David Parrish Realtor

Resuming our conversation “Why Buy…”

Buying Real Estate is a Good Investment

Last time we documented that the driving reasons for the purchase of a home aren’t all about price or even financial considerations. Even so, we would be remiss not to consider the financial aspects of the decision to buy. We documented additionally, that despite the current fall in real estate values, real estate has out performed the Stock Market over the course of time even the tumultuous recent past beginning January 1, 2000… and that did not include the recent declines in stock prices occurring the first part of this month. Taking that decline into consideration gives Real Estate an even more “glorious” track record…

We also established that just like day trading, short-term real estate investment is not for the feint of heart or the casual / uninitiated investor. I’ll speak more about flipping and investing in a future article. True enough; there was a time when it was a sure thing almost regardless of what you purchased. Now that day is gone; and, buying smart is paramount, as it should have always been.

WSJ: Buy Now

Even so, it’s about more than price. To me, the financial decision really comes down to those of quality and costs… the quality of the investment and the cost of the investment.

First Quality! The first thing in selecting any investment should be the quality of the investment… In real estate this can be summed up as location. No other attribute impacts the value of real estate as location. Location determines the potential for a property to perform in the future. And yet all too often, I see buyers make their decisions to purchase based on easily changed property characteristics, such as room color or whether the yard is shady or not … all the while seeming oblivious to location. True bargains are based on quality versus cost!

Buy Smart .. Buy to Hold!

Cost: Please understand price and cost are not the same thing! The cost of money is another factor of the cost of an investment. Granted if you’re paying cash you may not feel that cost so directly (even though it’s still there). But most homeowner’s are not paying cash… they’re borrowing the money!

Yes the FED just committed to keeping interest rates low for the next two years. But the truth of the matter is that the FED discount rate and the yield on T-Bills aren’t the only things that determine consumer interest rates. At today’s nominal rates (4.25% for a 30 year fixed rate mortgage) expect a rise to 5.5% interests (not out of the question 12-18 months out). A 1% rise in rates above the current rate of 4.25% represents an increase in the monthly payment (P&I) for a 30-year fixed rate mortgage of 12.15% of $59.59 per month on a $100,000 loan amount.

If we assume the drop in home prices for the next 12 months will be 6% (the number forecast by various sources vary between 4% and 8%) and the interest rate increases projected do occur… let’s say 1% to 5.25%, our increase in cost (Principal & Interest) would be a 5.4% increase in cost. So to absorb the likely increase in interest rates (1%), values would have to drop at least 11% to retain the same payment (monthly cost). No one is predicting price declines in this range for the Metro Birmingham Market or anywhere close to that for anything but the most depressed Alabama Markets.

So you don’t believe interest rates will rise 1%! To manage even a .5% increase in mortgage interest rates, prices would have to fall at least 5.75%! So what is the rate of decline in the market where you would like to buy a home?

These scenarios assume that there will be no inflation. So how does inflation impact these costs?

 While I’ll not go into the subject deeply here, inflation puts pressure on interest rates (causes them to rise) because future dollars are worth less than today’s dollars. Inflation also tends to have a greater impact on new home prices than existing home prices… so it’s effects aren’t felt evenly across the board when it comes to home prices. Even so, inflation has a tendency to push home prices up but not necessarily at the same rate that it is occurring due to market forces (supply and demand). In a word inflation is not good for those sitting on the sidelines.

At the present we are experiencing an inflation rate of 3.6% with all indicators pointing toward much higher rates in the future. A major impact inflation will have on the market in the current economic environment is driving up rents. Some of you may be old enough to remember the rent controls that went into effect in the 70’s when inflation rates approached the 12% rate. Or the 20% interest rates for home mortgages in 1980 when inflation was running at the 14-15% range.

Home ownership is a definite hedge against inflation! And yes… Despite the media… Now is a great time to buy! But buy smart… get the help of a reliable and professional counselor/advisor helping you make a truly informed choice.

May the market be with you.

