Your Trusted Real Estate Advisor

This email came from a client who is doing some repairs and updating on her home for an eventual move—but three to five years away because she sees the market as weak right now. She also had a question about what to do about her current loan.

“Rates - I spoke w/ countrywide, our lender and with our current 7 year ARM expiring 12/09, it sounded like we’d need to wait to see about a better either short term ( 5-7 year ARM) or get a 30 year fixed, even if we stayed in the house another 3-5 years???

Would appreciate your thoughts – thanks.”

My reply:

It sounds like you are on the right track. If you don’t have to move right now, it’s probably better for you to wait until the market shows definite signs that it’s starting back up.

My one caveat is that if you wait 3-5 years in order for the market for your home to be better, the market for your next home will have improved also. For example, right now it is possible to get a brand new home at a lower price than many resale homes in the same subdivision because the builders are hurting so much they are giving huge incentives. In 3 years those incentives will be gone and comparable new homes will be much more expensive. That 3-year old home which could be purchased today will have a lot of equity. In addition, resale homes that are 1-3 years old now will then be 4-6 years old. Your home will 31 years old, and won’t have appreciated as much.

Actually, I have a 2^nd caveat: although the market for selling your home is tough right now, the selection you would have as a buyer is extensive. With all you’ve done to your home, it would stand out from the crowd of competitors and go fairly quickly if priced right as well. Then you would have an opportunity to pick up your next home at a good price.

With your plans to stay in your current home longer, though, I’ll address your question about rates. You are on the right track here also. Since your current loan doesn’t adjust for another 15 months, you can afford to wait to get an even better loan at some low point in the roller-coaster ride of interest rates. Unless rates drop dramatically in the next few months, waiting probably will help, not hurt you. You’ve got time to wait for something good to come along.

If by this time next year you haven’t seen a good deal on rates come along, then start talking with a lender about refinancing. If at that time you still are thinking about moving within 2-4 years, either another ARM or even a 30-year loan would work, depending on what you can do with closing costs. The primary piece of advice I give clients about refinancing is to, in effect, amortize the closing costs of their refinance. Rather than focus on interest rates, work to get lower closing costs for the refinanced loan.

For example, if the new loan will have $4,800 in closing costs, and you will only save about $48 a month (approximate savings on a $150,000 loan with a drop from 6% to 5.5%), it will take 100 months to break even. Staying less than 8 years in the house after that kind of refinance just means you will have used some of your equity needlessly. So, if you do refinance, try to do it with no closing costs, even it if takes a premium interest rate to do it.

Long-winded, but I hope this helps.

Denver Business Journal reports: Denver home prices up for third month

Denver home prices had a 1 percent monthly appreciation in May, a 1.5 percent rise in June, and 0.8 percent in July. Not great, but this was the second-strongest showing of any of the 20 metro areas analyzed. Click the link above to see the entire article.

There continue to be signs that we may be near the bottom of the downturn in home prices. Perhaps when the current financial crisis gets settled, the bottled-up demand for new homes will be released.

In his comment to my last post, “Notice to Bottom Feeders”, my friend Gary asked, “So what good is this bailout to me”. He expects it to cost him either in higher taxes or a devalued dollar. (See comments below that post).

I share his concerns. I don’t understand all that has gone on (and evidently neither does anyone in Washington), but even I can see that the only good the bailout might bring is that it might enable our overall economy to stabilize. Then it will take some time to work our way out of this mess.

I mentioned two points in my reply to Gary: something must be done quickly; and whatever is done must not make things worse. Whatever is done, it must be thoroughly debated beforehand to head off disastrous unintended consequences. A personal story illustrates the latter point beautifully.

In 1985 the organization that employed me got itself into financial trouble. Their solution was to eliminate salaries, including mine. That organization employed four Campus Ministers. All of us lost our jobs. We had a long discussion where the four of us (plus my wife whom I had just picked up from the airport) offered suggestions for keeping the ministry alive with a least one position retained (“Have you thought about trying to …”), and kept getting the answer “No, we hadn’t thought of that”.

Finally, my wife Lindsey said, “It sounds like you haven’t thought this through.” The Chairman of the Board that made the decision roared back in anger, “Of course we haven’t thought it through. We only made the decision yesterday!”

Sounds like Washington, doesn’t it?

The Mid-year newsletter for The Genesis Group showing continuing negative trends in the sale of both new and resale homes. To see it, click here The Genesis Group Newsletter.

But also in that newsletter is an article about the current housing market titled “The expected decline continues, market rapidly approaching bottom”.

A key sentence: “Despite, or rather because of these negative reports, it is becoming clearer to us that the market is rapidly approaching bottom.”

One of my favorite passages from the Bible is just a phrase that occurs almost 400 times: “it came to pass”. Nothing stays the same. There is no accurate linear projection from this date into the future showing that the direction things are headed now is the direction they will always head. Market has been headed down. It will go up. If it has been going up, it will go down again at some point.

Perhaps it’s true that “the market is rapidly approaching bottom”. I have two things to say about it: “I’m ready for it to change”; and “now is the time to take advantage of the bottom of the market”.