This is a reprint from a 2005 Article I wrote regarding the Real Estate Bubble (Before it burst). An interesting re-read for me, after watching the market for the past few years.
The Perfect Storm; Bubble Trouble
By Michael J. Rebibo, CFP®
April 2005
A friend of mine recently asked me if I were interested in going “in with him and some of his neighbors” to buy some townhouses to “flip for a profit”. They were forming a partnership in order “to get in on some of the hot real estate deals” that are now available. These were not traditional real estate investors but successful businessmen in the cable industry. Another friend said she doubled her investment on a second home she purchased at the beach less than a year ago. A few others have purchased speculative condos and are “hoping to make a killing”.
It all reminds me of 1989, the year I purchased my first home. The market was red hot and interest rates were on the rise. I couldn’t wait to get into the real estate market so I could enjoy some of the appreciation everyone else was realizing. I purchased the home for $289,000. Less than three years later, I listed it for $262,000, a drop of nearly 10%. After fix up and closing costs, I had to write a check for $14,000. Most of you will remember this time when rates were increasing, housing prices were falling, and the stock market was stagnant. Is this what the next 3 years have in store for us? As financial planners, it is our job to see through the noise and lead our clients down the safer path.
Real Estate Reaches Record Appreciation Levels
Recently, the Office of Federal Housing Enterprise Oversight, the government entity charged with ensuring the capital adequacy and financial safety and soundness of FNMA and FHLMC, published its House Price Index for 2004. For the 5th consecutive year, housing prices have increased by more than 7.5% nationwide. National housing prices increased by 10.24% in the 2004.
Conundrum
The Federal Reserve has increased short-term rates at a “measured pace” 8 times since June of 2004. Yet long-term rates such as mortgages remain below their levels of 1 year ago. Fed Guru Greenspan recently referred to the current low long term interest rates as a “conundrum” (which by the way is also a great white wine made by Caymus Vineyards)! Fed tightening, higher core inflation, near record oil prices, lower dollar, record federal budget deficit, and above trend economic growth create the perfect storm for higher long term rates and an immediate halt to appreciating property values.
Testifying before the House Financial Services Committee last month, Greenspan stopped short of calling home buyers “irrationally exuberant”, but stated "I think we're running into certain problems in certain localized areas. We do have characteristics of bubbles (in those markets) but not, as best I can judge, nationwide." Publicly traded homebuilders stocks fell 10% on the comment.
Home Sales Slowing
According to Merrill Lynch economist David Rosenberg, “the backlog of unsold homes has risen steadily, and in January approached a five-year high of 4.7 months supply. However, raw data, excluding seasonal adjustments indicate that the backlog has reached six months, which would mark an eight-year high.” While our local markets remain strong, this may be the last rush to purchase property before rates increase by too much.
Home Appreciation Outstrips Personal Income
“Median house prices have risen about 30% since March 2001, well ahead of an 11% gain in personal income”, says Michael Youngblood, head of asset-backed research at Friedman Billings & Ramsey.
Speculation on the Increase
Meanwhile, “unfettered access to easy money has inflated home prices nationwide, particularly on the coasts, and lately has let to an upsurge in speculative buying.” says Kopin Tan of Barron’s. Just as with the stock bubble in 2000, recent increases in speculative buyers and property flippers have driven up values in many urban areas like Washington DC.
“Household real-estate assets now equal nearly 14% of Gross Domestic Product, the highest proportion in two decades and eerily close to the ratio of household mutual fund and equity holdings relative to GDP at the stock market’s peak in 2000.” says Kopin Tan of Barron’s.
David Berson, the chief economist for Fannie Mae, observed in his weekly commentary that investor ownership of housing hasn't been this high since the late 1980s, which led to a crash in housing prices. "Many analysts think that a high investor share in the Northeast and California helped exacerbate the housing downturn that happened during the 1990-1991 recession”.
