There is a new trend in some areas that have been especially hard hit during the past 4 years - people who are current on their mortgages walking away and letting the bank take back their house.  In the early 1980s this phenomenon was happening in Houston, TX, where we lived at the time, because home prices dropped all over the city and surrounding communities and people who were unable to sell their homes for what they owed simply walked away.  Some neighborhoods looked like Phoenix and Florida do today with foreclosure after foreclosure lining the streets.  Here is a link to a recent article from Realtor.com about the risks in doing this.

I was looking at information for a client on a home listed in our MLS and realized this home and seller were representational of the worst case situations that have been happening in the past few years.

They bought their home in 1998 for a great price, enjoyed having it appreciate to a current tax valuation $116,000 more than they paid in 1998, and then drained it of equity in 2002 and then again in 2006 by taking out large 1st and 2nd loans.  I don’t know the reason they did this, but it is very sad.  Sometimes people lose their job.  Sometimes they have huge medical bills to pay off.  Sometimes they use the money for other investments.  And sometimes they just treat their home as an ATM and the money ends up wasted on depreciating cars, boats, furniture, and just stuff.  And when the market changes, they are stuck and end up in foreclosure because they can no longer afford their payment.

In this case, the owner borrowed what the house was worth and did it not once, but twice.  And they didn’t use just a single mortgage, they used both a 1st and 2nd loan each time.  Remember my last post about easy money?  They were put at risk by risky loans.  I wish I knew what their story is.  Why would they do this to themselves?  The refinance in 2006 was at a variable rate over 1.5% higher than their 1998 rate.  And what was wrong with their 2002 loans that they would refinance and accept such a high rate in 2006?  Was their 2002 rate even higher?  Were their 2002 loans even riskier types of loans they were trying to get out from under?  Did they just want another $28,000 out of the house that they got by refinancing in 2006?  Why did they trust the lender who put them into these loans?  Did they realize they were putting themselves at risk?  Did they care?  Was it out of desperation?

Their 1998 rate was  fixed and they put 5% down.  They did everything right when they bought the house, but then 4 years later, everything seemed to start going wrong.  They ended up filing for foreclosure in 2008, actually managed to get a loan modification, and then went back into foreclosure in 2009.  Which, by the way, is not an uncommon occurrence.

The sad thing is that if they had stuck with their original loan, by fall of 2008 they would have paid it down by over $23,000 and with over $100,000 in appreciation, they could have sold in 2008 and walked away with cash in their pockets.  Their loan to value ratio would have been only 54%.  They would have owned 46% of their home 10 years after buying it!  Even if they had taken equity out to update the home, they still should have had plenty of cash when they sold.  A very sad case indeed.  And now an opportunity for someone else who buys their foreclosure.  Watch for posts in February about my free consumer seminars to help you avoid being one of these sad cases and instead be a story of real estate success.

First, let me share a little history lesson.  The change in the markets the past few years is now affecting what people are buying when they do buy a home.  During the roaring 90s when the dot com industry rose, people had a lot of extra cash in their pockets and built homes to reflect their desires.  Showy, big, extravagant homes dotted (that is a pun ) the landscape, especially in California.  Then the dot com bubble burst starting in 2000 and the market changed.  Investments in the stock market tied to technology went poof and bank accounts dwindled.  Real estate then became the go-to investment arena and we all know what happened.  Real estate prices escalated until 2006.  In markets like CA, FL, AZ, and Las Vegas, prices were surging 30-40% per year and those who were actually awake during that time realized what goes up must come down.  I personally could not believe that interest only loans were being used by consumers to purchase the home they would be living in.  Interest only loans are a strategic product used by real estate investors to manage cash flow.  I don’t think that description applies to most of our neighbors.  So what does all this have to do with smaller homes?

Just think how different the real estate market and our economy would be today if we had foregone the speculation of the past decade.  Did you know 1 in 4 homes was sold as an investment during the go-go years?  That’s 25%.  Do you think that had an impact on pricing?  Absolutely.  Just like tulip bulbs in Holland centuries ago.  We Americans went around with blinders on because getting money was so easy and we didn’t want to believe it could end.  But just like the dot com bubble, it was an upside down pyramid and collapsed under it’s own weight.  We ran out of buyers who could buy at such frothy prices.  Fortunately, in some markets such as Colorado Springs, we had more steady increases in prices and never saw huge increases, so most homeowners can weather the current market.  But even here prices have dropped about 20% on average over the past 3 years and people who bought at the height of the market are underwater unless they had a large down payment or have been making extra principal payments since they bought their home.  If they can stay put, they’ll be okay.  If they have to sell, they have a problem unless they can bring cash to closing.  For some, hardship will allow them to qualify for a short sale to avoid foreclosure.  Sadly, others will lose their homes.

