Real Estate Enthusiasts and Friends,
I love being right! This is not a moment of vanity, but I really stuck my neck out by forecasting that the market would gently increase this year contrary to what most media commentators and pundits were saying. As I studied the data, it did not seem likely that the market was on the verge of collapse or that it was headed down in any significant measure. The doomsday myth is still just a myth. Store this memory away because there will be many more times when people will be predicting the end of the world and this experience should serve to remind you to be skeptical of such claims. Do not assume that you are immune to down cycles (that would be foolish), but rather that there are always solutions to problems and alternative courses of action!
With that being said, be careful of arrogance because market movement will always create economic winners and losers. This lesson was repeated numerous times in my studies at U.C. Riverside. In any economic cycle, some individuals will benefit and some will not! There were lots of losers in this last round and if you are not properly aware, you can find yourself in trouble. This is the primary purpose of this newsletter: to help you be on your toes, so that you will find yourself in the winners' circle. That's where I'll be.
MARKET OUTLOOK
For those of you who took my advice and purchased a property in the past few months, kudos to you! Your purchase timing was as perfect as it gets. You bought an appreciating asset on sale (some prices were discounted as much as 10% off) and at the same time, you secured your investment when interest rates happened to be near their cyclical lows. One of my clients did so well that when his new home was appraised, it was valued at 40,000 dollars over his negotiated purchase price. That's not bad. It is important to note that this tremendous windfall occurred because he was also working with a top notched real estate agent. In order to get the really good deals, you have to have a great negotiator on your team.
The good news is that it is not over. There are still lots of great deals out there and since we are still in a buyer's market, you have the potential of winning some great assets at great prices. Interest Rates are starting to creep up but they are still very low compared with rates over the past year. Depending on your particular scenario and your personal credit worthiness, you could expect rates in the low 6's. The graph at the side is from Bankrate.com and for 30 year fixed rate mortgages in the state of Oregon; we are seeing rates averaging right around 6.0%.
Why are interest rates so thoroughly studied by academics and analysts? Basically, interest is the cost of borrowing money and it is closely tied to risk. The higher the risk of being paid back, the more that a lender is going to charge a borrower for that money. For real estate investors like us, the rate of interest can make a huge impact on the equity we retain at the end of the project as well as the monthly outflow of cash. Similarly, one must carefully consider the same investment consequences of interest rates on the purchase of a primary residence.
Mortgage Backed Securities
In past issues, I have discussed at great length how the bond market works in opposition to the stock market. When times are good, money leaves the bond market and flows into the stock market due to higher returns on investment. Conversely, when times are tough on Wall Street, money flows back to the safety of the bond market. This ebb and flow of money is the primary driver of interest rates.
So, you are a bank. People invest their savings in your institution because you offer them a safe and a small return to store their cash with you. You want to make money on their deposits, so you need to sell that money. You write loans or bonds. As it happens, times are tough on Wall Street and lots of money is flowing into your institution. Yippie! But remember that lots of money is also flowing into your competitors' institutions as well. They are also trying to do the same thing you are and everyone is competing to sell their money. If you want to sell more money, you have to attract more borrowers or people who will buy your money. How are you going to attract borrowers if your rates are the highest in town? So, you cut back rates to attract more borrowers. The opposite is also true.
At the same time, you may be employing people to help you sell your money and you will offer them incentives to do so. The graph at the right illustrates this very effectively as it shows the pricing trend for Mortgage Backed Securities for the past 45 days. The 100 price point represents a par price for the market. If a loan is sold for more than 100, the trader makes a bonus and if it is sold below 100, the price of the bond comes with an additional cost. So, this graph really tells us what is going on inside the lending institutions themselves. Trading above 100 indicates that lenders have a plentiful supply of cash and below 100; their supply is decreasing.
What does this mean to you? Right now, cash in moving back to Wall Street because the market is starting to pick up. Lenders are still issuing loans but because they don't have to be as competitive, they can charge more for their money. Hence, rates are also going up. But, the good news is that we have been on a two week cycle from peak to peak. As money flows back, the competition heats up and rates come down. As your mortgage planner, I study this activity on a daily basis so that I can make accurate determinations on the timing of your projects. Even though I stay on top of this, I still want you to be aware of what I see in the market so that you will be able to make sound financial decisions.
New Alert on Identity Theft!
I was listening to the Clark Howard show on KPAM 860 last Friday and he spoke fervently about a new form of identity theft, which is basically unpreventable. I was floored when I heard what these innovative thieves are doing. Fortunately, they haven't hit anyone in Oregon yet, but this has been going on in California, Texas, Virginia, and several other high population areas. It is only a matter of time until someone here does it. Clark Howard even said that it was a miracle that the Secret Service even caught onto this. They arrested 4 people in Southern California in connection with other fraudulent crimes and in the process; they stumbled across this latest scam.
