Thanks Criggchef for this flickr image.

We are currently seeing some amazingly low interest rates. Rates on loans less than $729,000 fell to the lowest level on record for the second consecutive week after the Federal Reserve launched a new effort to assist the staggering U.S. housing market. Yet, also interesting is that rates on loans larger than $729,000 are abnormally low as well.

With a loan amount of $1,000,000 and 75% Loan-to-Value:

We are big believers that it is impossible to time the bottom of the real estate markets. Yet, what we can assess is the current opportunity in the market relative to other times in history. Currently, rates are reaching historical all time lows while at the same time buying conditions and available residential housing inventory are creating abnormal Bay Area buying opportunities. This market is a prime residential buying opportunity for individuals and families that are endeavoring to purchase and live in their homes for the next 7-10 years.

One only has to look at the evening news to see that the National residential housing inventory has been seriously devalued over the last 2 years. Yet, the story that is not being told is that much of this Bay Area housing stock is now being sold with multiple offers. We know for we have been watching these offers begin to pool as rates have fallen. So, with this recent shift in financing over $729,000, we are also now beginning to witness a huge opportunity in the $700,000-$2,000,000 market. Many opportunities are beginning to present themselves to those that are looking for long term ownership (7-10 years) and can afford to ride out the many ups and downs we will inevitably see over the next couple of years.

 
Thanks ladybugbkt for the flickr photo.

We have been transacting some amazing deals in this market! Prices have fallen and interest rates have remained very low for the time being. Qualified home buyers looking to enter this market are getting the best of both worlds. 

There has also been much discussion about the stimulus package circulating in our office lately. Out of the entire package we have found the $8,000 first time home buyers tax credit to be the most important to Bay Area buyers.

Below is more information about what you need to qualify for this credit…

- You must either be a first time buyer or have not owned a home in 3 years

- The property you purchase must be your principle residence

- You must make the purchase between January 1 through December 1 of 2009

- Your yearly modified adjusted gross income must not exceed $75,000 for singles and $150,000 for married couples

- There is no cash exchange or payout for closing costs or down payment – you must file your tax return to get the $8,000 credit

- If the house you buy costs less than $80,000 you will receive only 10% of the purchase price in credit

- You must live in the property for a minimum of 3 years, or you will have to pay the credit back

- There is STILL time to use the credit on your 2008 tax return! Alternatively you can claim the credit on 2009 taxes.

The above information is provided for informational purposes only, and believed to be accurate. For legal or tax advice, please consult an attorney or tax adviser.

 
Thanks Kristie Wells for the use of this Flickr Photo.

I just had a heating specialist look at a heater replacement for one of my clients. It appears that the new stimulus bill is going to create an opportune time for home owners to replace old appliances. Specifically speaking, ABC heating and cooling just broke it down for me on an average 2000 square foot home. They showed me how an 80% low efficiency furnace is still the cheapest product. Yet, the $1500 credit will make the highest efficiency furnace (95% efficient) so that it is only $20 more than the mid-range model (90% efficient).

Below is a summary of the changes to the energy efficiency tax credits.

On February 17, 2009 President Obama signed a stimulus bill that made some significant changes to the energy efficiency tax credits.  The highlights of the American Recovery and Reinvestment Act of 2009 are the following:

- The tax credit has been raised from 10% to 30% for 2009 and extended through 2010.
- The tax credits for a specific dollar amount have been converted to 30% of the cost.
- The maximum credit has been raised from $500 to $1,500.

Note, there do seem to be income limits to these tax credtis and it is worth checking with your tax advisor before making purchases. For a more complete explanation of the tax bill and  the products that it covers go to the Energy Star website.

Looking for a great heating and cooling specialist in the Bay Area, contact Jeff Cecchin with ABC Cooling and Heating at (925) 250-0202.

Thanks Victoria Peckham for this flickr photo.
I often read John Mauldin. He has a unique perspective on the financial markets and macro-economic issues. Yesterday, I received his weekly e-newsletter and it had an interesting quote from Charles D. Ellis.

…Charles Ellis, who helps oversee the $15-billion endowment fund at Yale University, said:

Watch a pro football game, and it’s obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, ‘I don’t want to play against those guys!’

Well, 90% of stock market volume is done by institutions, and half of that is done by the world’s 50 largest investment firms, deeply committed, vastly well prepared — the smartest sons of bitches in the world working their tails off all day long. You know what? I don’t want to play against those guys either.”

