Beans ‘n Cream Review
NEWSFLASH: These is NO Inventory!!
I was in a conversation with one of the most productive agents in our area recently and he told me that there were “no homes for him to sell”. I thought he had a brain cramp. Look at all the ‘For Sale’ signs, all the homes on MLS, all the short sales and foreclosures plus all the shadow inventory on its way. Had this respected agent lost his mind?
As he saw the puzzled expression on my face (which was his intent), he began to explain that every home that is priced correctly is being gobbled up by buyers right away. The only homes that remain on the market for more than 30 days are the ones where the price doesn’t COMPEL a buyer (even multiple buyers) to make an offer.
I pondered his assertion for a while and his premise began to make more and more sense because I am witnessing:
- Increased attendance at Open Houses. Buyers are coming out to look because they know now is the time to buy(great interest rates with higher rates around the bend, huge inventory available, etc.)
- Realistic sellers (in terms of asking price) are getting significantly more traffic. This results in an increase in interested buyers; more interested buyers push prices higher. By adjusting prices, many sellers are getting higher offers. By remaining overpriced (and hoping to negotiate down), other sellers are seeing no traffic and no offers.
Why are there record numbers of homes on the market when the properly priced homes are being gobbled up (some at even higher than the listing price)? Because there is a huge difference between a home ‘being on the market’ and a home that is seriously ‘for sale’. Sellers who are serious about selling are aggressive with pricing because that is how you gain the highest price. A little counter-intuitive maybe; but, it’s very true.
Pricing is the centerpiece of your real estate agents marketing plan (although not the only component). The marketing plan should be designed to drive as many qualified buyers to see your home because THAT is the single most important factor in getting the most money – the number of people bidding. My advice is to give yourself the best chance for highest bids by pricing the home at a compelling number.
Why the Wealthy Are Buying
We have taken the stance that real estate is currently a great investment. There have been MANY that have let us know that they think we are crazy. Today, let’s look at a few prominent people, media sources and one very important group that agree that now is the time to buy.
Fortune Magazine and The Wall Street Journal
John Paulson, billionaire investor.
Donald Trump, no introduction necessary.
Barbara Corcoran, real estate TV personality.
A pretty impressive list! The question: Is anyone listening to them? The answer: The wealthiest people in the country. According to the most recent Existing Sales Report from the National Association of Realtors, at a time when sales of all homes have decreased 2.8% compared to last year, homes over $1million dollars are selling at a rate 3.9% higher. Why are the wealthy purchasing real estate right now?
- Money is cheap. The 5% interest rate will not be available forever.
- The ability to lock in that interest rate for 30 years may soon disappear.
- Getting a mortgage may get much more expensive soon.
- They want to buy low and sell high. The price of real estate is low.
Bottom Line
We know many will disagree with us about now being the time to buy. But if the wealthiest people in the country are buying, shouldn’t we at least consider the possibility?
Breaking News right now from NBC15 Madison : Sauk County Emergency Management is recommending residents along Levee Rd. & Plummer’s Grove in Town of Fairfield to evacuate. The earthen berm system is unstable at this time and DNR personnel monitoring the situation are unsure what may occur due to rising water.
Baraboo, WI – Sauk County Emergency Management is recommending those Sauk County residents along Levee Rd. and Plummer’s Grove in the Town of Fairfield, (near Lake Delton), seek alternative housing until further notice.
Water levels are expected to rise to 19 feet 6 inches or higher over the next few days and maintain that level for several days. The earthen berm system is unstable at this time and Department of Natural Resource personnel monitoring the situation are unsure what may occur due to the rising water. Roads are expected to become water covered and first responders may be unable to reach residents in this area to render aid.
Levee Rd. has been closed from Hwy. T in Sauk County through Columbia Co.
Residents can call for Salvation Army at 608-356-4895 if they need sheltering.
