Real Estate Enthusiasts and Friends,
I was very pleased with the response that so many of you had for my first monthly issues as well as the weekly updates. Thank you all for your very kind words and your excellent support. A client asked me yesterday how I liked being a mortgage consultant. I immediately responded by saying that I love it. I'm not a great salesman and in an industry full of sales people it seems unlikely that someone like me would have a tough time competing. In the course of the conversation, I explained that with my background in finance, economics, and home construction, I was perfectly positioned to fulfill an advisory role with my clients. This is what I love about what I do because I get the opportunity to educate my clients and help them see solutions to their problems as well as formulating strategies that will build wealth over time. My goal is that this newsletter will continue to deliver on my promise and commitment to have the most informed and up-to-date clientele in this industry.
MARKET OUTLOOK
The Fed Cuts the Rate Again!
The financial markets have been on an amazing roller coaster ride. As I discussed last month, there is a pretty good chance that we might see at least one quarter of negative growth in our Gross Domestic Product (GDP) this year. The reality of this is resulting in a very volatile market, which indicates to me that there is a great deal of fear in the minds of investors. On the release of good or bad news, the market has made significant shifts in its direction. Given the stresses on the economy and especially within the credit markets, we are going to see some interesting times.
To combat these pressures and to aid our ailing economy, the Fed has cuts rates again. The Fed Funds Target Rate is now at 3%. As a result of this cut last week, Wall Street has rebounded substantially! Eric Martin reported in Bloomberg on Feb 2nd that last week's stock market gains were the greatest it has had in the past 5 years. This is great news as it helped decrease the substantive paper losses that have been keeping many investors up late at night.
How does this rate cut affect the mortgage market and the prices that you are paying to borrow money to purchase real estate? Unfortunately, you are not assisted by those liars and frauds on the TV and radio who continually barrage borrowers with their advertising campaigns. You may have even heard a few of these media spots. "The Fed has slashed rates again making this an amazing opportunity to lock in the rate of a lifetime." What a lie. Rates are low right now but not because of the Fed's rate cut. They are low because of the supply and demand for mortgage securities and the many factors that are influencing the bond market. I teach my clients routinely that if you want to understand how mortgage rates move you have to understand that a mortgage is basically a bond. It is a fixed yield investment that is locked in over a period of time. Therefore, mortgage rates are going to move up or down with the bond market.
The rate cut is going to help people whose mortgage rates are based on various indexes. Index based loans make up business loans, adjustable rate mortgages (ARMs), Home Equity Lines of Credit (HELOCs), and other consumer loans. For short term borrowing, this is an advantageous time to get into one of these types of loans. The other great benefit of the lower Fed Funds Rate on mortgages is that people who are stuck in these products may begin to feel some payment relief as their payments become cheaper. The will help lessen the rate of foreclosures, which will spare credit companies more "sub-prime" losses.
But What About Fixed Rate Mortgages?
Contrary to what the mass-volume mortgage brokers are saying on the radio, 30 year fixed rate mortgages move according to pressures in the bond market. As I stated previously, the most important thing to keep in mind about fixed rate mortgages is that they are 30 year bonds. Therefore, fixed rate mortgages compete with the securities and exchange markets for investment dollars. When the stock market is on fire earning 10% or more, are you going to invest in a product that earns only 5%? Are you going to invest your money in a product that only pays 5% when inflation is going to eat a big portion of your profit? Remember a bond is a fixed yield instrument. Clearly, the answer would be a big no. When the stock market is soaring, you are going to move your investment dollars into the stock market.
If you sold bonds for a living, how would you react to investors pulling their money out and putting it elsewhere? You would sweeten the deal a little. So, you start raising the rate that investors will receive if they buy your bond. Therefore, bond rates go up when the securities markets do well. Now, if the stock market tanks because there are rampant fears or some inherent scandalous activity (ENRON - need I say more), where are you going to move your investment dollars? Remember, investors are always trying to make their money work hard for them. If the risks in the stock market are too high, you are going to move into investments that are safer. This is when bonds do really well and mortgage rates come down.
