Wednesday, March 25, 2009

Recession Home Prices In Villa Rica

Villa Rica is a small town to the west of Atlanta. Like many areas around Atlanta, this city, whose name ironically means “rich village,” has been hit hard by the mortgage crisis. Home prices here were rising quickly over the past few years as Atlanta’s real estate market blossomed amid rising home values and a booming local economy. Homeowners in Villa Rica, the site of a gold rush in the early 1800s, found that their homes were an investment that was as good as gold.

All that came to a swift end when the mortgage crisis hit in 2008. Development all but stopped as home sales crashed to a halt. Rising numbers of foreclosures meant that many homes sat empty for months on end.

In my neighborhood on the north side of town, near Wesley Chapel Road, home prices had increased by 30% over the previous ten years. This is a small, quiet subdivision with newer houses that were close to the median price for the area. Almost overnight, the market value of these homes fell by approximately half. A planned subdivision that was being built behind my neighborhood now sits silent. Its roads are completed but there are no houses along them.

For Sale signs went up but brought in few prospective buyers. Most prospective sellers stopped bothering with real estate agents and put out For Sale By Owner signs. For a period of almost a year, we had vacant foreclosure houses on either side of my home. It has only been in the past few weeks that a family has bought one of these houses using seller financing. The other is still vacant.

The credit freeze is an important aspect of the fallen real estate prices. With banks afraid to lend money, it can be hard for many people to qualify for mortgages. Since we have owned our house for several years, as interest rates fell I contacted our loan officer to discuss refinancing our mortgage.

He told me that even though we have excellent credit, a refinance is out of the question because of the declining values of homes. As home prices fell, we lost equity so that, like many other homeowners around the country, we now owe more on our mortgage than our home is currently worth.

The same trend makes it difficult for new homebuyers to secure financing. In sharp contrast to the past decade, most banks are now requiring borrowers, even those with excellent credit, to make a down payment of at least twenty percent of the purchase price of the home. When combined with the crash of the stock market and other investments, this means that many prospective buyers do not have a sufficiently large nest egg to take advantage of the many great real estate deals that exist. The one recent sale in my neighborhood was financed by the seller and did not involve a bank.

Eventually, the economy will begin to grow again and the real estate markets will wake from their slumber. Banks will begin to lend more money and people will once again be able to purchase their dream home. As buyers enter the market, home prices will once again start to rise. For homeowners in Villa Rica and around the country, that day cannot come soon enough.

Bedford MA

Tuesday, March 24, 2009

Buying a First Home in a Tight Economy

The mortgage crisis has created a surplus of homes for sale with very few buyers. This means that many people have a golden opportunity to get a great deal on a nice home. Plunging prices tempt buyers to purchase homes at a discounts of approximately fifty percent of what the house sold for a few years ago in many cities. First time homebuyers might be skittish about buying a home in such an unstable economy, but if you do your “homework” you can safely get a good deal.

First, look at the big picture. Examine the industry in which you work and take a close look at how your company is faring. If your industry is particularly unstable, or if your company is considering layoffs or pay cuts, you should be very careful about committing yourself to a mortgage. You should try to minimize the chance that you will not be able to pay your bills by considering the chance that you will be facing unemployment or decrease in pay.

Second, when you start shopping for a home, carefully consider how much you should spend. Traditionally, lenders have desired that a mortgage payment be no more than 25% of borrower’s take-home pay and that all payments be less than 32% of the total take home pay. For example, if you make $5,000 per month after taxes, your mortgage payment, including escrows for homeowner’s insurance and property taxes, should be less than $1250 per month. Similarly, your total monthly obligations, including credit cards, car payments, etc. should be less than $1600 per month. This ensures that there will be plenty of money left over to pay utilities and buy other necessities, such as food and clothing. In the current economic climate, a borrower would be wise to be even more conservative than these traditional guidelines.

In the past, borrowers could finance almost all of the cost of a home. Now, however, mortgages with no money down or small down payments are a thing of the past. To minimize their own risks, most banks are requiring a down payment of at least twenty percent of the sale price. This means that most borrowers will need a sizable nest egg to qualify for a mortgage. Banks normally require that the down payment money be verified over a period of time. For example, it is not uncommon to require six months of bank statements or documentation showing the source of the funds. Gifts are normally acceptable, but it is common to require that the donor complete forms that state that the money is a gift and not a loan. Gifts or abnormal sources of down payments will likely trigger additional scrutiny of loan applications these days.

Shop around to find the best interest rate and down payment. Dealing with a mortgage broker instead of individual banks makes it easier to find the best deal. A major cause of the current crisis is that many people were not fully aware of what type of mortgage they were buying. Ask questions and find out exactly what is being offered. This is particularly important if you are buying an adjustable rate mortgage (ARM). You should find out how much the interest rate can adjust and how much that will increase your payment. Also find out if there is a prepayment penalty or a balloon payment. If you do not understand what you are signing, don’t sign!