So back to my question.  What would the market be like if the housing market had been steady instead of the scenario we did have?  First off, not as many people would own homes or if they did, they would own smaller homes than they purchased because they wouldn’t have based their decision on an expectation that their home was going to appreciate in the double digits every year and make them rich.  Home ownership DOES make people rich, but it is a slow steady process that lasts a lifetime.  The other thing we would have seen is smaller homes because they would be more affordable.  In some places, like California and Hawaii, they’ve had to keep home sizes smaller in general because land is so expensive.  If speculators hadn’t driven up prices buying properties with loans that required no verification of income or assets, more people would still be in their homes because they would have been given those loans based on more realistic requirements.  Hind sight is always 20-20, and looking into the past shows us a process that was totally out of control.

Fortunately, our economy provides the answers and we will dig ourselves out of this mess.  Without buyers who can or will pay inflated prices, home sellers have had to reduce prices in order to sell.  Many people who would like to sell have kept their homes off the market for now, reducing inventory, which will help with recovery.  The market is winding down, although in some places, it definitely crashed.  At some point we will reach equilibrium.  We are getting closer, although there are still more foreclosed homes coming to the market that will keep prices down for the next few years.  As prices have come down, people who didn’t want to or couldn’t buy when prices were high, are now finding that homes are affordable.  The rate of affordability has increased.  Builders will build smaller homes to entice first time buyers and seniors who are downsizing.  The other good thing that has happened is that people have started saving again and are being more cautious about buying.  Loans aren’t as easy to get and people have to jump through hoops to prove they can pay their mortgage in order to get a loan.  Many people will wait until they feel more secure in their work or feel they will be in the house long enough for buying to make sense.  But more people who didn’t think they could ever afford to buy, can now find homes within their means.  And ultimately we will help the environment as green technologies become more prevalent in building and remodeling and energy efficiency becomes more important.

If we keep the recent market lesson fresh in our minds, what has happened can prove to be a good thing because it is changing how people view money.  Perhaps individually people will remember and not allow themselves to be drawn into craziness in the future.  New homes built will be smaller so that builders can keep prices where buyers can afford to buy.  Condo owners will ultimately be helped as people discover that is an affordable option in not so affordable markets.  As baby boomers retire they will still want 2nd homes and that will once again help the Florida, Arizona, and condo markets recover.  Some baby boomers will retire to smaller, more affordable communities and will help the economies of those areas where their spending will create more jobs.  First time home buyers have a fantastic opportunity right now to get into a home at lower prices and amazingly low interest rates.  Even when the $8000 tax credit ends, homes will still be affordable.  But that still doesn’t mean everyone should buy.  It still needs to be a careful decision.

For those who can’t buy yet, investors are buying foreclosure and short sale homes and renting them out, so renters will find more choices available to them.  Investors will be part of the solution as well.  So there is light at the end of the tunnel.  Now is the perfect time to put money aside and plan to one day be a homeowner or get that 2nd home or move up to a bigger home.  With planning they are all great choices.  If you are in a position to act now, congratulations!  This will prove to be one of the greatest opportunities of the 21st century.

I read articles on several real estate websites weekly and found an article I read today a great synopsis of what has happened over the past few years.  We started noticing the impact of the real estate meltdown in Colorado Springs the beginning of 2007.  There were hints things were changing in 2006, but prices didn’t start really changing until the foreclosure activity started increasing in 2007.  Here’s the article from Broker Agent Social if you’d like to learn more.

Every week I provide sellers whose homes I have listed with information about trends in our local market so they can be up to speed on what’s going on.  The good news during March was that the number of listings flattened and the number of showings for our company is staying steady.  Sellers have to know this market is not easy and must have a hardy constitution to weather all the uncertainties if they really want to sell their home.  This is not a market to “try” to sell.  That commitment has to be made upfront.  But, with a leveling of listing activity and a 22% increase in sales in El Paso County for March 2009, there is a glimmer of a silver lining on all those clouds.

There are still a lot of foreclosures and short sales to wade through and many more coming, so any upward trend won’t happen quickly, but when it does come, it will be steady because that’s what our local market usually is - steady.  No flash and dash like 40% gains per year seen in Florida, just steady upticks in prices.  Distressed property sales are still more than 30% of the monthly sales for March and 94% of homes that sold were priced below $400,000, so El Paso County is becoming more affordable to more people.  With the $8000 tax credit for first time buyers (remember that also means people who haven’t owned a home in 3 years) and low interest rates, we are in the midst of a perfect storm.  What an opportunity!!!  There is increased activity in some areas of California and in Las Vegas, so we’ll just keep watching the trends and keep you informed.