I began to ponder about this in regard to the real estate markets. I was able to establish that this statement works for the real estate market. In every market marginal value is constantly being ground out as competitors compete with one another. This is why free markets are so efficient and why competition reduces the cost to transact. Now in real estate the complexities of financing, insurance, construction and other specific knowledge, make transacting less efficient than say using e-trade to exchange stocks and bonds (this means you can find value in the inefficiency if you have the right adviser). Yet, real estate too must adhere to the indifference principal.

OK… so, work with me here. If you are a buyer or seller in the real estate markets (or any other markets for that matter)… And you are looking for value in your next transaction… And you yourself are not a big player in these markets (most home owners only transact several homes in their life times and often there is many years between transactions)… And you want to compete with others in the market…

Find the best help you can. Don’t just look for the agent that says, “I have lived and worked in the neighborhood for many years”. Although, specific market knowledge is important, the internet has now made it so any agent can search the local multiple listing service and see the limited inventory that is available. Look for the advisors that demonstrate the largest capacity to create marginal value in your next transaction. For example, in the Bay Area we have found that our strategies for buyers allow them to win competitive offers even when they are not the highest offer. We accomplish this by preparing our clients financially. Working with a competent financial planner/mortgage broker we developed a strategy for our clients that allows them to close their leveraged transaction in 7 days verses the typical 30 days. We do this with no additional transactional risk. This is based on the market mechanic that sellers are willing to take a lesser price if it means they get their money faster. This is just one example of the marginal utility that we create for our Bay Area buyers. This strategy has become even more valuable in the current liquidity crisis where sellers are highly concerned with whether a buyer can complete a transaction or not.

The real estate markets are tough. So, seek the best help possible.

One of our premier home inspectors just started a new blog. It is called Jay Marlette’s: The House Explained. We have used Jay for our home inspections for over 7 years now and because he is so technologically savvy it did not surprise me that he would start a blog. In fact, his current home inspection site (houseman.org) is one of the best home inspector sites in our area. It has online scheduling, which is great for both customers and agents.

I spoke with Jay about this new venture and I knew it could be a valuable resource, but I never expected such in depth articles. His posts really explain how different aspects of your home work. We are always saying that house construction and home improvement projects are not rocket science, but Jay’s writing and understanding of a home’s fundamentals is fantastic. I highly recommend Jay’s services as a home inspector, and his new blog. 

Thanks woodlywonderworks for this Flickr Photo

Yesterday this was posted on MSN.com’s Market Dispatch… 

Freddie Mac this morning said that the benchmark 30-year fixed mortgage rate fell to an average of 5.01%, with an average of 0.6 point for the week that ends today. That’s the lowest rate since Freddie Mac started tracking the numbers in 1971.”Interest rates for 30-year fixed-rate mortgages fell for the tenth week to a fourth consecutive record low due in part to the Federal Reserve’s recent purchases of mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae,” Frank Nothaft, Freddie Mac chief economist, said in a statement. “On Nov. 25, 2008, the Federal Reserve announced that it planned to purchase up to $500 billion of these securities by the end of June of this year. For the sake of comparison, there were roughly $4.7 trillion of such securities backed by home mortgages available as of Sept. 30, 2008.”  

As we enter 2009 I was struck by the amount of activity in the real estate markets. If this is any indication of what 2009 will look like then I expect refinances and purchases to boom in the first quarter of this year. In December we wrote 5 offers on different properties and all of them had multiple bidders. This is a big difference compared to December of 2008 when most agents had zero offers in contract. We are not seeing the over bidding that we witnessed at the height of the market, but Bay Area properties which are listed at market prices are selling quickly a bit over their asking prices. This December we witnessed homes in North and East Richmond, which were hammered by the liquidity crisis, snatched up in less than 3 days!

We are seeing cheep financing coupled with low prices that is driving buyers into the real estate markets. This is healthy for it is beginning to clear out the foreclosure and short sale inventory that has plagued pricing for the last year and a half. In turn we believe this shrinking inventory will stabilize prices and subdue the skewed deep discounting that is caused by the banks fire selling as a means to getting real property off of their books.

