The Federal Reserve Cuts Rates .75%

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Tries to stave off a larger decline in the stock market The Federal Open Market Committee (FOMC) held an emergency meeting last night to determine how to address the sharp sell off of stocks from around the world yesterday and the impending sell off US stocks today.  It was the first special meeting since 9/17/01 and the largest one day cut since 1984.  They decided to cut the Fed Funds Rate (FFR) to 3.5%. Here’s an updated chart showing the Fed Funds Rate, the Prime Rate and the National 30 yr. Fixed Rate average. For more information about this story click here… To learn more about how Fed Rate cuts affect mortgage rates, check out our blog entry from Jan. 15, 2008… Cashflow Coach

FED Rate Cuts: How Low Can They Go?

Will Fed Rate Cuts Equal Lower 30 yr. Fixed Rates?

The Federal Reserve will be meeting on Jan. 29^th & 30^th to discuss the state of our economy.  Will they cut rates and if yes by how much?  Will the rate cuts lead to decreasing or increasing mortgage rates?

There’s a lot of confusion about the Fed Funds Rate (FFR) and the typical 30 yr. fixed rate.  Do these rates move in the same direction or are they inversely related? 

First, let me provide a simplistic definition.  The Fed Funds Rate is the rate the Federal Reserve charges other banks for overnight deposits.  It is also the rate the Fed uses to control inflation.   If inflation starts to rise above the 1% – 2% “neutral” zone, the Fed will usually increase the Fed Funds rate to slow down the economy.   If inflation starts to decrease below the 2% level then the Fed will usually start to cut the FFR stimulate the economy. 

A Fannie Mae 30 year fixed rate mortgage is actually a bond, also known as a Mortgage Backed Security (MBS).  If you are a bond holder (investor), the worst thing for your bond investment is inflation.  If inflation is rising, then the value of your bond (30 yr. Fixed rate) is declining, so as an investor you would require a higher rate of return to compensate for the inflation.  Here’s an example to help you understand.

Bond Holder/Investor: willing to lend $100,000 to a home owner for 30 yrs. expecting a rate of return (interest) of 6% because inflation today is only 3%.

Borrower/homeowner A: willing to finance the home purchase with a loan of $100,000 for 30 yrs. at 6% interest rate.

Let’s say a month from now, inflation jumps to 5% from 3%.

The Bond Holder/Investor is still willing to lend $100,000 for 30 yrs. to borrower/homeowner B but because inflation is 2% higher, the investor will charge 7.5% or 8% to compensate for the loss of value of what that note will be worth in 30 yrs.

This is a simplified example, but the point is that normally when the Federal Reserve decreases the FFR, they are trying to stimulate economic growth which means that inflation will eventually start to rise.  The 30 yr. fixed rates will start to rise as inflation starts to rise with the economy.

This is not always the case and we are seeing the exception in today’s interest rates.  The last few FFR cuts led to declining 30yr. rates and part of the reason is that we may be heading into a mild recession.  There’s an interesting article from Goldman Sachs anticipating that we will have a recession in 2008 and that the Fed Funds Rate will be cut to 2.5% by the third quarter from 4.25% that we are at today.

If this comes to pass and the FFR rate is reduced to 2.5%, we will most likely see 30 yr. fixed rates in the 5% range.

A number of analysts are expecting a .50% rate cut at the Jan. 30^th meeting.  This will reduce your Prime based interest rates like your home equity line and some credit cards.  The Prime rate is just the FFR plus 3%.

Stay posted, because I believe that 30 yr. rates will continue it’s trend down and should help homeowners qualify for an inexpensive mortgage to take advantage of the tremendous real estate bargains.  Let’s help move inventory off the market and get our home values back on the rise.

But Wait There’s More:

Jim McMahan, a Mortgage Broker in Texas taught me some guidelines that the FED tends to follow:

1. The FED’s goal is to keep Core Inflation (C.I.) at 3% or less.   (the PCE is currently at 2.16%)

2. Everytime we’ve had a recession, the FED has taken the Real Interest rate to a negative number in order to stimulate growth:

   Real Interest (R.I.) rate = Federal Funds Rate (F.F.R.) – Core Inflation (C.I.)