Please sign up for up to date information at www.Nixle.com (Sauk Co. Nixle Emergency Information System)
Don’t Believe Everything You Read
Many headlines in the media right now are proclaiming the total collapse of the housing market. What makes it seem very believable is the headlines are based on two reports from the National Association of Realtors (NAR): the Existing Home Sales Report and the Pending Home Sales Report. However, all is not what it seems.
Both reports look at two different sets of data:
- A year-over-year comparison of transactions (Y-O-Y)
- A month-over-month comparison of transactions (M-O-M)
The negative headlines you have been reading are based on the Y-O-Y statistics. They are horrific. There is a logical explanation for this however. Last year, at this time, we were headed toward the expiration of the Homebuyer Tax Credit, one of the greatest buyer tax incentives in American history. There were people rushing to get their home into contract and/or to a closing. This dragged demand forward. People who would have normally closed later in the year moved their closing up in order to take advantage of the tax credit. Comparing sales in the first four months of this year to the same time last year wouldn’t be comparing similar situations. That wouldn’t make sense.
A better way to judge the market at this time is to compare month-over-month sales. Here is a graph showing the increase in pending sales over the last twelve months.
As we can see, sales dropped dramatically after the expiration of the tax credit in April 2010. Then sales began to slowly rebuild and are now increasing nicely.
Bottom Line
The market is gaining momentum not losing ground. Headlines sell papers. Actually knowing what is truly happening in the real estate market is what’s important.
Real Estate: GOLDen Opportunity of this Decade
Everyone wants to comment on the current real estate market. They want to talk about how now is not the time to buy a home. Some even argue owning a house has never been a great investment. Most say it will be a long time before real estate again begins to appreciate. It all sounds so familiar to me. It was just a decade ago that many made the same arguments about gold as an investment.
Gold had dropped from over $400 an ounce to $250 an ounce (a 40% decline) from February 1996 to August 1999. People ran from gold as though it was a plague.
Lord William Rees-Mogg, the current Chairman of The Zurich Club, in 1997 said:
“No investment has been so thoroughly exploded as gold; most people think that there will no more be another gold boom than there will be another boom in tulip futures in The Netherlands.”
Two years later in 1999, Don Wolanchuk author of the Wolanchuk Report explained:
“Everybody hates gold. You can’t have a bottom until everybody is out. And everybody is out of the gold sector.”
Everyone knows what happened next. The proclamation of gold’s death was rather premature. Gold rose from $250 an ounce to over $1,400 an ounce in the next twelve years. I see the same situation with real estate today. I am not predicting that real estate will see the same levels of appreciation. I do believe however that the market will rebound strongly.
Those who continued to believe in gold as an investment were rewarded. Those who continue to believe in real estate as a sound investment will also be rewarded.
Here is what Adam Hamilton wrote in October 2000 in an essay titled Is Gold Dead?
The road for gold investors has been long and parched in the last five years. They have wandered through a seemingly endless desert, occasionally tempted by what proves to be an illusory mirage. Many have fallen beside the sun-cracked path, their white bones picked clean by buzzards and gleaming in the sun. Nevertheless, a brave contrarian core continues to march forward. They have studied history, currency, gold, investments, economics, and finance. They understand the timeless value of gold, the cyclical nature of the markets, and the vagaries of human psychology. They realize it is darkest before the dawn, and the journey most difficult right before the homestretch is reached. Gold is in an INCREDIBLE position, and it will have its day. Nothing goes up in price forever, and nothing goes down in price forever. Investments are cyclical. Gold is NOT dead, it is simply biding its time, waiting for its next earth-shattering mega-rally. The spoils that go to the few remaining gold investors when that day inevitably arrives will be fantastic. The stunning victory will quickly blot out the painful memories of the long struggle…
You could replace the word ‘gold’ with the words ‘real estate’ throughout this essay and it would apply today.