What the thieves do is go into places where people swipe their credit and debit cards to pay for products or services. Then they distract the clerks and with some slight of hand, they add an electronic device into the card reader itself. You come along and swipe your card to buy something and while your transaction is taking place, all of the information contained on your magnetic strip has been covertly transmitted to a thief nearby. Within an hour, your bank account is emptied or your credit card is maxed out. Clark Howard was explaining how there is not a real way to prevent this other than using cash for all of your purchases.
The problem is sorting it out after the theft has occurred. With credit cards, you will be able to get a credit back from the company once you catch it and report it. He explained that you have 60 days to report a wrongful credit to your bill. If you pay your credit card bills without reviewing each item carefully, you run the risk of paying for fraudulent transactions. If don't catch it for several months, you are too late and also responsible for that debt. If you use credit cards, be certain to review your statement each month and if there are fraudulent transactions, report them immediately. You should be able to put your credit back together before significant damage has occurred to your credit and your finances. If you don't check your statements, you may end up with some major problems.
The real danger is to your bank account. For all practical purposes, the thieves have just made a clone of your debit card. When you call up the bank to report the fraudulent activity, the bank is going to say that it was you who used your card. From their perspective, your card was swiped, a pin was entered, and the transaction totally looked like it was you who withdrew the funds from your account. You are going to have a devil of a time trying to get it sorted out. The reality is that if you prefer to use electronic forms of payment, you are better to use your credit cards because recovering from the theft will be a lot easier. You would also be wise to use credit cards with small limits for everyday spending.
As it turns out, I received an e-mail from a really good friend who sent out a great article on identity theft. Here are some great pointers that I wanted to pass along to you.
The alert requires any company checking your credit to contact you by phone to authorize new credit. This should prevent a great deal of damage to your credit. After a theft or fraud, you will want to check your credit on a regular basis to make certain that your credit worthiness remains in tact. Here are the numbers for the following credit and social security institutions.
Lesson from Mac
I was having a conversation with my Father in Law a few weeks ago about defensive driving. I have noticed on my long trek into work that Highway 30 through Columbia County provides an unrelenting series of auto accidents; some more spectacular than others. I don't know if you do this, but I find myself asking this question every time I pass a wreck, "How did they manage to do that?" My Father and I were discussing the importance of leaving some extra space between cars and paying attention to the flow of traffic and in so doing, you have wiggle room to avoid an accident if something happens that is unexpected. It suddenly reminded me about something my Grandfather used to tell me; ALWAYS THINK AHEAD!
Since Mac was a Navy pilot in combat and he was in harm's way, he spent a great deal of time thinking forward about things that might happen, so that he had a way out or around the danger. One tragic example of this came when he was a test pilot at China Lake in Southern California. The Navy was designing and testing a new rocket named "Tiny Tim" that was capable of slamming through a concrete fortification. The picture at the right is an SB2C-4 Helldiver, which the Navy used in the test firing of this rocket. It was a big rocket for the time and the way that the engineers set up the launching sequence really concerned my Grandfather. It was designed to drop a few yards before the rocket engine would arm and ignite. My Grandfather thought ahead of all the possible dangers and he asked the Navy why there were not any protections in place to prevent an early ignition. He suggested some sort of physical arming device that would ensure a safe launch. At this, he received a lot of complaining and nay saying and he heard a lot of things like, "That would never happen!" Does that sound familiar?
Anyways, Mac firmly declined to fly the mission on safety grounds and the Navy asked his best friend to fly it in his stead. Even against my Grandfather's concerns, Jack flew the mission. Sadly, on August 21, 1944 my Grandfather's concerns were warranted and his prophetic forecast ended in tragedy. Jack dropped the missile on a dive and as Mac foresaw, it ignited early blowing one of his outboard elevator tabs into a fixed position, which kept Jack's airplane in a dive. A few moments later, Jack's Helldiver crashed and he was instantly killed. If you type China Lake into Wikipedia, you'll see that the airfield is named Armitage Field in honor of my Grandfather's friend.
My Grandfather used this story on several occasions to remind me to always be thinking ahead in order to avoid danger. In the case of the financial world, anything is ALWAYS possible! Never forget that. It is always possible that the Fed will go crazy fighting inflation as Chairman Paul Volcker did in the 1980's. I don't believe that this is likely, but it is always possible. It doesn't matter at all what your personal situation is, you should always pre-determine a solid strategy in the event that something unexpected occurs. Be prepared!
It doesn't matter if you have lots of wealth or you are just starting out with very little. What are you going to do if you lose your job? What are going to do if the market falls apart and you have a rising adjustable? What are you going to do if you are injured and lose your ability to work? What are you going to do? There are many such questions that you can and should ask yourself. Unfortunately, most people go blissfully along in life without a contingency plan. This does not mean that you should live life in constant fear of the unexpected. Simply, we should look forward to identify possible dangers and then we can create effective plans to avoid or mitigate them. Look ahead and make sure that you are prepared!
