Interest Rates Are On The Rise

Mortgage interest rates are on the rise.  I've been preaching this for some time now (see my blog post of February 21, 2011) but the Federal Housing Finance Agency has made it official:  the average mortgage interest rate hit 5.06% for the month of March.  The last time the rate was as high as 5% was last June.  This latest announcement highlights the undeniable upward trend in mortgage interest rates since November of last year when the average rate was 4.38%.  This represents an approximate increase of 0.124% per month.

As I wrote back in February, the interest rate you pay has a much more dramatic effect on you mortgage payment than the price of the house.  Let's just assume the beautiful home pictured above is your dream house. And let's further suppose it's on the market right now at $400,000.  If you finance $320,000 (a typical 80% loan to value) at 5%, ignoring taxes and insurance for the sake of simplicity, you would have a payment of approximately $1,718.  Let's now assume that, as is expected, property values continue to decline. Let's take a guess of another 5% reductin in property values between now and the end of the year. Let's also assume the interest rates are on the rise and increase at the same 0.124%. Mortgage interest rates would then be around 6.116% - so let's calculate for 6.125% - a much more likely number. Your mortgage, should you wait until December to buy, would then be based on a purchase price of $380,000, you would be financing $304,000, and your mortgage payment would be approximately $1,847, an increase of $133, or nearly 8% more per month than you would have paid had you bought now. Seems crazy, but it's true. My dad always says "Figures can't lie, but liers can figure," and this is a perfect example of that old anecdote. No matter what anyone says about waiting until the market hits bottom they are either dumb or lying. NOW is the time! Those numbers just can't lie. So buy that beautiful home now or wait until all you can afford is:

 

Real Estate Market Trends In New Castle County Delaware – Part One

As the spring market starts winding up, my clients and friends are asking me about real estate market trends in New Castle County.  I thought I would dedicate some posts on my blog to shed a little light on the topic. This is the first in a series of postings, so look for more to follow very soon.  New Castle County is an interesting market.  There are a lot of attorneys here due to so many large corporations making Delaware their state of incorporation.  A large university (UD), a large bank (Bank of America)  and a large multi-national conglomerate (DuPont) tend to dominate employment.   It’s pricier here just due to being on the east coast.  There is further price support for New Castle County real estate because real estate taxes in Delaware are so much lower than New Jersey and Pennsylvania.  Many who work in Philadelphia chose to live here instead, thus creating more demand than there would otherwise be.          

Speaking of demand, let’s get right to it.  The laws of supply and demand, as the country has been so brutally reminded of over the last few years, are alive and well doing what they do.  Real estate market trends in New Castle County have followed the same track as most of the country.  Supply is up, demand is down, ‘nuff said really, but I’ll add historical detail for perspective.  The charts I’m posting in this series come directly from TREND, the MLS for the region.  The first chart shows total inventory of single family residences for New Castle County – that is, the homes that were on the market month by month over the last nine years and into the first quarter of 2011. 

                                                                                                                                             

The years 2002 through the middle of 2005 are pretty steady with between about 1,200 to 1,500 houses on the market at any given time.  The bubble clearly starts to inflate at the middle of 2005 and 2006 then shows the stampede to the market as homeowners started cashing in on new-found equity in real estate.  Demand was increasing and supply was stretching to meet it, and those who had been in there homes for a long time were taking a tidy profit.  Inventory climbed even higher in 2007, exceeding 3,000 homes on the market in New Castle County for the first time ever.  By the fall of 2007, many real estate professionals were already worrying that the level of inventory would exceed demand as prices continued to inflate – that even without any aberrations in the mortgage markets there would have to be a correction driven by the normal market functions.  By the summer of 2008, most real estate professionals were saying it just cannot last.  Then the Lehman Brothers tragedy hit and prices began their long decline. 

What does this mean for you?  I’m getting there…

Current Real Estate Market Trends in Delaware, Pennsylvania, New Jersey

Current real estate market trends in Delaware, Pennsylvania and New Jersey are a buyer’s dream.  It’s useful for buyers relocating to any city in the tri-state area  to evaluate real estate market trends in the area as a whole. Anyone relocating from the west coast, say, to Philadelphia will likely find a home in Wilmington to be within a reasonable commuting distance to the larger city. The towns of Cherry Hill, Princeton and Plainsboro in southern New Jersey also provide great neighborhoods within a comfortable commute to Philly. And equally, there are numerous people from Wilmington who commute to southern New Jersey for work.

