I just listened to a great call with an eye towards what we can expect in the year 2010 in the housing and rate market.  A great point was brought up about the cost of waiting.  Right now the government has pushed some major incentives into the market.  In December of 2008 the government announced a purchasing program that pushed rates roughly 1% lower than where they were the previous month, and had been for almost a year.

The Government is also allowing for a TRUE TAX CREDIT of $8000 for first time home buyers that is set to expire in April.  These 2 things can make a huge difference for a first time home buyer.  If you wait to buy and rates go up the roughly 1% that most experts are forecasting, you would be looking at a cost of about 5% of your loan amount upfront to buy down your mortgage rate back down to current levels, on a $200,000 loan that is $10,000.  Add to that the loss of the tax rebate, that is nearly $20,000, or about 10% of the purchase amount.  A more impressive number is the lifetime cost of a mortgage that is 1% higher than the available rate today.  The 30 year cost of a $200,000 loan with a 1% rate increase is $45,000.

This is a call to action, if you are debating buying your first house, or moving up to a larger home, please consider the cost of waiting.

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Tags: buyer, tax credit, thoughts

I had a client the other day ask me about the real estate market and waiting for the bottom.  In this case he was hoping for real estate prices to come down so he could buy at a lower price.  I told him that was a great idea, but it is really tough to time the market and that many professionals get that type of thing wrong, so I would be wary of trying.  In his case he was looking for a $200,000 house, and a 5% price reduction which represented a $10,000 difference in the cost of the house.  We agreed that was a lot of money.  However, I told him that if the bottom of the market was already here, and we just didn’t recognize it yet, waiting longer could cost him a bunch more.

I explained that once the housing market bottoms and we see the market for homes stabilize, demand will increase and we will probably see a significant amount of buyers since plenty of people have had the same thoughts about waiting for the market to bottom.  Because of that we could see prices rise quickly.  This would actually not be the most costly part of the market shift. As things get better, the government will no longer have the incentive to keep interest rates low, and they will stop sinking hundreds of billions of dollars into the Mortgage Backed Securities market (MBS-these are the assets that are made when banks pool the mortgages that you and I pay every month)

Once the government stops funneling money into these MBS markets, interest rates will rise, and even if they only go back to levels just before the government stepped in that would represent a 1.5% increase in interest rates from where we are now.  FYI, that initial interest rate drop from the mid 6% range down to the mid to high 4% range happened in less than 1 week in Dec. 2008.

So back to my client and his $10,000 price drop.  We decided that $10,000 was a lot of money.  However, if the interest rate on his purchase goes up 1.5% from where we are now to when he decides to make the purchase (assuming he can still get the house for the $200,000 list price) he could expect about a $64,000 increase in the interest cost over the life of the loan.  Now that is a lot of money!

If the state of the economy is teaching us anything, it is that you can’t just look at short-term benefits.  Sure, it is great to get what you want today, but you also have to keep an eye on what it will cost you tomorrow.

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I was talking with a customer yesterday and they asked me what I thought about the 700 Billion dollar “bail out” of Wall Street using tax payer dollars. Well, I said, I am not an economist, but I think it is a good deal for tax payers. The response from my client was a gasp of surprise. A good deal for tax payers? How could funneling $700 billion to Wall Street be a good deal for us? Well, I said, it depends on how the money is spent. These funds are not designed to just be handed over. The government, thus you and I are buying mortgages from the banks. These mortgages, while underperforming and in many cases are for an amount over the current market value of the property, are backed by REAL property. A house, or condo, a real asset that has value. The governments plan is to buy these mortgages at .40 to .50 cents on the dollar of what the face value is. So lets look at the math really quick. The bank did a mortgage at 95% of the value of a house worth $300,000, so they now have a mortgage at $285,000. Economy is bad, house values decline, buyer can’t pay the mortgage…Now we have a bad mortgage debt that is really hurting the bank and their ability to raise new capital. The government comes in and offers the bank .50 on the dollar for the $285,000 note, or $142,500. Lets say the house has declined 30% from the original value, that means it is still worth $210,000.  The difference is that the Government has a much lower cost basis than the original lender did, thus they are actually in a significantly improved position compared to the bank. 

I also see it possible for the government to renegotiate the rate on these purchased notes, to help the struggling homeowner keep their home. A worse case scenario, the government could force foreclose and easily recoup their cost of purchasing the mortgage.

With that explanation, my client felt as though we actually might be making an investment rather than bailing out the banks that have made bad credit decisions for the past 4-5 years. There is a lot of details yet to be ironed out, but I do believe that this “investment program” was needed, or we could have been facing a far higher price in the very near future.     

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Water cooler conversations, the media and your pocketbook make it hard to escape the fact the economy is affecting personal finances. Grocery prices are climbing, gas and oil are near all time high and goods and services have increased across the board. If these concerns are on your mind you are like most Americans.

There is a bright spot on the horizon. In the past few days, the U.S. government has taken over mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). The rescue puts the companies under the control of their regulator, the Federal Housing Finance Agency, and includes a plan for the Treasury to purchase these mortgage bonds as well as the firms’ senior preferred stock.

The government’s plan should alleviate growing concerns about the financial sector in general now that two of the most troubled companies enjoy the explicit backing of the U.S. government. Fannie Mae and Freddie Mac own or guarantee more than five trillion dollars in mortgages and play an essential role in supporting the U.S. housing market. This will provide a sizable boost to the market for mortgage bonds guaranteed by Fannie Mae and Freddie Mac.

In a nutshell, this is a positive step meant to stabilize the mortgage industry and in turn the housing market – and its working! Interest rates – already great – have gone down even more and the housing market showing signs of improving! More good news – the Buyers Market is prevailing. If you are considering a move or buying a second home or investment property, there is plenty of available inventory and the low interest rates mean you will either have a lower payment or qualify for more home – either way you win! With these changes, it might be a good time analyze your home mortgage. The recent events may put you in a position to lower your mortgage interest rate, reduce the amount of your monthly mortgage payments.

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