Zillow Chief Economist Stan Humphries confirms what I"ve been saying for five years now; Millennials prefer renting to owning a home. Millennials can be defined as the generation born from in the early 1980s to the early 2000s. If you want to be more definitive, let's say 1981 through 2002 (or today's 12-33 year olds.) This is a HUGE demographic, some 80-90 million Americans.
They ain't buying homes. Here's why:
(1) older Millennials got burned in the real estate boom and bust last decade. They were the "last in" on the Federal Reserve-induced boom and bought at the top of the market. When the balloon popped, they got caught holding the bag. So many of them short sold those properties or lost them in foreclosure because...
(2) ...they don't have the income. 1in 7 can't find work and over 4 out of 10 of the best educated millennials are underemployed.
(3) they have a giant debt-load, thanks to the student loan program.
(4) Millennials are mobile, uncommitted, and untethered by choice. Laying down roots doesn't appeal to this financially-strapped generation. As they struggle to find meaningful, well-paying work, they are postponing marriage and child-rearing--two key factors which encourage home ownership.
What's that mean for San Diego real estate? As millennials postpone the home purchase decision, the median age of first-time home buyers will rise. The linked article about the Zillow research suggest it could rise to as high as 33 years old (nationally) by the end of the decade--that number was around 28 years old last decade. In San Diego, we typically add 3-4 years to the national average because of our high home prices. Stated simply, we may not feel the full effect of millenial homebuyers for another 15 years.
How can an investor capitalize on this? Give 'em what they want--rental housing. As wage inflation kicks in, there will be an upwards pressure on rents. As rents rise, the price of multi-family properties rises too. Investors can purchase 3-4 unit properties today, with 25% down, and have positive cash-flow based on existing rents. There are over two dozen properties for sale today in San Diego County, three of which are in Oceanside (my favorite investment location) which meet the positive cash-flow test.
I think you're going to see rents double in the next 10 years and I believe multi-family properties could increase as much as 50% in value during that time. Investors have a chance to double or triple their money in the next ten years. Contact me to analyze the numbers and risks associated with this advice.
Mortgage bonds had a rocky ride this week but still finished at the same level they did last Friday. Wednesday spooked the market and it dropped a half-point, suggesting that rates would rise .125%. Unexpected strength today buoyed the market and kept mortgage rates at their July, 2014 levels.
You can follow the national average mortgage rates at Bankrate.com. San Diego mortgage rates tend to be .125% LOWER than the national average. Average rates as of Ausust 1, 2014:
30 Year fixed conventional average= 4.21%
15 Year fixed conventional average= 3.28%
30 year fixed VA/FHA average= 3.75%
30 year fixed VA/FHA jumbo avg.= 4.125%
5/1 adjustable rate conv. average= 3.53%
CAUTION: San Diego home prices up but the price increases are decelerating. That's fancy double-speak for "you're making money but not as quicly as you did last year". I don't know if that's the beginning of the end of the boom or the beginning of the boom. Let me explain:
Six years ago, I said to pounce on the homes under $400,000 because the median income was well above the amount required to support a mortgage on a median-priced home. I was right; those home are all up at least 20% (which means you would have doubled your down payment investment in 6 years). Today, median income does not support a mortgage for a median priced home. That sends a cautionary signal to me UNLESS....
...there will be inflationary pressures on wages. Wage push inflation is usually the last part of an inflationary cycle. Anyone who eats or drives a car knows that price inflation is real but wages haven't kept up with commodities prices increases. It looks like wages are about to explode. That's good news for real estate prices as it introduces a whole new round of buyers, willing to pay higher prices for homes.
While caution should be shown towards home prices, we could see another 20-25% upside in San Diego home prices, then everything turns to $***. Maybe. Bottom Line: buy what you can afford, live in it, and think long-term in real estate. Flippers will eventually get burned.
Should you buy a home or rent one, in San Diego?
