History of Home Prices

Here is an entertaining perspective of the housing bubble. For those of you who get sick at the IMAX theater, better have some dramamine ready.



This production was created by the folks at www.speculativebubble.com

Here's the chart that the roller coaster was based on (click on the image for a larger view):





















The source for the chart is from Robert J. Schiller's "Irrational Exuberance," 2nd Edition. 2006

Roth IRA: When's the Best Time to Start?

The best time to start or fund your Roth IRA is - NOW!

If you haven't started your Roth IRA, you should seriously consider opening an account ASAP! If you have a Roth IRA and haven't funded it yet for 2007, you still have time. Here's a good article on why you should have a Roth IRA.

The timing couldn't be better. For one, you can still fund your Roth for 2007 up until April 17th, your tax return deadline and then turn around and fund your 2008 contribution right afterwards in one lump sum or incrementally throughout the year.

For 2007, your max. contribution is $4,000 ($5,000 over age 50) and for 2008 the max. is $5,000 ($6,000 over age 50). If you're married, your spouse can also fund a Roth at the same amounts, even if that spouse doesn't have earned income, as long as you file a joint return.

If you're wondering where the money to fund your Roth will come from, consider investing your Tax rebate. If you're married and have 2 children, you could receive up to $1,800 depending on your Adjusted Gross Income. What's the value of that $1,800 over 20, 30, 40 years or more? Use this calculator to see (use 0% for the Federal & State taxes).

Not all Roth IRA's are created equal. The primary feature of a Roth IRA is that you can invest after tax dollars to grow tax free and to make withdrawals tax free. Before you set up an account, make sure you understand the internal fees for that Roth IRA. Some mutual funds inside your Roth have a lot of internal costs that will eat away at your rate of return. Warren Buffet recommends index funds for the non professional investor. Check with a qualified fee only advisor for the best account options.

If you have a son or daughter helping you in your business, help them understand the value of starting a Roth IRA as early as possible and the power of compounding. Their contribution can be equal to their annual earned income amount up to the maximum allowed. Try this on for size:

A 17 year old contributes $1,000 of earned income into their Roth IRA each year for 10 years and stops with a total contribution of $10,000. Assume a 10% rate of return. Here are some estimated results:

• When they are 27, the value of the Roth would be $17,531
• When they are 37, the value of the Roth would be $45,471
• When they are 47, the value of the Roth would be $117,941
• When they are 57, the value of the Roth would be $305,908
• When they are 67, the value of the Roth would be $793,448
• When they are 77, the value of the Roth would be $2,057,999

Remember, this is tax free income (as the law now stands) after 59 1/2. Start young and let the power of compounding work for you.

Self Directed IRA's

On another note, did you know you can buy and sell real estate through a Self Directed IRA? Why would you want to do this, you ask? What if you could pick up an REO property at discount, fix it and flip it or lease it and sell it later at a profit. That profit is not taxable.

This is a very simplified example, so you should definitely talk to someone in the know. A good company to get more information from is The Entrust Group.

If you don't have enough money in your Self Directed IRA to purchase a property alone, consider partnering with one or more trusted associates and buy a property. You know there's a lot of good deals out there.

As always, consult with a qualified CPA and Financial Advisor to determine how to set this all up to best meet your short and long term goals, but start now!

The Cashflow Coach

• Mortgage Lender & Coach
• Providing a full range of mortgage services.
• Subscribe to my blog to stay updated on new articles.
• Now offering a full range of Investment Planning services

Median Home Prices Decline - The Positive Perspective

"WORST IN NATION: AREA HOME SALE PRICES PLUMMET IN 4^TH QUARTER" (from the Lansing State Journal, 2/15/08)

This was on the front page of our local paper. Why do the news makers report the most outrageous stats? It's probably because "Shock and Awe" sells papers.

A more accurate line would be:

"Lansing, like almost every other city in the nation, sees declines in real estate values and reduction in numbers of sales in the 4th quarter. On the whole, Lansing is not down all that much when you really analyze what's really happening."

