Are We In A Bubble?

Many people are looking at today's housing prices and wondering will they keep on going up, will they hold at this new level or will they come down with either a giant crash or a slow hiss of deflation. I tried to polish my crystal ball the best I could, but it remained cloudy. This is probably because housing prices, like food and energy prices do not exist in a vacuum. There are many factors pulling them in different directions.

There are a few factors that are abundantly clear. Although we have our own opinion, we will present the facts as we see them and stand back so you can draw your own conclusion.

Unique Markets

Although housing prices have reached the outrageous stage, there are a few areas where they have begun to retreat. Keep in mind that in spite of general trends, individual real estate markets can be unique. Urban areas can witness a mass exodus while suburbs and country are booming. At other times the reverse is true.

Among the recent trends is one caused by the fact that many people have figured out they don't have to deal with crowded cities and they can work from home – almost anywhere. That is another story, but with a more than tangential impact on our topic.

Obstacles To Overcome

We see these high real estate prices at a time when some are experiencing job insecurities brought on by economic conditions such as supply chain disruptions and government mandates. Consider the plight of pipeline workers who bought homes based on the better than average income this construction gave them. With a stroke of a pen, those jobs were gone. At this writing, the powers that be are considering shutting down still another pipeline. Then we have medical professionals, who also generally make good money... last year's heroes are this year's zeroes if they don't take a medicine they may have little confidence in. Whether you agree with these actions or not, the impact is real and the money may no longer coming in to make payments on the homes they bought or were thinking about buying.

Beyond that, we are seeing inflation coming upon us at a near record rate. There is less to spend on housing after paying more for food, clothing and gasoline. Whether this actually would keep some from paying the price in the current market or if it just makes people feel less confident and wealthy is really immaterial if it changes their behavior.

So except for the few who have figured out how to prosper in these unusual times it looks like higher and higher prices will be creating economic headwinds. But – remember local markets do not always follow greater trends. Mortgages remain unreasonably low, even as prices for materials used in new construction continue to be a drag on the market, along with shortages of skilled workers.

Institutional / Corporate Influences

Recently Zillow announced that they were dropping out of the housing market. Their entry was treated like the eight hundred pound gorilla entering the market because of the vast resources at their disposal. As it happened they bought high (perhaps helping to push prices higher for everyone) and could only sell not so high. I have seen reports that say they lost over eighty thousand dollars on the average house. Most of us would be out very quickly at that rate... and eventually it caught up with them and they are gone. It kind of gives one pause when they base their deals on the Zestimates.

Chicom backed Evergrande recently missed payments on three hundred billion in debt obligations and Oceanwide Holdings has had two of their major developments foreclosed. While these are most commercial projects in California and New York these, and financial troubles of smaller Chinese investors can have negative impact on the financial markets and individual housing markets.

Outliers

Even with problems in the Chinese housing markets ricocheting around America, there is also the impact higher end markets – usually outside many major cities – as some who have managed to prosper financially in the communist environment are looking to get their money out of the reach of said Chicoms.

Here in the Tampa Bay area construction is booming – as it is in some other areas. The area is already built out pretty well so there are not a great deal of single family homes being built, but there are some. Near me there was a fairly nice house sitting vacant on a large lot. A builder bought the place and knocked it down. Now they are building four homes where one once stood. They may not be as grand as the former structure, but the demand is being met as people come for the milder climate, lower taxes and a less stressful environment. Much of the construction taking place is either condos are apartments. Neither fits the cry for “affordable housing” as the economics simply do not work without hitting the already burdened tax payers.

On the Horizon

However word out of the nation's capitol is that they are working to see that those who have been underserved in the past should have an opportunity to buy a home. Here is where good intentions and economic reality collide. This is the same thinking that led to the 2008 housing debacle. The reason these communities were underserved is that, in many cases, the people could not survive the financial colonoscopy the banksters perform before granting a home loan.

The solution back then was the no doc loan. You could just go to a lender and give them a song and dance about your booming financial situation. Since the federal government was scrutinizing the banksters, you could get a loan with a credit score in the 400s and a body temperature somewhere around 98 degrees.

The results were predictable. Many people moved in to their new homes and some never even made the first payment. The government stepped in and attempted to keep the market from going south too rapidly, but it was not particularly effective in preventing masses of foreclosures that eventually came on the market and down came the prices. This is something that may be in our future depending on how the people in DC want to serve the underserved.

