Reason #4 To Buy a Home in 2009

This reason only applies to eligible first time home buyers; but, you will be amazed at how many people qualify as a first time home buyer. Congress' definition of a first time home buyers is anyone who has NOT owned a primary residence in the last 3 years before your closing date on a new home. Thus, someone who owns a second home or a rental property could qualify as a first time home buyer!

If you last owned a primary residence, a home in which you lived in, more than 3 years ago you qualify for this credit!

If your parents or other family member own a home and they are co-signing with you to help you buy your first home you still get the $8,000 credit!

If your significant other has owned a home in the last 3 years and you have not, you can still claim the credit, all $8,000 of it, IF you buy a home BEFORE you get married, if a wedding is in your future. Sounds like a good way to help pay for your wedding!

But, don't miss out as this credit expires on November 30, 2009! You MUST CLOSE on your new home by this date! With only 3 months to go I would recommend against writing offers on "short sale" properties as they often take 3 to 5 months to close. Don't let this opportunity pass you by!

Green Shoots for Denver Real Estate

Yesterday, the highly publicized Case-Shiller Index for June and the second quarter was released. There was good news for the second month in a row for the 20 city national index and for Denver locally. For the Denver metro area Case-Shiller reported that our median home price rose 2.5% in the second quarter from the first quarter. On an annualized basis this would be a 10% annual increase!

Next, FHFA who oversees Fannie Mae and Freddie Mac, reported the following good news for the Denver metro area--
* 4th best results for the 25 largest cities with a median price increase of 1.24% in the second
quarter.
* 2nd best results for the 25 largest cities with a median price increase of .89% in the last
year.

Denver was one of only two large cities to report a median price increase in the last year. Why is this happening? I can think of four good reasons--
* Inventory levels are down and demand is up--Economics 101
* Interest rates are incredibly low.
* The $8,000 first time homebuyer tax credit
* Real estate investors are buying properties left and right, rehabbing the properties, and
reselling them for good profits, which is causing prices to rise in many hard hit
neighborhoods. This reminds of a survey I saw from 2007 that only 12% of first time home
buyers want to buy a "fixer upper", which leaves lots of inventory for investors to choose
from.

Reason #3 To Buy a Home Now

The last big foreclosure crisis in Colorado was in the late 1980's. And when you look at the numbers and statistics it appears that 1989 and 2009 are really similar. 1990 was the beginning of a slow recovery that really took off 3 or 4 years later. I believe 2010 could be the beginning of a recovery this time.

So, I went back and looked at 3 numbers from 1989 and here they are--
* Median home price--$92,000
* Median household income--$32,852
* Average 30 year fixed mortgage rate--10.32%

Since most housing affordability studies have always assumed 20% down, I will use that number in this calculation. Thus, for a loan at 80% loan to value with an interest rate of 10.32%, the P&I payment would have been $663 a month, which was equal to 24% of the median family's income.

Today, the median home price is $229,900 with a rate of 5.25% and the best median income figure I can find is the state-wide number from the U.S. Census Bureau for 2007 of $67,500. http://www.census.gov/hhes/www/income/statemedfaminc.html Honestly, Denver's median income is probably higher than this though.

Thus, if a buyer put 20% down on a median priced house as above, their P&I payment would be $1015, which is equal to just 18% of the median income. This means that homes today are approximately 25% more affordable than they were in 1989!

Why? Much lower interest rates. I have said for years that your mortgage rate has a bigger effect on your payment than the price.

So, why buy now? I am 98% sure that interest rates in 2010 will be higher as the Federal Reserve quits buying the majority of mortgage bonds issued by Fannie and Freddie in December. In fact, mortgage rates could easily rise by 1% or more next year because of this. Take advantage of these incredibly low interest rates and housing affordability that goes with it.

2 New Ways to Pay for College

Every fall millions of American families struggle with how to pay for college for their kids. This fall annual tuition for incoming freshman at CU Boulder ranges from $7,932 to as high as $11,782 depending on which school/major they will be in. WOW! On top of that, CU estimates that room and board, and other fees will total an additional $12,127. Total cost for first year of college is over $20,000 a year!

I graduated from college 18 years ago and tuition for my senior year was about $1500 and my room in a duplex was $120 a month. How times have changed!

I saw a statistic from Sallie Mae this week that said the average American family borrows 39% of the total cost for their kid's college expenses. WOW! That's about $8,000 a year they are borrowing for a grand total of $32,000 over 4 years.

Here are the traditional ways of borrowing to pay for college--student loans, student loans for the parents, and home equity loans. Unfortunately, many families don't have the equity in their homes they once had three to five years ago. Second, the ease of access to that equity is much more difficult today. For example, most banks won't do a home equity loan above 80% of their home's value. This third option may not be an option then.

Here's a fourth option for you. Buy a home or condo where your child(ren) will be attending college for the next few years. Your child(ren) will live in the home or condo and rent out the additional bedrooms to a friend or two or three and ask them to pay you rent instead of paying rent to the college. This will greatly reduce your monthly payment.