My headline is more accurate, I doubt if anyone at the Journal would print it though. Here's the actual report sorted by largest decline from the National Association of REALTORS®. Note the "p" next to the "2007 IV" column heading and you'll see that these are preliminary numbers not the final numbers.

So what is really happening:

1. Median just means the middle. So if 5 homes sold today, one for $300,000, another for $350,000 another for $109,000 another for $105,000 and the last one for $108,000, then the median would be 109,000. Because it's the one in the middle of the others.

2. Don't confuse median with average. The average sale price in the above set of numbers would be $194,400 (add the sale prices together and divide by 5).

a. The average home price in the Lansing area in December of 2007 (from Michigan Association of REALTORS®) was $141,022. Only a -5.79% drop for the year and a -2.18% drop from the 3rd quarter, 2007 average.

b. Lansing is as we have been saying for 15 years a very stable, boring market (think of the tortoise not the hare); just like you want real estate markets to be. We did not see home sale prices double in the last 5 years and we wont see them cut in half either.

3. Don't confuse appraised value with market value. Over the last 5 years or so, home owners were going to their mortgage lenders every two years or so and reducing their interest rates. Every time, their home value seemed to go up. Remember, the value has not increased until you sell it.

4. Year to date, I am still finding that the appraised value of my client's homes are at or around their 2002 - 2004 appraised values and more often than not, still at or around the SEV x 2.

So,

1. If you don't need to sell your home, don't. Rent it or keep it for a while, but if you don't need to sell it - Don't. One less house on the MLS will keep values higher.

2. There are some great deals out there as banks own more and more homes. Consider buying one, fixing it up and renting it to a family in need for a very fair rent. It will get a house off the market, improve a neighborhood, help a family and you will almost certainly do well financially.

3. Join the Cornerstone Home Loans Supply and Demand team. We have set a goal to help our clients and Realtors to sell 300 homes in the Lansing area. These are both REO and non-REO homes. We will track the sales and keep you updated. Read our previous post on why this is important for the Lansing area.

4. Subscribe to our Blog to stay current on the real estate market - take advantage of this. Get the facts before you start getting down or making misinformed decisions. If you want a more fair perspective - keep reading our blog.

The Cashflow Coach

• Mortgage Lender & Coach
• Providing a full range of mortgage services.
• Subscribe to my blog to stay updated on new articles.
• Now offering a full range of Investment Planning services

Copyright © 2008 the Cashflow Coach | All Rights Reserved

FHA vs. Conventional Loans

The FHA has been in the news a lot lately. More recently because of the pending conforming loan limit changes. Just a word on that, especially those of you in Michigan - don't expect much if any change in our conforming loan limits.

The calculation is based on 1.25% of the median home values. Which means for Michigan homeowners our calculation will be based on a average value of $141,000 x 1.25% = $176,250. This is well under the current conforming limit of $417,000 and on top of that, we are not considered a high cost living area. So if you have a jumbo loan (loan amount greater than $417,000) I would not plan on refinancing for the sake of refinancing.

Why will FHA loans be the most used in 2008 by lenders who are working in the interest of their home buyer clients?

1. Interest rates are consistently lower than conventional loans by 1/8% to 1/4%
2. FHA Mortgage Insurance Premium rates are lower than conventional PMI rates with similar down payments and are tax deductible like interest.
3. PMI is now deductible, if you itemize on your tax return (please consult a tax professional). This makes the effective cost of this loan in a lot of cases less than a comparable conventional loan.
4. The minimum down payment is 3%. In some cases, subject to appraisal and seller approval) the seller can even gift this amount. Seller are still able to pay all of buyers' closing costs usually around 3 or 4% (can pay up to 6%).
5. Even though conventional loans can approve borrowers for $0 down based on underwriting, Fannie Mae is tagging many neighborhoods as declining value areas and requiring 5 to 10% down payment minimums for many borrowers. Some lenders are no longer doing $0 down loans at all in Michigan. Within the last week a few of our lenders no longer offering conventional 0% down loans the minimum down payment on purchases will be 10%.
6. Credit scores are allowed to be less than conventional loans (often a 600 score is all that is needed to be approved).
7. Loan limits are around $200,000 with no maximum income requirements.
8. It is a great option for someone who has and ARM loan adjusting and has a stagnant appraised value. FHA is more easily able to combine first and second mortgages with fixed rates and reduce the total mortgage payment.
9. FHA underwriting still allows for deferred student loans to be ignored in debt to income ratios for approvals.
10. FHA loans are automated and documentation requirements are streamlined. Many agents who have in the past worked with higher sale priced homes, and have not dealt with FHA for a few years, you will be surprised at how much easier they are now.
11. Can finance doublewide manufactured homes with little money down.