Bubble
Yale University economist Robert Shiller, author of "Irrational Exuberance," the 2000 best-selling book about the '90s stock-market bubble, said the only similar housing boom in U.S. history was when GIs returned home from World War II, lifting a depressed market. The latest addition of “Irrational Exuberance includes a chapter on the current real-estate trend.He thinks the current boom is a "classic bubble" because people keep buying houses they know are too expensive because they expect prices to rise even higher.
Conclusions
Ultimately it will be the level of long term interest rates that will create a local or national housing bubble. If rates exceed 6%, expect a 10% correction across the board. Larger homes will most likely be hit harder. If rates stay below this threshold, we may still see some localized drop in values in the higher end prices of homes in localized areas. The question is when?
As financial planners, it is our job to help our clients steer clear of disaster. Most real estate acquisitions are highly leveraged. This leverage works against you in a falling market. If your clients have an over allocation of real estate, it may be time to rebalance.
Showing posts with label Real Estate. Show all posts
Showing posts with label Real Estate. Show all posts
Friday, March 11, 2011
Tuesday, April 21, 2009
Money For Nothing and a Mortgage for Free
The US government is spending trillions of dollars to keep our ailing economy afloat. This has already softened the free fall in the equity markets and hopefully we will see it in our housing markets. But it comes at a cost, which is the likelihood of higher taxes and inflation in the future.
My friend Tom Millon, a secondary mortgage market specialist in the U.S. mortgage business, says it this way in his recent newsletter, "Never fear. We have a new put option protecting us. Remember the Greenspan put? That's the one that protected the stock market in the late 'Nineties. It was always safe to buy stocks because Greenspan would lower rates to support stocks every time they dipped. Today we have the Obama-Bernanke-Geithner put option." The new put option Tom is referring to is government subsidized mortgages. Our government is using printing money to buy mortgage back securities, which has pushed mortgage rates down to an artificially low price. This free money is being offered to you or anyone else to go spend on a new house or refinance your existing one. Everyone in the country who can afford to buy a house or refinance must take advantage of this "put option". It is basically free money and will not last!
The downside of this government generosity is it debases our currency and increases our debt. There are no free lunches and it may unleash inflation. Imagine a future with inflation above 5% and interest rates above 8%. Your house will be going up at this time and you will have locked your mortgage at 5% or below! There is no better way to protect yourself, except maybe moving to a Latin American Country, from the pain that is yet to come! Pay down your loan if necessary to qualify. Conforming loans are now up to $729,000.
1st Portfolio recently purchased a mortgage company, previously known as Pineapple Lending, now called 1st Portfolio Lending. Please give us a call so that we can analyze your personal financial circumstances and help you save on a new home mortgage. If you mention this newsletter, we will provide you with a $250 closing cost credit to reduce your expense.
Monday, March 9, 2009
Do Your Part To Help Economy
Do Your Part To Help Economy: Take Some of the Government Hand Outs, Lower Your Mortgage Payments or Buy a New House.
Our government is giving away tax dollars in an effort to stop home depreciation and help the economy. Here is a summary of how to get some of these tax dollars in your pocket while helping the faltering economy. Falling real estate values are killing the Nation’s financial institutions, not to mention damaging the stock market and to the equity in your home. Take advantage of the $787 Billion Stimulus Package and the $75 Billion Treasury’s “Making Home Affordable” Programs and help stop the bleeding. Here is a quick summary of how you can help:
1. Refinance Now: The US Treasury has been buying mortgage backed securities at an unprecedented rate. This has lowered fixed mortgage rates to the low 5% range. This, combined with the new, higher loan limits of $625,000 has helped many to lower their mortgage payments. If your loan amount exceeds $625,000 or if you are over 80% loan to value, consider paying down the mortgage to meet the lender’s guidelines. Remember, if you reduce debt costing you 6%, you are guaranteed to earn that rate of interest on your investment.
