We Have to Earn Our Way Out

You have to earn your way through life--Trevor and Ian's Mom

My oldest son is working two jobs—one of which is a delivery job for a local deli. He needs transportation, and it can’t be me anymore. I found myself in a Catch-22: support his need to work and buy him a car, or stick to my firm belief that my boys need to earn their way through life and tell him to buy his own car. The reality is that without a car, he can’t work, but without work he can’t buy a car. I wrestled with this dilemma for days before I hit on a solution that I think supports both concepts. I will buy him a reliable used car that he can reasonably repay me for each month for a specified number of years. At that time, the car will be his. This way, not only is he earning the right to have a car, but he has “skin in the game.”I love my son, but he has not always been kind to the family car. Now, it’s in his best interest to take care of this car because he will be paying for all gas and maintenance.

In America they are too full to swallow sorrow--Double Luck by Lu Chi Fa

I just finished reading Double Luck—the story of a Chinese orphan who works hard through adversity to make it to America via Hong Kong and Taiwan. He was sold into slavery at age 5 and was the sole bread winner for his brother’s family at age 9. It’s caused me to revisit my childhood memories in a major way because Chi Fa was leaving Taiwan for America just as I was leaving America for Taiwan. He was 18. I was 5.

To Chi Fa, I was one of those Americans that were too full to swallow sorrow. My first thought was that at age five I was too young to have any sorrow to swallow, but this author had already experienced more sorrow by the time he was five than I experienced my whole childhood. My family lived just outside of Taipei for three years, and while we probably didn’t live the way most of my friends lived back in the States, we lived much better than most of the Taiwanese families that lived in the lean-to’s behind my house. Interestingly enough, my memories of playing with the kids back there all involve laughter and smiles. They didn’t have a lot, but then they didn’t need a lot to be a family and be happy.

I have still joy in the midst of these things--Confusius

In the decades following the Great Depression, Americans were forced to live their lives differently. They learned to save and not take even the smallest luxuries for granted. During World War II they had to fight for their country, their way of life, the freedom that seemed inherently theirs, and in a lot of cases their very lives. That generation of Americans did without, sacrificed, worked harder than many of us can imagine… and in return, they earned every penny they saved, every car they drove, every house they lived in, every privilege they experienced, and every luxury they cherished.

My memories of family gatherings at my grandfather’s house are warm and wonderful and full of laughter. My grandfather, all of his sisters and brothers—one who was even held as a POW in Germany during World War II—and their families all gathered to share and be with each other. It was a time to cherish what everyone had. It was a time to cherish each other and family.

The families that lived behind me in Taiwan didn’t have much, not even a true roof over their head, but they also didn’t have credit card debt, mortgages that they couldn’t afford, or a feeling that their joy was based in anything other than family and friends and that which they earned—including integrity and dignity which is very important in the Chinese culture. In the book that I just read, Chi Fa had many reasons to be bitter, to be full of sorrow, to blame everyone and everything around him. Instead he made wishes on the first star in the night sky and recited Confusius for comfort:

With coarse rice to eat,

With water to drink,

And my bended arm for a pillow—

I have still joy in the midst of these things

We Have to Earn Our Way Out--Margie MacDonald

I think the solution to stabilizing the housing market is to go back to the concept of earning what we have and keeping our priorities in perspective. The mortgage industry has to earn the world’s trust back, and the only way to do this is to operate from a foundation of honesty, principle, and integrity from this day forward. Buyers need to earn the right to own a home, and the only way to do this is to work hard to earn and save a down payment—their skin in the game—and to live within their means. Americans, still, live a better life than most of the world, but we need to refocus our priorities and responsibilities to ensure we don’t lose the privileges of the American way of life.

NVAR August Statistics

The data put out by the Northern Virginia Association of Realtors (NVAR) for the summer months is not as encouraging as last summer's data. Since the expiration of the tax credit, inventory is up and sales are down compared to the same time frame last year.

Northern Virginia Inventory

 Source: NVAR

Northern Virginia Sales

Source: NVAR

Instead of putting bandaids on the effect, we should be curing the cause

While July's home sales figures took many by surprise for its sharp plunge--a whopping 27% from June to July and the largest in over 10 years--the figures were exactly what I was expecting.

It is clear that buyers are not buying, but why?

