Phillip's Blog

Are we at the bottom?
By Phillip Cantrell

The only way to even partially predict what is to come is by looking at historical data and attempt to identify the trends. The events surrounding historical trends sometimes match up very closely with current events and even my simple mind can say “hey, that’s what is happening now.” Such is the case with current trends in real estate. Historically there have been several factors that were readily identifiable with the “bottom” of a housing market. Many of those factors are present today.

For example: low interest rates. The fed has been buying treasuries over the past couple of years in an effort to hold down interest rates. This has worked in the short term, but over the longer term they will eventually have to stop this process and allow free market equilibrium to return because they simply don’t have the funds to keep going. In the meantime, as you can see from the graph below, mortgage rates are lower now than they have been at any time since 1963...that’s a 47 year history people! Now is an excellent time to take advantage of this “calm before the storm” and use it to your advantage by making your move.

Another historical trend that is evident is the decline in home prices. In Williamson County, the median home price in January 2010 was 14.4% below the same time last year, and a full 22.8% below the peak of the market in late 2006. That a pretty big drop but actually represented an improvement over the lowest point last year when median price was off the peak of 2006 by 25.9%. In hard dollar terms, the median home price in Williamson County was off $104,700 from that same peak in November 2006 – that’s a huge drop, any way you slice it. Of course these percentages of decline were unevenly spread across pricing sector with the more expensive homes taking the bigger hit. What we are beginning to see though is that prices are approaching what I call a “stumbling” recovery. They’ll be up 3 months and down one. We’ll have a few missteps along the way, but overall the trend is upwards.

The biggest trend that I see now which bodes well for the buyer is the huge amount of inventory still on the market. In January there were 13,414 single family houses available in the greater Nashville area. This number should be around 9,500 units. Hence the downward pressure on prices. Again though, this is a number that is beginning to decline and as it does, the downward price pressure will decline as well. Abundant inventory means not only more choice, but more bargaining power for the buyer.

Believe it or not, for those with good credit and documentable income (and that’s a whole different conversation) there are still some excellent loan programs out there. As I write this, FHA is still offering programs with as little as 3.5% down. This is about to change though, so if you qualify, you need to get on it. Given the rapidly changing mortgage underwriting requirements, tomorrow is a new day and who knows what new requirements these folks will come up with next. I have seen instances where we had buyers who fully qualified on Friday, and by Monday they no longer met underwriting guidelines. The universal approach with today’s underwriter seems to be to play a never ending game of “cover your assets” as much as possible. All the big lenders are literally shaking in their boots that the loan they write today won’t be marketable in the secondary market tomorrow. The bottom line is that as FHA goes, so goes the entire mortgage world. They are rapidly moving toward higher down payment requirements while decreasing seller contribution amounts. As a buyer, all this will increase your cost by waiting.

Finally the most popular Tax Credits in history are still available to qualified buyers. If you are a first time buyer, or haven’t owned a home in three years, the government will give you a tax credit of $8000. That means that you can deduct this amount from your taxes and if you don’t owe that much in taxes, you get a big fat government check. Likewise, if you have lived in your home for five years, you probably qualify for a $6500 tax credit. This still seems kind of backward to me since there is a finite number of first time home buyers in any given year, and an almost infinite number of move up buyers. But what do I know? Regardless, it all amount to the government passing out FREE money. Why wouldn’t you take advantage of this if it is available to you? (I’m not an accountant, so be sure to consult yours.)

To sum it all up, this may be the best time in history to buy a home. However, as with all good things, this too will soon come to an end. As the government disengages from the treasury market and discontinues the incentives (due in April 2010), equilibrium of the free market will begin to return and the window of opportunity will begin to close. Mortgage rates rise, inventory declines and prices increase.

In case you don’t know what it looks like, THIS is the bottom of the market.

The beauty of a blog…

The true beauty of a blog is not just in the sharing of information, but also in the creation of a platform for dialog. Sometimes I get some feedback on my posts, and sometimes it just spins off into cyber-land without ever knowing if anyone hears it. Kind of like the age old question of “if a tree falls in the woods and no one is there to hear it, does it make a sound?” I never have heard a satisfactory answer to that one, except for the fact that the sound waves are indeed created, regardless of the recipient. In a nutshell, that is blogging. And in some respects that is politics too.

