Housing: That Sinking Feeling

Homeowners are getting slammed as builders slash prices. The big question: Will this shock treatment help hasten the end of the painful downturn?
OCTOBER 15, 2007
Business Week
By Mara Der Hovanesian and Christopher Palmeri

Las Vegas was once the hottest of the red-hot real estate markets. But when sales really started choking up last year, developer KB Home (KBH ) did something drastic. Determined not to be caught with a big backlog of unsold homes through one of the industry's notorious down cycles, the builder started slashing prices. A lot. In the 1,400-home Huntington community, a subdivision of two-story stucco houses west of the famed Strip, homes that started at $320,000 a year ago are now listed for $270,000--just a starting point for potential deals.

Those sorts of discounts seem to be attracting buyers. Pending sales contracts jumped 23% after KB cut list prices by $25,000 in May, one of the recent price breaks in the Huntington subdivision, according to the market research firm Hanley Wood. That may be good for KB, or at least less bad than holding on to a lot of unsold units. It may also be good for current buyers who snap up homes at huge discounts to recent asking prices. "We try to make prudent decisions regarding pricing," says Jim Widner, regional general manager for KB in Las Vegas. "Prices are going to rise and fall over the short term, but long term a home is one of the best investments."

For homeowners who jumped in at the height of the boom, the discounts aren't so good. In Quayside Court, a quiet cul-de-sac in Huntington, many residents who bought last year suddenly own homes worth a whole lot less--making it hard for anyone who has to refinance, sell, or borrow against the equity. "When we first moved here [in the summer of 2006], the housing market was incredible," says Tammy Elder, a mother of three. "Unfortunately we bought a house that was overpriced, and we don't know if we'll ever break even."

KB's extreme strategy at Huntington is playing out across the country--even in places like Minneapolis and St. Louis that were bypassed by housing mania. For the first time, big builders are offering massive, often six-figure, price cuts in overbuilt developments nationwide, giving the industry a kind of shock treatment designed to move inventory off the books fast. It remains to be seen whether these radical measures will revive the market or deepen the slump, but it's certainly having an impact on the local communities. On Sept. 14, Hovnanian Enterprises Inc. (HOV ) kicked off a 72-hour Deal of the Century, in which it slashed prices by as much as $100,000 in 19 states. That same day, Standard Pacific Corp. (SPF ) launched its Mission: Possible campaign in 49 communities across Southern California, promising $20 million in total discounts. And on Sept. 29, D.R. Horton Inc. (DHI ) auctioned off 53 homes in San Diego with bids starting at $150,000, half off the list price. "We wanted to get the message across louder," says Hovnanian CEO Ara K. Hovnanian. "Customers needed a stimulus."


UP-FRONT PAIN
Builders' balance sheets needed a boost, too. Even though the five-largest publicly held residential builders have cut the value of their land and unsold homes from $49.7 billion in 2006 to $41.9 billion today, that inventory as a percentage of sales has soared 33% during the past year, according to Banc of America Securities (BAC ). Those idle assets have taken a toll on the industry's health. A year ago builders' debt payments were roughly the same as their cash flow. Now debt is 2.5 times cash flow. Profits are disappearing as well, with KB Home, D.R. Horton, and other big builders all reporting losses in the third quarter. On Sept. 25 the country's No. 2 builder by homes sold last year, Lennar Corp. (LEN ), reported a $513.9 million quarterly loss, the biggest in its 53-year history. And while there have certainly been other influences on the market, builders bear a lot of the blame for their woes.

The real question is whether the drastic price-cutting will short-circuit the usual long, painful downturn builders seem destined to undergo in this economically sensitive business. This is the first housing slump in which the industry has been big enough and well enough capitalized to even consider such extreme measures. And they are extreme. Margins, which ran as high as 35% at the peak of the housing boom, are close to nil when builders sell at fire-sale prices. If by doing so the builders can force the market to accept the reality that housing values have fallen--and accept it fast--there's at least the possibility of emerging from the current bust sooner than in earlier down cycles. "The discounts depress the market, and that's why we think home prices have got more to fall," says David Wyss, chief economist for Standard & Poor's, which like BusinessWeek is owned by The McGraw-Hill Cos. (MHP ) "But rather than a prolonged bust, you take the pain up front." A fast recovery in the housing market wouldn't just be a tonic for builders; it could also give a much needed boost to the overall economy.

There is, of course, much that could go wrong. Indeed, potential risks with this untested strategy abound, especially for smaller players. If the price cuts aren't deep enough or builders don't rein in production enough, they won't clear out the glut of unsold homes. Then there's the worry that the discounts lower prices too much, forcing builders to write down even more of the raw land held on their books. And if prices keep falling, buyers could decide to cancel contracts in hopes of getting a better deal later, as they've already started to do. There are also broader markets forces at play, ones that builders may not be able to surmount even by slashing prices. For example, the rising number of foreclosures could add to the backlog of unsold homes faster than they can clear them out. "It's a losing battle," says Jim Belfiore, president of Belfiore Real Estate Consulting, a research firm.

Still, builders figure they're better off cutting supply fast rather than letting it drag down earnings for months or even years. "You have to keep moving inventory," says John F. Eilermann, Jr., chief executive officer of McBride & Son Homes, a privately held regional firm that's offering discounts of up to $100,000 and hosting block parties with pig roasts to lure buyers in St. Louis. "Our biggest cost is the land sitting out there. You have to get yourself in a better position for when the market does turn."


PSYCHOLOGICAL BLOW
Following its deal of the century, Hovnanian, the nation's No. 7 builder, booked more than 2,100 gross sales with 1,700 contracts and 400 sales deposits. Standard Pacific has 227 pending contracts from its sale. Assuming those and other such deals ultimately close, the homebuilders could recoup some of the capital tied up in their unsold properties and generate enough cash flow to keep up with their debt payments. That's paramount for builders' survival. "They're better off clearing the showrooms than sitting on an asset that's likely wasting," says Lawrence J. White, a professor of economics at New York University's Stern School of Business. "That's like idle capacity on a factory floor."

When builders cut their prices in one fell swoop, rather than letting them drift slowly downward, they in essence force sellers of existing homes to do the same. At the very least, that can be a severe psychological blow that in earlier slumps was absorbed over a period of time rather than all at once. For some homeowners, it's a catastrophic financial blow as well. With new, clearly established market prices, troubled homeowners who paid peak prices will have a harder time refinancing. Others, who need to sell fast, will most likely do so at a steep loss. If they sell for less than their mortgage, they'll be left owing money to the bank. And speculators who banked on being able to flip properties fast in a rising market or strapped homeowners struggling with adjustable-rate mortgages that are now resetting with higher payments face their own particular hell. As painful as such situations are, however, the excesses must be wrung out of the market before the sector or the broader economy can recover. "It's unfortunately a necessary part of the process," says Richard J. DeKaser, chief economist for Cleveland lender National City Corp. (NCC ) "Once you see developers acting as aggressively as they are, the rest of the housing market is not too far behind."

Homeowners are almost always slower than builders to bite the bullet and cut their asking prices. That's why prices on sales for existing homes haven't dropped as precipitously as prices for new homes. The average price for a new home in Las Vegas, for example, is down 10% from the previous year compared with 3.8% in the resale market. With owners unwilling to accept lower prices, there's a growing glut of unsold existing homes here and across the country. On Sept. 25, the number of existing homes for sale nationwide, including vacant and owner-occupied listings, hit a 19-year peak of 4.58 million, up from 2.15 million in January, 2005, according to the National Association of Realtors. The resale market will eventually have to realign--meaning homeowners will have to cut their prices--before the slump can end.


