Enewsletter - Dec. 14, 2009
HARRY'S COLUMN
WE COULDN'T HAVE SAID IT ANY BETTER - BUSINESS WEEK SAYS, "BUY NOW" !!!
In a Business Week article of Dec. 8, 2009, Marc Roth, the founder and president of Home Warranty of America, dramatically made the following point. "If you want to buy a house, now is the time, and if you don't act soon, you will regret it. Here's why: historically low interest rates."
As of today, the average 30-year fixed-rate loan with no points or fees is around 5%. That is the lowest the rate has been in nearly 40 years and should make all current and prospective homeowners take notice of this once-in-a-lifetime opportunity.
A BRIEF OVERVIEW OF INTEREST RATE HISTORY
In 1970 the rate was approximately 7.25%. After hovering there for a couple of years, it began a trend upward, landing near 10% in late 1973. It settled at 8.5% to 9% from 1974 to the end of 1976. After the rise to 10%, that probably seemed O.K. to most home buyers. But they weren't happy soon thereafter. From 1977 to 1981, a period of only 60 months, the 30-year fixed rate climbed to 18%. And when rates started to decline after that, they took a long time to recede to previous levels. They hit 9% for a brief time in 1986 and bounced around 10% to 11% until 1990. For the next 11 years through 2001, the rates slowly ebbed and flowed downward, ranging from 7% to 9%. We've since spent the last nine years, until very recently, at 6% to 7%. So you can see why 5% is so remarkable.
So, what can we learn from the historical trends and numbers?
First, rates have far further to move upward than downward. For more than 30 years, 7% was the low and 18% the high. The norm was 9% in the 1970s, 10% in the mid-1980s through the early 1990s, 7% to 8% for much of the 1990s, and 6% only over the last handful of years.
Second, the last time the long-term trends reversed from low to high, it took more than 20 years (1970 to 1992) for the rate to get back to where it was, and 30 years to actually start trending below the 1970 low.
Finally, the most important lesson is to understand the actual financial impact the rate has on the cost of purchasing and paying off a home. Typically, for a $200,000 mortgage, if the homeowner were to keep the home for 30 years, each quarter-point move up in interest rates would cost that buyer $12,000.
Loan Costs
Stay with me now. We are at 5%. As the economy stabilizes, it is reasonable for us to see 30-year fixed rates climb to 6% within the foreseeable future and probably to a range of 7% to 8% when the economy is humming again. If every quarter of a point is worth $12,000 per $200,000 borrowed, then each point is worth almost $50,000.
Let's put that into perspective. You have a good stable job (yes, unemployment is at 10% nationally, but another way of looking at that figure is that most of us have good stable jobs). You would like to own a $240,000 home. However, even though home prices have steadied, you may be thinking you can get another $5,000 or $10,000 discount if you wait (never mind the $8,000 or $6,500 tax credit due to run out next spring). Or you may be waiting for the news to tell you the economy is "more stable" and it's safe to get back in the pool. In exchange for what you may think is prudence, you will risk paying $50,000 more per point in interest rate changes over the course of the loan, between now and the time you decide you are ready to buy. And you are ignoring the fact that according to the Case-Shiller index, home prices in most regions have been trending back up for the last several months.
If you are someone who is looking to buy or upgrade in the $350,000-to-$600,000 home price range, and many people out there are, then you're borrowing $300,000 to $600,000. At 7%, the $300,000 loan will cost just under $150,000 more over the lifetime, and the $600,000 loan an additional $300,000, if rates move up just 2% before you pull the trigger.
What I'm trying to impress upon everyone is that if you are planning on being a homeowner now and/or in the foreseeable future, or if you are looking to move your family into a bigger home, then pay more attention to the interest rates than the price of the home. If you have a steady job, good credit, and the down payment, then you really are being offered the gift of a lifetime.