Why buy…  (Part 1)

It seems that whenever anyone mentions real estate the conversation immediately turns to the financial aspects of buying a home. Where are prices headed? Where are interest rates headed? Is now the time to buy? Should I wait to try and get a ‘better buy’? Should I wait until I can get a ‘steal’?

National Housing Survey

The funny thing about all these questions is that survey-after-survey confirms that price is not the reason families actually buy a home.

When money is considered at all, it is in light of not paying rent to a landlord. Let’s look at two recent surveys as examples:

The top five reasons given in the survey for buying a home, in order, are:

Why they buy...

• It means having a good place to raise children and provide them with a good education
• You have a physical structure where you and your family feel safe
• It allows you to have more space for your family
• It gives you control of what you do with your living space (renovations and updates)
• Paying rent is not a good investment

The Myers Research and Strategic Services Survey

The top five reasons given in the survey for buying a home, in order, are:

• Home ownership provides a stable and safe environment for children and other family members
• Home ownership means the money you spend on housing goes towards building equity, rather than to a landlord
• Home ownership creates the opportunity to pay off a mortgage and own your home by the time you retire
• Home ownership creates the opportunity to live in a neighborhood that you enjoy
• Home ownership allows you the right to decorate, modify and renovate your home as you see fit

And yet price dominates our conversation when we talk about buying a home. However, when it comes down to it, we actually buy for the same reasons our parents and grandparents did – we want a better lifestyle for our families and ourselves.

Real Estate vs Stock Market ROI

Despite the precipitous fall in real estate values that has occurred over the past five years, real estate has still outperformed the stock markets. It seems that what has really happened is that the “sure-thing” mentality derived from years upon years of appreciating values lured the public into an unrealistic expectation of non-stop appreciation… no-risk gain. As with all markets, there will be ups and downs… Real estate is no different from any other investment in that regard. Even so, when you look at true performance year-over-year, it has out performed most other investment options available to the general public.

Now I don’t want to discount the financial reasons to buy… It’s just that they aren’t the major reason for buying. Even so, let’s take a look at what the record actually shows about the value of real estate as an investment and what the financial experts have to say.

As the Oracle of Omaha, Warren Buffett, believes and does… He buys to hold. He looks at the intrinsic value of any option before investing his hard earned cash and then buys to hold for the long-term. He shuns the short-term view, as should most investors. The short-term, often highly dependent on market timing, will always be higher risk and require greater skill (and perhaps luck) to be successful.

I’ll continue this discussion in my next column… until then…

May the market be with you.

The Real Story…

News and commentary about the real estate market and related topics.
Dave Parrish, ABR®,CSP,GRI,ePRO®,REALTOR ®, RE/MAX MarketPlace

The opinions expressed here are my own and don’t necessarily represent those of RE/MAX International.

No man is an island…

We like to think of ourselves, as free and independent… it’s built into the genes of every American citizen and those too who wish to be citizens of this land. As a matter of fact, a large part of the holiday just celebrated honors not only the historic event occurring more than 200 years ago but also a national belief that we operate independently of all others. It is very much similar to thinking of ourselves, as an island unaffected by the events of foreign shores or different planes…

No Man Is An Island… All mankind is of one author, and is one volume; when one man dies, one chapter is not torn out of the book, but translated into a better language; and every chapter must be so translated…As therefore the bell that rings to a sermon, calls not upon the preacher only, but upon the congregation to come: so this bell calls us all: but how much more me, who am brought so near the door by this sickness….No man is an island, entire of itself…any man’s death diminishes me, because I am involved in mankind; and therefore never send to know for whom the bell tolls; it tolls for thee.  John Donne   Meditation XVIIFrom Devotions Upon Emergent  Occasions (1623)

In the realm of real estate we have quickly and painfully learned how inaccurate this idea is… for we are now paying for the irresponsible and greedy actions of many. They may have been mistakes made by others and it may even be that we too contributed to those pains now shared.

As much as we want the turmoil of this recession and the dower real estate market to be over, it is not nor will it be anytime soon. As a matter of fact there are reports from dependable sources that not only is it continuing but that it may even dip further.

In a recent interview economist, author and Yale University Professor Robert Shiller (co-founder of the Case-Shiller Home-Price Index) says that chances are ‘substantial’ that the United States is headed back into a recession.