The opposite is also true. When the Fed cuts the rates, it is a boon to Wall Street as corporations can borrow at much cheaper rates. Investors know that rate cuts are good for corporations because it will not only be cheaper to produce various goods and services, but there will be more demand to purchase those products. Rate cuts almost always coincide with massive rallies on the exchange floors.
Not only do rate cuts push stocks higher, but they are inflationary in nature. Because it is cheaper to produce more goods and services, the economy expands. Expansionary periods generate more wealth and distribute it to more people allowing them the ability to purchase and invest more. This increased demand naturally pushes prices up and the rate of inflation rises.
Simply put, Fed rates are a double hit to mortgage rates. Not only do they create disincentives for people to invest in mortgage securities (bonds) because rates of return are higher elsewhere, but they also create an inflationary environment in which bond traders become especially nervous. Barry Habib wrote in The Daily Market Update, Wednesday, January 30, 2008 that, "As inflation increases, the buying power of that fixed return is eroded, because it costs more dollars to buy the same amount of goods and services. So if inflation is on the rise - investors will demand a higher fixed rate of return to compensate them for the more rapid erosion of buying power on their return." Will this spell disaster to your buying plans if you are looking to buy in the next few months?
The answer is no! If you look at the graph rates are still lower now than they have been at any time during the past year. If the economy continues to falter, many analysts believe that the Fed will continue to cut rates to keep the economy from drowning. This is a really good thing. It is far better to have a thriving economy than great mortgage rates and this is especially true for real estate and financial investors. A good economy will produce more buyers and it will give more people greater means to buy our investments. In fact, this is the prime buying window when prices are down and people are reacting with fear.
With this kind of opportunistic fear running rampant in the ranks of the media, I could not conceive of a better time to be in the market to puchase your next investment. Most people who are trying to sell right now may have similar thoughts and this fear will pay smart buyers huge dividends in the negotiation process. I really like the bullet, "How animals & properties suffer!" If I recall back to the 6th grade, isn't this called personification? I'm sure the animals and houses feel really bad about the economy and wish the government would do something to make business cycles go away.
The sad truth that isn't being reported is that the numbers are finally out and 2007 was the 5th highest volume of home sales in American history. According to the National Association of Realtors, there were 5.6 million homes sold in the U.S. Yes, it's true that in 2005, there were 7.076 million homes sold but you have to remember that in the 4 years prior to 2005, home sales average 4.5 million sold. That means that even will all of this catastrophe, we still eeked out one of the most remarkable selling years ever.
REAL ESTATE OUTLOOK
I expect that this year is going to be an amazing year when it comes to real estate. With the economy beginning to show signs of a recovery, although it may still not materialize for a few more quarters, the chances are strong that investments made now will pay huge dividends into the future. There are no signs that economic growth is going to turn substantially negative this year in the Portland area. Certainly some sectors of the economy might get squeezed but the data indicates that more people will be moving into the area and the job growth is going to remain steadily growing over the next few years. At this time, I project that real estate investments purchased in 2008 will do well over the next 5 years.
Klamath Falls, Oregon
Last week, I traveled down to Klamath Falls to see what the real estate market is like down in the Oregon's southern cascades. I found that it was a remarkably beautiful town with amazing real estate opportunities. They have been hit a lot harder than the Portland economy and their housing market is down a lot further than ours. This lends itself to some excellent buys. Klamath Falls is attempting to increase is tourist and vacation revenue by creating resort communities similar in nature to those found in Sun River. It is situated on the banks of Klamath Lake and it is also home to the Oregon Institute of Technology. As it is only a 5 to 6 hour drive from Portland and only a couple of hours from Mount Bachelor, it is ideally situated for those looking for some small town adventure.
During my stay, I visited with several realtors and I learned that Klamath Falls has a huge Air Force Base at Kingsley Field. There is talk that the government may be expanding operations there and if this comes to fruition, there could be some excellent buys that appreciate very well over the next few years. I found the people living there to be very friendly and eager for outside interest.