Unemployment

Probably the biggest factor is the job market. Unemployment figures continue to hover around 10%, and many businesses are unwilling to hire right now for various reasons. The impact of new health care costs, the possibility of higher business taxes, and the lowering of consumer confidence, all create a wait-and-see atmosphere for businesses. Many potential buyers have lost jobs or have taken pay cuts which prevent them from qualifying for mortgages. Buyers that have jobs are fearful of committing to a 30 year mortgage payment when their job future appears to be questionable. 

Tax Credit

While the tax credit seemed to be a good idea at the time, in hindsight it appears that the tax credit simply pulled all future purchases forward. Those buyers that were considering buying over the next year or two simply moved their time frame up so that purchases that would have been spread out over a 12-24 month period were condensed in to a 9 month period. In my opinion, the effect that this had was to artificially inflate prices and demand during this 9 month period. After the tax credit expired, there simply were no more buyers. Anyone that was going to buy, already had.

Interest Rates and Home Values Declining

Today, buyers are hearing that mortgage rates are at historic lows and are likely to go down even more. They are also hearing that the housing market is either in a double dip or will enter into a double dip. Buyers are not in a hurry to buy because they think they will get a lower interest rate and/or purchase at a lower price if they wait.

Expectations

I work with both buyers and sellers. As a result, there are certain trends that I am starting to see. During the months that the tax credit was in place, there was a surge in buyers and a coinciding decline in housing inventory. The surge in buyers was obviously due to the tax credit. The decline in housing inventory was largely due to two factors: banks unwilling to flood the market with too many properties for fear that it would cause values to decline even more and the moratorium that was put on foreclosures in the beginning of 2009. Because banks were not foreclosing on homes for that 3-6 month period, there were fewer homes in the foreclosure sales pipeline while the tax credit was in place. We found ourselves in an expected eye of the storm--a small pocket of time where buyers were actually competing for properties. This caused prices to go up, sales to surge, and many--most importantly, sellers--to feel that the worst was behind us, and normalcy had returned. 

Normal sellers started to return to the market--hoping to take advantage of the active real estate market--but many waited too long. Now inventory is growing as a result of these new sellers, but their expectations are based on conditions that no longer exist: tax-credit-induced buyers and low inventory. Foreclosure inventory has also started to grow: the result of banks once again processing foreclosures both because the moratorium is no longer in place and because loans modified under the Making Home Affordable loan modification program are failing to reach permanent status. Buyers are once again unwilling to buy in a declining market unless they see a deal that is too good to pass up. Sellers haven't quite figured out that market conditions have dropped off the cliff once again so they are unwilling to list their houses for prices that will attract today's buyers.

So where do we go from here?

It appears to me that every program that has been thrown at the real estate market has simply prolonged the inevitable. The tax credit did not revive the housing economy; it simply pulled demand forward and created unrealistic expectations on the part of sellers. The Making Home Affordable program ignored two important facts: many home owners were defaulting on loans because they couldn't afford the loan--having lied to qualify for the loan in the first place, and home owners were unwilling to pay for a house, no matter how attractive the terms were, that would never regain positive equity in their life time.

I would like to see the real estate market allowed to run its course naturally. I know this means that in the short term existing home owners will lose even more equity than they have already lost, but I think in the long term this is the only way for values to truly level out to levels that can be sustained by the current economy--levels where today's buyers are willing and able to purchase. Fear of sustained or growing unemployment, pay cuts, tightening credit, and rising down payment requirements are make it harder for today's buyer to purchase. 

The real estate market might have been the cause of this economy, but it is now the effect. Instead of putting bandaids on the effect, we should be curing the cause--the economy as it affects the job market.

NVAR January Statistics--Now is a great time to sell!

The Northern VA Association of Realtors (NVAR) January statistics are an interesting combination of trends. Medium home sales prices increased 13.75%, days on the market decreased 38%, inventory decreased 24%, and sales ticked up almost 1%, from last January.

The trend that we should also be aware of is how January compares to the last several months where the real estate market was greatly affected by buyers who were trying to take advantage of the expiring tax credit. Beginning in June, the number of monthly sales as a percentage of active listings averaged 26%. That percentage dropped dramatically to 18% in January. Interest rates continue to hover at or below 5%, and for the time being, inventory sits at what is considered a "normal" 6 month supply. The implication of this 18% statistic is that the real estate activity we witnessed last fall was largely fueled by the tax credit.

There is a great window of opportunity to sell right now before the tax credit expires. With low interest rates and the extension of the tax credit, there are buyers eager to buy their first home or take advantage of the move-up tax credit. These buyers do not have much to choose from right now so if you're thinking about selling any time in the next year or so, now is the time to do it! Take advantage of these buyers because the statistics indicate that after the tax credit expires, they may not exist.