STRATEGIES
The best strategy to avoid financial pitfalls is to always have a backup. For the most part, this is overcome by possessing financial reserves. If you lose your job or something happens, having money in the bank will help you keep the bills paid and the electricity on while you scramble to figure out your next move. It will give you time to get your house sold if that becomes necessary. Furthermore, if you purchased your home correctly, your odds of earning solid appreciation are much greater and you will be in a better position to dump your house if you become pressed to do so. If your loan to value is around 85% or less, there should be enough equity that a quick sale dump is possible. This is where most people went wrong. Because they didn't have enough room in their loans, they could not unload their properties as their funds dwindled and they were forced to simply surrender their home to the bank.
Strangely though, I have seen some sellers act in a completely irrational fashion. Seraina and I just came across a situation in which the sellers hung onto the dream of getting some cash out of their sale. Instead of lowering their price to move the property, they held the property through the foreclosure process. In lieu of lowering the price and walking away, they still walked away, but with a foreclosure on their record, which will remain with them for 7 years. Have a backup plan.
If you don't have the right insurance safeguards in place, you are asking for it. I recommend that all my clients and especially those with family members acquire the right amount of insurance; both life and disability. Spend 10 minutes with your loved ones this month and discuss how the bills would get paid if the primary wage earner happened to get into a serious accident on the way home. Pretty quickly you would see that you are probably not prepared. Most people aren't. This would be a great month ever to carefully consider your escape plans and create a strategy to be properly prepared for tough times. If you need some counsel, call me to set up an appointment and I'll work with you to create a strategy.
REAL ESTATE OUTLOOK
The real estate market is still moving upwards in most communities within the Portland Metropolitan area. There are still pockets that are slowing and some are even negative, but on the whole the Portland market is up. Most of the professionals that I talk with all agree that business is increasing at a healthy pace and their schedules are definitely filling up. As I mentioned in the first paragraph, this is still a strong buying opportunity to acquire new properties in most areas. For the best profits, you may be advised to look at the markets that are currently down. Not only are you more likely to secure better terms on your acquisitions, but you will save money in the process.
Build Your Dream House
Another avenue that every one of you should consider is building your own home. I have done this myself and I personally understand the value that comes from building versus buying retail. Our home in St. Helens only cost $250,000 including land and the construction of a 3,300 square foot Kentucky Colonial. The last time it was appraised, it was valued at $450,000. Even if the real estate market cuts the equity in our home a bit, we still made really good money on our investment. At $450,000, we enjoyed an 80% return on investment in a 5 year period of time. Honestly, this has been one of the wisest investments I have ever made. I believe in home construction and if you are up to the challenge, you will be so glad you did it.
I have begun working with a building company that offers the kind of service that one would hope to find but rarely does. David and Elizabeth Wilkening run a company named Craftbuilt Fine Homes and they are amazing to work with as well as being completely transparent in the services and costs of your construction project. Unlike most builders who pad the construction budget by adding profit to the cost of materials, fixtures, and labor; the Wilkenings charge a flat fee for their services and ALL of the construction costs are truly at cost. You get to decide which sub-contractors you will be using in addition to every other aspect of the project. You will receive invoices and receipts ensuring that you will literally know what it cost you to build your home. I admire and respect this approach a lot and I do not have any reservations referring my construction clients to them.
As I have discussed the possibility of home construction with several of my clients, I have been amazed that most people seem to think that building your own house is either a crazy nightmare or out of their reach. The reality is that it is very possible to build your own home. The only challenge is that you will need to have good credit and some decent financial reserves. If this is something that you possess or could possess in the future, we would like to extend a special invitation to you to meet the Wilkenings and learn about how you can build your home the right way the first time around.
Seminar on Home Construction
Seraina and I are hosting a home construction seminar on June 26th at the Lincoln Tower next to Washington Square Mall beginning at 6:30 in the evening. David and Elizabeth will come and talk about the construction industry as well as their unique approach. They will discuss a couple of scenarios in which their clients were pleasantly surprised to discover that there was a significant amount of equity, naturally built into their homes at completion of those projects. How would you like to be $50,000 wealthier at the end of a home purchase? This is a real possibility when you build your own home. I would like to invite you to attend our event if have ever dreamt of building your own home. If you haven't, I still think you should come because this is an option that is worth learning about as you move forward. Come and learn how affordable and easy it can be. David and Elizabeth will be available for your questions and you will be glad you came. We look forward to seeing you there. Please call me to reserve your seat!
Real Estate Statistics through April 2008
Inventory has increased to 10.3 months, which brings it level with February numbers. I was disappointed to see this, but it makes perfect sense and it definitely follows the trend of the previous two years. As the summer months approach, many people who have been waiting to place their homes for sale until there are more buyers out, suddenly jump in. The biggest question that will truly determine the direction of this market will be whether or not the average trend line will continue on its upward course or will we start to see it begin to level. The National Association of Realtors is expecting 2008 to land in one of the top 5 years for most houses sold, which leads me to believe that we should start
| Area Report | ||||
| Rank | Area | Appreciation | Pending Sales | Average Sales Price |
| Top 3 | ||||
| 1 | North Portland | 7.7% | -22.4% | 274,800 |
| 2 | Lake Oswego/West Linn | 7.0% | -44.6% | 552,800 |
| 3 | Northeast Portland | 6.7% | -35.2% | 316,400 |
| Worst 3 | ||||
| 1 | Gresham/Troutdale | 0.4% | -36.3% | 257,900 |
| 2 | Mt. Hood/Gvt Camp | -5.2% | -12.5% | 261,300 |
| 3 | Milwaukie/Clackamas | -5.9% | -34.6% | 339,500 |
to see this trend peaking. This trend will become more evident as the summer progresses. The important point is that we are still seeing appreciation continue to grow in many areas.