We are already facing a wave of foreclosures in the making, brought about by rent and payment moratoriums that have expired. Again there will be efforts to slow their entry into the market, but is it possible they will be more successful than in the past?

Trends Are Made Up Of Individual Stories

Buying at what may be the top of the market is best if you can be there for a while. During the last crash, I got a call from a couple that bought a house with no money down. I don't recall if it was one of those deals with negative amortization during the first few years, but they owed $200,000. They were getting a divorce and neither one could afford the place themselves. They had consulted a realtor who told them the house was currently worth 190,000. No room for commission and no listing! They could not come to the closing table with enough money to either pay off the shortfall in the sale price or the realtors commission. With what I have learned over the years, I might have been able to do something for them – not get them much cash, but avoid the foreclosure. As it was, I wished them well and suggested they reconsider the divorce.

Are we headed down the same path? My crystal ball is still quite cloudy so I picked up one of the novelty Eight Balls. I shook it up and flipped it over. It told me: The future is uncertain.

 

Ditching PMI – Part 2

Last time we discussed ways of getting the PMI payment out of your life once it is there. Most would agree that it would be better if you didn't have it in your life at all. There are some strategies a new home buyer can look into to eliminate the burden of PMI. They don't always work out, but are worth pursuing.

80,10,10

Many years ago, we were buying a house and only had about 10% to put down. Since we had done business with this representative before we discussed our options. Here is where it is good to work with someone who actually has your interest at heart rather than someone who just wants to sell you a loan. Yes, it is true, not a lenders are pure of heart.

The normal procedure would have to put down the 10% and get a loan for the balance. What our “friend in the business” suggested was two loans: one for 80% with no PMI and a shorter term second at 10%. When we looked at the numbers, it was a no brainer. The second mortgage payment was fairly close to the amount we would have paid for PMI and the payments went toward knocking down the amount owed, rather than giving piece of mind to the banksters somewhere across the country. I've spoken with some lenders and some will do this. Shop around. If you are putting 3% down, I'm pretty sure this approach won't fly.

Seller Carries Second

Depending on the seller's financial situation, some can be induced to take back a portion of the payment. Why would they do this? Now multiple buyers for every property may not be be optimal time for this strategy but in buyers markets, it may help them sell the home more quickly. Also, if they are not needing the funds to buy their next home and have no investment plans, you can give them 25-50 times more than the amost non-existant interest paid by the banks and still get a good deal.

Private Lenders

Since you are not looking for a full term loan, there are many people who have found making private loans are a better investment than the banksters can ever offer. Talk to friends who invest in real estate, many will know of these people, but, they may be hesitant to share the information so their favorite lenders don't run out of money before their project can be funded.

One Caveat

Thanks to Messrs Dodd and Frank protecting the American public, balloon mortgages for your home are now longer legal. The logic for this is that during the Great Depression, many mortgages had lower payments for so many years and then the entire balance came due. People could not get more financing an many lost their homes. This applies to both sellers and private lenders. Regular institutions know not to create such loans.

On the other hand, if you are buying an investment property, it's like the wild west. For the most part, whatever you and the lender can agree to will make the deal work. Just be careful you don't get so excited about the deal that you sign anything just to get it done. Read the paper and if you don't understand it... paying a couple hundred to a real estate attorney can save you thousands.

 

Ditching PMI – Part 1

 

PMI, or Private Mortgage Insurance, is a fact of life for many home buyers these days. Most sort of understand it as a requirement to get the loan. What the insurance does is protect the lender (and the underwriter) after they have given you the usual financial colonoscopy in case you stop making payments. Just be aware, PMI is part of the price or admission but it does nothing to protect you or your interests.

This is usually required if you are unable to put the down the desired 20% when buing a home. Yes, you can get a home loan for 3% down, or sometimes less, but it will cost you, in terms of interest rate and PMI premiums. While I am no fan of the banksters doing this, in reality, lower down payment loans do present a higher risk. Of course they can always boot you out on the street (maybe not now though) and take the property back, but that is expensive for them, and rarely a winning proposition. We will look at PMI from the perspective of homeowners already caught in its clutches. Next time, we will look at it from the buyers angle and what they may be able to do about it.

Is PMI As Certain As Death And Taxes?

