Mortgage Rates Report

Have you considered the 92057 zip code in Oceanside for your next investment property?  We think there is a compelling argument for the long-term property investor.  Consider this question on Trulia Voices:

I said:

Do a home search for properties in the 92057 Zip code, on Trulia- keep it to under $225,000.  Most of these properties sold north of $400K, in 2005. While that was overblown, you can see that there is a lot of room there for growth over a 5-10 year period.  They were once valued that high, now they're about half of the 2005 values.   Now, click this link- Marine Corps NCOs receive about $1,500-$1700/month for housing (and they spend it).

$20% down on a $200,000 home will have a PITI of about $1,550.

That's positive cash flow, ladies and gentlemen.  The challenge for this investor will be that most of the homes were built in the 1970's so he can't get a newer home.  He will be able to avoid the Mello-Roos tax so that will make his cash-flow all the more juicy.

Will the property rise to its 2005 values?  It may take ten years, like the recovery from the last distression, or longer.  However, a down payment and closing costs would be about $45,000 to own this home.  The rents will cover the payments and a depreciation tax break wil be available to the owner. 

How will the investor receive a 10% return, over a ten-year period?  The Rule of 72 says that if the $45,000 doubles, to $90,000, in 7 years, the return will be a skosh over 10%.  This means that a sales price of $275,000, by 2015, will get the investor a 10% return.  Admittedly, 5.2% appreciation is a healthy return but we think an investor is buying the property right, at these prices.

Positive cash-flow mitigates a helluva lot of risk.

Actions

Brian.Brady Send feedback »

Scripps Ranch REALTOR Kris Berg gives us the single best explanation of Mello-Roos fees I've seen:

In 1982, the Community Facilities District Act was approved by the State Legislature. The bills coauthors were Senator Henry Mello and Assemblyman Mike Roos -- Get it? The impetus for the bill was our famous Proposition 13 which was enacted in 1979 and severly limited the amount of property tax revenues which our local governments had previously enjoyed. With tax revenues limited, revenues which could be earmarked for public improvement projects and new infrastructure, a new source of funds was needed.

Spend five minutes reading Kris' conversational tutorial, at San Diego Home Blog,  and you'll never wonder what Mello-Roos fees are again.

Actions

Brian.Brady 1 feedback »

I know, I know... I'm shooting myself in the foot.  I'll start this essay with the conclusion; if you think prices are going to drop even farther, don't buy a home in San Diego...unless...

Let me explain.  Dean Calbraith wrote an article, in the Union Trib, about mortgage rates' affect on the affordability index in San Diego.  It was the standard industry hype from some local economists and mortgage professionals:

"The day of low interest rates is over," said Dan Seiver, an economist at San Diego State University. "Because of inflation, we'll be having interest-rate rises across the board. But having rising mortgage rates in the current real estate environment is like pouring water on a drowning man."

Eh...maybe, Dan.  You'd be surprised at the resilency of a real estate market to higher rates.  Higher inflation could also lead to higher wages, which throws the affordabilty index out the window.  Purchase prices are permanent while loans are temporary; they can always be refinanced to a lower rate during the next economic cycle.

Oh, yeah.  I almost forgot.  I've been yelling about the affordability index since last Thanksgiving and higher rates since May 2, 2008.  Panic, if you're buying a home in July- lock your rate at application.  Don't fret too much about an economic cycle, though.

Gary London, who heads The London Group Realty Advisors in San Diego, said, "It's inevitable that interest rates will rise, which will only slow what's increasingly becoming a festering situation with real estate."

Many local real estate experts say prices will decline at least through the end of this year and probably through much of 2009. The main reason for that drop is that we're only halfway through the wave of foreclosures emanating from the bursting of the housing bubble.

Maybe, Gary.  If prices plummet more than they have, as you predict, a 4% 30 year fixed rate won't get people off the fence.

Would-be home buyers face a challenge: Do you wait to buy your home until the market hits absolute rock bottom by which time interest rates may be zooming skyward? Or do you buy a home now at interest rates that are relatively cheap, and then watch the selling price of your home erode over the next year or year and a half?

That really is impossible to say.  Timing the bottom is never a good strategy for a long-term investor.  Buying a property you can afford is.  In some areas of San Diego County, prices are at their 2002 levels; a bargain indeed.  In some of the worst affected areas, prices may ALREADY have bottomed as investors step up and buy.

"The rising rates make things a lot more complicated," said T.J. Knowles, a mortgage broker with CalBrokers in Del Mar. "If you wait too long for the price to drop before buying a house while the interest rate is rising, over the long term you could cost yourself a ton of money."

Or not, TJ.    Again, prices are permanent, mortgage loans are temporary.

Call me to run the numbers.  You may very well buy a home for $400,000 today  that drops in price to $368,000, in 2009.  It may also rise to $410,000 at the end of next year.  They key component is your expected hold time.  If it's 7-10 years, you're probably going to make money, regardless of how close you come to the bottom.

