Interest Rates Rise!

After what seemed last endless stability of our interest rates as they hovered at and just below 5%, the last two days have seen a rise in rates.  The Portland real estate market was loving those interest rates and coupled with the first-time buyer tax credit, we saw an increase in sales in the lower end of our market. 

What’s caused this to happen?  Inflation and debt fears by major investors have made the bond market nervous.  On Wednesday, the bond market was down 159.37 bps (basis points).  This is the bond equivalent to a 500+pt drop in the stock market.  Typically, the bond market fluctuates anywhere from 0-15 bps on an average day.  If the market loses 12+ bps, you will see mortgage rates rise slightly.  Rates started moving up that morning and increased 0.625%.  They increased again today.  Are the days in the 4%’s gone?  Nobody knows for sure.  But, we do know that low rates boost activity in the housing sector.  And, we definitely know that “interest rates trump price” in the housing market (see my earlier blog on “To Buy or Not to Buy”).

To Help a Borrower Short on Cash

Moving forward, here’s a few ways to help a borrower short on cash:

1)      ♥  When they buy, they will skip a month’s payment, keeping cash in pocket.  For example, close in June and first payment won’t be due until August.

2)     ♥   If they are a first-timer, they will be able to write off mortgage interest on their taxes (big write-off, consult your CPA).  They should be able to raise their payroll exemptions and have less taxes taken out of paycheck, putting more in their pocket right now.

3)     ♥  $8000 tax credit for most will mean no (or smaller) tax bill next April.  Read number two about raising exemptions and getting a few hundred/month benefit right now.

 4)      ♥  Gifts from mom & dad.  Many parents or relatives will help a family member get into a home.  And, there are ways to work it out to keep everyone involved in the deal happy.  Call me for details and ideas.

A Couple of Tips to Insure a Good Move!

For many families, moving can be a very stressful event.  Over the years, I’ve watched a lot families in the Portland Oregon area endure the moving process. Besides coming to terms with your new life in a new home, you and your family will also need to think about moving day.  Too often, families get caught up in various activities before moving day and fail to make the proper preparations.  If you and your family are preparing to move, try to stay calm (easier said than done) and organized (huhhhh???) throughout the process.

Make a detailed checklist

It can be difficult to keep track of all the tasks associated with moving.  Just try to organize your days leading up to and beyond moving day.  If you have a reminder of what needs to be done and where you need to be, you are more likely to have a smooth moving day.  I, personally, love “lists” and “lists of lists”, but that’s another blog.

Prepare for day 1

Prior to packing all of your boxes, you may want to assemble one box of neccessities for the whole family.  As most families finish unpacking thier trucks late in the evening, it’s just a hassle to open several boxes to find pillows and toothbrushes.  So place anything you might need in the first 24 hours in a separate box, mark it clearly and keep it accessible during the move.  Also, if you have any valuable or irreplaceable items – such as jewelry and personal keepsakes – you should try to wrap the items well and keep them with you while moving.

Pack manageable boxes, label every box, de-clutter as you go, and get the family involved.

Your Day 1 Box:

should include:  personal toiletries, soap, toilet paper, snacks & drinks, flashlight, screwdriver, pliers, hammer, set of plastic plates and cutlery, paper towels or napkins, notepads & pens, box knife.  I’m sure there’s more.  I’m still trying to block out my last move.

Declining Prices vs Interest Rates: When to Buy!

As I’ve often said, attempting to “time” any market (stocks, real estate, Portland weather) is a “fool’s folly”!  So, it’s a tough decision.  If you’re going to buy and hold, I still believe real estate is one of the best investments. If you are buying and selling in the same market, you will “give up” on the selling side but will “get” on the buying side, so you’re probably “even Steven”. 

I always want to cut to the chase with some figures. The following table shows the monthly payment for each loan amount and interest rate.  A buyer today at 5% interest borrowing $100,000 has a monthly principle and interest payment of $536.82.  If prices deline 5% (and the loan amount does also) and interest rates rise just 1/2 of 1%, then the monthly payment remains almost the same ($539.40).

So if rates go up just 1% to 6%, then prices must drop at least 10% for that same buyer to qualify for the same monthly payment.  Check out the link below:

interestratevspricing0001

The point being is that if you believe that much of the price decline has already happened and you anticipate interest rate increases…and you should.  Why?  Because interest rates are the lowest in recorded history.  But, also at some point, the Fed is going to have to start recouping some of the intense borrowing that has happened to attempt to “jump-start” our present economic slump.  I definitely do not pretend to have the answers, but do have lots of questions.  All the same, the numbers “speak” to me.

The Power of Leveraging Other People’s Money!

Just FYI:  Let’s say that a person is considering a $250,000 home in our fabulous greater metro area of Portland, Oregon using an FHA loan (only a couple of years ago, one might’ve laughed at the thought!!).  The downpayment will be $8,750.  Let’s assume that the home appreciates at a conservative 3% for the next 7 years, the “Future Value” of the home would be $308,000.  If the buyer obtained a 30 year mortgage with an interest rate of 5%, with the normal amortization that takes place, the $8,750 down payment would grow to $96,000 in equity for the homeowner.

That’s over 10 times the original investment, and it’s all because of leverage:  using other people’s money!!

Just compare that to what the $8,750 would be worth if the purchaser had bought a CD (certificate of deposit through a bank) at 4% (hard, if not impossible, to get right now…let me know if you know of anything close to 4%), it would have a future value of $11,572.  At a modest 3% appreciation, the future value of the down payment on the home is worth over eight times more…and that doesn’t even take into consideration the fact that the owner got to live in the home and enjoy it with tax benefits during that time.

The inventory of homes is high, giving buyers a lot of choice.  Interest rates are at historical lows, giving buyers more purchasing power.  The “First-Time Buyer Tax Credit” is a gift, giving 1st-time buyers a boost (which, hopefully, will “trickle up” throught the home-buying ranks).  Just sharing some positive news about real estate!!!

Where’s the “Beef”? Or Where’s the “Relief”?

I understand….no, actually, I really DON’T understand the problem or the incredible complexity of the situation with banks vs the homeowners being forced into foreclosure. I do know there’s no ONE person or institution or profession to blame. And, I know this is definitely affecting the property values and the ability to sell for Portland, Oregon homeowners. The banks averted their eyes and allowed many people who, plainly and simply, were not qualified to receive the financing the lending institutions allowed. There were plenty of mortgage brokers and real estate brokers who participated in this fantasy. There were some buyers who did not take personal responsibility for own financial well-being. There were some buyers who were fraudulently mislead. All of this is a part of the whole truth. I have to say that I didn’t personally witness much of it in my business. But, all I know is that the fall-out affects everyone, whether you live in Portland or elsewhere. As goes the housing market, goes the rest of the economy. So, without some relief for homeowners, there will be little relief for the rest of the economic market. I was dismayed to see that legislation that would have allowed bankruptcy judges to modify mortgages died in the Senate last week, handing the Obama administration a significant defeat in its plans to mitigate the foreclosure crisis. I know there has to be some middle ground. See this article from the Business Digest of the online Washington Post:  http://bit.ly/HPvEc