AskTerryT.com

    A few weeks ago I wrote a blog about now being the time for buyers to step up.  I need to elaborate on some issues though.  I actually believe we have seen where the bottom of this real estate market is going.  That bottom is homes priced under $200,000.  I have personally had listings under this threshold with multiple offers and some even being bid up.  The problem is we don’t actually have enough good properties under this threshold yet.  Give it some time we will.  Additionally, we are seeing investors jump back in the game, especially if they can get properties at 60-70 percent of the broker price opinion. The reason they are returning is because the market is full of potential renters that actually have lots of cash.  These potential renters have cash because they haven’t had to make a mortgage payment for over six to eight months due to short sales or foreclosure.  Most of these people still have jobs with the ability to make payments, just not the amount they have to pay to keep a home that isn’t worth what they paid for it.  How do you spell bad investment?  These people are great prospects for renters and even in some cases, rent to own prospects, with nice healthy deposits up front.  Music to the ears of any would be investor for sure!

The other folks getting into the game are first time home buyers. According to CAR statistics the minimum household income needed to purchase an entry-level home at $356,350 in the first quarter of 2008 was $68,830, based on an adjustable rate of 5.65 percent and assuming a 10 percent down payment.  They went on to say that first time buyers typically purchase a home equal to 85 percent of the prevailing median price.  The monthly payment and insurance was $2,260 for the first quarter.  At $68,830 the minimum qualifying income was 30 percent lower than a year ago.

In the High Desert that means 64 percent of the people can afford to by a home according to CAR, along with Sacramento County, this is the highest affordability area in the state.  In the rest of the Inland Empire it varies between 30 and 45 percent.  Those are very good numbers, much improved over years past.  However to do this you need to have full documentation of income, good credit and where the down payment will come from.  With FHA the down payment part is simple; it can be gift money, either from your family or from a charitable organization like the Nehemiah Group.  Credit I’m finding is another issue all together.  It seems there was an additional reason why folks didn’t get into the housing market the past few years and it has nothing to do with home values.  Some folks just don’t understand their credit report.  No credit is equally as disqualifying as bad credit.  My first advice to everyone is to know what your credit report looks like.  Go online and Google “credit report” and you will see plenty of sites.  My favorite is the one we see all the time on TV and has the cute little jingle sung by the guy in the fish restaurant, freecreditreport.com.  Next, get with someone that can help you understand this and start getting it in shape.  If you have any late payments, charges off, repossessions they all need to be cleaned up before you can buy.  If you have a judgment, pay it.  If all these “dings” on your report have been paid but still show open you need to contact the creditors on your report and ask them to remove these items.  Now you may need to supply supporting evidence it is paid, so do your research.  If the bad credit is your spouse and you can show enough income on your own and you don’t need your spouse, you may be okay.  With people that don’t have any credit, you need to establish at least four lines of some form. Also, folks open up a checking account!  Don’t pay bills with cash or money orders; you have no record that you made payments.  If you’re renting you can use the utility bills but if you paid in cash you have no record of paying.  If this is the case you will need to go to the utility companies and beg them for a record of payment; however that may or may not show who made the payments so you can’t establish credit in your own name and that is what you need. Also, things like too much credit or open accounts and a lot of inquiries will hurt you.  If you were shopping for a car and you went to several dealers they may have all looked at your credit report.  That is not good ether.  If you know in advance what your report looks like you’re ahead of the game. It amazes me that when I sit down with prospects and I ask them “what I can expect to see on your credit report” they have no clue or they assume that everything is okay!  Be informed folks it’s that simple.  Bottom line is this, understand your credit report before you try to get a loan and be honest and up front with your lender.

Let’s look at this housing market and identify what is going on first. We are currently in a housing meltdown proportional to what occurred before the great depression in 1926. Values in some areas on a national level have dropped over 35% from the same time last year, and are continuing a downward spiral.

In the Inland Empire, we have seen a 25% to 35% drop in home values.  The local Multiple Listing Service has an inventory of over 40,000 listings. Each month we are seeing a dramatic increase in NOD filings which will lead to more foreclosures and bank owned properties. In a nutshell, we will continue to have distressed property sales of some kind well into 2009 and 2010 with property values that will most likely level off sometime by the end of 2008 or maybe sooner if the banks get aggressive in pricing the properties they own as well as negotiating on short sales.  

What about debt forgiveness.  Let’s get real folks. Let’s say your neighbor down the street refinanced or purchased their home in 2006 or 2007 for $300,000 on an adjustable loan.  Now the property is valued at $225,000 and their payment just went up and they can’t afford it.  Additionally, to make matters worse, the bread winner lost his job.  Who is going to give them a loan and what happens to that $75,000? For most the only option is a short sale.  

Buyers that sat out the housing explosion that occurred between 2000 and 2005 and saved money, or if you’re a renter with a good job and good credit it just doesn’t get any better.  There are plenty of great financing programs for these people. FHA loans can be obtained for less than 6.5% interest with 3% down and all of that can be gift money, if you hook up with a lender that knows how to do FHA loans. Additionally Fannie Mae just introduced a 3% down program as well.  

How long will this last?  Well in all honesty; these low rates should not be here to begin with.  Let me explain.  30 year mortgages are not tied to the rates the Fed has been reducing.  They are more a result of supply and demand, the value of the US dollar and the commodities market.  So what is up with supply and demand? Well it’s low for sure. The banks have a liquidity issue and programs are scarce, however that is changing.  Low supply and demand will in fact keep rates down. Now what about the dollar?  Well it is taking a beating and that should drive rates up.  How about the commodities market?  It is off the charts. The price of oil alone on the futures market is approaching $130 a barrel and we will see $150 by the end of summer.  Now take the last 30 years of the cost of oil and put it on a graph, then lay over the rates on 30 year mortgages covering the same time period and what you see is amazing.  Oil  and 30 year interest rates track each other. What do you think will change first, supply and demand of 30 year mortgages, or an increase in the value of the dollar and a drop of the price for oil?  In my opinion the supply and demand issue will be the first to correct and when that happens you will see an increase in 30 year interest rates.  

Additionally you always want to buy in a down market; conversely you sell in an up market.  But if you can, you don’t buy in an increasing market you buy while the market is still dropping so you get 100% of the growth potential at the lowest interest rates.  Where are we now? We are still dropping and interest rates are extremely low.   

That leads us back to the beginning.  Now is the time to buy, get off the fence call a good lender, get a good Realtor and get busy.  If you’re a renter you could be a homeowner with a mortgage interest deduction that could actually put more cash in your pocket each month. Do it now before interest rates go up.