August 18, 2008
I just got back from southern California; here in Central Florida we think the real estate market has gotten tough but not really. We haven’t seen the market take a huge drop in home values (depreciation) like out west or primarily in markets that have grown up to much or to fast.
In Southern California in some areas they are seeing depreciation upwards to 15% maybe more. As with all real estate markets in the country there will be pockets that just won’t be affected by the down turn. These are areas that have great schools or ocean front, condos not included, in south Florida the condo market is so over saturated that no matter where the condos are they are suffering lower prices.
The adjustable rate mortgages, or the exotic mortgages that allow you to pick your payment option, negative am type loans. Let me first address the negative am type loans. All though they are not ideal and you might end up owing more than you initially started out with you have to think about the appreciation that the property can achieve.
It usually takes about six to seven years for a home to double in value, and we have seen that from coat to coast and more like 3-4 years, I know in Southern California, this year excluded houses doubled in value in 3 short years. So yes some areas are seeing a drop in prices but it won’t last long time and prices will rebound.
Meanwhile back to a negative am, so the loan goes up form its original amount, but not to panic, if the home goes up in value more than the negative am your loan to value gets better. Let’s say that you are at 100% loan to value right now, and all of a sudden your loan goes up by 2% and your house value drops by 5% now you are upside down by 7%.
Not to worry because your home value will simply not continue to go down, maybe over the next 6-12 months, but you are going to see interest rates drop a bit between now and the end of the year the fed is getting aggressive by cutting the overnight discount rate to banks so they ultimately have more money to loan.
All of this will have an affect on the real estate market that we see. The example we have above if the home goes up say 50% over the next 5 years then you will have about 50k in value and somewhere around 10% increase in loan amount, that means in the end you are up 40% in value and now can have a much better chance to get your home refinanced as you have a better loan to value.
One of the reasons you see home prices dropping is because you have people that simply got a little too over extended. All of the mortgage products out there allowed people to get a little ahead of them selves and now that the rates are going up people are scrambling to catch up.
In Southern California, house prices are simply just too high to begin with and people were out getting first, second, and even third mortgages to get into a house, now they are paying upwards of 10-20k per year more and can’t handle it. First thing you see are the for sale signs going up in the neighborhood then they turn to lease purchase, rent or anything just take my house before foreclosure, when you get more sellers than buyers you end up seeing home prices drop, and they will stay that way until the signs start coming down. That will happen; when people can refinance their houses which looks like that possibility is on the horizon.
Now enter foreclosures as the banks start taking properties back the signs will start to go away, as soon as those signs disappear the prices will start going back up and you will see appreciation coming back again.
See my next blog talking about foreclosures. All the things I cover in my blog are from questions that I get from my customers or from men and women or our armed services as I travel the world discussing the very thing s I write about here in an effort to give back to my fellow marines, sailors, soldiers and airmen.
All My Best,