The best way to shop for a house is to get pre-approved for a mortgage before you start looking at houses. This way you will know in advance how much the bank is willing to loan and you can shop for houses within your price range. This also makes it easier to close on your house quickly when you find your dream home. Since your finances have already been approved by the lender, only items dealing with your specific house will have to be completed.

When you begin shopping for a house, consider foreclosures and other distressed sales. These homes often sell at deep discounts, but do carry some additional risks. For example, such homes are often sold “as is” with no warranty. Since the previous owner could not afford to make the mortgage payments on the home, it is unlikely that they were able to pay for upkeep and maintenance on the home as well. In some cases, the previous owner may even have vented their frustrations on the house’s windows, walls, and doors. This damage will probably not be repaired by the seller and therefore will add to the real cost of buying the home. If the house has been unoccupied, there may be damage from vandals as well.

To minimize the risk of finding unpleasant surprises in the form of expensive repairs after closing on your new home, it is essential to have both an appraisal and a home inspection done before you buy your home. The appraisal confirms the market value of the home and will likely be required by your lender. The home inspection checks the condition of the house and protects the borrower from hidden defects. Additionally, you should maintain a cash reserve to cover any unexpected expenses that arise after the closing.

You can also obtain valuable inside knowledge on local real-estate markets from realtors. You should understand that the listing agent on a house works for the seller. To get the maximum benefit of a realtor, you should hire your own realtor to work for you. This creates a fiduciary relationship between you and your realtor that does not exist between you and the seller’s realtor. Having two realtors will not add to the cost of the house since the two realtors will split the commission.

The collapse in home prices has caused many problems within the financial sector of the United States, but for certain individuals it is also a great opportunity. For a prospective buyer who has excellent credit and money for a down payment, there are plenty of opportunities to buy a very nice home at a fire sale price.

March 24, 2009
Enroute from Atlanta to Newark NJ

Monday, March 2, 2009

Investing in the Obama Economy

Whether we voted for him or not, we must realize that Barack Obama is going to change the face of the United States and its economy. Radical changes in numerous areas of our economy are causing upheaval in the stock market and investment portfolios. To make the best investment choices, we should look at what Obama plans to do and the likely effects of his policies.

A big question on the minds of most investors is whether to ride out the crashing market or to try and salvage what remains of their portfolios. Since the financial crisis began in September 2008, the Dow Jones Industrial Average has fallen from a high above 13,000 to below 6,800 in trading today (3/2/09). If you are still in the market, you have probably seen a loss of approximately half the value of your portfolio.

A good strategy depends on the length of time that you have to recoup your losses. Historically, the stock market always shows a profit over time. Even in the stock market crash of 1929, when the Dow fell from 380 to 42 as the US entered the Great Depression, the stocks eventually regained their value. The down side is that this takes time. The market did not recover to its pre-1929 values until the late 1950s.

President Obama is following a set of policies that is very similar to those enacted by President Roosevelt in the 1930s and the government of Japan in the 1990s. In both cases, the increased government spending, higher taxes, and increased regulation led to a deeper recession and a slow recovery that took in excess of ten years. What we can learn from this is that, in all likelihood, we may not recover our past losses until 2030.

President Obama’s stimulus and bailouts have not stopped Wall Street’s freefall. With every new bailout and nationalization, the market falls further. Since there is no end in sight to government dabbling in the economy, there is also no bottom in sight to market losses.

If you are someone who needs your investment money in the short term, up to ten years from now, my recommendation is that you consider cutting your losses and get out of the stock market. Your current losses will become permanent, but you will preserve what you have left.

On the other hand, if you will not need your money for twenty to thirty years and are somewhat risk tolerant, you should consider staying in the market. The economy is cyclical and, in spite of everything that we can throw against it, it will recover in time. If a substantial change in government policy occurs over the next few years, the recovery might be sooner and sharper than anyone imagines.

For investors with a middle range outlook, from ten to twenty years, you should talk with your investment advisor about moving at least part of your portfolio to more conservative, less risky investments. You will lock in some losses, but you will also preserve more of your cash in the event of a long recovery.

The next question is what does constitute a safe and conservative investment in this economic climate. To answer this, we should look at what President Obama has announced as his intentions as well as what he has already done in his first six weeks in office. His banking polices, including government purchases of bank stock, have caused the value of bank stocks to crash. Auto stocks have fallen amid government bailouts and increased government control of the industry. Obama’s cap-and-trade energy tax will likely hurt traditional energy companies as well as the many businesses whose operations require energy to produce and transport their products. Health care is likely to be a target for nationalization or price controls in the near future. All of these sectors are likely to be poor investments for the next few years.