A weak U.S. housing market and a murky global economy indicate that the country is at a "tipping point" at the edge of a fresh economic contraction. While some economic models suggest the economy is on the path to recovery, we are in unchartered territory, which due to the numerous unknowns makes these models less reliable. Shiller believes the U.S. economy will face a double-dip… further economic stress largely based on the current fragility of the housing market.

Home prices dropped 33 percent in 20 cities through March from their 2006 peak, reaching their lowest level since 2003, according to the latest Case-Shiller report on May 31. The decline means the sector has double-dipped back into negative territory, as the index fell below its previous post-housing-bubble low set in April 2009.

Shiller has said that U.S. housing prices could decline another 10 to 25 percent over the next five years. "There’s no precedent for this statistically, so no way to predict," Shiller said recently, according to Bloomberg.

With so many houses in foreclosure, prices will stay depressed, especially with unemployment at 9.1 percent and tighter lending restrictions being the norm at many financial institutions.

Other experts agree that high unemployment rates and a tough economy mean housing prices are still well on their way on a downward slope.

In a recent Bloomberg report Paul Dales, a senior U.S. economist stated "With the foreclosure pipeline still full to bursting, it’s hard to see this downward pressure on prices abating."

While many believe the housing market may see a pickup in prices this summer, Shiller is concerned about the long-term path the sector is taking. Among many of the items impacting markets are issues that many may seem remote… yet their impact looms large on the recovery.

For example the economic crisis faced in Greece, a country the same size of the state of Alabama in terms of area with a population and in terms of population smaller than that of Metro Los Angeles area (compared to other nations Greece is number 73 based on population), has the potential of disastrous impact on the entire world economy… first to the European Union but then spreading to other nations including the U.S and China.

Here in the U.S.  (much as happened with Japan’s failed efforts to ease their economic crisis of the 90’s), in our efforts to avoid/lessen the pain of the economic crisis…the Federal Reserve has pumped hundreds of billions into the economy in order to spur more robust economic growth, while interest rates stand near zero. However, all the loose monetary policy in the world won’t help if consumer demand just isn’t there.

"When the demand isn’t there, you can lower interest rates all the way to zero and people are still not willing to spend — that’s where we are right now," Shiller says.

Closer to home, we must be concerned about the actions of individuals electing to do Strategic Walk-Away’s (those allowing their homes to go into foreclosure when in fact they are able to make their mortgage payments) as a means of protecting themselves from the reality of negativity equity caused by the current economic down-turn while individually contributing to a deepening of the housing crisis.

Truly “no man is an island”.  Understand this or better yet remember it often, as you go about your daily business. Act in a way that honors the impact we have on the world around us, with a sense of fairness, justice and compassion, with an attitude and actions that leave a trail of integrity and happiness in your wake with ripples of joy as you pass through the lives of others. Be aware that we may be like ships passing as in the night, but even so, we all are sailing upon the same sea, each one of us, perhaps unknowingly, affecting the journey of the other. Or as my wife loves to say: Do right, karma is real… What goes around comes around.

May the market be with you.

The Real Story…

News and commentary about the real estate market and related topics.
Dave Parrish, ABR®, CSP, GRI, ePRO®,REALTOR ®, RE/MAX MarketPlace

The opinions expressed here are my own and don’t necessarily represent those of RE/MAX International.

No man is an island…

We like to think of ourselves, as free and independent… it’s built into the genes of every American citizen and those too who wish to be citizens of this land. As a matter of fact, a large part of the holiday just celebrated honors not only the historic event occurring more than 200 years ago but also a national belief that we operate independently of all others. It is very much similar to thinking of ourselves, as an island unaffected by the events of foreign shores or different planes…

In the realm of real estate we have quickly and painfully learned how inaccurate this idea is… for we are now paying for the irresponsible and greedy actions of many. They may have been mistakes made by others and it may even be that we too contributed to those pains now shared.

As much as we want the turmoil of this recession and the dower real estate market to be over, it is not nor will it be anytime soon. As a matter of fact there are reports from dependable sources that not only is it continuing but that it may even dip further.

