Sushi Money

*** Update ***  Apparently the Treasury Secretary’s plan does NOT include plans for current homeowners to refinance their loans.  So while many of us may sit on mortgage loans at greater than 6% or 7%, this plan would allow neighbors to move in to their house with a new mortgage loan with much lower payments.   This seems wrong… it may be a temporary fix, but how will it help millions of current homeowners who are having trouble making payments on their current mortgage loans? 

This week we found out we’re officially in a recession, and have been since around December, 2007.  The market has been wallowing at multi-year lows and layoffs have been increasing.  In light of so many economic challenges, it’s hard to see any bright spots that can move us forward.  But what about a lower mortgage payment?  Would a couple hundred extra bucks each month really make a difference, or help people purchase a house?

For many of us, it just might.  That’s the focus area of the government recently- mortgage loans and the possibility that a U.S. sponsored wave of mortgage activity and refinancing could bolster both the housing market and the economy as a whole. 

“The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full point lower than prevailing rates for standard 30-year fixed-rate mortgages.”

“The plan is very similar to an idea floated in October by R. Glenn Hubbard and Christopher Mayer, academics at Columbia University’s Business School. “I think a program to substantially bring down rates for homebuyers would be an incredibly valuable program, and I think it captures a real part of solving what has been an incredibly challenging dislocation in the credit markets,” Mr. Mayer said in an interview. He estimated the idea under consideration could quickly help 1.5 million to 2.5 million people buy homes, giving a major boost to the housing market and broader economy.”

Certainly people would still need to qualify for the mortgage and have decent credit ratings to do so.  But a 30-year loan at 4.5% ?  Sign me up… not only would the monthly payment for many of us decrease, we would be able to focus more on reducing debt levels and increasing consumer spending.  *** Not for current homeowners! ***

“…Treasury Secretary Henry Paulson views lowering mortgage rates as key to fixing the housing crisis; hence the mortgage-security-buying program announced last week.  The most important thing we can do to mitigate foreclosures and progress through the housing correction,” Mr. Paulson said in a speech Monday, “is to reduce the cost of mortgage finance, so more families can afford to buy a home and so homeowners can refinance into more affordable mortgages.”

I have to agree (for once) with Secretary Paulson- making homeownership more affordable for credit-worthy families sounds like a great idea.  As long as we aren’t handing out loans to people that can’t repay them… hopefully we’ve learned that lesson already. 

Just for kicks I ran the numbers on the difference between the monthly payment for a 6.5% 30 year fixed-rate loan, and the same loan at 4.5%.  These numbers are for principal and interest only and don’t include taxes or insurance payments:

• 6.5% 30-year fixed-rate loan:   Monthly payment of $1,137.72
• 4.5% 30-year fixed-rate loan:   Monthly payment of $ 912.03

Okay, so we save about $225 bucks a month with the new mortgage. That’s not chump-change, and lots of folks can qualify for a 4.5% loan that would not otherwise qualify for a 6.5% loan.  Even refinancing is a great idea as long as we’re planning to stay in that house for a few years or more.   *** Not for current homeowners! ***

A Rush Into Refinancing may be just what the country needs right now however. But the new plan may not even include this option!  

I thought that’s what the Treasury Secretary was aiming for, and how they believe it can help dig out the country from the current housing mess.  Get more people into homes sitting empty out there, and make those monthly payments more affordable for all of us.  Good idea, but if they exclude current homeowners, then I don’t see how it helps the economy en masse.

By the way, what’s even more important over the long term on that interest rate scenario?  Think about how much interest you would be saving. 

• 6.5% 30-year fixed-rate loan:  Total interest paid $229,587
• 4.5% 30-year fixed-rate loan:  Total interest paid $148,336

That lower rate loan would save us over $81,000 dollars!!!

Sounds pretty good to me- that would pay for a kitchen and bath remodel, or even a few new cars over the lifetime of that mortgage loan. 

So is it time to buy that house you’ve been looking for?  Time to wade into real estate again?  Well, the real estate debate continues, and there are many opinions.   Even if a lot of us can think of several really good real estate deals out there, the money’s just not there right now.  And that’s part of the problem- with the stock market down, real income down, and folks losing their jobs, we’re running out of people that can qualify to purchase real estate.  

Maybe, just maybe, lower long term mortgage rates will help us climb out of this whirlpool?  Hard to say- that whirlpool is also a downward spiral… and deflation can take a long time to work out of.  Just ask the Japanese.

Mortgage fraud arrests? The news says hundreds swept up in mortgage fraud. Hundreds? Wow.. amazing but a little late, huh? Well in a difficult economy it looks like the lawyers will have plenty of business.

