“Price is what you pay…but value is what you get”- Warren Buffett.

I don’t know Mr. Buffett, but I do know Scott Layden of Gibraltar Mortgage. I’ve know Scott for at least a dozen years. I have often turned to Scott when I needed a knowledgeable answer to a technical question. As well as, a good beating on the tennis court. Today, let’s stick to realty economics. I have asked Scott to lend his two cents worth to the question of where the market stands in regard to rates and value and I believe we got several dollars worth. Enjoy.

As I celebrate my 26th year in real estate (investing, developing, brokering at one time in the 1980′s and as an analyst) and 16th year in the mortgage business, I am, more than a quarter century later, still astounded by the fact that people don’t recognize opportunity when it stares them in the face.
Realty values haven’t gone anywhere, but, the prices which got too high a few years back are too low now.
How do we know this?

Real estate pricing is “the tail, not the dog.” Prices are driven by the payments relative to the local indigenous people’s incomes. When neighborhoods or markets change, they rise or fall as populations with higher or lower incomes move in or out. People in a given market area (more in California and Manhattan, less in Tennessee) spend a standard percentage of their pre-tax income for their home payment. When those norms get stretched too much on the high end, the market turns off, and when tenants can become homeowners for essentially the same payment for renting (with 20%down) the market “turns on”. Tennesseans historically pay in the mid 20s percentage-wise of their pre-tax income on payments, while our average now is 18%…note that first time home buyers typically pay a higher percentage as they get their real estate start. The middle Tennessee market turns off at 30% of gross income spent on house payment…which it did.

There is no axiom that applies more directly to financially successful real estate transactions than “buy when people are selling, and sell when people are buying”. While this is overly simplistic to execute at the end of an up or down cycle or when a market hasn’t found it’s bottom and is in decline (like the pre-election months of 2008), one can easlily sense when a market is “too down” (like now) or “too up” (like 2.3 years ago).
Ideally, on would BUY now, and SELL later. The market is bottoming right now.
A good plan B would be to “write a contingent contract now, and then try like crazy to sell at a palatable price quickly later.”

However (excuse me as I seem to be on a pithy quote roll here. I apologize for this) “a rising tide lifts all ships”…and vice versa. If your house price is currently (and temporarily) down…and you are buying the same market…”so what”? Sell your house lower and buy your new home at a commensurately lower price. You don’t lose anything but the transaction costs, which you would lose anyway in a “good” market. It’s a great time to get the home YOU want as there are more homes on the market now then there have been for a long time.

Also, I hear a lot about “what if I lose my job.” This worry is only valid if one is going to sell, then rent or rent and not buy, keeping one’s proceeds as an extra cash cushion just in case. If you are going to have a home, and going to have a mortgage on the home, and are not jumping sky high in mortgage size from one property to the next, you are merely trading risk, not adding risk.
We are at an astoundingly good time to buy. Prices have moderated back to a couple of years ago (eliminating the bubble, but not the value) and rates are ARTIFICIALLY at the lowest point in Fannie Mae and Freddie Mac’s history. Unless the recession persists, the government will eventually stop actively buying mortgages (which is what they are doing today, driving rates down) and rates WILL go up.
So, with rates at historic lows, the intelligent homeowner has several choices:
1. If your current home is right for you for more than 2 years, refinance now and save some money (I can do the analysis for free on a “does it make sense to refinance?” spreadsheet;
2. If your home is not right for you, you are underwater on the mortgage, and can’t sell, hold on and be patient;
3. If your current home is not right for you at this time, and you have equity, and the new home would last a while and you can get a price/discount as needed similar to what you are selling, then by all means…move!
One last question that doesn’t fit snugly in the paragraphs above are: “Why has the Brentwood/Green Hills/Franklin/Spring Hill market been so slow, considering that our economy is doing relatively fine…certainly better than most of the country?” The answer: The first three are move-up areas, NOT typical first time home buyer areas. As the outlying areas pick up more with sales to first time home buyers, and we get a few more inbound relocations, this market will turn on strongly, as the affordability index is the best it has been since the 1990s. Spring Hill is hurting a little uniquely, as it was just getting started into move-up home prices when the market stagnated. It too, will turn back on as the prices firm up in Franklin and Brentwood, making the fact one can get a GREAT home for $75-125,000 less than one would pay in Franklin; a strong motivating factor for more people to make the drive each day.

At Gibraltar Mortgage (the company I own) we carry MULTIPLE wholesalers to make sure that in this volatile financing market , your transaction can get done and done with the best rate/cost combination for you.
If you would like to integrate mortgage planning into your overall financial strategy, this is something we do FOR FREE as part of the mortgage transaction. I know Scott would appreciate a call to discuss YOUR personal situation and how market conditions can be used to your advantage. Scott can be reached at (615) 550-LOAN x121.

Many thanks Scott for your incites into a difficult subject.