In a recent interview economist, author and Yale University Professor Robert Shiller (co-founder of the Case-Shiller Home-Price Index) says that chances are ‘substantial’ that the United States is headed back into a recession.

A weak U.S. housing market and a murky global economy indicate that the country is at a “tipping point” at the edge of a fresh economic contraction. While some economic models suggest the economy is on the path to recovery, we are in unchartered territory, which due to the numerous unknowns makes these models less reliable. Shiller believes the U.S. economy will face a double-dip… further economic stress largely based on the current fragility of the housing market.

Home prices dropped 33 percent in 20 cities through March from their 2006 peak, reaching their lowest level since 2003, according to the latest Case-Shiller report on May 31. The decline means the sector has double-dipped back into negative territory, as the index fell below its previous post-housing-bubble low set in April 2009.

Shiller has said that U.S. housing prices could decline another 10 to 25 percent over the next five years. “There’s no precedent for this statistically, so no way to predict,” Shiller said recently, according to Bloomberg.

With so many houses in foreclosure, prices will stay depressed, especially with unemployment at 9.1 percent and tighter lending restrictions being the norm at many financial institutions.

Other experts agree that high unemployment rates and a tough economy mean housing prices are still well on their way on a downward slope.

In a recent Bloomberg report Paul Dales, a senior U.S. economist stated “With the foreclosure pipeline still full to bursting, it’s hard to see this downward pressure on prices abating.”

While many believe the housing market may see a pickup in prices this summer, Shiller is concerned about the long-term path the sector is taking. Among many of the items impacting markets are issues that many may seem remote… yet their impact looms large on the recovery.

For example the economic crisis faced in Greece, a country the same size of the state of Alabama in terms of area with a population and in terms of population smaller than that of Metro Los Angeles area (compared to other nations Greece is number 73 based on population), has the potential of disastrous impact on the entire world economy… first to the European Union but then spreading to other nations including the U.S and China.

Here in the U.S.  (much as happened with Japan’s failed efforts to ease their economic crisis of the 90’s), in our efforts to avoid/lessen the pain of the economic crisis…the Federal Reserve has pumped hundreds of billions into the economy in order to spur more robust economic growth, while interest rates stand near zero. However, all the loose monetary policy in the world won’t help if consumer demand just isn’t there.

“When the demand isn’t there, you can lower interest rates all the way to zero and people are still not willing to spend — that’s where we are right now,” Shiller says.

Closer to home, we must be concerned about the actions of individuals electing to do Strategic Walk-Away’s (those allowing their homes to go into foreclosure when in fact they are able to make their mortgage payments) as a means of protecting themselves from the reality of negativity equity caused by the current economic down-turn while individually contributing to a deepening of the housing crisis.

Truly “no man is an island”.  Understand this or better yet remember it often, as you go about your daily business. Act in a way that honors the impact we have on the world around us, with a sense of fairness, justice and compassion, with an attitude and actions that leave a trail of integrity and happiness in your wake with ripples of joy as you pass through the lives of others. Be aware that we may be like ships passing as in the night, but even so, we all are sailing upon the same sea, each one of us, perhaps unknowingly, affecting the journey of the other. Or as my wife loves to say: Do right, karma is real… What goes around comes around.

May the market be with you.

The Real Story…

News and commentary about the real estate market and related topics.

Dave Parrish, ABR®, CSP, GRI, ePRO®,REALTOR ®, RE/MAX MarketPlace
The opinions expressed here are my own and don’t necessarily represent those of RE/MAX International.

5 Reasons You Should Consider Selling Now

The decision to sell right now has been a difficult one for many. Seems everyone is waiting on the bottom… Waiting on a return of the housing market. The truth of the matter is that while we may well be bumping along the bottom of the market now, we are still a long way away from the recovery of the market and we will see further declines in housing prices, as inventory levels continue to rise. As you have read here before, I don’t believe that we will see a true stabilization of the market before 2016 at the earliest… and it could be even longer perhaps 2020. So if you plan on moving anytime in 2011 or perhaps even the next couple of years, you may want to strongly consider selling your house now rather than waiting. Here are five reasons why:

1. Increased Buyer Activity…

There is currently an increase in the number of buyers attending open houses and searching online for a home. This surge dramatically increases the exposure for your house. The best chance of getting quality offers (perhaps even multiple offers) is RIGHT NOW!

