A real life question for August 2010: Should I refinance or should I move?

30 year conventional mortgage rates are now in low 4 percent range. That really requires repeating: 30 year conventional mortgage rates are now in the low 4 percent range. When I first started in real estate full time in 1980 conventional 30 year mortgage rates were at 18.5% or HIGHER. No that was not the credit card rate it was the interest rate for mortgages. What was amazing is that people actually purchased homes and took out mortgages. It is also true that they refinanced to lower the rate and the month payment. (Generally when they refinanced they did not take any additional equity.

While we are engaged in a debate about renting versus owning, that debate is really in response to people who purchased homes who cannot afford them. People who should not have been approved for mortgages. People who could not afford to stay in the homes. People purchased on one of three assumptions: prices would go up, the property could be easily flipped, or that payments would go down. Notice that none of the assumptions assumed that they would keep the property long term. Now we are back to the world of conservative lending and common sense. In real estate jargon: we are in a market of 'sustainable ownership.' Very simply, people should purchase what they can afford to maintain over time. It is the prudent approach to home ownership. It is great advice.

For many people that raises a really good question. If you currently own a home that has an interest rate in the 5 or 6% range it probably makes sense to refinance. There are lots of important factors to consider: Is your employment situation strong? Do you plan to be in the area longer term? What is my equity situation? Do I owe more that the property is worth? What is my overall financial health like?

What is encouraging is that lower cost mortgage money is available even if you are in a negative equity situation. There are programs available that will allow you to refinance up to 125% of your homes equity. One critical note, you will need to pay back the mortgage.

Many people have real equity in their home, but have seen that amount reduced. The market has corrected so they have less equity than when they paid for the house. For some people this fact causes them to ignore a great question: Should I buy another home rather than refinance? The answer to question is family specific, that is what is 'right' for your family? If your housing needs have changed, you need a larger house, you need a smaller house, you want a lower mortgage payment, you want more land, you want a newer home, you want a townhouse, etc; then you should engage in the conversation. It may make sense, with interest rates at the lowest level in the past 50 years to make the change.

Some of my clients are concluding that the lower prices of homes, the large number of choices and the interest rates are compelling. They are making the decision to sell and purchase another home. In some instances, they are doing that although they are coming up with cash to pay off their existing mortgages. What they are doing is looking at their financial situation and the family shelter needs and making a measured, strategic decision. Yes they are selling their existing home and yes they are getting financial advice and real estate advice. They looking at the big picture and making prudent decisions.

If you are in the same place, do not hesitate to call your neighborhood Realtor for some real estate advice. I am available at 401 640 7097.

Real Estate Summer 2010: The New Normal

It has been a bizarre summer in real estate. We have seen very good activity as we complete the sales of the early summer. The median price in Rhode Island has moved up to $220,000. Closed sales are in fact also up, but there is a new normal. It is much more difficult to obtain mortgage money. The lenders have over reacted to the experience of the time of 'easy money.' The new reality is that virtually all of the commitment letters being issued to buyers are to extremely well qualified people. In an absolute way this is appropriate. The real estate market and the country need a housing market of 'sustainable home ownership.' Sustainable home ownership is a concept in which people are qualified and purchase properties that they can afford to own for the long term. We used to call this 'common sense.' It is the way it should be: People should only purchase what they can afford to own.
The challenge is in the details. The lenders have increased the standards from rigorous to highly rigorous. Some of the requirements are over the top. It is fair that the 'chain of flow' of the deposit should be documented. Where is the money for the down payment coming from? A friend of mine in Maine shared with me a story about that concept applied to the ridiculous. A young couple, with whom she was working, had received $8000 in wedding gifts from about 80 quests. The originator wanted gift letters from each of the guests indicating how much they had given. To my Realtor friend's credit, she had the young couple give the money to each of their parents and then provide two gift letters and two checks, each in the amount of $4000. When I share this story with other Realtors....no one is surprised.

This is the new normal.