Month’s Shadow Inventory: State by State
Earlier this week, we reported on the National Association of Realtors’ (NAR) Economists’ Outlook and gave you a map showing the percentage of overall sales that distressed properties represented in each state. Today we want to show you another map from the same NAR outlook. This one shows the number of months shadow inventory by state:
NAR explained their methodology:
The map shows the number of months it would take to clear the shadow inventory by state. The months’ supply is estimated by dividing the shadow inventory and the monthly number of distressed sales. The numbers range broadly from 51 months in New Jersey to 7 months in Nevada. When looking at months’ supply it is important to keep in mind that this estimate highly depends on saturation of distressed sales. Given that New Jersey over the past year on average reported about 20 percent of existing home sales to be distressed sales, it will take a longer period for the shadow inventory to clear. In contrast, Nevada’s distressed sales averaged a considerable 70 percent share of the existing sales and at that rate the current shadow inventory would clear in 7 months.
Bottom Line
Appreciation of residential real estate will not take place until a region works their way through the shadow inventory that exists. This map gives you an indication of when that will occur in your state. In Wisconsin, we have just over a year until we will see signs of appreciation.
The 4 Stages Of Wealth Building As A Homeowner
One of the primary objectives of owning a home is to let the home appreciate over time and become a pillar of a family’s financial strength.
But before we can discuss “wealth”, we need to identify the stages to get there.
Stage 1
Having “Emergency Cash” is the first stage. It’s having $5-7,000 liquid for life’s inconveniences (the boiler breaking down, the car needing work, etc). When faced with the inevitable challenges that arise, many people are forced to run to their credit cards to make it through. They become stuck with high interest rate, non-tax deductible borrowing.
Stage 2
The second stage is the elimination of “Bad Debt”. We define “Bad Debt” as any debt whose interest is not tax deductible. Obviously, those high interest rate credit cards must be the first to go. But we also want to divest ourselves of the borrowing associated with car loans, boat loans, student loans, and personal loans because it typically can be done cheaper.
Stage 3
Shockingly, when you arrive at stage three, you will be considered in the Top 5% of Americans in terms of financial security. Stage three is accomplished when you have 3-6 months of your total expenses in reserves. The average homeowner (who is logically financially better off than the non-homeowner) has less than one month’s expenses in reserve! When life shows them more than a minor inconvenience (like a job loss, an illness/disability, or worse), most people are in a panic situation. With 3-6 month’s reserves, you will have time to weigh options and make better choices.
Stage 4
True financial security is attained when you become “Debt Free”. But not without debt. We consider our clients “Debt Free” when they have enough liquid assets to pay off whatever mortgage they have outstanding. Wealth building almost requires utilizing the tax benefits of having a mortgage in combination with strategies that utilize The 3 Miracles of Money…
The 3 Miracles of Money
- Compound Interest – The impact of money left to grow upon itself can be dramatic. If you had $1 on Monday and you could double it every day ($2 on Tuesday, $4 on Wednesday, etc.), by the end of 20 days, you would have $1,048,576.00!!! Now, you can’t double your cash every day, not even every year, but the concept holds true…..compounding interest is a good thing!
- Tax Free Growth – The ability to accumulate assets without giving Uncle Sam a third of it (in the form of Federal and State Income Taxes) is how the $1 became $1 million. If the growth was taxed at 33% ($1 on Monday gave you $1.67 on Tuesday – instead of $2- and so on), your $1 would only grow to $28,466.20 after 20 days!!! THAT IS NOT A TYPO! You would have “lost” over $1 million.
- Leverage and Arbitrage – If you can put up minimum cash and take title to a significant asset (like a down payment on a home….the smaller the down payment the better), you can leverage that cash investment to large returns. At the same time, if you can take the cash that you don’t bury in home equity and effectuate a spread between your “after tax cost of money” (mortgage payment) and your investment options (hopefully, in a tax free environment), you can gain the exponential growth that creates wealth.
Bottom Line
Please take the time to investigate all that is possible, by harnessing the POWER of a mortgage to help you move your family towards wealth. Working with a loan officer who can educate you on the power behind properly leveraged real estate via tax savings and reallocation of equity is key. Ask me for my loan officer recommendations today!
