll need the bank understands you won’t be rushing out to spend the bank’s money on furniture and computers at Office Depot. Use what you already have at home, list it as a business asset when you go to apply for a loan and save your new start up the precious little cash the bank will require you to contribute to the loan in order for it to be approved.

3. Ask suppliers for more favorable terms. There’s a couple of old mottos: “it never hurts to ask” and “the worst they can say is no“. This could not be more true than in dealing with those suppliers for your business. Remember, YOU are their customer. If you’re starting out and don’t have much cash, ask for more time to pay.

A lot of companies want payment 2/10 net 30, meaning you get a 2% discount for paying in the first 10 days and if you don’t pay in the first 10 days the full amount is due within 30 days. Other companies, especially larger suppliers, may try to push their own credit program on you - for instance if you go to any of the big box stores or office supply stores they will want you to sign up for a business account or store credit card.

Let them know right up front when you order that you are a new business and you need to stretch your dollar as far as possible. Ask if it’s possible to pay over 60 days instead of 30. If they balk at that suggest 45 days. Always start with the higher number. Let them know that within the year you hope to be taking advantage of any discounts for paying early (once your venture starts bringing in revenues as opposed to burning through cash at the start).

4. Consider generic instead of name brand and shop around. By this we don’t simply mean buying the store brand, single-ply TP for the office or the refurbished ink cartridges. When building your wigit, is there a part or component that could be made cheaper by someone else and added to the final product, or can a piece be substituted for another (making them interchangable and therefore reusable). The easier it is to swap parts, replace parts, and interchange them, the easier it will be to make your product cheaper and at a lower cost to you.

If you are offering a service rather than a product, this means buying the store brand pens that dry up faster… no, just kidding, you can still shop around for lower prices on things you use to bring your service to market or that add value to your service. These value added features will of course depend upon your service or possibly a particular customer’s needs.

5. Invite enthusiastic and early suppliers and customers to become investors or partners. You will find out early on that there is no one who wants you to succeed more than your suppliers. They like for their customers to grow as that helps them grow in return. If a particular supplier is eager to help you get up and running, and to sell you more supplies, perhaps this supplier would be willing to take an equity stake to help get your venture up and running.

It could be as easy as providing a set amount of supplies for free, giving you a discount, an extended amount of time to pay, or could be actually taking an equity stake in return for some capital. Likewise some customers early on may like your product so much that they want to ensure it will be there to meet their needs down the road. These customers have a vested interest in seeing your business becoming successful and sustained. At the very least these early suppliers and customers represent a good resource that can help your business grow. These groups also represent excellent sources for advisory panels, board of directors positions, and by making them more involved in your business will help forge more loyalty and drive growth. If you go to a bank looking for a loan it will also look better in the bank’s eyes that you take such an interest in your customers and suppliers and value their feedback and input.

There are many more ways to help get your business up and running without having a truck load of money to get started. This article is meant to stimulate your thoughts on what you can do in your own unique situation to think outside the box with regard to funding your venture. Please feel free to share any alternatives to cash investment that you think might work or even those that you have tried that don’t work and why they didn’t work.

As always, I appreciate your comments and feedback…

After last week’s sell-off I would expect to see some buying opportunities this coming week, especially if you’re looking to invest for the long-term and not just a quick trade. It may be a while before the indices climb back up to their record levels seen earlier this month.

On Friday, August 3rd, the unemployment rate and nonfarm payroll data will be released by the Commerce Department. I’m expecting the results to be in line with the market expectations. If the unemployment rate comes in even slightly lower you will probably see a brief end-of-the-week rally on Friday due to last week’s sell-off.

Investors will be willing to shrug off short-term concerns of subprime mortgage woes if the unemployment rate is declining and therefore the economy is actually doing better. Those subprime borrowers are still employed in the aggregate sense if the unemployment rate is dropping! If the unemployment rate comes in higher than expected, which I doubt will be the case, you will see another repeat of last Friday… more selling despite an otherwise healthy economy.

