Monday, September 24, 2007

Time to Invest In Real Estate?

Are you getting tired of hearing on the news or reading in the papers how your house value is going down? The media is correct that home values in some parts of Atlanta have seen a decline in the past year. The issues with the mortgage market have not helped matters with the tightening of loan guidelines and increases to jumbo rates. Now that the perception is that every house is a deal/steal, people are lining up to be real estate investors. Before you jump into the real estate game, be sure to consider the risks.

Having long-term success at real estate investing requires a lot of work and local market knowledge. There is money to be made, but one must become an expert and do lots of market research before jumping in. If you are ready to make the plunge, start reading everything you can about real estate investing. There are also many real estate investment clubs that you can join to exchange ideas and learn what other successful investors have done. To find contact information, try the website for the National Real Estate Investors Association www.nationalreia.com.

You will also need to find a local real-estate agent who specializes in investment properties. This is a specialization that takes a great deal of focus by the real estate agent to be a true expert. Most agents focus on either listings or helping buyers find a home to live in. Finding a good home for an investment property requires a different skill set and knowledge base. You will be looking to your agent for guidance on expected rent levels for specific neighborhoods and on what qualities make a good investment property.

Often, however, the only way to learn is from experience, especially since many of the people you'll be contacting won't necessarily have your best interests at heart. Books will preach get-rich-quick strategies and seminars will promise huge returns, but there's nothing like putting your own hard-earned money on the line to learn the risks and rewards of owning a house or condo.

If you don't already own a home yourself, you'd be smart to buy one. You'll learn a lot about the mortgage process and the economics of owning real estate, and you can always rent it out later once you've learned more. Once you are ready to start buying more properties, you’ll need to do some serious thinking about what kind of investor you want to be. If you are a handy man, then you may want to buy homes that need fixing up, increasing the homes value in the process. If you don’t have the skill or vision required to be successful at adding value through improvements, then you may want to stick to the long term rental approach. The market that we are in is going to have opportunities to buy homes that are undervalued that can be flipped when the pendulum swings to a sellers market.

The subprime mortgage debacle has eliminated loan options for many potential homebuyers forcing them into the rental market. The demand for rental properties has increased and will continue until the secondary market develops loan products open up options to these buyers. Due to the fundamentals of economics, the higher demand will put pressure on rent rates to increase unless enough new rental properties are added to the equation.
Whatever you do, though, don't do it lightly. Buying and selling real estate without doing a lot of homework is like walking in a casino without knowing how to play cards. The more work that you do upfront; the better you will improve your odds to come out ahead.

Friday, August 10, 2007

The Changing Mortgage Market and Liquidity Crunch
By Chris Crock, MBA, PFP

The saying that “any press is good press” may be true for the likes of Paris Hilton, but it hasn’t been the case for the mortgage industry as of late. HomeBanc Mortgage, one of the mortgage industry leaders here in Georgia, shut their doors last month. At their peak they originated approximately 12% of the mortgages in Georgia. HomeBanc was the 112th major US lender to shut their doors this year.

Why is this consolidation happening? Let’s start with a little background on how mortgages work…

In years passed a borrower would visit their local savings and loan to obtain a mortgage. The Loan Officer at the bank would approve the mortgage and fund it with cash reserves from the vault. This system worked well until the bank ran out of money to lend. Borrowers came to the S&L looking for a loan and were told to come back when a current mortgage paid off. What the bank needed was a way to sell the loans they made freeing up the capital to lend to new borrowers. This way they could lend the “same” money over and over, earning an income from servicing the loans and assisting the community by offering a near limitless pool of money.

To address this issue, Fannie Mae (FNMA) and Ginnie Mae (GNMA) were established. The goal was to provide cheap mortgage money to prospective homeowners and a high quality bond for the investment community. The bond or Mortgage Backed Security (MBS) takes mortgages with similar risk characteristics and pools them together. Investors in the MBS’s know ahead of time the return they are going to receive, much like a Certificate of Deposit. To ensure the performance of the bond, each mortgage is underwritten to specific guidelines. By ensuring the borrower is both capable (Verification of Employment), willing to repay (credit report) the debt, has the cash to close (Verification of Deposit), and the value is in the property (appraisal), the loans and thus the bond will perform as expected.

During the recent real estate boom underwriting guidelines were relaxed giving way to a whole new menu of products such as the 100% investment property loans with credit scores below 600. In addition, to streamline the influx of applications, income and asset verification took a back seat to a borrower with strong credit. With housing prices rising rapidly, the basis for the mortgage, the property, could be sold to cover the note and foreclosure costs if this occurred. This cycle worked well until the price of houses moderated in 2006.

Once the housing market began to cool and prices moderated, foreclosed homes were being sold for less than the note. To add insult to injury, the loans underwritten to the looser guidelines are not performing as hoped. With the value of the collateral in question (falling home prices) and the future performance of the borrowers unknown, investors’ appetites for this risk has waned. To attract investors in this environment, rates had to increase substantially.

