Florida Mortgage Report

Can You Predict the Next Real Estate Bubble and When the Bubble is Over?

Dan Amoss over at Whiskey and Gunpowder makes a good correlation to various valuation calculations and the prediction of a real estate "bubble".  Namely he compares rent-to-price and price-to-income ratios to determine whether real estate is overpriced or not.

His post is about the next real estate bubble that will likely occur, showing justifiable reasons for that bubble to happen in Eastern Europe.  He uses Bulgary as his example where rent-to-price ratios (cap rates) run at just 3-4% and the price-to-income ratios are around 7-9.

If you apply those same calculations to Florida real estate, particularly South Florida, you could easily see the properties down here were overpriced and a "bubble" was due for bursting.  A bubble bursting is not a disaster, but rather a correction that needed to take place to sustain a normal marketplace.

So, when should the potential investor get in? 

When the cap rates start to look attractive again, namely getting back to around 10%.  If we start seeing cap rates greater than 10%, then properties are being undervalued, which increases the chances of making a great investment.

Why wait until 10%?  You don't have to, but 10% is a good gauge for when properties are valued correctly.  You may very well be happy making less than 10%.  You may also want to make more than 10%.  You have more options as to when you purchase, but do not try to time the market. 

Instead, focus on your investment objectives and find properties that meet those objectives.  Never forget that you make the profit on the purchase, not the sale!!!

What about the family just looking to move?

When to buy is subjective for them.  There are a lot of variables that you cannot control, including the timing of when you must move. For these types of buyers I suggest to not try to time the market and focus more on finding a home that you love and can afford.  If you find one, buy it regardless of the market conditions because you will be happy living in it and not worried about the "investment".

If you are unsure if a property meets your criteria for a purchase, contact me and I can help.  I will help ensure the property you purchase fits into your overall financial and investment plans and help you find the mortgage that is the best fit also.

Real Estate Forecast for 2008 (excerpt from You Magazine - December Issue)

Real Estate in 2008:
What Does the Future Hold?
2007 was a historic year in the real estate and financial markets, thanks to the highly-publicized subprime collapse and subsequent credit crunch. As the end of the year approaches, we know you are wondering what 2008 has in store. With this in mind, we turned to mortgage industry icon Bill Dallas for insights into what we can expect next year...

Keep Reading »

Are You Using a Certified Mortgage Planner for Your Commercial Mortgages?

Most you are realizing how beneficial to your financial health it is to be working with a Certified Mortgage Planning Specialist for your residential properties, especially investment ones.  But do you realize that your business can succeed or fail based on the mortgage you have on your commercial property as well?

Why aren't you working with a mortgage professional that understands how commercial mortgages tie into your business's financial and investment plans as well? 

Many facets associated with commercial properties are different, but they also provide many additional benefits and greater potential for increased wealth over time, not to mention assist in the assurance your business will be around years from now.

If you own a business or are investing in commercial properties, or even are just thinking about doing so, think about how beneficial it will be to work with a certified mortgage planner, especially one that understands how commercial loans "fit" into the business's overall plan.

This is a "Be Careful What You Wish For" Post

Recently, I began asking for more testimonials, something I usually do not do as I would like to think I would receive them when my services warranted.  Then I read something, somewhere that showed statistically that if you do not ask, you will not receive.  Well, being the numbers kind of guy I am, I realized quickly I needed to start asking.

Well, I have not mastered the art of asking for testimonials, but decided to ask one of the many non-clients that have come to me for advice to provide a testimonial if he chose to.  To say I was blown away is a major understatement as I was not prepared for the degree of impact I have had on this gentlemen's life.

Here is the exact testimonial, including his name, used with his permission...

