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| The Big Bad Market |
Posted
02-02-2008 : by
Rob Alley
Category : Real Estate, House, and Home
Subcategory : Real Estate Agents
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Ok,
It's Time to Come Out Now
If you don't have a TV, a radio, or a
newspaper, you may have missed all of the negative press surrounding
the mortgage and housing markets. The severity of the situation has
created a mild panic that has paralyzed the consumer. If you are
waiting for a "bottom" to the overall crisis, and for all the news to
turn positive, don't hold your breath. Typically, where tragedy occurs,
opportunity arises. Let me show you why it is "OK to come out now," and
why you might be sorry if you wait too long. Mortgage Meltdown?
The news might have you thinking that no one can get a loan these days.
This is far from true. Hindsight has given us a clear picture of the
kind of loans that shouldn't be offered again. The loans that have
performed more consistently are still abundantly available, and you
might be surprised that you can qualify.
Banks like to see strength in at least 2 of the 4 areas:
1. Credit Score
2. Sufficient verifiable income for the payment amount
3. Equity in the property or down payment
4. Liquid assets (money in the bank, stock market, IRA's, 401k's, etc...)
The items that will make your loan more difficult to obtain:
1. Non-Owner Occupied (investment property)
2. Stated or No Income (meaning you can't prove it with W2's or Tax Returns)
Bottom Line: If you can legitimately afford to make a regular house
payment, there's a very high chance that this can be proven to a
lender, who will in turn be happy to give you an excellent loan. To
make things better, interest rates are historically low. At the very
lowest point in mortgage rate history, a 30 year fixed conforming loan
danced around the 5.0% range. In the last several weeks, it has dropped
to 5.625%. There is even further impetus to act on this information.
Even if prices decline another 10% due to the market panic, there are
sellers out there right now selling for 20% under current appraised
value. So you might find a house for $160,000 today that will end up
being worth $180,000 when the market bottoms out - a paradox, but true.
This also means that your value is likely to be at it's highest as far
as refinancing. Remember that EQUITY is one of the positive factors
banks consider.
If you think you might be in your current home for more than a few
years, have an adjustable rate mortgage, or have an interest rate
that's over 6% - or - if you are a potential home-buyer, it is OK to
come out now. Doing so could save you lots of money.
The Pendulum Effect
National average home prices are down significantly. This trend will
continue, but consider three things. First, the hardest-hit markets
drag down the average depreciation. Second, mid to high priced homes
were more inflated than entry level housing. When those homes
depreciate, they have farther to fall than a lower priced home. This
also brings down the national home price average. Finally, panic can
create a knee-jerk reaction among sellers, and market perception can
create hesitancy among buyers.
What does this all mean? It's a GREAT time to shop for a moderately
priced home. When the market has found a solid bottom and the demand
returns, there will be a lot less ambiguity about what a home in your
area is really worth. Sellers will be less willing to entertain offers,
and selection will decrease.
Recession and Expansion
There are times when the economy is brisk and everyone feels confident
about his or her prospects for the future. As a result, they spend more
money, eat out more often, and buy more new cars and houses.
Then, for one reason or another, the economy slows down. Companies lay
off employees and consumers are more careful about where they spend
money, perhaps saving more than usual. As a result, the economy
decelerates even further. If it slows enough, we have a recession.
During such a time, fewer people are buying homes. Even so, some
homeowners find themselves in a situation where they must sell.
Families grow beyond the capacity of the home, employees get relocated,
and some may even find themselves unable to make their mortgage payment
- perhaps because of a layoff in the family.
In the business cycle of real estate, there are buyers' markets and
sellers' markets...and some markets in between. It is all based on
supply and/or demand.
Supply and Demand - Inventory
During a seller's market, homes sell quickly and sellers have a lot of
pricing power. As a result, prices rise more rapidly than at other
times. During a buyer's market, homes may sit on the market for a while
before selling; consequently, sellers become more flexible and may even
drop their prices.
The market is determined by supply and demand.
In real estate, the relationship between supply and demand is
calculated as "available inventory." At the current sales pace, how
long would it take to sell the total number of houses available on the
market? That is how the real estate industry measures inventory.
Inventory is measured in weeks and months. Longer inventory times are
associated with buyers' markets. Shorter inventory periods are
associated with sellers' markets. Some buyers and sellers hope to time
their transactions to take advantage of market cycles.
Timing Your Purchase to the Market Cycle
The real estate market does not necessarily move in tandem with the
stock market or the economy as a whole. When the economy is doing well,
interest rates are generally higher. The result is that fewer people
can afford houses. When the economy slows down, interest rates fall.
The "affordability index" moves up and more people can afford houses.
As you can see, this cycle does not move "in sync" with the rest of the
economy. One problem with attempting to time your purchase to the
business cycle is that even experts have problems accurately predicting
the future economy. It is also strongly influenced by employment,
salary, and consumer outlook for the future. If you could "time the
market," that strategy would most benefit first-time buyers. All these
factors make it difficult to know, in advance, whether the housing
market is going to boom or bust.
Why You Should Not Wait to Purchase a Home
People who already own a home usually need to sell it in order to come
up with the down payment for their next home. Even if they don't, they
would have to carry the debt and obligations on two homes at the same
time. This can create financial hardship, even when you rent out the
previous home. There are maintenance costs, renters don't always make
their payments on time, the rent may not cover the mortgage and other
costs, and sometimes the property may be vacant.
If you are a move-up buyer and want to purchase your next home during a
depressed market, you generally have to sell your current home during
that same depressed market. If you want to sell during a boom, then you
also have to purchase during the same boom - It tends to equal out.
Finally, suppose you are a first-time buyer and wait until the
beginning of a boom is near. If you guess wrong, are you going to
wait...and wait...and wait...till the next depressed market? If so, you
could miss out on loads of depreciation...and that is assuming you
guessed right about your market timing? For instance, in 1996 when the
home market was struggling, who would have predicted what the next
seven years actually produced? |
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Rob AlleyREALTORŪ - Roy Wheeler Realty Co.President - Virginia Tech Alumni Association - Charlottesville Chapter Boy Scouts of America - District Advancement Chairman - Monticello District 434-220-7630 (office) http://www.robsellscharlottesville.com/ |
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| Author's Name : Rob Alley |
| Author's Business Name : Roy Wheeler Realty Co. |
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