This is a fantastic buyers market, and thus we are seeing the frozen gears of the market begin grind into motion.It is anybody’s guess as to when supply and demand will stabilize and a more normal market will arise. Yet, the signs of buyers returning to the markets are a definite plus and the longer rates remain low, the better off our markets will be. For the foreseeable future this will be a terrific market for buyers to get great values.

There is a great series of YouTube videos of Warren Buffett speaking to the University of Florida’s MBA class. Part 1 has a great discussion about integrity and why it is fundamental for success. I found one of the most interesting segments (shown above) to be Buffett’s discussion of the rescue of Long Term Capital Management (LTCM). LTCM was a hedge fund that went belly up in late 1990’s and was rescued by a massive industry bail out, supervised by the United States Federal Reserve. Buffet speaks about how LTCM was run by 16 exceedingly high IQ, long term veterans of the investment markets that probably had a combined 300-400 years worth of experience. Buffet makes a fundamental interpretation about risk and how much is too much. He spoke to how these men foolishly risked their own livelihood when he stated, “To make money they risked what they had and needed for what they didn’t have and did not need.”

After watching this segment I began to think philosophically about how the destruction of LTCM was a smaller scale bail out that sounded very similar to our current credit crunch and massive US bail out. Both instances were caused by some of the smartest minds in their industries. Both ended with the destruction of businesses, where owners risked everything (including the jobs and the livelihoods of others) to gain much of what they did not need to be a viable business in the first place. Is greed the best word to describe this kind of behavior?

Buffet also spoke about how knowledge can create blindness. For instance, in the case of LTCM the owners were experts at mathematics, which blinded them to the simple fundamental human and business concerns that all businesses must acknowledge. I have seen this in my own industry, where some of the brightest have let their intelligence get in the way of their own ability to make prudent decisions surrounding real estate investing. I have also seen many others avoid this pitfall, by living in a mood of wonder. I have seen how part of success is an awe-inspiring willingness to learn more and explore new possibilities, while thwarting moods of over informed arrogance. There is also something to Warren Buffett’s ability to be explicit about the offers, actions and investments he makes and how he rarely relies on inexplicit decisions. We should all be mindful that the philosophies we hold directly influence the actions and practices we live in.
 

As we are watching the Federal Reserve lower the Federal Funds rate to 1/4% and witnessing the Federal Government give away 700 billion tax payer dollars I have encountered many economists (and Dan Green) that are speaking about the fears of future inflation. In this context, I just read an interesting posting called The Inflation Factor written by Doug Short. Posted on the macro economic blog The Big Picture (that I suggest and frequently read), this article is an interesting prospective on how inflation could effect your retirement.

More pertinent to residential real estate, this article takes a look at how inflation affects our individual financial situations. It is very interesting to note how inflation can change your perspective about your home mortgage. As the posting states “…inflation is the main reason why a long-term fixed expense like a mortgage payment goes from a major burden to a minor nuisance.” Inflation is just another example of how purchasing real estate is a part of your entire financial plan. Inflation is market mechanic that no one individual can control, yet it can drastically effect how your future turns out if you do not factor inflation into your entire strategic financial plan.

Note, that Dan Green’s article Explaining What Happened At the Fed (December 16th, 2008) is interesting speculation that the current financial regulation that is occurring in the US will probably keep rates low for the short term, but will also most likely spur inflation that will make rates rise in the long term. This means if you are considering a refinance, now might be an opportune time. If you are considering buying real estate this might also be a window of opportunity.

 
Thanks H Dickens for this flickr photo. 

I have recently written about how the current volatile market has created many windows of opportunity for buyers and sellers in the real estate markets. Yet, I had not realized how the current market volatility had also created an opportunity for inner family wealth transfer. I just read an article in the Wall Street Journal, titled With Shares Tanking Think About Gifting, which illustrates this situation. When investments are down and the value is less, then there may be an opportunity to transfer these assets to family with the strategy of building wealth once the market recovers. Many wealth advisors are also speculating that congress will reform the gift and estate tax system. When you put all of this together the current volatile market may be an opportunity to pass an estate onto the next generation at a reduced cost.

This year I have had several clients take action to pass property and other assets to their children. There is great opportunity in change if you have a competent team to help you assess the different possibilities and then advise you on the prudent actions to fulfill on your ambitions. 
 