Loans sold to FNMA or GNMA remain largely untouched in the recent credit crunch because the investment qualities of the loans are well known. The current conforming loan limit remains at $417,000. The foreclosure and delinquency rates are well within acceptable standards lending support to these products as their interest rates have fallen in the recent weeks.

The recent rapid rise in rates not directly tied to FNMA/GNMA is an example of the pendulum swinging too wide. The fact remains that a qualified borrower is a good investment from a bondholder perspective. In a typical interest rate market, jumbo loans (loans in excess of the conforming limit) with proper documentation carry a yield about 1/4 higher than similar conforming products. Sanity will eventually return to the markets and non-conforming pricing will come in line with their risk characteristics. The depth and breadth of the current subprime issue will determine when that change occurs.

Our hearts go out to everybody touched by this unfortunate issue. Investors have closed, companies have closed, and borrowers have been left with un-funded loans. Unfortunately the damage is widespread. On the bright side, there are still a large number of lenders that are navigating through this market. All lenders are going to have tightening loan guidelines during this liquidity crunch. A good mortgage broker can still place loans with the lenders that are still viable. A little patience is going to be required as the markets sort themselves out. At the end of the day…people are still going to buy homes and there will still be lenders willing to finance them.

Monday, July 16, 2007

Your Home: An Investment with Benefits
By Chris Crock, MBA, PFP

My wife and I bought our first home in Norcross 9 ½ years ago. There were many factors that went into the decision to buy instead of lease a home or apartment. As a young couple, we primarily felt that buying a home was the best way to plant our roots. We had always heard that buying a home was a great long term investment, but weren’t really sure exactly why. With a little time and perspective under my belt, I now know the details of why the American Dream of homeownership is truly an investment with benefits.

Leveraged Investment

There are different schools of thought on whether the best financial plan would include paying off a mortgage or leveraging this large asset with a mortgage. With literally hundreds of mortgage products available for consumers in the marketplace, individuals can choose to buy a home and pay cash or pay little to no money at closing. Using the leverage of using the mortgage lender’s money to buy the home can create a powerful investment tool for consumers.

To put the power of a leveraged investment in perspective, consider the following example. A qualified borrower buys a $500,000 home in Duluth and only puts 10% ($50,000) down at closing. Assuming a 6% rate of appreciation, the home would be worth $555,700 in just 2 years. A mortgage in this scenario accomplishes several things. For the borrower that couldn’t pay cash, it allows them to own a $500,000 home and take full advantage of the appreciation of that property. A borrower that could pay cash or make a much larger down payment is able to invest the money that they didn’t put in the home into other investments.

Inflation Hedge

One of the biggest retirement killers is a silent slow drain on your assets called inflation. We have all heard it before….A dollar today will not have the same buying power as the same dollar in the future. When developing a financial plan to meet retirement goals, inflation is one of those big unknown variables that makes a big difference in how much money you will have to save to meet those goals. Most investment advisors would consider a home to be a great inflation hedge. An inflation hedge is an investment that will increase in value at a faster rate during periods of high inflation and at lower rates during low inflationary periods. This phenomenon is why it isn’t too uncommon to have people sell their home for 10 times what they paid for it after living there for 30 years. A large portion of that gain is due to the home riding the inflation wave over time. A home’s natural inflation hedge benefit is one of the main advantages of owning versus leasing a home.

Tax Benefits

Under the current tax code, the government has the ability to influence tax payers’ spending decisions. Some of the greatest tax breaks are those regarding homeownership. Policy makers know that consumers drive our economy and that homeownership makes up a large percentage of consumer spending. One of the greatest tax breaks is the capital gains exemption up to $250,000 for individual filers and up to $500,000 for those who are married. This exemption is available for a home that was owned and used as a primary residence for at least two of the past five years. Another great tax deduction for people that qualify is the mortgage interest deduction. For example, a person that has paid $15,000 in mortgage interest and is in the 25% tax bracket would save approximately $3,750 in income tax. To throw in an added bonus, there are deductions for origination and discount points paid on your mortgage in the year that you obtain the loan. Be sure to check with your CPA or financial advisor regarding your specific scenario and eligibility for these tax benefits.

Personal Pride and Enjoyment

A home is more than just a financial investment. We often have strong emotional ties to the place where we raise our families and create memories. It is hard to get as much enjoyment out of a quarterly investment portfolio statement as you can out of your own home. Whether you buy a 40 year old fixer upper with charm or a brand new home with all the modern conveniences, there is a sense of pride that comes with calling it your own.

I always recommend that you seek advice from the appropriate professional advisor before making big financial decisions. With any investment, there is risk. With risk, there is an opportunity for reward. I believe that if you don’t take calculated risks in life, then you are taking a big one!

Thursday, June 21, 2007

An Interesting Perspective
By Chris Crock, MBA, PFP

The Fourth of July is always an exciting time of year for me and my family. We load up the car and head up to the lake. It is a time to celebrate our freedom, family and friendships. Taking for granted the freedoms that we have here in the United States is easy to do. Our rights to property ownership are part of the foundation that makes this country so great. These rights should be cherished and protected at all cost. We also have a free and open market economy that has allowed our country to become the wealthiest in the world. As we all know, the market is subject to change and we have seen some pretty drastic changes in the past month with interest rates.

