Pay attention to Ben Bernake’s words and what the Fed is going to do if you are thinking about purchasing a home.

Why? you ask. What does the Fed have to do with my buying a home in Tucson Arizona?

The Fed determines the monetary supply and if we are in for inflationary ride, you may be wise to consider not paying all cash for your property but rather instead take a loan putting 20% down because you will be paying off that 30 year loan with cheaper dollars.

If you can get 4.75% or 5% money, and if we run into inflation in a few years, you still have 80% of that amount you originally were going to use to pay cash for a house, squirreled away and now you can hopefully put it into an investment where you will make more than 5%. And to boot, you will have the interest deduction.

History illustrates that inflation is always with us. Think about ten years ago and the price of an automobile, the price of a pound of hamburger, and the price of home. What are the percentage increases? And yes, it’s true you have had increases in your own paycheck, but that kept you even with inflation.

The Bureau of Labor Statistics at it’s website :

http://www.bls.gov/data/inflation_calculator.htm

has a calculator which will calculate the dollar value in terms of today’s dollar. It’s fun (and frightening) to play with it to see how much of your dollar has been eroded by inflation over the years. $1.00 in 1942, the year I was born, is equal to $13.32 today. $1.00 in 1964 when my daughter was born is now equal to $7.04, and that same $1.00 in 1968 when my son was born is now equal to $6.27.

Humor me with this little exercise. In 2000, you hypothetically purchased a property for $200,000 and financed the entire property at 5% interest for 30 years.
The monthly payment would have been $1,073.64 principle and interest only.

Now, ten years later, the inflationary index (using the calculator) places that home’s value at $253,556.33 in dollars today, and that same $1,073.64 principle and interest payment with inflation is equal to $1361.14 in today’s dollars. That is a 21% increase in 10 years.

So if Bernake wants to curb deflationary pressures by trying to increase inflation through bond buying, some type of inflation may be in the offing. Think about how you want to finance property and consult with your tax accountant and your financial advisor.

Resources:
Articles RE: FOMC meeting

http://blogs.barrons.com/stockstowatchtoday/2010/09/22/et-qe-two-bernanke-bonds-say-yes/

http://www.ibtimes.com/articles/63876/20100920/what-to-expect-at-the-fomc-meeting.htm

http://finance.yahoo.com/news/Gold-Prices-Pop-After-FOMC-tsmf-3153566242.html?x=0

http://caps.fool.com/Blogs/peter-schiff-video-blog-/449832

    Celebrations of the winter solstice marked the full rotation of the earth around the sun.    The shortest day of the year is behind us.  Daylight increases with every passing day.  Holiday cheer is abundant and in less than ten days, we will be welcoming 2009 with First Night celebrations.  

    Snowbirds, or to be politically correct, winter visitors  will soon arrive.  While much of the remainder of the country has snow, sleet, freezing weather, and bone chilling cold ahead of them, those people who make a pilgrimage to Tucson will be in for high 60’s and 70’s  weather and increasing daylight – especially since Arizona does not turn it’s clock back!

    For anyone thinking about purchasing a winter home, this is the time!  Although many people pay cash, it may be worthwhile to think about taking a mortgage, especially since rates are 4.625% for a person with good credit scores who can put 20% down.  The 1% loan origination fee charged on this $100,000 loan has a break even point of about four years.  Principal and interest at that rate on $100,000 would be $514.14.

    Wrapping the loan origination fee of 1% or $1,000 into the loan at a higher rate of 5% makes the payment $536.82.  The difference is $22.68 a month.  Dividing the $1,000 by $22.68 gives a break even point of 44.209 months, or nearly four years.

    Although it has been the dream of everyone to be mortgage free, the exercise of examining one’s own mortality may be worthwhile.  Looking at a 30 year mortgage, assuming I am 68 years old, what is the probability I will live to be 98?   When really do I think I will die?  Let’s see, my Mom died when she was x years old, and my Dad died when he was y years old…what does that say about my own gene pool?   Hmmmm….I will probably die about 86 years old.

    So if I have a 30 year mortgage, that means there will be an additional 12 years to pay off when I die.   History has told us that inflation is inevitable… and let’s just calculate a mere 3% inflationary factor each year…interesting…that $100,000 in 2009 will become $245,684.22 in 2039!  It may be more prudent for me to let my estate worry about that remaining 12 years…a consultation with a financial advisor or CPA, might be in order here.

    History also tells us that regardless of the political affiliation of the administration, whenever we have a budget deficit, the government pays it off by printing money…i.e. inflation.  So perhaps 3% is a low rate. If we were to experience 5% – a rate which has been consistent for Tucson between 1993 and 2004, the value then jumps to $446,774.49!

   And then we add the income tax deduction which is calculated on the marginal tax rate…and the fact we keep our $100,000 in tact for other safe but more liquid investments…

   Financing is a personal decision.  But with the price of properties in Tucson now, including Active Adult Communities, people thinking about a second home should consider the advantages of acting now.

Resources:

Tucson Weather and Precipitation:

http://www.weather.com/weather/wxclimatology/monthly/graph/USAZ0247?from=tenDay_bottomnav_undeclared

Lenders:

Nova Home Loans:

http://www.lancedickson.com

Sundt Mortgage:

http://www.sundtmortgage.com

Realtor:

http://www.terrybishop.com

e-mail:  terry@terrybishop.com

Housing Statistics 1993-2007:

See blog

     In all the media doom and gloom, (which of course sells papers and viewership for news programs) one can look closely and see there is positive impact out there – interest rates as low as 4.675% – for someone willing to pay a one per cent loan origination fee.