2. Get your first time homebuyer $8000 tax credit[1] when you buy a home before December 1st 2009. A “first time home buyer” is anyone who has not owned a home for three years. If you plan to buy before the deadline, you can begin saving by reducing your withholdings now. The law also allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates and can be applied by filing 2008 returns instead of for 2009 returns. Income must be lower than $75,000 for individuals and $150,000 for couples. If you already own a home and have a twenty something year-old living in your house, give them a push! Now is the time to pick up a steal!
3. The Home Affordable Refinance[2]: This program will be available to 4 to 5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac. This program is aimed at homeowners whose loan to value is greater than 80% and do not qualify for a traditional refinance. These borrowers may be eligible to refinance their loan and take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan. The Home Affordable Refinance program ends in June 2010. Only homeowners in good standing whose loans are held by Fannie Mae or Freddie Mac qualify. The property must be owner-occupied and the borrower must have enough income to make payments on the new mortgage debt. Borrowers can't owe more than 105 percent of their home's current value on their first mortgage. Borrowers with a second mortgage still can qualify as long as their first mortgage isn't more than 105 percent of their home's value. Homeowners can't take cash out during the refinancing to pay other debt.
4. The Home Affordable Modification[3]: This program will help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments. Who can qualify? The program applies to mortgages made on Jan. 1 or earlier. If your mortgage payment including taxes, insurance and homeowners association dues exceeds 31 percent of your gross monthly income you may qualify for modification. The property must be the homeowner's primary residence. Home loans for single-family properties that are worth more than $759,750 don't qualify. Homeowners are eligible for up to $1,000 of principal reduction payments each year for up to five years! You do not need to be behind on your mortgage to qualify for this program.
5. Mortgage Analysis: Need help to figure it out? Call for a free mortgage analysis. 703-821-5554
[1] http://www.federalhousingtaxcredit.com/
[2] http://www.treas.gov/press/releases/reports/guidelines_summary.pdf
[3] http://www.treas.gov/press/releases/reports/guidelines_summary.pdf
Our government is giving away tax dollars in an effort to stop home depreciation and help the economy. Here is a summary of how to get some of these tax dollars in your pocket while helping the faltering economy. Falling real estate values are killing the Nation’s financial institutions, not to mention damaging the stock market and to the equity in your home. Take advantage of the $787 Billion Stimulus Package and the $75 Billion Treasury’s “Making Home Affordable” Programs and help stop the bleeding. Here is a quick summary of how you can help:
1. Refinance Now: The US Treasury has been buying mortgage backed securities at an unprecedented rate. This has lowered fixed mortgage rates to the low 5% range. This, combined with the new, higher loan limits of $625,000 has helped many to lower their mortgage payments. If your loan amount exceeds $625,000 or if you are over 80% loan to value, consider paying down the mortgage to meet the lender’s guidelines. Remember, if you reduce debt costing you 6%, you are guaranteed to earn that rate of interest on your investment.
2. Get your first time homebuyer $8000 tax credit[1] when you buy a home before December 1st 2009. A “first time home buyer” is anyone who has not owned a home for three years. If you plan to buy before the deadline, you can begin saving by reducing your withholdings now. The law also allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates and can be applied by filing 2008 returns instead of for 2009 returns. Income must be lower than $75,000 for individuals and $150,000 for couples. If you already own a home and have a twenty something year-old living in your house, give them a push! Now is the time to pick up a steal!
3. The Home Affordable Refinance[2]: This program will be available to 4 to 5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac. This program is aimed at homeowners whose loan to value is greater than 80% and do not qualify for a traditional refinance. These borrowers may be eligible to refinance their loan and take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan. The Home Affordable Refinance program ends in June 2010. Only homeowners in good standing whose loans are held by Fannie Mae or Freddie Mac qualify. The property must be owner-occupied and the borrower must have enough income to make payments on the new mortgage debt. Borrowers can't owe more than 105 percent of their home's current value on their first mortgage. Borrowers with a second mortgage still can qualify as long as their first mortgage isn't more than 105 percent of their home's value. Homeowners can't take cash out during the refinancing to pay other debt.