While it looks like the Feds are finally announcing results of their investigations, it’s not just the mortgage brokers who are being looked at. Hedge funds are also now prime targets for investigation as to their role in the subprime mess. And two former Bear Stearns executives were arrested this morning. Seems at least one of these gentlemen may have been secretly withdrawing his own money from a failing hedge fund while smiling to other investors about how well they were doing.

After touring southern California last week it was amazing to see how prices have come down. Builders are still building, but are also scrambling to close deals on various houses and subdivisions. I even saw one sign: “Any Offer Accepted.” They probably left out the word reasonable.

I talked with several people who were seeing 40% reductions in the valuations of their homes. They sighed acknowledging that in addition to supply and demand, it was primarily an income qualification issue for how much of a home people can really afford. Reality was coming home to roost.

But during the hey day of the real estate boom, it wasn’t just the mortgage brokers leaning towards fraud. Many speculators and home buyers fudged their applications with exotic loans just to buy a property. Of course the speculation and application fraud is mostly history as more stringent mortgage qualification standards are now in place. But amazingly enough, mortgage fraud is still a problem across the nation.

I wonder if there’s any fraud in the oil or refining industry? Well maybe fraud is a bit strong of a word, but how about rampant oil industry speculation?

“As business and consumers consider the implications for them of crude oil selling at US$130-plus per barrel, they should bear in mind that, at a conservative calculation, at least 60% of that price comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures and New York Nymex futures exchanges and uncontrolled inter-bank or over-the-counter trading to avoid scrutiny.”

We’ve been through the dot.com boom and the real estate boom. If this is the oil and gas boom, does that mean prices will come down later too? More importantly, what’s the next boom? I’d like to get in on that one…

With the struggling economy as the larger theme of this election year, people are looking for answers.  Housing is still a hot topic for many, especially in the high-flying real estate boomtowns across the nation.  CNN/Money writes that some of the hardest hit cities may see real estate drops of 50% of more!

That’s amazing to consider, but even more amazing to me are the statistics they put out on unemployment in some of the California cities.  18%? 10%?  Wow.   Numbers don’t lie, but I can tell you that I’m sitting in one of those cities as I write this, and if unemployment is that bad, you can’t tell it from all the people out shopping and running around town.  The restaurants are pretty full, the roads are crowded, the stores are open and summer is getting underway for all the kids.

Certainly appearances can be deceiving.  After talking with some of the locals, the small business owners indicate that sales have definitely slowed down compared to a year ago.   With food and energy prices skyrocketing that’s no surprise these days.  But even with the slowdown in spending there are jobs to be had in service industries.  Just not the kind of jobs that replace good paying industry jobs to support larger families.  But if you’re looking for temporary or minimum wage service jobs, you can find them.

Even with real estate, there’s a few folks looking for the bottom.  Where I’m sitting, foreclosures are still up but bidders are jockeying for position to get the best deals on houses, often bidding the price up more than listed.  Will we head up from here or just wallow around for a while?  Most likely the latter.  But those tax rebates we’ve put to work have both good and bad news to go along with them.  Consumers are spending more money with free handouts, but the deficit isn’t getting any better either.

We had a quiet weekend at home for Memorial Day, and spent the time catching up and visiting with family. Did gas prices keep us from traveling? No, not really, although we are driving less. It was just time to enjoy being home and getting some things done that we’ve been putting off.

We did change our travel plans for the summer however. Instead of driving across the country in a small RV, we’re now flying. It wasn’t a hard decision- we actually found round trip airfare for less than a third of what it would cost to drive the same distance. So this way we’ll have more time once we get there, and save money as well. Up until a few weeks ago the price was comparable either way. But as gas prices have risen, driving became more expensive. Then we found some really cheap fares to fly, so that made it an easy decision.

I would like to have driven though- and stopped at different towns across the country to see how folks are doing out there. Some of our relatives have been on the road for over four weeks and said people seem busier than ever. But reading the news this morning it seems that consumer confidence has dropped to a 15 1/2 year low as reported by the Conference Board Consumer Confidence Index.

The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. Says Lynn Franco, Director of The Conference Board Consumer Research Center:

“The Consumer Confidence Index now stands at a 16-year low (Oct. 1992, 54.6). Weakening business and job conditions coupled with growing pessimism about the short-term future have further depleted consumers’ confidence in the overall state of the economy. Consumers’ inflation expectations, fueled by increasing prices at the pump, are now at an all-time high and are likely to rise further in the months ahead. As for the short-term outlook, the Expectations Index suggests little likelihood of a turnaround in the immediate months ahead.”