How much does it cost upfront? Here's the great news, FHA allows you to help a child buy a home even if they don't have a job and you just have to put 3.50% down! This also helps your child build a positive credit history with the best kind of debt possible--a mortgage.

Then, when your child(ren) are done with you can sell the home for a profit (hopefully) and use that money to repay any student loans you or your child have after graduation. Ta da! A new way to pay for college!

One final note--if your child has not owned a home in the last 3 years they will qualify for the $8,000 first time homebuyer tax credit even if you as the parents are on the loan and on title. But, they must close on a home by November 30th. Ta da! Another new way to pay for college!

Reason #2 Why Now Is The Time To Buy

Last Friday I blogged on the topic that the Denver real estate market may soon become a Seller's Market instead of a Buyer's Market. Why? Inventory is dropping especially on homes priced under $200,000 where inventory is under 3 months.

A second great reason to buy a home in 2009 is the exceptionally low mortgage rates we have this year. They are not as low as they were in the first 5 months of the year; but rates in the 5's are hard to complain about. My wife and I bought our first home in 2000 when rates were above 8%.

There have been 2 primary reasons why mortgage rates have been so low. First, is the recession we have been in. Normally, during every recession bond yields and mortgage rates drop as investors seek "safe haven" investments with a fixed return on their investment.

But, the second reason is more important as the Federal Reserve has taken never before seen actions to help our economy recover. One action has been the purchase of mortgage backed securities or mortgage bonds. They have purchased nearly $800 billion of mortgage bonds this year! Their plan is to purchase $1.25 trillion this year. This "temporary" demand has caused bond prices to rise and thus rates to fall. This "temporary" program ends in December.

A second action by the Fed has been their purchase of the Treasury's new debt issues such as 10 year T-bills and 30 year T-bonds. The Fed last week in their Meeting Minutes reminded the market that their purchase of the Treasury Securities will end in October with no plan to extend this "temporary" program.

Everything else being equal when the Fed quits buying the Treasury's new debt in November it is expected that Treasury yields will have to RISE to attract new buyers. Remember the Law of Supply and Demand? If supply stays the same and demand drops, what has to happen to prices? Just as with flat screen TVs, cars, and other consumer goods, prices MUST DROP. And with bonds when prices drop, RATES OR YIELDS RISE.

Thus, I expect in November mortgage rates will rise by 1/4% to 1/2% at that time. Come January, people smarter than me are estimating that mortgage rates will rise by 1% or more from today's super low rates. Ouch!

On a $200,000 home, your payment just increased by $123 a month if rates rise 1%! I will end with this maxim, "time is money". In this case taking your time could cost you a lot of money.

Are We Now In A Seller's Market?

In last week's report on the metro Denver area real estate revealed that housing inventory dropped to 4.7 months in July, its lowest reading in several years. For homes priced under $200,000, inventory is now under 3 months.

For decades a housing market in which inventory is under 6 months has been identified as a Seller's Market. So, is the Denver market now a Seller's Market? On some homes it definitely is as a majority of bank owned properties now sell for above listing price and as much 20% higher!

Why is this happening? Buyers are getting into bidding wars on these homes as the banks "artificially" price these homes too low on purpose. Also, inventory levels are really low. If you are trying to buy a home under $100,000 inventory levels are at about 2 weeks I hear!

So, what does a Seller's Market mean for home buyers and especially first time home buyers?

First, is more and more bidding wars on homes. In 2000 my wife and I were involved in two of these before being able to buy the 3rd home we wrote a contract on.

Second, home prices will rise as NAR's 2nd quarter report revealed on Wednesday. I remember in the late 90's when prices were rising 10% to 15% a year consistently that 99% of first time home buyers could not save money fast enough to keep up with the rising prices. For example, a couple might be able to save $500 a month or $6,000 a year; but home prices rose $20,000! They would go backwards by trying to save additional money.

Third and this is key for many first time home buyers, is fewer seller concessions to help with your closing costs. Two weeks ago I asked my most trusted appraiser whom I have worked with for 8 years about seller concessions. He told me he expects that seller concessions will diminish greatly in 2010 as sellers begin to realize that the market is NOW in their favor. This could mean that you need an extra $3,000-$5,000 to buy a home in 2010.

On Monday, I will cover 2 more reasons why 2009 may be the BEST YEAR EVER to buy a home in Denver.

How 47% of All Homes In Denver Were Purchased

I read this week on-line that in June 47.5% of all home purchases in Denver were with a FHA loan. WOW! I was astounded by this number. Three years ago I bet only 4-5% of all purchases were consummated with a FHA loan here in Denver. I definitely helped increase that percentage then.

You see when nearly every other mortgage professional was closing sub-prime loans I was closing FHA loans instead. In 11+ years I have only closed 6 sub-prime loans! Unless the borrower was already under contract on a home, I would instruct them on how to obtain a FHA loan whether it took 3 months or 3 years as I KNEW the sub-prime loans had trouble written all over them. I know I lost a lot of deals doing that in 2004-2006; but I had to do the right thing. Thankfully, by the grace of God I am still here doing the right thing.