Real estate trends in Delaware, Pennsylvania and New Jersey, like the rest of the country, are not pretty. One good indicator for real estate trends in the tri-state region is the number of housing permits being issued in the area for new residential construction. The Federal Reserve Bank of Philadelphia reported on Monday that, in February of this year, single family residence permits declined in Delaware, Pennsylvania and New Jersey by 11.1%, 38.1% and 26.6%, respectively. Meanwhile, the rest of the country showed an average increase of just under 1%. The obvious reason for the decline in housing starts is the existing home inventory currently on the market, and the so-called shadow inventory of homes likely to be foreclosed upon, both at historic highs. When discussing real estate trends, inventory is expressed in terms of months to sell all the homes on the market.  The tri-state region has a challenging number of homes on the market. With regards to the shadow inventory alone, Delaware, Pennsylvania and New Jersey have 30,29, and 51 months of inventory, respectively, to plow through. (See the url below.) A normal market would have some 7 months supply of homes currently being marketed. The shadow inventory of homes likely to come on the market due to foreclosure but not yet being marketed, however, is typically not even a point of discussion among real estate professionals in a normal market. So, needless to say, there is still significant price pressure on homes in Delaware, Pennsylvania, and southern New Jersey.

The take away from all of this is that, if you are being relocated to anywhere in the Delaware, Pennsylvania, New Jersey tri-state area you will have a significant selection of homes to chose from.  Furthermore, sellers who are determined to sell their homes in such a glutted market will be aggressive in their pricing from the beginning. If they’re working with smart real estate professionals they will already know that prices are expected to decline further, and if they want to sell now they had better come to grips with that and market their home at a compelling price. The bottom line, if you’re relocating here you’re going to find very attractive real estate market trends throughout the tri-state region.

Shadow inventory supply:

http://economistsoutlook.blogs.realtor.org/files/2011/03/shadowinv_0311d.PNG

Useful Little Maps and Graphs from the National Association of Realtors

College students across the country are familiar with the ritual of checking the professors' bulletin boards for one's test scores and class standing to be posted - always discreetly by student ID. The National Association of Realtors has recently posted the scores, so to speak, of the individual states' shadow inventory. You can check out your state's standing of shadow inventory compared to the rest of the country. It's interesting, but more importantly, it's a valuable rough competition gauge if you're considering placing your house on the market. You might hold off if there is a lot of shadow inventory poised to come on the market and compete with your home. On the other hand, there are markets in the country that are below average for shadow inventory - maybe you should make your move now. Click on the links to see the graphs.

Map of percentage of properties currently on the market that are distressed sales:
http://economistsoutlook.blogs.realtor.org/files/2011/03/shadowinv_0311a.png

The 26 states with the highest level of shadow inventory:
http://economistsoutlook.blogs.realtor.org/files/2011/03/shadowinv_0311b.PNG

The 25 states with the lowest level of shadow inventory:
http://economistsoutlook.blogs.realtor.org/files/2011/03/shadowinv_0311c.PNG

Map of the number of months it will take to clear the shadow inventory by state:
http://economistsoutlook.blogs.realtor.org/files/2011/03/shadowinv_0311d.PNG

Reading Between the (Property) Lines

A recent statement by NAR (National Association of Realtors) Chief Economist Lawrence Yun is revealing:  "Housing affordability conditions have been at record levels and the economy has been improving, but home sales are being constrained by the twin problems of unnecessarily tight credit, and a measurable level of contract cancellations from some appraisals not supporting prices negotiated between buyers and sellers."  The "unnecessarily tight credit" is not news, real estate professionals have been complaining about that for over two years now.  It's the second remark that I find interesting - contracts being cancelled due to homes not appraising for the agreed upon sales price.  It hints to me that there are buyers out there willing to step up and come closer to a seller's asking price.  I've been blogging and preaching to any client or prospective client that will listen that indications in the market place are such that home values are expecting to decline further through mid-year 2011, and that perhaps towards the end of the year we may find some stabilization, maybe even a return to more historical property valuation in the 3% range.  So, the interesting part is not so much that the properties don't appraise, but that it suggests there is price support among buyers right now.  To me, it's evidence of that so-called pent-up demand that every real estate professional in the country is hoping is real and will soon be released from the forces that are keeping it plugged.

Lions and Tigers and MERS - Oh My!

When I was a little boy, four years old I think, I saw "The Wizard of Oz" for the first time.  It frightened me so much that I hid behind the couch, peeking every so often over the back of it to try and follow along.  Something about those flying monkeys gave me such a case of the heeby jeebies.  I've got 'em again!

The New York Supreme Court ruled a few days ago that MERS (Mortgage Electronic Registration Systems) has the right to foreclose on delinquent mortgages. MERS has already prevailed in New Hampshire, California and Kansas. Is your state next?

This can't be right.  Is everyone clear about what MERS is and what it does?

