April 2008 Issue of Financially Independent

Real Estate Enthusiasts and Friends,

I have moved to Mortgage Express and it has been an amazing move. I apologize for the lateness of this newsletter as well as the tardiness of my notification letter. This has been a complicated transition and now that I'm finally settling into my new office, I can get these very important tasks accomplished. My cell phone is the same (503)438-5785 but my new office number is now (503) 517-8763. My e-mail has changed to dsmith@mtgxps.com. This is a great company that values customer service and competence as much as I do. They also have direct access to wholesale lenders, which allows me the ability to offer significantly better rates and programs than before. I now have access to FHA loans, which will be a great asset for sub-prime situations. I look forward to working with you at my new office in the Lincoln Tower on the eighth floor.

MARKET OUTLOOK

Is the Market on the brink of DISASTER?

A lot of great minds are convinced that we are on the edge of a huge financial disaster. Who am I to disagree (see Lesson from Mac, page 3)? To give a brief summary, they argue that the Fed is in a tight spot. If the Fed continues to add liquidity to the system as well as bailing out troubled financial institutions, then it risks the destruction of the dollar due to rising inflation. If the Fed does nothing on the other hand, then the economy will likely falter into a serious recession. It's like giving chemo to a cancer patient. You are poisoning the patient in hopes of killing the disease, which should save the patient's life down the road. However, if you give too much or the patient isn't strong enough, the chemo kills the patient. Right now, the cancer in our economy is a credit crunch combined with a declining real estate market. These markets are vast and they are critical to the overall health of the economy. If you have a decline in a market that constitutes 1/7 of the total U.S. economy, it is going to have a major impact on many other sectors of the economy. If the Fed makes a mistake, we could see more problems emerge.

Siegel on the Federal Funds Market

In this example, the cure is a poisonous medicine called, "let's add liquidity to the market." This is how it works. Jeremy Siegel, the wizard of Wharton (Business School at the University of Pennsylvania) wrote in his book, Stocks for the Long Run, "When the Federal Reserve buys and sells government securities, it influences the amount of reserves of the banking system. There is an active market for these reserves among banks, where billions of dollars are bought and sold each day. This market is called the federal funds market and the interest rate at which these funds are borrowed and lent is called the federal funds rate" (Siegel, 151). In other words, the Federal Reserve buys or sells government securities and money is either added to the system or taken out of the system. Through this activity, the Fed controls the amount of money that works in the economy.

He continues, "If the Fed buys securities, then the supply of reserves is increased and the interest rate on federal funds goes down as banks have ample reserves to lend." This is exactly what is happening now. The Fed is purchasing government securities from the banking institutions, which introduces money into the banking system. When they do this, the increased money supply causes the prices on just about everything in the economy to increase as well. The converse is also true. As the Fed sells government securities, it reduces the liquidity in the system and banks, "...Scramble for the remaining supply" (Siegel, 151).

I know that this stuff is really dry and boring. However, a thorough understanding of the banking system will measurably impact your real estate investment decisions. It will help you see through the media hype and you'll be able to more accurately see the consequences that come from Fed policy decisions on your investments. Based on their current policy, we can conclude that by adding liquidity to the system, the Fed will bolster the economy while risking the rise of inflation. We also know that the Fed dislikes inflation almost as much as economic declines. Therefore, we can expect that the Fed will target inflation by selling government securities as soon as the economy can bear it.

Forecast on Long Term Mortgage Rates

For those of you thinking that a change in Fed policy will bring lower fixed rate mortgages, you may be waiting for quite a while. Remember that Fed action has a direct impact on the economy which becomes apparent in the securities and exchanges markets and that these markets compete with the bond markets for investment dollars. Normally, I would argue that when the Fed sells securities and decreases liquidity, we should expect money to flow into bonds as the Fed tightens the profits that can be made on Wall Street. But this will not be the case this summer.