There is an enormous gated community, Running Y Ranch Resort, which boasts a litany of gorgeous homes and a golf course designed by Arnold Palmer. When we were driving through the area, we also noticed that the Running Y resort had its very own outdoor ice-skating rink, the Bill Collier Community Ice Arena. It looked absolutely inviting and extremely up-scale. They built it right. If you enjoy Oregon's high dessert, you may be interested in looking at Klamath Falls as a great retreat from Portland's hustle and bustle.
To really get some valuable information in the hands of my clients, I have asked my Realtor Partners to share what they are seeing and the opportunities they would like to share with you.
Seraina Aguayo
Greetings! It's time for a market update from a Realtor/Broker point of view. I have found that while everyone may have opinions on the current state of the real estate market, nothing is more appreciated than facts backed by numbers and statistics.
We saw 2007 finish with a continued decrease in the number of transactions. Even though sales prices were sluggish most of the year, we did see them rise steadily. This seems to be consistent for most Portland/Metro areas. Lake Oswego and West Linn continue to be strong markets with an appreciation rate of 7.8% for 2007. This is an impressive number for any market! The market that out-performed all the others and completely shocked me was Columbia County at an astonishing 11.6%!
When comparing 2007 with 2006, we see that the number of closed sales was down 29.4% and pending sales declined 32.5%. Interestingly, when we compare the activity in 2007 with 2006, the Portland/Metro area saw an 8.1% increase in new listings. At this month's rate of sales, that leaves us with approximately 8.5 months of inventory. Don't let this information get you down just yet! With this much inventory, sellers are EXTREMELY motivated to get their properties sold. That last sentence is worth repeating! If you are a buyer right now, hooray for you! There couldn't be a better time to capitalize on this rare market! I have buyers right now that are getting some amazing deals because they are utilizing this tremendous leverage during the purchase negotiations.
So let us put things into perspective. Portland just had its third highest total sales volume in residential real estate history at $9.7 billion, which is only off by 6.7% from the massive $10.4 billion peak in 2006. Wait, there's more. The average sale price increased 6.3% from $322,600 to $342,900 and the median sale price appreciated 7.2% from $270,500 to $290,000.
I am thrilled to note that condo appreciation rates were 13% for 2007! Condo appreciation in 2005 and 2006 were just slightly higher with a 14% appreciation rate and those were considered phenomenal years. The truth is that I am seeing a great deal of investor activity and I have been fielding numerous calls on my listings since the beginning of the New Year. So, when people tell me that there just aren't enough buyers in the market right now, I just have to reply with, "Yes, we have buyers; they just aren't the buyers we are used to."
Let's face it, buyers are significantly more educated now than they have ever been before and I think that this is a very good thing. A 2006 National Association of Realtors study reveals that more than 80% of all home buyers will do extensive research about properties on the internet well before they make a decision to purchase. With this in mind, I counsel my sellers to use this to their advantage by developing the correct pricing strategy to help their property stand out from the competition. Many of the homes listed on the market are not priced right and they consequently sit on the market. If they can position themselves correctly with a competitive price, their property will move. It usually surprises sellers when they learn how much they can reduce their DOM (days on market) by making minor adjustments to price or by adding buyer concessions.
Overall, there has never been a greater opportunity in real estate as there is at this time. We can either get on the boat or watch it pass by us.
"A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty."
-Winston Churchill
If you would like more market data on your specific market area or would like a FREE comparable market analysis, please contact me at serainaaguayo@johnlscott.com or Dave Smith. *Data gathered from the National Association of Realtors® and the Regional Multiple Listing ServiceTM of Oregon.
STRATEGIES
Home buyers: With appreciation continuing to grow in our area, I continue to advise my clients that this is strong buyer's market. I recommend that you ask your realtor to seek as much in seller's concessions as possible. I have just found a new first time home buyer's loan program that will allow you to receive 6% in seller's concessions. Even though the initial rate is higher than other 100% LTV (Loan to Value) program rates, you will have more funds at closing to do some interesting things. I have been able to work it out so that 2% of the 6% will go to permanently buy down the interest rate by nearly ½ a point. This will give my client a very, very good rate and he will still have 4% of the loan amount to cover the remaining closing costs. This is an amazing strategy to use for those of you who are buying your first homes.