Consumers’ appraisal of current conditions grew more pessimistic in May. Those claiming business conditions are “bad” rose to 30.6 percent from 26.5 percent, while those claiming business conditions are “good” decreased to 13.1 percent from 15.4 percent last month. Consumers’ assessment of the job market was also more downbeat. The percentage of consumers saying jobs are “hard to get” was virtually unchanged, 28.0 percent versus 27.9 percent in April. Those claiming jobs are “plentiful” declined to 16.3 percent from 17.1 percent.

Last week the University of Michigan Consumer Sentiment Survey fell to a 28 year low. Not since 1980 have consumers felt so negatively about the economy.

It’s not hard to understand why with the challenges we’ve faced over the past year. And with gas prices posting record price increases for over 20 straight days, it makes you wonder what’s really going on. It’s like there’s a buying frenzy taking place… kind of like the dot-com boom except this time with oil and energy commodities.

But for most of us it is what it is. We’ll have to deal with it until the government figures out a workable response. Over the past few months, U.S. drivers have indeed cut back on driving, but it hasn’t put a dent in gas prices yet.

But the Fed is reporting that the credit crunch is easing, and even home sales actually increased a little in April. But sales activity is still very slow and the price of single-family homes has fallen quite a bit over the past year.

Do you lie in bed at night worrying about home prices? Most people don’t. We live in a house, and usually plan to be there for a while. For me it’s a decade or longer asset, and not something we plan to borrow money from. But if you’re trying to move or sell a house, it must be a difficult time.

The economic challenges will continue to affect most of us for some time. Unless energy prices moderate soon, it’s going to get a lot tougher out there.

Lots of ways to look at the challenges out there. If you’re curious how the tax rebate plan will affect you, the WSJ provides The Skinny on the Stimulus Plan. Also an interesting look at the most bubbly real estate markets across the U.S.

Lenders are also taking a new look at how to work with consumers.
But even with all the challenges, Anya has it right with how a down market brings both reality and opportunity to the table.

    Among our many personal finance challenges, selling a home can be a daunting task even in the best of times.  And now isn’t the best of times for most of the nation.  Okay, an understatement to be sure- the housing “slump” has gone on for more than a year and most experts are not predicting a turn-around any time soon.  But depending on where you live, real estate may not be too bad, with some economists even seeing a turnaround in progress in places such as Denver, Colorado for example.  Many metropolitan niche markets across the nation are also doing fine… but most of us don’t live in those places.  So lets not get ahead of ourselves- in 2007 housing construction fell by the largest amount in almost three decades in an unprecedented national downturn.  And foreclosures may continue to rise over the first half of 2008 before finally stablizing later this year.

 ”Mark Zandi, chief economist at Moody’s Economy.com, is forecasting that median sales prices for existing homes will fall by 2.5 percent for all of 2007, which would be the first annual price decline on records that go back four decades.”

Yet even with the pessimism, there is reason to hope.  The National Association of Realtors (NAR) forecasts existing home sales for 2008 to stablize and gradually increase.  And for many people, it’s time to buy or sell a home regardless of what the market is doing.   For others the rental market looks pretty good right now as well.

Our lives are so often a tangle of priorities.  If you are selling a home because of a job change or family situation change, then your proverbial plate is pretty darn full.   And if you’re selling because home ownership (and mortgage debt) is not something you can or want to handle anymore, then you may feel a lot of stress based on finances and a need for change.  Heck- selling a home is never easy no matter what your situation.  But if you’ve got some time on your side it can make the process a lot easier.

On that note there is a wealth of information available, and it bears repeating a few key themes.  Bankrate.com has written about 8 Tips for Pricing Your Home.   Solid information that boils down to knowing your market, seeking professional help and working hard to understand valuation and price strategies.  But I think we can do a lot more.  We looked at some of those strategies in Get Ready to Sell That House.    Selling by owner is also a challenge, so think hard about the FSBO approach.  And if you’re facing financial challenge and struggling with mortgage payments, we examined what you can do to avoid foreclosure.

Among all the negative news and gloom out there I try not to give into the hype.  The day is a lot brighter when I simply focus on our personal goals and priorities while turning down the volume of pessimistic commentary from the media.  I won’t tune it out completely because it’s important to stay informed.  But as with so many things, finding a balance in life is important.  A few years from now our memories will fade as we face the challenges of a new day.  I prefer to envision a positive future… setting  intentions for what we plan to achieve over time.  We can create a new future…  I wish you well!