BUILDERS' PARADISE
Driving along interstate 215 west of McCarran International Airport, it's easy to forget that Vegas' lifeblood is gambling and not homebuilding. Acres of brand-new subdivisions stretch for miles toward the red rock mountains in the distance. Out here, the brightly colored billboards on the highway aren't hyping entertainers on the Strip but rather new communities with aspirational names like Canyon Estates and Inspirada. A string of low-rise office buildings read like a who's who of the housing boom, with signs for Pulte Homes (PHM ), Countrywide Home Loans (CFC ), and Prudential Americana Realtors. Welcome to Constructionland.

A strong job market, the thriving casino and convention industry, and the highest population growth in the country made Vegas a boomtown for builders. Sin City represented one of the top five markets. Industry researcher Steve Bottfeld of Marketing Solutions estimates there are roughly 568 subdivisions being developed and marketed, the highest per capita in the nation. As recently as two years ago, prospective buyers would camp outside new developments to bid on dirt lots. Today, new homes are empty and communities half-built. The number of unsold homes has reached as much as 48,000, by some estimates, up from a more or less steady level of 10,000 over the last several years. "Builders have a glut of houses that's going to weigh on home prices for awhile." says Dennis L. Smith, president of Home Builders Research Inc., a local consultancy.

Mike Alley has gotten whacked hard by the area's declining housing market. In the spring of 2005, Alley, an independent real estate agent in Racine, Wis., moved to Las Vegas, lured by the warm weather and the strong real estate market. He quickly found a sales job with Pulte, where he says agents were pulling in $500,000 a year for basically taking orders. "It was nutty," says Alley. "Houses were flying off the lot."

A year later, he decided to jump into the market himself and buy a home. He spent a month searching, settling on KB's Huntington subdivision. The neighborhood attracted a mix of folks, from couples just starting out to empty nesters. More important, there were a lot of families with young kids the same age as his. The $86,000 worth of upgrades, including higher-end cabinets and granite countertops, thrown in by KB Homes at a discount clinched it. Alley thought he was getting a deal: In August, 2006, he paid $360,000 for a three-bedroom home in Quayside Court, which was appraised for $415,000.

Yet even Alley, who made his living in this industry, says he was blindsided by the markdowns. Today he reckons his home is worth around $300,000. "I didn't quite keep my finger on the pulse of what [KB is] doing in this community," says Alley, who's largely gotten out of the real estate business. "I'm looking at the sales data, and they were selling my model for $50,000 less even months after I bought it."


HOUSING SUMMIT
For Valentina Decarlo, who lives down the block, the situation is even worse. A longtime Las Vegas resident, the 39-year-old has spent almost 20 years working as a cocktail waitress, currently at Wynn Casino where tips supplement her $32,000-a-year paycheck. She took a gamble of her own last July when she put down $77,000 on a four-bedroom house.

After DeCarlo got stomach cancer last October, though, she missed work and started relying on credit cards to stay afloat. She's struggling to keep up with her $2,140 monthly payment. While she paid $367,500 in July, 2006, DeCarlo thinks similar properties are now going for less than $300,000. That means her home may not be worth more than her outstanding mortgage, so she can't easily refinance. Her lender, Countrywide, suggested selling the home at a loss or finding roommates, she says. "I'm going to lose everything that I've worked so hard for," says DeCarlo. "Our primary objective is to keep people in their homes," says Jumana Bauwens, a Countrywide spokeswoman, who adds the lender has completed more than 35,000 workouts on troubled mortgages in 2007.

If DeCarlo can't find a solution, she will face foreclosure, an increasingly common occurrence in this rapidly deteriorating market. Foreclosures in Las Vegas are the highest in the nation. And there's no sign of a slowdown: New filings in the city topped 33,000 through August, vs. 19,909 in all of 2006, according to the data firm RealtyTrac. The fallout in Las Vegas has been so bad already that Nevada Governor Jim Gibbons has called for a housing summit on Oct. 4 with the city's five largest builders, five largest banks, and others like Freddie Mac (FRE ) and Fannie Mae (FNM ) to figure out how to help troubled home¬owners. "We are trying to target those folks who are headed downstream toward the waterfall before they get into trouble," says Lon A. DeWeese, chief financial officer of the Nevada Housing Div.

Speculators, especially those who bought late in the cycle, are likely to get hit the hardest. Roxasita Yasul, a 66-year-old retired hospital assistant, decided in late 2005 to supplement her Social Security and her husband's pension by investing in real estate. Back in the 1980s in California, she had tried her luck picking up houses at auction. It was a pretty successful venture. So she got her real estate license and bought four houses last year in new Vegas communities, including one in Huntington. Like most investors, a group who's rapid-fire buying and selling helped fuel the boom in this area, she figured she could always sell the properties in a rising market.

It hasn't worked out that way. Yasul paid $350,000 for the two-story home on Quayside Court in June of last year, but she expects it wouldn't bring in more than $300,000 today--if she could even find a buyer. She's not interested in selling now, hoping to wait for the market to rebound. "I'm not lucky with this one," says Yasul. "Those easy rates and interest-only loans will come due, and people will get hit with reality. The outlook is very gloomy."

In the meantime, Yasul is desperately searching for tenants. That causes its own problems. Too many renters in a neighborhood can further depress prices, a worry that's already causing consternation among her neighbors. "It's like living in an apartment community," says Elder, her Huntington neighbor. "Renters don't care as much about the homes if they don't own them."

The current housing downturn and the damage it's inflicting on the overall economy are far from over. With a slew of risky, adjustable-rate mortgages still to reset next year, foreclosure rates could climb even higher. That's a big reason why the stocks of the nation's 20 largest homebuilders have fallen an average 65% since the start of 2007. But there a few weak rays of light at the end of the tunnel. Builders are taking the painful step of cutting production. Permits are down 49% from the market's September, 2005, peak. That's half the time it took to reach this point in the last decline. "Builders definitely responded more quickly this time, and that's a good thing," says Banc of America Securities analyst Daniel Oppenheim. "But the inventory overhang is so great, it's going to take a long time to work through this. They still have a ways to go before there's a recovery."

Why The Fed's Cut Won't Spark Inflation

Housing woes, tighter credit, and a softer labor market should douse it.
Business Week, Oct 8th

Did the Federal Reserve do a good thing or a bad thing? Wall Street and bourses around the world seem to be of two minds since the Fed boldly slashed its target interest rate by a half-point on Sept. 18. The response in several previously frozen markets for short-term financing was extremely positive, and stock investors were jubilant. However, the reaction in longer-term fixed income and commodities markets, especially for gold, has been more circumspect. Investors there have new worries that the Fed just kick-started a round of inflation.

The concerns seem clear. The price of crude oil is hovering around $80 per barrel, threatening to lift energy costs in coming months. Gold, a traditional inflation hedge, has soared above $700 per ounce and is flirting with a 28-year high. The dollar has fallen to a record low against major currencies, and that is expected to boost import prices. And market-based measures of expected inflation have picked up.

However, all that does not add up to a deteriorating inflation outlook. What's missing is the economic backdrop against which all this is occurring. The economy is slowing down, as the effects of a new decline in housing and the credit crunch are buffeting consumer and business demand. The labor markets are softening, a process that began before the credit squeeze and one that eases worries that rising labor costs will fuel higher prices. Moreover, inflation outside of energy and food has been falling all year and has shown little evidence that higher production costs for energy and food are being passed along into prices of other products.