As always, that depends. If you're looking for a home in La Jolla, you may never find a one which is less expensive to own than rent, in today's dollars. The physical beauty of the seaside burg is stunning and La Jolla has traditionally traded at a steep premium to rent v. own parity.
Nick Timiraos suggested that buying conditions are getting better for San Diego, in the Wall Street Journal:
Home ownership is also looking more affordable because after several years of declines, apartment rents will rise by around 4% this year, says Mr. Nadji. He says rents are poised "to pick up even more momentum across the country next year."
Rising rents are one reason a would-be home buyer should consider purchasing a La Jolla home rather than waiting for prices to reach parity there. If inflation kicks in, and onc day it will, rents could increase a level far above what the mortgage payment, for a La Jolla home, would be today.
Even cities where it is still cheaper to rent than own have seen big boosts in affordability. In San Diego, the monthly cost of owning a home has averaged around 83% more than renting over the past two decades. During the third quarter, owning was 22% more expensive than renting, according to John Burns Real Estate Consulting
Take note of this figure. In many San Diego sub-markets, (mostly the beach cities), housing prices will never reach parity with today's rents. Like the La Jolla example, inlaftion may cure that in 2-3 years. Still, some San Diego County markets have already reached parity meaning, it's cheaper to own rather than rent. Even in some beach cities, like Oceanside or Imperial Beach.
I searched active Oceanside homes for sale and found one which is listed for $189,000. With about $7,000 down payment, and an FHA loan with a 4.88% APR, the monthly mortgage payment would be $1250, some $50-$100 below what it might fetch in rent. That's one of many Oceanside properties which are at or below parity for the rent V own model.
I also found plenty of similar opportunities while searching for homes for sale in Chula Vista. There were many more recently built homes, which command premium rents, listed under $250,000.
San Diego entrepreneur Bill Lyons intends to make these home searches easier when he releases his new website, Revestor.com. Revestor organizes current listings, by capitalization rate or cash flow, to offer homeowners a chance to "rate" properties, by comparing the listed price to current rental data.
San Diego is still selling at a slight premium but this may be as good as it gets. If mortgage rates continue to stay low, because of the Fed's printing press and quantitative easing, the bubble for low rates will soon pop, and inflation will kick in. Locking in a price, and a low mortgage rate, might be the best way to insure you won a piece of our sunshiney paradise.
Posted at 11:02 AM in Blue Collar Beach Towns, Current Affairs, Da' Fed, Economy, FHA Loans, Financial Planning, Investment Strategies, La Jolla Real Estate , Mission Valley Condo Loans, Mortgage Financing, Mortgage Rates Report, Opinion, Real Estate, Recession, San Diego Condo Loans, Solana Beach Real Estate, Triple Crown Condos, Value Investing, Veterans Admin Home Loans | Permalink | Comments (0) | TrackBack (0)
Okay, the last secret I told you about was how to compile a credit and income package for a lender so you could get accurate quotes and pre-approvals. Now, I'm going to tell you how to shop for the right loan originator.
I have always stated that you should be shopping mortgage consultants not loan programs but this double-barreled article will help you do both. Understand this first. You are NEVER going to get the absolute best rate offered on a home loan; it's impossible to determine what "best is:
Instead, you should be shopping loan originators. You should spend some time online and on the phone getting to know the originator before you give her a copy of your "credit" package to receive a quote.
You should get a list of 5-6 loan professionals and spend 10-15 minutes on the phone with them. Where do you find these people? Here are some sources for "leads' on good loan originators:1- Call Brian Brady immediately 858-777-9751! Okay, I'm sort of kidding but I can be a source for you because you have enough interest to read my article this far. My point is that you've already met one originator online.
2- Ask your Realtor for a loan originator whom she trusts. If you don't have a Realtor, yet, use that as leverage in your hiring process. Explain to the 2-3 Realtors you're interviewing that you consider their recommendation of a loan source to be an integral part of their service offering; you'll get a great response.