There is no doubt that we are in turbulent financial times. Yet in volatile markets are opportunities. Katie and I are committed to producing a competitive advantage for our clients to achieve their financial and lifestyle goals. We do this by designing effective strategies for our clients, taking into account their specific situation, wherewithal and ambition. With our team of financial, investment, mortgage, insurance and tax advisors, we are able to help our clients take advantage of the unique opportunities made possible by the current real estate market.

We believe the main stream media has overemphasized the threats and tragic stories of owning real estate. This is not a big surprise since the media’s job is to sell news and entertainment. Therefore sensationalism works. But in this approach the media disregards any financial benefit associated with real estate and masks the new opportunities that are now possible for buyers and sellers. For this reason, we thought it would be helpful to share with you some of our recent transactions that demonstrate our ability to create and implement strategic plans that opened major opportunities for our clients.

• Last month one of our clients was able to purchase a million dollar home in San Francisco with a 15% down payment. (If you are wondering, being able to buy at that price range with 15% down in this market is just short of a miracle.) Our client was able to finance the purchase with a 1st mortgage for approximately 75% of the purchase price at an interest rate of 5.5%. For the balance, we were able to get him a home equity line of credit (HELOC) at prime minus 1%! This is a concrete example of the superior help provided by our financial & mortgage provider who was able to accomplish this in a market where the common media is saying mortgage rates are close to 7% and HELOC’s do not exist.

• Other clients of ours recently acquired their dream home a $500,000 home on 5 acres with an apricot orchard. This same home would have sold for close to $800,000 in 2005. We put together a strategy where they could sell their current home or rent it and keep it as an investment. After exploring selling their current residence they decided to rent it instead. This has increased their investment capacity while they have acquired a replacement property at an opportune time when values of real property are artificially low due to the liquidity crisis.

• This month we formulated an uncommon strategy for one of our clients who was looking to move into a larger home to better care for his family. We found that the San Francisco market he currently lived in was not nearly as affected as the market he wanted to move to in Concord. We sold his 1936, 1,450 square foot home in San Francisco for $566 per square foot and helped him buy a brand new 3,856 square foot home in Concord for $272 per square foot. The 2 properties are only about 30 miles from one another, but have a difference in cost of $294 per square foot. This strategy helped our client transition to a new home with a significant profit. Volatility means there is more risk in the marketplace. It also means there is more opportunity. In order to take advantage of these opportunities, we have found that it is necessary to have a powerful team of financial, investment, tax and real estate advisors. We and our network of professionals have demonstrated our ability to help our clients to take advantage of the current market.

We thank all of our clients that have transacted with us in the past and we look forward to helping many of you in the future. Please contact us if you need assistance or if you know of anyone else who may need our services. It would be our pleasure to assist them with the same care as we have provided you.

There are a number of important tax law changes that take effect this year, including three changes that will affect some homeowners. There are also changes that impact business owners.

While you won’t see the impact of these changes until you file your returns early in 2009, it helps to know about them now so you can keep proper records and make the smartest decisions for your money.

Take a few minutes to review the changes so you can keep them in mind as you devise your 2008 tax strategies.

Changes for Homeowners

Homeowner’s Exemption: In the past, taxpayers have taken the opportunity to convert a rental property or vacation home into their primary residence and then later sell the property. This allowed them to take advantage of the Homeowner’s Exemption which allows a taxpayer to exclude up to $250K ($500K for married couples) of gain realized on the sale of a primary residence. An example of a common strategy has been:

• Taxpayer acquires rental property in 2000 for $100K.
• Taxpayer rents the property out for three years.
• In 2003, taxpayer moves into the property as his/her primary residence.
• In 2005, taxpayer sells the property for $600K.
• Taxpayer (married couple) avoids paying taxes on the entire gain ($500K).

(more…)

Following is an excerpt from John Mauldin’s “Thoughts from the Front Line” and a link to the entire piece. It’s lengthy but a great articulation of the current financial situation and proposed government intervention. It is in the form of a letter to Congressman Joe Barton, TX, a top Republican House leader. John Mauldin is a multiple NYT Best Selling author and recognized financial expert. He has been heard on CNBC, Bloomberg and many radio shows across the country. He is the editor of the highly acclaimed, free weekly economic and investment e-letter that goes to over 1 million subscribers each week.