Perhaps most important, a financial shock that results in falling asset prices is never inflationary. It's just the opposite. For example, when the bubble in tech stocks burst in 2000, the U.S. economy flirted with outright deflation; that is, not just lower inflation but falling prices. In 2003 and 2004, prices of consumer goods, excluding energy and food, fell for two consecutive years, something that hadn't happened since the Depression. This time it's home prices that are falling, and the impact is hammering prices of mortgage-related securities.

THE ECONOMY IS HARDLY in a position to generate a worrisome bout of inflation right now. It managed to grow only 1.9% from the second quarter of 2006 to the second quarter of this year. In coming quarters, as the slump in housing and tighter credit depress demand, the average growth rate is unlikely to accelerate from that clip.

Significantly, the economy's recent and prospective pace is safely below any accepted estimate of the economy's noninflationary growth limit. Most economists believe that rate is somewhere above 2.5% but below 3%. When an economy grows below that pace for a long period, demand is not strong enough to strain the productive limits of existing labor and production capacity, meaning upward pressure on prices is difficult, if not impossible, to sustain.

Consumer demand will be under particular stress in coming months, especially if job markets continue to soften. Up to now, most of the worries about inflation have been centered on potential wage pressures stemming from tight labor markets, but that's changing. The September drop in the Conference Board's gauge of consumer confidence, to the lowest level in nearly two years, partly reflected concerns about jobs. For the second month in a row, the percentage of households describing jobs as "hard to get" rose, while the share saying jobs were "plentiful" fell.

Another sign that labor markets are loosening up is this year's drop in the ratio of employment to the adult population. The decline from 63.4% at the end of last year to 62.8% in August is the steepest since the weak job market of 2003.

DECLINING HOME PRICES will be another weight on consumers, as well as inflation. Housing wealth, which has helped to support household spending, is sure to take a hit in coming quarters. In July the Standard & Poor's/ Case-Shiller Home Price index for 20 major cities showed prices down 3.9% from a year ago, faster than June's 3.4% drop. Adding more fuel to future price weakness, sales of existing homes kept falling in August, down 4.3% from July, and the time needed to sell the houses now sitting on the market has increased to 10 months, close to a 20-year high that will continue to place heavy downward pressure on prices.

Against this backdrop, it shouldn't be surprising that core inflation, which excludes energy and food, is already declining. Since its recent peak of 2.9% in September, 2006, yearly inflation measured by the core consumer price index has fallen steadily to 2.1% in August. Price growth across broad categories of goods and services, from housing to apparel to recreation, has moderated. Most notably, inflation for services outside of energy, which makes up 72% of the core consumer price index and tends to be less sensitive to economic slowdowns, has fallen from 3.9% last year to 3.2% in August.

OF COURSE, PRICES of energy and food matter to overall inflation, and they can influence inflation expectations, a central concern of Fed policymakers. Since the Fed's rate cut, long-term Treasury yields have risen, a counterintuitive jump some attribute to higher expected inflation, which is a driver of bond yields.

Expected inflation, measured by the difference between the yield on a 10-year Treasury note and a Treasury inflation-protected security (TIPS) of the same maturity, has picked up. However, the rise is from low August levels not seen in more than 3 1/2 years, and the current reading is well within the range of the past year. Also, the increase in expected inflation accounts for less than half of the overall rise in market yields. That suggests higher rates also reflect two things: a reversal of the flight to quality that had lifted Treasury demand and pushed yields lower in July and August, plus investors' belief that Fed rate cuts will help to avoid a recession.

Inflation worries are also swirling around the dollar's decline, which tends to put upward pressure on prices of imported goods. However, the drop since the greenback's peak in early 2002 has been primarily against major currencies, where the trade-weighted dollar is down 33%. Against the currencies of all other economies, which account for 45% of U.S. trade, the U.S. unit is down only 6%.

Plus, many countries tend to hold the line on the prices they charge in the U.S., even when their currencies rise. For example, prices of imported consumer goods excluding autos are up only 1.4% from a year ago, while imported autos are up only 0.9%. And the CPI shows no upward pressure on retail prices in key import-related areas: Through August, the yearly inflation rate for apparel is 1.4%, while that for new autos is 0.9%.

Many investors will continue to fret until it becomes clear that the Fed has not awakened the inflation beast. However, for pricing pressure to accelerate, the economy would largely have to escape the negative impacts of the credit crunch, an extended housing slump, and falling home prices. That just doesn't seem likely.

Fed Hikes rate and mortgage rates decline... Why?

by Barry Habib

Just Like An Episode OF "Ripley's Believe It Or Not"...
The Recent Fed Rate Decision to lower rates actually helped to increase mortgage Rates.Strange, but true… When the Fed has hiked the Fed Funds Rate in the past, interest rates on mortgages have actually gotten better. So it should be no surprise that when the Fed lowers rates, interest rates on mortgage loans would worsen.

But how does this work and why?
Although it may seem counter-intuitive at first, it really does make perfect sense.

First, put yourself in the position of a mortgage bondholder… like the mortgage lender. If you lend the money, you receive interest over time. If that were a mortgage, it could be a full 30 years worth of repayments and interest. Let's say you were going to be receiving $1,000 per month for the entire 30-year term. At first, that $1,000 may be a very fair return, as you calculate what you can do with that money every month. But over time, inflation requires that you spend more money to purchase the very same goods and services that you can purchase today for less. That same $1,000 just doesn't go as far in future years as it does today. This eats away at the value of a long-term fixed instrument like a bond or a mortgage, and explains why inflation is the main enemy of bonds. Because bond investors are very aware of this, they will require a higher rate of return or interest on their investment to compensate them, if they feel that inflation will be increasing.

In today's improving economic environment, inflation is expected to be on the rise. In response, interest rates on long-term bonds, like mortgages, have moved markedly higher in expectation of this. Interestingly, the increase in mortgage rates during the first half of the year has occurred without any movement by the Fed, and some mistakenly think that this is anticipation of a Fed rate hike. Not true. Reality is that bond rates are simply pricing in the expectation of higher inflation over time.

Now think about it - a move to tighten or hike rates by the Fed is designed to slow inflation, and we can now see why tempering inflation is very good news for bond holders or mortgage lenders. With inflation reduced, the buying power of their future returns will face less erosion from the effects of inflation.

So believe it or not, this is why a Fed rate hike actually helps reduce mortgage rates, and vis versa. This being said, when we see that inflation is within the "ideal" range of 1-2%, this also has a positive effect on mortgage rates. The last numbers showed us that our year over year core inflation rates are sitting pretty at 1.8%. This is good news for bonds, meaning that inflation is in check thus increasing the long term value of the dollar.

Falling home prices could dent economy: Why is this good news?

By Rex Nutting, MarketWatch
Last Update: 3:20 PM ET 9/14/07

WASHINGTON (MarketWatch) - Just as rising home prices helped fuel the economic expansion of the past six years by making people wealthier, falling home prices could put a big dent in economic growth in the next few years by making them poorer.

At this point, few economists expect the economy to sink into a recession, but almost all of them agree that consumer spending would slow, perhaps significantly, if home prices were to fall.

With the number of excess homes rising amid falling demand, the negatives in the housing market will "continue putting downward pressure on prices," said Seamus Symth, an economist for Goldman Sachs, who says home prices were plunging at a 9% annual rate in the most recent data. Goldman expects home prices to fall 7% this year and another 7% next year.

