Blah Blah Economy

Cash For Clunkers Is Absolute Ultra Stupidity

Quite a controversial headline wouldn’t you say?  I would bet you think my tone may be a bit strong, but I think I have just cause.

The “Cash For Clunkers” plan that Congress has approved is an absolutely stupid idea.  Sure, it sounds nice.  Bring your gas guzzling vehicle to a dealer and they’ll apply a government issued voucher for up to $4,500.00 which would be applied towards the purchase of a more efficient vehicle of 22MPG or higher according to the Associated Press and Foxnews.com.

Why Is This Stupid?

Cars go down in value, and the program is going to entice people to drive their perfectly good vehicle, which in most cases is going to be paid for, and has already lost most of its value, to the dealer where they’ll get sucked into financing a newer vehicle.

THIS IS GOING TO TEMPT PEOPLE TO GO DEEPER INTO DEBT by investing their money in a consumable product that goes down in value, not UP!  Not a good plan.

Why Is This ULTRA Stupid?

The dealerships must agree to destroy the “clunker.”  Are you serious?  Who are these people!?  For those who have “clunkers” that work just fine, the market for resale to people who are a bit smarter with their car purchases is eliminated.  All of those people who would love to buy a used car won’t be able to.

Let me explain what a smart car purchase is.  Save, pay cash, then save, then upgrade with cash.  Repeat.  Let’s say you bought a car for $2000.00 cash.  Sure, it wouldn’t be luxurious, but it would get the job done.  Then, for 10 months, you saved on average $300/month and put it into a car fund.

“How am I going to save $300/month?” You dummy!  How are you going to afford $300/month for a car payment?

After 10 months, in a car that has already lost most of its value (someone else took that hit, hopefully) plus $3000.00 (10 months X $300.00) you are able to trade your $2000.00 “clunker” in for a $5000.00 “clunker.”

Do this for another 10 months and you can upgrade to an $8000.00 car.  Another 10 months and you’re in a PAID FOR car for $11,000.00.  Another 10 months and you’re driving a fairly nice 2-3 year-old car worth about $14,000.00 and it’s only taken you 40 months to get there.  AND IT’S PAID FOR.  That’s a little over 3 years.

Buy a new car, and you’re stuck with $300.00+ payments for at least 60 months.  As Dave Ramsey says, “stupid tax.”

The amount of gas that you’ll save by upgrading from your SUV to a newer, more efficient car will be all but wiped out by the loss of value you’ll incur with the car you borrow with your $4,500 voucher.

Shredding perfectly good older cars that someone might treasure for the sake of luring someone who can’t afford a more expensive car into debt is a stupid and very wasteful plan.  Besides, WHERE IS THE MONEY COMING FROM?

Arizona Anti-Deficiency Laws Are Changing

The following information was provided by Marc McCain, Attorney at law, regarding the changes that are coming regarding the Arizona Anti-Deficiency legislation.

A deficiency is the amount that you still owe the bank after the bank forecloses.  If you are selling your home short of what you owe, or you are about to experience a foreclosure, then this information is important for you.  As always, please seek professional legal council when it comes to your particular situation.  I can help you sell your house, but I’m not an attorney.  We leave that up to the legal experts.

Arizona’s anti-deficiency laws are changing effective September 30, 2009!

The change is designed to limit the type of borrowers that will qualify for anti-deficiency treatment. Set forth below is a general outline of Arizona law regarding when a borrower may be subject to a deficiency action or sued on its note following a foreclosure or short sale. However, borrowers must understand that these are only general rules — every situation must be analyzed carefully based on the specific facts – consult with a professional at all times to determine your rights and obligations in connection with a foreclosure or short sale.