To be honest, something has been torturing me for months and I must to get it off my chest. I am completely mystified and perplexed by the blatant lack of understanding of the real issues in this country on the part of our leadership…on both sides of the political isle. It seems that not one single person in Washington understands that “IT’S THE ECONOMY, STUPID!” Absolutely nothing else matters until the economy – the engine of this locomotive – is healthy again. Nothing else matters!

Here is an undeniable fact: 51% of all private sector jobs in America are created by small business, aka The Entrepreneur. These are the people who despite the strongest headwinds of governmental interference (read: deterrence) in the history of this country, are out there every day taking huge personal risks in the perpetual quest to serve their clients and make a living. They are the ones who have stuck their heads above the sand and are straining against almost overwhelming odds to build something that will hopefully change their family tree, all the while creating jobs and generating wealth for those all around them. Sometimes, those around the entrepreneur are the only ones who see the wealth, since everyone else always get paid first. Yet there is something fundamental to the DNA of the entrepreneur that drives him forward, day after day, against all possible obstacles. The mindset of the entrepreneur can no more be understood by the non-entrepreneur than the human brain can comprehend the infinity of outer space.

Yet despite all the obstacles to the effort, the entrepreneur still persists in getting up every morning, leaving the cave, killing something and dragging it home. This is THE engine that drives our economy. So why has the entrepreneur and small business been so TOTALLY ignored in everything our government has done over the past 18 months???

Not only ignored mind you, but punished! Here’s a true example: one small business owner that I know very well lives in a home comprised of 5000 square feet, in a nice neighborhood and was appraised last year for just over $1mm. This guy (let’s call him Bill) has worked hard, living on beans and rice for years, in order to accumulate sufficient resources to build such a nice home. He didn’t cheat or rip anybody off to do it; he simply WORKED LIKE A DOG, lived beneath his means and SAVED his money – very unusual concepts in our society today. This house was the result of 15 long years of effort. In other words, he chose to delay gratification so he could build a house like this someday.

Having just come through this depression (yes, I used the “D” word) Bill realized that under current management this country will probably experience another of equally serious magnitude within the next 7-9 years. Since Bill is now 50, that means the timing on the next big dip will be pretty close to his targeted retirement age. Not wanting to go into the next recession with the overhead of a larger home (high HOA fees, high utility bills, etc) Bill decided recently that it would be logical and wise to sell the big house and downsize to one of less than half the value of his current house thereby lowering his overhead. Even though this is the worst time in 15 years to sell a big home, Bill is ok selling at today’s reduced prices because he made good decisions, managed the construction of his big home wisely, and unlike many others, didn’t use his home equity like an ATM machine. After the smoke clears he should be able to put about 40% down on the new home.

Here’s a summary of the scenario: Bill has a 780 credit score, earns well into the 6 figures in income each year, in addition to having the 40% down payment on the new home. Keep in mind now, Bill is downsizing and reducing his monthly expenses. This type of buyer should have the mortgage guys drooling down their shirt fronts to do a mortgage for him, right? I mean everybody knows from TV that in today’s secondary mortgage market a person who works at Wal-Mart or some other major company, has a 580 credit score and debt to income ratio of 45% can get an FHA (government guaranteed mortgage) with as little as 3% down at a rate of LESS than 5% for 30 years.

Bill’s deal should be a slam dunk, right? Well guess what? BILL HAS BEEN TURNED DOWN BY SIX BANKS!

You see the problem is that Bill is an entrepreneur so his personal finances, like his life, are inextricably intertwined with the company he owns (two of them actually). He lives and breathes his company that provides over 120 jobs and has about $40mm in annual sales. The success and survival of that company is his raison d’être – his reason for being on this earth. Yet, because his company is set up as a Limited Liability Company he pays thousands of dollars each year in taxes to the Federal, State and Local governments, but reports his personal income on a K-1 schedule and a 1096 form. His taxes are paid through the company, not on his personal income tax return. In fact, he strives every year to reduce his personal income tax liability because to fail to do so means paying double taxes. Remember, he paid taxes on the income through the company, but the income also flows through to him personally so if structured wrong, he will pay taxes a second time on the same income.