As you can see on the area report graph, North Portland is doing the best in the area at 7.7% appreciation. Pending sales are certainly down and compared with other townships, North Portland is off by the least. It is not really surprising to me that Government Camp is not doing that well since it is primarily a tourist destination. In tough times, tourism always takes a beating. I was surprised to see that Milwaukie and Clackamas are doing as poorly as they are. You can see that the median home price is closest in value to homes in Lake Oswego but without the prestige. (That pretty much sums it up!) This could be an indicator that home values increased in this area at an accelerated rate and now they are coming back down to reality.
Due to my contrarian mindset, I would suggest that investors focus on these depressed areas in order to find the best deals. Clearly, sellers will be more motivated in areas that are getting hit harder. However, remember that good investments will be found in each of these areas and that area appreciation is only a function of what is going on in general. It is always good to know these figures, because it will give you a snapshot of the market activity in those different locales.
SERAINA AGUAYO
There is so much more to relocation and the purchase of "Real Estate" than interest rates, rate locks, investment capital, brokerage fees, home-inspections and appraisals. Last week, I spent some time with Dave Smith conversing with neighbors in the North Portland area and it really opened our eyes to a very significant neighborhood transformation that has really picked up in the last 5 to 7 years. Gentrification is a phenomenon that is changing the face of Old Portland Homes and like all changes; it brings the good and the bad.
The effect of this dramatic transformation is what is known as gentrification. According to Wikipedia, "gentrification is a number of processes of change in demographics, land uses and building conditions in an area accompanied by rapid increase in a neighborhoods property prices and influx of investment and physical remodeling and renovation."
At a glance, areas such as Piedmont, Irvington, Alberta, and Sellwood are radically changing shape. Take a stroll down any of these characteristic neighborhoods and you will immediately notice many home renovations, in fill developments, and many projects aimed at improving "curb appeal". Beyond the colonial columns, white picket fences and arborvitaes, there is a great deal of history and those homes can still remember the sounds of families playing and living together. On the breeze of the old maples and dogwoods, one can hear the whispers of life long since past. Gentrification changes this and builds new memories for the world of tomorrow.
One of the primary results of gentrification is a shift in the demographics of a neighborhood. As properties are improved and prices increase, lower-income residents can no longer afford to buy in these areas. Another consequence is that an increase in property values results in an increase in property taxes. Residents, who find themselves unwilling or unable to pay the difference, typically sell or even transfer the difference to their tenants by increasing rents. So, gentrification usually moves lower-income residents out of a neighborhood. For better or for worse, this is a natural result of the general improvement of the neighborhood.
There are many people who are very un-happy about gentrification. We spoke with one member of the community who felt guilty for contributing to the renovation of her community. She said, "I have seen good and bad come of this. It is just shocking for me to see a house that 10 years ago sold for $100,000.00 and recently within the last month I watched it go for over $600,000.00." Yes, it is true that if you build up the value of the community, prices will increase as a result. It's also true that the increased prices will shut out certain demographic groups. These are tough issues and there isn't an easy answer.
On the other hand, there are also many wonderful results that naturally come from gentrification. As a native Oregonian, I have many memories of the North East and North Portland areas and I remember numerous homes that were poorly maintained and in terrible shape. Many of the homes in these communities were run-down, neglected and abused. My family and I always admired the 3 story, 5,000 square feet historic Craftsman style homes (circa 1900) and the grandeur of historic colonials with their enormous columns boasting incredibly ornate detail. At the same time, we were usually admiring these gems for their potential, because so many of them had fallen to the wayside. To have such a unique piece of history slide into disrepair is such a shame. Although gentrification alters the face of history, neglect can have a worse impact on both the value and the history of those old neighborhoods.
A positive aspect of gentrification is that old, run down neighborhoods are making a huge comeback. Remodelers and renovators are buying some of these homes and they are bringing them up to modern standards while maintaining their original charm and character. Sometimes this doesn't happen and a total demolition occurs. But on the whole, these neighborhoods are now becoming very desirable places to live and this is resulting in the revitalization and renewed vigor of these communities.