I have been in the lending business for almost 15 years. In the last 7 years, because conventional loans made lending possible for many more home buyers without the upfront PMI, my clients closed very few FHA loans. Since January 1, 2008, however, I have originated more than 15 FHA loans and will close most of those this quarter. I am excited about how easy, inexpensive to the borrower and flexible they are.

If like me, you have not used them, reconsider them for your home sales. If you have been using them consistently over the last few years, keep using them. They are becoming a first option for competitive lenders in serving their clients.

A couple of additional considerations:

1. The home still needs to pass inspection - FHA will be more lenient on this in 2008 than before but it should still be considered. You will begin to see more FHA 203k (home improvement) loans offered. These loans do add expense and time to processing. Combining a construction loan program to a government loan program will be more cumbersome.
2. FHA still charges an UFMIP (up front mortgage insurance premium). This is 1.5% of the loan amount ($2,250 on a $150,000 loan) and is added to the loan amount at closing. Remember, this can be refunded in part within seven years if the loan is paid off during that time. First time homebuyers will usually get some of this money back when they sell their home.

The Cashflow Coach

• Mortgage Lender & Coach
• Providing a full range of mortgage services.
• Subscribe to my blog to stay updated on new articles.
• Now offering a full range of Investment Planning services

Copyright © 2008 the Cashflow Coach | All Rights Reserved

Foreclosure: What To Do If You are Facing It

There is a lot of misinformation and frustration in the foreclosure process. I hope the following information and links will help you better understand what is happening to you and how you can better communicate to your lender.

"Foreclosure is a legal process by which a bank, mortgage company or other creditor takes a homeowner's property in order to satisfy a debt. The foreclosure is the result of non-payment of the mortgage (including second mortgages and home equity loans); however, people also lose their homes due to unpaid property taxes. As a result of the foreclosure (at the end of the redemption period), the homeowner loses the rights he or she had to the property."

Communication with your Lender as early as possible will be helpful. The following information can be found at the Federal Trade Commission...

Contacting Your Loan Servicer

Before you have any conversation with your loan servicer, prepare. Record your income and expenses, and calculate the equity in your home. To calculate the equity, estimate the market value less the balance of your first and any second mortgage or home equity loan. Then, write down the answers to the following questions:

• What happened to make you miss your mortgage payment(s)? Do you have any documents to back up your explanation for falling behind? How have you tried to resolve the problem?
• Is your problem temporary, long-term, or permanent? What changes in your situation do you see in the short term, and in the long term? What other financial issues may be stopping you from getting back on track with your mortgage?
• What would you like to see happen? Do you want to keep the home? What type of payment arrangement would be feasible for you?

Throughout the foreclosure prevention process:

• Keep notes of all your communications with the servicer, including date and time of contact, the nature of the contact (face-to-face, by phone, email, fax or postal mail), the name of the representative, and the outcome.
• Follow up any oral requests you make with a letter to the servicer. Send your letter by certified mail, "return receipt requested," so you can document what the servicer received. Keep copies of your letter and any enclosures.
• Meet all deadlines the servicer gives you.
• Stay in your home during the process, since you may not qualify for certain types of assistance if you move out. Renting your home will change it from a primary residence to an investment property. Most likely, it will disqualify you for any additional "workout" assistance from the servicer. If you choose this route, be sure the rental income is enough to help you get and keep your loan current.

