Friday, March 27, 2020

Governor's Lock-down and Real estate

On Monday the Governor here in Washington State, decided to go to a stay home policy that has more or less shut down all 'non-essential' business and services. For real estate that means we as realtors cannot show property to prospects nor can we engage in things such as an open house. For the home inspectors, they are linked to the "essential construction industry" and as such can with some limitations perform home inspections for pending transactions. It also seems that appraisers are still able to do their thing as well. So pending transactions should be OK during this shut down.

However the buying and selling process is going to be slowed down for all active listings in the area until such time the government returns to a more "normal" status. If we can get this thing under control soon, say in the next 30-45 days, we should be right back on track for a reasonable real estate market. I believe that at least some negative fallout in the form of some layoffs and such will result. For buyers in the entry-level price ranges this could be a blessing in disguise as that potential "fallout" would soften the number of qualified buyers seeking homes and make life a little easier in the hunt once it resumes hopefully before May.

Whatever the outcome economically there are going to be some winners and losers. The losers are those that unfortunately lost jobs or opportunities due to this government lock-down. They will get their chance to return after things perk up. The winners need to be ready to strike when the lock-down is lifted. 

Friday, March 20, 2020

Virus versus Housing

Last week I mentioned that the Wuhan Corona virus and associated economic issues might lead to an influx of cash for real estate. That has not materialized yet. Bonds, Gold, Hard Money, all of the normal flow points for equities in distress are also down. That means the wealthy "market makers" are holding onto cash. This is very surprising to me because there are few if any places on this planet where cash is earning money, in fact in many countries cash COSTS money.

I believe that investors are genuinely spooked by this virus and are waiting for the cases to start declining rather than continuing upwards. Once the dust settles they will likely move that cash back into equities, bonds, gold or where ever they think the best opportunity is. Until that happens mortgage interest rates will continue to climb, the stock market will remain flat or possibly dip lower. We really have to wait to see what the "big financial fish" do before we can get a handle on the long term market effects for real estate and other sectors.

Locally our housing market hasn't reacted that much to this condition. There does seem to be a tad less buyers out and about house hunting, but well priced homes seem to be getting traction despite the doom and gloom. Hopefully Washington's governor will not go too far with the draconian wand like they have in California, Oregon, and New York. Yes, we need to keep people safe, but there are also practical limits to this thing and I believe the aforementioned states have already tread into those murky waters of over reaction.

That said, we should all be mindful of the call for some social distancing and limit excursions to solo activities and necessary outings. Looking at houses is necessary :)


Friday, March 13, 2020

Stock Market Tanks, Is Housing OK?

Wall Street is having a hemorrhage over the Corona virus (COVID-19) and the broad stock market has managed to shed more than a quarter of its value in just two weeks time. Is this as bad as it looks? The short answer is: "not really." In my estimation the stock market was a bit overvalued and all it needed was a trigger event to cause some major adjustment. This sell off is an overreaction to a near non-event. However the over reaction may be deliberate on the part of the major market players, the uber rich.

In contrast to the so called "Great Recession" that began at the end of 2008, this event is not being "triggered" by an underlying financial crisis like we had in 2008. Leading up to the last recession, back in '08 there were several real and identifiable problems including a fair bit of corrupt behavior in the mortgage lending business as well as a few government fails on SEC regulations and banking. The 2008 crisis was real. This crisis is simply an excuse for super rich billionaires to take massive profits on what was largely considered to be a puffed up stock market.

The core economic indicators are still much stronger than they were in 2008. That said, this could potentially become something to worry about if the actual job market starts to soften as a result. I still think that isn't going to happen just because of this Corona scare and the recent Wall Street sell-off. A broad economic downtown will require other issues than an overblown virus. Make no mistake, the Corona virus is being exploited. As of this writing less than 5,000 people have died from this COVID-19 virus, on a planet populated by 7.6 BILLION. This year's influenza season (flu) is expected to take the lives of some 700,000 people worldwide. 

Although Corona virus is more aggressive in its spread and in certain risk categories it is more deadly, it however is not a big enough problem to warrant the market response we see here. It has become political in nature and that has created as much a problem as the actual virus itself.

It is important to remember that the rich billionaires that sold early in the market slide are sitting on massive piles of cash. These guys sold off $6.5 trillion last week, this week all of the small investors were in a panic and sold off their positions making matters even worse for them and BETTER for the rich guys. The billionaires will come back into the market after the dust settles and buy back their positions for 60 to 70 cents on the dollar. They will make all the money back again plus a tidy bit extra. Right now about $10 TRILLION in stock market cash has exited the Wall Street equities market and now is circulating in other markets.

What is important is that there is idle cash in the marketplace right now. The billionaires don't like idle cash. Even if the super rich start buying back stocks soon, they will ultimately have surplus cash and some of that cash will likely find its way into the economy via lending, capital investment, and venture capital. Much of this will drive real estate projects that often need large chunks of up front cash to get started.

