Follow me on loan rate vs. house price

First off I'd like to apologize for not writing in a while. I don't know why, but I just didn't feel like writing. I hope you understand. Now I want you to follow me on a thought that became clearer as I crunched numbers and pieced my thoughts together. I wanted to share loan rate versus house price as the title illustrates. What do I mean by this. Let me give you a very simple scenario, and I add the disclaimer that I am not a loan consultant, so my numbers are without other fees and costs of a loan. The numbers I show are simple loan amount, interest rate, total paid, and base monthly payment. Here goes:

Scenario 1
House price: $300,000 Down Payment: 5% or 15,000 Loan: $285,000 @ 6.25%
monthly payment: $1,754.79 ($1,484.38 interest only) Total payment: $ 631,725. 85

Scenario 2
House price: $270,000 Down Payment: 5% or 13,500 Loan: $256,500 @ 7.5%
monthly payment: $1,793.49 ($1,603.13 interest only) Total payment: $645,654.68

If you get where I am going with this, it is actually cheaper to buy the more expensive home at the beautiful and enticing rates the Fed has given us for a short time until it can't be sustained any longer. Am I wrong in my thinking? Please comment.

This is good

I was reading MSN's real estate articles, and some of them are great. I mean, they are so negative in some (which make the main page), then in others, they dumb it down so people think through why they own or want to. Check this on out:

http://realestate.msn.com/Buying/Article2.aspx?cp-documentid=4706111

Its about five lousy reasons not to buy a home. I found it amusing and to the point, not scaring people, not hurting feelings and ideas of real estate, just showing the reality of home ownership. Why didn't this article make the front page of MSN or even receive a "post comment" section so I could thank them for making some black and white sense out of such a colorful market situation? Check it out!

Someone asked me...

Someone asked me, "Lars, when is the right time to buy?" This question is always an interesting one with many facets. I get a unique face when I respond with the question, "Are you ready to buy?" I get responses with confusion or a clarification of their question. I don't mean to confuse people when I ask if they are ready, but that's the biggest issue, and the most important question people should ask themselves. There is always a good time to buy if you know what your getting into. Misinformed buyers become hardship sellers.
Those that buy when the market is near the lowest and slowest, they negotiate a great deal, and watch the value go up in the next cycle. It seems that people are trying to play the housing market like the lottery. They don't want to spend a dollar (ride what's left of the down) to win big (ride it up for the next cycle). Now what's different in the scenario is that the likelihood of winning the big lottery is about as likely as to be struck by lightning. The housing market, on the other hand, has many winning tickets by way of homes. There are plenty of homes for buying and selling, the mortgage rates are low, the loans are available, and some homes even appraise to allow renegotiation of price. So is it a question of when, or is it a question of how... how ready are you?

Its primarily shelter

My sister called me one day and told me her friend's buddy was looking for a place in San Diego. We talked and set up a time to view properties. What we discussed was price, space, and proximity to school or school transportation to UC San Diego. Having attended there, I had a good idea of the areas that would be perfect to look at. After viewing more than a handful, we deduced the possibilities to two. He and I both spoke with his dad, who would be the one purchasing the condo for his two sons. W e discussed pros and cons, the prices, and then we finally thought about the financial benefit. When that seemed equally weighted, the father asked me which one I would rather live in, “as a student.” I said without hesitating which one I would prefer living in as a student.
The ultimate question was not which will maximize his return after three years and the boys are graduated. San Diego on average has experienced a 5% decrease in home prices over the last 1 ½ years and are still fluctuating in certain areas. That wasn't the concern though. The market doesn't determine most sellers reason for selling, their needs do. Most people live in their home for around six years and in that time realize an appreciation exceeding 40%, but they live there because they need a roof over their heads. He had a need to see his money go towards something other than a landlord's pocket for two of his boys over the years they would be attending the university. Now having an idea of the areas, I also knew that the prices if he bought where he did, that the resale on this particular complex was higher than what he bought it for, and now he has five figures of equity all before the school year starts. This is a great example of a buyer needing a place and not hesitating to go form with a purchase, despite the negativity of the media and others. Not only was there no hesitation, but there was a substantial payoff for doing so. This is the ideal consumer the market is looking for to correct the surplus inventory and buyer fears. Thank you for setting the example!