1. In Arizona, if a borrower fails to pay its loan, a lender can foreclose its Deed of Trust lien either judicially per A.R.S. § 33-721
2. If the foreclosure price does not pay a lender what it is owed, the lender may generally seek a deficiency against the borrower for the difference. However, certain states, including Arizona, have what are called anti-deficiency laws that bar a lender from seeking a deficiency in certain situations.
3. In determining if anti-deficiency rules apply, the first step is to confirm what law applies to the loan, particularly the lender’s remedies under the Promissory Note. The applicable law should NOT be assumed. Read your Promissory Note and other loan documents carefully and understand their terms.
4. Assuming Arizona law applies to the lender’s rights under the Promissory Note, Arizona’s anti-deficiency laws are found in 2 places – in A.R.S. § 33-729(A) (regarding judicial foreclosures), and A.R.S. § 33-814(G) (regarding trustee’s sales).
5. In both judicial foreclosures and trustee’s sales, anti-deficiency rules apply only if the property being foreclosed meets the following criteria: (a) 2½ acres or less; and (b) limited to and utilized as a single one-family or single two-family dwelling. However, on July 10, 2009 Governor Brewer signed into law a change to A.R.S. § 33-814(G) which will take effect September 30, 2009. In addition to the above requirements, the trustee’s sale statute will also require that: (a) the trustor has lived in the property for at least 6 consecutive months; and (b) a certificate of occupancy has been issued. Until September 30, 2009, there is NO requirement that the trustor use the property as a residence – residential investment properties satisfy the anti-deficiency criteria. Effective September 30, 2009, investment properties sold at trustee’s sale will NOT qualify for anti-deficiency treatment if the trustor has not lived in the property for at least 6 consecutive months. Commercial properties and loans secured by residential homes being developed for sale but never used as dwellings don’t qualify for anti-deficiency treatment. In addition, a deed of trust that is a lien against more than one property will not be subject to anti-deficiency rules — the deed of trust needs to be a lien against a single trust property.
6. A.R.S. § 33-729(A) also requires that the loan be a purchase money (“PM”). However, the trustee’s sale statute, A.R.S. § 33-814(G), does NOT require that the loan be a PM loan. A PM loan doesn’t lose its PM nature when it is refinanced. However, cash out refi’s raise interesting issues.
7. In a judicial foreclosure, only a PM lender on qualifying residential property is prevented from seeking a deficiency; a nonpurchase money (“NPM”) lender is not – it can obtain a deficiency following a foreclosure or sue the borrower on the note.
8. In a trustee’s sale, both PM and NPM lenders that foreclose on qualifying property are prevented from seeking a deficiency and from suing directly on the note.
9. Junior liens extinguished by a 1st position foreclosure may be able to sue on the note. The issue is whether the junior loan was a PM or NPM loan – if it was a PM loan on qualifying property, the lender can NOT sue the borrower on the note following the foreclosure; if it was a NPM loan, the lender CAN sue the borrower.
10. If a lender can not seek a deficiency, then the lender can NOT waive its security and sue directly on its note. This means that a lender under a PM loan on qualifying property will NOT be able to sue the borrower on the note. This rule also applies to short sales. Note there are gray areas regarding cash out refi’s. Other Lender claims are also not barred – e.g. mortgage fraud.
11. Even if anti-deficiency rules apply, a borrower will be liable to a lender for any diminution in value of the trust property due to voluntary waste. In other words, don’t damage the property, take fixtures, A/C units, etc., or let the Property go to waste.
12. Real property taxes are NOT an owner’s personal obligation, but only a lien against the real property. However, HOA assessments ARE an owner’s personal obligation and if not paid can result in credit damage, lawsuits and other collection efforts.
13. Last, but not least, consult with qualified tax professionals BEFORE deciding to do a short sale or foreclosure. 1099 income, gains, losses and other tax consequences may result from foreclosures, short sales and loan modifications. Know what tax consequences you will face and plan accordingly.

Good News for Phoenix Real Estate

It’s not a big surprise considering the number of homes that have been selling recently that the inventory has depleted considerably and the availability of affordable housing is drying up after this massive real estate hemorrhage.

I cannot tell the future, but I can see when there’s a break in a pattern, as you will also see indicated in the graph below. Whenever a market corrects, it usually over corrects to a comparable intensity of the original inflation. Prices were so overinflated, and people have SO overreacted, that the low prices in the valley are deflated and can be considered as artificially low as they were high.

If I base my opinion simply on the pattern in this graph which outlines average monthly sales in the Greater Metropolitan Phoenix Market, then we are on track to recover, and we will bounce back. Since Arizona is a national leader in real estate trends, we should see a healthy recovery. Again, I cannot predict the future.

