4 months ago I blogged about mortgage rates hitting a 50 year low. Now, with properties values at 2003 levels and mortgage rates even lower (30 year fixed averaging 3.7% in Florida today) we are experiencing an incredible opportunity in an otherwise troublesome real estate market. Analysts continue to discuss whether we are at the absolute bottom and whether interest rates can go any lower and my answer is maybe and probably not. Here are some thoughts for those of you struggling with a buy decision:
It is almost impossible to time the market perfectly. If you are waiting for the absolute bottom you will miss it. Conservative real estate investors stay ahead of the market, buying on the way down and selling on the way up. Good properties in our area are already hard to come by and when priced at market value they sell quickly, often with multiple offers. I see too many buyers miss out on opportunities because they are under bidding or waiting for values to go lower. You can’t make any money in real estate if you don’t buy anything.
If you can qualify for a mortgage, then you should definitely consider borrowing money for your purchase. With rates so low most investors, even if they have the cash, are trying to finance at least a portion of their purchase. They can then use their cash for another property or consider other investments. Let me be clear – I’m not suggesting that you should finance your real estate purchase and put all your cash in the stock market. Discuss your investment options with your financial planner and make sure you keep 6 months to a year of mortgage payments in the bank just in case.
Investors who have a higher tolerance for risk are considering more aggressive strategies. For example, did you know you can borrow money against your investment portfolio, sometimes at rates below prime? For short term investments like rehab and resell (fix and flip), this is a perfect way to keep your money in other investments like the stock market while buying and selling real estate with borrowed funds. A good financial planner or stock broker can assist you with these transactions, but please consider maintaining a low loan to value (or high equity) in your real estate investment in case you need to sell quickly.
Finally, 2 things are inevitable – property values will go up and so will interest rates. Since most of us buy real estate for the long term then it is really hard to go wrong in today’s market. If you want to buy, but the bank won’t loan you money then consider seller financing or other alternative methods. For example, did you know that you can purchase real estate with your IRA? Your stock broker may not share this information with you because their company may not allow it, but specialized IRA custodians will allow you to buy investment property with a self-directed IRA. Don’t have an IRA? Start one or roll your 401k into a self directed plan. Ask your real estate broker if they are familiar with these types of transactions or stay tuned for a future blog post with more details.
Its been over a month since President Obama signed the Debt bill into law and we still aren’t sure what it all means for the Real Estate Market. I can tell you this much – when the super committee convenes there will be quite a few housing provisions on the table. I don’t have to tell you what could happen to our economy if we do not start to see a more robust housing recovery. Everyone knows housing is critical to our overall economy yet politicians continue to threaten some of our most sacred and growth-oriented programs. For starters, our mortgage interest deduction which has been in place since 1913 continues to be the single best incentive for Americans to become homeowners, and it keeps housing costs down for millions of Americans facing foreclosure. Can you imagine what could happen to our real estate market if that mortgage deduction went away? Well, its on the table and some members of Congress don’t seem to understand the fire they are playing with. In addition, other real estate provisions have been discussed including capital gains benefits, property tax deductions, like-kind exchanges, as well as Section 8 housing and other low income housing subsidy programs.
Don’t get me wrong, I understand we need to address our debt crisis (and I certainly am biased), but any economist will tell you that real estate investment is critical to an economic recovery. I don’t know about you, but I’m not willing to risk another recession and continued high unemployment. Congress will be asked to vote on this by December 23rd and will be anxious to start their holiday break. Lets make sure they make the right decision. Please call or write your Congressmen and ask them to think about our real estate market and what it means to all Americans.
According to Freddie Mac’s weekly survey the average rate for a 30-year fixed loan fell to 4.15 percent last week, down from 4.32%. That was the lowest in more than a half century. Frank Nothaft, chief economist for Freddie Mac said, “The Federal Reserve’s policy statement last week and ongoing market concerns over the European debt market carried momentum into this week allowing all mortgage products in our survey to reach all-time record lows.”
Is it time to refinance or perhaps purchase that dream home you’ve always wanted? With interest rates this low and property values down there has never been a better time to buy. Even investors who typically purchase real estate with cash are leveraging their investment properties in order to take advantage of these low rates.
The February data is out and Lawrence Yun, National Association of REALTORS® chief economist, is reporting a drop in February’s existing home sales. After a rise in January sales, there could be several reasons for this drop, but the most likely reason is the bad weather across the country in February. The good news is that Mr. Yun still feels that we will finish the year strong and we should see rising sales in the coming months. A reduction in appraisal issues, less stringent underwriting standards and continued job growth are some factors that could drive a continued recovery in our national real estate market. For information on our local South Florida market visit our Local Market Watch page.
Some other interesting data from this report:
There is a large gap between the price of new construction and existing homes, 45% versus a normal 15% difference.
