Phillip's Blog

Almost on a daily basis, I am asked questions by folks who have read a book or watched a show on HGTV and want to flesh out their understanding of issues related to real estate. Most of what we see on TV and read in magazines or (in some cases) books is put there for pure entertainment value. Or as is the case of TV and newspapers, to sensationalize a topic in order to gain the attention of the pubic. So how does one get to the facts??

My dad, or someone I once knew, said that if you want to know the truth about something, ask someone who knows. So in that theme I have begun collecting the various questions I have received over the past months and will publish them here, along with the answers. Hopefully this will help the readers out there, or at the very least give you something to do when you can’t sleep at night. So here goes . . .

Q. We Want to Buy Land and Build Our Dream Home. What Advice Can You Provide On Buying Land?

A. Buying land can seem daunting to most homebuyers, but if you’ve decided to build your own home, there are a few basic guidelines that can make the process go more smoothly.

First, know your budget...and do your homework! Interest rates and down payments can be higher for land than for home buying. And the financing term is usually shorter. Before you begin your land search, sit down with a loan officer to discuss interest rates, down payments, and construction loans.

Second, determine your building costs. Talk with several local contractors to find out what the average price per square foot is for a home that you are planning to build. Make sure to include all costs, including land, architectural design, direct construction, landscaping, taxes, permits and other fees.

Third, decide on an approximate location, size of lot, and features you want. Make a list of features you want the property to have. Find out if the land is suitable for the type of home you want to build. Examine lot views, home sighting, topography, drainage, and the impact neighboring lots may have.

As a rule of thumb, in Williamson County most builders try to work on a 5 times lot cost. So if the lost cost $100k then the total cost of a house on that lot (including lot cost) would be around $500k. No one has ever demonstrated the validity of this pricing model to me, but that’s another blog. Recently, due to the current state of the new construction market, I have been seeing some builders moving product for 4.5 or even 4 times the lot cost. I don’t know how long that will last but it creates a real opportunity for prospective buyers.

Another thought to keep in mind is to talk to various builders before you buy a developed lot. Most of them will cut a deal with you by purchasing the lot, building the home and then selling you a turnkey package. Really this is better for you and the builder, mainly because what happens if things go sour between the two of you? His house is sitting on your land…that’s a problem.

Buying land can be tricky and requires someone knowing what they are doing to look over your shoulder. There are many things to consider, such as: Is the land build-able? Are there any neighborhood covenants or restrictions that could limit your building plans? Is there suitable drainage? Are there any environmental hazards like buried toxic waste, or gas lines? Make sure you study all aspects carefully before purchasing land.

If you are trying to figure market timing on making that leap…forget about it! Just like buying stocks or any other investment based on timing your move to a market high point or (in the case of real estate) a low point – it’s a BAD idea. Every expert in any field will tell you: buy when you are ready, not when your “Uncle Joe” thinks it’s a good time to move.

With that said though, you definitely don’t want to buy and then watch the value of your investment take an immediate decline. Fortunately that has never been a real issue to worry about in the Greater Nashville area. While the market may be “down” that is truly a relative term. “Down” from what? In this market, the “down” means that the rate of increase is not as high has been in previous years, on average.

Now this morning, we have the HUGE news that the Fed has cut the Federal Funds Rate 75 basis points or ¾% following an emergency phone conference and one week prior to the regular meeting...the largest cut since 1994. That's THIRTEEN (13) years ago folks!!

While this rate does not have direct impact on mortgage rates, it does have an indirect impact and it’s kind of funny how rates are falling out, relative to the product type. The other day I posted the latest mortgage rate averages which were way down from this time last year. Well, check out today’s average rates as published in the Wall Street Journal:

        30 year Fixed             5.42%
        15 year Fixed             4.93%
        30 year Fixed Jumbo     6.46%
        5/1 ARM                     5.12%
        5/1 Jumbo ARM            5.62%

When was the last time you say an ARM with a higher interest rate than a Fixed Rate mortgage? And when was the last time you saw a 15 year Fixed with a rate below 5%??

Getting back to the original theme of this blog, here are some indications it time to buy:

Inventories Start to Decline: That means the best buys are leaving the market and “best” doesn’t necessarily mean “cheap”. It means the homes with the highest likelihood of profitable resale. The most desirable homes will leave the market first. Here’s the current inventory chart:

Days on Market Decline: this refers to the number of days a home is listed for sale on the MLS and is also known as “DOM”. When the DOM shortens, that signals a coming sellers market. Watch this indicator carefully, it hasn’t started to drop yet, but we are right on the verge. Here is the current Days on Market chart:

Interest Rates Decline rapidly and Mortgage Applications Increase Rapidly: we talked about this earlier with the drop in mortgage rates just since this past Friday. What do you think will happen when the indirect impact of the Fed rate reduction filters down to the mortgage market over the next few days? They’ll be lining up to get money, that’s what. And as we know, when demand increases, prices (in this case, rates) increase.

Prices Remain Firm or Rise: this one is self explanatory if you understand basic economics. Prices are a product of demand. In a tight market, sellers reduce their prices and offer more incentives. If homes sell reasonably well, prices won’t move downward – they move up. It’s about supply and demand. More demand = higher prices. Here is the current pricing chart:

Now is the time to buy a better house while prices are steady (but beginning to increase), interest rates are low, and inventory is still high (but dropping). Move now, before it becomes a sellers market this spring!!