It was towards the end of 2003, beginning of 2004 that things started to exponentially bloat, soaring to ridiculous heights, and absolutely crashing as quickly as a 747 filled with solid lead.

In August of 2005, my neighbor bought the same unit I purchased in 2003 for $200,000.00 more than I paid for mine. They are still there. Oops.

The market’s plateau began in approximately June of 2006, rose a bit more, and then decidedly burned in flames at about January of 2008, through March of 2009. The number of homes sold began to increase in May of 2008, but the price continued to drop.

What would have happened if we had continued to grow at a normal, typical rate of 4% per year?  Perhaps the following, showing a line drawn at about a 4% increase over the same period of time.  This shows that a starting value of $175,000.00 would over the time represented in this graph, grow to approximately $244,000.00.

One could argue at this point one of two possibilities.  Either a) the market will quickly correct, over correct, and bounce back and forth over the next 8 years or so to find equilibrium along that blue line, or b) the blue line must be adjusted down, erasing all of the growth in this millennium.

If that’s the case, then the home you’re living in, which is now worth what it was pre-Y2K, will not be worth what it should be worth for as long, if not longer than it takes to re-write the entire first decade of this century.  To reach home prices that we should be at, we’re looking at roughly 10 years of steady growth at a “normal” rate.

The problem is that nobody knows what normal is anymore BECAUSE OF THAT GIANT HUMP in the middle of the chart.  Who’s to blame?  Many people think it was the government forcing the banks to lend to people who couldn’t afford it which drove them to “get creative.”  Dave Ramsey calls “creative financing” “Too Broke to Buy a House.”  I tend to agree.

Either way, it will be interesting to see what happens, and ultimately, it appears as though we’ve experienced the beginning of the bottom of this roller coaster ride.  Which means one thing…

If you haven’t bought a house yet, it’s time to buy.  There’s blood in the streets and the street sweepers (the investors) have been very busy recently.  Don’t miss out.

What Makes a Buyer’s Market: Supply and Demand

This is a pretty simple concept that can be over complicated by economists.  A buyer’s market simply means that it’s better to be buying than selling.  Why?  Too many houses (supply surplus) and not enough buyers (no reckless lending.)

Supply and Demand

When a supplier (people selling homes) floods the market with too much product (houses) the buyers tend to take longer to choose what they want.  As a result, sellers who are tired of waiting will lower their prices to spur the buyer into taking action.  This is a natural movement that many sellers miss because they don’t understand the LAW of supply and demand.  When the supply is low, buyers climb over themselves to bid on what product is available which drives the price up.

The red line represents the supply.  The green line represents the demand.  The point at which they cross is the market value or market equilibrium.  This is the price that we aim for when we price a home.

The graph can be interpreted as such.  On the demand curve (green) when the price of the product is $1.00, the number of units sold will be 100.  When the price is $10.00, the number of units sold will be about 14.  It’s the economists challenge to set the price of his product as close to market equilibrium as he or she can whereby the most money is made for the least amount of production.  100 units sold X $1.00 = $100.00.  14 units sol X $10.00 = $140.00, but 50 units sold at a price of $6.00 each is $300.00.

Shifting Curves

This is the important note for supply and demand.  When supply is increased, the entire red curve shifts to the right by the number of units produced.  Assuming demand remains the same, the point at which the lines cross will naturally fall and the price will naturally fall.  If the price is not adjusted, the product will not sell.  If demand increases at the same rate as the supply increases, then the price will remain the same because market equilibrium will simply follow along.  True, more product will be sold, but the price will stay put.  Remember, when supply and/or demand increases or decreases, the entire line shifts left or right.  For example, if demand suddenly dropped off for a given product like homes, and there was an excess of supply or a surplus such as we have now, the price point would fall dramatically.

Buyers Market

In Phoenix, we have a surplus of homes.  Nation wide we have a shortage of buyers because of tightened lending.  In many cases, the buyers are really still there, but they’re just afraid to move forward and/or they don’t realize they actually can get a home loan.  While the buyer’s market exists, it means the influence of movement on the supply and demand curve has shifted to the demand curve.  Buyers can ask for more, and have more to choose from than ever before, so why not wait it out?

On the contrary, if it’s a buyer’s market and there is blood running in the streets, take advantage of it because you won’t want to be buying in a seller’s market.

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