The path of home prices could be the key to whether the economy grows or stalls.

"A big issue is whether developments in the relatively small housing sector will spread to the large consumption sector, perhaps through declines in house prices," San Francisco Federal Reserve Bank President Janet Yellen said in a recent speech. "Should the decline in house prices occur in the context of rising unemployment, the risks could be significant."


Economists are forecasting that home prices will decline more than 5% this year and nearly 4% next year, according to the latest survey by Blue Chip Economic Indicators. Those same economists expect consumer spending to slow from 3.1% last year to 2.8% this year and 2.3% next year.

While a cumulative 8% drop in home prices (after nearly doubling in the previous six years) doesn't sound so ominous, such a decline would be the largest since the Great Depression.

Sticky home prices

Because most owners are reluctant to sell at a loss unless they are forced to, it's extremely unusual to see nominal home prices fall. In economists' jargon, home prices are "sticky" on the downside, but not on the upside.

By comparison, prices in the stock market adjust quickly to new perceptions about values, as investors take their losses and move on. During market corrections, the volume of shares traded doesn't fall, because the market quickly finds a new equilibrium between supply and demand.

The housing market is completely different. Sellers don't quickly adjust their prices to a new market reality. And because prices don't fall to bring demand into balance with supply, the volume of houses sold plunges during a correction. Home sales are now down 23% from the peak more than two years ago. The housing market can take years to find an equilibrium. In most housing corrections, sales remain very weak until excess supply is worked off. Prices can be flat for years.

So why are prices falling now? There's every reason to believe that supply and demand are getting even further out of balance. The number of vacant homes is at a record level, and more new homes are coming on the market every day. Foreclosures are rising, further increasing supply. More adjustable-rate mortgages will reset to a higher monthly payment in coming months, pressuring more homeowners to sell or default.

At the same time, the rationing of credit is reducing demand. The subprime and Alt-A mortgage markets, which represented about 40% of mortgages last year, have almost completely dried up. Lenders are increasing their standards for approving a loan, and interest rates for jumbo loans have risen substantially.

The wealth effect

The difficulties in the mortgage market will not only depress home sales, it will also reduce consumer spending. In recent years, consumers have taken advantage of the mortgage market to withdraw and spend some of the equity they've built up in their homes,

"We've given people the ability to spend more, and it's going away now," said Paul Kasriel, chief economist for Northern Trust.

Economists can't agree on how much spending has been boosted by mortgage-equity extraction, also known as MEW.

Some theorize that each additional dollar of wealth (from appreciation in assets such as housing or stocks) boosts spending by about 3 cents. By that account, the $8.1 trillion gain in real estate values since 2001 added about $243 billion to consumer spending over those six years, an insignificant amount compared with the $46 trillion they've spent.

But other economists say extra housing wealth is more likely to be spent than extra stock market wealth. Former Fed chairman Alan Greenspan and Fed economist James Kennedy concluded in a study published in 2005 that consumers spent about half of what they took out of their homes, and invested the other half in home improvements.

According to Kennedy's unofficial Fed data, consumers have taken $2.2 trillion in equity out of their homes though refinancing their mortgage or through a home-equity loan since 2001.

MEW has been slowing for more than a year now and was only half as big in the first quarter as it was in 2005. The Fed will report on second-quarter MEW next week, but remember those numbers will be from before the credit crunch hit in August.

"To the extent that MEW has been dying, it is now officially dead," said Alec Crawford, a mortgage-backed securities analyst for RBS Greenwich Capital.

Households will also be hit with another piece of collateral damage from the credit crunch, Kasriel said. Cheap credit not only fueled the housing boom, it also fueled the leveraged buyout boom. Corporations have also been borrowing money so they can buy back shares from individuals.

In the past six years, corporations have bought back $1.3 trillion in shares, mostly from the household sector. The credit crunch will probably mean corporations will be buying fewer shares from households, at least for a while.

Relenting already

"Consumers are already relenting," said Mark Zandi, chief economist for Moody's Economy.com. With home prices falling, gas and food prices rising and job growth flat, "there's nothing supporting consumer spending at this point."

Sales of some durable goods have already fallen. "There's no purchase that's more discretionary than a Harley," Kasriel said. Last week, the motorcycle maker (HOG) cut its profit and production forecast, saying it's "a difficult time for the U.S. consumer."

The consumer is facing other headwinds too, of course. Energy prices and food prices are cutting into disposable incomes.

Job growth will be the wild card. There's already been a significant slowdown in hiring, but job losses have been scant. Jobless claims are flat.

"By far, the biggest risk is if businesses get skittish about hiring," said Zoltan Pozsar, an economist with Moody's Economy.com. "Consumption can chug along as long as people keep ahold of their jobs."

US home prices post record decline; Seattle bucks trend.

blatently plagerized from Seattle Times article written by Vinnie Tong, 08/24/07

NEW YORK — U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since Standard & Poor's began its nationwide housing index in 1987, the research group said today.

A separate index that covers 20 U.S. cities fell 3.5 percent in June from a year earlier, but a small group of cities in that index — including Seattle — actually bucked the trend and posted price increases in June.

The broad decline in home prices around the nation in the second quarter shows no evidence of a market recovery anytime soon, one of the architects of the index said.

MacroMarkets Chief Economist Robert Shiller said the declining residential real estate market "shows no signs of slowing down."

The report came a day after the National Association of Realtors said sales of existing homes dropped for a fifth straight month in July while the number of unsold homes shot up to a record level.

The S&P/Case-Schiller quarterly index tracks price trends among existing single-family homes across the nation compared with a year earlier.

Housing is among the economic indicators closely watched by Federal Reserve policymakers.

After five years of rapidly rising home prices, the market stalled last year, with prices holding steady or falling as sales slowed. Since then, lenders have made it more difficult for some people to get mortgages by tightening standards just as foreclosures rise and some who borrowed at adjustable rates are facing higher payments they can't meet.

Problems have spread from those with poor credit repayment histories to more creditworthy borrowers.

The Fed has taken a number of steps aimed at stabilizing the situation, and market watchers are looking for a possible cut in the Fed's target for the federal funds rate, which is the rate commercial banks charge each other for short-term loans. That rate has been kept steady at 5.25 percent for more than a year.

The Fed has its next regularly scheduled meeting Sept. 18.

Only five of the cities surveyed for S&P's 20-city index showed a year-over-year increase in prices in June. Seattle led the way with a 7.9 percent price rise, followed by Charlotte (6.8 percent) and Portland (4.5 percent). Atlanta and Dallas (1.6 percent each) rounded out the group.

Foreclosures Worries

In amongst the worries and woes of the existing mortgage crisis, I have heard murmurs and rumors about our local real estate losing value. Please let me reiterate, for those of you I have not currently lectured, about the basic facts of supply and demand. We have a very strong market in this area, mostly for the reasons that constitute a normal increase in the average home price. We have increased movement into the area, we have a strong job market, and of course, we have only so much land to go around. If you doubt this at all, step outside and look around. To the west you will find water, to the north and east you will find mountains and to the south you will find Oregon. There really is only so much land to go around. Seattle is mostly surrounded by water.

That being said, of course, we are finding a softening in the price ranges from 500-900K. That means simply that sellers are going to have to make more concessions to facilitate the sale of their home. That is it. It does not mean much more than that. The majority of this is coming from sellers who originally purchased more home than they could afford and now are having to make some cutbacks in their lifestyle. This is about the worst of what we are going to see as far as national ramifications of the current mortgage mess. That and not being able to get the loans we were once able to come by rather easily.