Distressed Sales: State by State
We have often written on the impact foreclosures and short sales have on the value of the house next door. The Center for Responsible Lending has done great reporting on the subject. It seems distressed properties will be a challenge we will need to deal with for some time. The National Association of Realtors (NAR) released their Existing Sales Report. The report said:
Distressed homes – sold at discount – accounted for a 39 percent market share in February, up from 37 percent in January and 35 percent in February 2010.
This week, NAR released an Economic Outlook. In the report, they covered the percentage of overall sales that distressed properties represented in each state. Here is a map that accompanied the report:
Bottom Line
Distressed properties have a major impact on house values in a marketplace, here in Wisconsin 34% of recent sales have been distressed properties. There is still a large percentage of distressed properties on the market. Home prices will continue to soften until we work our way through this inventory.
We Think We’re Going to Believe Grandpa
There are those currently debating the financial advantages of owning a home. Some are looking at studies and reporting that homeownership has never really been a great investment.
One of these people is Jack C. Francis, a former Federal Reserve economist and professor at Baruch College. He said in a recent CNBC article:
“For generations, parents and grandparents have been telling us that the way to get ahead was to buy a house and keep making payments with a fixed interest rate and after 20 or 30 years it would be way up in value and that was your nest egg in old age. You could either live in it rent free or sell it and use the proceeds to rent an apartment.”
The article goes on to explain the rest of Mr. Francis’ comment:
That was good advice until 2006 when home prices collapsed, he says, and it “may become good advice 10 years from now, but right now it’s not.”
Mr. Francis bases his conclusions on a study he completed which covered the years 1978 through 2008. In his study it showed that home prices increased annually by 5.7% and that the S&P 500 increased by 10.8%. Based on this information, Mr. Francis gives the following advice:
To students who come to him for guidance on whether to buy or rent in the near term, however, Francis has one word of advice: wait. “I keep telling them this is not the time to buy,” he says.
Let’s take a closer look at this conclusion.
1. We have our own study.
Mr. Francis did a study over a thirty year period which did not include the last 3 years. If we look at the same categories since January 2000 (covering one of the worst decades in American real estate history), we find that home values GAINED 42% while the S&P LOST 4.7%. It all depends on which set of data you choose to use.
2. The proper comparison is rent vs. buy.
All of these comparisons claim that putting your money into a different investment vehicle other than real estate might make sense. What they are not taking into consideration is that the investor will still have a housing expense. They will still need money for shelter. They cannot just take their money for shelter and buy other assets with it. A person can’t live in their 401k or their IRA. This leads us to…
3. In most markets today, owning is LESS expensive than renting.
Trulia recently came out with their Rent vs. Buy Index. The report shows:
that it is more affordable to buy than to rent a two-bedroom home in 72 percent of America’s 50 largest cities.
For more on this issue including a 50 city breakdown, comment below.
4. Current mortgage opportunities may never be available again
The government has driven mortgage interest rates to all time lows. You can still get a 5% rate and guarantee it for 30 years. Both of these opportunities may soon disappear. Mortgage rates will increase as the economy improves and the Fed no longer feels pressure to keep rates low. The 30 year mortgage may soon be a thing of the past if suggested mortgage reforms come to be. You can lock in your housing expense for 30 years if you purchase. Renting is like having an adjustable rate loan with no cap that readjusts EVERY year. Which way do you think a landlord will readjust it?
For more on this, comment below.
5. Most Americans see more to homeownership than financial value.
Last week, Fannie Mae released the National Housing Survey. The survey reported:
- 96% of all homeowners said homeownership has been a positive experience.
- 84% of Americans still believe that owning a home makes more sense than renting. Even 68% of renters believe owning makes more sense.
- 2 in 3 Americans believe that lifestyle benefits of homeownership (65%) are superior to the financial benefits (32%).
Bottom Line
There are more and more studies being done on the value of homeownership. We think we will trust in what our parents and grandparents said. Your mortgage payment is money you put into your savings. Your rent payment goes into the garbage.