4. The Home Affordable Modification[3]: This program will help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments. Who can qualify? The program applies to mortgages made on Jan. 1 or earlier. If your mortgage payment including taxes, insurance and homeowners association dues exceeds 31 percent of your gross monthly income you may qualify for modification. The property must be the homeowner's primary residence. Home loans for single-family properties that are worth more than $759,750 don't qualify. Homeowners are eligible for up to $1,000 of principal reduction payments each year for up to five years! You do not need to be behind on your mortgage to qualify for this program.
5. Mortgage Analysis: Need help to figure it out? Call for a free mortgage analysis. 703-821-5554
[1] http://www.federalhousingtaxcredit.com/
[2] http://www.treas.gov/press/releases/reports/guidelines_summary.pdf
[3] http://www.treas.gov/press/releases/reports/guidelines_summary.pdf
Thursday, January 4, 2007
Real Estate Corner
The real estate market softened considerably during 2006. There have been pockets of depreciation in certain parts of the country and in the higher priced homes. I have seen drops of as much as 15% from recent peaks in the same markets. However, the overall market seems to have stabilized. We have not as yet experienced a significant broad based drop in home prices. 
In our local market, the average sales prices of homes in Northern Virginia declined 4% in November compared to a year ago. Homes are also taking longer to sell, averaging 85 days on the market compared to just 35 days a year ago. There were also 30% fewer home sales than a year ago. One of the most interesting phenomenons is the switch from a seller’s market to a buyer’s market. Over the past 5 years, buyers have been paying on average 2% less than the listed price. However, in 2006, this number has increased to 7%.
I expect 2007 to be a true buyers market with sellers willing to provide handsome concessions and lower prices to entice buyers. If rates move north of 6.75%, there may be some true housing depreciation. Most economists however, are still expecting a soft real estate landing with a flat market over the next 2 years.
The Mortgage Bankers Association referred to 2006 as “A Normalization of the Housing Market”. In the aggregate, residential real estate seems to have remained roughly the same as a year ago. Home sales were lower by 10%, with new homes falling by 17% and existing homes falling by 8%. (This excludes data from December 2006, which will not be released until the end of January).
According to the Office of Federal Housing Enterprise Oversight, “US Home prices rose in the 3rd quarter, but the rate of appreciation declined significantly and some areas experienced declines. Nationally, home prices were 7.73% higher in the third quarter of 2006 than they were a year earlier.” Idaho topped the list of states with an annual increase of 17.5%, while Michigan, home of Ford and GM, was at the bottom with a slight price decline.
In our local market, the average sales prices of homes in Northern Virginia declined 4% in November compared to a year ago. Homes are also taking longer to sell, averaging 85 days on the market compared to just 35 days a year ago. There were also 30% fewer home sales than a year ago. One of the most interesting phenomenons is the switch from a seller’s market to a buyer’s market. Over the past 5 years, buyers have been paying on average 2% less than the listed price. However, in 2006, this number has increased to 7%.
I expect 2007 to be a true buyers market with sellers willing to provide handsome concessions and lower prices to entice buyers. If rates move north of 6.75%, there may be some true housing depreciation. Most economists however, are still expecting a soft real estate landing with a flat market over the next 2 years.
Monday, April 4, 2005
The Perfect Storm; Bubble Trouble
A friend of mine recently asked me if I were interested in going “in with him and some of his neighbors” to buy some townhouses to “flip for a profit”. They were forming a partnership in order “to get in on some of the hot real estate deals” that are now available. These were not traditional real estate investors but successful businessmen in the cable industry. Another friend said she doubled her investment on a second home she purchased at the beach less than a year ago. A few others have purchased speculative condos and are “hoping to make a killing”.