It’s the End of the World As We Know It

Dear Joe,

I understand your reluctance to vote for a bill that 90% of the people who voted for you are against. That is generally not good politics. They don’t understand why taxpayers should spend $700 billion to bail out rich guys on Wall Street who are now in trouble. And if I only got my information from local papers and news sources, I would probably agree. But the media (apart from CNBC) has simply not gotten this story right. It is not just a crisis on Wall Street. Left unchecked, this will morph within a few weeks to a crisis on Main Street. What I want to do is describe the nature of the crisis, how this problem will come home to your district, and what has to be done to avert a true, full-blown depression, where the ultimate cost will be far higher to the taxpayers than $700 billion. And let me say that my mail is not running at 10 to 1 against, but it is really high. I am probably going to make a lot of my regular readers mad, but they need to hear what is really happening on the front lines of the financial world.

MORE

One of the costs of living in the Bay Area, and California for that matter, is that you are much more likely to owe AMT (Alternative Minimum Tax) when you file your personal Federal Tax Returns. Other than an act of congress to change the tax law, there’s not much you can do about it. The silver lining on this cloud has to do with… your mortgage.

The original AMT established in 1970 targeted tax shelters used by a few wealthy households and was greatly expanded in 1986 to aim at a different set of deductions that most Americans receive. The AMT sets a minimum tax rate of either 26% or 28% on some taxpayers so that they cannot use certain types of deductions to lower their income tax obligation. Sounds reasonable, right? I mean, why should people who are making millions of dollars be able escape paying their fair share of income tax!? Well, because of the way the AMT is structured, welcome to the life of the rich and famous!

According to the Congressional Budget Office, “Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax.” That will be over 30 million household.

But why are we Californians affected more than the rest of the population? First, incomes in the Bay Area are statistically higher than the rest of the country. But here is the more specific reason: two of the disallowed deductions through the AMT schedule are state income tax and real estate tax.

As of 2007, the highest rate of state income tax is that of California, with a maximum rate of 10.3%. Under the standard 1040 tax schedule, if you itemize your deductions, you are allowed to deduct what you pay in state income tax. Not so under the AMT schedule. Despite the real estate downturn over the past year, values in many places in the Bay Area have remained stable and are still one of the highest priced areas in the US. Property taxes are often a significant part of one’s housing expense, to the tune of 1.25% per year of the assessed value of your home. This too is excluded under the AMT. So what’s a newly rich & famous person to do?

Generally speaking, the interest that you pay on your mortgage for your home remains deductable under AMT. That’s a bit of a blanket statement, so don’t take it as gospel. I’ve discussed this with the brightest of CPAs and they still will say “well… there may be some other issues”. The point being talk with your CPA or Tax Advisor. Nonetheless, let’s go through an example of how this can remain a tax benefit of having deductable mortgage interest on the AMT.

Let’s say you have a $500,000 qualified mortgage and pay 6% interest (and for simplicity let’s say your mortgage payment is interest only). You would have paid $30,000 of interest over the course of the year. If you are subject to the 26% AMT rate and approximately 10% California tax rate, that $30,000 would give you an approximate $10,800 reduction in your tax liability. This basically means that because of the deduction (even under the AMT), that 6% interest rate is costing you about 3.8% on an after-tax basis. Not bad.

What the moral of the story? Tax Efficiency. In the words of Ben Franklin… “In this world nothing can be said to be certain, except death and taxes.” If you accept that premise, then it would be wise structure your mortgage and money to be tax efficient. It’s not too complicated but it can be complex. For the do-it-yourselfers, run through pro formas on your Turbo Tax or other income tax preparation programs. For the rest of us, get good help from a skilled CPA or tax advisor. You need to do this whenever you are buying, refinancing or messing with your mortgage. You could inadvertently make a move that would eliminate your tax benefits.

Fannie Mae and Freddie Mac were taken over by the US government on September 7th, 2008. This is result of the unprecedented changes that are occurring in the US financial and real estate markets. And there is no doubt at this point that the effects of our liquidity crisis will be felt worldwide. Yet, what does it mean for top 1% income earners that are also consumers of US mortgages? (If you’re wondering, you are in the 90th percentile of income earners if your annual household income is over $150,000; top 1% is above $250,000.) It has been almost two decades since the recession and real estate downturn of the early 1990s brought on by, among other things, the Savings & Loan crises. As we learned back then, top 1% income earners are not immune. I’d like to offer my speculation about the risks and opportunities available in the current volatile marketplace.