3- Go into your local bank and tell the teller that you are thinking of buying property. That teller gets paid $25 to refer their in-house mortgage salesperson so he'll be all worked up.
4- Call your CPA or tax preparer and announce that you need a home loan. If the CPA offers to help you with it, get a new CPA. There is a growing trend among tax professionals to provide financial services like mortgages and investments. I can't speak too intelligently about the investments side but there are two problems with CPAs offering home loans: (a) they offer horrible advice. (b) their inexperience usually ends up costing more.
5- Stockbrokers and financial planners are usually good sources. These guys understand investments and leverage so they know a few of us who can integrate your mortgage into your financial plan. I have found that when I work with a stockbroker, the client gets great advice and a loan that makes sense. if you don't have a stockbroker, ask the richest person you know for a name (I'm not kidding about this). Some stockbrokers offer mortgages; again, stay away from that for the same reasons as CPAs.
6- Ask someone who owns more than one property who their mortgage gal is.
7- Ask a small businessperson (with whom you're friendly) who their mortgage source is.
8- Ask your brother or sister (or cousin or parents).
Cool! Now you have a list of 6-8 mortgage originators. Should you print off your package and send it to them? Should you e-mail each of them and ask for a quote? Hold on, amigos ! Remember I said to shop for loan originators and not loan programs? The loan terms shopping comes after you've isolated 2-3 originators with whom you want to do business.
My next article will tell you how to interview an originator in 15 minutes or less and be certain that you have the right people.
Investors with money stuck in an IRA,or old employer's 401-k account, have traditionally shunned real estate as an investment. Custodial fees were high and there was no way to leverage the property through an IRA. There may be a solution.
Consider a non-recourse, loan to the IRA. Real estate investors can get a commercial loan, directly to their Individual Retirement Account, through our IRA mortgage program. A brief rundown:
Not all IRA custodians will be able to administer real property holdings. A short list of custodians for real estate investments includes:
I participated in a live chat with Turbo Tax VP, and Certified Public Accountant Bob Meighan today. I had two pointed questions for him:
MEIGHAN. The homebuyer credit is a "refundable" credit, which means that you get the full credit regardless of your tax liability. In other words, the IRS will send you a check if your credit is more than the tax liability/withholding.
BRADY. If the transaction closes on or after Jan 2, 2010, can the home buyer still claim the tax credit on their 2009 tax return? If the transaction closes after April 15, 2010 (but before June 30, 2010), would they file an amended return for 2009?
MEIGHAN. The beauty of the homebuyer credit is that you can get the credit dollars pretty fast. So, if you purchase in 2010, you have the option to claim the credit on your 2009 return (either the originally filed one or even an amended return). By doing so, you get your credit dollars now (or relatively soon) versus having to wait to claim the credit on your 2010 tax return (which would be filed in 2011).
Other questions asked in the chat about the Homebuyer Tax Credit:
Q. What will be the earliest day I will be able to file online this year?
MEIGHAN. TurboTax Online is up and running now. While not all IRS forms are final yet, most should be final by January 1, 2010. So get ready and get going. By the way, if you'll be claiming one of the homebuyer credits, you may have to wait a few weeks because the credit form for this won't be final from the IRS until sometime in January.
Q. Can you tell folks the top 3 things EVERYONE should know about this credit....at a very high level?
MEIGHAN: Three things you need to know about the homebuyer credit:
1. The credit is available to first time AND existing homebuyers. The credit amounts are $8000 and $6500 respectively. And pay attention to the rules. For example, a first time buyer simply means you have not owned a principal residence in the last three years.
2. The purchase date has been extended to June 30, 2010, but you have to have a signed contract in place by April 30, 2010.... See More
3. Those claiming a homebuyer credit on their 2009 return will have to paper file the return. The IRS will NOT accept the return electronically because they need a copy of your settlement statement to substantiate your purchase. Having to file a paper copy of your return is big disappointment because it will delay your refund from days to weeks.