Sellers: You still have some tough times ahead until the market turns around. However, review the strategies that Seraina discussed earlier especially when it comes to pricing because you might be able to win the day if you stand above the competition. One of the statistics that should be top of mind when you price your home is the List Price/Sales Price Ratio. What this statistic analyzes is the ratio between the price that houses are initially listed and at what price they are actually sold. Unfortunately, most people incorrectly price their homes based upon a sale that previously occurred in their neighborhood. I've heard this so many times. "The Smiths sold their house for $267,000 and our house is much nicer and bigger. We've got to be able to get at least $290,000 for ours." This is human nature and it seems perfectly logical. In fact, I've been guilty of this myself. Unfortunately, they don't know all of the factors that made that sale possible. As well, most of those "dreamy" sales prices occurred back when the markets were still red hot.
One of the best ways to accurately identify the correct listing price is to utilize the Sales Price/List Price Ratio. For example, if your realtor shows you that houses in your market are listing about 10% over the actual sales price, then simply add 10% on top of price that your realtor believes will sell your home. This will place your home within a competitive structure that will increase the chances that you'll not only get an offer within the actual market price, but you may gain a marginal bonus as well. The best thing about this strategy is that your house is not as likely to sit for months gaining notoriety as a "bad" house.
Investors: This is dream come true. Rates for investment properties have fallen to levels that primary residence borrowers used to enjoy. (They are enjoying even better rates as well!) This is great moment. In most housing recessions of the past, interest rates tended to be high, which caused the housing industry to bomb out completely. This is not the case this time round. There are great buys all around and you have cheap money available to fund your projects. However there is one big caveat.
As a Mortgage Consultant, I am finding that the Fannie Mae guidelines for investor properties are getting a lot tighter. Even with good credit scores, I am finding it difficult to get solid approvals for investment ventures. I have done a lot of research to figure out what is going on since these findings are coming back through an automated computer program. The connection that I have discovered is reserves. Banks are looking to lend to people who have liquid resources that are available to them in a crunch.
This makes perfect sense given that a lot of the "death and destruction" in mortgage banking and mortgage backed securities came because people stretched themselves so extensively that when tough times came; they fizzled. I recommend that if you are looking to get an investment property, you must find ways to build up your financial reserves. Typically banks are looking for 6 months PITI (Principle, Interest, Taxes, and Insurance). This means that if your combined mortgages have a combined payment of $3,000, you will need somewhere around $18,000 in the bank or some other liquid account. Ask me about the kind of assets that work well and the ones that don't.
Renovators: I have found a new strategy for this as well. If you are willing to buy a house that needs fixing up and you plan to live in it for at least 6 months, there are renovation loans available to you. They allow you to buy the house and monies are available similar to a construction loan that will enable you to remodel the house. This is also a great strategy to employ if you are in a low priced housing category and the houses that you can afford to buy can't get financed because there are significant problems with the house. Bring these houses up-to-date and loan is yours.
REFINANCING UPDATE
If you are considering a refinance, you should not wait much longer. If you look at the graphs on page 2 you will note that we have already passed one rate bottom and we may not be back to those prices for some time. If the Fed continues to drop the rate it will continue to devalue bonds and the rates to buy those bonds will go up. If the market rebounds sharply, you may completely miss the really good rates for another 3 to 5 years when the next cycle comes around.
FEBRUARY ACTION STEPS
Be well and have a Great New Year!
All the best,
Dave Smith
If you are interested in purchasing, selling, or refinancing a home, Dave would love to work with you to find the best strategy that will fit into you short and long term personal and financial goals.
I recognize that the financial situations of each of my clients and anyone who reads this newsletter do vary widely. Therefore, the strategies stated herein should be explored further with your financial advisor or advisors to be sure that these strategies are beneficial. The opinions expressed in this newsletter are not intended as specific investment advice or as a proposal for providing mortgage lending services.
I am a full service Mortgage Planner who will work to make certain that the home loan you choose will be properly integrated into your short and long term goals as well as your monthly budget!
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