If you reside in Michigan, then here is a simple outline of what to expect. Thanks to Ethan Dozeman for this information from his post.

The 6 Stages of Foreclosure:

Stage 1: 30 to 90 Days delinquent on mortgage payments.

The Lender reports late payments to the Credit Bureaus (TransUnion, Equifax, & Experian.) The Lender notifies the borrower by mail and by phone to encourage them to catch up on past due payments.

Stage 2: 90 to 150 days delinquent on mortgage payments.

The Lender sends the file to foreclosure attorney. Foreclosure proceedings begin. Must bring mortgage completely current to stop foreclosure, no partial payments accepted.

Stage 3: 5 weeks of advertising a Sherriff's sale.

Lender must advertise property sale to pay off the mortgage balance for 5 weeks. The sale must be advertised in prominent newspapers.

Stage 4: Sheriff's Sale

Property sale is held at the county courthouse. The winning bidder is usually the lender who bids the amount of their debt. Lender becomes owner subject to the rights of the borrower to redeem the property.

Stage 5: 6 month to 12 month redemption period

The borrower has 6 or 12 months to redeem the property by paying the lender in full. 6 month redemption period if the property is less than 3 acres. 12 month redemption if the property is more than 3 acres. 1 month redemption for an abandoned property.

Stage 6: Redemption period expires and the Lender controls property

Lender (or highest bidder from Sherriff's sale) now owns the property free and clear of any junior lien. Lender can now consider offers on the property. Borrower is evicted from the dwelling.

Understanding the Short Sale

An alternative to foreclosure is the short sale. This is the process of negotiating with the Lender to accept a lower price on the property than what you owe.

Why would the Lender accept less than what you owe on the property? In some instances, they would accept less than what you owe if they believe that they will take a bigger loss by foreclosing (legal fees and lower bids at auction).

For more information about the Short Sale, go to E Z Home Ownership Realty, LLC

Be Wary Of Scams:

Scam artists follow the headlines, and know there are homeowners falling behind in their mortgage payments or at risk for foreclosure. Their pitches may sound like a way for you to get out from under, but their intentions are as far away from honorable as they can be. They mean to take your money. Among the predatory scams that have been reported are:

• The foreclosure prevention specialist: The "specialist" really is a phony counselor who charges outrageous fees in exchange for making a few phone calls or completing some paperwork that a homeowner could easily do for himself. None of the actions results in saving the home. This scam gives homeowners a false sense of hope, delays them from seeking qualified help, and exposes their personal financial information to a fraudster.
• The lease/buy back: Homeowners are deceived into signing over the deed to their home to a scam artist who tells them they will be able to remain in the house as a renter and eventually buy it back. Usually, the terms of this scheme are so demanding that the buy-back becomes impossible, the homeowner gets evicted, and the "rescuer" walks off with most or all of the equity.
• The bait-and-switch: Homeowners think they are signing documents to bring the mortgage current. Instead, they are signing over the deed to their home. Homeowners usually don't know they've been scammed until they get an eviction notice.

the Cashflow Coach

The Key to Rising Home Prices

Higher Demand or Lower Supply = Rising Prices

It's a basic economic principle that when supply increases, prices come down. And, when supply decreases, demand can rise and prices will rise with demand. (a good resource is Basic Economics, by Thomas Sowell)

As Banks take over more and more properties in Mid-Michigan they will seek to sell them as fast as they can at what ever price they can get. This increased supply with low demand has slowed our housing market currently. It will continue to slow down, until we see one of two things happen: Either demand rises (job creation - an inflow of residents) or supply decreases (homes are purchased quickly and taken off the market).

In 2008, one of our Goals at Cornerstone Home Loans is to assist our clients, Real Estate Agents and banks to take 300 REO homes off the market. Our upcoming seminar has 15 minutes devoted to how to get this done with great profit to those who participate. If you are interested in learning how you can be a part of this effort, join us on the 17th and then schedule time to meet with Evan Vanderwey- he will assist you in determining how you can increase your net worth in this opportunity market.

What is an REO home?