It all reminds me of 1989, the year I purchased my first home. The market was red hot and interest rates were on the rise. I couldn’t wait to get into the real estate market so I could enjoy some of the appreciation everyone else was realizing. I purchased the home for $289,000. Less than three years later, I listed it for $262,000, a drop of nearly 10%. After fix up and closing costs, I had to write a check for $14,000. Most of you will remember this time when rates were increasing, housing prices were falling, and the stock market was stagnant. Is this what the next 3 years have in store for us? As financial planners, it is our job to see through the noise and lead our clients down the safer path.
Real Estate Reaches Record Appreciation Levels
Recently, the Office of Federal Housing Enterprise Oversight, the government entity charged with ensuring the capital adequacy and financial safety and soundness of FNMA and FHLMC, published its House Price Index for 2004. For the 5th consecutive year, housing prices have increased by more than 7.5% nationwide. National housing prices increased by 10.24% in the 2004. Here are the to 10 states ranked by appreciation over the past 5 years:
(click to enlarge)
Testifying before the House Financial Services Committee last month, Greenspan stopped short of calling home buyers “irrationally exuberant”, but stated "I think we're running into certain problems in certain localized areas. We do have characteristics of bubbles (in those markets) but not, as best I can judge, nationwide." Publicly traded homebuilders stocks fell 10% on the comment.
Home Sales Slowing
According to Merrill Lynch economist David Rosenberg, “the backlog of unsold homes has risen steadily, and in January approached a five-year high of 4.7 months supply. However, raw data, excluding seasonal adjustments indicate that the backlog has reached six months, which would mark an eight-year high.” While our local markets remain strong, this may be the last rush to purchase property before rates increase by too much.
Home Appreciation Outstrips Personal Income
“Median house prices have risen about 30% since March 2001, well ahead of an 11% gain in personal income”, says Michael Youngblood, head of asset-backed research at Friedman Billings & Ramsey.
Speculation on the Increase
Meanwhile, “unfettered access to easy money has inflated home prices nationwide, particularly on the coasts, and lately has let to an upsurge in speculative buying.” says Kopin Tan of Barron’s. Just as with the stock bubble in 2000, recent increases in speculative buyers and property flippers have driven up values in many urban areas like Washington DC.
“Household real-estate assets now equal nearly 14% of Gross Domestic Product, the highest proportion in two decades and eerily close to the ratio of household mutual fund and equity holdings relative to GDP at the stock market’s peak in 2000.” says Kopin Tan of Barron’s.
David Berson, the chief economist for Fannie Mae, observed in his weekly commentary that investor ownership of housing hasn't been this high since the late 1980s, which led to a crash in housing prices. "Many analysts think that a high investor share in the Northeast and California helped exacerbate the housing downturn that happened during the 1990-1991 recession”.
Bubble
It all reminds me of 1989, the year I purchased my first home. The market was red hot and interest rates were on the rise. I couldn’t wait to get into the real estate market so I could enjoy some of the appreciation everyone else was realizing. I purchased the home for $289,000. Less than three years later, I listed it for $262,000, a drop of nearly 10%. After fix up and closing costs, I had to write a check for $14,000. Most of you will remember this time when rates were increasing, housing prices were falling, and the stock market was stagnant. Is this what the next 3 years have in store for us? As financial planners, it is our job to see through the noise and lead our clients down the safer path.
Real Estate Reaches Record Appreciation Levels
Recently, the Office of Federal Housing Enterprise Oversight, the government entity charged with ensuring the capital adequacy and financial safety and soundness of FNMA and FHLMC, published its House Price Index for 2004. For the 5th consecutive year, housing prices have increased by more than 7.5% nationwide. National housing prices increased by 10.24% in the 2004. Here are the to 10 states ranked by appreciation over the past 5 years:
(click to enlarge)
Conundrum
The Federal Reserve has increased short-term rates at a “measured pace” 8 times since June of 2004. Yet long-term rates such as mortgages remain below their levels of 1 year ago. Fed Guru Greenspan recently referred to the current low long term interest rates as a “conundrum” (which by the way is also a great white wine made by Caymus Vineyards)! Fed tightening, higher core inflation, near record oil prices, lower dollar, record federal budget deficit, and above trend economic growth create the perfect storm for higher long term rates and an immediate halt to appreciating property values.