    “Rates have not been that low in at least six years” said Lance Dickson, Senior Vice-President of Nova Home Loans in Tucson.  People not desiring to pay a loan origination fee for a 30 year fixed mortgage can obtain a mortgage for about 5%. 

     Jerry Sundt of President of Sundt Mortgage in Tucson is offering the same low rates for people with good credit scores.  Twenty per cent down is required for an 80-20 Loan to Value.  For every $100,000 in purchase price, the borrower needs to put down $20,000 for a 20% equity stake. 

     This  is an ideal time to refinance a higher rate mortgage if you have at least 20% equity in your home.  Many people are now in 6 1/2 % or 6.75%  mortgages.  We’re looking at good credit scores of about 740.  But rates are much lower for people with lower credit scores too!

     To understand how interest impacts payment, $100,000

               at 6.75% for 30 years, the cost is $648.60; 

              at 6 .25%, for 30 years, the cost is $632.07;

              at 5%, the cost is $536.82; and

              at 4.675% the cost is:  $517.14. 

    If you are thinking about selling your home within a year or two, refinancing may not pay.  You, your lender, and/or your Realtor, should do a break even analysis to determine if a lower rate will save you money. Calculate the closing costs including the loan origination fee to determine whether this works for you. 

    The media does not emphasize that people who have been in their homes prior to 2004 and have not refinanced to the hilt, should have some solid equity in their homes. 

   A previous blog dated July 28, 2008 and titled “Bring on the Numbers” traces the increase in home pricing in Tucson from 1993 through 2007.  With a 45% increase in three years between 2005 to 2007, the lamented decrease in home value of about 25% still leaves the homeowner who bought in  2004 or before, with at least a 20% increase in equity.  The only article I’ve seen about this phenomena was written by Kenneth Harney who is “right on” in his analysis.

    With more than 600 homes in Tucson on the market for $120,000 or less, now is the time to “sieze the day!”    A gander at the blog yesterday which shows all the active listings and the breakdown by both zip code and price range combined with the lowest interest rates in years will get savy people moving. 

    It is a well known fact that by the time the media says we are pulling out of the doledrums, prices have already moved up — and when that happens, interest rates will move up too!  The media uses lagging indicators!

    So to the savy out there, Carpe Diem!

 Resources:

Ken Harney Articles:  http://realtytimes.com/rtpages/kennethharney.htm

Lance Dickson -Senior Vice President – Nova Home Loans:  http://www.lancedickson.com/

Jerry Sundt – President – Sundt Mortgage http://www.sundtmortgage.com/

Tucson Realtor:  Terry Bishop   http://www.terrybishop.com

   I showed property this weekend and amongst the properties I showed to my client were a couple of short sales.  I also had occassion to check a property which I previously mentioned in an earlier blog. 

    I had a client who made a full price offer of $275,000 for the property.  We had had a cursory inspection prior to making the offer and had the requisite information, loan approvals, “as is” documentation, the whole shebang.  We knew before writing the offer that this would be a “go” deal.

    We submitted the offer to the Realtor and were told it would be between 30 and 60 days before we knew whether or not the offer would be accepted and maybe as much as 90 days before the property could close escrow.  My client needed to find a house and we withdrew the offer.  We found another house and closed escrow within three weeks.

     The “short sale” house which we offered $275,000 for closed at $223,000.  That is a $52,000 difference.

     I think $52,000 is a lot of money.

    I was reminded of a short sale I tried to do with a seller who was facing foreclosure.  I had three cash offers on the property.  The property had polybutelyne piping which had burst and therefore there was black mold as well as an assortment of other problems with the property including a green swamp for a pool.

    I had all the appropriate “as is” addenda, proof that the buyers could purchase, a thorough inspection on the property which detailed the problems, as well as photos which I gave to the lender.  This was a property, which to me, seemed to be a liability for the lender and a property I thought the lender would want to get rid of fast.  Wrong again!

     The lender had to send the offer to “committee” and it would be another 30 to 60 days before a response would be generated.  In the meantime, the owner of the property declared bankruptcy, and the lender was faced with just pennies on the dollar.

    In checking the property this weekend, I spoke with a very well regarded Tucson Realtor about a short sale property which now has a contract on it.  She expressed my sentiments exactly, “I don’t have time to do short sales….this has been five months in the making…I can’t tell you how many offers I’ve had on this property, all higher than what the lender finally took.”  

    She then went on to detail some of the problems.  Lenders lose paperwork, it is sent again and lost again, one person says one thing, another something else.  There is no rhyme nor reason to how the lenders do things.  It often takes ten phone calls to get someone on the phone, nevermind an answer to a simple question.

  Lenders are in the business of making money.   That is a noble goal.   I too am in the business of making money.  But one would think lenders could streamline the entire short sale process.  I have long advocated that lenders put all of the paperwork in order prior to putting a home on the market.  Have the appraisal done beforehand and if another appraisal is needed later, so be it.  It’s cheaper than $52,000! 

    When the property goes on the market, allow the Realtor to list the price at whatever price, but the lender would have a base price under which, then “committees”, could be involved.   But if the base price comes in at $238,700, the property is on the market for $249,000, and an offer comes in at $240,000- then the lender can act immediately to accept the contract and close in a timely manner.  A 48 hour turn around from the time the offer is submitted to acceptance would be possible rather than 30-60 days!

     Good Realtors are getting disgusted. Lenders are loosing money right and left.  Maybe $52,000 is not a lot of money in a “billions of dollars industry”, but multiply that number by the numbers of properties where lenders take far less because of their ineptitude and/or bureaucracy and I’ll bet the final number comes to millions!