Tuesday, March 22, 2011

We Think We’re Going to Believe Grandpa

by THE KCM CREW on MARCH 22, 2011


There are those currently debating the financial advantages of owning a home. Some are looking at studies and reporting that homeownership has never really been a great investment.

One of these people is Jack C. Francis, a formerFederal Reserve economist and professor at Baruch College. He said in a recent CNBC article:

“For generations, parents and grandparents have been telling us that the way to get ahead was to buy a house and keep making payments with a fixed interest rate and after 20 or 30 years it would be way up in value and that was your nest egg in old age. You could either live in it rent free or sell it and use the proceeds to rent an apartment.”

The article goes on to explain the rest of Mr. Francis’ comment:

That was good advice until 2006 when home prices collapsed, he says, and it “may become good advice 10 years from now, but right now it’s not.”

Mr. Francis bases his conclusions on a study he completed which covered the years 1978 through 2008. In his study it showed that home prices increased annually by 5.7% and that the S&P 500 increased by 10.8%. Based on this information, Mr. Francis gives the following advice:

To students who come to him for guidance on whether to buy or rent in the near term, however, Francis has one word of advice: wait. “I keep telling them this is not the time to buy,” he says.

Let’s take a closer look at this conclusion.

1. We have our own study.

Mr. Francis did a study over a thirty year period which did not include the last 3 years. If we look at the same categories since January 2000 (covering one of the worst decades in American real estate history), we find that home values GAINED 42% while the S&P LOST 4.7%. It all depends on which set of data you choose to use.

2. The proper comparison is rent vs. buy.

All of these comparisons claim that putting your money into a different investment vehicle other than real estate might make sense. What they are not taking into consideration is that the investor will still have a housing expense. They will still need money for shelter. They cannot just take their money for shelter and buy other assets with it. A person can’t live in their 401k or their IRA. This leads us to…

3. In most markets today, owning is LESS expensive than renting.

Trulia recently came out with their Rent vs. Buy Index. The report shows:

that it is more affordable to buy than to rent a two-bedroom home in 72 percent of America’s 50 largest cities.

For more on this issue including a 50 city breakdown, click here.

4. Current mortgage opportunities may never be available again

The government has driven mortgage interest rates to all time lows. You can still get a 5% rate and guarantee it for 30 years. Both of these opportunities may soon disappear. Mortgage rates will increase as the economy improves and the Fed no longer feels pressure to keep rates low. The 30 year mortgage may soon be a thing of the past if suggested mortgage reforms come to be. You can lock in your housing expense for 30 years if you purchase. Renting is like having an adjustable rate loan with no cap that readjusts EVERY year. Which way do you think a landlord will readjust it?

For more on this, click here.

5. Most Americans see more to homeownership than financial value.

Last week, Fannie Mae released the National Housing Survey. The survey reported:

  • 96% of all homeowners said homeownership has been a positive experience.
  • 84% of Americans still believe that owning a home makes more sense than renting.Even 68% of renters believe owning makes more sense.
  • 2 in 3 Americans believe that lifestyle benefits of homeownership (65%) are superior to the financial benefits (32%).

Bottom Line

There are more and more studies being done on the value of homeownership. We think we will trust in what our parents and grandparents said. Your mortgage payment is money you put into your savings. Your rent payment goes into the garbage.

Thursday, March 3, 2011

San Diego, Orange counties lead state growth

But California's recovery will remain 'painfully slow,' Wells Fargo says

ORIGINALLY PUBLISHED MARCH 2, 2011 AT 6 A.M., UPDATED MARCH 1, 2011 AT 6 A.M.

Job growth in San Diego and Orange counties will help lead California into economic recovery, but the statewide growth rate will remain "painfully slow," according to a study released Tuesday by the economics group at Wells Fargo Securities.

"While California's economic performance is expected to improve a touch in 2011, the state will continue to perform somewhat below the national average," wrote Wells Fargo economist Scott Anderson.

Anderson noted that San Diego has had a modest improvement in its job market over the past year - outpacing both Los Angeles and the San Francisco Bay Area - with the addition 3,300 new workers in healthcare and 800 in professional, scientific and technical services and 4,100 temporary workers.

In addition, he said tourism should start injecting more money into the local economy in 2011, thanks partly to the construction of a new cruise ship terminal.

"Rising hotel room rates and occupancy rates are already visible," he said.

On the other hand, Anderson noted that the county only managed to bring down its jobless rate by 0.2 percentage points over the past year to 10.1 percent, dragged down by the loss of 2,600 construction jobs, "illustrating the 'treading water' nature of the jobs recovery so far."

In addition, he said, San Diego's housing market "remains far from normal and a true bottom appears a way off." Even though the median home price is 1.7 percent ahead of last year, he said, the pace of growth is slowing down and "further price declines are expected in the months ahead." After the Northern California Wine Country and Orange County, San Diego has the state's third-highest inventory of homes to be sold: 5.9 months' worth of detached homes, compared to a statewide average of 5.0 and as low as 3.4 in Sacramento or 3.8 in San Francisco.

The report also warned that San Diego's economy could be damaged by expected cuts in Pentagon procurement spending, although it may also benefit from Navy cutbacks, because ships may be relocated here as operations are streamlined in other areas.

On a statewide basis, Anderson predicted that jobs will grow 1 percent this year, bringing the unemployment rate below 12 percent. But he added that "jobs and unemployment across the state will remain the biggest economic problem for the state's policymakers."

Tuesday, March 1, 2011

If Your Goal Is to Buy Low, Buy Now!


by THE KCM CREW on MARCH 1, 2011

There is a very famous saying which asserts “Sell High, Buy Low”. It is obviously great advice no matter what the investment. Below is a graph showing the cycle of investments. It shows the points of maximum risk and maximum opportunity when purchasing. We want to sell high (point of maximum risk) and buy low (point of maximum opportunity).

The challenge is how to determine when we have hit bottom if you are a purchaser. The only time you can guarantee a bottom is after you pass it.

However, there is more and more evidence that the COST of a home has in fact hit bottom. Notice we have used the word COST. Unless you are an all cash buyer, you must take into consideration the expense of financing a property to determine the true cost of purchasing the home. Interest rates have increased over the last quarter; and the rise in rates has counteracted any fall in prices.

Let’s look at an example:

Let’s say you were going to take out a $200,000 30-year-fixed-rate mortgage in November of 2010. At that time, interest rates were 4.17% (as per Freddie Mac). Your principle and interest payment would have come to $974.54. According to the most recent report from Case Shiller house prices fell 3.9% in the 4th quarter of 2010. The most recent report from the Federal Housing Finance Agency shows a 0.8% fall in prices. Let’s use the larger percentage decrease: 3.9%.

For the sake of keeping the math simple, we will now say you can get the same house with a $192,000 mortgage (4% discount from November price). Interest rates are now 4.95% (as per Freddie Mac).

Your principle and interest payment would now be $1,024.84.

By waiting to pay less for the PRICE of the house, the COST increased over $50 a month. That adds up to more than $600 a year and over $18,000 over the life of the loan.

We realize that there are other things to consider (ex. the mortgage tax deduction, etc.). This example is just a simple way to show that there is a difference between COST and PRICE.

Bottom Line

If you want to buy low, buy now. It appears COST has hit its lowest point.