In these uncertain times, it truly is necessary to get back to basics. Clean up your credit, Save for a rainy day. Create Passive Income. All of the things we were supposed to being the whole time. Why? Because, I can tell you to be sure, in the coming markets. Those who are set up to make investments are going to be the ones to benefit. Who said, "Fortune favors the prepared."? Whoever it was, has been thru something like our existing market. If you have questions about your next step, please call me. I am here to help!

Listed below are the latest top foreclosure zip codes in the US. As you can see, not one is from the state of Washington.

500 Top foreclosure zip codes

June 19 2007: 3:56 PM EDT
NEW YORK (CNNMoney.com) -- The most foreclosure activity is clustered in two area; old Rust-Belt areas and new Sun-Belt ones. More than a quarter of all leading foreclosure zip codes are in California but many of the worst-hit zip codes are in the Midwest. Ohio has 49 zip codes in the top 500, trailing only California and Florida, which has 72. Michigan has 34, including four in the top 10. All of them are within Detroit city limits.

Foreclosures: Hardest hit zip codes
Zip Code,City,State,Default Notices,Auction Notices,Bank Repossessions,Total Foreclosure Filings
44105,Cleveland,OH,140,184,459,783
30310,Atlanta,GA,1,349,359,709
80219,Denver,CO,8,657,40,705
48228,Detroit,MI,160,491,28,679
48205,Detroit,MI,164,425,45,634
95823,Sacramento,CA,450,41,143,634
48224,Detroit,MI,139,421,23,583
89031,North Las Vegas,NV,348,127,100,575
80239,Denver,CO,5,523,25,553
48219,Detroit,MI,124,400,25,549
44112,Cleveland,OH,71,186,288,545
48227,Detroit,MI,126,385,30,541
95828,Sacramento,CA,372,46,113,531
60628,Chicago,IL,409,46,69,524
92336,Fontana,CA,380,74,55,509
46201,Indianapolis,IN,334,56,100,490
48235,Detroit,MI,116,356,17,489
89131,as Vegas,NV,283,100,105,488
33160,North Miami Beach,FL,421,37,22,480
44108,Cleveland,OH,97,115,261,473
44120,Cleveland,OH,80,124,261,465
92563,Murrieta,CA,320,105,40,465

Now, if you have any relatives or friends in the Midwest. I want you to call them and see if they are financially ok. These statistics are pretty scary.

All the best!

Marya Noyes
206-686-5363

Fed cuts the discount rate

As I am sure many of you have been aware, the markets are changing rapidly. We have had many lenders close their doors for good in the last 2 weeks. We are definately in a different world from just a month ago in the lending sector. However, we did get a sign that the Fed, "really does like us" today.

FED ACTION: The Federal Reserve cut the discount rate this morning. That's the rate that the Fed charges member banks for short-term loans. It won't have a direct effect on the interest rates that consumers pay.

The rate that does directly affect consumers is the federal funds rate. That one remains unchanged at 5.25 percent. The prime rate remains 8.25 percent. Rates won't change on debt that's indexed to the prime rate, such as home equity lines of credit and some credit cards.
My colleague Greg McBride, writer of the Fed Blog, is out of pocket this morning but sends this missive via BlackBerry:

Cutting the discount rate but not the fed funds rate is the next step up from injecting capital in the system, but is still short of cutting the fed funds rate. This is a move saying "the Fed is open for business" to keep credit markets functioning, but doesn't have a direct consumer impact.
The Fed issued two explanations this morning.

Here's the first:
Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

And the second:
To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points. The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco.

Banks are going to be happy about that ability to borrow from the Fed for 30 days, renewable by the borrower. I hope this calms down the credit markets, including the one for mortgages.
(bankrate.com)

We shall see, we shall see.

The Question was, "When does refinancing make sense?"

The only real way to answer your question is to work the numbers.
This issue is that most people have equity in their home that is really not doing them any good.
I.e. (your home appreciates at the same rate regardless if you own it outright or it's 100% financed.) So The deal is here you are going to want to make sure that you are out of debt first..
i.e pay down all credit cards and get money into an account earning a rate of return as soon as possible..

See the difference is this.. The interest you pay on home loans is simple interest.. Ie. 6% of $100,000, interest only the payment will be $500 / month.. Unless the rate changes. (not to mention, it's also tax deductible) Now the interest you receive on money that's invested is compounded interest.. So let's just say for the ease of math.. You have a loan for $200,000 at 6% with an interest only loan your payment = $1000 Now because it's tax deductible, given a federal tax bracket of 25%, your effective actual rate is 4.5%.. So now, let's say instead of paying principle on that loan,(which would only be $199 a month on a normal 30 year loan.
You take that at put it in a investment account earning a rate of return of 7%...
In 5 years your investment account will be worth = $14,529.09 If you were to make that principle payments on your loan you would of paid down only $13,891 of your principle..
You would think not that big of a deal. Except that, in those 5 years you have created liquidity..
That would carry you if you loose your job, get disabled, want to make an investment etc.
If that money is stuck in the value of your home, you have no ability to access it if the worst occurs.

Also, if you are accumulating equity outside of your home you are also keeping alive the best tax deduction that most of us have.. (our mortgage). If you are paying it down, you are killing it..
Why would you do that, when you are working and need all the tax deductions that you can get?

Now let's look in 10 years.
In 10 years.. Same investment strategy..
$199/month in account
You have a loan balance of $200K, Still getting the $12K a year write off.
Now you have $34,844 in a liquid reserve account...
(imagine if this money was going in your 401K and you were getting it matched from your firm.) Net worth = $424,989

Vs. putting the money toward your principle.
10 years.
Loan amount $167,371
Now yearly mortgage interest deduction is lowered to $10,042 No liquidity..
Net worth = $422,724, assuming 7% appreciation on the home.

Now this difference is vastly compounded if you continue to take equity out of your home as soon as it builds up and put it in the reserve account..
Let's say at year 5.. You decide to do a refi and take cash out..
House would be worth $420,766...@ 7% appreciation..

Increase your loan to 80% LTV for a loan amount of $336,613..
Now your tax write off's are a $20,196/year..
Vs. the paying principle version at year 5 of only $11,166 in mortgage interest..
Now if you took that money minus fee's and put that into your reserve account..
Five years later you would have $198,538 in your liquid reserve account..
The house is worth $590,146..still assuming 7% appreciation.
Your overall net worth is estimated @ $457,562..

Compare that to year 10 with just your 30 year fixed loan.
House is also worth $590,146
Loan amount is down to $167,371..
No liquid reserves,
Annual mortgage tax write off is down to $10,042 Total net worth is estimated @ $422,755..
That's $25K less than the other option...

However, what about the increased payment on the higher loan amount?
Well, that's easy..
Your total payment goes from $1199 on the 30 year fixed to $1656..on the interest only loan.
Now the $1199 of that by year 10 that's a $10,042 mortgage interest write off on your taxes At the 25% tax bracket, that equals $2510 back at the end of the year Vs. the higher loan amount with a $20,196 total mortgage interest write off At the 25% tax bracket, this equals $5049 back at the end of the year..
So you still come out ahead..

Now what if the value of your house goes down?
Let me tell you this.. Your are going to be really happy you took that money out..
Say your appreciation per year actually drops to 1% for 5 years after you took the $130K out..
In 5 years you have $198,538 in your liquid reserve account.
@ 1% appreciation your house goes to $442,229 from $420,766 You maintain your $20,196 mortgage interest write off and your overall net worth Is estimated at $309,645..