In past recessions, investors were able to invest in foreign markets when the domestic economy slowed. The current crisis, however, is worldwide. In spite of the poor performance of the US economy, it still leads that of most of other nations. Russia, Venezuela, and other oil producers have been hit hard by the collapse of oil prices. European nations have banking problems similar to ours and many are constructing their own bailout plans. Countries that depend heavily on US imports, such as China, are suffering from diminished US consumer demand.

On the other hand, a slowing economy does offer some opportunities. As more Americans make do with less, discount retailers are likely to do well. Family Dollar (FDO) is currently trading near its 52 week high, as is Dollar Tree (DLTR). McDonalds (MCD) is another company that has thus far done well in the crisis as people forgo expensive restaurants for the dollar menu.

Another likely growth sector is green energy. Obama’s energy policy will be to force a change from traditional sources of energy to new ones such as wind and solar. Carbon based energy, such as coal and oil, will be targeted by the federal government. During the campaign, Obama himself predicted that his policies would bankrupt companies that try to operate coal power plants. Similarly, companies that focus on ethanol, fuel cells, and hybrid technologies will be good bets. Even if they are not profitable on their own terms, they will be likely to receive substantial government subsidies and contracts.

To make wise investment choices, we must also consider the likelihood of either deflation or inflation. Currently, with a backlog of production, rising unemployment, and flagging consumer confidence, deflation is a threat. Increased government spending can also cause deflation since the government is competing with the private sector for money and, in effect, reducing the money supply.

Deflation occurs when people stop spending, causing the value of goods and services to decline. This may seem like a good thing when prices start to decline until you realize that the value of your property and your savings is declining as well. As goods pile up, companies cut production and lay off workers. Since consumers have less money to spend, they buy even less and more goods pile up. The cycle is a vicious one that can be hard to break. Deflation plagued both the US under the New Deal and Japan in the 1990s.

If the economy does slide into deflation, the values of almost all investments will decline. In a deflationary economy, real estate, commodities, stocks, and bonds are all poor investments. The best investment choice for a deflationary economy is to hold on to your cash.

On the other hand, inflation occurs when prices rise. Many economists believe that inflation is likely in the long term due to large government spending programs funded by debt. To service the interest on this massive debt, the government is likely to have problems generating enough revenue from the sale of government bonds. Other countries, such as China, that buy our debt have their own financial problems. Likewise, US citizens are also saddled with debt and have little left over to invest. If the government cannot raise cash through the sale of bonds, they will be left with little choice but to print more money or default on their loans.

When the government prints more money, basic economics tells us that as the money supply increases, the price (value) of the dollar will decrease. A dollar will buy less and the price of goods will increase. In our recent history, the 1970s was a time of rising inflation and, due to the high cost of capital, stagnant growth. The combination was referred to as “stagflation.” Inflation and unemployment figures were combined into a “misery index” that topped 20% by the time President Carter left office.

While deflation is likely in the short term, it is likely that we will face inflation in the long term. While an inflated dollar might make it easier to repay loans, it also erodes the value of savings and investments. People on fixed incomes are also hurt because their cash flow stream may not be indexed for the real rate of inflation.

In times of inflation, since prices tend to rise, the best investment strategy is to buy things. This strategy works from household items to real estate and commodities. For example, if you know that prices are going to rise and you know that your children will need new clothes and shoes for school next year, you would be better off to buy now before the price rises. Similarly, buying a house at the onset of an inflationary period will see an increase in the value of the house due to the inflationary decline of the dollar.

Commodities, particularly gold, are a traditional refuge during times of inflation. Gold is touted as a hedge against inflation, but because it is a high profile commodity often carries an extra expense. The price of gold is also sometimes manipulated by governments because it is often seen as a referendum on the economy.

Oil is another commodity that traditionally does well during times of inflation. Oil is currently trading at $44 per barrel, down from a high of nearly $150 per barrel in the summer of 2008. A big part of oil’s collapse was due to declining demand as the world’s economy began grinding to a halt. As the recovery eventually begins, demand will increase and the price of oil will recover. Regardless of Obama’s push for alternate energy, most of the world will run on oil for a long time to come.

One final consideration for investing during Obama’s tenure is taxes. Obama has been open about his plans to raise taxes on upper-income taxpayers and it is extremely likely that middle-income families will soon face an increased tax burden as well. Investors should take this into account. Individual Retirement Accounts (IRAs) offer a common means of deferring taxes. Investors should also keep in mind that there are likely to be drastic changes to the tax code. Many tax shelters and deductions are likely to be eliminated as the government tries to increase revenue.

Regardless of how the economy performs, one smart use of your money is to get yourself out of debt. With fewer monthly obligations to meet, you will have more disposable income with which to handle whatever life throws at you. Instead of paying interest to a lender, you’ll either be able to collect interest on investments or buy goods that will appreciate in value. In a time of uncertainty, preparation and savings is the smartest investment.

Disclaimer: I am not a licensed financial advisor. Consult your professional financial advisor before making changes to your portfolio.


Newark NJ