NVAR Real Estate Market Trend

 

NVAR Active Listings

 

NVAR Homes Sold

NVAR December Statistics

While inventory continues to shrink, it would appear that the impending expiration of the First Time Home Buyer's Tax Credit pulled demand forward as buyers tried to settle before the end of November. For the first time in 9 years, the number of homes sold went down from November to December.

Source: NVAR

TH versus Condo

I've had a lot of questions lately from buyers asking my thoughts on buying a townhouse versus a condo.

Assuming you are not looking at a townhouse-style condo, there are some lifestyle choices that might help you make a decision. Condos do not require yard work.Condos do not require exterior maintenance. Condos do have shared walls in all four directions. Condos usually have shared main entrances. From an investment perspective, condos are typically the first kind of property to lose value in a down market, but they are sometimes the first thing to gain momentum when a down market starts to turn around because their lower price attracts first-time home buyers.

If your lifestyle preferences do not encourage you to buy a condo, you can certainly get more bang-for-your-buck by purchasing a Fee Simple ownership property as opposed to a Condominium ownership property. In this area, Fee simple ownership typically includes single family homes and most townhouses where Condominium ownership typically includes apartment-style properties and some townhouses. Single family homes and townhouses usually have lower monthly HOA fees: $60-$70. Monthly condo fees start at about $225 in the suburbs and can get as high as $800 for some of the luxury buildings close to Washington, DC. I put together a table to show how this affects a monthly payment. This is VERY generic as it would be too hard to cover all contingencies. The table is based on the following constants:

• 5.25% interest on a 30-year fixed mortgage
• $70 monthly HOA fee for the Fee Simple payment
• $300 monthly Condo fee for the Condo payment
• Taxes that are proportional to property value so taxes are higher for higher loan amounts

Buyers: Plan on Having a Contract Ratified by March

A lot of buyers are trying to get a contract ratified by April 30, 2010 in order to receive the tax credit. I'm recommending that buyers have contracts ratified by mid-March in order to take advantage of these low interest rates!

Many analysts feel 6% 30-year fixed rates are in our near future. Below is a chart that shows how much a monthly mortgage payment will increase between 5% and 6%, and then how that difference adds up over a 5, 10, and 15 year period.

NVAR November Statistics

The Northern Virginia Association of Realtors has published November Statistics. These numbers reflect a surge in sales as first time homebuyers rushed to meet the expiring tax credit. It will be interesting to see what December's and January's numbers bring. Also, most lenders have put a holiday moratorium on foreclosures. We will see this reflected in inventory in the next couple of months so keep this in mind when viewing inventory statistics in the beginning of next year.

Is HAMP Setting Homeowners Up to Fail?

HAMP--Home Affordable Modification Program--is part of the U.S. Treasury's Home Affordability and Stability Plan that was announced last March. In a nutshell, HAMP was established to encourage lenders to modify mortgages so that payments were no more than 31% of a homeowner's gross monthly income. At the time, many Americans hoped the program would prevent the wave of foreclosures that threatened to take away home from many families as well as threatened equity for many homeowners.

While we have yet to get any definitive statistics from Treasury regarding permanent modifications, the anecdotal evidence that is starting to trickle in does not look promising. If you are paying attention to my Tweets, you will have seen many articles that document this evidence.

Why It's a Great Time to Buy

I'd like to preface this blog post by saying that in the short term, I think that housing prices will drop again before we see bottom. The story will continue to be about supply and demand. Right now we are in a bubble where demand (fueled by hungry investors with cash and buyers trying to take advantage of the tax credit) is up and supply (dimished by last winter's moratorium on foreclosures and a pause in foreclosure processing as lenders give HAMP a try) is down. These factors will change in the coming months as I have outlined in previous blog posts: the tax credit expiration will diminish demand, and a wave of defaults as Option ARM loans reset will increase supply.

That being said, if you are planning on purchasing a house and holding on to it for the long-term--either as a permanent residence or as an investment--now is a great time to buy! While we are not at the bottom of the market in terms of price, we are probably at the bottom in terms of interest rates. This week, Freddie Mac announced that 30-year fixed rates are at an all-time low--averaging 4.71% nationally. Rates will not stay this low for long. As I blogged about last week, the Fed's Mortgage Backed Securities (MBS) Purchase Program is due to end next March. This program is what has kept mortgage interest rates low so when it ends, mortgage interest rates will start to climb.