Vs. the 30 year example, house appreciates @ 1% Your house will still be worth $442,229 from $420,766. However, you loan amount is down to $167,371..
You have no liquidity. Your tax write offs are down to $10,042 / year And your net worth is only estimated @ only $274,858.. That's a $34,700 difference in 5 years. Imagine 10.

Now what if you loose your job and you have no income?

Which option would you of rather of taken?
Which option is safer?..
The lower mortgage with the lower payment and no money to make it?
Or the higher mortgage with enough liquidity in order to ride out until you get a new one?
See financial planners have been using this mantra for years..
Diversify, diversify, diversify,,
Mortgage planners have finally caught on..
See I told you this was a long answer..

In financial planning you should have 4 goals..

1) get a reserve account: (This is for things called life.. Ex. Car breaks down, need to go to the doctor.. Whatever..)The whole purpose of this account is develop the habit of accessing this account instead of your credit cards.. Why? Developing wealth is almost all about good financial habits.. It's virtually impossible to out earn-bad financial habits..)

2) Pay off all revolving debt: This way you get to decide what you do with your money every month instead of the creditors..

3) Big liquid reserve account: Make sure it's diversified, safe, earning a rate of return.. All those good financial words.

4) Pay off your house: However, new definition of pay off your house is have enough money in account #3 to pay off house you wanted to however, don't do it.. Does not make sense.. Need the write offs..

These steps should be followed in this order..
Any money in number 4, should only be there if the other 3 have already been done..
Otherwise your plan will not be efficient or effective.

So that would be the long answer to why people would refinance their house, even to a higher rate if need be.. Remember all rates of return are relative.. Meaning, even if home loan rates go to 12%, market returns will be 15%... Check it out, it's historically accurate..
If you want to know more..there are so many books out there..

Read:
Missed Fortune 101, Doug Andrews
Borrow Smart, Retire Rich, Todd Kendall
Millionaire Mortgage Planner, Steven Marshall Last chance Millionaire, Doug Andrews

Truly the list goes on and on..

Housing Activity "Rejuvenating" Around Western Washington
KIRKLAND, Wash. (Mar. 7, 2007) – February housing activity began to show signs of a rejuvenating market, according to observations from brokers and the latest numbers from Northwest Multiple Listing Service.
Figures for February show system-wide gains in both pending sales (offers made and accepted, but not yet closed) and sales prices compared to a year ago. Results were mixed among the 19 counties in the MLS service area, but together they reported a 4.8 percent increase in year-over-year pending sales for February.
Prices for last month's closed sales of single-family homes and condominiums jumped 14.4 percent from twelve months ago. The median price for last month's completed transactions was $324,000. That was $40,800 more than at this time last year.
The condominium market shows continued strength, with pending sales rising 13.7 percent from a year ago. Prices for condo sales that closed last month were 20 percent higher than twelve months ago.
Inventory also rose from year-ago levels, climbing more than 40 percent, but brokers are not convinced the buildup means a tilt to a buyer's market. In many counties, the month's supply ratio is less than five months (a supply of six months or greater is generally considered to be a buyer's market).
In King County there is currently a 2.6 month's supply of single family homes and only about a two month's supply of condominiums (see chart).
NWMLS director Ken Bacon, the broker at Windermere Real Estate in Redmond, said the market is changing from one that slightly favored sellers to a strong seller's market. "We are now seeing multiple offers on many of our listings," he reports, adding second quarter inventory will not be able to keep pace with demand. As a result, Bacon said they have resumed training agents on both buyer and seller strategies in multiple offer situations.
"Housing sales in February continue to show signs of regeneration—especially in the more affordable price ranges and in neighborhoods that are close to the job centers in Seattle and Bellevue," said J. Lennox Scott, chairman and CEO of John L. Scott Real Estate. He expects the activity in the more affordable markets will cause a "chain reaction of sales up the price points in the coming months."
MLS members notched 8,043 pending sales last month, up from 7,673 a year ago and the largest volume since October. Condo sales surged 13.7 percent from a year ago.
"The news is good and getting better," commented NWMLS director Dick Beeson, the broker/owner at Windermere Real Estate/Commencement Associates in Tacoma. He said the market is settling in, adding "it is as balanced as I have seen since 2000."
Inventory continues to build in Pierce County, Beeson reported, with condos accounting for a growing share of inventory in Pierce County. Condo listings are up 66 percent from a year ago, while prices for condos that sold there last month rose 19.5 percent. For last month's closed sales of single family homes in Pierce County, prices rose 12.5 percent.
Beeson noted buyers are waiting to see what's new on the market, but then are paying close to list price. His office reports lighter traffic at open houses, but attributes it to growing numbers of buyers who shop online for preliminary information before touring.
Last month's closed sales lagged year-ago totals, reflecting the slower activity during the past few months when the region was battered by flooding, windstorms and snow.
Prices on last month's completed transactions showed considerable variation, ranging from double-digit gains (in eight counties) to double-digit declines (in two counties).
Mason County reported a 23 percent jump in the sales price of single family home sales (excluding condominiums) last month, the highest percentage increase among the 19 counties in the MLS system. Homes in that county fetched a median selling price of $192,400. That compares to a median sales price of almost $430,000 for single family home sales that closed in King County last month, where prices were up 9.4 percent.
Condominium prices in King County jumped 24.6 percent from a year ago. The median sales prices for last month's closed sales was $285,250, which compares to the year-ago figure of $228,950. Area-wide, the median price for condos that sold last month was $252,000, up $42,000 (20 percent) from a year ago.
Low interest rates and job growth will continue to sustain a healthy housing economy throughout the Puget Sound region, according to Lennox Scott.

Don't Beleive the Hype! It still makes sense to make your move in real estate.

Nearly a full third of households are still renting...but if you are one of them, you could be paying a hefty price. Additionally, the children of the baby boomer generation are close to or at the home buying age, but these "echo boomers" could mistakenly decide to put off the purchase of a home because of all the noise about a "bubble" in home prices.

Is there a "bubble"? The simple answer is "no". Even if interest rates move a bit higher, it won't be enough to cause a nationwide slide in home prices. The key to a healthy housing market is the job market. If the payment on a new home might be slightly higher due to increased interest rates, it generally won't stop someone from purchasing the home of their dreams...but if they feel their job is in jeopardy, it might be enough to stop them from making a move. So with the currently low levels of unemployment and the beefy gains in job creations, it looks like the housing market will remain vibrant. Although it will be difficult to sustain the double-digit gains that much of the country has seen, price declines are highly unlikely. Expect a more moderate rate of appreciation, perhaps closer to the historical 6-7% range, which is still very good.

It is important to note that housing tends to be localized. So if the job market in your area is weak, housing prices could under perform the rest of the country.

But this talk of a housing bubble has been going on for a few years now, and those who were unfortunately victimized by continuing to rent instead of purchasing a home are painfully mulling over their missed opportunity. But is it too late? Even with the more moderate levels of appreciation expected…procrastinating on that home purchase could cost you a bundle.
Let's look at an example. If you are paying rent at $1,500 per month and your landlord increases your payment by a modest 5% each year, you would wind up paying just about $100,000 over a 5-year period! Worse yet, after forking over $100,000, you still would have nothing to show for it.