With all the news about the real estate market not expected to rebound until 2008 or even 2009, the sluggish real estate market and its affect on homebuilders, big box retailers like Home Depot, and durable goods manufacturers like Whirlpool should all have those concerns already priced into the stock. Therefore you can only stand to profit if the real estate market stages a come back prior to 2009. I don’t want to be misleading though, if 2008 and 2009 are down years for real estate again, these same stocks could have farther to fall.

As always, I welcome your feedback and comments… have a great week!

Oh how far we’ve fallen… the Dow closed the week at 13,265. On Friday the advances were outnumbered by the declines by more than 2 to 1 on both the NASDAQ and the NYSE exchanges.

Despite some companies posting better than expected results, the dark clouds hovering over the real estate market and likewise the concern about possible sub-prime loans defaulting by the truck load kept the investors from hitting the buy button.

With such a dismal ending to a week I feel it’s best to cap my summary there and look forward to The Week Ahead, both literally and my upcoming blog topic that I expect to post sometime tomorrow.

On a side note: I have been contemplating a change in my website and I want some opinions from my regular readers. If you could, please take a moment and email me any thoughts you have on what you like and don’t like about my current layout, content, etc. I would greatly appreciate it. I am considering combining my Week in Review and my Week Ahead blog postings to make it easier to visit one time and get the recap as well as the upcoming events in the market. This would be a combined entry on either a Saturday or Sunday. It is my goal to then use the time during the week to highlight individual stocks that I feel are noteworthy as well as other interesting things going on in real estate or insurance related topics. Let me know what you think…

As always, I appreciate your feedback and comments…

The housing slump has undoubtedly put some home sellers in a bind. And even those not currently in the market to buy or sell can be affected by a rise in mortgage interest rates, just ask the homeowners with Interest-only mortgages or those with ARMs (see the last blog posting from yesterday, July 26th for more discussion on these types of loans).

The overall market was sent reeling again yesterday amid reports that the housing sector only continues to get much worse. The Dow fell more than 300 points yesterday (at one point being down more than 400) mainly because of investors jittery over the slowing housing market and therefore perceived lack of consumer confidence.

Think about this: everyone knows that real estate is in a slump right now, yet not many buyers are using this opportunity as a time to buy. It’s easily understandable that buyers are worried. They don’t want to buy a house only to see the prices fall further. But it’s a dangerous game to play when you try to predict the bottom - this is true in housing just as it is in stocks. More homebuilders and mortgage companies are coming out and publicly saying that the bottom (which was expected in early 2008) may now even be extended into 2009! Even companies like Whirlpool are blaming the housing market on slowing sales (see my July 22nd blog entry about Whirlpool’s earnings announcement).

It seems the media only fuels the consumer sentiment in either direction. When the Dow was breaking 14,000 just a week and a half ago on July 17th, that’s all you could read about it seems. Then investors started pulling money out. And the bad news came with the existing home sales, quickly followed by similar bad news on the new construction homes. It all adds up to investors feeling too uncertain about the future and seeing the markets at or near all-time highs and deciding now is the time to take some profits.

Given the current skid in the local real estate market as described in the Cincinnati Enquirer on July 25th, it will be interesting to see if investors start to look for buying opportunities in real estate now that the real estate market has softened and the stock market is beginning to look over priced. (Adobe PDF version of the Cincinnati Enquirer article).

Even if investors don’t pull money from stocks and pour it into buying land and homes, the investors can help the real estate economy by moving money from stocks to bonds. Putting more money in Treasuries and mortgage-backed securities will help balance out the load and make banks more happy to write more mortgages.

How so? you ask… Well, since there will be investors pushing the price of the Treasuries up through the additional purchasing, they yield on the Treasuries will fall and the mortgage rates will start to move downward as it will cost the banks less to borrow money… therefore driving down the mortgage rates. Meanwhile investors, if they are also buying mortgage-backed securities, will add liquidity to the market thus giving banks added funds to loan out in the form of mortgages. As if this wasn’t just the icing on the cake, the banks existing loan portfolios will be worth more to investors as their existing loans will carry higher interest rates than the new loans they are writing at the lower rates. So the bank benefits by writing new loans at lower rates and selling the old loans with the higher rates to investors.