Unfortunately, the documents that Bill can provide are no longer acceptable as income verification within today’s underwriting guidelines. Meaning, Bill cannot PROVE his ability to afford this new home to the satisfaction of a clerk in a cubicle 800 miles away who operates on the new guidelines established by Fannie Mae and Freddie Mac. The two institutions that were nationalized this year by our government and now control who gets a mortgage and who is denied a mortgage in this country. All of this occurred under the oversight of your congressional leaders and sanctioned by the last two presidents.

Let me paint this comparison clearly: a man who has worked all his life to build a company, lived within his means, saved his money, created untold wealth and employment for others, is DENIED the opportunity to do the responsible thing and REDUCE his overhead. While somebody else possessing a very low level of personal responsibility, spending almost half of every dollar they earn on debt payments, can get a cheap mortgage at the drop of a hat!

An absolutely astounding side note to this story is that one banker actually recommended to Bill that he not maximize his deductions so that his documents would be more appealing to the underwriters. Imagine the audacity! Send more money to the IRS so Bill can qualify for the same deal as everyone else, but even then the interest rates would be at least two full points higher, all because he is self employed.

Is it just me or is something bad wrong with this picture? I wish I could say this is a made up story, but sadly, it’s all factual. This actually happened to Bill and its happening to others just like him every day.

The net effect of the current mortgage environment is to not only stifle the entrepreneurial spirit in this country, but to actually PUNISH those who step out and become small business people. Like I said earlier, small business provides more than half of all jobs in this country. Guess what happens when it gets too tough to do business here? The entrepreneur folds the tent and goes where he can feed his family. (Of course the government only wants him to fold the tent, and go to work for the latest company they just bailed out.)

While we publicly argue about healthcare reform, are involved two (soon to be three) wars, and continue to throw good money after bad by bailing out grossly mismanaged corporate entities, ROME IS BURNING! Precious little more than lip service is being done to address the plight of the small business person in this country. He and she are perpetually dumped on but like the little energizer bunny, they just keep on ticking. Fighting hard to keep the nose above water and live through the blizzard of garbage that heads their way. Pretty amazing!

Issue #2 that keeps getting ignored by our leaders is housing. Did you know that the single largest segment of the Gross Domestic Product (13.2% or so) is housing and housing related industries? It seems simple then that any moron can figure out that how the housing industry goes, so goes the economy. Yet this continues to be the elephant in the room that everyone in DC wants to ignore, EXCEPT where they can manipulate it for power or votes. But that’s a whole different dialogue for another time.

All I can say is that it’s your tax dollars at work. Hope you saved some of what little you have left for what is yet to come.

If your home lost value last year, you were in good company. 

The estimated value of the White House has dropped 5.1 percent—from $308 million to $292.5 million—in the last year, according to real estate Web site Zillow. Homes across the United States declined in value by about 5 percent, so the 132-room mansion is following the national trend.

The 5.1 percent decrease in the value of the White House is an improvement over its 7.2 percent decrease in 2008; and the nationwide 5 percent drop is a major improvement over the 11.9 percent average decrease in 2008. The White House, designed by an Irish architect and built in 1792, totals 55,000 square feet and sits on 18 acres.

Good thing the President isn't contemplating a cash out refinance, eh?

This why it is important to pay attention to what our government is doing, why it's important to have discussions with our kids about politics.  If we, as a people, are more interested in "The Biggest Looser" than we are in what is happening in Washington, we shall all wake up one morning and find ourselves in a completely different world.  Please read the following and pass along to others who CARE about this nation...

THE NEXT BATTLE: STOP SOCIALISM

By DICK MORRIS

Published on DickMorris.com on January 19, 2010

After Obama succeeds in jamming health care changes down the collective throats of his embattled constituents, his next move will be to bring overt socialism to the United States in the guise of regulatory reform.

The legislation he seeks to pilot through the Senate (it already passed the House) literally gives the Secretary of the Treasury the power to seize any company in any sector which, in his judgment, is in danger of insolvency and whose failure would cause systemic damage to the national economy (aka - too big to fail).

Once the government has seized a private business under this horrific law, the Secretary of the Treasury is empowered to fire its management, replace its board of directors, wipe out the equity of its shareholders, and close any divisions or parts of it he wishes.  Fidel Castro and Hugo Chavez would envy such power.

Exploiting concerns that another global meltdown might be around the corner, the Obama legislation effectively brings socialism to the United States.

There's no other term for it.

Even the existence of such enormous power will have a chilling effect on economic decisions and political freedom.