Fed is still cutting rates/ rent still increasing

Its great to see the Fed actively participating in this market to help keep it from soaring rates into the 14-21% like in the 80s and 90s market correction. With rates and options like now, it is a good market to jump into. The inventory is available, the sellers are motivated. The sellers that aren't are the ones that don't have much equity in their home or simply will only sell if they get what they want. Those will sit. Sellers, if you have equity in your home, congratulations. In this day in age, The United States has less than a 1% savings rate. I wish I could cite that source, but I've heard it from many financial planners and analysts that I can't give credit to just one of them. When compared to China with savings over 40%, we really live in the now and not the later. Its the sad truth, and the truth hurts. The Fed is trying to help, but it is ultimately up to the consumer and the decision to use what is given to help keep things moving and people happy. Meanwhile, rent is going up. That is a fun trend to watch. The more the market falters, the more the landlords smile with fat pockets. The Lusk Center for Real Estate stated an increase in rent 6- 7% in both LA and Orange counties, around 5% in the Inland Empire, and about 5.5% in San Diego County. While they are going up, rental occupancy is going up to, but people aren't complaining as much. That appreciation is even more OUT of the pocket, not in. So, rent rates are going up and mortgage rates are going down. Let's see the outcome.

Builders beware, you're over saturating the market

In July, new home construction declined over 6% compared to June and almost 21% from last July, according to the California Association of Realtors. Is this telling you anything? It's telling me a lot! To me, this trend is saying to the builders to stop building. They have over saturated the market, and now are slowly building less. That isn't enough though. There are too many homes and too few buyers. As buyers fear getting into a market that is controlled by them, every extra house is one more reason the sales have dropped significantly. On a positive note, building permits have dropped 23% since last July. Now I am not against new construction, on the contrary. I find new homes more appealing since they cater to the buyers so much more, but its the current market that is diluted enough already. Its like a batch of lemonade with too much water (inventory) and not enough sugar (buyers). It may be cold and good for you, but that first sour taste is enough to send many away. Lenders are trying to sweeten the batch themselves so they may assist others and their companies in order to correct the market, but that sour taste stops enough consumers from adding a little sugar and drinking it down with refreshment. Thanks to the media, our lemonade is advertised as a terrible batch... they must not know their history.
The hardest part is that people grow accustomed to a situation and have a hard time changing. The market is asking people to suck it up and act like these past few years never happened, that buyers have to actually put money down in most cases, that sellers have to negotiate more, and that lenders will loan money at low rates to someone who can prove he/she should get that loan. This is requiring people be honest, save their money, and shop wisely for the future, not just the now.

About foreclosures

Foreclosures, foreclosures, foreclosures! That is the most popular topic Realtors are constantly asked about. Let’s jump right in and talk about it. According to Realtor.org, the Center for Responsible Lending (CRL) estimates that 2.2 million households have or will lose their homes to increasing monthly payments in the next few years. A majority of this is due to subprime lending that we talked about last month as well as adjustable rate mortgages. Pat Combs, President of NAR (National Association of Realtors), said, “Foreclosures threaten the very communities that Realtors work to build. Realtors care as much about keeping families in their homes as we do about helping them find the home of their dreams, which is why NAR has partnered with CRL and Neighborworks America to give out Realtor members tools to help clients and customers at risk and educate homeowners about their options if they are facing foreclosure.” Measures are being taken with the government to sponsor programs to help homeowners stay in their homes. A bill was introduced in the senate on Monday, May 14th, that would provide nearly $300 million for ‘revolving’ loan funds, helping subsidize loans for families facing foreclosure. Inman News says that it is called the Homeownership Protection and Enhancement Act of 2007, or HOPE Act.
NAR has created a new brochure that illustrates examples of potentially dangerous mortgages, ‘predatory’ lending practices, identifies housing counseling organizations, and gives pointers on the steps homeowners should take as soon as they think they might not make a payment. Some options include: Forbearance, Reinstatement, Repayment plan, and Loan modification. If you or anyone you know needs or would like one of these brochures, please do not hesitate to ask!