Let’s hope the real estate market and the stock market both rebound! However it’s more likely that only one will bouce back sooner than the other… and my bets are on the stock market right now! Real estate is a much longer-term play than the stocks and I think it will therefore have a longer tail end to the slowdown than a slump in the stock market would. As always, I welcome your comments and feedback…

In yesterday’s online edition of The Cincinnati Enquirer there was a story about the various local real estate markets throughout the U.S. that are most susceptible to seeing their markets collapse. Cincinnati ranked # 8 in the nation for having the riskiest housing market according to Forbes magazine based on the extent to which most homeowners are leveraged (via the loan to value ratio).

The article points out that Cincinnati has not only a higher than average number of adjustable rate mortgages (ARMs) in use in its market but it also has the 5th highest mortgage loan to home value amount in the 40 largest metropolitan markets throughout the country. The combination of the greater use of ARMs and the more-leveraged homeowner could make it difficult for the area to regain any momentum in improving local sales of new and existing homes.

Although I see some validity in Forbes‘ study, there is more to consider than just how much people borrow to buy a home and how many of those people use ARMs to do so. In fact, a better indicator than ARMs might be a study that considers the number of people using Interest Only loans to buy properties. These are the individuals that stand to be squeezed the hardest as interest rates climb.

ARMs come in varying terms - say 3 year ARM, 5 year ARM, 7 year ARM, and so forth. Therefore you have the number of people facing an interest rate increase with ARMs spread out over several years. Also, there is a max. amount that an ARM can increase in any given year (usually 2% increase in the interest rate) as well as a max. increase for the life of the loan. If someone had taken out a 5 year ARM in 2002 that was due to increase this year, they would most likely face a 2% increase in interest rate.

Considering interest rates in 2002 were around the 40 year lows, these ARMs may have even been done at 4% or even less! So to think that the market is going to get destroyed by people losing their shirts when the interest rates on their loans is going up from 4% to 6%… well, let’s just say I’m not expecting to trade in my real estate license for an auctioneer’s license in the near future. Cincinnati is a pretty modest market, with the overall appreciation over the past few years more closely resembling an inflation factor of about 3%. We certainly didn’t see the run up in prices that some markets did, like Miami, FL that topped the Forbes list for the most risky market in the U.S.

I don’t have hard figures on this, but just knowing the culture of this city leads me to think the real estate market here is more stable. A lot of Cincinnatians, especially those on the west side, tend to stay in the city for long periods of time… many are even “lifers”. While this can make it difficult to come into town and adapt, it does create stability in the marketplace. Also, the city is not exactly tied to a volatile industry (i.e. high tech in Silicon Valley circa 2000 & 2001). This city is home to some staple consumer goods that some would even say are recession proof… Procter & Gamble comes to mind first thing, as does the grocery chain Krogers. There are also a lot of steady, conservative financial companies… like insurer’s Great American, Western Southern, Ohio Casualty, Cincinnati Financial, and Union Central. Fifth Third Bank is headquartered here and the Federal Reserve has an arm of the Cleveland branch in downtown as well. It would be interesting to see the proportion of people who are born here and also stay here after college or well into their careers (home buying years).

In case the link to the above Cincinnati Enquirer doesn’t work, I am attaching a copy of the article in Adobe PDF format that you can read in your Internet browser or download to your desktop. For more information on companies with headquarters or a strong presence in the Greater Cincinnati area, please visit CincinnatiUSA.org

As always, I welcome your comments and feedback…

Yesterday I went on at length about how real estate in Ohio could be adversely affected by a rise in foreclosures. While yesterday’s comments are certainly true, I think it’s best to present a balanced picture. I can’t preach gloom and doom when the climate in Cincinnati and Dayton, Ohio is far better than other parts of the country where real estate was once hot as little as a year or two ago.