"While reading the Active Rain real estate blog online, I stumbled upon some words of wisdom that made good common sense.  Those words were written by Mr. Robert Ashby.  I took the time to visit Mr. Ashby's website, found an email address,  and wrote a letter explaining my circumstances in hopes that he could lend some more solid advice.  Mr. Ashby found the time to respond to my request while he was on vacation, I couldn't help but think this was the type of person who truly cares about the advice they're giving.  That initial contact occurred over 1/2 year ago, and I've maintained loose contact with Mr. Ashby since then, and he always responds to my questions with what I still consider good solid advice.  I consider Mr. Ashby a great asset in my education and understanding of how to utilize my mortgage debt to create financial well-being. It should be noted that while Mr. Ashby works out of Florida, I live in the southwestern United States, and am NOT a client of Mr. Ashby's, yet he always listens to my concerns and responds in a timely fashion.  I wish my local mortgage lenders were half as helpful.  I look forward to my continued correspondence with Robert and consider him an "Advisor for Life".  Thanks Robert."

- Justin R.
Las Vegas, NV

(I underlined the one sentence for emphasis)

Really Simple Currency Investing Creates More US Money

Ok, as promised, here is what would have happened with your $10,000 investment when converted back to today's USD during the same time as my previous post's housing comparison. 

For a quick overview, this chart is based on you simply converting $10,000 USD to another currency and switching it back to USD today.  There are numerous ways to add additional rates of return (safely) in those other currencies and you would be even further ahead.  It is also not adjusted for inflation.

Currency Used	Worth Today (USD)	Rate of Return (annualized)
Euro	$15,732.74	8.59%
Aussie Dollar	$15,353.15	8.11%
Japanese Yen	$11,394.45	2.40%
New Zealand Dollar	$15,609.41	8.43%
Norwegian Kroner	$14,397.16	6.85%
South African Rand	$14,157.64	6.53%
Swiss Franc	$14,030.85	6.35%
British Pound	$14,159.87	6.53%
Canadian Dollar	$15,365.33	8.12%
Russian Ruble	$12,882.26	4.71%

As you can see, a fairly good hedge against the devaluing of the USD, and your home is by investing overseas (or even next door).  Wouldn't you like to have investment rates like those all the time, except for the Japanese Yen, of course.

I did this particular post for two reasons.  The first is that you must include international investments as part of your investing.  That should be crystal clear.

The other reason is that, with an open mind, it is easy to achieve far greater rates of return than your mortgage costs, so stop "focusing" on paying off your mortgage and get onto investing.  Delaying will only cost you more money.

Don't have the money to invest?  Your mortgage may actually be able to help you by putting that idle equity to much better use.  Don't rush out and do it though.  There are a lot of variables that play into a mortgage and investment plan and you need to find the right team of experts to make it work.

That being said, if you are thinking about how to "employ your house", then feel free to contact me (link in upper middle column).  I will help the best I can and, of course, if you are in Florida, I can work you through the entire process.

Why Aren't Homes Selling? This Should be a Clue

Ever wonder why there doesn't seem to be any homes being sold in your area?  Granted some areas are doing well, but a survey released today from Reuters/University of Michigan provides an insight as to one possibility.

The survey revolves around the homeowner's perception of their own home values and the headlines today stated the obvious, a record 26% of US homeowner's say the value of their hoes has fallen during the past year.  The survey also showed 21% of homeowners expect their homes value to decline in the year ahead.  OK, the news ran with that, but take a different look at the survey and you can see why homes aren't selling.

What about the other 74%?  Therein lies the problem.  You see, until more homeowners get their heads out of butts and face reality, the inventory in many localities will not move, may even increase.  This is especially true here in South Florida.

You have to wonder what 3 out of 4 Americans are thinking considering all the facts.  With the credit troubles, rising foreclosures, ARMS adjusting higher, etc., not to mention large inventories (we are around 2 years), what exactly makes them think they can get big bucks on their homes still? 

Sellers are stubborn, having too much "emotions" about their home.  They apparently still don't get that the prices during the boom were unsustainable and affordability is becoming scarcer in the process.  Not lowering your price or offering some good incentives means your house will not go anywhere and the market will remain stagnant. 

Let's all face reality folks.  Home prices need to fall in order for the complete correction to complete the cycle, then prices can begin to move higher again.  So, if your house in on the market, be realistic in your sales price so the world can return to normal. 

PS - As a mortgage professional, I don't like prices going down as it means less money per loan, but reality is reality and we all need to adapt to the changing markets.

Fed Cuts Rates: Who Wins?