REO stands for "Real Estate Owned". For a bank to have Real Estate Owned means that they took over property, mostly due to the fact that these days they are foreclosing on more properties. Banks never want to hold real estate, they always unload it and because they are generally publicly traded companies, they would like to get most of that done in the calendar year of 2008 so they have a clean 2009. What does this mean for you? There will be more REO's on the market that Banks wand to unload in the next 12 to 18 months than ever before in Michigan.What kind of impact can 300 homes have in our area?When ever you decrease supply of anything, the prices rise. So any little bit helps. In Michigan, if we can reduce REO the volume by 10% buy helping people purchase them and take them off the market, then we will increase values.

The best part is that you don't have to do this without profit to you. You can do better by doing good. After all, we live in the best free market in the world. Be a part of it.

Cashflow Coach

Uncertain Times Require Creative Measures

Michigan has been in the news a lot recently when it comes to depreciating real estate, record foreclosures, unemployment, declining new home starts, etc., etc. You can choose to listen to all of the pessimism and sink back into your scarcity mode or you can choose to look for solutions and have an attitude of abundance.

I spoke to our local home builders association (www.glhba.org) last night and talked about creative solutions that builders can employ to move homes without dropping the sales price and still make a profit. These strategies are not new, i.e. Trades, Lease Options, Land Contracts, etc, but putting numbers to it and quantifying the end results does make a difference. When you have real numbers to work with, you can make better decisions.

In times like these, especially in Michigan, everyone needs to be open to new ideas or at least open to new solutions. One company that is capitalizing on the increasing foreclosure market and helping the seller, the Realtors, and the bank is EZ Home Ownership Realty, LLC (www.ezhomeownershiprealtyllc.com) They have become experts in negotiating short sales with mortgage banks.

The short sale benefits: 1. the seller because it prevents a foreclosure, 2. the bank because they may end up getting more money prior to foreclosure than at the sheriff's sale, 3. Buyer's Agent, if they bring a qualified buyer to the seller, they will receive a commission, 4. Listing Agent, they will receive a commission for finding a buyer. 5. the neighborhood because the value of the home doesn't drop as drastically as it would in a foreclosure sale. There are many more tangible and intangible benefits of a short sale but needless to say, this is a strategy that is being used and becoming more accepted by mortgage banks' loss mitigation departments.

These solutions may require a little more work to close and in some cases we may not realize the benefit immediately but some business is better than no business. If you structure these strategies correctly, you'll be in a better position when the market turns and you'll have established yourself as a trustworthy professional and that will go a long way.

500 to 1,000 Jobs in Lansing

Michigan's biggest problem is not the mortgage market meltdown happening across the country right now. Our biggest problem is the loss of about 5,000 Michigan residents last year and thousands of jobs.

Now for the rest of the story....

1. The Accident Fund Company announced yesterday that they are planning on converting the old Board of Water & Light Ottawa Station into their national corporate headquarters. The plan is part of a redevelopment agreement reached with the city and state.

This move will create over 500 jobs and revitalize a much needed downtown business district. With the help of the Michigan Economic Development Corp. and the 21st Century Jobs fund this will be one of many more moves to continue to grow the Lansing area.

2. MSU received a $50 million grant for alternative fuel research which is estimated to create 100 or more jobs between Wisconsin and Mid-Michigan.

3. Suppliers like Android Industries, Bridgewater Interiors and Magna Powertrain combined want to hire more than 300 people, according to Capital Area Michigan Works, which is helping some suppliers find workers. (Source: Lansing State Journal)

Despite all of the doom & gloom in the media, did you know that the unemployment rate in the Lansing area is only 5.7% as of August. Compare that to Grand Rapid's rate of 5.9% and the rest of the state at 7.4% (source: BLS).

What does all of this have to do with Real Estate? We believe that this is the best time to consider moving up. Yes, you may need to lower the price of your current home or look at selling later but let's quantify the loss AND the gain and see if it makes sense. A lot of our recent clients have gained a lot more than they've lost.

Call my office and schedule an appointment to review your situation, we can help you evaluate all of your options.