What is attracting so many renovators and remodelers to these areas? Most of them are admired for their character, developed neighborhoods, mature growth, history, and charm. Take Piedmont for example, which is located on the East side of the Willamette River in the N and NE of Portland. The boundaries for Piedmont include Interstate 5, Northeast Columbia Boulevard, Northeast Martin Luther King Jr. Boulevard and North Ainsworth Street. Within Piedmont's general boundaries, it includes approximately 616 acres, 2,518 residences and 6,427 residents. Piedmont is highly sought after because it is an "Ideal Urban Village" and it is widely praised for its easy access to popular neighborhoods like Kenton, Boise, Alberta, Irvington, Mississippi and Humboldt. Piedmont, which literally means "foot of the mountain", was established in 1895 as an upper middle-class suburb (it's not a suburb anymore) and it was previously known as "The Emerald and Portland's Evergreen Suburb."
Gentrification is renewing and reenergizing "Historic Piedmont" and this is a substantial improvement to the devolution that has been occurring there over the past 30 to 50 years. Just as Dave spoke about waves in real estate pricing; Piedmont is experiencing a tremendous increase in both status and popularity. Within the last 5-7 years, Piedmont has become one of the highest appreciating cities of all surrounding Portland neighborhoods. Advancing from "starter home" to "fixer-upper" and now to "established" categories; the neighborhood has made a major transformation. Some properties in the Piedmont area have appreciated at an astonishing rate of 80% or greater in the past 5 years. This is one of the reasons that I write these articles. I want my clients to be highly informed about the pockets of real estate that show the most promise.
Personally, and I believe Dave would agree, I am delighted with the renovation of these Portland neighborhoods and even though there is a lot of controversy surrounding this topic, this process is better for the homes, the neighborhoods, and the history.
Bear with me as I make a case for gentrification because there are so many positive outcomes. I concede that this process is changing the nature of the neighborhoods that are found in North and Northeast Portland, but these changes have revitalized the community atmosphere. This is a testimony to property rights and the freedom of land ownership. This progression has taken place freely and gradually as more and more purchasers began to take an interest in the abundance and diversity that these neighborhoods boast. There is also a profound sense of community that seems to be lacking in the some suburban neighborhoods. We were talking with local residents in the Alameda and Piedmont areas and they were happy to tell us about their block parties, community barbeques, neighborhood awareness and the like.
It will be interesting to learn more about these neighborhoods and to further investigate the development and effects of gentrification. I highly recommend these communities to my clients because there is still a tremendous amount of untapped potential. I will continue to work in this area and I look forward to speaking with more community members who are usually kind enough to share their intriguing stories with me. This is perhaps the greatest thing about these neighborhoods; you are not only living in history but you become part of it.
Seraina Aguayo, Broker, Realtor, GRI
John L. Scott/Sandy
(971) 322-9878
If you would like more market data on your specific market area or would like a FREE comparable market analysis, please contact me at greshamagent@johnlscott.com or Dave Smith. *Data gathered from the National Association of Realtors® and the Regional Multiple Listing ServiceTM of Oregon.
JUNE ACTION STEPS
All the best,
Dave Smith
I am a Mortgage Consultant with Mortgage Express. You can contact me at my office number, (503) 517-8763 or at my e-mail address, which is dsmith@mtgxps. If you are interested in purchasing, selling, or refinancing a home, I 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.
Real Estate Enthusiasts and Friends,
This has been an exciting month as the real estate market has been gradually starting to recover. Back in January, I forecasted that the data indicated a mild recession, which would cause the real estate market to remain relatively flat through summer of 2008. But, through the autumn months of 2008 and spring of 2009, the market would begin to move ahead into positive territory. Not surprisingly, recent statistical data is beginning to run the course that I forecasted over 4 months ago in spite of the pessimistic outlook that most pundits predicted. This does not suggest that everything is fine and that market difficulties are a thing of the past. Keep in mind that the market has just endured one of the most serious collapses of financial credit since the great depression and we have been very fortunate that circumstances helped to prevent a total free fall. In this edition, I will address the areas of strength in this recovery as well as some issues that must not be ignored.
MARKET OUTLOOK
Inflation Concerns
In the April 2008 edition, I spent a considerable amount of time discussing the nature of the Fed's activity to increase liquidity at the cost of the dollar. I used an analogy that compares the course the Fed is on with a doctor's prescription of Chemo therapy. Basically, the doctor poisons the patient hoping that the poison will kill the disease before it kills the patient. Too much or too little and the patient dies. Similarly the Fed is poisoning the economy in hopes of killing the credit crunch. If there is too much or too little the dollar will collapse and the economy will find itself in serious trouble. I will keep a careful eye on the Fed.
The Federal Reserve has cut the Fed Funds Rate 7 times since September, which has brought the Fed Funds rate down to 2%; and as a result, the dollar has suffered. On April 22, 2008, the dollar fell to a record low of $1.6019 against the 15 nation currency index that comprises the Euro (Bloomberg, May 7, 2008). What this means is that if you traded one Euro for U.S. dollars at a bank, your one Euro would purchase 1.6019 dollars. If the Fed is increasing inflation by making the dollar more available (i.e. lowering the Fed Funds rate), the value of the dollar against other currencies declines. This has significant impacts on international trade as well as investment in U.S. goods and services. One good thing about a falling dollar is that it makes goods and services that we sell abroad cheaper for those who are buying them abroad. This has actually helped our exports and it may be a major contributing factor to the fact that manufacturing is up.