Q. Would a current homeowner be eligible for the extended Homebuyer
Credit if they purchased a second home in another state this year? They
did not sell their current home, but were told by their Realtor that
they can claim the credit.
MEIGHAN. As long as you owned and lived in the existing home for at least five consecutive years of the eight years prior to the purchase date of your new home, you may qualify. There are other requirements like income and purchase price, but otherwise you should qualify. By the way, there is no requirement that you sell your existing home.
Q. Can a home buyer file with TurboTax.com with the home buyers credit?
A. You can use any version of TurboTax to claim the first time homebuyer credit. However, you won't be able to file until sometime in January when the IRS releases the final form for claiming this credit. Also, those claiming the credit will have to paper file their return because of the IRS requirement to attach your closing statement. This paper filing requirement is true for ALL filers, regardless of whether you use tax software or go to a pro.
For more information, read the December 17, 2009 TurboTax Blog post about the home buyer tax credit.
To purchase Turbo Tax for 2009, click here
Higher mortgage rates, in the near-term future, is the conclusion of many economists. They cite an expansion of the money supply, the eventual end of the Fed's mortgage-backed securities purchase program, China's willful selling of US Treasury securites, and a recovering economy. Logic dictates that all those factors would contribute to 70-s style hyperinflation. I agreed until it hit me...
A generation of Americans may have changed their spending habits forever. If sustainability is the new black dress, frugality is the new accessory. Consider this parsed comment by my partner, Sean Purcell:
Religion and economics are very, very similar. They are both based on faith rather than any real, empirical evidence. For decades now economics has tried to establish itself as science in our institutions of higher learning. I remember in the 80s when I was a Psychology major we were doing much the same thing. But Religion, Economics, Psychology.. these are all Social Studies not Social Sciences.
American consumerism was driven by belief in a grander future due to an underlying model. Our post-9/11 model was debt-driven. At one point, a full percentage point of our GDP came from withdrawn home equity; we were robbing Peter to buy from Paul. That strategy was hardly sustainable and not in concert with the frugalty associated with the "American Spirit".
The Fall, 2008 financial meltdown changed that flawed belief in deficit spending (for households). As 'wealth" evaporated, a function of that "wealth", (i.e spending), evaporated as well. Plainly put, you're less likely to spend an extra hundred bucks each month if you lost five grand in your mutual fund. I can't scientifically tell you exactly how much that will affect future GDP but I'm speculating that it removes at least 1-2 percentage points from it. Tightening the belt is not just removing the frothy spending; it contracts spending to the point where you try to "get back your losses". Not only will you cut back on that former expenditure of $100/month, you'll cut back MORE to save $100/month- and you'll do that for the fifty months it takes to get back your losses.
Patagonia is cashing in on the rebirth of American frugality with it's T-shirt. I saw at least ten people wearing these shirts on my vacation to Catalina Island. Americans are questioning restaurant checks, asking for itemized business proposals, and spending time on hold to understand why the local utility provider is collecting "franchise fees" (HINT: it's a tax). We're embracing the simple life and de-cluttering our garages, homes, offices, and lives. It is no longer fashionable to conspicuously consume because your neighbor is wondering if his tax dollars are bailing out the mortgage you used to buy your Hummer. We're seeing inconspicuous consumption in the luxury market. Wealthy people are not comfortable displaying signs of opulence (even though they earned it):
"Luxury shame is very real," says travel industry analyst Henry Harteveldt of Forrester Research. "When your neighbors are losing their jobs and you're doing well, you don't flaunt your success. Of course, there are still people who will continue to enjoy the fruits of their success. They may still rent the beachfront home and continue to fly in the G5 and tool around in the leased Bentley, but they're not going to go home and brag that that's what they did on vacation."