For the last 2 years in my industry I have seen hundreds of offers, emails, and mailers about how to become a FHA Expert as if they were some brand new loan. Each time I receive an offer to become a FHA Expert I quietly think to myself, “I already am a FHA expert, I could teach that class or seminar in my sleep.” You see FHA loans have been around for decades and they are great loans and I have closed hundreds of them.

Who are you going to trust with your FHA loan? Someone, who thinks they are a new type of loan and who is still “cutting his or her teeth” on them? Or someone who has closed hundreds of them for 11+ years?

Denver Home Prices UP 16%

The National Association of Realtors or NAR reported 2nd quarter statistics for over 100 metro areas today. Nationally, the median home price increased 4% in the 2nd quarter from the first quarter. The national median home price as of June 30th was $174,100, which is down 15.6% from June 2008.

NAR also reported that 36% of all home sales nationally in the 2nd quarter were distressed sales. What's a distressed sale? It's the sale of a property by a bank or a seller who owes more than the house is worth; otherwise known as a short sale. On average distressed properties sell for about 15% less than a privately sold home which drags down the median price from above.

For Denver our median price increased a whopping 16% in the 2nd quarter from the first quarter as our median price increased by over $30,000 to $223,700!!! That is a HUGE increase. It even surprised me by the size of the increase.

More and more reports are pinpointing the bottom of our real estate market to have been March 2009. The vaunted and highly publicized Case-Shiller Index also points to a bottom in March.

Remember the saying "buy low, sell high"? NOW is the time to buy.

It's Better To Have and Not Need, Then To Need and Not Have

Yesterday we learned that banks truly have the safety and peace of mind we crave when we have lots of equity in our homes or we make larger than necessary down payments. So, how can we turn the tables on the banks and regain safety and peace of mind for US?

Here’s the secret—Liquidity. Liquidity is a fancy economic term for money in the bank. Thousands of companies have gone out of business, not because they are not profitable; but because they ran out of money. For instance, in June 2007 First Magnus was named one of the 20 largest wholesale and correspondent mortgage lenders in the country and rated a best buy by many stock analysts because of their increasing market share and profit margin. By the end of July they were out of business! Why? They ran out of money and did so in about 2 weeks after Countrywide pulled the plug on them.

CASH IS KING! Money talks! Money in the bank is a wonderful thing for a business and for an individual or a family.

Let’s assume you were buying a $200,000 home and you had $22,000 in the bank. Should you put 10% down or $20,000? Or should you put down $7,000 or 3.50%? Traditional wisdom tells us to put 10% down so that you feel safer; but we learned yesterday that our feelings can betray us.

What’s the safer choice?

It comes back to liquidity and money in the bank. I would recommend that you only put 3.50% down or $7,000, as that will leave you with $15,000 in the bank after closing. And every financial advisor will tell you to keep at least 3 to 6 months of living expenses saved in the bank and maybe even more right now.

You see your home is safer when your money is parked OUTSIDE of your home in the bank where you can get to it easily when needed. Whereas, your home is more at risk with a larger down payment, as that large down payment parks your money INSIDE your home where it is very tough to get at when needed.

Remember the adage: “It’s better to have and not need, then to need and not have”? This is the principle I am talking about. It’s better to keep your money in the bank and have access to it (liquidity) and not need it then to have your money in the house and need it and not have access to it. Because, when do you really really NEED peace of mind? When catastrophe or trouble strikes. Will you be prepared?

What's the Safer Loan?

I recently have had 2 clients trying to decide between putting the smallest down payment possible on a house or putting extra money down on that house for safety and peace of mind. Currently, the smallest down payment possible is 3.50% for a FHA loan unless you are a veteran and qualify for a Veterans loan with no money down.

I want to deal with the emotional question which loan is safer: a loan with 10% or more down or a loan with 3.50% down? If we were to poll Americans on this exact question, I would bet that 90% of Americans would say the loan with 10% or more down is safer. And I would say you are “correct”.

But, “for whom”? Let me tell you a story one of my clients told me a couple years ago. One of her parents’ neighbors had owned his home for 27 years and had been paying on his mortgage for 27 years. He was just 3 years from paying off his house in full. Then, catastrophe struck and he no longer had any income to make any more mortgage payments. He had lots and lots of equity in his home; but because he had no job and no income he could not get a new mortgage or line of credit to make the house payment with. And thus he LOST his home to foreclosure and he lost over $300,000 in equity!

I bet before his catastrophe struck that he felt “very safe” because he had a lot of equity in his house. It made him feel safe. But, what he did discover through the School of Hard Knocks? That your home’s equity is NEVER SAFE or guaranteed until the house is completely paid off.

Who truly WAS safe after 27 years of payments by the borrower? The BANK! The BANK had the safety and peace of mind, not Mr. Homeowner.

The same principle applies when we choose to make a larger down payment than needed to buy a home. We “feel” like our home and our loan is safer; but, it is NOT! It’s safer for the bank, not us as they have more certainty of getting their money back as they already have more of our money.

So, what’s the safer loan? I will discuss that tomorrow along with the fact that most borrowers are confusing safety with liquidity.