However, inflation is a major concern to the Federal Reserve. To fight it, the Fed will have to reign in the monetary policy by increasing rates and increasing the reserve requirements. In the same article, Bo Nielson reports that, "Kansas City Fed President Thomas Hoenig said in a speech in Denver yesterday that "serious" U.S. inflation may compel the central bank to increase interest rates." Do not take this news idly. In this course of action, any of you who have mortgage rates tied to an index (usually an Adjustable Rate Mortgage - ARMs), will likely see increases in your payments. Even though they will be increasing rates, I would not expect those increases to be severe because the market is in recovery mode and not in red hot growth mode. Therefore, the Fed will have to be gentle with their rate changes or they could easily erase the gains that the market will post in the next 6 months.
Hooray for Portland!
In the midst of the subprime meltdown and the worst housing market in the past two decades, Portland has fared remarkably well. In the February edition of the Economist, it was reported that Portland was one of only three U.S. metropolitan markets that saw positive housing appreciation in 2007! The other two cities were Seattle and Charlotte, North Carolina. In the April 2008 edition of Portland Monthly, Camela Raymond wrote, "So far this year our home prices have held steady. And with a projected 17,000 new jobs coming to Oregon, unemployment should stay at 5 percent, according to the state employment economist, Art Ayre" (Portland Monthly, 71). She also stated the logical conclusion that, "...A healthy economy, of course, stimulates a healthy housing market" (Portland Monthly, 70). This is very true. I reported back in my January 2008 edition that Portland State Economists were forecasting strong and steady growth in employment.
Fortunately, Portland's business growth tends to be mild and steady, which is better for stability than markets that heat up a lot and then cool down a lot. If you think of business cycles as a sinusoidal curve (a wave), then like a wave we expect that there will be highs and lows. However, if the higher that peaks rise above our base line then the business lows tend to be equally as deep. Camela made an interesting point in her article. She wrote that, "...We won't have nearly as far to fall as a place like California, where double-digit annual price increases have been replaced by similar decreases" (Portland Monthly, 70). Since Portland's business cycles are not as extreme, declining cycles will not be as severe.
If we combine a good economic forecast with the cheapest housing prices of all west coast cities and a gentle growth in real estate values, we can expect that for the moment, things are going to be alright in Oregon. Anyone who says that short term gains in the real estate market will last forever is either ignorant or extremely dishonest. There will be economic downturns here, but for the moment, things are moving onward and upward.
Real Estate Statistics for the 1st Quarter of 2008
I would like to give you some good news that is not seeing the light of day from our trustworthy media sources. According to RMLS statistics, average sales price appreciation increased by 4.9% from March 2007 to March of 2008 ($344,700 v. $328,700). RMLS also indicates that by this same formula, "The median sales price appreciated 5.1% ($290,000 v. $276,000)."
To me, the most important statistic is the Housing Inventory Data because I believe it really tells what is happening in the real estate market. I inputted the data into Excel and produced this graph. As an economist, I view the Housing Inventory purely in terms of supply and demand. The statistic measures the houses that are currently on the market and it estimates the time it would take for consumers to purchase those houses at the current rate of consumption. For instance, the current housing inventory is listed at 9.1 months. This means that at the rate of sales, it would take the market 9.1 months to sell every house that is listed on the market today. To give you a frame of reference, most realtors consider that a 6 month inventory is a normal and healthy real estate market. If the inventory moves above 6 months, we are in a buyer's market. If it falls below 6 months, we are in a seller's market.
How can one see the supply and demand curves in this graph? The supply is represented by the height of each month's inventory. Those are the houses on the market that will sit at the current rate of consumption. The demand for those houses is a little more subtly depicted in this graph. The demand is inferred by the trend line. When the trend is going up, you are witnessing a decreasing demand for those houses, which constitutes a greater inventory. When the trend line is going down, demand is increasing as the inventory is being depleted. What should really grab your attention is how sharply demand has increased over the past few months relative to the two preceding cycles.
The News That's Not Being Reported
To really drive this point home, there's one more piece to the statistic that should really blow you away. Housing inventories have declined from 12.8 months in January, 10.4 months in February, and 9.1 months in March, but at the same time Active Listings have increased by 45.99% (15,412 v. 10,557). So, the inventory is really falling sharply even though there are 46 percent more houses being added to the inventory as opposed to the year before. What is the inference? It proves to me that demand for houses is up a lot more sharply than most people have realized yet and while the media is still running doom and gloom pieces aimed at selling news, some buyers are succumbing to fear and they are missing this opportunity. Once the mainstream awareness clues into this fact, the window will close and the market will return to normal trading. The good deals will be bought or re-listed at higher prices to match the market.