Oh, now back to my conclusion:  Don't buy a home today if you think prices are going to continue to drop...unless...

they've dropped as far as they will already.

Actions

Brian.Brady Send feedback »

Oceanside real estate investors have a long love affair with the Marine Corps.  Camp Pendleton (home to the First Marine Division) supplies a steady stream of young families with a need for off-base housing.  With the average housing allowance of about $1,700 (for an E-5 with a family) and dropping home prices, great opportunities are available for investors.

I'm bullish, long-term, on coastal California real estate- that's no secret.  The underlying demographics are still positive for California; more people will be moving in than moving out, over the next 20 years.  Aging baby boomers yearn for warm climes in retirement.  While California has its share of problems, it is still the "promised land" for many Americans.  The presence of the Marine Corps, in Oceanside, just makes the job of a landlord more palatable during this decline.

One investor purchased a townhome for $180,000, near the Vandergrift gate,  last month from the REO department of a mortgage lender.  This property sold for over $380,000 in 2005.  With 20% down, a mortgage of $144,000 has a PITI (including HOA) of about $1450.  Market rents are about $1500 and well within the reach of a Camp Pendleton Staff Sergeant.  The property needed some $8,000- $10,000 in repairs but we think the $50,000 required to own and renovate the property.  We think that property can be worth $275,000, in a five year period, and effectively return 15% on the original investment.

Have we reached bottom in the San Diego County housing decline?  It's too early to tell but cash-flow positive real estate investments, like we're seeing in Oceanside, certainly take the guesswork of that answer.

Actions

Brian.Brady Send feedback »

Benjamin Bach is Canada's "Wealth Planning Guy" and a Sales Representative with The Wealth Team at Keller Williams Golden Triangle Realty.  His website is http://www.kitchener-waterloo-real-estate-investments.com/.  Benjamin responded to my prediction that the Canadian mortgage and housing markets were ready to crash.  Rather than bury the comment in the old article, I asked him to write it as a guest author.   Here it is:

"Real Estate is all LOCAL"

Parts of Canada's RE market have appreciated at *very quick* rates in the past few years. Certain parts of Alberta have seen huge rises in prices, and I was amongst those that thought the run up in prices was not sustainable.

Other areas have been very flat for the last while. There are cities where a duplex has been $80,000 for the last 10 years, and probably will be for the next 10 as well.

Toronto, the economic centre of the country, continues to sustain prices that, to me, seem high. Condo's for 500K are the same size as what I buy 1hr away for $170K. BUT - ~80,000 people are moving to Toronto a year (that stat was current as of a couple of years ago), and they need to move somewhere. I don't think Toronto's prices will continue to go up as much as they have in recent years, but I don't see them going down. The high end of Toronto's condo market, specifically new non-Name Brand condo's over $1mil (i.e. NOT Ritz, Trump etc), feels a little more inflated by speculation to me.

That brings me to my little gem, Kitchener Waterloo. Our economy continues to grow, unemployment and vacancy (2% !) keep going down, and we have one of the youngest and highest paid workforces in Canada.

The manufacturing sector has been hurt by the currency exchange, but is still profitable. Old plants close down, but Toyota (among others) opens new ones. Old plants - 1 million sq ft last year - get sold or leased, absorbed back into the market.

There are three major post secondary institutions in Kitchener Waterloo, with a medical school almost completed.

We were recently voted the world's most intelligent community

We are the heart of Canada's Hi Tech sector (the Blackberry everyone loves is made in Waterloo, 5 minutes from my office)

We have a very strong FIRE sector.

A VERY diverse economic base.

When I spoke with Benjamin Tal last month, a head Real Estate analyst in Canada, he singled out Kitchener Waterloo as the bright spot for Real Estate investors in Ontario. I agree, and my clients do too - voting with their wallets.

Clients from Toronto, Montreal, Vancouver, Calgary, New York, California and recently even Kuwait are attracted to our low prices and great economy. Condos from 130Ks (they're nice - we own a couple), newer single detahced homes in *nice* areas from the $230,000s - and we're less than 1 hour away from Toronto, and Pearson International Airport.

Just like in the US, there are some areas where, to me, prices feel high. But Canadians as a whole have not embraced the sub prime lending that the US has seen in recent years, and *most* canadians aren't buying huge homes they can't afford, without equity. Clearly, there are always some who do, and independant of the economy, they'll get burned, almost every single time.

Investors in Canada should be looking to areas where they can get a great, reliable, steady return on their investment - Kitchener Waterloo fits the bill in every regard, and you don't need to plunk 35% down like most of us Canucks would have to when buying stateside.

Information is believed to be accurate but is not warranted

Thanks for the contribution, Benjamin!  Your perspective is helpful.

Actions

Brian.Brady 3 feedbacks »