In the short term, I believe we will see falling interest rates as the US government touts increased liquidity and the international markets cheer the savior of their large investments in the US mortgage markets. This drop has already occurred as rates fell more than 1/2% in the last couple of days in treasury yields and certain conforming and so-called conforming-jumbo mortgages. This could be positive for a large group people currently holding US properties encumbered with interim fixed period ARM loans that are due to reset in 2009. I believe we are going to see a massive refinancing movement while these rates are low and this may act to lessen the blow of the second wave of foreclosures due to hit the US next year. Rates on many 30 year mortgage products are now at or below 6% which is extremely low in terms of historical averages at 9%. Note that many property owners will still not be able to refinance due to the drop in property values and the lack of their ability to get a satisfactory appraisal, as well as stricter underwriting guidelines. Yet, I think it is safe to say that this second wave of foreclosures is going to be less dramatic than the first wave that was primarily attributed to defaults of sub-prime mortgages. The first crippling wave of foreclosures during 2007 and 2008 was a product of highly risky sub-prime loans done in mass and then abruptly stopped as the markets collapsed.

Yet, it is my belief that unabashed glee is short sided. The takeover will shift Fannie Mae and Freddie Mac’s losses to US tax payers. If you are a taxpaying US citizen who does not own real property, then you are exposed to the financial burden without any of the benefits of owning real estate. Someone will eventually have to pay the piper for these losses and it now appears that this burden will be heaped on top of the US’s national debt that is already staggeringly high. Just like individuals cannot expect to heavily leverage themselves without consequence, neither can governments. Thus I speculate that in order for our government to strengthen its position in the global economy we will need to drastically cut debt and this translates into increased taxes and slashed government programs. We are already experiencing this issue of increasing taxes and reducing government programs at the state level as California once again struggles to pass a balanced budget. An increase in taxes means additional financial pressure that will have to be levied on US citizens at some point in time. This will be a destructive consequence to the US economy.

Now more than ever top 1% income earners who endeavor to capitalize on their existing assets and/or enter the real property markets need superior help. Questions such as whether or not to refinance existing debt, if to sell and/or buy now, trade up, what financial structures are most tax efficient, and so forth, are vital to answer in order to preserve and increase their wealth. The answers to these questions will significantly impact the profitability or loss in your real property transactions, whether for investment or for your personal residence. It is critical that your financial, real estate and tax advisors are able to make powerful interpretations of your current and future situation. When there is a disruption in the marketplace, such as our current economic situation, there is heightened risk and also amplified opportunity. Make sure that your advisors are capable of handling all of your concerns during this turbulent time. If you are looking for financial, mortgage or real estate assistance feel free to contact us for a free initial consultation so we can adequately assess your needs.

Trulia just released a new application, that will allow the user to get open homes and open house information on their iPhone. Check out the video demo. It looks interesting.

Being that I just purchased a BlackBerry phone, I have found e-mail and data on the fly is a very powerful tool. I wonder how many home seekers will use this new Trulia application? At first glance this appears to be a great tool for Sunday open house searchers. It would be great to turn your phone on and have all of the open house data in your vicinity. One question I have is, does this service have all the MLS listed homes on it? If not, how soon until your local MLS designs a copy cat service? 

Thanks JPhilipson for this flicker photo.
I have many times said on this blog that this is the best residential real estate buying environment I have seen in my career. I have also said, that rising rates would be devastating to buyers in this market. I just read a convincing article on the Behind the Mortgage blog that alludes to the negative effect rising rates can have for buyers.

First, this market is currently suffering from a lack of liquidity and the restrictive guidelines that mortgage banks are imposing on buyers. Buyers must now have higher credit scores, more down and the property they buy is under much more restrictive scrutiny from appraisers. This has led to many buyers being cut out of the housing markets, which in turn has dropped demand and thus lowered housing values.

Second, rates have until now remained relatively low. This means that qualified buyers are cleaning up in this market. I speak from experience in this market, while I am seeing buyers get some great deals on property, and also get great 30 fixed rates.