I submit that one of the reasons America has become the most prosperous nation on earth is because property rights are so clearly defined, vigorously defended, and publicly delineated.  Anyone in the world, and that means literally anyone, can go down to your county courthouse and ask to see your deed.  It is a public record.  It is this transparency that makes it such a valuable asset.  No one can dispute that you own it - again,  it is a matter of public record.  Now that's not to say that there are never any errors in the public records, no foul-ups ever committed in the process of recording a deed.  There are, in fact, some busy attorneys that bill a lot of hours embroiled in challenges to property rights.  By and large, though, they are statistically rare compared to the enormous volume of property transactions that take place in the United States in a given year.  It is a fact that it's a somewhat convoluted process to painstakingly record every single property conveyance that takes place in your county.  But, again, it's the fact that it happens that makes your property worth something.  Because you can prove you own it, you can sell it.

And what does MERS have to do with this?  MERS is a streamlined process to record transfers of mortgage and real estate instruments.  It is not, let me repeat, it is NOT a transparent process.  There is a group of "too-big-to-fail" banks that have created a club for their convenience to streamline the process for bundling mortgages into mortgage backed securities.  In order to record the transfer of mortgages without having to go through the oh-so-annoying tedium of waiting in line at the courthouse for each and every transaction, someone hatched the idea that they could just keep an electronic registry and that they would all agree among themselves it would be correct, and legal, and moral - because it is in the interest of commerce, after all.  It would also be, very conveniently, private.

Each bank can, because they decided it to be so, certify whoever they chose to be the recorder of mortgage transfers.  There is no qualifying process, no professional certifying board that oversees who is an authorized  recorder of this electronic registry.  The wicked witch of the east (MERS) has her little monkeys flying around the electronic countryside doing her bidding while she stirs her cauldron of mortgage documents into a thick murky soup.

I'm not an attorney - but I don't think I have to be one to conclude that MERS is, at the very least not fair, and probably down-right, blatantly, illegal.  How can it be right, that a process that is meant to be transparent and naked for all to see, should be sequestered and hidden away by a very tiny group of bankers?

"Come here, my little pretty..."

The Beige Book Is Out - Or What Does Your Lunch Money Have To Do With Your Landlord?

So, the Feds famous (or infamous, depending...) Beige Book is out with current trends on all things economic in the country. The overall consensus appears to be modestly positive. The caveat is that the real estate market is still moping along. Kerry Curry, writing in the Housing Wire e-zine makes the following assessment based on a read of the Beige Book:


"Reports on home prices were mixed. Atlanta and Kansas City observed persistent downward price pressure. Home prices continued to fall according to Philadelphia reports, but mainly at the high-end of the market. Cleveland and Chicago contacts described prices as little changed.

The outlook for residential sales and construction improved marginally, although activity is expected to remain at low levels. Kansas City contacts anticipate a seasonal surge in sales activity this spring. Atlanta, Dallas and San Francisco also expect modest improvement, while little to no sales growth is expected among Philadelphia contacts. A slight uptick is expected in Chicago and San Francisco construction.

Several districts indicated improvements in commercial real estate sales and leasing activity, including Boston, Richmond, Chicago, Kansas City, Dallas and San Francisco. But most reports characterized nonresidential construction as weak."

My friends and clients in the greater Philadelphia region will be interested the comments about our area. I really am not a pessimist about the market (I feel a need to keep reaffirming that) but I am a realist. The real estate market in this area is still experiencing downward pressure. If you want to sell a property you must, absolutely MUST, keep that in mind as you think about your pricing strategy. There are a bajillion (to use my teenagers parlance) properties of every stripe on the market right now, another bajillion that the owners would like to sell but are waiting for a better climate, and still another bajillion that the banks are circling like vultures. 

My opinion - we have another couple of years of depressed real estate prices. Meanwhile, inflation WILL enter from stage left (some will say stage right but the democrats are responsible for most of the stimulus, which will be the catalysis for rising prices) and start to eat away at the average family's budget. My evidence for that - it's happening right now. Oil is going up, gasoline is going up, and there is growing worldwide pressure on agriculture which will result in higher grocery bills for all of us. And rents? They will have to rise as landlords struggle to keep up with the costs of maintaining their properties.


And what about interest rates? They are at the bottom, really. Can they go lower? I remember my grandparents telling me they bought their first house with a 3% loan from their LOCAL bank. The down-payment? A solid 25%. Do you think any bank will go to 3% in this environment? The average first-time home buyer still wants at least 95% loan-to-value. What bank is going to give out 95% loan-to-value at 3% - not going to happen.  So, interest rates my hover where they are for a time, but there is no where else for them to go but up.


In the final analysis, the time to buy real estate is RIGHT NOW. Lock in your rate. Everyone is on the money talk shows saying that you can't think of your house as an investment, it is shelter only. What they need to emphasize is that it is FIXED COST shelter. Your mortgage will not increase along with everything else you have to buy, thus providing stability in the largest piece of your budget pie.  If you continue to rent your housing costs will rise along with everything else, and then you'll have to use your lunch money to pay the landlord. (That's right - my sub-title was a shameless hook to get you to read the whole piece.)

