Why Short Sales Will Be Around for a While

February 15, 2012 By Jon Griffith Leave a Comment

If in fact the reports are correct, and I believe they’re pretty close, then nearly 50% of the home owners in Phoenix and surrounding areas are upside down in their homes, owing more than their homes are worth.

That’s not to say that everyone is grossly under water, but underwater is underwater. The degree to which you’re under water will vastly impact your decisions regarding your future, and affect the outcome of a possible need…the sale of your home.

Life continues to happen, and that means that for who are able to make their monthly payments, a shift in circumstances may mean the need to sell their home and reconfigure their lives. If their house is upside down and they need to sell, they’ll have no choice but to sell the house short of what they owe their lender. If they have to sell, they’ll either need to cover the difference out of pocket, or ask their lender to take a loss.

The answer to the question, “how long will short sales be around” depends on the rate of growth in the real estate market and the rate of appreciation in resale values.

Let’s take a look at an example of one person’s situation in a highly desirable area of Scottsdale. Originally purchased at $115,000, this Scottsdale town-home appraised at $240,000 one year prior to the height of the market. A neighboring property with an identical footprint sold for $319,000. When the market tanked, the values dropped to their current range of $100-120K.

Why was the home appraised when it was? For the purpose of taking out a Home Equity Line of Credit (HELOC) which ultimately raised the amount owed on the property from $115,000 to $200,000.

With a town home valued at $100,000 and a mortgage balance of $200,000, there’s a HUGE gap to bridge before the home has any equity. So let’s look at an example of what happened to this particular condominium. We’ll look at it first from the “What If” angle.

What if the housing bubble had never happened?

The figure above assumes a 4% annual appreciation. The town home, purchased in 2002 for $115,000 gradually increases in value to an approximate value of $169,000 by 2012. Not bad, considering by then the amount owed on the home would be about $88,000.00. The green line represents the balance owed on the property, which should gradually decrease over time. In this illustration, there’s no evidence of a bubble, but the bubble was the only reason a line of credit was available, so the green line should continue to decrease.

But that’s not what happened. In reality, the following illustration shows a more accurate picture of what’s going on. The current value of the property is $100,000, not $169,000. So, by shifting the blue line to the right, we get a more accurate picture of how long it will take to break even on the property.

As in the previous figure, this assumes a 4% annual appreciation, but this time we’ve added the bubble, and shown that the value of the property TODAY is $100,000. Based on this, we can assume that it will be another 7 years before this house is worth what is owed…if 4% is the rate of appreciation and the home owner continues to make payments to the principal balance. Obviously longer if it’s lower, and shorter if it’s higher. Either way, this house is under water for a while. Another factor to consider is the number of interest only loans that cause that green line to remain flat. I haven’t illustrated that, but if you flat line the loan balance, you can imagine how long it will take for the blue line to reach the green line. In fact, the property may cap out at a certain value and never be worth what is owed.

What This Means

This means that if there is ANY reason that this home owner would need to sell the home (and life happens) then the sale will be a short sale. The conclusion drawn from this is that Short Sales will be around for a while.

Filed Under: Short Sales Tagged With: home, housing, property, short sales

Who Can Afford A Down Payment?

December 27, 2011 By Jon Griffith Leave a Comment

As I’m reading through the latest predictions for the upcoming market conditions, I’m taken aback by one of the statements. In an article written by Jed Kolko, Chief Economist for Trulia.com entitled What the Cyrstal Ball Says about the housing market in 2012, he points out the probability of rental rates increasing, and that it would be a bad thing.

I believe the reason that it is perceived as a bad thing is part of the core of the financial problems we have in this country. The reasoning is this. If rental rates increase, and housing prices decrease, then it creates a great environment for buyers, “but only for prospective buyers who can afford the downpayment and qualify for a mortgage.”

I apologize if I’m completely out of my mind, but what kind of buyer do we want? Do we want to encourage people who cannot afford a home to buy a home? And what about cash buyers? There’s no mention of them, and they do exist, in droves.