This recession is different from the last big one. The last severe recession was in the early 80's. The Baby Boomers led us out of that recession because they were 20-40 years old; they were still in the acquisition part of the family wealth cycle. Today, those folks are 45-65 and facing reduced income and a longer life span; they're in the conservation part of the family life cycle. Their political heroes have changed from Ronald Reagan (who gave them more money to spend through tax cuts) to Barack Obama (who tells them they won't have to pay for anything). For President Obama's "Care State" to work, he'll have to raise income taxes on the people still working...that "ain't goin' over so good".
Cheap is cool now because cheap suggests future cash in the bank. If a generational shift from conspicuous consumption is underway, economic expansion will be reached with 1-3% GDP growth rather than 4-6% GDP growth. Slower growth rates will contract P/E ratios, leading to stagnated stock prices. Slower growth will lead to lower price/rent ratios, leading to stagnated real estate appreciation.
Slow and predictable growth could lead to a long period of stability in the mortgage markets.
Today's Federally-subsidized mortgage rates are a full percentage point below the real cost of mortgage capital. Jumbo loans, with no Federal guarantees behind them, are currently 6-6.25%. A growing economy could see those rates rise to as much as .7%. When the Fed pulls its mortgages subsidy, we could see conforming mortgage rates rise to about .25%-.5% below the jumbo loan rates.
What this means is that we could see conforming mortgage rates (under $417,000) jump up into the 6's and fluctuate from 5.75% to 6.75% for another 5-7 years. Admittedly, that's materially higher than the current level but a far cry from the double digit mortgage rates world of 1977-1990.
What's that mean to you?
If you have a loan that can be refinanced before the end of the year, do it. If your loan can not be refinanced, and you have an adjustable rate mortgage, you might not have to hit the panic button. Most ARMs adjust to LIBOR plus 2.75%. Today, that adjustment would go to about 5.0%. Your ARM could very well remain in the 5-6.5% range, for the next five years if my newfound theory of anti-consumerism is correct.
Investors take notice! Phoenix home prices led the nation in declines:
The Case-Shiller indexes compare the sale prices of the same homes each year to determine price trends and are considered one of the most accurate home price gauges.
The hardest hit of all 20 cities on a year-over-year basis was Phoenix, where prices plummeted 30.7% during the past 12 months. Las Vegas prices plunged 30.6% and Miami sank 28.1%.
Phoenix real estate broker, Greg Swann of Bloodhound Realty, assembled a list of 100 homes listed for less than $100,000. Greg reports that not EVERY home on the list is tenant-ready but that there are gems hidden among the heap of lender-owned properties:
Click on this link for a PDF file of listings for 100 potential rental homes selling — right now — for $100,000 or less. These are lender-owned homes, so they’re going to be fixers. And some of them will need so much work they’re not worth bothering with. But some of them will need next to nothing — $5,000 or less in repairs — and they will be cash-flow positive from the very first tenant.
For the most part these are not Cadillac homes, but they still have a lot going for them: 1,400sf and above, stucco and tile, built 1995 or later, with back yards and garages. These homes can attract decent rents — $800 and above in most cases — and many of them will be appealing to owner-occupants on resale.
I sell a lot of rental homes, and the homes I sell stay rented. A list like this might produce ten workable rentals. But they’ll be choice rentals, attracting premium tenants and selling at a premium price when you’re ready to move on.
Investment properties make good sense when leveraged to the point where the rental income covers all costs. Most mortgage lenders require 25% down for the best rates. On a $100,000 property, that means that an investor will need some $30-35,000 for down payment, closing costs, and repairs to make the home tenant-ready. A $75,000 loan will most likely have a PITI payment of about $600.
I think you'll be blown away by his answer.
Sean Purcell and I recorded a 15 minute episode this afternoon about what the stock market crash means for working REALTORs. We may come across as a couple of polyannas but we think the stock market might get some respite from…Columbus Day.
We talk about the great opportunities for investors and how REALTORs can court them.
Originally posted on Bloodhound Blog