   (2.09% = 4.25% – 2.16%)

3. Real Interest rates have never increased 8 quarters in a row unless inflation (C.I.) was present at 4.5% or greater.

4. Mortgage Rates in the U.S. have been at or below 7.5%, 85% of the time in the last 80 years.

5. Mortgage rates tend to gravitate towards Core Inflation (C.I.) + 3.5%   (2.16% + 3.5% = 5.66%)

Cashflow Coach

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The Key to Rising Home Prices

Higher Demand or Lower Supply = Rising Prices

It’s a basic economic principle that when supply increases, prices come down.   And, when supply decreases, demand can rise and prices will rise with demand.   (a good resource is Basic Economics, by Thomas Sowell)

As Banks take over more and more properties in Mid-Michigan they will seek to sell them as fast as they can at what ever price they can get. This increased supply with low demand has slowed our housing market currently. It will continue to slow down, until we see one of two things happen: Either demand rises (job creation – an inflow of residents) or supply decreases (homes are purchased quickly and taken off the market).

In 2008, one of our Goals at Cornerstone Home Loans is to assist our clients, Real Estate Agents and banks to take 300 REO homes off the market. Our upcoming seminar has 15 minutes devoted to how to get this done with great profit to those who participate. If you are interested in learning how you can be a part of this effort, join us on the 17th and then schedule time to meet with Evan Vanderwey- he will assist you in determining how you can increase your net worth in this opportunity market.

What is an REO home?

REO stands for “Real Estate Owned”. For a bank to have Real Estate Owned means that they took over property, mostly due to the fact that these days they are foreclosing on more properties. Banks never want to hold real estate, they always unload it and because they are generally publicly traded companies, they would like to get most of that done in the calendar year of 2008 so they have a clean 2009. What does this mean for you? There will be more REO’s on the market that Banks wand to unload in the next 12 to 18 months than ever before in Michigan.What kind of impact can 300 homes have in our area?When ever you decrease supply of anything, the prices rise.  So any little bit helps.  In Michigan, if we can reduce REO the volume by 10% buy helping people purchase them and take them off the market, then we will increase values.

The best part is that you don’t have to do this without profit to you. You can do better by doing good.  After all, we live in the best free market in the world. Be a part of it. 

Cashflow Coach

Michigan: Guilt By Association

As a mortgage broker in the Lansing area for 14 years, I’ve seen the real estate industry go through various cycles along with the mortgage industry.  Yes, I understand that the housing market across the country as a whole does not look very positive but we need to be careful to not generalize the negative aspects of this downturn to every state and county.

A prime example of this is here in the Great Lakes State of Michigan.  Lately it seems like we’re getting more press than Britney & Paris combined.   An issue I’m dealing with on a regular basis is trying to convince the banks that I broker through that Mid-Michigan is not in the same boat as the rest of the state.  We are not guilty by association.

Michigan’s statewide unemployment rate as of Oct. 07 is 7.7% compared to the national average of 4.7%.  But when you look at Michigan’s unemployment numbers, you’ll find that for the same time period, the Detroit Metro area was at 9.2%, Flint was at 8.1%, Grand Rapids was at 5.8% and the Lansing area was at 5.4%.  (source: U.S. BLS)  This has been a long term trend in this state.

What we have found to be true around the country is that there is a correlation between jobs and home values.   Yes, we have experienced a downturn in home values in the Lansing area but not to the degree or severity that other parts of the state and country have.  What do we attribute to that?

Business Expansion and Jobs

Lansing has benefitted from a diverse economy consisting of Government (state and local), Manufacturing (GM and its suppliers), Education (MSU, Cooley, LCC and more), Financial Services (Jackson National & Auto Owners) and Health Care (Sparrow and Ingham Hospitals).  (Source: Lansing Chamber of Commerce)

More importantly, small businesses that work directly with or benefit indirectly from these industries continue to grow.  Did you know that more than 58% of all the Lansing area businesses have less 5 employees? 

An example of businesses that are expanding in the Lansing area is the Grand Traverse Pie Company.  This company just recently opened a new location in East Lansing and plans on using this location as their franchise training center.   For more information about this company click here.

Here’s another article on business expansion in the Lansing suburb of Charlotte.

One of the advantages of not having double digit housing growth prior to this credit bubble bursting is that our declines are not as severe as other parts of the country.  There are a lot of homes on the market which means there are a lot of great bargains if you’re ready to take advantage of it.