Today I went to a 2 hour class provided by RE/MAX Properties, Inc and it opened my eyes to possibilities.  I have been aware of the ability to invest in real estate in self directed IRAs for 10 years, but today’s class with Jenn Dizmang was more sophisticated and evolved than the classes I’ve attended before.  Previous classes were sales pitches for black boxes given by people who would make money from participants.  Today’s class explained what is possible and how it is possible.  And I know we only touched the surface.  The book Jenn recommended to learn more is by Hubert Bromma and is entitled How to Invest in Real Estate With Your IRA and 401K & Pay Little or No Taxes.  I’ll include it in my Recommended Books Page but I have not read it yet - just taking Jenn’s word for it.  For real estate investors who want to take advantage of the current market and put hard assets in their retirement account it is something to consider and learn more about.  Bricks and mortar.  Real estate.  Yes it is possible but it has to be done correctly.  That means understanding real estate investing before using retirement assets to do more.  You can’t take capital losses in a tax deferred account.  Everyone who has taken a hit in the stock market knows that.

Let me emphasize that I don’t give tax, financial, or legal advice.   I don’t have those credentials.  You need to talk to the professionals you know to get that type of advice.  What I want to give you through this blog is a general knowledge of all the opportunities available to people who want to manage their money and investments well.   When I was a financial advisor (no longer licensed), I always referred to real estate as the commodity portion of most investor’s portfolios.  For most people that is the home they live in.  That’s why I found myself getting my real estate license over 6 years ago - to diversify my own portfolio with real estate investments.  The current stock market shows why diversification is important.  The 4 major asset categories are cash, bonds, equities, and commodities.  A lot of people have flocked to gold (a commodity) in the past few years and the price has been driven up.  Classic supply and demand.  The real opportunities lie in real estate and other depressed assets.  Building a foundation at a time like now is the key to great wealth.  I’m looking forward to the next up cycle in the economy because I am positioning myself now to take advantage of the opportunities.

As always, I suggest reading everything you can get your hands on, either on the web or in books, to learn how people who are successful investors have done it.  You don’t have to learn everything the hard way.  By gathering ideas that make sense to you and taking calculated risks, you will be amazed at what can happen.  I grew up poor but I vowed to never be poor again.  I hated risk at first but I’ve learned to be excited about taking educated risks with things I understand.  You have to educate yourself first and then take your first steps.  You don’t want to be foolish and driven by fear or greed.  It’s an exciting time filled with potential.  I wish you much success.

It’s been a tough time in real estate since July 2008 when the stock market started tumbling and the banks took a turn for the worse, but I’m here to tell you homes are still selling.  It’s just a different market.  At our company, RE/MAX Properties, Inc in Colorado Springs, we are using new tools and techniques to address the realities of today’s market.  I’m on top of it.  In analyzing my business I also realized that since January 2007 when many Realtors started leaving the business or getting part time jobs because their business dried up, I’ve kept going and only really started feeling the impact of the changing market in the fall of 2008.  I have sold 25 homes since January 2007, my buyer specialist closed 2 for me, and I have 2 under contract now.  How many Realtors can post those statistics?  It’s less than in previous years, but I and my team are getting homes closed!

What we are seeing is that all of my sales since fall have been either foreclosure or short sale properties.  As I’ve said before, unless sellers are willing to compete with these types of properties they will find themselves in the group of homes that didn’t sell when 2009 is over.  Last year that number was 64% of homes that were in the MLS in the Pikes Peak Region.

I recently completed training as a Certified Distressed Property Expert (CDPE), so I am able to help people who are at risk of losing their homes determine whether they would benefit from a short sale.  I am actively using a great new tool for buyers to be able to check out the price and information on any home in our MLS from their car - anonymously!  And I am ramping up our new InvestorLoft tool for the investors I am working with so they can search on cash flow or Cap Rate.  Awesome!

Finally, towards the end of March I will be learning more about how to help buyers purchase real estate in their self-directed IRA.  If your stock market investments aren’t cutting the mustard or you have cash in IRAs that you don’t know what to do with, you may be interested in looking into this option.  Along with converting to a Roth IRA while your account values are down, if you qualify to do so, looking at real estate may be just what gets you going in the right direction.  Stay tuned.

If any of this intrigues you, you can learn more at carefreehomes4u.com.  To use the tools mentioned above, just email me or give me a call.  It is a fantastic time to buy!  Opportunities are everywhere.

I just love Google streetview!  Here’s the link to the streetview of a home I just listed.  It was built in 1909 and is near the Stratton Open Space so a sweet location.  It needs work but is a gem for someone who wants to turn this little treasure into their own piece of Cheyenne Canyon.  Here’s the link: Cheyenne Blvd home

What do real estate, inflation, and CDs have to do with each other?  Other than the obvious - that they are all part of the financial picture in the US?  Wait, we don’t have inflation.  No, not yet, but it is coming.  The stimulus package will make certain that it happens.  If you didn’t live through the late 70s and early 80s, let me explain. 

