The situation is changing



 Not too long ago, we were in the middle of long, upward-trending market. Real estate values were appreciating steadily and sometimes substantially. Then, suddenly, the situation changed. BAM! The bottom fell out, or the bubble burst, or whatever. Use the analogy of your choice, but virtually overnight we went from a strong sellers’ market past a strong buyers’ market and right into recession where folks couldn’t buy homes no matter how badly they needed or wanted to do so.

That’s where we’ve been for the past couple of years, although we’ve been slowly but surely working our way out. The real estate business is different, but it’s still IN business. New rules are being figured out and experimented with. The credit rules are being eased again and new loan products are being created, allowing more and more folks to buy homes with loans that make sense. Banks and mortgage servicers are figuring out the fine line between dripping foreclosed inventory into the market fast enough to clear the backlog, and flooding the market so much that the nascent recovery is inundated.

Slowly but surely, we are crawling our way out of the depths of the market.

In just the past few days, there have been a few interesting pieces of news slip across my computer screen. First, interest rates are continuing to rise. It is possible that we have seen the bottom, and are moving past it. Second, the number of transactions has increased over last year. Finally, although many (most?) predictors are showing continuing price decreases into 2012, at least one model is showing that some parts of the country might actually see some price increases by the end of 2011.

I’ve already written about the importance of rising interest rates as a factor in determining the true cost of real estate. With rising rates, buyers have a lot of incentive to buy NOW. The more buyers buy, the smaller the inventory, which leads to upward pressure on prices. Add in the potential of rising prices, and the urge to buy now gets stronger still.

Factor all these pieces of information into the equation, and it really does look like we might be able to see a recovery coming ‘round.

When journeying down the long dark road, we must continue on and never give up faith we'll one day reach our destination - no matter how ugly that road appears before the naked eye. – Reed Murphy

The best gift

The holiday season is quickly drawing to a close, and I hope yours has been full of peace, joy, and all the good things you were hoping it would be. I hope you were able to give and receive the gifts you wanted, and that meant something special to you. I especially hope that you were able to give some thought to one of the best gifts you will ever be able to give yourself and your family: your own home.

A home is a place of your own where you can raise your family, share with friends and feel safe and secure. Other benefits for homeowners include better physical health, higher lifetime income, higher student test scores, and lower teen delinquency.

Reduced prices and low interest rates have placed housing affordability at its highest but rates have started inching up in the past few weeks which will directly result in higher payments.

Credit, debt ratios and income are the limiting factors that could be keeping you from taking advantage of these opportunities. Isn't it time you found out where you stand to buy a home?

The benefits of talking with a qualified mortgage officer and pre-approval are without question. It saves time, money and removes the uncertainty of not knowing. The direct benefits include:

•Amount the buyer can borrow - as interest rates rise, the amount decreases

•Looking at the "right" homes - price, size, amenities, location

•Find the best loan - interest rate is tied to credit score; do you qualify for the best rate?

•Uncover credit issues early - time to cure possible problems; 90% of credit reports have errors

•Bargaining power - helps negotiate price, terms and timing

•Close quicker - verifications have been made; takes less time to close

Call me for a recommendation and a list of what you need to share with a loan officer. It may be the best gift you give your family.

Each day comes bearing its own gifts. Untie the ribbons. ~Ruth Ann Schabacker

Buy low, sell high . . . and lose

We all know the drill, don’t we, that the key to success with financial investments is to “buy low and sell high”? So, since the majority of the predictions floating around right now are that real estate prices are going to continue to drop for another 12 to 18 months, we should wait that long before we buy any real estate. Makes perfect sense, doesn’t it?

Well, not necessarily, and especially with real estate.

The important thing to keep in mind here is that there is the difference between “price” and “cost.” For an investment like real estate, which is usually leveraged with a mortgage, you need to be more concerned with the cost than the price. This is such an important concept that lenders are required to disclose the total cost to the buyer – as accurately as possible – and give the buyer the opportunity to back out of the deal. If it turns out that the estimated cost was not accurate enough, lenders are now required to recalculate it and disclose it again.

So what is the difference between price and cost? Simply put, the price of the house is only part of the cost. Over and above the price, you have to pay for a lot of other stuff. In real estate, most of the “other stuff” is interest on the loan that was taken out to pay for the house. There are other pieces and parts included in “cost,” but the interest on the loan is the most important part.

The thing about interest is that little changes in the rate can have dramatic effects on the true cost of the house. Let’s imagine you’re buying a new home, and the 30-year loan will be for $350,000. If the interest rate is 4.5%, the principal and interest payment will be $1,773.40. If the interest rate increases only half a percentage point to 5%, the payment will be $1,878.88. An increase of only half a percentage point will cost you over $100 every month for the next 30 years.

Now here’s the thing: interest rates are rising now.

As of today, average 30-year mortgage rates are over two-tenths of a point higher than they were last week. In other words, if you closed that $350,000 loan today at the average rate (4.83%), your payments would be $1,842.68, or $46.33 higher than if you closed at last week’s rate (4.61%, with a payment of $1,796.35).

But what about the falling price of the house? Won’t it offset the increase in interest? Only if the decrease in value is substantial. To expand on that last example, the price of the home would have to fall to about $341,200 to offset that rate increase of half a point. In other words, the price would have to fall more than 2.5% in the same week to come out even with the increase in the interest rate.

Real estate values are not falling that fast, and are not expected to in the coming months. Most predictions I’ve seen are in the range of 5 – 10 % spread over the next 12 months or so, but the falling prices are not nearly as important as the rising interest rates.

If you are in the market for a new home, it is time to make a decision. Choose wisely.

The essence of strategy is choosing what not to do. -- Michael Porter