And speaking of having nothing to show for it - how about any improvements you might make to a rental property? It's not uncommon for renters to freshen up the paint, install new light fixtures or plant some nice flowers outside. But guess what…all your efforts, labor and the benefit of that improvement belong to the landlord, not to you.

With the extensive variety of programs to help buyers obtain a mortgage with little to even zero down payment, the very same money could have been used towards home ownership. Even using a standard 30-year fixed program, a mortgage of $300,000 could be obtained with a total monthly mortgage payment - including property taxes and insurance - of around $2,200. Assuming a 25% tax bracket, this would be equivalent to the average amount spent on rent during the same period after your tax benefit.

And the benefits of home ownership are quite considerable. Because the mortgage is being paid down each month, equity is being built. After 5-years, the $300,000 mortgage would be reduced to $279,000, adding $21,000 to your net worth. Home appreciation can add an even bigger chunk. If your home appreciates at a modest 5% per year, the value of a $300,000 home would increase to $383,000 after 5-years. Subtract the remaining mortgage of $279,000 and you have a whopping $104,000 of additional net worth! Even if the appreciation level were at 3.5% or half the historical norm, the result would be $77,000 of additional net worth.

But if laying out the initial increase in monthly payment and having to wait for your tax benefit to show up next April is a tough nut to crack, the IRS wants to help. Instead of waiting to file for the tax benefits derived from your new home purchase, you can simply adjust the amount of your withholding. This allows you to have less tax withheld from each paycheck so you can handle the new mortgage payment more comfortably throughout the year. In essence, you are taking your tax refund as you go instead of letting Uncle Sam hold it all year, interest free.

Visit www.irs.gov and use the IRS withholding calculator. This very handy tool can quickly show you the effect a change in withholding will do to your net paycheck. Remember to balance this with the expected refund and it is always a good idea to check with your tax advisor.

Don't be victimized by the bubble hype. Buying a home is a big step, but it is almost always one in the right direction.

The Cost of Waiting.. Real Estate Continues to Appreciate in the Greater Seattle Area

This month we are going to focus on another cost for real estate investors. That, of course, is the cost of waiting. Economists call it opportunity cost, that is; the cost of loosing one option while you are exercising another. In this situation, it would be the cost of leaving your money where it is, instead of moving it into an investment vehicle. In the next couple of weeks Vicki and I are going to be publishing several blogs that really go deep into investigating the "actual" cost of waiting.

This week we'll be talking about one of the primary costs incurred in the real estate waiting game; appreciation. As I tell most of my clients, "Appreciation is a wonderful thing if you're the one getting the benefit of it, not so great if you're the one chasing it." We are very blessed to live where we do. This market has been, and continues to be an amazing place to live and do business. Following is a blurb taken from our local paper, The Seattle Times.. By: Elizabeth Rhodes and Justin Mayo.

Prices keep soaring

"Superstar" Seattle market has grown faster than U.S. market for decades.

Of course, if moderate-income buyers instead choose a condominium or less-expensive house (often a fixer-upper), the possibilities are greater.

But for how long? King County's single-family-home prices shot up 19.7 percent in the first six months of this year, compared with the same period in 2005, according to The Times analysis. It's based on price per square foot, considered the truest measure of housing cost.

As the residential real-estate market cools in other parts of the nation, one question is why Seattle's market remains robust. Money magazine predicts homes in the Seattle-Bellevue-Everett area will appreciate 10.5 percent between this June and next. That's twice the rate predicted for the country overall.

Home prices are often described in simple terms as products of supply and demand, but several factors — land availability, job and population growth, and interest rates — make the housing market more complex.

Professor Chris Mayer, director of the Milstein Center for Real Estate at New York's Columbia Business School, says Seattle outperforms other major cities because it's relatively unusual.

"Seattle is one of a handful of places I've written about and referred to as a 'superstar city,' " Mayer said. "It's not quite in the same league as San Francisco and New York, but if you look at census data, house prices in Seattle have grown faster than the national average for 50 years, from 1950 to 2000."

So major home appreciation "is a pattern that's been going on for a long time," Mayer said.
He defines superstar cities as people magnets because of their attractiveness and amenities.
"But being attractive isn't enough," he said. "It's also necessary to limit supply." That's happened here for two reasons.

First: Seattle is essentially out of land on which detached houses can be built.

Second: The state's Growth Management Act effectively limits supply by restricting where homes can be built.

"When you restrict construction you inherently raise the prices of homes," Mayer said. "So it ends up being the case that the only people who can afford to live there are people with higher incomes. I'm not saying this is good or bad or desirable, but it is an outcome of restricting new construction."

Plenty of King County residents can afford houses. The percentage of households earning more than 150 percent of median income — that would be more than $90,000 today — grew faster than any other income category between 1990 and 2004. It now accounts for almost one-third of all households, a county study found. They number almost 250,000.

But Mayer says having well-off local residents isn't the whole story.

"In superstar markets, including Seattle, you can tie the price of housing to the incomes of the wealthiest Americans — not just the people who live in those cities right now," he said.

"This means house prices can grow faster than the incomes of existing residents if there are new residents from outside the metro area who can afford to move in and buy those houses."

That's happening here. Puget Sound's already strong economy is growing — a trend expected to continue at least through 2009 with the addition of 140,000 jobs, according to Conway Pedersen Economics.

This growth has made Washington one of the top 10 states attracting more people than they're losing, the state's Economic and Revenue Forecast Council reports.

Californians account for roughly 30 percent of our newcomers. Their state's housing prices make Seattle's look like a fire sale and nearly guarantee that California homeowners arrive here equity-rich. Just one example: Late last year, San Francisco's median home price was $825,000 — more than double Seattle's.

"In a regional sense, it's job growth that's driving housing demand and house-price growth the most," King County demographer Chandler Felt observed. "The demand is there and continues to be there."

Northwest Housing Update

Here is a great article from the Northwest Multiple Listing Service. As you have probably seen, Real Estate is a great headline grabber these days and as an Investor it is important to read lots of differing views and begin to form your own opinions. This article is a really good recap of what is "actually happening" here in the Pacific Northwest.

