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Archive for July 2011
The date for the 2nd ANNUAL VINTANA GARAGE SALE EXTRAVAGANZA has been officially set for Sept 10th and 11th, 2011. Please mark your calendars! Last year was a total success, we had over 30 families participate! Mark your calendars!! It™s gonna be HUGE!!
Should you lock in the interest rate on your mortgage? A couple of things to consider:1. While I am confident that the Debt Ceiling Debate will be settled (whether it™s for six months or a year), my greater concern is the growing belief that the ratings agencies are looking at downgrading our government™s bonds from our AAA status. By lowering the credit rating of the bonds being presented to the market, the confidence of those who buy our bonds will be shaken. In order to overcome the risk of lower rated bonds, we will need to offer greater rates of returns on our bonds. THAT will result in a rise in mortgage rates because mortgages are what make up the bonds. This will affect virtually every conforming loan limit home buyer, whether they have conventional or government (FHA/VA) financing.2. The pending lowering of the maximum loan amounts (slated for October 1st) that can be sold to FannieMae, FreddieMac and GinnieMae (in high cost areas from $729,250 to $625,500 for single family homes) will create more œJumbo Loans. Jumbo loans have historically been .25% to .375% higher than conforming loans; however, industry insiders are hinting at a much bigger spread (.75% or more). Granted, this will not impact most home buyers, but it is worth noting.Now, it is possible that neither item becomes effective. Let™s keep our fingers crossed. Yet, what is the benefit of NOT locking. Maybe rates could go down an eighth or a quarter of a percent. Is that worth the risk of a rate increase that would be quick and dramatick of a half of a percent or more?The safe bet is to LOCK to protect yourself¦¦my mother always said, œbetter safe than sorry.
We hope that headline grabbed you. The reason we used it was to bring some perspective to the debate as to whether or not homeownership is a wise investment in today™s troubled market. A family should never look at the purchase of a home simply as a financial investment. It is so much more than that. But, even if we look at it as only an investment, we must look at it in the long term. Let™s use gold as an example.Gold had dropped from over $400 an ounce to $250 an ounce (a 40% decline) from February 1996 to August 1999. People were so glad they hadn™t bought at $400 an ounce.Lord William Rees-Mogg, the current Chairman of The Zurich Club, in 1997 said:œNo investment has been so thoroughly exploded as gold; most people think that there will no more be another gold boom than there will be another boom in tulip futures in The Netherlands. Everyone knows what happened next. The proclamation of gold™s death was rather premature. Gold rose from $250 an ounce to over $1,500 an ounce in the next twelve years.If we look at real estate in the long term, we can see that it has been a great vehicle for building family wealth. The Federal Reserve™s Survey of Consumer Finances, conducted once every three years, provides a snapshot of family income and net worth. There survey has shown every time that homeowners™ net worth far exceeds that of renters. Here is the breakdown of the last several surveys: § 1998 “ Homeowner net worth exceed renters by 31% § 2001 “ Homeowner net worth exceed renters by 36% § 2004 “ Homeowner net worth exceed renters by 41% § 2007 “ Homeowner net worth exceed renters by 46%The 2010 survey is not out yet but the National Association of Realtors™ has estimated that number to be approximately 41% in 2010. You may be thinking this is no longer the case based on the current fall in home values which have dropped back to 2000 “ 2002 prices.Harvard University just completed a study that showed:œEven if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters.
There has been much written about the falling inventories of distressed properties in many market places. Some have looked at the decreasing percentage of distressed property sales reported by the National Association of Realtors over the last four months as a sign that we are finally cleaning out the last remnants of the foreclosures. If you look at the numbers, it could seem that way: § March: 40% of all sales were distressed properties § April: 37% of all sales were distressed properties § May: 31% of all sales were distressed properties § June: 30% of all sales were distressed propertiesHowever, in reality the falling percentage of distressed property sales is not an accurate indicator. The reason the percentages are falling is because many homes are currently tied up in the process of foreclosure.An article in HousingWire quoted James Zeldin, EVP Default Resource on the issue:œI would absolutely expect an increase in inventory over the next 12 to 18 months. I™m personally expecting that a lot faster. I believe we™re going to see macro forces pushing these institutions to do more REO liquidation.Once these properties are cleared through the foreclosure process, the inventories of distressed homes will again increase and the percentage of sales will again begin to climb.
We are working our way through large numbers of distressed properties every month. However, there are many more which will come to market in the next year to eighteen months.
When lenders evaluate mortgage borrowers, they look at four things: income (the ability to repay), credit (the willingness to repay), collateral (appraised value and property condition) and assets (cash in the deal and cash reserves after closing, mostly). Of the œfour legs of the table, assets are the least discussed, and yet may be the most important.
What do we mean when we talk about assets?
