residential real estate

There's been a lot of talk lately about "shadow inventory". That is homes, not yet on the market, where borrowers are 90+ days delinquent on their loans and/or are in pre-foreclosure. Illinois is among one of the top 10 states with high incidences of foreclosures. When adding IL with AZ, CA, FL, NV, NY and NJ, they take up about 60% of the share in the foreclosure market nationwide. The market is already saturated with distressed properties, which accounted for 39% of first quarter sales this year, up from 36% a year earlier. Top that with approximately 25 months of shadow inventory and we are well passed the ideal inventory of 6 months. While these properties are driving down home values, it is interesting to note that 47% of home sales in the first quarter of this year were from repeat buyers (21% from investors, and 32% from first time homebuyers). People are still buying homes. It is a great market for first time homebuyers, cash buyers, investors purchasing rental properties, and for renters who continue to see their rent go up with no tax write-off. Now is a great time to buy a home.

Avoiding fraudulent foreclosure will keep the American Dream alive for many families and ensure that our national recovery is built upon a firm foundation.

~ Bank of America, October 2010

If you have attended any of my Fireside Chats, you know that I believe that the residential real estate recovery is an absolute key to the U.S. economy convincingly pulling out of the worst recession since the 1930s.

Pressure heated up this past Friday for banks to completely halt foreclosure proceedings, with top lawmakers and consumer groups calling for a country-wide moratorium. Senate Majority Leader Harry Reid, (D-NV), joined the chorus of requests on Friday, advocating that major lenders stop foreclosures nationwide. Of course, Reid's home state of Nevada has been the worst hit by the foreclosure crisis, with one out of 84 homes receiving a notice in August, 4.5 times the national average.  Las Vegas is the worst-hit city in the U.S.

So now, with the recent announcement by Bank of America, the largest mortgage holder in America, as well as J.P.

While giving a presentation this week, one of my slides includes housing from 1965. At that time the average home cost $13,600 and the average income was $6,400. Today the average home cost is about $184,000 and the average income is $48,000. We needed less money down in '65 and the debt to income ratio was less. With no other debt or expenses in 1965, technically a person could pay off their home in a little over 2 years. Interest rates at that time were around 5%. Now our debt is greater, we have to put more money down to purchase a home (excluding FHA and VA purchases), and it takes almost twice as long to pay it off, while interest rates currently remain the same as they were in 1965. So you have to ask yourself, has our spending gotten out of hand? Are our debts too great? We know taxes have certainly increased since 1965, but we can't hand all the blame there. So what are we doing differently in our spending, then we did, or our parents did in 1965. How much leverage do we have in our homes? How are we using them as an asset versus a debt? Now is a great time to make home improvements and keep your home from looking "dated" when it is time to sell.

If you have an interest rate of 4.75%, with the ability to get the rate down to 4.25% is it better to refinance now, especially having just refinanced about a year ago from a 5.25% rate?  While I would defer to my lending experts in the field, the general rule of thumb is to refi if you can get your rate down 1% or more during the refi process.   That is because there are closing costs and fees involved each time you refinance your home.  So, if for example, you paid $500 in closings and fees last year to refi your home, and you've reduced your mortgage payments by $50 per month, it would only take you 10 months to pay off  the prior refi, and over one year you've then saved $100 (the add'l 2 months in savings).  But, if you don't think rates will go any lower than 4.25%, you are also saving in future months what you have paid had you not refinanced.  I hope this helps in your decision making process.  Please be sure to always check with your current lender and compare with additional lenders to get the best rates and lowest fees you can. 

We should never pretend to know what we don't know, we should not feel ashamed to ask and learn from people below, and we should listen carefully to the views of the cadres at the lowest levels. Be a pupil before you become a teacher; learn from the cadres at the lower levels before you issue orders.

— Mao Tse-tung.

After today’s press conference, I feel compelled to send a letter to our President.  This may seem a little strong in places, but my feelings on these matters are strong in all places. 