The Federal Reserve has increased short-term rates at a “measured pace” 8 times since June of 2004. Yet long-term rates such as mortgages remain below their levels of 1 year ago. Fed Guru Greenspan recently referred to the current low long term interest rates as a “conundrum” (which by the way is also a great white wine made by Caymus Vineyards)! Fed tightening, higher core inflation, near record oil prices, lower dollar, record federal budget deficit, and above trend economic growth create the perfect storm for higher long term rates and an immediate halt to appreciating property values.
Testifying before the House Financial Services Committee last month, Greenspan stopped short of calling home buyers “irrationally exuberant”, but stated "I think we're running into certain problems in certain localized areas. We do have characteristics of bubbles (in those markets) but not, as best I can judge, nationwide." Publicly traded homebuilders stocks fell 10% on the comment.
Home Sales Slowing
According to Merrill Lynch economist David Rosenberg, “the backlog of unsold homes has risen steadily, and in January approached a five-year high of 4.7 months supply. However, raw data, excluding seasonal adjustments indicate that the backlog has reached six months, which would mark an eight-year high.” While our local markets remain strong, this may be the last rush to purchase property before rates increase by too much.
Home Appreciation Outstrips Personal Income
“Median house prices have risen about 30% since March 2001, well ahead of an 11% gain in personal income”, says Michael Youngblood, head of asset-backed research at Friedman Billings & Ramsey.
Speculation on the Increase
Meanwhile, “unfettered access to easy money has inflated home prices nationwide, particularly on the coasts, and lately has let to an upsurge in speculative buying.” says Kopin Tan of Barron’s. Just as with the stock bubble in 2000, recent increases in speculative buyers and property flippers have driven up values in many urban areas like Washington DC.
“Household real-estate assets now equal nearly 14% of Gross Domestic Product, the highest proportion in two decades and eerily close to the ratio of household mutual fund and equity holdings relative to GDP at the stock market’s peak in 2000.” says Kopin Tan of Barron’s.
David Berson, the chief economist for Fannie Mae, observed in his weekly commentary that investor ownership of housing hasn't been this high since the late 1980s, which led to a crash in housing prices. "Many analysts think that a high investor share in the Northeast and California helped exacerbate the housing downturn that happened during the 1990-1991 recession”.
Bubble
Yale University economist Robert Shiller, author of "Irrational Exuberance," the 2000 best-selling book about the '90s stock-market bubble, said the only similar housing boom in U.S. history was when GIs returned home from World War II, lifting a depressed market. The latest addition of “Irrational Exuberance includes a chapter on the current real-estate trend.He thinks the current boom is a "classic bubble" because people keep buying houses they know are too expensive because they expect prices to rise even higher.
Conclusions
Ultimately it will be the level of long term interest rates that will create a local or national housing bubble. If rates exceed 6%, expect a 10% correction across the board. Larger homes will most likely be hit harder. If rates stay below this threshold, we may still see some localized drop in values in the higher end prices of homes in localized areas. The question is when?
As financial planners, it is our job to help our clients steer clear of disaster. Most real estate acquisitions are highly leveraged. This leverage works against you in a falling market. If your clients have an over allocation of real estate, it may be time to rebalance.
Ultimately it will be the level of long term interest rates that will create a local or national housing bubble. If rates exceed 6%, expect a 10% correction across the board. Larger homes will most likely be hit harder. If rates stay below this threshold, we may still see some localized drop in values in the higher end prices of homes in localized areas. The question is when?
As financial planners, it is our job to help our clients steer clear of disaster. Most real estate acquisitions are highly leveraged. This leverage works against you in a falling market. If your clients have an over allocation of real estate, it may be time to rebalance.
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