According to Wikipedia, Supply and demand is an “economic model of price determination in a market.” The entry concludes that in a competitive market, the price will function to equalize the quantity demanded by consumers and the quantity supplied by producers, resulting in economic equilibrium. Generally, when demand exceeds supply, prices of a particular item or service are generally higher, and when supply exceeds demand, prices of a particular item or service are lower.
Last month, when home buyers were working hard to sign deals to get at the housing tax-credit money, the DEMAND for homes was higher than it had been in previous months. This was because more buyers were going after the real cash benefit provided by the stimulus housing tax credit.
Not to depress anyone, but the price of homes rose a little because of this. Many home sellers were able to take advantage of this as home buyers were willing to pay a little more because of the money they would be getting from the government afterward.
Everyone is happy (at least in the short run).
Today, the tax credit reservations are on the books. Those who have not sold their home yet will likely have to lower their price. Those buying a home today will not be getting a check after closing like those who made their deal last month, but they will be paying a lower price for the home.
Let’s say that the effect of an $8000 tax credit to the buyer resulted in a $4000 rise in the price. It makes sense. The $8000 must be accounted for in a free market. The seller receives $4000 more for the home than they would otherwise have received and the buyer paid $4000 more for the home than they otherwise would have been able to pay. This is a simple way to look at what is really happening.
It also means that the prices of homes (including the one the buyer just moved into) went down by $4000 the day the tax credit expired.
So what are the takeaways? How do we act now to make the most of the situation?
Over the next couple of days, I’ll be looking at applications for homeowners both new and old based on the realities of supply and demand.
Supply and Demand $ New Homeowners
If you just purchased a home in the last few months and as a result will obtain a housing tax credit through the IRS, then you just paid more for your house than you otherwise would have and, even worse, more for your house than it’s currently worth.
BUT, before you look for ways to get out of your deal before closing, listen up, because you got (or will get) reimbursed for that loss times about two – even more if you’re smart.
Recognize that you and the seller of the home you purchased split the benefit of the stimulus money 50/50 and that your home just went down in value by $4000.
But remember, your check is twice that. So you are already ahead by $4000. Nice work!
Yet, if you use the $8000 credit check wisely you can increase that benefit even further. Here are a few ideas:
~ Once the money comes in, pay down your mortgage by $4000. If you borrowed $100,000 at 5.25% using a 30-year mortgage, then by paying the $4000 down on the loan you shave three years off your loan and save yourself an additional $15,000 in interest over the life of the loan. By doing this you’ve doubled your money again.
~ If you have any credit card debt, pay $4000 toward that debt as a part of a total debt elimination plan (for help with this Google Dave Ramsey Debt Snowball). This will save you at least $100 per month in payments to those accounts and allow you to eliminate your remaining debt faster and/or add $100 to your mortgage. If you added $100 each month to the same mortgage above, you would pay that loan off in 21 years and save yourself more than $33,000 in interest. Now you’ve multiplied your stimulus check by four!
~ If you have no other debt and are disciplined, you could put $4000 into a Growth Mix Roth IRA. If left alone for 30 years (basing this on the last 30 years, including 2008), your $4000 would be worth over $119,000 at about the same time your mortgage is paid off. And because you chose a Roth IRA, you won’t have to pay tax on that investment account. This increases the value of your $4000 gain by over 25 times its original value!
Was I for the stimulus bill?
Can we sometimes turn the government’s bad ideas into good ones for us? Sure can.
Supply and Demand and Homeowners Who Have a Home Listed for Sale
If I heard the following phrase once, I’ve heard it a thousand times: “I’ve just been sitting here doing the right thing and making my payments and I’m the one who’s getting the short end of the stick.”
Well, yup, kinda, but kinda not, too.
Yes, now that the housing stimulus is over, if you want to sell your home, you will have to drop your price. Supply and Demand say so and Supply and Demand don’t lie.
Yet if you are selling in order to buy another home, and like many, your next home is priced higher than the one you are listing, then now is the best time for you to drop your price and buy up.
The numbers have never looked so good. Here are a few things to think about:
Ignore what you paid for your home. This is an irrelevant number – the market is the market. You need to let go of your emotional attachment to the price you paid for your home.
How do I make the cash flow work? This is the tricky part and usually requires the help of a qualified mortgage advisor. There are ways to get out of a home for a little less than you owe and be able to get into your next home with little or no money down. We just have to be a little creative. The benefits often outweigh the costs – it’s worth a look.