We have seen a .625% increase in fixed rates in the past month. As of June 11th, the par 30 year fixed conforming rate was 6.500% with 1% origination. This is up from 5.875% for the same loan on May 9th. The rapid rise in interest rates has been caused by the Federal Reserve’s fears of rising inflation pressures. The Federal Reserve attempts to manage inflation by adjusting the Federal Funds Target Rate up or down which in turn causes the Prime Rate to go up or down. What all of this means to you and me is that when the Federal Reserve is nervous about rising inflation, we see mortgage interest rates rise. When there are signs of low inflation, mortgage interest rates have a tendency to move lower.

In the past month interest rates have reached their high point for the past year. While this isn’t great news for someone locking in their interest rate, it is important to keep a historical perspective on rates. The 30 year fixed chart makes this point very clear.

Since April 1971, the 30 year conventional fixed rate mortgage did not drop below 6.500% until July 2002. In that timeframe, the 30-year fixed rate has only been lower 12.4% of the time. The mean average rate over this period has been 9.24%. This makes 6.500% seem like a steal. The difference in an amortized payment on a $200,000 loan with a 9.24% rate and a 6.500% rate is $379.44. Therefore, our payments are historically $379.44 better than average over the past 36 years for this size loan. For every .125% increase in rate that is seen on a $200,000 loan, the amortized monthly payment increases only by around $16.40.


If you are in the process of buying a home, the quick rise in interest rates could create a little indigestion. Hopefully, a little historical perspective will help ease the pain. I always try to focus on the things that I can control. Since I am not the Chairman of the Board of Governors for the Federal Reserve, I do not have the ability to lower interest rates. If I were buying a home, I would have control over doing my research on buying the right house that has good potential to be a great investment. It is important to spend your focus on buying the right property that fits for your lifestyle and financial situation. Choosing a Realtor® that is an expert in the market where you are purchasing is a critical part of the process. Do not fret over the things that you cannot control. By choosing the right home to buy, you can make a great investment in any market.

Friday, May 11, 2007

Our Local Housing Market Scoreboard


One of the primary questions that I am asked these days is, “How is the housing market?” We all have heard the media blurbs about a housing bubble, falling housing prices, and construction slowdown. Unfortunately, the media has a way of implanting these beliefs in our psyche. For the most part, these reports are about national statistics that have little or no impact on our local market.

Housing markets vary from city to city, zip code to zip code, and even neighborhood to neighborhood. When looking to purchase or sell your home, it is important to keep in mind the fundamentals that are driving your local market.

The Local Housing Market Scoreboard is designed as a snapshot of economic indicators that are driving our market here in western Gwinnett County. It will become a regular addition to the Real Estate section of Inside Gwinnett.

Supply

Quite often statistics are used to try to convince someone of whatever point they are trying to prove. In this case, these statistics when viewed together can help clarify the current housing market in our local area. The economic fundamentals of supply and demand determine the relative house values for an area. The scoreboard measures the supply side of the equation by looking at the number of homes listed for sale in western Gwinnett County. This number has seen a whopping 78.54% increase since the same time last year. A greater supply without an increase in demand would have a negative impact on the market and home values.

Demand

The demand for homes can be analyzed by looking at the average time that a home is on the market before it sells and the changes in employed potential homeowners entering the market. With Atlanta reaching the 5 millionth resident recently combined with a low unemployment rate of 4.0%, the demand for housing is strong. The average time that it has taken a home to sell has increased by 17 days since the same time last year. This would make one think that homeowners in the area would be willing to reduce their sales price to speed up the sales process. However, the average sales price in western Gwinnett has increased by 9.63% since last year. This could mean that the number of higher priced homes are selling at a greater rate than last year. Most likely the increase is due to a combination of some inflation and more activity with higher priced homes selling this year compared to last year.

Interest Rates

The most common loan program these days is still the 30 year fixed rate amortizing loan. Fewer people have been choosing to lock in an adjustable rate mortgage (ARM) in the past year. This is due to there being very little rate advantage in choosing an ARM versus a fixed rate. The 30 year fixed rate has seen a slight improvement in the past month with the par rate falling below 6%. Historically, this is a very good time to borrow money for financing a home. The low rates will allow first time homebuyers to afford a home sooner than they would have if interest rates were not so low.

The Scoreboard only lists a handful of economic indicators to keep things simple. I will reference it from time to time as there are important shifts in the market. It is important to contact a local Realtor® who is an expert in the area where you are buying or selling a home. A professional Realtor® is going to be your best resource in determining what factors are impacting a home’s value.

Chris Crock lives in Peachtree Corners and is a mortgage professional affiliated with F&D Advisors, LLC, a wealth management firm in Atlanta, GA. Crock is the current President of the River Station Community Association. He has an MBA in Personal Financial Planning from Georgia State University. Send Chris your feedback at chris.crock@fdadvisors.com or 404-253-7652.