Long term prospects for WA real estate

I read an interesting piece in the WA realtor magazine's summer issue positing that prospects are good for the long term health of WA's residential real estate industry. Apparently WA's immigration rate ranks 4th among all states, with newcomers accounting for 55 percent of WA's population growth in the last decade. Many immigrants who would otherwise have bought homes in WA have been hobbled by the poor economy or their inability to sell a property elsewhere. As those conditions ease, pent up demand and a desire to take advantage of lower prices & interest rates will buoy the local real estate market. Perhaps an improvement in the overall economy would float WA's boat a little higher than others. My question is whether we'll have a strong enough improvement in the economy without the threat of inflation causing the Fed to finally increase interest rates. As always, it's a wait and see...

interest rates rising

With interest rates rising, we recommend that all our readers check their mortgage terms. If your loan is an ARM (adjustable rate mortgage), you should strongly consider 1) locking your rate and converting to a fixed rate loan, or 2) refinancing into a fixed rate loan. ARMs have a provision that allows borrowers to convert their floating interest rate to a fixed rate during a particular time window (often the 12th to 60th months of the loan). Your mortgage papers will tell you what index and margin would be used to determine your fixed rate. For instance, if your index is the LIBOR (London Interbank Offered Rate) and your margin is 5%, then your fixed rate would come out somewhere around 5.8% as of today's date.

Converting an ARM could be a good option for people whose credit scores don't qualify them for the lowest refinance rates or whose index + margin calculation comes out lower than current interest rates. It may also be a good choice for folks who can't refinance due to high debt to value ratios or because they own a type of property, such as a condo, where financing is tight and/or expensive. Refinancing might be a better option if current interest rates are below your conversion interest rate, or if you have provisions in your loan, such as a balloon payment, that you'd like to get rid of. However, it's important to consider that a refinance will cost several thousand dollars (which may be wrapped into the loan in some cases), whereas a conversion is essentially free. Make sure you run the numbers to see how you'll come out ahead. But be sure to do them, because rising interest rates could float your ARM rate to an unaffordable level.

If you have an ARM, we recommend that you talk to a reputable lender to esplore your options. If you don't remember your loan officer's name, give us a call. We can look up the information or recommend other talented and trustworthy mortgage professionals.

Price vs Interest Rate

Buyers in todays residential housing market often consider waiting for a lower price as the best way to minimize monthly loan payments. Thus, many buyers may not be giving adequate consideration to currently low interest rates which may be even more important in keeping costs down. As we pointed out recently, distressed properties (foreclosures, short sales, etc) are not always bargains. A similar assumption, that a lower price reduces costs more than taking advantage of historically low interest rates, may also be in error. While both price and interest rates are important, a half percent increase in interest rates can more than negate a 5% price reduction.

A simplified example illustrates this: Tom and Sue wish to purchase a house priced at $400,000. They have 25% down and need a loan of $300,000. They can obtain that loan now at a 4.5% interest rate requiring a payment of $1,520/mo. They decide to wait instead, expecting the price to come down another 5%, so the loan amount will be $285,000. If they are able to purchase at the lower price and the interest rate does not change, payments will be $1,444/mo. However, if interest rates rise just to 5% while waiting, even if they are able to buy at their price, payments will be $1,530/mo, or $10/mo higher than if they had not waited. If the lower price does not materialize while waiting and the interest rate increases to 5% their payments will be $1,610/mo, or about $90/mo more than they would have paid at the original price and interest rate. This does not even address the greater total amount of interest which might be paid over the life of the loan.

While half a percent may seem a large increase in interest rates, it is worth noting rates have increased about that much in the past month or two. What interest rates will be even a month from now is uncertain, but it appears rates are likely to increase by fits and starts to significantly higher levels. Conversely, while housing prices may go lower, widespread price reductions have slowed to a relative crawl. We suggest buyers who are waiting or are considering waiting for prices to fall further, carefully evaluate the relative impact of lower price versus higher interest rate. By all means negotiate price, but it may be better for your finances to do it now while you can still take advantage of the lower interest rates still available rather than wait.

Foreclosures aren't the only bargains!

