Avante Real Estate – East Bay Real Estate Blog

East Bay Blog

Getting Back to Basics

March 17th, 2008 8:14 PM

There is a slowly changing mindset among today's homebuyers. It is a change back to how people used to look at a home purchase before the run up in values from the start of this decade. It has been a slow process, but one that I think is healthy, and ultimately the smart way to look at purchasing property.

Until last year, people were always looking at a home purchase as an investment. They would ask me how the home was priced, and how fast I thought the property would appreciate in value. Of course I would always answer that no one could know that, and that appreciation is never guaranteed, but in the long run I always believed that eventually a home will go up in value. I still strongly believe that today, that is why I think today's prices are reaching a bargain level, but that is a topic for another blog...

The frame of mind today when a buyer is looking for their primary residence they think "can I imagine myself happily living in this house for a long time?" That is the number one factor in looking at the home, not "how much will this home's value increase?", which was the mindset over the last couple of years. Homebuyers are not as interested in neighborhood "comp's" to set value (it is difficult to set values using comparables today since some bank owned homes, or short sales can skew the value of a neighborhood very quickly.) The important factor is whether they like the home, can afford the payments and can see themselves living there for a long time.

For investors, cash flow has become much more important again. Over the first part of the decade, the biggest variable on investor's minds was how much do I have to pay now, and how much will it be worth in a year or two. The appreciation of property was the primary driver. In today's market, the investor looks at how much do I have to pay now, and how much income will the property produce at a monthly/annual rate. How cash flow positive/negative is this investment. Appreciation is always in the back of their minds, but as it will probably take years to see any significant increase in overall values, cash flow is now the #1 consideration of an investment property.

On a side note, I believe that the second home market may be in for a harder fall depending on how the economy continues to hold up against the continuing waves of bad news (today Bear Stearns was purchased by JP Morgan for $2 a share. It was either that or bankruptcy. This stock was over $150 per share just over a year ago). If we fall into a deeper recession, many people's discretionary spending will begin to disappear, and the thought of buying that second home in Tahoe, Santa Cruz, etc... will be put on hold. This will have a negative effect on real estate values in may resort cities. That still remains to be seen...

Again, these are just my thoughts about what I'm seeing in today's market, if you or someone you know is in need of professional real estate advice, don't hesitate to give us a call, until next time...

Posted by Ted & Lucy Ramos on March 17th, 2008 8:14 PMPost a Comment (0)

Take Advantage of This Time

March 20th, 2008 7:24 PM

I read a very interesting article this last week regarding real estate. The article was in last week's issue of Time magazine. It is entitled "Ignore the Headlines" by Dan Kadlec. It echoes a lot of the things that I have been blogging about over the last several months. The essence of the article is that now is a great time to invest. The article talks about stocks as well, but addresses real estate specifically. Prices are down significantly, and although it is a real possibility that they could continue to drop, moves by the markets will wipe out any price decrease with an increase in interest rates.

The Fed has been making a lot of moves lately to try to stimulate the economy, especially with all of the recent developments. Most recently with the near failure of Bear Stearns, the Fed lowered the Fed Funds rate by 0.75%. One of the biggest one time moves in recent memory. Although there is no direct link between mortgage rates and the Fed Funds rate, it will still have the indirect effect of lowering mortgage rates. The Fed can not make the same mistake it made last time of keeping rates low for too long. Many blame that for our current problems. Once the economy begins to stabilize and recover, you can bet that the Fed will begin to raise rates again. Once most people decide that it is a better time to invest in real estate, two things will already have happened:

1. You'll have competition. When you realize that the market has recovered and it is a good time to get back in so will everyone else. Currently buyers hold the advantage in negotiations, that is because of the lack of other buyers competing and the surplus of homes for sale on the market. You can bet that once sellers see more buyers walking through there homes, they won't be as willing to take a lower price.

2. Once we recover you will see interest rates rise and this will wipe out any benefit you may have gained by waiting. Here is an example of a home purchase now, and in one year:

Today

$218,900 (put 20% down/30 year fixed)

5.5% interest rate

$994.31 monthly payment

Cost in 12 Months?

$197,010 (If price drops an additional 10%)

6% interest rate (recession ends, Fed raises rates)

$994.94 monthly payment

After waiting a year, and assuming that the market continued to move down you would still spend the same amount of money per month because as we recover the Fed will begin to raise rates. By waiting a year you saved nothing and ended up living a year somewhere you would rather not have been. Further, this assumes that the real estate market continues to drop.

The point of that article and the point that I have been making over the last several months is that if you are considering looking into buying a home, now could be the perfect time. As always, these are my opinions, until next time...

Posted by Ted & Lucy Ramos on March 20th, 2008 7:24 PMPost a Comment (0)

My thoughts on the days news

March 10th, 2008 7:36 PM

The news keeps coming... Today we find out over the news wire that Countrywide Financial, the largest U.S. Mortgage Lender is being investigated by the FBI for securities fraud. Although it is surprising to hear that a company as large as Countrywide is being investigated by the FBI, I have to say it probably should have been expected. After any economic event where people lose a lot of money, and where it affects our economy as a whole, there needs to be someone/something to blame for the mess. Just think back to the last major economic event that had such a broad effect on people's pocket books. Back in the late 90's we had the tech boom, followed by the bust. After the stock market corrected the government started to investigate who was to blame...hence we had the CEO's of WorldCom, Enron... and all the rest. These executives were the villains of the tech boom/bust.

Now we are in the midst of another slumping economy due in large part to the slumping housing market. Many of the problems can be traced to the lax lending standards that the large mortgage lenders had during the run up of real estate values during the years of high appreciation. Now there must be someone to blame for this mess, my bet is we will see some mortgage executives getting carted off to jail before all is said and done.

Don't get me wrong, I have no idea if any type of fraud occurred at Countrywide or any of the other mortgage lenders that are being investigated. However, if the economy continues to head toward recession, which many economists believe we are already in, there will need to be some villains where we can lay the blame...

As always these are only my opinions, and you are always free to respond, until next time...

Posted by Ted & Lucy Ramos on March 10th, 2008 7:36 PMPost a Comment (0)