The State of the Markets

If someone were to wake up from a 5-year coma and ask about the state of our country’s economy, the chart below pretty much sums it up.

The past five years in the housing market, the financial market and the economy have been anything but boring.

With respect to the housing market, we are at a critical juncture. Pundits and so-called experts are lining up on opposing sides of the recovery debate. Optimists will point out that after historic price declines, affordability is at all-time highs and government support for the housing market has helped mitigate the negative effects of tightened credit and mounting foreclosures. The bottom, they say, is in.

Meanwhile, pessimists urge caution. Foreclosures continue to rise, more borrowers are falling behind and the government is considering removing some of the programs that have kept interest rates low.

Ultimately, both arguments have merit. But they both miss the point.

Take another look at the graph above. It’s no coincidence that during the time of most uncertainty in the stock market (2008), the housing market experienced its steepest declines. It’s also no accident that the recent bottom in stocks (March 2009) matches almost exactly with the turning point in housing.

The answer to the riddle is simple: Confidence.

In a new book called This Time is Different, economists Kenneth Rogoff and Carmen Reinhart dissect hundreds of years of financial crises and try to assess how societies keep getting themselves into the same mess over and over again.

A common thread in the discussion, specifically surrounding debt crises like the one we experienced (and indeed are still experiencing), is the notion that confidence plays a far larger, and far less understood role in economic panics than most people think. According to Rogoff and Reinhart: “Economists do not have a terribly good idea of what kinds of events shift confidence and how to concretely assess confidence vulnerability.”

Since most people equate the stock market with the economy, swoons on Wall Street send the message that all is not well with our economic future. Accumulate enough of these swoons and confidence gets punctured to the point where people start acting differently. As risk aversion grows, consumers delay purchases, businesses delay expansion and banks stop lending.

In March of last year, the housing market was beyond bleak. Liquidity dried up and buyers were terrified. Ditto on Wall Street. But as stocks recovered through the spring, hope emerged that maybe the worst was behind us.

Now, as the recent surge in stocks is tested, so too will the surge in home buying: The two are far more linked than most understand.

This post first appeared in the February edition of: Cirios Trends: In Search of Real Estate Opportunities.

By the Numbers: Amortize This

Source: Cirios Trends,Volume 1, Issue 2
March 2, 2009;
By the Numbers: Amortize This

When you go to get a loan and the banker starts yammering on about amortization schedules, listen.

While amortization choices have shrunk in the last few years as exotic lending has all but disappeared, there are still important decisions to be made on this front.

Amortization is the process by which you pay back your loan through regular payments. Most 30-year, fixed rate mortgages are fully amortized, meaning that on Day 1, your loan payment is calculated and stays the same for the life of the loan.

The formula to calculate this monthly payment is simple: Ok, maybe its not so simple, but the point is that there’s a standard way of calculating your payment that depends on only 3 variables:

A = Your monthly payment P = The principle amount (the amount you borrowed) n = The number of periods on your loan (for most loans, a period is a month), and r = Your interest rate (per period, expressed as a decimal).

For example, a $400,000 loan at 6.0% amortized over 30 years would work out to a monthly payment of $2,398.20. If you pay this amount every month for 360 months, you’re free and clear, having paid all interest and principle due the bank.

Over the life of our example loan, the portion of your payment that goes towards interest versus principle varies over time. In your first payment, $2,000 (83%) goes towards interest. At ten years, that drops to 70%. Twenty years, 45%. Your last payment is 99.5% principle.

An interesting consequence of this aspect of mortgages is that by making larger payments up front, you can make a huge difference to your personal bottom line.

If you tack on an extra $200 to each of your first 12 payments, every dollar goes towards reducing your principle balance. After 30 years, you save $13,000 in interest costs and finish paying the loan off 6 months early.

Perhaps more importantly (since not everyone holds onto their mortgage the entire 30 years), the day you pay down that extra $200 in principal, you begin to reduce your interest expense. It’s like putting money into a savings account earning 6.0%.

On top of that, each extra payment you make reduces the amount you owe the following month: So as long as you continue to make payments regularly, you’re ahead of schedule. In our $200-a-month example you are $2400, or one full payment ahead after just 1 year.

If down the road you have some unforeseen expenses and need to skip a payment, no problem, you won’t be considered delinquent.

And the kicker: Because your principle balance was reduced for the entire time you were ahead, more of your payments went towards principle each month, further reducing your principle balance. In our example, if you skipped a payment at the beginning of year five, you would still owe $750 less in principal then you would if you hadn’t gotten ahead of the curve.

Link: www.ciriosre.com

Doing Your Real Estate Homework: Google Earth

Source: Cirios Real Estate Inc., San Francisco, CA

Just because you don’t have a real estate license and are smart enough to know that Zillow’s Zestimates are about as accurate as the Warriors are dominant in the NBA, doesn’t mean you can’t find valuable real estate information online.

One of the most useful tools for valuing properties is Google Earth. Location still drives the value of real estate, and Google Earth makes it easy to examine a property and its surrounding area. The more research you can do from home, the fewer wasted property visits you’ll end up making.

Always analyze the following characteristics of any neighborhood:

? Lot (corner lot? back yard, front yard)
? Street (cul-de-sac, tree-lined, major artery)
? Negative Obsolescence (power lines, rail road tracks, airport flight path)
? Transportation (freeways, bus routes)
? Amenities (schools, dining, entertainment)
? Street view (house, street)
* Keep in mind the street view may be dated, so details could be different

Here’s how we use Google Earth to examine a specific property.

Property Address:
8579 Beverly Lane, Dublin, CA 94568

Lot: The house looks small, but the large lot leaves room for a possible addition in the back.

Street: The subject’s street likely gets little traffic since there is no direct access from Village Parkway (the main thoroughfare in the area.)

Negative Obsolescence: The property backs up to Village Parkway, and although there is no direct access, noise pollution could be a problem.

Transportation: Using Google Earth’s transportation option under the Layers tab, you can see the nearby public transportation routes and stations. The subject is very close to the Dublin/Pleasanton BART station as well as the 680 and 580 Freeways.

Amenities: Using the Dining option under the Layers tab, you can see Village Parkway offers options like Taco Bell & Sangam Indian Cuisine. An In-n-Out Burger is less than a mile away; this should be considered a major positive.

Street View: The street has similar looking homes that are comparable to the subject. The wall between the subject and Village Parkway is very low, which could mean more noise pollution than we might have initially thought.

Conclusion: Without stepping foot outside, we learned 8579 Beverly Lane’s neighborhood is close to 2 freeways, BART and an In-n-Out Burger. Street noise from Village Parkway, however, could be a problem. Armed with this information, you can make an informed decision about whether an on-site visit is your next step.