Trending
Back at the University of California at Riverside, I took an advanced course in finance and investment. The professor was discussing financial inertia. Just like in physics, a financial asset or index that is in motion will tend to stay in motion, unless acted upon by another force. In the graph above on Housing Inventories, you can see two trends very clearly and the beginning of a third trend. The first trend begins close to April of 2006 and it peaked in February 2007. The next trend begins shortly thereafter and it peaked in January of 2008, where the housing inventory reached 12.8 months. You'll also notice that housing inventories showed declines in the 3 months following each peak for the past 2 years. This is clearly the spring boost. Even though we see this trend repeated 3 times, what is different this time is the significant decrease in inventories over the previous two.
What this tells me is that our market is returning to equilibrium, which is somewhere around 6 months of inventory. The market wants to be there. This past fall and winter the inventory increased far too high as a result of the fear in the market. Many people believed incorrectly that we were due for a major correction. This major correction has yet to materialize and the possibility of such a correction is looking more remote each day. Remember that markets tend to move with the majority emotion of either greed or fear.
I was at an open house yesterday, and I was talking about this with another realtor. He told me that he had a client tell him that he would not purchase a home below market price. I was stunned! Can you imagine anyone saying that they would never buy anything on sale? I was astounded that someone would actually say this, but the psychology behind the client's statement was very profound. There's no way that he truly believes or follows that philosophy. Everyone likes to buy things at reduced prices. However, his statement revealed what was really going on; he was afraid. He was afraid that a below market price was a sign of worse things like a market collapsing or a substantial flaw with the house. My Jeremy Siegel quote from last month applies perfectly to this situation. Most people buy when the consensus is positive and they sell when it's pessimistic. Those of you who use this information wisely will earn substantial rewards as we implement strategies that balance the risks with the opportunities.
REAL ESTATE OUTLOOK
As I discussed earlier, the trend appears to be moving back in par with a normal 6 month rate. We can see that new demand for housing is consuming our excess housing inventories and if the trend continues, we may see some solid growth in the housing market by the end of this summer. Since the market moves on tidal emotions of greed and fear, trending helps the wise investor see how those emotions are impacting the macro-economy. The wise investor also knows that even though a trend is identified, it can change at any time and often it changes just after the prevailing sentiment fully believes that the trend is unstoppable. So, we are due for a market upswing and just when everyone is confident that growth will continue into the indefinite future, that's when I'll start advising you to hold off and wait.
I expect that appreciation will increase gently through the summer months but it should remain close to 5% throughout the next year. To give you up-to-date information on various sub-markets within the Portland Metropolitan Area, I will include statistics of the 3 best markets and the 3 worst markets from this time forward.
| Area Report | ||||
| Rank | Area | Appreciation
Over the past 12 months |
Pending Sales
2008 v. 2007 |
Average Sales Price |
| Top 3 | ||||
| 1 | Lake Oswego/West Linn | 8.7% | 44.3% | 557,600 |
| 2 | North Portland | 8.2% | -19.4% | 274,300 |
| 3 | Northeast Portland | 6.9% | -36.0% | 321,200 |
| Worst 3 | ||||
| 1 | Oregon City/Camby | 0.6% | -34.4% | 309,200 |
| 2 | Mt. Hood/Gvt Camp | -4.0% | 0.0% | 253,200 |
| 3 | Milwaukie/Clackamas | -6.4% | -34.9% | 356,000 |
Lesson from Mac
My Grandfather Mac was a pilot for the Navy in World War II and he flew the Douglas SBD Dive Bomber. He was stationed at Guadalcanal and his squadron was responsible for bombing enemy positions and naval traffic in that area. He told me that on one particular night while he was asleep in the barracks, the sirens went off and the anti-aircraft batteries started firing at enemy airplanes attacking the base. He ran out of the barracks and as fast as he could, he got into the bomb shelter. In the midst of the guns firing and bombs falling, the anti-aircraft guns hit one of the Japanese airplanes and it crashed in the jungle not far from the base. The next morning, Mac was very curious about the downed airplane and hiked out to see it. What he saw shocked and bothered him greatly.
Upon approaching the airplane, he noticed that the propeller looked rather familiar. As he got closer, he saw in writing as clear as day, "Made in the U.S.A." Just prior to the commencement of the war, we were still selling war supplies to a potential enemy that ended up using those supplies on us. He told me that what really bothered him was that the greed of the war profiteers to earn greater financial rewards was more important than the lives of the service men that were lost as a result. The lesson that this taught me is one of honor. It was not honorable to value money more than human life.
I understand that businesses are in the business of making money. That's what they were created for. I, too, have to make money or my family will not eat. However, honor should always be present to override certain decisions and guide us in making right ones. YourDictionary.com has several definitions of honor. The one I like best is, "A keen sense of right and wrong; adherence to action or principles considered right; integrity to conduct oneself with honor."
The reason I shared this story is that I have seen a tremendous lack of honor with the loans that have been sold by other professionals in this business. In the past month alone, I have worked with 4 clients who needed major repair work on loans that only enriched the mortgage brokers at the cost of their clients. In one such instance, a loan was sold at a ridiculously high interest rate and the closing costs were atrocious. What made it even worse was that their current loan made it impossible to get the loan that would have put them in a great financial position. The point in all of this is that if you are working with someone who will forgo a paycheck to do the right thing; that is only kind of professional that you should ever, ever work with. Honor is important and it is something that I value highly.