CEOs of large companies will be constantly looking over their shoulders, worried about government seizure.  Since there is no objective standard built into the bill - such as bankruptcy - they will never know when the feds will swoop down and lock the doors.  This policy of economic terrorism will influence investment decisions, lead to companies scaling down their size just to avoid seizure, and refusing to take risks which, while good for job creation, might mark them as potentially insolvent.

Politically, corporate executives will have to think long and hard before they donate funds to Obama's political opponents or antagonize the Administration.  The standards for government seizure are so flexible and judgmental that a political conflict can easily escalate into a corporate seizure.

This bill is Obama's plan to bring socialism to America.  He will use the power this legislation confers widely and ruthlessly to force corporations to do his bidding, follow his policies, or face the prospect of seizure.

Corporate executives, in particular, will come to feel - rightly - that their jobs are on the line if they don't keep their relations with the Administration calm and smooth.  Imagine if JFK had had this power when he balked at steel price increases in 1962.  Or, if LBJ had used this power to coerce support for the War in Vietnam.  Of if Nixon was able to use this kind of power in pursuit of those on his list of enemies.

This legislation, while cloaked in obscure language and replete with bureaucratic gobbledygook, is a dire threat to our freedom.

It is part of the socialist trio that animates Obama's program:  regulatory "reform", cap and trade, and health care.  Among them, these bills will give him power over all major businesses, all utilities, all manufacturing industries, and all health care providers.  There's not much left.

If Massachusetts delivers for democracy and elects Scott Brown to the Senate, we have a good chance of stopping the two legs of this triad that are still pending - regulatory reform and cap and trade. 

Parts of the regulatory reform bill are OK.  The consumer agency it contemplates could do good things.  But one suspects that these provisions are just window dressing to disguise the massive power grab behind the bill.  Never before has our government had the power to seize corporations at will.  And it certainly has never before been based on such subjective criteria.

But these issues may not excite the massive public opposition that health care reform did.  The average American may not realize how dangerous these bills are. But we must mobilize and stop them from passing. 

To preserve our freedom.

http://tinyurl.com/DickMorrisTHC

Go to DickMorris.com to read all of Dick's columns!

Sorry so long to get this out. By now it’s probably old news to you, but at least I don’t varnish it like the media.

Some numbers are trending in the right direction, some numbers cooled a bit. Overall, the feeling in the market could best be described as cautious anticipation. I say the because while some of the numbers are down, they are only down slightly and it feels like the sun is just over the horizon. Maybe that’s wishful fantasy after this cold, dark night we have been in for 2 years, but still things do feel like the burden is lessening. And that’s a good thing.

Of course in every chart the purple line represents 2009.

Merry Christmas to you and yours!

Q. My wife and I are interested in investing in real estate. What should we know before we jump in and put down our money?

A. Investing in real estate can be a very profitable investment, but there are a few things you should know.

• Financing investment properties may have a higher interest rate than in a home where you reside. You also may be required by the lending institution to have a larger down payment.

• The secret to making money is to buy right. Choose a property that will appreciate over time. You want to buy an “average” home in a very strong neighborhood or area – then improve the property. Be particularly careful about the location of the property, and any future changes to the area.

• If you are handy at making repairs, and available to make them, buying a fix-up property can be profitable. Make sure you choose a neighborhood where the houses are well-maintained at a higher value.

• Lastly, you’ll need to become knowledgeable about landlord tenant legal issues whether you lease the property yourself, or enlist a management company to handle your property.

If you have any questions, or if you are buying or selling real estate and need competent and professional representation, please call us at (615) 371-1544.

Making Small Talk

Have you ever found yourself at a meeting or social event and been at a loss for words? Making small talk isn’t random. It follows a formula, says Bernardo Carducci, author of The Pocket Guide to Making Successful Small Talk. Carducci says you can anticipate where the conversation is going and plan ahead. Here are some tips to follow:

» Look for someone not talking with a group and use a simple opening line, “This appetizer (food) is great!” Or, mention something about the building or room. Then introduce yourself.

» If a conversation stalls, you can restart it with a compliment. “That’s a great suit (tie, jewelry, color of clothing), you’re wearing.”

» If there’s someone you want to talk to (but they’re talking in a group), meander over, introduce yourself to others in the group and soon enough you’ll be able to talk directly with that person.