Unbelievable, But True

Roger Schlesinger
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Posted: Jun 27, 2008 9:23 AM
Unbelievable, But True

A famous literary figure once said, “One shoe can change your life.” Do you believe that? Stay tuned and you will see how the unbelievable can very easily be true. Now I know how hard it is to let the unbelievable into your world. Whether it is fear of the unknown or years of skepticism, people seem paralyzed at times that call for action. If you can open your mind, you can open your life! Pay attention and you can find the road to your personal satisfaction and to financial freedom.

Most people have heard that the masses are always wrong or at best not at the forefront of discovery. Understandably, joining the masses is the easiest path even if you have lingering doubts about the validity of the goals. Being a member of the masses means that you fit in as almost everyone “goes with the flow.” It doesn’t take a stiff backbone to join this group, only a burning desire to belong. If you can quench the fire of conformity, you can move on.

As a card-carrying member of the masses, you’re convinced that real estate is not only standing still, it is actually going backward. My question: why do you feel so positive about your position when few people, especially the “town criers,” have even spent 10 minutes checking the facts? Forget “everyone feels that way.” Forget the media which sounds this doom-and-gloom thesis a dozen times a day. It’s now time to change your ways, open your mind, and take a contrarian view. There is another side to every story. Maybe even the true side of the story.

Why isn’t real estate selling? Is it lack of demand or too much supply? Maybe it’s just lack of creativity by sellers. If you are selling a house and are having trouble attracting buyers, consider buying down the loan for the prospective buyer instead of lowering the price. If your current asking price is $299,000 and you expect the buyer to put 10% down, it is better to buy down the loan with $10,000 than lower the price by $10,000 to $289,000. On the $270,000 loan to transact at the asking price, you will be able to offer the buyer 5.875% on a 30-year fixed, down from current market of 6.5% or 5.375% on a 15-year fixed down from the current 6.25%. You will see more response to that type of property marketing simply by spending the same $10,000 in a more beneficial way. In tougher times, people need to be led to the desired outcome.

The aforementioned idea can also work if you are trying to refinance your own home and are struggling to qualify. It’s harder to qualify for loans today as lenders are under extreme scrutiny to make “perfect loans.” If qualifying for a rate is a problem and you have equity in your house, consider taking “cash out” of the house to perform the buy down described in the previous paragraph. It’s easier to be approved at 5.875% than 6.5% and the cost of the buy down will be made up by the monthly savings. On the $270,000 loan above, your payment would drop from $1706 per month to $1597 saving $109 per month. It would take approximately 7.5 years to make up the cost, which is a bit long, but you got the loan. Your monthly earnings could be $273 less to quality at 5.875% than you would need at 6.5%.

Why should you buy real estate now? For the same reason that more people buy clothing that is on sale, automobiles that are on sale, or invest in the stock market after it sells off. You get a better value. Real estate is even easier to buy now than any of the above because it is primarily a long-term hold. Therefore, you have a much longer window to seek profits and for most people, real estate is simply a “place to live” and not an investment. The fact that so many Americans have done so well in real estate is a bonus, but also a curse for the masses. People always talk about waiting for prices to come down and generally when they do, the masses do not buy. The reason: they are convinced that prices are going lower! Once the market turns, the masses will begin to understand it is time to buy and chase prices that are on the rise. For many of the reasons I cited above, the masses are happier buying in a seller’s market and selling in a buyer’s market. There are still deals in both those markets; however, the masses swarm to the wrong side of the equation.

Let’s go over why real estate is a bargain, not a problem, at this time. Let’s consider everything: price, financing, taxes, monthly costs, demand, supply, and the economic factors influencing the market. Once you seen the full picture, perhaps you will join my camp. That is the one that believes the real estate market is already starting to turn upwards and the facts will become prevalent this fall.

Price is a valueless term that confuses more than it ever helps. The price of a house is determined by its size, its utility, the size of the property, the location, location, location (a real estate truism) and last but not least, what an individual will pay for the place. The size of the house is the square footage but the utility is more important than the size. The utility is the number of rooms and the type of rooms. A 2,500 square foot house with one bedroom and 1.5 bathrooms would have less value than a 2,000 square foot house with 3 bedrooms and 3 bathrooms. The acreage can be important in some locations, typically rural or suburban. Regardless of all of the other factors, the real value comes from the location: Beverly Hills, California, being perceived as a better location for a home than Youngstown, Ohio. (No offense to Youngstown, as I have never even been there). Putting everything aside, the house is still only worth what a buyer will pay for it. That said the bigger house on the bigger property with the proper room counts in the better areas will sell for a higher price. The conventional wisdom will tell you to buy the cheapest house in the best area as opposed to the best house in the less expensive area for maximum price appreciation. That doesn’t necessarily mean for a better quality of life.

Home financing and overall monthly expenses go hand in hand. Many people are afraid that their monthly costs will go through the roof because they believe that mortgage rates are heading up. That may happen or we could see a major recession hit and rates could set record lows. Until the mortgage market loosens up, and jumbo loans become commonplace once again, it is too soon to project any direction for rates. Currently, conforming rates up to $417,000 are in good supply as are the “conforming jumbos” which have a maximum of $729,750 for single family residences. These loans are offered by Fannie Mae and Freddie Mac. The FHA offers loans in basically the same loan limits and make it a bit easier for borrowers going down to a 580 credit score and allowing as many co-signers as necessary. Getting a loan with payments that fit in your monthly budget shouldn’t be a stumbling block at this time.

Everyone has been talking about the “supply of homes,” but it’s a bit of a red herring. Two things you need to understand…first, a community isn’t a “bad real estate bet” just because it has are a number of unsold houses, especially new ones. Second, there is the belief that an extensive inventory of homes needs to be sold before we can recover. In California, the foreclosure capital is Lodi. Builders considered it a bedroom community for San Francisco because it was within a couple of hours drive of the Bay Area. That was before $4.50+ a gallon. Many of Lodi’s “hard luck” homes may not be sold for a decade. This will primarily affect the builders and the bankers. In the meantime, buyers can select properties from Lodi’s inventory, live comfortably, and be in position for long-term equity growth.

Aside from pricing/market timing concerns, the big inhibitor is availability (or absence) of versatile loan programs. This downside is mainly seen in the lack of great financing above the new Fannie/Freddie $729,750 maximum. Until lenders are willing to make loans as in the old days, with safeguards this time, our markets will lag. What will push them up? The weak dollar allowing foreigners to buy our real estate at a huge discount, the need to house an ever-growing population (births minus deaths plus legal immigration), and for the second home expansion that has started in earnest thanks to retiring, affluent baby boomers.

Unfortunately, the media takes great pains in making sure that every ounce of news that can indicate problems in the housing sector is broadcasted near and far. While negativity holds sway with the masses, those few people with courage and foresight are out staking their claims to be in a good place when the housing industry turns and makes its next run. I began with “One shoe can change your life.” That’s the motto of a real believer in dreams-come-true: Cinderella. If you become a believer, maybe you’ll live happily ever after as the one of the next set of financially well-off Americans. This is your fairy godmother…I mean, the Mortgage Minute Guy…signing off.