If you would like to take advantage of these bargains but don’t know how you’ll swing it financially or don’t know what you would qualify for.  Contact me to schedule a Cashflow Optimization Analysis.  You may be surprised by what you could do.

You have a choice in how you approach our current economy and housing situation.  You can choose to live in fear with a scarcity mind set or you can choose to live with an abundance mentality.

Either way, you can be assured that you are not guilty by association.  Lansing is a great place to grow your business.

Michigan: Top 5 in Foreclosures & One of the Best Real Estate Opportunities

If you spend any time listening to the various news outlets, it is very easy to become less than positive about Michigan; the slowing economy, declining home values, rising unemployment, etc.  I want to share with you in Paul Harvey’s famous words, “the rest of the story.”

One of the keys to having perspective today is by looking back in history.  Probably the closest similarity to what we are going through is the Houston, Texas market in the mid to late 1980’s, click here to read more.  The similarities between Texas & Michigan are strikingly familiar.

1. Texas’ primary industry then was its Oil production, here in Michigan it’s Auto manufacturing.

2.  The Savings & Loan crisis of the 80’s is similar to what is happening in the Sub-prime mortgage market although not quite to the same dollar volume, at least not yet.

3. Texas was in a recession then, and Michigan is currently the only state with a negative GDP.

What made the Texas time period worse than Michigan now was the passing of a few tax laws making tax credits available to investors which prompted huge over building and over supply of residential and commercial construction.   We have not seen the same over building, especially in Lansing.  For Texas, this led to a longer recovery time for housing values and inventories than we will need to prepare for.

Now for the rest of the story–   Michigan for many reasons will remain in the top 10 for foreclosed single family homes in the next 12 to 18 months – maybe a little bit longer than that.  This fact will produce two main realities for us.

1.  We will have many opportunities to buy homes from banks at very low prices.

2.  There will be an increasing number of families and individuals in our market that need a place to live and cannot get an affordable mortgage due to lower credit scores and tightening lending standards.

Add these two things together and you are at the cross roads of opportunity – if you’re prepared.  It’s been said that Luck is where opportunity and preparedness meet.  This is a great time to add real estate to your portfolio, whether you buy and hold the property for 2 to 5 years or flip it, now is the perfect time to buy – prices are low.

We are helping clients evaluate whether this strategy makes sense - it’s not for everyone.  By doing a cashflow analysis, we can help quantify the numbers in your scenario to determine what the best and worst case outcomes could be. Here is just one case study, but we are working with more and more clients to achieve similar results.

This couple purchased land and built a home just outside of town 3 years ago.  When they completed their home, they had it appraised for $50,000 more than they paid to build it.  Today it appraises for about $5,000 less than they paid to build it.  This was not very exciting news. 

Then, this summer, a home in their neighborhood came on the market and they soon found out that the home was listed well under what it had sold for a few years before.  It had sold then for $100,000, and the bank was asking for $65,000.  They offered $60,000 and their offer was accepted.  They plan to put $10,000 into it as improvements – in this case, a roof and carpet and a few other minor repairs.  They will likely not do any of the work themselves as they are very busy with life right now. 

We will do a loan for $70,000 and the value of the home on an appraisal is around $90,000.  To make a long story short, in 5 years, the value will likely be around $130,000 while the mortgage balance will be around $65,000.  They plan on renting the home for the same amount as their monthly payment. 

The will end up with nearly $60,000 in equity in the home – WITH NO INVESTMENT OF THEIR OWN MONEY.  They could sell it in five years, or they could hold it for 15 years and then sell it.  In 5 years, they will likely turn a $60,000 profit without a dollar of their own money (remember their loan paid them back their initial investment.)  Do you know what kind of return that is?  It’s an infinite rate of return – how does that sound?  In 15 years, the home will likely be worth over $150,000 and be close to being paid off.  Lemonade from Lemons.

I will be sharing some of these strategies and case studies at our next Wealth Workshop.  Recent attendees give their comments below.  Don’t miss this opportunity to evaluate a strategy that can boost your financial net worth.  If you are a builder, come learn how a “Trade” can help you retain the value of your neighborhood and provide a win – win to everyone involved.

I am committed to you, my client.  In a market like this, it is less likely that you will make a mistake and lose money.  It certainly isn’t guaranteed, nothing valuable is, but with the right professionals involved, you have a great chance of doing well.  I look forward to seeing you at the Kellogg Center on the 27^th!