As a real estate agent who doesn’t believe borrowing money is part of a sound financial plan, I have a hard time with the topic of mortgages. There are great deals out there, but we shouldn’t be waiting until someone wants to take advantage of a good deal to counsel them about the principles of money…mainly saving, which is what’s required to build up a down payment. If you haven’t figured that out by now, then you might want to consider re-signing your lease until you do. If you’re thinking about buying a house, know that a down payment is going to be part of the equation. Plan your life around a 20% down payment and your long term costs will be much less than if you go with a more “creative” financing plan.

As my financial coach Dave Ramsey always says, “creative usually means too broke to buy a house.”

Filed Under: Blah Blah Economy Tagged With: buyers, housing, market, mortgage

Planning Prevents

November 8, 2010 By Jon Griffith 2 Comments

Following a good model of financial planning will make the difference between future success, and future failure. While there is no guarantee of success, however you may define it, there is certainly a guarantee of failure if you don’t take the time to plan according to your end goal. Of course, if you have no end goal, making a plan might be a bit more difficult than you imagined. Most people who succeed in life do so because they have a goal in mind, and they take the steps they need to take to reach that goal.

A majority of the valley is in turmoil when it comes to housing. There’s no need to explain what has happened over the past few years. More focus needs to be placed on how you’ve learned from it, and what you intend to do about it.

Just Start

The first step to planning your future is to be aware of where you are. I would bet that most of your financial stress is due to not knowing, and not knowing is due to a fear of finding out the truth. This circle of thought will prevent your from reaching your goals. Take inventory of your money. Figure out what’s going where, how much you actually make, and where you want it to go.

A Healthy Cash Flow Budget

In this order, 1) Feed Yourself, 2) Clothe yourself, 3) Keep a roof over your head, 4) Keep the lights on, and 5) maintain your transportation, whether it be a car, a scooter, or your walking shoes. Beyond that, you have room to solve your problems, or invest in your future.

If you have structured your life to give, spend and save appropriately (and I’ll define that next) then you cannot lose, and the degree to which you win will only be dependent upon the amount of income you can generate.

An appropriate method to live by goes as follows:

Give 10% of your pay away as soon as you get it. Don’t care where, but support something you believe in.
Keep your rent or house payment at or below 25% of your take-home pay.
Never borrow money.
Save 15% of your income FOREVER so it grows, and don’t choose to do anything that would jeopardize it.
Save 15% of your income for your kids’ college educations so they don’t end up in debt.
Invest, Give, and Spend the rest.

House Poor

The big one here that I’ll touch on is the housing expense. In our current market state, where our dollar has lost value, we have nearly 10% unemployment, and our homes are worth half of what we borrowed, it’s time to look at the above formula to see if our current spending matches our ideal spending plan. If you find that you are spending more than 30% of your income ( I know, I said 25% above, but the banks approve on 30% ) on your house payment, then you are robbing yourself of the future freedom to choose whatever you want to do. You’re blowing your future away, and your current level of comfort, and in many cases, your fears, are preventing you from taking action to solve the problem.

You have people around you, who aren’t qualified to make these decisions for you, pulling you in all directions with their opinions about what you should or shouldn’t do. Here’s a tip, and a hard truth: Taking advice from someone who is broke about how not to be broke, will keep you broke, so smile, and thank them for their opinion, and then get professional advice.

If you’re house poor, and you have come to the realization that it’s time to do something about it, and your house is worth less than you owe, then your solution is to sell the house. That will most likely involve a short sale. If you need more information about this topic, or you need to speak with me about how you can solve this monumental future financial problem, please call me and we can talk about it. Knowing the facts will give you peace of mind.

Filed Under: Living Debt Free, Personal Finances Tagged With: house, House Poor, housing, spending

To The Owner, It’s More About the Home

September 24, 2008 By Jon Griffith Leave a Comment

There’s nothing worse than media articles that continually pound the idea that your finances are in shambles. YOUR finances. I’m not certain what the analysts in the stock market are attempting to convey during these strangely unique economic times other than:

You’re going to lose your job soon.
Your interest rates are going to increase.
You should not by a house.
The world as we know it is gone forever.