FOR IMMEDIATE RELEASE: March 7, 2007
February 2007 RecapsFebruary 2007 King County BreakoutsFebruary 2007 Snohomish Breakouts
Housing Activity "Rejuvenating" Around Western Washington
KIRKLAND, Wash. (Mar. 7, 2007) – February housing activity began to show signs of a rejuvenating market, according to observations from brokers and the latest numbers from Northwest Multiple Listing Service.
Figures for February show system-wide gains in both pending sales (offers made and accepted, but not yet closed) and sales prices compared to a year ago. Results were mixed among the 19 counties in the MLS service area, but together they reported a 4.8 percent increase in year-over-year pending sales for February.
Prices for last month's closed sales of single-family homes and condominiums jumped 14.4 percent from twelve months ago. The median price for last month's completed transactions was $324,000. That was $40,800 more than at this time last year.
The condominium market shows continued strength, with pending sales rising 13.7 percent from a year ago. Prices for condo sales that closed last month were 20 percent higher than twelve months ago.
Inventory also rose from year-ago levels, climbing more than 40 percent, but brokers are not convinced the buildup means a tilt to a buyer's market. In many counties, the month's supply ratio is less than five months (a supply of six months or greater is generally considered to be a buyer's market).
In King County there is currently a 2.6 month's supply of single family homes and only about a two month's supply of condominiums (see chart).
NWMLS director Ken Bacon, the broker at Windermere Real Estate in Redmond, said the market is changing from one that slightly favored sellers to a strong seller's market. "We are now seeing multiple offers on many of our listings," he reports, adding second quarter inventory will not be able to keep pace with demand. As a result, Bacon said they have resumed training agents on both buyer and seller strategies in multiple offer situations.
"Housing sales in February continue to show signs of regeneration—especially in the more affordable price ranges and in neighborhoods that are close to the job centers in Seattle and Bellevue," said J. Lennox Scott, chairman and CEO of John L. Scott Real Estate. He expects the activity in the more affordable markets will cause a "chain reaction of sales up the price points in the coming months."
MLS members notched 8,043 pending sales last month, up from 7,673 a year ago and the largest volume since October. Condo sales surged 13.7 percent from a year ago.
"The news is good and getting better," commented NWMLS director Dick Beeson, the broker/owner at Windermere Real Estate/Commencement Associates in Tacoma. He said the market is settling in, adding "it is as balanced as I have seen since 2000."
Inventory continues to build in Pierce County, Beeson reported, with condos accounting for a growing share of inventory in Pierce County. Condo listings are up 66 percent from a year ago, while prices for condos that sold there last month rose 19.5 percent. For last month's closed sales of single family homes in Pierce County, prices rose 12.5 percent.
Beeson noted buyers are waiting to see what's new on the market, but then are paying close to list price. His office reports lighter traffic at open houses, but attributes it to growing numbers of buyers who shop online for preliminary information before touring.
Last month's closed sales lagged year-ago totals, reflecting the slower activity during the past few months when the region was battered by flooding, windstorms and snow.
Prices on last month's completed transactions showed considerable variation, ranging from double-digit gains (in eight counties) to double-digit declines (in two counties).
Mason County reported a 23 percent jump in the sales price of single family home sales (excluding condominiums) last month, the highest percentage increase among the 19 counties in the MLS system. Homes in that county fetched a median selling price of $192,400. That compares to a median sales price of almost $430,000 for single family home sales that closed in King County last month, where prices were up 9.4 percent.
Condominium prices in King County jumped 24.6 percent from a year ago. The median sales prices for last month's closed sales was $285,250, which compares to the year-ago figure of $228,950. Area-wide, the median price for condos that sold last month was $252,000, up $42,000 (20 percent) from a year ago.
Low interest rates and job growth will continue to sustain a healthy housing economy throughout the Puget Sound region, according to Lennox Scott.
Northwest Multiple Listing Service is the largest full-service MLS in the Northwest. Based in Kirkland and owned by its member brokers, it currently encompasses nearly 2,100 companies with more than 26,000 sales associates. Together, they serve 19 counties, mostly in western Washington, plus Grant, Kittitas and Okanogan counties in the central part of the state.

My Experiences as a Real Estate Investor - Part 1

My name is Matt Tinney and I plan on achieving financial freedom (where passive income equates to expenses) within the next 2-4 years because of my real estate strategy. In part 1 of "My Experiences as a Real Estate Investor", I will explain to you what I've done and learned in real estate to date.

Since May 2006, I have been investing in real estate and I have not looked back since. I am aspiring to be financially free in 2-4 years, a rather steep but achievable goal for me and my situation.

My life and perspective on managing my financial success is forever ingrained in my thinking. I have educated my soul first, by reading Millionaire Mind, and learning how to first managing the money I had. It is really remarkable what happens when you learn how to manage your money. It literally starts to flow to you because you know to manage the money you got.

As my team told me from the start, it is a process, one foot in front of the other. The key is to just start doing it. This is not one of those get rich schemes, put in 10K and then hope for the best. That is risky.

Of course you will always want to:

1. Develop a financial STRATEGY. I devised a 1-3-5 year strategy and I am continuously (again process) updating it. What I did was develop an income statement and balance sheet from the cash flow game and plugged in my numbers. When I find an opportunity, I work with my team and plug in the numbers. I know exactly what I can and cannot afford. This is so important because deals come and go and you need to always on top of your game.

2. Understand where you are going and stick to one thing that interests you. For me, I just feel in love with real estate. I literally feel into it after buying a condo in Shoreline in August 2005. I learned the mistakes that first time home buyers can make. I almost got into a deal that would have made no sense for my financial future. That is history for me now but it is a good reminder about where I came from. However, I don't look back and dwell on mistakes. It is really easy to fall into the trap of feeling sorry for yourself, which leads me to my third key.

3. Be selective in who and what you tell others, particularly in the beginning. This might come to a surprise to you, but if you are reading this, you are not like the general population. Your thoughts on money go against the grain and when that happens, you can create conflicts of interest. I am very selective in who I share my financial freedom and strategy with. I learned that it is difficult enough for me internally to digest what I am doing let alone have others tell me I am wasting my money. I get the comments such as "your young, SPEND YOUR MONEY or oh honey what are you doing with your money in real estate, THAT'S RISKY". Well, news flash here, it’s only risky because of the lack of education. If you are educated in a subject such as a real estate AND you have the proper team behind you, then the risks subside substantially. The biggest hurdles are those internal to one's self. There are several classes available on understand why you think the way you do (landmark seminar is one), millionaire mind is another but it is a conference and there is also a book)

4. Work with people that you love to be around and trust. There are many people in the real estate industry that do not own properties themselves. I found it hard for me to take their advice and then I realized I want to learn from those that are actually doing this stuff. I am a very hand on, roll up my sleeves and get busy person. And so is my team. Vicki and Marya are my core team and I wouldn't be here without them.

5. Play cash flow. You might be asking, "Well, what is cash flow?" Cash flow is a board game that was developed by Robert Kiyosaki, the author of Rich Dad, Poor Dad. This game teaches you what happens when you get out of the rat race and into the fast track of financial freedom. It teaches you what an income statement is, and how decisions you make affect the numbers on your financial report card (income statement, and balance sheet). Every time I play cash flow, I learn something different. Playing cash flow has also given me a lot of interesting ideas, one of which is looking to start a small business to generate additional cash flow. Cash flow is also interesting because when you look back at how you played the game, it is an indication into how you are in real life. We have cash flow ever month and I recommend it to everyone.

In my next article, I will talk to what I learned works and what doesn't work in renting out a unit, screening tenants, preparing the unit, etc.Thanks for reading and as my motto goes "Impossible is how you perceive it"!

-Matt Tinney

Welcome!

Welcome to Financial Freedom!!
This is the first posting I have done to the new blog that was created solely for the purpose of helping my clients, friends and relatives thrive financially. The goal of this blog is to add real content that is useful in helping people work toward their own financial freedom. This is to be a place where my clients, friends and relatives can create a forum of sorts to discuss topics that are helpful in this endeavor. As sometimes working in this field, we all feel quite alone. This "new" way of thinking can sometimes leave us isolated from the "common way" of doing things. I have created this blog for the sole purpose of creating a community of investors that can help each other through the perils of their own journey. This is a place where people can share experience, strength and hope. There is no reason why any of us should have to, reinvent the wheel, as it were. Together we are stronger than we are separately, not to mention, I have learned more from my clients at times than I have taught them. We are all working and learning. Together we are going to change the way that finances are taught to our children and the people we care about. Together we will create the destiny we choose to achieve. If you wish to author and article or have a question that you would like answered regarding the many aspects of real estate investing please email me @ marya@integrapacific.com. I will be happy to make you an author on this blog. If I cannot provide the appropriate wisdom. I am sure that one of my fellow investors can.

All the best!

Marya Noyes
206-686-5363