Anyone CAN do something positive in THIS market – will YOU?

Using Technology to Accelerate Your Business

Technology can cause giddyness in some people, like an 8 year old waiting to open presents on Christmas morning or it can cause paralysis of analysis because you don’t know where to start.  It can be a tool that helps you maintain some efficiency throughout your day or it can be a time waster.  In any case, it’s important to remember that technology in and of itself is not good or bad, in fact it’s amoral.  It is a tool.  How we use it determines if it’s good technology or not.

One of my favorite business books is Good to Great by Jim Collins.  In his book, he has a chapter on Technology and interestingly enough, the research team for the book “ferociously debated whether this topic merited its own chapter.” (Good to Great, pg. 159)   The point of the chapter is not about technology itself because “no technology… can [make a] good company great…can make you Level 5…can turn the wrong people into the right people…can instill the discipline to confront the brutal facts of reality nor can it instill unwavering faith.”  (Ibid, pg. 161)

You first need to know your Hedgehog Concept, which is the intersection of 3 circles.  The 3 circles are: 1. What are you deeply passionate about? 2. What can you be the best in the world at? and 3. What drives your economic engine?  According to Collins, “a Hedgehog Concept is not a goal to be the best, a strategy to be the best, an intention to be the best, a plan to be the best.  It is an understanding of what you can be the best at.”  (Ibid, pg. 98)

Once you understand what your Hedgehog Concept is, then you can ask the question, “Does the technology [you're considering to implement] fit directly with your Hedgehog Concept?  If yes, then you need to become a pioneer in the application of that technology.”  (emphasis mine, Ibid, pg. 162)  “The good-to-great companies used technology as an accelerator of momentum, not a creator of it.”  (Ibid, pg. 162) 

What does all of this mean to you as a sales professional or business owner?  It means that you first need to know what is it that you can be the best at and then find the technology to help you do more of “that.”  Before you go out and spend your commission check on the next greatest mobile phone, the latest and greatest software or spend time on your website or blog, you need to know what are you most passionate about, can you become the best at it and will you be _____ (fairly, highly or overly – you decide) compensated  for it?

 When you have an answer to that, then technology can become the accelerator and create momentum to accomplish more.

What is a Builder Trade?

We seldom talk about Builders and Realtors offering home trades.  In markets like this one however, the technique is making a comeback in order to move real estate. In a real estate market where properties are selling in under 60 days and at list price or higher, builder trades are not valuable to most people because Builders know that their buyers will be able to sell their home if it has not already sold. 

But, in a real estate market that holds on to its inventory like my 18 month holds onto his eight ounces of slightly warmed vitamin D milk, we are all compelled to take another look. My belief though, is that Trades should not be looked at as temporary, necessary evils, rather, as a profit center and net worth builder that did not exist 24 months ago. 

We all believe in the investor Mantra: “Buy Low and Sell High”.  Why is it then; that so few of us are interested in finding ways to employ that right now?  We will have to do things differently in this market that’s for sure – and action in this market has the potential to yield returns even greater than traditional markets where supply and demand are in a more normal balance. 

Strike while the iron is hot!   In a nutshell, a Builder trade is the offer of a builder to purchase the home of an interested buyer who’s home has not yet sold.  Traditionally the Builder will price his home to sell at or near its asking price and the buyer’s home price is the negotiated number.  The Builder and buyer work closely with the lender and essentially ask “What will it take to make this deal work – and are we willing to do it?”  If the answer is “yes,” the deal can be structured to work well, cash flow wise. 

Here is a simple scenario to explain how a Builder Trade happens.  A homeowner wants to buy a builder’s new spec home but cannot unless his home sells.  The homeowner has had his home listed with a listing Agent, for the last 8 months with no buyers.  The builder’s listing agent is going to go crazy if another interested party comes through their completed spec home with a home sale contingency. 

Because the Realtors are usually not paid on the acquisition of the buyer’s home by the Builder, creative deals are struck to fairly compensate the agents involved.  The homeowner’s agent is losing the commission on this home that he had listed.  But, he understands that without the trade, it was unlikely he would have gotten paid at all.  

