CURRENT THOUGHTS ON TRUST DEEDS

by Richard C. Temme

You became a trust deed investor because you wanted to earn a retail rate of interest on your money. You realized that the old axiom "the higher the yield, the higher the risk" was only true when comparing wholesale investments to other wholesale investments such as bank CD's, corporate bonds, corporate bond funds and insurance annuities. You realized that retailing your money using trust deeds to secure your funds could, in many instances, and with notable exceptions, be as safe or safer than some wholesale investments and still yield more. The secret was your willingness to tolerate the inconveniences and irritation of retailing your investment capital in order to achieve a higher return. You were aware that a company like R.C. Temme Corporation could help you absorb and minimize those irritations and reduce the inconveniences.

Hopefully you realized when you invested in trust deeds that, compared to other trust deed investments, your safety level and/or potential for inconvenience was usually inverse to the amount of yield. You could choose the safety level or inconvenience level that most nearly met your needs. During the last six years, those of you who have chosen higher levels of safety in your trust deed investments have likely been very thankful for your foresight.

SOUTHERN CALIFORNIA REAL ESTATE

After approximately five or six years of market decline, real estate values in Southern California are showing signs of stabilization in many areas. Like you, we read the recent news that foreclosure filings have recently increased. We still have a few concerns regarding some elements of the real estate market. However, the UCLA Economics Department continues its optimistic reports. Bank of America just issued an optimistic report. The California Association of Realtors just reported that homes are selling faster, and with less price reduction, than at any time since 1990. Various boards of realtors report increased activity. The unemployment rate in Southern California continues to decline. Properties are selling again.

An interesting observation is that five or six years ago, one Hispanic name, Garcia, appeared on the list of ten most common surnames buying homes in L.A. County. A recent survey found that six of the ten most common surnames buying homes in L.A. County are now Latino.

 The Latino segment of the market, along with a substantial percentage of the other 40% of home buyers, mostly bought lower priced, entry level homes. This may explain why lower priced homes, in our major population areas, are among the strongest sector of todays real estate market. The extraordinary sales activity in lower priced homes explains why average and median prices have been falling.

Many investors remain confused as to the difference between the continuing decline in average or median sales prices, so often mentioned in newspapers, and changes in the value of properties. The average or median sales price can drop without values changing. This occurs simply by having a greater percentage of lower priced properties sell than had sold in a previous period, as compared to higher priced properties.

CHANGING ATTITUDES

Signs of stability in the real estate market obviously translate to changing attitudes among trust deed investors. Where most of you are relatively conservative investors, some of your fellow trust deed investors who have only recently joined the conservative ranks are already starting to give up the safety before yield philosophy that has successfully guided most of you through the last six years. The fear factor among trust deed investors is diminishing somewhat as hints of stability in the real estate market materialize.

There are still a few weak spots in the real estate market. It is good to bear in mind that first trust deed investors have been overwhelmingly more successful than junior lienholders during the last six years.

ARE INTEREST RATES LIKELY TO REMAIN IN A NARROW RANGE AND/OR
 COME DOWN OVER THE NEXT FEW YEARS?

Many business writers would have us believe the Narrow Range Theory. The general logic presented by many analysts is that the Federal Reserve has done a good job in managing inflation. It appears that only a national or world crises or a botched attempt to balance the national budget could cause interest rates to rise significantly greater than cyclical fluctuations. We believe investors must always have a contingency plan in the event of an inflation creating crisis. However, most of our investors appear to lean towards the narrow interest rate range theory in planning their investment strategy.

Many more investors are now looking at trust deeds. Some investors say they are gaining confidence, again, in the real estate market. Some say they want more yield and like receiving a retail interest rate on their investments. Others tell us they are averaging out of what they perceive as an over bought stock market.

 Now may be a good time for certain investors to consider increasing that portion of their assets allocated to dollar denominated investments. We, of course, believe for many reasons, that funds you wish to allocate to dollar denominated investments can achieve an extraordinarily good risk benefit ratio when invested in trust deeds or small pieces of many different first trust deeds. Prepayment penalties would be important if interest rates were to fall further. You want to lock in, to whatever degree possible, the higher rate of return on your money.

 December, 1996

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