In fact, the local market is even doing better than northeast Ohio (namely Cleveland and Youngstown, Ohio areas), where it was noted yesterday that Cleveland leads the nations in the foreclosure rate based on zip code.

Just as CNNMoney.com has ranked the highest 500 zip codes for foreclosure activity, Money Magazine has published its annual report of top 100 cities to live in. Two greater Cincinnati and Dayton towns made the list: Mason, Ohio and Beavercreek, Ohio. Mason is a northeast suburb of Cincinnati while Beavercreak is a southeast suburb of Dayton. Mason came in ranking 81 out of 100 while Beavercreek was close behind at # 84.

Certainly these two areas are deserving of their inclusion in the list. So while Ohio may be one of the worst states for foreclosure activity, there remains a relatively stable economy with modest job growth and a decent real estate market given the overall trend nationwide. Much of Ohio has seen less decrease in price than other major markets, especially those hit hardest such as California and Florida.

In Ohio I expect to see a soft landing rather than a complete crash.

As always, I welcome your comments and feedback…

CNN.com, in partnership with Money magazine (via the CNNMoney website), recently published a list of the 500 top foreclosure areas based on zip code and the number of foreclosures in those zip codes. Not surprisingly there were several Ohio cities that made the list. It’s been no secret that Ohio is one of the nation’s leaders in foreclosures. Cleveland, Ohio had the most foreclosures in the nation.

Also on the list, and hitting closer to home in the Cincinnati and Dayton, Ohio real estate markets, was Middletown, Ohio zip code 45044. The rise in foreclosures in this zip code can be attributed to the year-long strike that the AK Steel (NYSE:AKS) union workers went through in their contract negotiations. Many of those employees faced a difficult year in 2006 with very little income and the fixed monthly bills associated with supporting a family.

While the local real estate markets throughout Ohio have not seen a tremendous decrease in prices, the increased level of foreclosures is worrysome because it will undoubtedly affect what consumers in the state will pay for a mortgage. If banks have a higher default rate in a particular state, they will most likely want to charge higher rates and/or have stricter requirements for qualifying for a mortgage in that state.

Higher mortgage costs mean less buying power for Ohioans. It also may drive some residents out of the market that would otherwise qualify for a loan. Some residents that live near a state border, such as those in Cincinnati that live near northern Kentucky, may even find it beneficial to move to the other side of the river to save money on a loan and therefore enable themselves to purchase more house for their money (lower interest = lower monthly house payment at every sales price level!)… I don’t think we’re to that point yet, the mortgage rates are still much more closely tied to the T-Bill and interest rates as a whole. But it’s worth noting.

The banks won’t participate in any kind of rate setting practice that could be construed as red-lining, an illegal practice where banks set higher rates in a particular area - historically done to subversively oppress minority homebuyers. But if they reduce their appetite for loans across the board for the entire state, the price for a loan will be higher given a fixed level of demand for the mortgage product. Likewise, if the rates charged are increased uniformly across the entire state, it would not be considered red-lining; rather, just an increased cost of doing business in that particular state. The banks would be charging those borrowers who actually pay their bills more to subsidize those who default. (Nothing like penalizing those people who are ACTUALLY YOUR GOOD CUSTOMERS!!!) But that’s no different than what happens when you buy a car or use your credit cards. The interest rate charged reflects a certain default rate (risk) given your credit score.

The rise in foreclosures also brings about an increase in supply of homes on the market as banks look to re-sell the foreclosed property to recoup the outstanding loans. These homes often sell at discounts as homeowners who are in default are less likely than those in good standing to maintain and improve their home. Think about it, would you take your car to get an oil change in you knew the repo man was cruising the block and coming to get it?! No, you wouldn’t spend money fixing something if you weren’t able to pay to keep it anyway!

Hopefully Ohio is only suffering a short-term setback in the way of foreclosures. Only time will tell. In the meantime we just have to pay the monthly mortgage and hope our neighbors and fellow Ohioans are able to do the same. As always, I welcome your comments and feedback…