2. Distressed Property Sales will continue to increase for the near term.

The good news is that the number of people paying their mortgage on time is increasing. This will lead to fewer new distressed property listings once the current backlog is put on the market. The not-so-good news is that there is still a large inventory of existing foreclosures and short sales that will still be coming to market.

The Wall Street Journal:

Why It’s Time to Buy

“Despite all the gloom, there are growing indications that it is a good time to buy… The long-term benefits of home ownership remain very much intact. For now, at least, you can deduct the mortgage interest on your taxes—a big perk for people in higher tax brackets. You get to paint your walls any color you wish, without having to clear it with a landlord. And assuming you can buy a home for about the same price as you can rent one, buying will give you the ability one day to live rent-free. Come retirement time, a paid-off mortgage means your monthly expenses are significantly reduced, and you have a chunk of equity to play with.”

LPS (Lender Processing Services) reported in their latest Mortgage Monitor that:

• There are still twice as many loans going 90+ days delinquent as are starting foreclosure (pointing to a growing back log – future foreclosures).
• There are almost three times more foreclosure starts as there are foreclosure sales (indicating a still growing inventory of foreclosures).
• Distressed property inventory levels are almost 45 times the rate of monthly foreclosure sales (current sales levels are unable to absorb the current level of foreclosures and short-sales).

This backlog of properties that will start coming to the market in about 90 days as banks clear up their paperwork problems. These properties sell at deep discounts. They will be your competition. Based on the existing home inventory plus all the additional inventory about to be added, we are looking at up to six years to work through that inventory pointing to a continued decline in home prices… So you can expect to get less for the your home next month than you will three months down the road… less next year than this year!

3. Interest rates are up over the last six months.

Recent Interest Rates

Also bouncing along the bottom last fall at historical lows, interest rates have climbed over 1/4% in the last six months. Every time the rates increase 1/4%, approximately 250,000 buyers are eliminated from qualifying for a mortgage. In an environment of volatile rates, waiting could mean that there will be fewer buyers eligible to purchase your house. It also could mean that you will pay a higher rate on the next home you buy.

4. Qualifying for a mortgage is about to get even more difficult.

Besides increasing rates, there are other factors that will hinder a buyer’s ability to qualify for a mortgage as we move forward. Lending standards have been getting tighter over the last year. And as the government debates the new proposed risk retention guidelines for mortgages with less than 20% down (QRM – Qualified Residential Mortgages), banks are gearing up for even more stringent standards.

Morgan Stanley recently stated: “Recent developments in issues such as GSE reform, Dodd-Frank securitization rules, and foreclosure settlement issues suggest a tighter and more expensive environment for mortgage credit.” This may impact any potential purchaser for your property and may also impact your next purchase.

5. It’s time to get on with your life.

Maybe the most important reason to sell now is so you can get on with your life. Do not allow a less-than-stellar housing market prevent you from reaching your goals. Think about the reasons you decided to move in the first place. Are these reasons still important to you? If you have to take less than you were originally hoping to get for your house, your family has a question to ask each other: Is the difference in sales price worth putting off our plans? Only you and your family know the answer to that question. If you plan to sell this year or even next, the reasons above prove that selling now makes more sense than waiting to later.

Sit down with a trusted real estate professional today to fully understand the best option for your individual situation.

May the market be with you.

Research for this column was based personal research and from information extracted from the KCMBlog.com  (Keeping Current Matters / Steve Harney  ©)

May 24 (Bloomberg) — Hugh Johnson, chairman of Hugh Johnson Advisors LLC, discusses the outlook for the U.S. housing market and economy. Sales of new homes climbed 7.3 percent to a 323,000 annual pace in April, figures from the Commerce Department showed today. Johnson speaks with Mark Crumpton on Bloomberg Television’s “Bottom Line.” (Source: Bloomberg) (Bloomberg)

The Real Story…

News and commentary about the real estate market and related topics.
Dave Parrish, ABR®, CSP, GRI, ePRO®,REALTOR ®, RE/MAX MarketPlace

The opinions expressed here are my own and don’t necessarily represent those of RE/MAX International.