The reason is because the Fed will only be reversing its strategy once the market is proven to be moving solidly upward. So, the economy will be growing and the Fed will not want to alter this. They will gently target inflation, which means that many investors will move assets to Wall Street to capture profits on stocks that are currently at bargain prices. My forecast is that long term mortgage rates will increase marginally through this summer and it is very unlikely, save a huge unforeseen disaster, that long term mortgage rates will not return to the lows we saw earlier this year.

The Doomsday Myth

When I was in school, I studied the Doomsday Myth. The doomsday scenario is a worst case scenario that is often forecasted by academics and professionals. They get lots of attention with their sensational claims, which is why I think they make them. Unfortunately, these sensational stories gain a lot of traction in the media whose businesses are made on stories of carnage and disaster. For instance, in the 1800s, people in England were absolutely convinced that since the English economy had nearly decimated their forests and simultaneously, the demographics were expanding rapidly at that time, disaster was on the horizon. They were certain that eventually people would not be able to afford housing, as lumber prices skyrocketed. Naturally, they concluded that this crisis would spill into nearly every aspect of the British economy. Of course this did not happen. Most people fail to appreciate the genius of the free market economic system. As prices on lumber increased, builders looked for substitute resources that could accomplish the same thing. Masonry products had been long overlooked in England because they were more expensive when lumber was so readily available and cheap. As trees became exceedingly limited, masonry products quickly became the cheaper resource and the economy naturally shifted direction. There was no crisis because the free market economy is always working to the benefit of consumers with very few exceptions. English builders built houses out of bricks instead of trees and the economy kept on going.

At Texas A&M University, economists studied numerous instances of doomsday scenarios to discover that nearly every doomsday event disappeared quietly into the night. Do you remember concerns that the AIDS virus would bankrupt insurance companies? Do you remember in history when Thomas Malthus proposed that most of the world's population would starve because the population was growing faster than its ability to produce enough food? Do you remember the Japanese (Shouldn't they have taken over the world by now)? Do you remember the S&L scandals and collapse of the 1980's? Does Y2K ring a bell? All of these things sell lots of newspapers on the streets of New York because everyone is terrified and equally fascinated by calamity. But, the reality is that if markets are allowed to function as they normally do, most of these catastrophes are solved by ingenious people motivated by personal gain. The brick makers of England were thrilled to have a product that became the staple of British construction.

Who I am to argue with the brilliant minds of our age? I can't argue that the figures look poor. But I am a historian by hobby and in the past we can clearly see that most predicted disasters never materialized. I am consequently very skeptical of anyone who predicts destruction; save the Lord (he has authority to predict destruction). You have to realize that there are many ingenious people who are at this very moment looking for ways to profit in these difficult times. They will figure it out. Things that were too expensive yesterday are getting cheaper everyday and those alternatives will soon be on the market.

THE RETURN OF SUB-PRIME

For instance, I met with a banker this morning who showed me some sub-prime loan programs that are scheduled to be released on May 1^st. This is huge! For so long, people with troubled credit or poor reserves have been declined by lenders and this has exacerbated the real estate market by decreasing the demand for housing. Now, this bank is positioning itself to fill a void that has been absent from the market and we will see the return of sub-prime loans. They know the numbers and they can see that many sub-prime borrowers are excellent credit risks and they will make a fortune providing a much needed product in the real estate market. An increase in the demand for housing will push real estate up.

REAL ESTATE OUTLOOK

"The worst course an investor can take is to follow the prevailing sentiment about economic activity. This will lead to buying at high prices when times are good and everyone is optimistic, and selling at the low when the recession nears it trough and pessimism prevails. Turning points [in the market] are rarely identified until several months after the peak or trough has been reached. By then, it is far too late to act in the market"

-Jeremy Siegel, Stocks for the Long Run

This is amazing advice and it resonates well with the advice that I have been giving in this newsletter since January of 2008. It is very difficult for even the brightest among us to make solid determinations about the direction that our current business cycle will take. I'm not a fortuneteller. My grandfather taught me a contrarian investor mindset by viewing the prevailing mindset with skepticism. See last month's article on the bandwagon principle. People are getting out of the real estate market in droves as measured by the increasing inventories in our market. Therefore, this is a great time to be getting in because we are definitely in a trough. It is impossible to say if we are at the beginning, middle, or end of the bottom cycle except to say that we are definitely in the bottom of the cycle. Jeremy Siegel wrote that by the time that everyone is certain that we are moving out of the trough, it will be too late to invest. The bargains are available now and it is my opinion that we will look back 6 months from now and we will recognize that the winter and spring months of 2008 were excellent times to have purchased an investment. Time will tell.

