Thursday, February 10, 2011

Business Cycle

Good People,

It’s been a tough year. Unemployment still high, foreclosures up there where it could begin to affect home values, Washington in gridlock, and no matter how hard we try, we just cannot right now see the light at the end of the tunnel. I understand; I’m living in the same world.

I saw recently, though, a graphic that I wanted right away to send you, because I believe it’s necessary for us all to see it. We already know it, of course, because it’s common sense. But sometimes seeing it on the page is more impactful. Here it is:

What you see is the standard business cycle that every student learns in Business 101. Business happens in cycles, and this is the standard that we all live through. People are Optimistic, and continue to be until they get Excited and reach a point of Euphoria, where they’ll pay anything to play.

Then values, because they’re never sustainable, go down. We go through periods of Denial, Fear and Panic until we feel terrible about what’s happened.

Then, from a state of Despondency and Depression, we  
begin to see the light. We’re Hopeful that we’re beyond it all, and reach a place of Optimism, which is where we started in the first place.

Look more closely. Note that people who buy at Euphoria are risking the most. People who buy at the bottom of the cycle are buying at the Point of Maximum Opportunity.

That would be now. Interest rates are as almost as low as they’ve ever been in this country. Home values in the country have declined, even in Boulder County.

Something else. Where have people made money over the past ten years? Take a look:

Maybe it’s time to think about buying the home of your dreams. Maybe it’s time to think about buying some real estate for investment. The light at the end of the tunnel is coming.

Call me to talk. I’m always here for you.

Enjoy the day,

Mike Moger

Wednesday, February 9, 2011

Interest Rates are critical

Good People:
Time for an update, and a conversation about what’s most important to you as a Buyer of a home.

Firstly, know that I understand clearly what my job is. As a Buyer, of course you want me to negotiate for you the lowest price for your new home, the closing schedule that meets your plans, and for there to be no glitches or rude surprises on the way to the closing table. I get that. But there’s more.

I know too that those are not the most important things to you. This is your home we’re talking about. Home is where you live your life. Home is that place on this planet where you feel the most secure. It’s that place to which you come after a hard day at work or play. It makes up the backdrop for all the memories your kids will take with them when they leave to go out into the world to find their own homes.

That’s a conversation we need have before we get in the car. But I also know that money will play a part. And negotiating the best financial deal is very important to you. It’s important to me, too.
That said, let’s talk about interest rates. Where are they today, and, best guess, where are they going? And why is that important?

Interest rates for awhile now have been historically low, bumping down around 4.00% on very good days. Until recently. Today, with a reasonable credit score and down payment, you can find about 5% on a 30-year mortgage. Stocks have been strong, which happens when companies and the buying public are feeling good. When that happens, the government starts to worry that those companies are going to increase the prices of what they sell. That’s called inflation, and the Federal Reserve will react by making business more costly and slow things down. We’re not there today, but we’re also a long way away from the Oh-My-God days of hoping the world doesn’t fall apart. For that reason, interest rates have increased.

Following is a graph of what’s happened recently:

Don’t wait for them to come down for you. Industry experts are showing a unanimous trend line to higher rates. Following is a best guess survey from the Mortgage Bankers Association, National Association of Realtors and one of the most reputable mortgage insurance companies in the industry:

Big deal. You just want to buy a home. How will an increase in interest rates get in your way?
You’re right. This is a big deal. Sellers will be very much impacted by the selling price of their homes. Buyers, on the other hand, should pay even more attention to their costs. Here’s why.

The cost of owning a home will start with the selling price, because in part, it will determine how much money you will borrow in the form of a mortgage. The amount of the mortgage and the interest rate will determine the monthly payments. The monthly payments will go on for years, so saving some money there will be compounded.

Following is a chart of possible monthly payments for someone who wants to borrow $400,000 on a new loan. If the interest rate is 4.50%, the monthly payment (principal and interest) will be $2026. If, however, the interest rate is just 1.00% higher at 5.50%, the payment is significantly higher at $2272/month. That’s a total cost to you of almost $3000/year on your payments.

Worse, if you wanted to keep your payment at the $2026/month level, you could do that, but you’d have to lower the amount you borrow to a bit less than $360,000. That’s a smaller mortgage by more than $40,000. Assuming you don’t want to bring an additional $40,000 to the closing table, you just gave up 10% of your home.

That’s a big deal. And that’s why interest rates are very important to you as a Buyer.

If you’ve been thinking about buying a home this year, either because you want a different home or for investment, or you know someone who has, we should get together to talk soon. I’m here for you.

Enjoy the day,
Mike Moger