Sound Matrix – Steady Clappin'

Sound Matrix – Steady Clappin'

The Oracle From Omaha Speaks

Warren Buffet has announced that we've hit the bottom of the housing market - it's all going to get better now.  (You can read the article here:  http://timandjulieharris.com/2011/02/28/warren-buffett-predicts-housing-recovery-this-year-has-housing-hit-bottom/#comment-35393)  Is he trying to create self-fulfilling prophesy?  That might actually be effective coming from the Oracle of Omaha.  Let's hope it's a prophesy that catches on.  BUT -  the National Association of Realtors, an organization that puts a great deal of effort into understanding real estate trends, is showing a decline in sales, at the same time Warren announces his increase.  I am truly not a pessimist and would love for him to be right, but the forces needed to improve the market just are not there yet - namely JOB GROWTH, DECLINING UNEMPLOYMENTS STATS, and AN IMPROVING JOB MARKET that really FEELS like it's improving to the average person, whethere employed or seeking.  My redundancy is intentional.  It's the job market!

It's MERS Stupid!!!

The MERS controversy is at the core of the foreclosure mess and it's getting nearly zero coverage. Why? Because it's very complicated and can't be explained in two or three minute news bites. There are two articles on John Mauldin's blog that everyone should not just read but STUDY.  The url's are posted here.
The first is:
http://www.johnmauldin.com/frontlinethoughts/the-subprime-debacle-act-2-mwo101510
And the second is:  
http://www.johnmauldin.com/frontlinethoughts/the-subprime-debacle-act-2-part-2-mwo102310

READ AND BE INFORMED!

Options Jazz Quartet

You gotta hear this...
http://www.youtube.com/watch?v=4i0nHaBz8F4

Don't Wait Any Longer!

I'm going to do my part to help the economy. Interest rates are going to go up, they have to. Property values are in the dirt. Though they are expected to decline a bit further rising interest rates will offset that. SO, if you know anyone who would like to buy a house anywhere in the country they should do it now. I'm not pitching for your business - I'm pitching for the US economy. Lock in a low mortgage now before inflation grabs a foothold. It's going to happen, it has to. What goes up must come down, and VICE VERSA. (Just my opinion, folks.)

Interest Rates Ticking Up

At the beginning of the month one of my clients, a first-time home-buyer, settled on their dream home with a 4.875% fixed rate mortgage. They're a conservative and careful couple with their finances so they bought a home they could easily afford on one income. They just missed locking in 4.75% by about a week. Of course they're a very happy couple even with the 1/8th increase. Just think - less than 5% for the 30 year duration of the loan makes it much more likely they'll be able to pay off their mortgage early. From a life planning perspective they're in really good shape. In 15 years or so they will be putting kids in college, probably will still have some of that mortgage to pay, but the payment will feel like much less to them as prices around them increase over time. But by the time they're making their last tuition payment they'll probably be close to making their last mortgage payment and then they can start putting all their new-found money towards retirement planning. If they control themselves, between 20 and 25 years from now they will be completely out of debt and socking away serious cash. I look for them to retire early and enjoy many years of retirement feeling young and in good health, enjoying their grandchildren, traveling, living a very comfortable life.

The point of all this? I fear so many are going to miss out on such good fortune because they're waiting for home values to fall further only to have the savings wiped out in higher interest rates. Are higher interest rates coming? Oh - most assuredly! As the saying goes, what goes up must come down and conversely, what goes down MUST also go up!

See the Washington Post article here:  http://www.washingtonpost.com/wp-dyn/content/article/2011/02/04/AR2011020402806.html

Real Estate Still In Decline?!

There were rumors going around that the real estate market had hit bottom, that this was it, we're now going to finally start an ascent.  My own business is doing a bit better than this time last year, but that is due to a few investor and commercial clients.  The residential market is, sorry to report, not yet on the bottom.  See the following links for more details:
http://www.housingwire.com/2011/02/22/spcase-shiller-u-s-home-prices-fall-2-4
http://www.housingwire.com/2011/01/25/8-cities-reach-new-lows-in-home-prices-spcase-shiller

Day One - The World Begins

So this is my year to get truly wired - as in on the web. I'm already "wired" from lack of sleep, multiple teenagers in my house, unpaid bills, the economy, the government,...shall I continue? No, I mean I'm about to weave an elegant electronic web of all my stuff. My business is going to have tentacles reaching into every corner of the Delaware real estate market, my music is going to find jazz aficionados anywhere in the world, my documents and photos are going on the cloud never to be lost to crashing hard drives again, I'm going to CONNECT baby and I, yes I, will find Ethernet nirvana! And this humble blog will be ground zero of my Ethernet empire.