Will You Give Your Kids A Chance?… Five Facts Your Need To Know

Fact # 1:        The “Have’s” and the “Have Nots”

The gap between the rich and poor is growing rapidly across the United States.  In 1994, for the first time since such records were kept, the richest 20% of US households received a greater share of national income than the middle three-fifths combined.  The bottom 40% were worse off in inflation-adjusted terms in 1993 than similarly situated people two decades earlier.  (Source:  US Department of Labor)

Fact # 2:         A College Education is the Difference

Earnings of full-time workers who have a college degree continue to accelerate faster than those with just a high school diploma.  In 1979, the average college graduate earned 49% more a year on an average than a worker with only a high school diploma.  BY 1994, the earnings gap had widened to 89%.  Each year of formal schooling after high school adds 5% to 15% to annual earnings later in life.  (Source:  US Department of Labor)

Fact # 3:         College Costs Are High And Rising

Today, the minimum per year cost for a student attending a 4-year, in-state university is about $10,000 per year.  This cost includes in-state tuition, books, room and board.  It now takes an average of 5 years to graduate.  Only about 40% graduate in 4 years.  Here are the minimum costs of a college education based on 5 years to graduate and college costs rising at 5% per year.

College Cost Now and Tomorrow (minimum)

Now                 5 Years           10 Years         15 Years
$50,000          $63,814          $81,445          $103,946

Fact # 4:         You Have Four Choices

1.   Pay college costs out of ordinary income.  (Add 25% to 30% to cost for taxes)

2.    Kids work to pay part of costs. (Kids take longer to graduate, higher drop-out rate)

3.    Student Loans.  (College graduate starts out in life deeply in dept)

4.    Pay college costs out of assets.  (Buy a rental property that will be free and clear)

Fact # 5:         The Easiest Way To Pay For A College Education Is By Buying A Rental Property With A 15 Year Loan.

Here’s the equity created in a $125,000 rental property with a 20% down payment.

Equity               Equity             Equity              Equity
Now               in 5 Years      in 10 Years     in 15 Years

* $25,000       $45,557          $77,003          $125,000
**$25,000       $80,112         $155,614        $259,866

* Assumes no increase in property value.
** Assumes 5% per year appreciation.

Yes I know everyone’s down on the real estate market… I also know that for the smart buyer in this unique Buyer’s Market, the time is ripe to buy so that you reap great profits in the future.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

– Warren Buffett.

May the Market be with you.

The Real Story…

News and commentary about the real estate market and related topics.

Dave Parrish, ABR®, CSP, GRI, ePRO®,REALTOR ®, RE/MAX MarketPlace
The opinions expressed here are my own and don’t necessarily represent those of RE/MAX International.

Thinking about investing in real estate?

Real estate has historically been the creator of more wealth than any other investment vehicle. No other investment approach offers the advantages offered by real estate to leverage your assets and energies into financial independence.

Don’t be fooled into thinking that is no loner true. The truth is that it s more applicable today than it has been for many years… Yes… even in 2011! The smart money is looking strongly at real estate now… Why? The price is right!

Image via Wikipedia

Whether it’s Donald Trump or Warren Buffet… you’re seeing great enthusiasm by those in the know. It’s called buying in a down market. While it’s true that prices are still falling the overall combination of factors affecting true cost favor buying now rather than waiting until the absolute bottom has passed. Inflation is still low, we’re still at near record low interest rates, the lenders are tightening further the underwriting requirements and raising other real costs like mortgage insurance.

“Be fearful when others are greedy, and be greedy when others are fearful.”

– Warren Buffet (In Annual Shareholders letter 2007)

Rely on an active real estate investor to guide you through the process of using real estate to build wealth and create future financial security.