The Wall Street Journal posted this interesting "Parsing of the Fed" yesterday...

If you were watching the markets yesterday, it was unusual in that both stocks and bonds rallied after a surprising move by the Feds to cut the rate by 50 basis points (.50%).  As mentioned yesterday before the release, investors were expected to scramble as they changed positions and they did.

So, since the Policy Statement is what likely kept bonds moving higher, let's dissect it as the WSJ already has...

Overall, Feds are fearful of both inflation and a recession.  Say what?  Their view on growth hasn't changed since early August, but the move was "to help forestall some of the adverse effects on the broader economy"(recession concerns)>  At the same time, they mention that inflationary pressures remain and will be watched.

So who are the winners after this change? 

• Adjustable Rate Mortgage (ARM) Holders - Likely to see drop in rate if adjusting (see yesterday's post...Don't FIX It if Your ARM is Not Broken)
• Fixed Rate Mortgage Seekers - Mortgage Bonds also rallied yesterday and with a bullish crossover of the 25-day Moving Average and the 200-day Moving Average, the trend will likely be lower.  Mortgage Backed Securities are not directly impacted by what the Fed does with the rate, but their Policy Statement and concerns about inflation are what drove the bond market.
• Home Equity Lines of Credit (HELOC) Holders - Rates tied to Prime will fall.
• Credit Card Holders - Most rates are tied to Prime and will likely fall eventually.
• Auto Loan Seekers - Most loans are indirectly tied to Prime and will likely fall as well.
• Others with loans tied directly or indirectly with the Prime Rate will benefit as well.

If there are so many winners, who loses?

Anyone seeking Certificates of Deposits (CDs), and many Money Market Accounts, among others.  While their rates are not directly tied to the Fed's move, as bank's obtain cheaper money, they will likely start offering lower rates on CDs since they do not need that source of funds as much.  Since Money Market Accounts use CDs as part of their investing structure, the reduced rates will carry over eventually.  Other "secure" investments may see returns dwindle as well.

Don't FIX It if Your ARM is Not Broken

Many homeowners have been rushing to refinance their Adjustable Rate Mortgages (ARMs) into a Fixed Rate Mortgage, mostly out of fear. 

While it is true that many ARMs adjusting this year will put homeowners into increased mortgage payments, some of which they will not be able to afford.  However, I am approached by many ARM holders who want to refinance and they have a while, sometimes a couple of years, before their ARM adjusts.  Should they follow the herd?

The answer is a definitive NO!  Sounds strange coming from someone who  makes money selling mortgages, doesn't it?  Well, the reality is that the Fed is likely to start a rate cutting trend today.  Typically this lasts for a while and leads to a lower LIBOR index as LIBOR tends to track reasonably close to what the Fed does. 

So, if your ARM is not adjusting for a while, you may see it adjust to rates comparable to today's fixed rates, possibly even lower, by the time it does adjust.  So, if you are near or below today's current fixed rates, then why worry?  Take advantage of the current savings you may be receiving for a while and see how things play out. DON'T BE AFRAID!

So, if you are fearful of where your mortgage rate is headed, that is understandable and fine.  But taking action based on emotions typically leads to disaster, so take a step back and find a mortgage professional that came help you analyze your situation properly and help you make an educated decision.

Is Your "Lost Home Equity" Working for You?

I am sure you are asking yourself, "what the heck is this guy talking about?"  Well, if you have been focusing on paying off your mortgage, you probably have no clue.  Here is what I am talking about.

You may have missed this stat recently released...US 2Q Homeowner's Equity Falls to 13 Year Low.  Surprised, you shouldn't be.  With all of the recent gains in real estate over the last several years, many homeowners have rushed to cash in some of that equity.  Most, unfortunately, went out and spent it or otherwise failed to receive the benefits of proper utilization of that equity.  With the recent drop in real estate values in many areas across the US, is it any wonder that home equity levels have dropped dramatically?

Some savvy homeowners did the right thing, though.  They took they cash out of their homes and invested it in safe, liquid accounts and are now having that money work for them, instead of disappearing within the walls of their homes.

Let's take a look at how you could have "lost equity", even having a mortgage balance greater than your home's value, and have it working for you.

