Thursday, April 23, 2009

Buydowns and the Bottom

Buydowns and the Bottom
Eric Trailer, Absolute Mortgage Banking

If you were in the market to buy a $2,000,000 home home in the Bay Area, would it make a differnce to you if the monthly investment was less than $5,000 with a 30% down payment? And I’m not just talking about the mortgage payment, I am talking about complete, tax adjusted cash flow including a 4.25% 30-year mortgage fixed for 10 years, property taxes and homeowners insurance. Sound too good to be true? It’s not. And yes it beats market rental rates by thousands.

Interest-rate buydowns are one of the most effective methods for both buyers and seller to obtain what they want, which of course is value. For the sellers, buying down an interest rate can have up to 8X the power over a price reduction, depending on the cost to buy the rate down. For buyers, a lower rate means higher qualification and bragging rights of having the lowest mortgage rate on the planet.

In the example above:
If the buyer was qualified up to $1.8mm at 5.5%, they are now qualified at $2mm at 4.25%
The seller only needs to invest four points or $56,000 to move the buyer $200,000; thus a $56,000 investment saves the seller about $144,000, which is therefore about FOUR TIMES more effective than reducing price

I use the example above since I have been receiving a tremendous amount of inquiries about what’s happening at the higher end, which are those homes selling at $1.5mm+, and whether creative financing has been more common than not. What we’re seeing is that creative financing, like interest rate buydowns and seller financing, are definitely more common at all price points. But what’s been rather fascinating to watch is that many sellers are becoming less inclined to reduce price, despite the fact that prices are off by between 7% to 17%, depending on which city the property is located. Yet, sellers have been very open to concessions that help them keep their price, despite the net proceeds being reduced. One of the reasons for this, in my opinion, is the fact that buying activity has skyrocketed on the last few weeks, which is obviously encoraging to sellers.

So what’s drivng the buying activity? Well, for starters, it seems like many buyers properly sensed that we’ve hit the proverbial “bottom” of the real estate market, which was recently confirmed ed by the exisitng home sales figures that came out last week. That’s right, not only are sales of both exisiting and new homes up significantly (4.7% and 5.1% respectively), the US median price and average price were both up in February over January. Add this data to the fact that interest rates have set a new low record, plus further validation from one of most respected economic forecasting sources avalable, the UCLA forecast, that 2010 will be a year of recovery, and it becomes clearer and clearer that there couldn’t be a greater opprtunity to buy real estate.

Source: Eric Trailer, Absolute Mortgage Banking
March 31, 2009

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