We all know that markets are constantly changing and drifting. The current market chatter alludes to rising rates as the economy rebounds and the Federal Reserve puts as much upward pressure as they can on rates to quell the potential inflation fears. As I wrote in my post, Buyers Could Get Caught Waiting For The Sky to Fall, the deals in the market may begin to vanish as the cost of capital increases. A risk for buyer’s now becomes that real estate prices have already been squeezed so rising rates will not necessarily drop property values in conjunction with increased cost of capital and the rising difficulties of getting approved.

It is interesting to see that Wachovia just tightened its guidelines on its, “pick a payment” loans. This is especially interesting to me, because at the beginning of the year we had a presentation at our office from a World Savings executive that touted the flexibility of this loan. My opinion is well reverberated in Mike Mueller’s recent post on the Lenderama blog.

“Seriously, The Neg Am loan has a very valuable place in the finance world when properly used.  I believe Wachovia (world Savings) had the highest performing Neg Am Portfolio in the biz.”

These mortgage products do have there place in the financial world. I also agree with the executive that visited our office at the beginning of the year. These products are useful and powerful for the right individual situation. Maybe, the changes in Wachovia’s policy have more to do with their own business concerns and buying Golden West mortgage, then with the validity of the product that was successful for Word Savings for so many years. Just check out this CNN Money story that illustrates how 3.8% of Golden West’s pool of pick a payment mortgages went belly up after Wachovia purchased them in 2006.

The answer is that there are no bad loans in the marketplace. Loans are not people thus they can’t act good or evil. Mortgages are either placed by a person with the strategic knowledge to effectively care for an individual’s entire financial situation or they are not. I have many clients who have taken World Savings pick a payment loans and they have met their financial strategies without causing any despair or foreclosures.

I think the conversation in the marketplace needs to change from the loan product, to who is doing your loan. Are they competent to take care of your mortgage concerns with out betraying the other financial concerns that you have? Many banks and brokers have done mortgages with a blind eye to the customers financial situations and concerns. Often, you can’t even blame the person doing the loan, because they are not even competent to take care of their own financial concerns, let alone yours. Maybe contracting guidelines is not the answer for banks. Maybe, they should start to think about how they operate in regards to the knowledge of the people they have doing the loans. Maybe if they observed, assessed and acted to care for a clients mortgage in the context of their total financial situation they would have a huge stack of loans that could sell on Wall Street as mortgage backed securities. Warren Buffet eloquently explained the breakdown in the mortgage markets when he said, “In extreme cases, mark-to-market degenerates into what I would call mark-to-myth.”

Thanks Ocean Flynn for this flicker Photo.

Thanks to Todd Derick for this flicker photo.

I just read an article on the Blown Mortgage blog. It had a graph showing new and existing home sales. Of course in this market both are down. In fact, the Blown Mortgage blog is claiming that the volume of existing home sales is down 15% from last year.

First, it is important to note that just because the volume of sales are down, it does not mean that values of homes are dropping. In fact this can be quite the contrary in certain areas. This is the case certain segments of the Berkeley California market where many listings are still transacting with multiple offers. Just a month ago I saw a home get 15 offers and sell at a price way above the average median price for a home of this size and location.

Second, I found it interesting that the existing home sales have begun to diverge from new home sales. In this graph since January of 1994 existing and new home sales tracked each other fairly steadily. Yet, we can see in January of 2008 that the curves are fairly far apart with the number of existing home sales beginning to level off while new home sales volume is still plummeting.

I speculate this is because many developers have stopped projects that were in the pipeline if they could. We have seen this effect in the drop in new home permits as well. We are seeing that the average homeowner in an existing home is still transacting while the investor/speculator is not. This makes sense for many home owners must sell and buy in any market. For instance, life ensues in any market and homeowners are relocated to new jobs all the time.

Does this indicate the bottom of the market? I am not sure, but it does indicate what we can expect from our market without a large volume of speculated dollars being spent to drive up prices. The air was let out of the real estate bubble for more then one reason. The constriction of financial liquidity in the mortgage markets started the deflation. Once the mood was set, the exit of speculators and investors, drove the market down further. Now we are seeing buyers who were over leveraged get caught in the falling values and go into foreclosure. I suspect that when we see the developers begin to return to the market and banks begin to loosen their guidelines, we will see a more robust market again. I also speculate that we should see a return in existing home sales before we see it in new home sales, for the mechanics of the entitlement and permitting processes means that it takes time for developers to ramp back up into production.