Home sales are actually up in homes under $100,000 and homes over $500,000
Cash purchases were 33% of the total sales, which may be an all time high
Distressed sales were 39% of the total sales
Appraisals caused 10% of transactions to fall through and caused delays in an additional 10% of transactions.
NAR Chief Economist Lawrence Yun discusses the newly released Pending Home Sales numbers and answers other questions about the outlook of our real estate market.
The Fed held its quarterly FOMC meeting last week and announced that it will reinvest principal payments from agency debt, mortgage backed securities and existing Treasury holdings into long-term U.S. Treasuries in an effort to keep interest rates low. It was expected that the Fed would keep rates in the range of 0% – 0.25%, which it did; however, the Fed reiterated that it will support lower rates “for an extended period.” Many analysts expect that the Fed’s current stance will remain until Qtr. 2 2011.
This comes as good news to those who are still planning to buy a home and want to capitalize on the historically low interest rates. In our marketplace, we have also recently heard from banks (who have offered limited financing packages over the past few years and in some cases none for condos) about new programs for purchases of single family homes (15% down with no PMI) and condos/townhomes (with 20% down).
The feds have done it again - Today President Obama signed a massive bill of over 2,300 pages that apparently nobody in Congress has actually read. I know I’m not the only one concerned about our lawmaker’s habit of passing legislation and then reading it. This has probably been standard practice forever, but now it seems our leaders are fond of saying things like, “We’ll find out what’s in the bill after we pass it”. Is honestly really the best policy in this case? You know, you can get most books on audio CD now. Perhaps if we put these bills on CD our legislators could listen to the bill on the way to the golf course or while on board their private jet. Anyway, I digress. So, what does this bill really mean to our real estate market?
Without going on a rant about how we got into this mess, lets just say that the mortgage industry is largely to blame and as a result mortgage brokers and bankers will feel most of the pain from this new legislation. According to the National Association of Realtors (I didn’t read the bill either), much of the bill deals with the regulation of hedge funds, banks and financial services companies, but there are several areas of the bill that could directly affect our real estate market in the future.
A new agency will be created: The Consumer Financial Protection Bureau (CFPB) to oversee the Real Estate Settlement and Procedures Act (RESPA) and the Truth in Lending Act (TILA), previously overseen by HUD and the Fed respectively.
Investors and homeowners who want to provide seller financing to buyers will be able to do so as long as they limit those transactions to three times a year.
Deadlines were created for reforming our secondary mortgage market companies - Fannie Mae and Freddie Mac .
Possibly the most important part of the bill is how is deals with the regulation of “exotic” loan products such as subprime and stated income loans. While these products are virtually non-existent now, they will undoubtedly become available again in the future and will face much more regulation including:
Lenders must ensure borrowers ability to repay the loan
New penalties have been established for irresponsible lending
More disclosures must be provided to consumers on mortgages
What does all this mean and how will it affect our real estate market? Well, it will likely be years before we see any direct affects of this legislation, but the stability it will provide is what should give comfort to real estate buyers and sellers right now. With these new regulations in place and a new agency to oversee everything, it seems unlikely that the mortgage industry will make the same exact mistakes again. So it stands to reason that we can expect a much more stable real estate market in the future, or at least a more normal market than we’ve seen in recent years.
Bottom line, for those of us who have been in real estate long enough, this real estate market already feels normal again. Just like the old days, if you want to buy a home you must have a job, good credit and 20% down. If you lack the sizeable down payment, you’ll need an FHA or VA insured mortgage. Buy only what you can afford and your home should be one of the most rewarding investments in your entire lifetime. For those who fall outside these limits or who have special financing needs, you may need to jump through some more hoops and you may wait longer to close your transaction, but be patient. Somewhere in a dark room inside a big bank, really smart people are figuring out how to give you money again.
Have you been thinking about upgrading your house, but find yourself procrastinating or wondering if the real estate market has yet to find a bottom? If you are fortunate enough to have the income and resources necessary to sell your current home and upgrade to your dream home, then now is the time. In many parts of the country, we’ve already seen the bottom of the market and if you haven’t seen it in your market, then it is probably closer than you think. Even if I’m wrong and values continue to drop (they will in some markets), if you wait for the absolute bottom, you’ll miss it and you may never have the opportunity to buy your dream home again. Please note: this post is about upgrading your personal residence and assumes you will stay in your new home for at least 10 years. This math is not necessarily for investors or real estate speculators (although they may still learn a thing or two). There will not be a test at the end of this blog.
It’s Time To Trade Up: 3 Reasons It Makes Sense
By trading up, you’ll likely make more money in the long run than you would just staying put. Here is how the math works. Let’s say you paid $500,000 for you house 5 years ago and the market has depreciated 30% since then, so your house is now worth$350,000. You are now $150,000 in the hole, right? Well, the answer is yes, unless you take advantage of the buyer’s market and upgrade. Let’s say your dream house that you couldn’t afford 5 years ago was $1,000,000 and now you can buy it for $700,000. So with the $300,000 discount on the new house you are already $150,000 ahead on the trade-up ($129k after commissions). Wait, it gets better. Let’s say in 10 years your new home has appreciated another 30% which equals $210,000 versus the $105,000 you would have gained on your original home. That’s a $105,000 difference in gain for a total upgrade benefit of $234,000!