Home Sales are waaaaay down, but price isn't

I just read in the LA Times the numbers for June. They are all over the place. Over all, the median home price for Southern California has gone up almost 2.5%, amazing since the inland empire has gone down in both price and sales. Sales have fallen everywhere, sorting out the people that want to sell, the people that want to sell with unreasonable expectations, and the people who have to sell.
I'm looking at the numbers, so I'll just write them in. Antelope Valley: Sales decrease 62% and median prices down 13%. Ventura County: Sales decrease 27.8% and median prices down 7%. Los Angeles County: Sales decrease 32.5% and median price increase 4.8%. Orange County: Sales decrease 31.6% and median prices increase 0.4%. San Bernadino County: Sales decrease 47.2% and median prices unchanged as a whole, with ups and downs scattered. Riverside County: Sales decrease 50.1% and median prices decrease 5.9%. Lastly, San Diego County: Sales decrease 22.6% and median prices decrease 1.9% (falling to where it was August 2006). When looking at these numbers, keep in mind that these include all sales, existing homes, condos, and new homes. New homes really pull it down with the vast amount of inventory and poor builder confidence, but that makes it a great steal if one decides to live there for a few years. They will give many upgrades and buyer incentives to get those sold, because less money than expected is still a return coming in instead of an investment going out.
Ah the buyers market. As inventory decreases and educated confidence in the market becomes stronger, the full buyers market will appear and the cycle will begin again like it has every 10-12 years.

Buyers, sellers, and investers in 2007

Let’s talk about the market for a bit. Buyers, sellers, and investors, where are they for 2007 and on? In an article by LA Times, they broke down the market into three levels. Leslie Appleton-Young of CAR (California Association of Realtors) explained that the three levels are low cost entry level homes, upward median homes, and luxury homes and estates nearing eight figures. The reason for this is to organize and explain whose market it is. Whose market is it, buyers’, seller's, neither, or both? Appleton-Young said both. In entry level homes and luxury estates, the seller is pretty much in control of price and terms. This, however, is not the case with median homes. With the majority of the market, sellers have to be willing to make their home appealing in appearance, terms, or incentives. Buyers have many options, so becoming the option they pick is key. But, as stated earlier, if it’s appealing and priced right, it will go, no question about it! The market is cyclical, what goes up must come down, but it's like the saying two steps forward and one step back, either way there is progression.
Investors who are open to the idea of investing outside of the United States are being introduced to a mind boggling world. The market is very specific to location, and no two areas are alike. In Europe for example, the countries entering the European Union are facing an explosion in multiple markets of trade, retail, employment, and of course real estate. This is not for everyone though, so if you have any questions, I can answer them personally or by email. A question answered is, well, one less you have to ask later.

Story of a homebuyer in mid- 2007

I would like to share a recent story to illustrate the market and the term, “buyer integration.” Keep in mind; I’m not trying to sell myself. I’m trying to sell the market as what it is for buyers and sellers. For the last three months, my client and I have been looking for the right property for her. We went to view properties and thought we found it the first day. Gorgeous place, in her price range and in the area she desired. After a handful of calls and emails, we concluded that they didn’t sell it. The property was later taken off the market. A day or two later, I get an email from my buyer…titled, “Plan B.” We viewed those, agreed on one, and went for it. When I called, it had an offer. The week after, I found a few more and emailed her the listings… “Plan C.” We found one with the same floor plan as plan B, so we put an offer on it. Long story short, they were unmotivated and leased the place when we cancelled the offer. Why did we cancel the offer? Plan D, the condo next door, same floor plan, was listed at the same price and was much better. This place is beautiful, well kept, and since the owners had it for long enough, they were motivated, willing to make a deal with us, and we are now in escrow. We could not have found a better place for her to call home. We even had to switch lenders to get her the best rate, service, and satisfaction possible!!
So, after patience and a willingness to work all the way to “Plan D” with a “Plan B” loan, my client is happy as can be that after a short, thirty day escrow, she will be able to call this place home. That is what it is all about!! The market is such that buyers can find exactly what they want, given the inventory numbers and the ever increasing willingness of sellers. Sellers are making money off their properties if they have owned it for a little while. These Sellers are beginning to feel the motivation of the buyers and are more confident to list their home. They, in turn, become buyers to do what my buyer just did…find the place of her dreams at the price she can afford! Where are you in this dream?

Ipods, awesome but potentially hazardous

Let’s talk about something we should actually worry about. Ipods and other MP3 players have catapulted the 21st century into a digital age. They provide hours if not days of music without having to repeat a cd, rewind a cassette, or what ever you do with an 8-track. Is this a crime? Most certainly not! What should be considered carefully though, is the volume at which they are played. An article on usatoday.com said that according to some independent research, Ipods can play music at up to 120 decibels. If that number doesn’t say much, go for a stroll down a runway and listen to the airplanes taking off. Or, you can attend your favorite concert, just be sure to get a spot near the speakers for the full effect.
In France, the government contacted Apple and requested the Ipods imported into their country be set at 100 decibels, “only” about as loud as a chainsaw. This is one attempt to save hearing loss for later years. Please, enjoy your music as much as you want, but remember to enjoy your hearing more.