      No matter what we read about the real estate market, there are still people who want to buy homes to live in.   There are always buyers and sellers, even in down markets.  Naturally this is a challenging time to be selling a home, but it’s a wonderful opportunity for a potential buyer.  I think it’s worth remembering that… there are buyers out there! The Street.com talks about opportunity for buyers in How to Get an Even Better Deal on a Home.   Their main idea?  Buying a FSBO, or For Sale By Owner house.  It’s an idea that works, both for the seller and buyer.  But it’s not always easy… especially for the seller!  I’ve bought and sold by owner, and would consider it again.  But as a buyer, I would definitely use a real estate agent as a “buyer’s agent” during the process.  And you really need to make sure “why” you’re buying the house.  Hopefully by now, most potential homebuyers are under no illusions about their home as a potential investment.  It may very well be a good investment many years from now…  but don’t be surprised if it’s value doesn’t go anywhere for a long, long time.  I’ve written about my experience with that process before!  But what a great opportunity buyers have if they do know what they’re looking for right now.

      If you’re selling your home, know that going the FSBO route takes enormous patience and dedication, but can also be very satisfying if you’re a “do-it-yourself” type… and you succeed.  While your waiting, showing and being patient, it isn’t very satisfying at all!  Unless of course you have plenty of time and don’t mind keeping your home “show-ready” for months on end. But it can save a lot of money if all goes as planned. In the current market climate however, I’m not sure I would go the FSBO route unless very confident about the process and the home I was trying to sell, especially as compared to the “competition” around the local area.   

      If you do decide on the FSBO approach, the article above alludes to several strategies and helpful interent companies such as ForSaleByOwner.com.  I’ve used them successfully, but I think the single most important factor was being able to get the house listed in the MLS (Multiple Listing Service).  So even though I managed and sold the home as a FSBO, it was listed on the MLS for agents to see. 

  Three Northwestern University professors who wrote an August study about the FSBO market say that MLS-listed homes do not necessarily deliver a higher price, but do offer a higher probability of a quick sale, within 60 or 90 days. In addition, roughly 20% of FSBO listings end up relisting in the MLS, which translates into a longer time on the market. Thus, one of the advantages of MLS is a shorter time to sale, which translates into savings (on mortgage, taxes and insurance).

      Of course some people would do almost anything to sell their home right now.   That’s where buyers have the real advantage today, and the single greatest factor, as always, is price.  I’ve talked before about the things you can do as a seller to present your home.  It’s absolutely essential right now.

Well, not everyone appreciates the government’s effort to try and help homeowners facing mortgage challenges. I can understand both sides of the issue, I just think that doing something is a lot better than nothing in the current economic climate. A recent USA Today editorial makes a similar case, and says “Freeze those teasers.” But others take a more hard line view such as Mr. John Berlau at the Center for Entrepreneurship at the Competitive Enterprise Institute. Interesting viewpoint, but I just don’t think it’s really that significant over the long term. Reform is necessary in the mortgage lending industry, and I suspect legitimate mortgage lenders will work a little harder to ensure clients understand the terms of mortgage loan contracts in the years ahead. Is it Congress’ turn now? We may see additional legislation to try and help people facing ARM resets and foreclosure. How do you feel about it?

President Bush announced a deal with the mortgage industry that may help a lot of people across the country. I’m no fan of bailouts, but I see this as a good thing. When I look at the balance between the mortgage industry, mortgage brokers and banks, and the real estate market- I think there are plenty of responsible homeowners who were sold products that were simply not appropriate. Should they have known better? Probably. Should the mortgage industry and brokers be blamed? Probably. But should we let potential foreclosures and the worst real estate market in generations affect the national economy? No… I don’t think so.

“We should not bail out lenders, real estate speculators or those made the reckless decision to buy a home they knew they could never afford,” Bush said after meeting with industry leaders at the White House. “But there are some responsible homeowners who could avoid foreclosure with some assistance.”

For those who do need help, and meet the criteria established, maybe this is a good thing for the nation as a whole. It really only affects people who still live in their homes, took out mortgages between 2005 and this past summer, and who have paid their loans on time, but are about to be “reset” for much higher rates. Doesn’t help everybody, but then again it’s not designed to do that.

“There is no perfect solution,” President Bush said Thursday as he announced an agreement hammered out with the mortgage industry. “The homeowners deserve our help. The steps I’ve outlined today are a sensible response to a serious challenge.”