Lesson from Mac

Many years ago, my grandfather, Mac, and I were studying a particular stock and he wanted to see how much I had been learning about investing. So, he asked me, "Who's right?" I gave him a perplexed expression that reflected my obvious bewilderment. "I don't understand what you mean," I asked. He responded by telling me that when I purchased this particular stock, I was in effect declaring that I believed the stock would go up. Why else would someone purchase a stock? If you are not selling the stock short, you definitely hope it will increase in value. He continued by telling me that the person on the other side of the transaction believes the stock will go down in price. Would they be selling their positions if they had confidence in the stock? Isn't that an amazing question that we should be continually asking ourselves when we are making investment decisions? "Who's right?"

If we apply this lesson to the current market, ask yourself if you believe the real estate market is going up or going down. Who's right? Who am I to argue with the prevailing thinkers of our time? My contrarian mindset is screaming at me that this is a great time to buy. There are so many people praying that they can dump their real estate holdings and those who have the presence of mind will recognize the amazing opportunity that this presents.

SERAINA AGUAYO

Home Search Season Is Here

Regardless of all the negativity in the media today, people are still buying and selling homes. It seems shocking, because occasionally, after listening to the news, it appears as though NO homes in the NW are selling.

The good news is that the market reports provided by the Regional Multiple Listing Service prove this is just not the case. "Compared with January 2008, closed sales were up 27.6% (1,384 v. 1,085) and pending sales rose 9.9 %( 1,837 v. 1,671)."-RMLS Market Action Report.

Based on my day to day business in this active real estate market, it is apparent that buyers are very active in the market, especially since February 2008.

From a seller's standpoint, there are a few key points to consider that will help get your home SOLD in this "sluggish" market.

• PRICING- First and foremost is this! Buyers won't even spare a passing glance at an overpriced listing. Especially now since short sale and foreclosure listings are at an all time high.
• MARKET SAVVY- Talk to a qualified real estate consultant who can demonstrate the current climate of your real estate market.
• CONDITION- If your house represents an example of "deferred maintenance", plan on letting it sit until you decide to spend the weekend with your paintbrush.
• TIMING- The spring and summer months are the best seasons to market your home.

For buyers my best recommendation is to work with someone who is knowledgeable in the marketplace. Steer clear of "The Real Estate Hobbyist or Part-timer." Outstanding representation in this market is vital to successfully negotiating your real estate transaction. Here are some key points:

• INTERVIEW REALTORS- Look for years of experience, overall knowledge of the real estate market and references.
• EDUCATION- Learn everything you can about the demographics, average days on market (DOM), Active, Pending and Sold listings.
• GET PRE-APPROVED- No seller will take your offer seriously without a lender pre-approval form.
• WRITE DOWN NEEDS & EXPECTATIONS- This is important in the beginning! By giving your Realtor a clear and concise written statement of your needs & expectations, you greatly reduce the possibility of miscommunication down the road. This will prevent anyone telling you, "You never told me that." Keep your written statement on hand to call their bluff.
• SET GOALS- Establish a date in which you would like to get the keys to your new home and plan accordingly (typical close of escrow time period is 30-45 days).
• TAKE ACTION- The time to buy is now!

If you are a home seller or buyer, I wish you well and advice you to take advantage of the tremendous amount of opportunity in the real estate market now.

Good Tidings!

*If you would like a free copy of a home buyer's needs and wants form, please send your request to info@SerainaAguayo.com.

