The Housing Equilibrium

Everything in life seeks equilibrium and balance. It doesn’t matter what it is... everything seeks balance. If you work too hard you will get sick and you will be forced to rest. If you don’t eat you get hungry. When the government manipulates affordability in housing markets it throws off the true market equilibrium. Fundamentally the government was attempting to create a new equilibrium where are greater percentage of the population were home owners. We now know that though well intentioned this push had severe consequences.

I have written a fair amount on this subject before. However the attached article is a compelling reminder that false supports are preventing us from finding the equilibrium. Letting the market correct will bring real stability back into the market. Yes, prices will likely be lower but the footing will be firm. False supports will continue to promote indecision in the marketplace and the reality is that the market is seeking a true equilibrium in spite of these false supports... hence the drop in sales numbers.

See the URL below:

http://money.cnn.com/2010/08/31/real_estate/federal_housing_programs.fortune/index.htm?section=money_realestate&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_realestate+%28Real+Estate%29

Desk of Zach Trailer
By Lanny Berg

The 8K Tax Credit Aftermath...

Those who patiently waited are finding a tremendous buying opportunity, A few months ago I wrote about how those who did NOT buy during the First Time Home Buyers Tax Credit might be the ones who end up benefiting the most... Well, it looks like that was an accurate assessment. The tax credit has expired and home sales are dropping significantly. The reality is that I would rather get 40K off of a 400K home than pay 400K and get an 8K tax credit. Over 2 million first time home buyers jumped in and bought new homes during this subsidized period. For those that did buy it probably wasn’t a bad decision but it demonstrates the real weakness that exists in the market and that people were focused on the wrong thing; a tax credit vs. the actual value of the housing market. Those who waited will now have less competition as there are fewer people in the market generating less demand. There is the additional benefit that they are actually benefiting from historically low interest rates. Now really is the time to buy...

By Lanny Berg
Desk of Zach Trailer

Uncertainty is a strategic advantage...

I have written many times that California is unique and amazing when it comes to real estate cycles. With interest rates fantastically low and housing prices low as well (specific to local markets) in some cases it is indeed becoming less expensive to buy than to rent. This is a pure cost analysis and is more directed at entry-level properties but non-the-less it is happening. People wonder is “now a good time to buy”? Though no one can predict what the future will bring if you have the capability would you rather be in the market to buy now or back in 2007? >Warren Buffet is famous for saying be greedy when others are fearful and be fearful when others are greedy…

Desk of Zach Trailer
by Lanny Berg

The Tax Credit is Ending... Now What?

A $8,000 Federal tax credit to first time home buyers resurrected a housing market across the country. California added it's own home buyers tax credit that had two buckets... one bucket was for the first time home buyer and the other bucket was for people purchasing new construction. Potentially this meant up to $16,000 in tax credits available to the first time home buyer in California. With the Federal tax credit no longer available and the California money running out people are wondering what is going to happen. Though no one exactly knows I think this there is a possibility that this creates an unbelievable opportunity for the first time home buyer.

I was talking with a potential client last night and we are both economic theorists. I told him that I thought it is possible that he isn't missing out at all. Theoretically speaking if you are competing against other home buyers during the period in which everyone is trying to get the tax credit than this is keeping pressure on pricing because demand is up. If demand retracts after the expiration of the credit and it allows you to negotiate a better deal than it may have been a good thing to wait.

Again this is theory:

Let's just say you could buy a great home for $600,000 home pre-expiration of the credit. Tax credit savings = $16,000.

Let's speculate that the same property at some point later this year after the expiration of the credit the same house could be negotiated because of a lack of competition in the market down to 550K. This 50K savings over the life of the loan is equivalent to $120-130K in actual savings. The argument could be made that if you took the 16K and invested it that that might be a larger return at the end of the day but the reality is that most people will not do this. Instead the potential savings negotiated off the purchase price is real money today in saving you on your monthly payment as well as saving over the life of the loan.

As always… Do your due diligence.

From the Desk of Zach Trailer
By Lanny Berg

DO AS I SAY... NOT AS I DO

DO AS I SAY... NOT AS I DO

There are many things about real estate that are great... one of which is that it never gets dull. With the boom everyone was a genius. With the bust everyone is pointing fingers at who's fault it was. Though banks had a big role in feeding the bubble it was Government policy or lack there of that created the ingredients for the bubble to form. Government policy encouraged home ownership to those who couldn't afford it and Wall Street in their creative capacity figured out how to create the financial products that would keep the supply of investment money coming in to fund the loans.

Government is now attempting to throw a lifeline to struggling homeowners and "rescue" them by creating programs and policies encouraging banks to offer loan modifications programs to struggling homeowners.... except for government held mortgages of course. An interesting read from the link to the article below.

http://money.cnn.com/2010/05/14/news/economy/fannie_freddie_principal_reduction/index.htm?section=money_realestate&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_realestate+%28Real+Estate%29

From the desk of Zach Trailer

A Bit of Perspective

This is an interesting article that brings a bit of gravity back to the encouraging housing sales statics that we have seen in 2010. The crux of this article touches on the fact that a high percentage of our national wealth is tied up in the housing market. Of course, over the last 10 years this wealth was leveraged to consume. The appreciating asset of our homes over the last 10 years created an "ATM" that people could then draw from for all sorts of purchases. Though this ATM has dried up for the average person the truth that this article points out is that this has other consequences that ripple through the economy affecting construction, small business, and government employment all which contribute to the jobs engine in the United States. This is a good read that helps bring to life the ripple effect that an overall reduction of value in the real estate market has.


http://finance.yahoo.com/real-estate/article/109507/real-estates-far-reach-to-continue-to-pinch

A Wild Ride on Wall Street

What a wild ride on Wall Street last week. All of 2010 gains were temporarily wiped out and after a roller coaster couple of days the Dow is gaining back what was lost. At one point a 30 year mortgage was in the neighborhood of 4.5% as money fleeing from EU risk came pouring into US Treasuries. An EU bailout has caused the dollar to fall again today 5/10 which is good for the stock market.

The Real Estate market continues to show strength. Below is a great link to see just how strongly the housing market has come back in silicon valley. http://www.burbed.com/2010/04/25/silicon-valley-median-home-price-rises-29-percent/ Median prices have risen by 29%. Likely there are a few contributing factors. The expiration of the first time home buyers tax credit brought a lot of buyers into the market. Historically low interests rates continue to be a big incentive to buyers. The truth of the matter is that compared with a year ago those who are still employed are far less afraid of losing their jobs than they were a year ago, especially in here in Silicon Valley. In Silicon Valley companies are financially healthy and making a lot of money. Many including Apple have announced fabulous earnings which gives confidence to those who are employed. In fact, tech is hiring again which will only continue to build strength in the market.

Have a great Monday!

From the desk of Zach Trailer.