ENOUGH ALREADY!

An article posted today at Marketwatch.com states that…

The purchase of a house is the ultimate confidence indicator, and if there’s anyone out there with any confidence these days after what the markets and the financial sector have been through, then you’re talking about the true eternal optimist.

Are you that optimist? Are you someone who wants to “indicate confidence?” We in the real estate business know the value of home ownership. We understand that when you buy a home, you put part of your payment into the value of the house, and part of it goes to the bank. When you rent, which is what many people who are sitting on the fence are doing, all of your payment goes to the owner of the home, and none of it is invested. Furthermore, none of your payment will help you reduce your tax liability at the end of the year. And historically over time, your home will increase in value.

Are you interested in giving yourself a raise? Then buy a house.

the housing market looks like a sunken soufflé

What a way to make a soufflé unappetizing. But we’re not talking about food are we. We’re talking about the concept of buying low and selling high, and the only thing that sunken represents to me is a low point, which is when I would buy. What about falling prices? When buyers hold out, sellers drop their price. That’s just basic supply and demand.

But why, ultimately, are you thinking about buying a home? Is it purely financial? I would hope not. This “sunken soufflé” could give you a perfect opportunity to finally secure a home. Not a house, not an investment for quick profit, but a home. Somewhere you can relax and entertain. Somewhere you can raise your children over the next 10 years. What you need is a place to call home.

If you look at the market in this light, it makes perfect sense to buy a home. Real estate is and always has been a long term wealth building investment vehicle, but more than that, it’s your little piece of America that you can rest upon every night when you come home from a long day at work.

Filed Under: Real Estate Finances Tagged With: confidence, housing, indicator, investment, opportunity, optimist, ownership, value, who can buy

Everyone Thinks it’s the Housing Mess

September 17, 2008 By Jon Griffith 1 Comment

Article upon article today blame the housing mess for causing the financial hardships we’ve seen reported over the past week. Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Merrill Lynch…when does the finger pointing stop?

The housing crisis is not the root of the troubles that we are facing today. A combined effort between greedy lenders and reckless buyers is what led to the housing mess we’re in. I don’t see any way to point the finger at anything more than greed. We in America have set aside all common sense and have extended ourselves way beyond what we know we can handle. Being in debt is being in prison. The more money you spend that you don’t have, the longer it will take to get out of where you’re at.

There is, in my opinion, a healthy way to become a home-owner. Spend less than you make, create a budget, and save. If you don’t agree with me, that’s okay, but I will lay out a quick and simple example of what I think a healthy distribution of your income could look like based on a $3000/month net income (after taxes.)

$3000.00

$-300.00. 10% giving back to the community in some way, shape or form, whether charitable contributions or to your church or through donating your time and resources.

$2700.00 Balance

$-300.00. 10% tucked away in a 401K or other savings plan.

$2400.00 Balance

$-1000.00 or 1/3 of your income to cover housing costs (rent/mortgage). This puts you in a home around the $120,000 mark if you plan to purchase.

$1400.00 Balance left over for the rest of your living expenses, auto, insurance, etc. Some of this is discretionary and some of this is not. Whatever you have left over, contribute towards a down payment fund and save, save, save, until you have enough to begin owning a home.

This model assumes you have no debt. If you have debt with interest rates that are higher than the investments you currently have, eliminate the debt and get on the right track, because even though you may think you’re saving, you’re actually losing money in the long run. Credit card debt is a cancer and will destroy your financial future.

I’m not a financial planner, but I do try do employ common sense when dealing with my income. Since I am in the sales industry, my income depends on each sale. If I don’t sell a home, I don’t eat. In this unique market where you, the buyer, hold the negotiating chips, with interest rates as low as they have been since before the housing crisis became a common topic, it’s time to buy and I can help you.

Please contact me today for more information about becoming a first time home buyer or about selling your current residence and moving to another location.