§ Monies needed for the down payment (the difference between the purchase price and the loan amount which may or may not be the same as the money deposit at contract signing) § Monies needed for closing costs (fees to the lender and third parties for things like appraisals, title insurance, settlement services, and so on) § Monies needed for Pre-Paids (homeowners insurance, flood insurance, real estate taxes, etc.) and establishing escrow accounts for future payments § Monies for Reserves– the money you still have left after closing. Monies that would be available, if a problem were to arise
Why do we care about assets?
§ Assets may be the truest reflection of a borrower™s fiscal strength. Their ability to save and properly budget could be a significant indicator to their future paying habits § The source of the assets is important. Savings? Gift or inheritance? Lottery victory? Insurance settlement? Sale of a baseball card collection? Each reflects differently on the borrower. § Many people don™t show all their income on their tax returns (it™s just a fact). Undocumented income can™t be used to qualify; however, often assets become a truer representation of a borrower ability to pay than their 1040s. § Reserves are an issue. A client with $50 in the bank after closing is riskier than one with $50,000. Also, clients who have money in the bank but have some sporadic lates on their credit are looked at differently than those who didn™t have the money to make the payments.
Common Asset Issues in Mortgage Packages:
§ Large deposits (defined as those which are excessive for the income level) raise an underwriter™s eyebrows. Where did the money come from? Maybe the borrower took a loan that doesn™t yet show up on their credit report. § Cash deposits are another red flag. In this day and age, people keep their money in the bank, not under their mattress. Where did the cash come from? § Gift monies and seller™s concessions, while considered as borrowers assets when doing calculations, will give an underwriter pause when assessing the borrower™s real ability to replay.Guidelines have tightened. When borrowers are paying off credit cards to get their ratios in line, lenders are asking where that money came from now. That act has nothing to do with the home purchase, but may be a sign of something fragile in the borrower™s financial make up.The best advice is to consult a loan professional to discuss the proper way to position your assets and the timing of it that will put you in the most favorable light.
Are there any negative effects from changing the listing price of a property? This question haunts Brokers/Agents as well as sellers of property every day. At present, there does not seem to be a consensus answer to this question within the professional real estate community. Fortunately, this question was scientifically investigated by John R. Knight. Unfortunately, few know the results of Professor Knight™s research.In Knight (2002), the impact of changing a property™s listing price is investigated. Additionally, the types of property that are most likely to experience a price change are also estimated. The findings from this research indicate that, on average, properties which experience a listing price change take longer to sell and suffer a price discount greater than similar properties. Furthermore, bigger price changes are found to experience even longer marketing times and greater price discounts. Finally, as for which properties are most likely to experience a price change, Knight finds that the greater the initial markup; the higher the likelihood that any given property will experience a listing price change.
Implications for Practice
Sellers as well as Brokers/Agents should therefore be aware of the critical necessity of getting the price correct from the start. Sellers wanting to over list will ultimately take longer to sell and will sell their property for less, on average, according to Knight. Brokers/Agents™ desire to take a listing and get the price right later will ultimately lead to their working harder according to Knight, and they are not doing their sellers any favors. Thus, an initial and detailed analysis of the proper price is much more critical than many originally thought. Interestingly, I have found in my own research that the direction (up or down) of the listing price change does not matter. A listing price increase and decrease both lead to similar results found in Knight™s work “ longer marketing times and lower prices. Therefore, get the price right from the beginning. It is best for all.
There have been some bright spots in the residential real estate market over the last couple of months. Several price indices have reported a stabilization of prices and some regions have even shown small levels of appreciation. This has led some to believe that we may have reached a bottom for home values. We must realize that what we are actually experiencing is a ˜window of opportunity™ as the banks are delayed in bringing certain inventories of distressed properties to the market. Let™s look at what others are reporting:
œThe crux of Simon™s analysis is that the loose lending practices seen during the housing bubble allowed 5 million renters to become homeowners, and that the market is in the protracted process of evicting this group. He believes housing prices will decline 6 percent to 8 percent nationally, with 6 million to 7 million more foreclosures yet to come.
œThe problem with the real estate market remains excess inventory. Based on Shilling™s research, there are 2 million to 2.5 million excess homes in the country ” a supply that will take 4-5 years to work-off. The result: Housing prices will fall another 20% and underwater mortgages will balloon from 23% to 40%, he says.
œBoth warmer weather and the drop in distressed sales percentage have contributed to recent home price improvements. However, given the disappointing pace in housing demand recovery, both factors may turn against us in the coming winter and push home prices lower again¦This supply-demand imbalance affirmed JPMorgan analysts™ estimate of a further 4% drop in home prices from the first quarter of 2011 to a new bottom next year.
œHome prices have gotten a little bit of a boost in recent months thanks to a seasonal uptick in market activity. Most analysts, however, expect further declines to characterize the later part of the year and possibly extend into next year, largely because of the huge supply of foreclosures on the market.
If you are thinking of selling in the next twelve months, you would probably do much better if you sold your house sooner rather than later.