30-Year AND 15-Year FRM At Lowest Level Since July 2005

McLean, VA – Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 5.69 percent with an average 0.5 point for the week ending January 17, 2008, down from last week when it averaged 5.87 percent as well. Last year at this time, the 30-year FRM averaged 6.23 percent.

The 15-year FRM this week averaged 5.21 percent with an average 0.4 point, down from last week when it averaged 5.43 percent. A year ago at this time, the 15-year FRM averaged 5.98 percent.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.40 percent this week, with an average 0.6 point, down from last week when it averaged 5.63 percent. A year ago, the 5-year ARM averaged 6.04 percent.

One-year Treasury-indexed ARMs averaged 5.26 percent this week with an average 0.6 point, down from last week when it was 5.37 percent. At this time last year, the 1-year ARM averaged 5.51 percent.

"The latest retail sales report indicated that shoppers scaled back spending in December, as retail sales declined by 0.4 percent from November's level," said Frank Nothaft, Freddie Mac vice president and chief economist. "Particularly weak were sales of building materials, garden equipment and supply stores, which fell by 2.9 percent from the previous month. The declines aggravated concerns about the well being of the economy and exerted downward pressure on mortgage rates.

"Mortgage rates moved down across loan products for the third consecutive week. Average rates on 30-year fixed-rate mortgages (FRMs) and 15-year FRMs are at their lowest since July 2005. The results from this week's survey mark the first time in seven years that the average rate on the 15-year FRM is lower than the average rate on 1-year adjustable-rate mortgages (ARMs)."

Source:  Freddie Mac's website, www.freddiemac.com

In the ongoing effort to keep you, the consumer, supplied with relevant information, this entry focuses again on the recent market numbers for the Greater Nashville Area.

There has been a lot talk in the media lately about what 2008 will look like for home sales. Some say it’s still trending downward with no recovery until 2009, others say we might have seen the worst of it. My opinion (and I’ll flesh that out in a minute) is that in our local market here in Middle Tennessee we have indeed seen the worst of it and this spring is going to be a banner selling season.

The Greater Nashville Association of Realtors^® (GNAR) and the Williamson County Association of Realtors^® (WCAR) has, within the past two days released the market stats for December on what is happening in this area. Keep in mind that the Greater Nashville numbers are comprised of Davidson County and the 5 surrounding counties that make up Nashville as we know it. While the Williamson County numbers are just for, well obviously, Williamson County. Since our company is located in the Cool Springs area of Brentwood, we belong to both associations and track both sets of numbers. With one set of numbers offering a big picture approach and the other focused in on just our local communities here in Williamson County. Normally the numbers track together in overall trends, although Williamson usually sees more dramatic movements on the trend lines simply because it’s a smaller market.

The two charts below track the Median home prices in Greater Nashville and Williamson County. As you can see, the December numbers are looking more normal for this time of year with an upward kick in prices for the month, kind of finishing out the year with a bang, so to speak.

Greater Nashville Home Prices-Dec.pdf
Williamson Co MediumPrice-Dec.pdf

Another set of numbers that we track is the gross number of units closed for both areas, as reflected in these charts. Again the red line is 2007. While the trend has been downward, the steepness of the slope is easing for Greater Nashville and has leveled off for Williamson County – actually the number of closed units was the same for both December and November. Anything other than a rapid decline is considered a positive event when compared to earlier months in 2007.

Greater Nashville Units Sold-Dec.pdf
WmsonCo Units Sold-Dec.pdf

One more set of numbers that is very enlightening is the current inventory level of available homes. Unfortunately this data is only available for the Greater Nashville area. Yes, the red line at the top of the chart is 2007.

Greater Nashville Inventory Comparison-Dec.pdf 

The bad news is that inventory is at an unprecedented level. The good news is that the decline slope has become steeper over the past two months; meaning that (finally!) builders have begun to slow the pace of new construction. It also means that some folks are just holding off on putting their homes on the market until some of this inventory gets absorbed.

What’s the summary on all this information?? While it is undoubtedly still a buyer’s market out there, prices are beginning to stiffen due to reduced inventory levels. This means the “worm is beginning to turn” as they say, with indicators trending toward a more balanced market. Economics being what they are, the market will always correct itself and that is exactly what we are beginning to see. Less product means higher prices, less product means increased competition for available product, and finally the blood bath for sellers is easing somewhat.

However, I don’t think we are out of the woods just yet, so hold up that jump onto the table and shouting for joy. There still is a ton of inventory out there still to be absorbed, and this being the winter season, the quantity of buyers active in the market is seasonally lower. And will continue to be low until spring.

So, while things look like positive trends, it appears we still have a few months of tough market ahead of us. The key to succeeding in this type of market for sellers is focusing on sound fundamentals – condition and price. Not only do you have to represent a good value in the buyer’s eye, you have to stand out in the noise of available inventory and represent exceptional value. For buyers, take all this as notice that the time for being overly picky is rapidly drawing to a close. Take your time to make the correct choice for you, but move on it while the prices are still reasonable. They won’t get much better than they are today.

Hope all this makes sense to you folks. If you want more clarification please don’t hesitate to contact me, I’d be happy to further interpret this information so you can apply it to your specific situation.

As always, keep us in mind for your real estate needs!