And how do we know?
“Absolutely not,” Geithner said, when asked in an ABC News interview broadcast today whether a downgrade is a concern. “That will never happen to this country.”
Sounds similar to this, no?
No one can say when it will happen, but at some point, we are going to have to pay the piper.
There is a lot of speculation that mortgage rates will rise above 6% once the Government’s different programs run their course (TARP, $8000 New Home Buyer Credit, etc) and financial institutions stop their foolish purchasing. Believe me, this is a good thing. Especially if you have been saving cash to buy a home. High interest rates make everyone’s cash in the transaction more valuable. And reading articles like the one below are indicating exactly that. Now, whether or not the Government steps in with something new to prop things up is anyone’s guess. But if they don’t…watch out. Housing prices would have no where else to go.
MORTGAGE FINANCING
FHFA reducing Fannie, Freddie portfolios
The federal regulator in charge of Fannie Mae and Freddie Mac said Tuesday that the mortgage finance giants would not be taking on additional measures to bring down interest rates on home loans as other government programs to stimulate the housing market expire.
The Federal Housing Finance Agency said it is committed to reducing the companies’ mortgage portfolios and does not expect the firms “to be substantial buyers or sellers of mortgages.” The agency said it expects private investors will step in as other government initiatives, such as the Federal Reserve’s trillion-dollar mortgage-acquisition program, wind down.
– Zachary A. Goldfarb
The scary part is that more and more of my friends are walking away from their homes. And this downward pressure on home prices will incite more debt slaves home owners to do just that. Walk away. So where does it stop?
I have several articles that you probably should read concerning real estate, here and here.
Now for a long while (over 6 years) I have been bearish on RE. For those who may not understand the term bearish, it pretty much means that I think that purchasing a property has NOT been a good move. But things are changing.
Take these homes for example.
Some things I know after researching the homes using DIAL and the CLERKS records are.
Now how can we distinguish if this is a good deal? Well lets lay some ground work.
I currently rent a crappier home than either of these for $775 a month. So if my net monthly cost is less than $775 a month, this tells me that I should consider “buying” a home. So I go to bankrate.com and open up their mortgage calculator.
The homes are asking $89k, and I would put down roughly $20k in cash. Making the loan amount $69k. And with a 15 year fixed and good credit, you should be able to pull close to 4.5% on the interest. You can see that the monthly payment is then $527.85. This may lead you to think “Jared, you would be saving $250 dollars a month, what is stopping you?” and that is a reasonable question.
If you look up the properties in DIAL, you will see that the annual taxes due on the homes is roughly $2k. Dividing that by 12 gives you your monthly tax rate at $166 a month.
$527.85 + $166 = $693.85
Monthly Mortgage Payment + Monthly Tax Rate = $693.85
Which doesn’t look quite as attractive, but is still interesting. Finally you should calculate maintenance costs. Which most people say the bare minimum is 1% of the purchase price. Realistically, I think we probably should go with 2-3% of the purchase price for these older homes, but for the sake of this post, we will just use 1%. 1% of $89k is…$890 which we will divide by 12 to get our monthly maintenance cost. $74.16.
$527.85 + $166 + $71.16 = 765.01
Monthly Mortgage Payment + Monthly Tax Rate + Monthly Maintenance Cost = $765.01
Yes, this looks really attractive, but I also want to add the transaction cost (The amount you pay in fees to the RE agent, Mortgage broker). I will have to guess a little bit here, if a real estate agent can shed some light I would appreciate it. So lets say that the total fees paid, is roughly 7% of the purchase price.
$89k x .07 = $6230
Now divide $6230 by how many months you will have the mortgage loan for. In our case, it is 180 months.
$6230 / 180 months = $34.61
Keep in mind that if you roll any of the fees into the loan, then you will pay interest on them.
$527.85 + $166 + $71.16 + $34.61 = $799.62
Monthly Mortgage Payment + Monthly Tax Rate + Monthly Maintenance Cost + Monthly Transaction Cost = $799.62
This is the basic math I use to figure out if I really am getting a deal or not. The interesting thing here, is that an investor could potentially buy this place. I mean they could maybe rent it for $850. So they would make ($577.85 x 12) $6934.12 annually on a $89k purchase. Roughly 7% +/-. Not a terrible investment using this math.
I did call about these homes, supposedly they have several offers. Thing is, with over 400 Notice of Defaults in January, we all know that there is plenty of inventory. Meaning that there is absolutely no freakin rush to “buy” a home.
Anyway, just some thoughts for people to consider before they purchase and please comment if I missed something.
I read Tim Duy’s post “It’s Not About Interest Rates Yet” and Tim left me in a deep think state. As Tim points out, the government program to buy Mortgage Backed Securities is set to end. But it now sounds like they may (surprise, surprise) extend the program. And reading this, it was yet further confirmation to one of my key beliefs about Real Estate. You see, many people do not seem to realize the scale of government intervention with the National Real Estate market. Others that are in the know, probably see the government as simply distorting demand. But in actuality the government IS the demand being both mouth and stomach. They are the loan holder, the real estate buyer, and everything in between. And with the government at the center of housing, the inflated prices are just another form of shadow tax. One that no person is able to articulate or describe to their friends. Because we as tax payers are conditioned to believe that taxation happens mainly on our pay check or in the annual ritual of filing our 1040. So to those looking to buy, how can you, I, or anyone possibly hope to compete against this? In my opinion we can’t. We can only wait until the demand is gone.
Speaking of shadows, I think the word “shadow” epitomizes the MSM (Main stream media) and even the local boys (IE, Bulletin, KTVZ, etc). It is why I thoroughly inspect every nugget of supposed news that is reported. For there exists something at every major news corporation that lurks in the shadows. Just like shadow statistics, shadow inventory, shadow tax, this one is known as shadow opinion. The thought came to me a while back when reading an OP-ED piece from the Bulletin. Some where along the line, the newspaper came up with the idea that if they put the word “Opinion” in the title, it would let the reader know that the article was the opinion of the writer. Also implying to us, the readers, that the rest of the written document is news. In actuality and truth, we should know that the news is all opinion. The paper, magazine, news channel or what have you has an opinion about all things. And should you listen closely on when, if, or how things are published, you can hear the true “Voice” of any given media outlet.
But I think Duncan over at BMW is right in his ongoing subtle analysis of the MSM. The bloggers seem to have an edge on them. At least they have a much tighter voice. Usually being written by one person, or at most, a handful of people. And about a specific topic no less. Plus the scope and draw of the content is on the ground and global. As these folks can be or are, literally, all over the world. Instead of watching or reading the MSM as it regurgitates the same garbage over and over again, my opinion (heh) is that listening to the voices of many bloggers of all creeds is a much better representation of actual News.
Finally, it was funny this morning, because as I was sitting at breakfast today clicking through my RSS reader. I pulled back from the individual articles, and took a long look at all the blogs that I love to read. Suddenly an image of my father sitting at my childhood breakfast table thumbing through his paper filled my thoughts. This struck me, because I know that this will be an image that my daughter will never have.
Duncan McGeary Cory Pratt Mike Brisk MishCopyright © Jared Folkins
Programming, Computers, Writing, Economics, and Life
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