www.michaelamers.com - Positive Mental Attitude

Bright Spots amidst the Gloom and Doom

I see the glass half full. I see opportunities abound. I see the Federal Reserve Board make some drastic moves in order to restore liquidity and confidence in our credit markets. The news has been tough on the real estate market. Still, there are signs this market may not be as bad for the qualified homebuyer.

The foreclosure crisis is a nationwide problem but the highest foreclosure rates are in formerly hot real estate markets like Las Vegas, Nevada and Stockton, California. Depending on where you are geographically determines the severity. About 1% of all homeowners nationwide risk foreclosure. Not bad when you consider that many of these homes were bought on speculation and never occupied.

The dollar has devalued (helped by Fed rate cuts) raising the price of all commodities (petroleum gets the headlines). Homes are a commodity like anything else. Real estate prices have come down enough where wealthy Europeans (strong Euro) are taking a second look at our vacation markets. Although the recent trend has been higher, mortgage rates are still near historic lows. It warrants keeping it all in perspective.

Remember that real estate is a local phenomenon. Desirability of a locale determines its demand. Detroit with its susceptible automotive economy is a far different market than Chicago, the cultural and economic center of the Midwest.

This may be one of the best times to purchase a home in 4 years. With this being an election year, it is likely mortgage rates will remain relatively stable as the two major political parties don’t want a full blown crisis on its hands (and get the blame for it). The fed will probably cut bank rates again, but since inflation is still a very real concern for economists, I imagine we will see a return to rising rates again next year when the campaign is over.

You can wait to buy a home if you wish but the net cost of buying it cheaper if prices continue to decline might be outweighed by higher interest rates. First timers are obviously in the best position to take advantage of this situation and have the most choice since the early 1990’s. Why stay where you are and give your landlord another rent check? That money is gone and in the long run is a minus sign on your savings. Invest in yourself. Home ownership is a time proven first step in investing and has been an excellent equity builder for a long term financial plan. It tends to beat out other investments.

The twenty-something generation has not fully entered the real estate market recently, but how much longer can they wait? The baby-boomers have reached the retirement milestone and will consider downsizing or relocation to warmer climes in the years to come. Families have outgrown starter homes. Companies relocate employees. The point is you can’t shut down the real estate market forever. There are reasons we buy and sell. Hopefully we are a wiser society now and each of us is better prepared as homebuyers, pre-approved first by a lender and buying only what is affordable.

"Buy and Hold" Makes a Good Homeowner

Homeownership is the foundation of a solid, long term financial plan. Before rampant speculation spoiled the housing market, the average American lived in a home for about 7 years. With the disappearance of easy home loans, the market has been in a correction phase. The new wave of homebuyers will be better qualified, more conservative, and able to seize the opportunities of a plentiful market.

Most Americans are not at foreclosure risk, and have faired well with their single most important asset. Most foreclosures involved investors that intended to flip their property for fast gain, or homeowners that undertook loans with extremely high loan-to-values within the last 3 years. Over the 20^th Century, the year to year increase in home prices had been roughly 3.5% per year. Not bad considering we buy homes as our primary shelter, not as an investment tool. Look to Standard & Poor’s Case-Shiller Home Price Indices for recent evidence. This index has been tracking home sales in the top U.S. markets since 1987. What the numbers show is quite interesting.

From January 1987 through January 2000, home prices in the Chicago market showed a robust increase of about 6.7% year to year. From January 2000 to January 2008, the trend had risen to just above 7 % year to year. This takes into account the price drops of the last 2 years. The peak in home prices was achieved in the second quarter of 2006 when the rise had reached to almost 11% year to year or three times normal gains. Even with falling prices, most homeowners who have been diligently patient have done quite well for themselves. This is true for every top 20 U.S. market except for Detroit which has its narrow-scoped automotive economy partly to blame for negative growth.

Equity in a home is merely a paper gain (or loss) until it’s sold. Most foreclosures have been investment properties, bought to flip for fast profit. Some have been owner occupied homes purchased with little or no equity interest. Others pulled out equity periodically for uses other than home improvement. Impatient with the idea of waiting for the normal uptrend to resume, these homeowners have chosen to lose their original investment and throw their credit history into the trash.

Given the numbers, we may be near a bottom to this downtrend. The Chicago market has declined by 10.8% since the peak in September 2006 and has reached a level not seen since January 2005. The declines of the last several years have been a necessary part of balancing a long term trend. As prices meet the long-term trend, stability will return and fresh buyers will begin to gradually build prices up. Today’s mortgages favor the documentable owner-occupant and disqualify the high risk takers. The next phase in the housing market will be marked by normal, healthy growth by buyers qualified to own. We all have learned a great lesson.