Everyday we wake up to more bad news about the housing crisis. Whether another mortgage company has failed, another bond insurance company is in trouble, or the opinions of negative statistical people, we hear very depressing news about our home and the value of it! Have you noticed that when you think there is a bottom to this housing market, the news makers tell us "we haven't even begun." This angers all of us when we see home values BELOW pre-boom prices. I agree with them, "This is a bad market (to be selling a home)!" This is NOT a bad market to be buying, and buying right. My Motto: "Buy Today!!!"
Recently I had a buyer tell me: "Todd, I am going to wait until the bottom comes and then I will buy." I asked him, "How will you know when the bottom of the market is here?" He said, "I'll know because the news will tell me." I thought to myself, "What happened to good old fashioned thinking for yourself?" I chuckled and we went on our way.
Regardless, this comment sparked my thought processes. How will Arizona really know when there is a bottom to housing declines in this market? Will our neighbors know? If your neighbors are like mine, they can't even tell you if it will rain or be sunny next week, let lone have a compass on the housing market and prices. Perhaps the gurus like the lenders, tv/news personalities, or REALTORS will tell us. No...I doubt that too! I recall in late 2005 when I was contemplating selling another rental, many people told me to hold onto it "because house prices would only rise." However, my "gut" told me to sell it. I am sure glad I did. I remember now that the market was strongest before it started collapsing. In other words, the home prices stopped elevating. I would say that was fall/winter of 2005 in Arizona. Throughout 2006 larger homes continued to sell but house values started slightly declining. By mid 2007, with lenders foreclosing and short sales, prices were being slashed 50-100 thousand dollars on houses. This lowered comparable property values and all house values began to slide downward.
So what is a short sale? This is a way to sell your home without it showing up on your credit that you lost it to foreclosure. If you lose a home to foreclosure, it can damage your credit for up to 10 years. With a short sale, the lender is consulted and together you sell the property for a discounted rate which doesn't include any of the add ons the homeowner added to the home, as well as a small loss on the part of the lender. This way, with the discounted price, the lender hopes the home can be sold within 3 months. Usually it does sell. However, it has a negative impact on house values in the area.
See when you decide to do a short sale or foreclosure because you feel you can no longer pay the payments, you are not only affecting your life, you are affecting the lives of everyone who lives within a one mile radius of your home. Your lower valued home becomes a "comp" or comparable property. Banks and lenders don't want to hold onto your home, so they slash the price by at least 10-15% below the current houses on the market. They want to SELL, SELL, SELL and get that home off their corporate books. Some will result in auctions. I will discuss auctions on another day.
So when do I think the bottom will occur? I believe we are in a "soft bottom." We could see houses drop another 5% but I cannot see prices going back to 2002-2003 prices. It will sink everyone! Now I could be wrong, but I believe that the federal government is going to step in and do something to help these lenders STOP adjusting mortgage payments in the ARM cycle, and help owners STAY in their homes. I also believe something will be done to Freddie Mac requirements that will help remove some of the homes on the market presently. After all, this is an election year!
By the third quarter of 2008, I believe we will begin to see stability in prices. So in the first two quarters, it is the time to buy. This is only my view. However, you must "buy right." Make sure you have a good REALTOR who can provide you with recent comparables (last 3 months) as well as rents. I will explain the rents later. Make sure that it is a home you can afford. Perhaps it is not your dream home but the payment is very affordable for your circumstances right now? I would say that is the way to go.
Also, make sure you have a reliable lender. All lenders or anyone working with mortgage lending, will be required to take coursework and be licensed in 2009. They will also be held to a higher ethical standard. This should keep some of the people who were less than professional from entering that field.
I advise clients, when looking at a home, to look at it not only "today terms" but "tomorrow terms." What are their plans for this home? Will they live in it for 2-5 years and then sell it? Will they rent it out after two years? Will they stay in it for up to 10 years? Every homeowner should have a 3-5 year plan when they buy a home. This plan doesn't have to be big or detailed but they need to know what their intentions are at that time. This plan effects what upgrades they make to the home as well as the best loan program to choose.
Make sure that your loan is conservative enough so you don't "have to" sell. Most of my lenders NEVER recommend 3 year or less arms. Five and seven year arms are typically decent arms because they give the home time to appreciate in a normal market, the homeowner has time to save money or refinance, and the homeowner has time to move before it corrects. Also, a good lender will usually never recommend an option arm for a primary home. An option arm or MTA loan typically charges more interest. Let's say 8.5% APR when the average rate is 6% APR. The owner has the option of paying half of the interest every month, full interest, or interest and principal. If the full interest is not paid by year's end, it is added to the principal at the end of the year. Hence the amount you owe on your house can rise year after year even in a BAD market like the one we are presently experiencing. Rarely should option arms/mta loans be used to finance a primary property. However, in high appreciation rental properties, it is a useful tool to maintain appropriate cash flow and manage a rental property.
Remember I mentioned having your REALTOR check housing rents? This is good to know because when you are deciding to buy, I always recommend that buyers know the rents in the area so if they do get in a bind, they can rent the property instead of lose the property. I know, most owners view short sales or bankruptcy as a last resort. I believe that renting out your property till it sells should be the last resort. Make sure that your payment is appropriate so you won't have to pay too much "out of pocket expenses" if you have to rent your property. This pays for your mortgage. Then in a year or two you can sell your home in a better market.
Unfortunately, many people like myself took too much equity out of their homes. I am sticking with it but many are just giving up. Don't wait until the market is roaring in 2009-2010, buy a "value added" house with pizzazz and watch it grow over the next 5 yrs in value.
Best of luck and happy house hunting!
Respectfully yours,
Todd Hillman
For more information about buying or selling a home in Central Arizona, please contact Todd Hillman, DPR REALTY, INC at his office. 623-979-3002.