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 Service^TM of Oregon.

STRATEGIES

I've been discussing real estate opportunities at great length these past few months and if you go back to my January newsletter, I proposed that the market would be flat for most of 2008 and that it would start to accelerate towards the end of summer and into the fall. But a financial portfolio would be tremendously weak if it only contained real estate holdings. You must diversify your portfolio, which means that you must also acquire other financial assets. As I study the markets in general, this is also a great time to purchase other financial investments. Just like real estate, you need to carefully study the funds, stocks, or bonds before determining to go forward. Meet with your advisor or advisors to discuss your personal strategy. The real estate markets tend to track well with the financial markets. This makes sense. If businesses are doing well and people are making lots of money, they'll be more inclined to buy houses. My guess is that both the financial markets as well as real estate are going to move upward this year. That means that there are bargains in both the real estate and financial markets to be purchased.

Create a Budget

I would like to start a discussion about how to become more financially independent, which is the ultimate goal of this newsletter. Where does one begin? The very first consideration is defensive strategies to building wealth. Seraina discussed the value of creating a budget in her article last month. This is the very first thing that anyone desiring financial freedom must do. I read the biographies of individuals who have succeeded in building substantial wealth and so far, they all lived by a budget. You have to determine what your expenses are. This will open the door to discovering ways to free up funds that are being wasted or lost. Your budget will automatically create opportunities to increase your standard of living by freeing up more money for the things that you really want or the things that you really want to do. Most people compromise those things for the momentary satisfaction of purchasing something that is quickly forgotten. Your budget will also help you increase your rate of savings. Your savings rate directly impacts the kind of lifestyle you will have when you retire. The more you save now; the more cruises you'll be able to take later in life.

Create a budget this month. My wife and I will work on ours as well and we will look for ways to reduce our overhead so that we will have more money for the better things in life.

REFINANCING UPDATE

With FHA, it is possible to refinance at lower rates and higher loan to value ratios. If you are looking to do a strategic refinance, we can discuss the value of such an action in an appointment. First, we will determine the break even point. This is the point at which the costs of doing the refinance equal the financial savings. If the break even point occurs in a reasonable amount of time and you expect to remain in the house for at least that long, then we can move to the next step to see if there is the possibility of sizeable savings.

The average family in the U.S. allocates 52% of their income to mandatory expenses. These are your mortgage payments, your bills, your food and gas expenditures, etc. Then, the average family allocates 46% of their take home income for lifestyle expenditures. This is the money you spend on clothing, eating out, going to movies, or other fun stuff. These combined expenditures leave only 2% for savings. People will rarely decrease their lifestyle budget in order to increase their savings rate. But what if it were possible to double your savings' rate without taking a hit to your lifestyle? A strategic refinance has the power to do this because it can decrease your mandatory expenses by 2 to 4%. You can then apply those 4 percentage points in savings to both your financial portfolio by 2% (doubling your effective savings rate) and maybe even increasing your lifestyle budget by 2% at the same time. A strategic refinance may be a great method to accelerating your path towards financial independence.

APRIL ACTION STEPS

• If you are planning to buy or refinance your home in the next few months, stay in contact with me to plan the strategy and the timing of your project.
• Create a workable budget and commit to live it.
• If you receive a nice tax refund, use it to build up your liquid reserves.
• Meet with your CPA to figure out how to avoid receiving a tax refund next year. My personal goal is to owe Uncle Sam a few dollars at the end of the year. I don't want to trigger a penalty but just eek by with the absolute minimum amount withheld from my paycheck throughout the year. A tax refund means that you have given the IRS and interest free loan for a year by allowing them to withhold more money than was necessary. It would be better to keep that money in your own pocket each month for your savings and your lifestyle.

All the best,

Dave Smith

Dave Smith is a Mortgage Consultant with Mortgage Express. You can contact him at his office (503) 517-8763 or at his e-mail address, which is dsmith@mtgxps. 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 your 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.