THE WALL STREET JOURNAL DEFINES THE AMERICAN DREAM 2:
DEFAULT ON MORTGAGE, THEN RENT
In the Dec. 10 issue of the Wall Street Journal, Mark Whitehouse describes the trend that is now becoming common throughout the country. Homeowners who face large mortgage payments for homes which are no longer worth what they paid for them, and whose income has been curtailed or eliminated by the recession, are walking away from their homes and are becoming renters. This creates a wonderful opportunity for prospective investors.
The article cites one homeowner whose monthly payments on his mortgage were $4,800. He short-sold his home and is now renting in the same neighborhood, for $2,200 a month. "I don't know if I'll buy another house again, because it's such a huge headache", he says.
Although this trend represents a very difficult adjustment for the homeowners and the lenders involved, it represents a wonderful opportunity for investors. These former home-owners are accustomed to living in good homes in good neighborhoods and have good renter profiles. Every one of them who walks away from their home puts another, well-maintained property on the market at a selling price that is very attractive to investors. Furthermore, these former-homeowners become the investor's next renters.
As a result of this trend, the pool of prospective renters has grown, thus creating an opportunity for smart investors to profit. Please call us, if you would like to discuss how investment property might help you attain your financial goals. We know the local market and are experts in investment property. We would be pleased to discuss this with you.
LATEST STATISTICS
Each week, we publish a link to our latest local Sales and Listing statistics. We should probably take a few minutes to discuss the relative strength of our local real estate market, based upon these statistics. The highlights of the latest statistics are:
Nov. 2008 Nov.2009
Total Number of MLS Sales 499 794
Average Sales Price $213,466 $214,062
Median Sales Price $187,000 $187,950
Note that the increase of 295 home sales from November of 2008 vs. November of 2009 represents an increase of +59.1% in MLS Sales. Also note that both the median price and the average price for homes in our area have stabilized; indicating that we have started to recover from the recession and real estate prices are on their way back up.
The statistics also list 28 statistical areas within the Pikes Peak area, plus Fremont, Lincoln, Park, Pueblo and Teller Counties.
Perhaps the most important numbers in the report are "SP/LP" (The relationship between the Selling Price and the Listing Price). This report shows that, as of November, 2009, the overall average of total sales prices were 97.4% of the list prices. This is a very strong relationship and a good indication that our local market is not as soft as the national market.
If you would like to discuss the local statistics in more detail, please give me a call.
POTPOURRI
COLORADO SPRINGS COST OF LIVING LOOKS GOOD
The latest statistics released by the Arlington-based Council for Community and Economic Research shows Colorado Springs's cost of living at 7.6% below the national average at the end of the third quarter of 2009. This is near the lowest level of the past 20 years. The index compares prices for 57 goods and services bought by households headed by middle managers.
According to Fred Crowley, senior economist for the Southern Colorado Economic Council, the latest figures indicate that the local economy has bottomed out and has begun to recover from the Recession.
Among other cities in the state, living costs in Boulder were 26.4% above the national average and Denver was 4.3% above the national average.
QUARTERLY UCCS STATISTICS ON LOCAL ECONOMY NOW AVAILABLE
The Quarterly Update on the El Paso County Economy as of September, 2009, issued by the College of Business and Administration at the University of Colorado at Colorado Springs has just been issued. Please give us a call and we will be happy to send a copy to you.
PAUL SAMUELSON DIES
Paul Samuelson, whose analytical work laid the foundation for modern economics, died Sunday in Belmont MA, after a brief illness. He was 94. His textbook, "Economics" which was published in 1948 and which was the most widely used college textbook on any topic, is still in use. Anyone, like me, who has suffered through Economics 101 has been influenced by that text. Mr. Samuelson's nephew, Lawrence Summers, currently runs President Obama's National Economic Council.
And, please remember, I would be honored to serve as your Broker for all of your residential real estate needs. I want to help you, my reader, make the most prudent and accurate Real Estate business decision.