It is better to trade up in a down market than in an escalating market. If you wait for the market to improve, it will cost you on the upswing. Let’s say that you wait 3 years to buy and the market goes up 10%. Your $350,000 house is now worth $385,000 and your dream home is now worth $770,000 so you’ve lost another $35,000 by waiting. I know what you’re thinking, “But if the market keeps going down, then I’ll be able to buy my dream house for even cheaper”. Sure, that could happen, but once again, if you wait for a true bottom then you’ll probably miss it. And, have you considered the effect of interest rates changes?
If you will be financing your upgrade, let’s assume that interest rates are going up. You really don’t think rates are going to stay this low forever, do you? Current interest rates have been hovering around 5%, the lowest in 40 years. So, yes, they are going back up and it will likely be a long time before we see them this low again (if ever). Here is the math on interest rates. Let’s assume that you will stay in your new home for 10 years. After all, it is your dream home. If you put 20% down on your $700,000 home, you will borrow $560,000 which will cost you about $256,000 in interest (not including principal) over 10 years at today’s rates (5%). If rates go up only one point to 6% on a 30 year fixed mortgage, you will pay an additional $56,000 in interest over 10 years. If rates go to 7% (still historically low), it will cost you $112,000 more, and so on.
The bottom line is that if you are considering an upgrade and if you have the resources, there is no better time than the present. Oh, I almost forgot; if you qualify for the new home-buyer tax credit, there is another $6,500 benefit to you if you get under contract by April 30 and close by June 30, 2010. See my post: “Homebuyer Tax Credit Extended, Includes Current Homeowners” for more information. If you want to run these numbers on your actual situation then please give us a call. We have a special calculator that does the math for you.
Another Government Acronym When this program was first announced last May it was referred to as the Foreclosure Alternatives Program (FAP), an easy name to understand and a concept that we have all been anxiously awaiting. When the details were finally released last week it was no surprise that the program was 7 months late, provides no real incentives for banks to participate and has absolutely no “teeth”. What is surprising is that the government has chosen to make this program part of its already questionable Home Affordable Modification Program (HAMP) and they have created a totally new acronym that is equally as surprising – HAFA, or the Home Affordable Foreclosure Alternatives Program. Is it me or is this a really sad oxymoron? Hello! Making Homes Affordable is about keeping your home and Foreclosure Alternatives is about losing your home (but avoiding foreclosure). Is the administration so stubborn that they cannot come up with a new program for people that clearly cannot afford their home anymore? Shouldn’t banks be able to determine whether or not a borrower should get a loan modification or a short sale? See my post: “Are Loan Modifications Working?”
I will share some basic details on the HAFA guidelines but honestly, even if banks decide to participate in the program, they likely won’t follow the guidelines anyway. We specialize in short sales and we frequently work with FHA borrowers that qualify for the 15 year old HUD Pre-Foreclosure Sale (PFS) program. If HUD actually enforced their guidelines and the banks actually followed them, we wouldn’t get any PFS deals done, and the fact is that we are successfully helping homeowners with their PFS transactions. So, the bottom line is that we now have another government program that will be loosely enforced and may just create more aggravation than it is worth. If you are facing foreclosure and don’t know what to do, your best bet is to contact a real estate professional, and even better, a Certified Distressed Property Expert®, for expert advice on how to avoid foreclosure. The banks don’t want to foreclose any more than you do, but if you want to successfully avoid foreclosure, you’ll need the help of a real estate professional who understands the banks and their ever changing policies and procedures. Note: Your friend, neighbor, relative, etc. that has their real estate license does not necessarily qualify to help you.
The HAFA Guidelines (In Theory)
PLEASE NOTE: These guidelines DO NOT apply to all homeowners and to my knowledge, no banks have adopted these guidelines yet. Furthermore, Fannie Mae and Freddie Mac have yet to release their final guidelines (which represent the majority of loans) so if these guidelines do not apply to you, it does not mean you are not eligible for a loan modification, short sale or deed in lieu of foreclosure. So, with hesitation, here are the basic requirements for HAFA, which are the same requirements for HAMP:
The property is the borrower’s principal residence
The mortgage loan is a first lien mortgage originated on or before January 1, 2009
The mortgage is delinquent or default is reasonably foreseeable
The current unpaid principal balance is equal to or less than $729,750
The borrower’s total monthly mortgage payment exceeds 31 percent of the borrower’s gross income
Bottom Line on Avoiding Foreclosure Bottom line, if you are facing foreclosure and you want to know your options, please contact us or any other real estate professional who specializes in distressed property.
