The Big Bad Market
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:
Credit Score
Sufficient verifiable income for the payment amount
Equity in the property or down payment
Liquid assets (money in the bank, stock market, IRA's, 401k's, etc...)
The items that will make your loan more difficult to obtain:
Non-Owner Occupied (investment property)
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?
Rob Alley
REALTOR® - 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/
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:
Credit Score
Sufficient verifiable income for the payment amount
Equity in the property or down payment
Liquid assets (money in the bank, stock market, IRA's, 401k's, etc...)
The items that will make your loan more difficult to obtain:
Non-Owner Occupied (investment property)
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?
Rob Alley
REALTOR® - 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/
Real Estate Professionals will benefit greatly by building their business in 2010… I appreciate this post. Thanks
ReplyDeleteClick here for: Sell House Quick
Real estate blogging encourages a culture and principle of RESPECTFUL debate. Great stuff as usual…. Thanks for this.
ReplyDeleteClick here for : Miami Florida Condos
Interesting real estate blog. I have bookmarked for future reference. Hope to see such good things again.
ReplyDeleteClick here for : Coral Gables Houses