Did you know we have seen many economic cycles that occur at about 30 year intervals?  Part of my college training was in economics, accounting, and finance.  My degree is in Computer Information Systems, because when I hit differential equations being taught from an engineering perspective, I decided a BS in Computer Systems was not where I wanted to be.  So my degree provided me with an education in programming, systems analysis, and business systems.  I never regret it.  I use what I learned every day and actually wish I also had a degree in economics.  I guess I’ll just hit the public library more often.

In the late 70s and early 80s inflation was rampant.  Everything was rising quickly, there was a shortage of oil, and interest rates went to double digits.  I personally paid 15.75% for a 2nd mortgage in 1982.  Ouch.  But I also made 16.5% on a 6 month CD.  The problem is that it was all funny money.  Incomes went up but so did the cost of everything.  In 1976 our home cost $39,000.  In 1988, our next home cost $163,000.  That same home today is worth over $400,000.  In California, it would probably be closer to $1Millon.  Who in middle class America can afford that?  With creative financing, a lot of people did, but then the stream of buyers dried up - just like in the early 80s.  ARMs, owner financing, assumptions, and other creative lending tools were the only way people could buy homes 30 years ago.  Sellers paying points for the buyer to buy down their rate was common.  Our seller did it to get us to 9 5/8%.  By 1982 that rate was a bargain when new loans were at 12.5%, hence we took a higher rate 2nd when we remodeled.

So what does all this have to do with 2009?  When the government starts printing more money and there is no gold standard, inflation happens.  Where do you think that $1.4Billion is coming from?  Future debt created by funny money.  So what will you invest in?  The stock market?  It will be a wild ride and may only go sideways at best for many years.  But still a good choice depending on your time horizon.  CDs or bonds?  Lock in low rates now to be eaten up by inflation later.  How about real estate?  Yes, what about real estate?  It’s tangible.  They aren’t making any more.  It goes in cycles that rise and fall with the economy, i.e., inflation.  Right now is a perfect storm for buying real estate.  Fear is keeping many buyers on the sidelines, but for the bold with a vision, history tells us you can be very wealthy down the road by making good use of real estate, by buying wisely, and letting the rising market and tenants paying down your mortgages help you leverage those early properties into more.  My grandparents started doing this during the depression.  They retired rich in real estate they owned without mortgages.

So educate yourself.  There are pitfalls with real estate that you need to be aware of, but the future can be quite rosy when you do it right.  For a great little treatise on how to do this, read the book or get the CD of The Automatic Millionaire Homeowner by David Bach.  David writes many books with great themes.  For this market, this one is his best.  Much success to you!  For more recommended reading, check out the Recommended Reading List Page.

What a crazy year 2009 has been already.  I’ve been busy listing homes, took 2 full days to attend CDPE (Certified Distressed Property Expert) training in January, and attended the CRS Sellabration in San Francisco in early February.  The real estate market continues to change and opportunities for buyers and investors are ripe.  Low interest rates, prices that haven’t been seen in many a moon, and lots of people looking for rentals in our local Colorado Springs market has created those opportunities.

Sales in January 2009 were down close to 17% from December, primarily because of everyone sitting back with bated breath waiting to hear if there is something in the stimulus package that will make their home purchase more profitable.  Many potential buyers are also waiting to see if their job will still be in place as the economy tumbles.  Stock portfolios have been hit hard as well, so investors are licking their wounds at the moment and trying to figure out if they can jump into the real estate fray anytime soon.  The good news is that inventories are also down, making it easier for sellers who are trying to sell increase their chances of a sale.

In this market, price is paramount!  We saw 1/3 of our sales go to distressed properties in November and December of 2008.  Some markets are much much worse.  What it means for sellers is they have to compete on price with short sales and foreclosures.  That will continue to reduce inventory and voila, one day the market will turn around because there will be more buyers than homes available.  That isn’t going to be anytime soon because another wave of foreclosures is coming, but history tells us it will happen.  Real estate has always been cyclical and we are in one hell of a cycle since 2007.

Prices rose too quickly because of easy money and lack of accountability.  One of 4 homes sold in recent years was either an investment purchase or 2nd home.  A whopping 25%!!!  When the bubble burst, there was a lot of collateral damage as plunging prices were brought to most neighborhoods.  As the cycle continues, buyers who were priced out of the market over the past several years will now have an opportunity to buy.  Investors will salivate over the opportunities for low priced rental properties.  Yes, the people with money will make money.  Wouldn’t you like to know how to be in that group during the next buying opportunity.  Stay tuned as I launch seminars to help you later this spring.

So that’s where we are now.  Lots of opportunity, but not a lot of credit available unless you have stellar financials.  For buyers who can buy now, have fun shopping.  It’s a great time to be in the real estate market!  Your dream home awaits.