Treasuries are not yielding much at the moment so investors will look to bonds, mortgages, and other real estate funding for better returns over the long haul. Again the investors will come back to the stock market after the panic subsides and when that happens some of this potential cash for real estate development will go away. Developers should be jumping on this opportunity for financing NOW!

In the current marketplace we still see strong employment, rising wages, low mortgage interest rates, and healthy investment in real estate. The housing market still looks pretty rosy for the rest of our spring season. I am seeing a tightening in inventory and more aggressive offers from buyers and that is also an indicator at least for the short term that conditions in housing are solid. 

Friday, March 6, 2020

Low Rates Spur Refinances, Caution is Advised

Many people may see super low interest rates on mortgages and think about a refinance. I spent an entire chapter in my 2010 book, "Don't Panic" about the math behind a refinance and that sometimes, a refi isn't as good as it looks. Mortgage interest is "front loaded." This means you pay the bulk of the interest in the first 10 years of the loan. When you refinance you often end up paying MORE interest even if your rate and payment is lower.

I am not saying that a refinance is "bad" but rather a refinance should be carefully thought out, especially if the homeowner is taking out cash. I have done many mortgage refinances over the decades with numerous properties. I have done them wrong and I have done them right. One should be cautious of what they use the money for when doing a refi. I absolutely DO NOT recommend taking cash out of a primary residence to fund things like cars, boats, or vacations. This is always a bad idea.

I am also very cautious about taking cash out of a primary residence to consolidate short term debts. If the debts are manageable the homeowner may be better off just whacking those debts down with heavy payments. The only thing that hurts a consumer more than a high rate of interest is a long term of payment. So a car payment at 7% interest with 3 years to go is better left alone than refinancing that debt over 30 years and taking valuable and secure equity from your home. Lets say the car was 0 down, $40,000 originally financed at 7% for 6 years. If the car is halfway through the loan cycle, the bulk of the interest is already paid. The balance is down to $16,408 after three years. There is only $1,100 remaining in interest on the loan. Refinancing that $16,408 over 30 years even at 4% will cost the debtor TEN TIMES as much interest! $11,792 in interest over 30 years. If money is tight and the car payment has gotten difficult to manage, it is often possible to refinance the car.

I am a strong proponent of using mortgage cash to improve the property. That doesn't mean buying furniture by the way. Remodel the kitchen, put in new landscaping, new siding and paint, etc. This improves the value of the house and thus helps to maintain the homeowners equity position despite increasing the balance owed. If the homeowner uses credit cards to purchase the home improvements, then refinances to pay that short term debt off, that works fine. Doing the improvements up front will at least result in a better property appraisal and possibly a lower rate on the new mortgage due to a potentially lower LTV.

Typically a cash out refinance will cost the homeowner either up front fees or a higher interest rate. Often that rate can be 1/4 to 1/2 percent which adds up to thousands of dollars over the life of the loan.

Ultimately if a homeowner intends to stay in the house for more than 5 years and can improve the rate of interest by a full percentage point, a refinance makes good sense particularly if doing a rate and term loan with no cash out.

Remember that every situation is unique and I am only suggesting that careful thought and study goes into the refinance decision. Furthermore find a local loan professional you can sit down with and go over the facts and figures. Don't do something as important as a mortgage with some shady online firm that teases you with a seemingly low rate. Mortgage rates are simply not that far apart in the real world. Mortgages are traded on wall street and investors are not paying a very big spread so when one bank shows a rate that is 1/2 percent lower than most others, you WILL be paying for that somewhere in the fee tree! There is absolutely NO FREE LUNCH in the lending business, no matter what the sleazy spokesperson says. Mortgages are highly complex devices and as such it is easy to "pull the wool over the eyes" of even the most brilliant people.

When I refinance a house, especially my primary residence, I look at more than just the rate. I look at what my current principal payment is each month at the time of refi, what the new principal payment will be, how much total interest did I add to the end of loan. Why am I concerned about principal reduction? Because home equity is the VERY reason buying is better than renting. When a home owner erodes the equity in the home, they erode the value of ownership, it should not be taken lightly.

Remember that when someone refinances a house they are in a loan already and they have paid that loan down to some extent. If someone is 5 years into a mortgage and they refi at 30 years they are postponing the eventual payoff by another 5 years. That adds total interest to the mix. When I do a rate and term refi, I also calculate the amount of time the new lower payment takes to cover the expense of doing the loan. If the loan fees are $3000 and I am saving $100 per month then I recover those fees after 30 months. If I refi the house again or sell it in less than 30 months I lost money on the refi! A good loan officer will go over these types of details with every prospect and that is worth far more than any slight difference in rate one might pay at a less quality firm.