Interesting news on he mortgage front in California is that FHA is now offering 3% down on loans up to $729,750. FHA also allows for a 3% credit towards buyers non-reoccurring closing costs. This means that buyers can be 0% down once again. I view this as a drastic loosening of the mortgage guidelines. One blockade down… So, where are those speculators?

I have written several postings in the past about all of the unimaginable things going on with real estate development around the world. Many of my posts have focused on Dubai where whole islands are being literally raised out of the sea.

Recently, I ran into a new concept that is in the process of being designed and building. Each story of the building actually rotates independent of the others. This means that the building is constantly in motion, so that it supplies every view possible to the occupants of each unit. What an interesting idea for a building that actually shifts its shape. It sounds as interesting for the people who view it on the street as it does for its occupants.

The renowned architect David Fisher is the visionary of this project. Of course Dubai is going to be one of the first cities to receive on of these animated projects. Check out the building in motion on the architects web site at: http://www.dynamicarchitecture.net/intro-high-resolution.html

Divorce, or variations on that theme, is starting to look almost as certain as death and taxes… the national average seems to be holding with about 1 out of 2 marriages ending in divorce. Among my friends, family and clients, it seems the number of couples around me calling it quits has escalated over the past few years. I suppose it could simply be my age, the circles I travel in and living in California. With splitting couples, very often their home will be their single largest asset. They may even fight tooth-and-nail to keep the home and send their “ex” packing. Here’s the thing: this could be a huge financial mistake. Often the consequences are not realized until long after signing the settlement agreement. Generally there are three issues around real estate that come up that are often overlooked in a divorce.

The first issue has to do with the property as an asset class and liquidity. Let’s say a couple (Popeye and Olive Oyl) owns a home worth $1,000,000 free & clear, i.e. no mortgage. And in addition, they have $1,000,000 of cash and invested assets. They agree to split everything 50/50. But Olive Oyl wants the home. So she will give Popeye her half of the cash in trade for his half of the house. Though Olive now has a place to live, she has 100% of her assets invested in real estate with no liquidity (unless she sells or finances some of the equity out of the property). This is equivalent to having all of your money tied up in one single, privately held investment… not real consistent with Modern Portfolio Theory.

The next issue has to do with affordability and qualifying. Let’s say Popeye and Olive have a $500,000 mortgage. The payment on the house with property taxes and insurance is $4000 per month. Olive only has to give Popeye $250,000 of her cash to buy him out. So she has $250,000 left in cash plus the house with the mortgage. The first question is can she afford the payment? That’s a much bigger question than I can address here, so let’s say she thinks she can handle the payment. But Popeye doesn’t let her get off the hook so easy. Since both signed the mortgage obligation when they were married, Popeye will remain liable from the lender’s point of view even though he may not be on the title as an owner of the property. If Olive can’t qualify on her own either for a new mortgage or in assuming the current one, Popeye may be very reluctant to go along with this.

Last, and probably one of the most overlooked issues with taking the home, has to do with . . . taxes. Popeye and Olive bought their home for $500,000 a while back. Since the value has doubled, they would have a $500,000 gain if they sold the home today. Because it was their principal residence for two out of the last five years, they would be able to exclude all $500,000 of the gain from being taxed as a married couple (see IRS Publication 936 at www.opesadvisors.com/resource/links.html). But if Olive buys out Popeye and at some point in the future she sells the home, she will only be able to exclude $250,000 of the gain as a single person. This means she will take on about a $62,000 tax burden that she will realize when she sells the home (assuming the tax laws don’t change… so could be more!). Additionally, if Olive sells the property and pays a real estate commission, she will incur 100% of that expense, as opposed to splitting it with Popeye. This could easily be another $25,000 she would have otherwise not paid (50% of a $50,000 commission). Olive has now blown about $90,000, or 12% of the assets she received out of the divorce settlement, without even knowing it.

For those of you that are able, consider working to have your marriage not be the one-out-of-two that divorce. For the other half, seek out financial, tax and legal advice prior to settling the terms of your agreement. Your attorney may be very skilled in representing you legally, but unlikely to know all of the finance and real estate consequences to your decisions.

Copyright © Jeffrey T. Smith • (415) 464-9500 • jtsmith@opesadvisors.com Jeffrey T. Smith is a financial advisor and the Marin Manager for Opes Advisors, a Wealth Management Firm specializing in Mortgage Banking and Investment Management.