Dear President Obama:

I am aware that you are gravely concerned about the economy and the employment situation, as am I. Further, I believe your policies of fiscal and monetary stimulus have failed to create economic growth or employment. Yet despite such failures, you continue to advocate – as recently as in today’s press conference -- more of the same stimulus remedies in the face of their failure.

On Labor Day you announced new spending of $50 billion on infrastructure construction to create “jobs”.

I recently had a client ask me about "flipping" a house.  He saw a great deal on a home near a water resort area that was on the market for $27,500.  He's very handy and wanted to make the purchase, do the work himself through the winter, and then turn around and sell the house.

I had just done a seminar on that very topic the week prior.  My response was this: if you are a risk taker and have disposable income, can buy the right house, at the right price, then yes -- there is some money to be made in flipping.  However, I would not recommend it at this time.  Right now investors that were flipping are currently purchasing homes low, rehabbing the home and then renting them.  It is a great market for rentals.  That being said, let's look at what it takes to accomplish a successful “flip.”

I am honored to welcome Diana Denton Szmurlo as a guest author to Towards Prosperity. Diana's enthusiasm, knowledge, confidence, and wisdom on all things real estate will be a blessing to you as you follow this blog. If Diana's that peaks an interest, please COMMENT on her posts. She is a great resource for me personally when it comes to my real estate awareness in the Fox Valley, and, indeed, understanding the national real estate market.

In this most difficult of times with rampant foreclosures and with the worthwhile venture of home ownership itself being questioning, I hope you benefit from having Diana as trusted source of knowledge for developing your own wisdom in your own critical investment in the American infrastructure.

Towards Prosperity,

Aerodynamically, the bumblebee shouldn't be able to fly,
but the bumblebee doesn't know that,
so it goes on flying anyway.

Mary Kay Ash 

Aerodynamically, and even sentimentally, you see, with all the media pessimism, the market shouldn't be able to fly, but the market doesn't know that, so it goes on flying anyway.

U.S. stocks rose today, adding to the biggest rally in the Standard & Poor’s 500 Index since July.  Treasuries fell as an unexpected jump in home sales and a drop in jobless claims tempered concern the economic rebound is weakening. Oil advanced for a second day. The S&P 500 climbed 0.9 percent to 1,090.10 at 4 p.m. in New York, bringing its two-day gain to 3.9 percent, the most since July 8^th.

A new day is coming, yes, a new day is coming.
It’s gonna be a brighter day, yes, it gonna be a better day.

~ The band “Cannon”, 1971 

Yesterday, my blog asked if you were happy.  With so much negative news, it is easy for us as investors to be discouraged.  My advice is to decide not to let the media fear mongers get you down.

U.S. stocks rose on Tuesday as a pair of positive data surprises helped alleviate continued investor anxiety over the economy's strength. Item #1 is that Bloomberg reports that U.S. consumer confidence rose more than expected in August, lifted by a mild improvement in the short-term outlook. But Item #2 is even more important: The S&P/Case-Shiller index of property values increased 4.2 percent from June 2009. The median estimate of economists surveyed by Bloomberg called for a 3.5 percent advance, reflecting a residue of demand from homebuyer tax credits that ended in April.

Talk? Talk?? It's only talk.
Arguments. Agreements. Advice.
Answers. Articulate announcements.
It's only talk: elephant talk.
     ~ King Crimson, 1981

Tuesday’s salient data was that Existing Home Sales Plunge 27%. That caused treasury yields to hit new lows. Home sales of existing homes dropped twice as much as expected, worse than every economist forecast, to a 15 year low. Existing Home Inventories soared to 12.5 month, the highest number of months of inventory since 1999.

Ever heard an elephant talk?  They do a lot of wailing, but don’t say very much.

Now, let’s look at this data another way. 

Reading the punditz and other bloggers, I’d (you’d) think the world is ending. It’s not.