I may sound like a broken record on this one but talk to your lender and your Realtor about renting out your old home, making a move and purchasing without selling your existing home. This makes sense especially if you stand to take little or no cash from the sale in this market anyway. Homes in almost any neighborhood have a market for renters. One of my clients has rented his 3500 square foot Okemos, MI home out for over $3000 per month for the past 12 months. Another few years and we both expect he can sell the home (maybe to the current tenant) for as much or more than he owes. Let the upmarket do the work.
Get out of debt. This may sound misplaced, but in most situations when I talk to clients who already own a home and want to know how to make the most of this opportunity market, I tell them the same thing: Make a plan to pay off all consumer debt and keep it paid off. Your ability to make a wise transition in this market is almost zero if you have consumer debt. Debt will kill you. Get rid of it this year while rates are still low. Make a decision to pay it off once and for all.
Supply and Demand & Real Estate Investors
Investment purchases in the third and fourth months of this year slowed almost to a halt.
Joedy Patrick, a local Real Estate Investor and owner of Entrust Great Lakes, a self-directed IRA plan administrator (his group allows investors to purchase real estate inside their IRAs to avoid or defer taxation – reach him directly at 517-980-5143) agrees that investors, by and large, have opted to wait until the stimulus money has worked itself out of the system (unless the deal is really good).
Foreclosure is the name of the game on a couple of levels. First, these are the deals that are attractive to investors because they can get homes at a deep discount. Second, it is the presence of these deals that keep the total market low into the future, which keeps them from reaping the reward from selling the properties.
This is the tricky part – both of the following statements are true:
~As soon as property values here in mid-Michigan (or where ever you are) start to rise, you will see fewer foreclosures.
~You will not see property values begin to rise until you see foreclosure numbers begin to return to normal (very low) levels.
Investors know that property values will rise again. The question is when?
Let’s say that you and I each buy a similar home in the same neighborhood for the same price. I make my purchase this summer and you make yours in 2012, two years from now. Later – let’s say 2015 – we each sell our home for twice what we paid for it. We both got the same return on our investment yet your annual return was better than mine because you only had your money in for three years and mine was tied up for five years to get the same amount of profit.
Now, renting the homes in the meantime can equalize these a bit, but many investors are looking to sell the home in the next five to ten years for a profit rather than be landlords for an extended period of time. The perfect deal is made at the bottom just before the market begins its incline.
They need to buy the home right, that is, for a low price.
They need to manage it well. Money put in covers money paid out each year.
They need to sell it for a profit as soon as possible OR hold it for income if rents received justify keeping the home for longer term.
Investors understand supply and demand, so they did not want to compete with the frenzy of homebuyers who were after free money that was not available to them as investors. They are now looking at making purchases again.
The message for buyers is this: now that the stimulus money is gone, you’ll get a better deal. Buy Now.
Tips For Buying Cheap Land
Today I will be sharing some tips with you for buying land that is cheap. Because the U.S. is in a major financial recession and has been for the last couple of years, the real estate market is truly suffering. There are so many more sellers than there are buyers which makes it good for buyers because sellers must compete aggressively if they want to get your business. This is the essence of a buyer’s market and it forces real estate prices way down. Oftentimes it forces the prices down far below fair market value.
Advantages Buyers Got in Hand
If you are actually in the market for purchasing cheap land, you have the advantage right out of the gate because of the strong buyer’s market that we are in. You can turn the tables in your favor even more if you practice your negotiating skills. Being a good negotiator isn’t something that comes natural. Very few people are naturally good at negotiating. Taking the extra time to learn a few negotiating tips will help you when it comes time to hash out the final deal.
A word of caution is to not fall in love with a particular piece of property during a market like this. The reason I say this is that there are so many choices for you that falling in love with a piece of property may influence your decision-making process when it comes time to negotiate. Remember, you’re trying to find cheap land and there are plenty of good deals out there. It doesn’t make any sense to buy the property that you can’t get at the right price.
Buyer’s Market Domination
It’s not difficult finding land during a buyer’s market like this at great prices. What is difficult is learning to be a great negotiator. You can get good prices during a buyer’s market but you can get amazing prices if you learn to be a better negotiator. Being a good negotiator means knowing exactly what your maximum price is before you ever step up to the negotiating table. Never let a seller convince you to raise your maximum price during the negotiating phase.
There are so many great opportunities available right now that there is absolutely no reason to settle on a deal that isn’t a deal of a lifetime. You may not find it on the first or second property that you look at but they are definitely out there. If you’re willing to put in the time and to look for them, you will find them.
The Housing Market Over the Last Decade
To the layman, the housing market is a concept that has really only recently come into the national consciousness. Before the recent housing crisis in the mid-aughts, citizens of the United States may have had a basic understanding of what the housing market was, but it was far from a commonplace topic on the news or in casual conversation. Of course, after the burst of the massive housing market bubble in and around 2007, the housing market became a frequent topic of discussion. Over the last decade, the market has undergone a wide variety of changes that ultimately have real estate insiders looking forward to a brighter future.