You know what I find amazing? This was a deal hammered out between the government leadership and private industry- without the involvement of Congress. There was no legislation or bill sent from Congress to the President to make this happen. I think that’s remarkable personally. I hope it works, and gets help to those who need it. Here’s the hotline number if you may need assistance: 1-888-995-HOPE

When I read columns by people weighing the pros and cons of actions such as buying real estate, I see opportunity and confusion. Anya Kamenetz writes To Buy or Not To Buy in her Generation Debt column, and talks about the real estate market today. It’s an honest appraisal of the fear of buying into a market that is struggling. She reviews the ups and downs, and comes away with some good advice for estimating a down payment and the reality of home ownership costs. But I think many people are confused by the difference between home ownership and owning a real estate investment property. The real estate boom that peaked in 2005 basically taught people that there wasn’t any difference. But there is.

If you’re a potential home buyer today, what is your real fear? That you will lose your shirt over a few years for how much you spent on a home? Okay, fair enough. If that’s true, then I agree- you’ve probably got no business being a homeowner. Buying, and living in, your own home is primarily a lifestyle, family and geographic choice more than an investment choice. Actually I don’t believe it is an investment choice. Its really meant for long-term ownership, and any investment benefits come way down the road as a reward for disciplined mortgage payments and long-term market appreciation. But it’s expensive, and there are no guarantees. From what I’ve read, the long-term return on real esate (30 + years) has typically averaged around 6 %. You can do a lot better in the stock market for that length of time.

So if someone anticpates moving in a few years, then why buy a home in the first place? The risk is that you tie up your money in a piece of property that isn’t going to sell, and may be worth less when you do sell it. Admittedly, many people buy that home and don’t anticipate that they’ll need to move in a few years. People get transferred, divorced, decide to move, etc. But that used to be the exception before we became such a mobile society.

I’ve been there… I bought a home and was suprised to be transferred less than two years later. Did I sell it? Nope. The market was stagnant and I had to sit with that home for a long time. I didn’t want to lose money, so I rented it. For a long time… like 13 years. Some of those years were pretty tough, especially with mortgage rates, maintenance costs, management costs (I was an out-of-town landlord), insurance and taxes. When I finally did sell, it worked out okay- and we used the money from that home to help purchase a primary home where we settled down for good. But I will tell you that there were many long years of renting that house with negative cash flow that were a challenge for me. And we didn’t have the income to purchase another home until much later. When we moved around during that timeframe, we usually rented. That was okay- we had no intention of staying in most of those places. I still carried that other home “on the books” for many years.

But you know what? That home that I was stuck with, that I couldn’t sell, that was such a hassle dealing with for many years also turned out to be a decent investment and tax shelter. The rental income losses offset my income, and all the time I continued to pay down the mortgage year after year. Well three mortgages/refinanced loans later anyway. By the time it sold I figure my annualized gain was about 9-10 %, not including the tax advantages and the equity in the home from paying the mortgage. That’s why I see such a stark difference in home ownership and owning real estate as an investment. It may not have started out that way, but that home was a rental real estate investment, plain and simple. Can the home you live in be a good investment? Absolutely… in some markets people have become wealthy by owning real estate the lived in. But it may take a very long time with few guarantees beyond a nice place to live. It helps if you’ve got a mortgage you can live with as well.

My reasons for owning, and living in, a home come down to making a place for our family to grow. In some ways it’s still a new experience. I really haven’t lived in any one home or location for more than three years for my entire life. Yet now we hope to stay in the same home for 15-20 years or more! Personally that’s a pretty good feeling… I don’t need to pay attention to the real estate market per se. In other words, I don’t spend time thinking or worrying about it becuase it’s not relevant right now. Ask me again in 10-15 years and I’ll probably have a different answer. The same for the stock market, retirement funds and investing… if I’m saving and investing for the long-term, then why worry so much right now? As I approach retirement one day, I’ll be a lot more interested in what the market is doing to my retirement assets.

So instead of fear and confusion, I see a lot of opportunity today for potential home buyers, especially those who know where they want to live, how long they want to be there, and how much they are willing to spend. The real estate market will probably struggle for a couple more years at least, and there will be many buying opportunities along the way. But if you’re set on becoming a homeowner, then find a place you really like at a fair market price, and plan to stay there a long time (5-10 years +). If you’re not planning to live in that home very long, then you proabably are better off renting.

And by the way, that home that became rental property for so many years? It didn’t start increasing in value until after the 8 year mark! If I had sold any time during the first 8 years, at best I would have broken even. For many people, breaking even on a home they live in is just fine… they’ve had the pleasure of living there all that time. But if it’s a rental property? That’s a tough place to be. Make sure it’s what you want to do with your time and money!