If you've been in the property for a while, there are several strategies available to remove this financial waste from your monthly budget. There are even some approaches you can look at if you are just buying currently... but more about that next time.

Refinance

If you have built up some equity over time and watched real estate values rising, taking you to the desired 20% equity position, you may be able to refinance with new terms. If your current lender won't do it, and your payments are current, there are many of other institutions anxious to sell you a loan. However, don't go looking to pull out a wad of cash as you take advantage of the increased value... otherwise you will be back in PMI territory once again.

Get A New Appraisal

By this I mean a thorough appraisal from a licensed appraiser. Not that you friendly local realtor wouldn't be happy to give you an idea of what your home is worth, but lending institutions have more confidence in a bona fide professional appraiser. You can take this to your current lender and stand their with your hat in hand while they run it through the various, hidden (to you) people who will make the decision to allow you to remove the extra charge each month. If that doesn't go well or your patience runs out, you can use it as you pursue a refinance else where. It could be well worth the several hundred dollars in the money saved.

Pay The Balance Down Faster

Given the nature of most mortgages, the early years show small reductions in the principle owed and most of the payment goes toward interest, adding what you can to each payment will help increase your equity faster and shorten the length of your loan. It will help if you can get an amortization schedule for your loan so you can see what is actually going on with your payments. Doubling the amount that goes to the principle each month will increase your equity to the point of releasing PMI more quickly and save you even more money as it reduces the number of payments to pay off your home. However much more you can pay off will be to your benefit.

Wait Patiently For The Banksters

In theory PMI should be removed when you achieve 20 to 22% equity in your property. However since this is of greater concern to you than the lender, you may have to initiate action to get the job done. Sometimes they are a little slow to respond and they may need to be reminded that the Homeowners Protection Act of 1999 makes removal mandatory and forbids the lender from keeping PMI in place for the life of the loan.

Look at what you are paying each month and think about what you could using the money for you rather than protecting the banksters. Putting PMI behind you may not be as difficult as you think.

More Equity In Your Home - Now What?

With the rising home prices, many home owners are seeing their equity increase dramatically. This is not necessarily an unmixed blessing since the value of the dollar is falling as inflation reduces everyone's purchasing power. But still, you have an asset that is certainly worth more than it was a year ago.

So now, what are you going to do about it, and will you benefit or get burned? There are several options. You may see the increased value as an opportunity to sell your property and buy a better, or larger one. I hate to carry bad news, but those better and nicer houses are hitting higher prices as well. Your higher price will probably give you a better down payment, but, unless there is a source for more money, it will also get you a larger mortgage, even though it is moderated by the fire sale interest rates.

Free Cash?

You do have the opportunity to pull cash out by way of a refinance or HELOC. On the plus side the proceeds are not taxable. If you are stuck with PMI, the increased value may let you ditch the extra expense.

However, it is not free money. It feels good to get a big check, but you are signing up for more payments that do have to be paid, The larger payments may put your home at risk if things begin to go badly. As much as some progressives would like to see it, eviction moratoriums cannot go on forever.

What Do YOU Want To Do?

On the other hand, If you still have your heart set on a bigger, better home, the increased borrowing power your home affords may just be the way to make your current home fit the bill – even in the era of increased material prices. This is called forcing the value to increase instead of merely waiting for inflation to take a hand.

If you are looking to invest, the equity in your property could provide the capital to get you going. Real estate purchased now may be at the top of the market or it may be higher than last year but cheaper than next year. In that case, if the property cash flows, paying a little more than in the past may not be such a big deal as historically when houses become more expensive and fewer people can afford them, more people turn to renting – and those prices go up as well.

Inflation? Going Up Or Down?

Speaking of inflation and increased prices, it is anyone's guess what the future holds. The people in DC believe the inflationary spike is only temporary. If this is true, the housing prices that have been rapidly rising may just as rapidly come down in a repeat of the housing bubbles of the past.

On the other hand, others believe the monetary polices that put more dollars into the market without real productivity increases will keep food, energy and housing prices on the upward path. I was polishing my crystal ball but it still seemed a bit cloudy.

The best path depends, in part, on which way the market goes and in part, what your goals are. You could end up more valuable assets or you could find you owe too much on your home to sell it, or even to stay in it. Unless you have a particular purpose for what ever you do – you may decide not to do anything at all.