SERAINA AGUAYO
WHAT, may I ask, were you thinking?!
What type of a reaction do you hope to elicit from someone viewing your listings?
This has been a topic I have wanted to write about for 3 years. What are people thinking when they post pictures of properties with cars all over the driveway, debris inside or outside of the house, laundry on the floor, etc..?
What type of a reaction are you hoping to inspire from potential buyers when posting a listing? Should we not do everything we can to get buyers in the front door?
Residential Buyers are Visual Creatures
Specifically "residential home buyers" tend to be visually motivated. I am not referring to the advertising of investment properties where the buyers are looking at the purchase from a logistical standpoint. If you have watched any of these TV shows like "Curb Appeal" or "Sweat Equity" on DIY Network, it becomes apparent that what you can "see" makes all the difference. According to a source from MarketingCharts, "Internet display advertising continued its growth leadership, increasing 15.9% in 2007 to $11.31 billion in expenditures." If visual appeal isn't important, why are Americans spending so much money on it?
People Tend to Buy Emotionally & Visually
People tend to purchase emotionally and visually. We are no longer in the day when realtors sold homes on text and static image advertisements. People want to be wooed and impressed and this almost always requires the use of graphics. It is amazing how emotionally moved a client can be based on how the property looks in the MLS.
I have literally watched clients toss listings aside when they looked at the images. Are you going to let that happen to your listing? You don't have to be a marketing major to attract buyers to your home. Show the properties off in the best light possible. I can't help but chuckle at some of the photos posted by other agents. My favorite so far was a new property flyer that had a great big image of the front of the house with a quaint little "Port-O-Potty" just off to the right of the image. It might have taken just a few minutes to apply a cropping tool to the photo. Ha! That just cracks me up! The realtor could have inadvertently turned off buyers when in reality the port-o-potty may not have been a real problem. There may have been a logical explanation for it being there, but the buyers never came because it was so unsightly in the picture.
Technology Is Better Than Ever!
As a real estate consumer, you should work with agents who are professional and can use technology effectively to give you a real advantage in the market. With Photoshop, virtual tours, streaming videos and various photo enhancement technologies, a good realtor can without a doubt market your property listings to create a stronger appeal.
It Takes Some Cooperation!
Unfortunately, there are far too many realtors who will poorly advertise their clients' homes. It is unacceptable, in my opinion, to sign documents and start snapping photos without that property being completely prepped first. As one of my standard practices, I will make suggestions that my clients should do in order to effectively create a listing that will attract the attention of buyers, which will result in a faster sale at a higher price. Did I mention the time my client spotted diapers and baby wipes in a property photo? The beauty of this is that your prospective buyer will be far more interested if the presentation is professional!
So there you have it. Let's set the stage for our listings and market them with confidence.
Seraina Aguayo, Broker, Realtor, GRI
John L. Scott/Sandy
(971) 322-9878
If you would like more market data on your specific market area or would like a FREE comparable market analysis, please contact me at greshamagent@johnlscott.com or Dave Smith. *Data gathered from the National Association of Realtors® and the Regional Multiple Listing ServiceTM of Oregon.
STRATEGIES
May's strategy is really simple. Take action. You know what things you need to do and what things you ought to be doing. Too often, we simply procrastinate. I have written a great newsletter that should really help you see the opportunities that are out there and they could be yours if you act. I hope that you are also working on your budget. My wife and I finished ours and it is working beautifully. We meet about bi-monthly depending on our schedules to go through the bills and how we can increase savings. The main thing is that I know what needs to come in and what needs to stay in the pot.
You may get sick of hearing about it, but savings or a lack of it is one of the worst problems that I continue to run into on a daily basis. People are not saving anymore. What's going to happen if they become injured or they lose their job? I happened to be very fortunate that a new company recruited me just prior to the demise of my old company. Otherwise, I would have been looking for a job as well. Had I been out on the street looking for work, at least I would have had some savings to carry me through. From a lending perspective, savings can mean the difference between a rejection and an acceptance. Build up your savings; it's the wisest thing you can do. On top of that, the more you can save now will only improve the life that you will live when you retire. It's too important to procrastinate.
Some of you may have noticed that I changed my title to Excellence in Mortgage Planning. I chose this new title because the newsletter is not really independent and the old title was inadequate. The information that I pass along to you in this newsletter sometimes assists you in your decisions, which results in you bringing your loans to me. I wanted my title to reflect the excellent counsel and strategies that I freely offer you so that you can work towards achieving your goals. My business philosophy is Excellence in Mortgage Planning!
MAY ACTION STEPS
All the best,
Dave Smith
I am a Mortgage Consultant with Mortgage Express. You can contact me at my office number, (503) 517-8763 or at my e-mail address, which is dsmith@mtgxps. If you are interested in purchasing, selling, or refinancing a home, I 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.
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 1st. 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.
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:
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 ServiceTM 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
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.
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</