Foreclosures are big these days. There's a proliferation of buyers who only want to buy foreclosures, agents who specialize in foreclosures and web sites that list upcoming foreclosures.

Foreclosures are fascinating because they require knowledge and preparation. Bidders must do their homework in order to know the details of the particular property (or more commonly, properties) that they are bidding on, along with the market knowledge to value them correctly. They must know the expected cost of repairs to the proeprty and check for liens against the title. They must have cash immediately available for the purchase and a cushion for unexpected expenses. Finally, they need the discipline required to bid at an acution, i.e. the judgement to pace bids judiciously, a firm price cap, and the ability to walk away.

After putting in all this work, will the foreclosure buyer have the best and cheapest property? Not necessarily. Don't get me wrong. Foreclosures can be a great opportunity, but they're not the best deal or the best option for every client. The greater Seattle area has a healthy mix of foreclosure properties, short sales, bank-owned, and yes, traditional seller-owned-and-not-in-trouble properties. All of these properties compete with each other for buyers, so that prices are generally equalized, with occasional bargains slipping through.

Where are these bargains? You never know until you negotiate one. Foreclosures are a good source, but more than one potential buyer has bid on a foreclosure property only to find that one of the lien holders is the final buyer. Often in these cases, the bank's loss mitigation formula is showing that there's more value in the property than is evident in the auction bidding. This can be a stumbling block in buying bank-owned properties, as well. In my opinion, the purchase of a bank-owned property often has the best combination of motivated seller and realistic pricing. Unfortunately, these deals can trip over inflated broker's price opinions and pricing floors set by the aforementioned loss mitigation formula. A truly motivated individual seller can beat any of these options with realistic pricing, low hassle closing, and a well-maintained property. In fact, a truly motivated seller of any kind is the real requirement for finding a great deal in the real estate market. For the buyer who's looking to spend the least and get the most, the rest is really just window dressing.

So go ahead and check out the foreclosure listings. Run your numbers and make some bids. But don't neglect the rest of the real estate market; there may be an even better deal right under your nose.

Help for military homeowners

Military homeowners who must sell a primary residence due to a PCS move may qualify for benefits under the Homeowners Assistance Program sponsored by the DoD and Army Corps of Engineers. Homeowners who cannot sell their homes "under reasonable terms and conditions" may apply for this program. If you've been affected by the downturn in the housing market, be sure to check out http://hap.usace.army.mil. You can also read more about it in this article from Kiplinger's Personal Finance magazine at http://www.kiplinger.com/magazine/archives/2009/08/housing_break_for_military_families.html

Condo buyers get busy

All signs point to condo financing becoming more difficult in the short run. The Federal Housing Administration will be tightening their financing rules for condos starting on Nov 2nd. Among other things, they'll be requiring that a condominium complex have a reserve study performed or renewed within the last year, less than 30% of homeowners with FHA loans, and a new HUD approval for the property. That's right, in order to get an FHA loan for any unit in a condo complex, the complex will have to go through a new, "improved" HUD approval process. Only HUD or an approved lender can perform this approval and the process is quite involved and likely to be expensive. Buildings that were previously on the approved list will have to re-apply.

Why not just wait to buy a condo until the fall out from these new FHA rules is known? Well, the Federal Reserve recently confirmed that they will slowly draw down the number of mortgage-backed securities that they are buying through spring of 2010. Most lenders believe that mortgage interest rates will begin to rise as the Fed pulls back, so that rates will rise above 6% by next year.

If you're thinking of making a condo purchase, it's time to look hard at your options. If you need an FHA loan, you may be shut out of today's low prices and interest rates unless you make your purchase before Nov 2nd.

A pool in Seattle?!

I put an ad on Craigslist over the weekend, saying "Buy a pool...get a house for free!" We have a listing in a great neighborhood (Phinney Ridge) that has that rarity in Seattle, a large, in-ground pool. Pools are not common here and opinions are mixed as to whether this pool, nice as it is, is an asset or a liability. The house attached to the pool is what I'd term a cosmetic fixer but charming and with great "bones." So now I spend my days imagining ways to reach the buyer who's going to appreciate a swim after a busy day of working on the house. Any bright ideas out there on marketing the property that's just a little different?!