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    Sunday, June 10, 2007

    The Waiting Game: Is it Time to Invest in Real Estate?


    The Waiting Game: Is it Time to Invest in Real Estate?

    It's said that history repeats itself; that distinct patterns and regular cycles are apparent and even predictable to those who can correctly analyze and interpret the data. When it comes to economic markets, the same holds true. Stocks, bonds, and real estate markets each go through basic cycles of highs, corrections, lows, and recoveries of various lengths and intensities. The trick, then, is timing: when to get in, when to get out, and when to sit on the sidelines and wait.

    This month, YOU Magazine looks at how the current real estate market compares to those of the past, while also examining what homeowners and potential home buyers need to do now to make the most of the post-subprime real estate market. We'll show you the numbers, what they mean, and how you and the right mortgage professional can make the most of the biggest investment you will likely ever make: your home.

    Home Prices
    It has been reported that national home prices have fallen recently, a trend not seen since 1991 – and one that has kept many potential home buyers on the fence and playing the waiting game. This decrease in prices, however, is not surprising in the least to the experts who study the market. In fact, between the growth in the number of speculators during the housing boom – when home prices reached record highs – and the increase in overall housing inventory, falling prices are a typical result within the basic model of a cyclical market.

    Interestingly, while total existing home sales fell at a seasonally adjusted rate of 2.6% in April, new-home sales actually increased 16.2%, according to statistics from the Bureau of Labor. That's the largest jump in new-home sales in 14 years! The report also demonstrates that increases in new-home sales were widespread as well: 27.8% in the South, 8.5% in the West, and 3.8% in the Northeast. Only the Midwest region saw a 4.0% decrease. Again, while these numbers were higher than expected, experts who study employment figures were not all that surprised.

    What does this mean? Well, for new home buyers, this is great news! This report demonstrates that home builders are taking extraordinary steps to move their inventory. In fact, home builders reportedly cut new-home prices more in April than in any month since 1970. This means that, in April, many home buyers had no problem finding a great deal on a brand new home. In fact, while total existing home inventory levels have increased 10.4%, which represent 85% of the real estate market, new-home inventories have actually fallen nearly 20% thanks in part to these amazing bargains.

    The Subprime Effect
    Ironically, while many builders and home sellers are more than willing to negotiate with qualified buyers (that is pre-approved, not pre-qualified buyers), many potential buyers may not even qualify for these same great deals in the near future. Since the recent collapse of subprime lending, an intense tightening of credit standards and lending guidelines is thought to have extended the downturn in the real estate market cycle. Not only do potential borrowers with credit issues now have fewer options, many current borrowers with credit issues may not be able to refinance if they continue to play the waiting game for too long in today's lending environment.

    For the most part, borrowers and potential borrowers with good-to-great credit have nothing to worry about when it comes to potential fallout from the subprime market. There are plenty of conventional mortgage products available to suit the needs of these borrowers. Borrowers with Adjustable Rate Mortgages (ARMs) due to reset at a higher rate, however, can no longer afford to play the waiting game. ARMs borrowers should consider seeking advice from a professional mortgage specialist right away before their current monthly payments reset up to 50% or even 100% higher! Even with a pre-payment penalty, there are fixed-rate products that could help many ARMs borrowers avoid becoming part of the estimated $650 billion in subprime mortgages expected to default or foreclose in the coming years.

    For potential borrowers with some credit problems, there are still opportunities to take advantage of the current buyer's market. Many lenders have started to reintroduce special mortgage programs that were eliminated just three to five months ago. Credit requirements are much tighter than they once were, of course, but high LTV/CLTV programs can still be found, and 100% financing is still available for both purchase and refinance loans. Despite the horror stories advanced by the media, it's important to investigate all options before assuming anything. Remember, available credit is also cyclical in nature, and the current tightening of lending standards is a direct response to the tremendous willingness of lenders to give credit during the real estate market's previous boom cycle.

    Market Indicators
    Understanding the various nuances of the real estate market is challenging to say the least, even for the experts. And when market cycles reach pivotal points of change, like today's real estate market, it becomes even more challenging as economists split hairs and debate the finest details of the market's behavior. The good news is, you don't need to figure it all out yourself. Let your mortgage professional work out the details. As a home buyer, there's really only one concept to embrace, and that's the idea that the real estate market is cyclical; that, no matter how painful it gets to watch the news every day, the market will eventually turn and continue on its natural course.

    There are, however, some basic indicators that savvy home buyers can pay attention to in order to obtain an edge over other investors: employment statistics and the production and availability of real estate and investment capital. These statistics each relate to the simple concept of supply and demand. When more people have jobs and more banks are willing to lend money, housing demand increases. Available inventory, i.e. supply, then sets prices at whatever consumers are willing to pay. We clearly saw this concept play out during the real estate market boom over the past few years when the national economy created jobs for 44 straight months.

    So, what's changed? In June of 2006, unemployment rates reached 4.8%, the highest level in 13 months according to a Department of Labor report. Shortly after, the subprime collapse forced lenders to change their habits, and suddenly less money was available to borrowers. Inventories jumped, increasing supply, and many jobs – especially in construction and real estate-related fields – were lost. In other words, the relationship between supply and demand changed, clearly marking the end of the real estate boom.

    In April 2007, however, unemployment dropped to 4.5% and new-home sales jumped, as builders offered great deals on current inventories and began construction on fewer new homes. Suddenly, with interest rates near historic lows, buyers on the fence were willing to pay for these discounted new homes.

    Did these "early-bird" buyers make a good deal? Should they have waited for prices to fall even more? What about further changes in interests rates?

    Well, let's look at an example. Let's say that a buyer is pre-approved to purchase a $300,000 home at 95% financing but decides to ignore possible interest rate hikes and wait for further price reductions on this particular home. With the economy showing strength in both employment and the stock market, it wouldn’t be outrageous to see interest rates increase just .75% in a very short period of time. Therefore, if rates were to increase while the price of the home did not drop any lower, the buyer's monthly payment would jump approximately $75 a month, or nearly $900 a year!

    But, let's look at this from a different angle and a different cycle. On June 8th, 2004, the S&P 500 Index was at 1142. By August 12th, it fell to a low of 1063, a little more than 7% in two months. Since then, it has risen over 32%. As this article is being written, the S&P 500 Index closed at 1530, a record-closing high which some say nearly marks the end of its current boom cycle. Using the same $300,000 home from our example, this would equate to a home selling for nearly $400,000 only three years from now.

    Are we saying that housing will duplicate this growth in its next boom cycle? No, certainly not. The point is this: by playing the waiting game – without good advice from a trusted source with their best interests in mind – and ignoring the basic concepts of historical market patterns, buyers can miss out on nice gains later on. In the end, homeownership, despite slumps and lulls in its cycle, is a great investment historically. After all, you can't live and raise a family in a stock. You can't refinance a bond when your kids go to college. And you can't retire into a mutual fund.

    Stay ahead of the curve by making an appointment with your real estate and mortgage professionals. Put together a game plan that can't lose.

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