The homeowner could not buy the Builder’s home unless his sold first – and this had not happened for over 8 months.   The Builder’s agent would get paid upon the purchase/trade of the spec home.  Because the Builder now owns the homeowner’s previous home the two agents could co-list it and share the commission or some type of arrangement could be worked out. Now the areas where decisions must be made are: 

1. How much does the builder pay the home buyer for his previous home?
2. How much does the customer pay for Builder’s new build?
3. How does the Builder dispose of the buyer’s previous home?

 These questions have answers that are easily arrived at by parties that want to find them.  Remember “Cash is king”.  Don’t use a dollar more of your own money than you need to.  And don’t borrower if you can’t make the payments.  Work with a Cash Flow Coach that understands how this works and can give you good advice about whether you are positioned well for this type of transaction. 

In the end, the Builder loves trades!  Why? 

1.      He maintains the sales price in his neighborhood.

2.      By charging full price for his new home he keeps his neighbors and/or previous clients happy.

3.      Because lesser valued homes keep their value better than higher priced homes he will likely not have to discount the home he acquires in trade as much as he would have his spec home. 

4.      Buyers of lower priced homes are usually more concerned with monthly payment and cash up front than with the home value and price of home so the sale is more likely.

5.      Buyers of homes of lower value are more prevalent because these buyers don’t necessarily have homes to sell.

6.      Even if he has to take a price reduction to sell the home he acquired on trade, a 20% reduction on a $140,000 home is less than the same 20% reduction on a $275,000 home.  If a market is down 20%, then which home would you like to discount, your spec or a lower priced home? 

7.      The Builder prefers the lower priced home.  If you have to reduce the value of a home, he says: “make it a home I DIDN’T build that is next to homes I DON’T have past clients in and in a neighborhood I DON’T own more lots in”.

8.      The Builder also has other options, he might decide to sell the home he acquired using a land contract or lease option.  He may even just hold and rent it. 

 9.      When the values come back in Lansing in five years, what would be wrong with Build More owning six or eight homes of his choosing that he purchased in a very low market.

10.   Renters and land contract buyers are more prevalent when home prices are down especially in this particular market where the property value decline is in part due to foreclosures and other credit damaging events:

    a.      More families are dealing with challenged credit, they still need homes and are having trouble getting loans these days.

    b.      People moving to Lansing, Michigan for 2 to 4 years are choosing to rent more often than in the past because they are afraid of getting stuck with a home they can’t sell in a few years. 

Now is the time for your business plan to involve some calculated creative strategies that will allow you to profit even in what may be called the worst of real estate markets. All of the above statements are true and are all a win-win-win. 

1. You win as you are making money in a down market while moving homes.
2. Your clients win as you have solved their problem.
3. The person or family that ends up using or buying the homes you acquire win because they need a place to live and have limited options.

 Do what makes sense, do it well and profit from it while adding a ton of value to a real estate market that desperately needs it!

500 to 1,000 Jobs in Lansing

Michigan’s biggest problem is not the mortgage market meltdown happening across the country right now.  Our biggest problem is the loss of about 5,000 Michigan residents last year and thousands of jobs.

Now for the rest of the story….

1. The Accident Fund Company announced yesterday that they are planning on converting the old Board of Water & Light Ottawa Station into their  national corporate headquarters.  The plan is part of a redevelopment agreement reached with the city and state.

This move will create over 500 jobs and revitalize a much needed downtown business district.  With the help of the Michigan Economic Development Corp. and the 21st Century Jobs fund this will be one of many more moves to continue to grow the Lansing area.

2. MSU received a $50 million grant for alternative fuel research which is estimated to create 100 or more jobs between Wisconsin and Mid-Michigan.

3. Suppliers like Android Industries, Bridgewater Interiors and Magna Powertrain combined want to hire more than 300 people, according to Capital Area Michigan Works, which is helping some suppliers find workers. (Source: Lansing State Journal)

Despite all of the doom & gloom in the media, did you know that the unemployment rate in the Lansing area is only 5.7% as of August.  Compare that to Grand Rapid’s rate of 5.9% and the rest of the state at 7.4% (source: BLS).

What does all of this have to do with Real Estate?  We believe that this is the best time to consider moving up.  Yes, you may need to lower the price of your current home or look at selling later but let’s quantify the loss AND the gain and see if it makes sense.  A lot of our recent clients have gained a lot more than they’ve lost.

Call my office and schedule an appointment to review your situation, we can help you evaluate all of your options.