Posted on February 14, 2006 at 12.46 PM
Retail Sales, Manufacturing and Housing figures are to be released this week. Traders are looking for some news to work with and home loan rates may be volatile. For the past two weeks interest rates have been creeping up and if the news of the week is economically stong and positive, home loan rates will continue to increase. Remember, it will take some pretty dismal news for Bonds to improve and home loan rates to drop. Please email me with any questions you may have at smaasbach@manhattanmortgage.com.
-Steven
A: I'm listing this under BUYER TIPS because as a buyer in a slowing housing market you can look for the signs of desperation that may lead to a great buying opportunity for you.
Its always sad to see a distressed homeowner put into a position where they have to sell their property fast and at a loss. However, this is how savvy real estate buyers make a great investment and build wealth for themselves even in a cooling housing market such as one we are in now.
To do this, lets do a make believe psychological analysis of a distressed seller whose life is being affected by the fact that he bought a property he couldn't afford (something that happens often as buyers let emotion take over financially sound decision making). Let the session begin!
Shrink: Why are you selling?
Seller: I bought way more property than I can afford and being a homeowner is actually draining my savings accounts. I have 3 months of savings left, when I used to have over a years worth.
Shrink: When did you buy and what did you buy?
Seller: I bought a condo, because I would never pass a co-op board, and I bought it a year and a half ago. I paid 600K for it and now there is a similar unit for sale in my building for 565K and its not selling.
Shrink: Is your job stable?
Seller: Yes, but I am currently spending about 50% of my monthly income on housing expenses. After taxes, living expenses, credit card payments and bills I am losing money each month!
Shrink: How are you holding up emotionally?
Seller: Im a Mess! I am worried all the time. I asked my parents if I can borrow some money but they have none to give me; now they are worried too. I fight with my girlfriend ALL the time. I have to sell this place before it tears my life apart!
Shrink: Your personal relationships have suffered because of this home purchase?
Seller: Unfortunately it has. If I bought something I can afford I wouldn't be in this position. It was a very costly mistake and one I'll never do again. I have to sell this place, even at a loss, and get my life back on track.
Shrink: Is this stressful environment affecting your work production?
Seller: No, thank god. Im still doing very well at work. It's almost as if I know that if I work harder and better, than I might be able to get a raise and stay here. But I know thats wishful thinking.
Shrink Diagnosis: While this bad investment is more a product of bad timing of the market, it was your fault that you purchased a property that you cannot afford. The fact that you are aware of this and at peace with it as a decision you made, is very important. Your personal life and your relationship with your family is the most important thing in your life, with your work relationship and production being a distant second. I would like you to sell your apartment immediately (obviously at a loss) and if that means pricing it lower than the other similar unit in your building, than so be it. We must do something now and end the downard financial spiral that has resulted from this ill-guided investment, and save your relationship with your family, significant other, and most importantly your perception of your own self. Can you do this?
Seller: Yes I think I can. I know there is some tax write off for a Capital loss so its not going to be that bad. I just want to get my life back.
Shrink: Then make it happen! Be happy there is no medical or mental illness at play here. This is strictly a result of your personal financial situation and is fixable.
While this is an exaggerated session, it is not unlikely! In fact, it is a circumstance that affects a lot of homeowners every year and is a direct result of people acting on emotion and buying something they WANT rather than something they can AFFORD! This distressed seller will have to sell and sell fast! Some signs that a buyer should look out for to pinpoint a distressed or needy seller could be:
1. Property first listed BELOW the last comp or similar unit currently ACTIVE in same building. In other words, the seller is NOT 'testing the market'!
2. Price reduction in first 30 days! Keep your eyes open for this. If a property reduces its asking price in the first month than chances are the seller needs to get rid of it fast!
3. Multiple OH's in 1 week period. If a seller holds 3 Open Houses in 1 week (Sunday, Monday, & Wednesday) chances are they are pushing the marketing limits for general showings and want to sell quickly.
4. Property on Market Forever. While the seller may not originally been in distress, if a property has been on the market for 8+ months and still has not sold, the seller must be frustrated and getting more ancy. They can easily become a distressed seller and accept an offer much lower than they originally had in mind!
A: As the economy continues to show signs of strength the general consensus right now continues to favor another 1/4 point rate hike at the next Fed meeting; the first for new chief Ben Bernanke. In fact, from what I'm hearing from old trader friends is that the rumors at the Chicago Board of Trade bond pits are already pricing in a 1/4 point rate hike for the next meeting, and leading to a final 1/4 point rate for the meeting after that. This would bring the Fed Funds Rate to 5.0% and definitely have an affect on housing as money gets more expensive to borrow.
How does this affect you? Well if you have been putting off buying for the past several months waiting for a slowdown, you may want to apply some time pressure to yourself as you might be faced with a double-edged sword.
On one hand, as rates rise housing prices should be flat to down to compensate. On the other hand, as rates rise it gets more expensive to borrow money when you can lock in a lower rate right now.
Its a tough call because anything can happen between now and the next fed meeting, but this consensus usually is pretty accurate as the new fed chief Bernanke is NOT going to want to mess around with 'The Street' and create an environment of uncertainty which nobody likes. One sign that may convince Bernanke to only raise rates 1 more time is that inflation indicators Oil & Natural Gas have corrected; especially Natural Gas which is now at a 1 year low! Wow, I wouldn't want to be on the wrong side of a trade in that pit at NYMEX!
The Low Down: Expect a 1/4 rate hike at the next meeting and possibly one more after that! Plan accordingly!
Part II of this story is about future regulation (read my previous post) the federal government is working to put in place on lenders in an attempt to protect homeowners from ill-guided and very riskly loan products; such as a COSI loan or other Negative Amortization loans (this is where unpaid interest gets added onto the principal increasing your total loan balance; NOT a good thing!). Past CNN Story.
While Im not sure what regulation will be be enforced or when it will be introduced, I do know that it's immediate effect will be a negative one on housing strictly due to the limiting of lending options that will now be available to homebuyers. However, in the end it sets a more stable housing environment that will be healthier in terms of long term growth!
~ Fed's Bies warns on mortgage, real estate lending