Prior to 2006 and 2007, the housing market was seeing unrivaled prosperity. Although some commentators warned of a potentially catastrophic housing bubble, many political leaders and lending institutions ignored the signs. From 1998 to 2006 the housing bubble was consistently increasing, which signaled to most people that the economy was in full swing. High prices and high demand were supposed to indicate a flourishing economy where people were making enough money to buy homes and homeowners were being rewarded for selling their homes. Of course, this turned out to not be the case, and that becomes readily apparent by 2006. Matt Battiata reviewed this information with Congress on four separate occasions.
During that tumultuous time, big banks started noticing that they had hedged their bets on impossible underdogs. They had handed out loans to individuals and families who simply couldn’t repay them and houses were being foreclosed at a rapid pace. As the situation degraded, foreclosed homes sat empty as confidence in the real estate market waned. No one wanted to purchase foreclosed properties even at a major discount because real estate values were plummeting fast. So the banks had seized control of countless homes without ever having been paid back on their original loans.
This was truly the most dismal time for real estate in the United States within the last decade. It was this housing crisis that plunged the United States into the Great Recession between the years of 2007 and 2009. The housing market at this time was certainly on its last leg. Homeowners had no interest in selling their home at drastically reduced prices and prospective home buyers and banks were understandably wary of entering into tenuous relationships. But, it was during this time that governments and lending institutions crafted new regulations for maintaining a tighter grip on the housing bubble.
Indeed, as real estate guru, Warren would tell you the real estate market in the US gradually started to regain its footing. Many publications even noted by 2012 that the market was in a full rebound mode. People had regained confidence in the housing sector and banks started to trust their potential beneficiaries much more. Of course, the goal of virtually anyone in the real estate industry is to continue selling houses and avoiding foreclosures. Of course, we did believe that foreclosures should be at a minimum, and the best way to do that is with better insight and more oversight.
Property Taxes Can Significantly Affect Home Loans
The market for real estate continues to boom, and everyone who can get their hands on some money is trying to invest in real estate. It’s considered a better, safer investment than stocks since real estate values aren’t likely to become worthless overnight. The huge influx of investment cash into real estate has raised prices to previously unimagined levels, making it harder than ever for the average working American to buy a home. The lending industry is aware of this and has introduced dozens of new types of loans in recent years that are designed to keep payments as low as possible. Unfortunately, these loans can’t minimize property taxes.
These loan types include all kinds of adjustable rate mortgages, including the always-dangerous Option ARM, as well as loans with greater flexibility regarding down payments and amortization schedules. By keeping the costs of these loans to a bare minimum, the payments are lower, and more consumers can afford larger, more expensive houses. One component of the mortgage payment that is often overlooked has been increasing along with the price of housing, and it may soon have a dramatic effect on the market – property taxes.
Property taxes are a necessary evil in our society, as they pay for all manner of necessary services. While it isn’t always necessary to do so, most homeowners pay their taxes through an escrow account that adds the money to their house payments. The homeowner just writes one check that includes the loan principal, interest, property tax and private mortgage insurance, if necessary. Few home buyer realize just how large that property tax component can be.
Immense Property Taxes
In some markets, such as California or South Florida, property taxes can be huge. A median priced home in the Miami area might require taxes of nearly $10,000 per year. For a homeowner who has already paid off his or her mortgage, this amount comes to more than $800 per month, which in many markets would constitute a house payment by itself. California rolled back assessments in 1978 with the passage of Proposition 13, which based the revenue on sales prices rather than assessed values. But as houses change hands quickly at ever-increasing prices, the taxes go up, too.
While there are mortgages that can keep house payments low and some that temporarily require no payment of principal. the taxes are always due and can’t be minimized. They are necessary for roads, fire departments, and schools. With taxes tied to home values, many buyers are discovering that they cannot afford to live in certain neighborhoods that would seemingly be affordable. Others, who fail to do research, are encountering “sticker shock” once the bill comes due. If you are struggling to pay a $2200 house payment, an additional $800 per month in assessments could be crushing.
Many states have enacted reforms similar to California’s, but municipal services, and the means to pay for them, will always be required. Recommendations for buyers include comparing different communities to find one with the lowest taxes (adjacent counties to urban areas are often a good choice) and making sure that the value of the home is assessed carefully.
If you have a mortgage with a high rate of interest, you may wish to contemplate taking out a new loan. You can consolidate your debt and lower your monthly house payment.