When I started working in real estate 30 years ago, once a sales agreement was signed, it was likely to close in 99% of the time. Now we are seeing between 10 and 15% falling apart because of inspection issues, appraisal issues, or underwriting issues. It means that sellers are waiting until contingencies are satisfied before making other commitments. This is appropriate. As we are having 'issues' at all price points.

This is the new normal.

One of the hardest things to get used to in the market now is in negotiation. Historically a buyer would make an offer expecting a counter. It would be normal to have a couple of 'back and forth.' In this market the buyer will make an initial offer. If the counter is not compelling, and sometimes even if it is they step away. Negotiations are over, and buyer moves to another house. This can be extremely frustrating for sellers. How do you negotiate strategically in this market? Knowing as much as you can about the buyer and how she, he or they think is important. Having an advocate, a Realtor, is becoming more important not less.

This is the new normal.

Finally, the reduction in the number or real estate licensees in amazing. Every two years. holders of real estate licenses, salespersons and brokers, must complete 24 hours of continuing education to obtain 'the state authority' to sell real estate. This year the number of sales person dropped from just over 7000 to approximately 3500. It is a drop of half. Brokers licenses dropped as well, but not as much. Most sales people work on a contingent fee. It is a difficult way to make a living in a soft real estate market. It also means that lots of new Realtors have moved into other fields. This is unfortunate. What is true is that this will pass . A different market will find us.

This is the new normal.

The Realtor Future: Authors or Objects

In early June I traveled for the Leadership Team out West, first to California’s Legislative meetings and then to the Resort and Second Homes Meeting at Lake Tahoe, Nevada. It was a special trip and very inspiring.

In each of my public presentations, one message was central: The future will be written, and we REALTORS® have a choice: We can be authors of our future, or the object of the future. In other words, we can engage and write our future or we can be spectators.

For the past several years, we have “involved” ourselves by providing solutions to the housing crisis. However, now, there is a new approach REALTORS® across the country are embracing: action and engagement.

Maybe it was wishful thinking (or blind optimism) that led us to believe that the market would self correct and mortgage money would be available to credit worthy consumers. After the bailout of the “Too Big to Fail” banks, REALTORS® assumed that these companies would step up and begin to provide the life blood to our market – mortgage money. We also assumed that the government would step in and solve the problems. I’m not sure why we believed that everyone else would step up and make it right, but we did. And, to be fair, steps were taken, but it has not been enough and it is not right.

The change for us to be more active is a good one. We are relying upon ourselves – our hands and our ingenuity – to figure out the solution AND take control, rather than allowing some else to resolve the problems.

Your NAR leadership team is working within this new understanding and focus. We are no longer stepping. We are marching and running.

Specifically, we are working to create channels of communication between REALTORS® and the big banks. Right now the five largest banks are responsible for 73 percent of all of the mortgages written in the United States. While that fact may be disturbing, particularly considering that 30 years ago the top five banks were responsible for 25 percent of mortgage lending, it does have value. We only need to communicate with those five to resolve many issues in the market.

We have decided we need to be authors of our relationship with these banks. It is easy to blame, but creative problem solving requires focus and discipline. These are skills, traits that REALTORS® know well. We are working to write and define the “new normal.”

Some people suggest that leadership should not tell you what we are attempting to do, but rather tell you after the success has happened. I disagree. By sharing our agenda, we make sure that we are representing you. It is also a way to make leadership accountable. Most importantly, sharing gives you the responsibility and the opportunity to work together to come up with effective solutions.

After all, who has a better vantage point than you, the neighborhood REALTOR®? So, please, share your thoughts and ideas with us.

This initiative is a reach. We are looking to redefine the flow and availability of mortgage money. But our industry cannot operate without it. We need to ensure that the global financial system has a steady, competitive, reliable, and available source of mortgage money.

The American Dream, when realized, is a great thing for American families. While re-thinking what people can afford is appropriate, re-thinking cannot be allowed to eliminate homeownership entirely from the national consciousness.

As authors of our future, we must insure that the American dream is the right size, but still very much a real part of the American experience.