Let's assume (I know what happens when you do that but let's risk it anyway) that three homeowners had a homes that appraised for $500,000 each 5 years ago and their mortgage balance was $300,000 at that time, each interest only.  Today's appraisal on these same homes (located in South Florida) are now valued at only $350,000.

The first homeowner decided against taking any cash out of their home, instead keeping status quo and refusing to take on added debt.  They were relatively smart as they decided to invest the monthly difference into a safe, liquid account, so they have some savings.

The second homeowner, was like many Americans, went ahead and did an 80% LTV cash out refinance, leaving them with a mortgage amount of $400,000 and $100,000 cash (the maximum allowable for tax purposes normally).  They spent the money on new cars, vacations, or other "wants", leaving them in more debt and now "upside down" in their homes.

The third homeowner decided to take advantage of the appreciation and did an 80% LTV cash out refinance, leaving them with a mortgage of $400,000 and $100,000 cash.  They opted to invest to meet financial goals down the road instead of spending the money now

So, if each homeowner were to sell right now, how well off would they be?  Are any in serious trouble?  Did any actually come out in reasonable shape?

Assuming a 6.00% mortgage and a 6% rate of return on the investment accounts, here is what each homeowner looks like right now...

	Homeowner 1	Homeowner 2	Homeowner 3
Real Estate	$350,000	$350,000	$350,000
Investment Account	$34,885	$0	$173,965
Mortgage	$300,000	$400,000	$400,000
Net Cash	$84,885	$-50,000	$123,965

As you can see, neither Homeowner 1 or 3 are in any real trouble, however, Homeowner 3 actually has part of the "lost equity" working for them as an investment.  Over a longer time period, Homeowner 3 will prove far ahead financially than even Homeowner 1.

Homeowner 2, not unlike many Americans these days, is not so fortunate.  If they have to sell, they will need to borrow $50,000 from somewhere to cover the losses.  If they are unable, they will need to do a "short sale", which will negatively impact their credit rating and ability to obtain a new home, even rent one.

Which homeowner would you like to be? 

Florida Property Tax Reform - Where's My Savings?

Ok, I have remained quiet about the property tax mess and the government's attempts to fix it.  Why?  Well, many people have already written about it and, quite frankly, I have mixed opinions about what has and is intended to be done.

For starters, the savings that everyone thought (and were led to believe) were coming this year have not occurred.  One of the biggest questions is about the valuation of one's property.  Since we are in a real estate market meltdown, why is the assessed value going up?  Simply put, the assessed value is based on last year, not this year, so it is a lagging valuation.

You see, real estate last year was still appreciating, at least during the beginning of the year.  Overall, the market went up some, despite the downtrend already in place before the year's end.  So, your assessed value should be going up, at least slightly to reflect that.  Another important point to remember is that the assessed value is not indicative of current market value.

Still confused as to why your tax savings are not apparent?  Well, if you do not have the "Save Our Home Values" provision in place for one reason or another, you do not have a "cap" on the amount your assessed value for tax purposes can go up.  Save Our Home Values limits the increase in taxable assessed values to just 3%, regardless of market conditions.  Those without this provision in place, such as investors, are going to still see large increases in their tax bills most likely.

One drawback to the Save Our Home Values provision is that those homeowners that are protected by it may see assessed values continue to climb even in the next few years despite falling home prices.  Why?  The provision does not limit the 3% annual increases based on current trends, but rather limits the increases to 3% up to current market values.  So, if you have owned a home for several years, you will likely see a small increase in your taxes at least one more year.  A good side of the limitation is that the amount may be less than 3% as it is also capped by the inflation rate.

What about that "super-exemption" we have all heard about?  Well, it is still on the docket.  That is, Florida Voters will be in control of its approval come January 29, 2008 since it requires approval of an amendment to the state constitution.

Still question your assessed value.  Don't fear as you may have a way out.  The Value Adjustment Board will listen to your petition if you cannot get satisfaction from the Property Appraiser's office.  But hurry, the deadline is September 18th (tomorrow) in Broward County and September 20th in Miami-Dade County, so you only have a day or two.