June 2008 Issue of Financially Independent

Real Estate Enthusiasts and Friends, 

      I love being right! This is not a moment of vanity, but I really stuck my neck out by forecasting that the market would gently increase this year contrary to what most media commentators and pundits were saying. As I studied the data, it did not seem likely that the market was on the verge of collapse or that it was headed down in any significant measure. The doomsday myth is still just a myth. Store this memory away because there will be many more times when people will be predicting the end of the world and this experience should serve to remind you to be skeptical of such claims. Do not assume that you are immune to down cycles (that would be foolish), but rather that there are always solutions to problems and alternative courses of action!

      With that being said, be careful of arrogance because market movement will always create economic winners and losers. This lesson was repeated numerous times in my studies at U.C. Riverside. In any economic cycle, some individuals will benefit and some will not! There were lots of losers in this last round and if you are not properly aware, you can find yourself in trouble. This is the primary purpose of this newsletter: to help you be on your toes, so that you will find yourself in the winners' circle. That's where I'll be.

 MARKET OUTLOOK 

      For those of you who took my advice and purchased a property in the past few months, kudos to you! Your purchase timing was as perfect as it gets. You bought an appreciating asset on sale (some prices were discounted as much as 10% off) and at the same time, you secured your investment when interest rates happened to be near their cyclical lows. One of my clients did so well that when his new home was appraised, it was valued at 40,000 dollars over his negotiated purchase price. That's not bad. It is important to note that this tremendous windfall occurred because he was also working with a top notched real estate agent. In order to get the really good deals, you have to have a great negotiator on your team.

      The good news is that it is not over. There are still lots of great deals out there and since we are still in a buyer's market, you have the potential of winning some great assets at great prices. Interest Rates are starting to creep up but they are still very low compared with rates over the past year. Depending on your particular scenario and your personal credit worthiness, you could expect rates in the low 6's. The graph at the side is from Bankrate.com and for 30 year fixed rate mortgages in the state of Oregon; we are seeing rates averaging right around 6.0%.

      Why are interest rates so thoroughly studied by academics and analysts? Basically, interest is the cost of borrowing money and it is closely tied to risk. The higher the risk of being paid back, the more that a lender is going to charge a borrower for that money. For real estate investors like us, the rate of interest can make a huge impact on the equity we retain at the end of the project as well as the monthly outflow of cash. Similarly, one must carefully consider the same investment consequences of interest rates on the purchase of a primary residence. 

Mortgage Backed Securities 

      In past issues, I have discussed at great length how the bond market works in opposition to the stock market. When times are good, money leaves the bond market and flows into the stock market due to higher returns on investment. Conversely, when times are tough on Wall Street, money flows back to the safety of the bond market. This ebb and flow of money is the primary driver of interest rates.

      So, you are a bank. People invest their savings in your institution because you offer them a safe and a small return to store their cash with you. You want to make money on their deposits, so you need to sell that money. You write loans or bonds. As it happens, times are tough on Wall Street and lots of money is flowing into your institution. Yippie! But remember that lots of money is also flowing into your competitors' institutions as well. They are also trying to do the same thing you are and everyone is competing to sell their money. If you want to sell more money, you have to attract more borrowers or people who will buy your money. How are you going to attract borrowers if your rates are the highest in town? So, you cut back rates to attract more borrowers. The opposite is also true.

      At the same time, you may be employing people to help you sell your money and you will offer them incentives to do so. The graph at the right illustrates this very effectively as it shows the pricing trend for Mortgage Backed Securities for the past 45 days. The 100 price point represents a par price for the market. If a loan is sold for more than 100, the trader makes a bonus and if it is sold below 100, the price of the bond comes with an additional cost. So, this graph really tells us what is going on inside the lending institutions themselves. Trading above 100 indicates that lenders have a plentiful supply of cash and below 100; their supply is decreasing.

      What does this mean to you? Right now, cash in moving back to Wall Street because the market is starting to pick up. Lenders are still issuing loans but because they don't have to be as competitive, they can charge more for their money. Hence, rates are also going up. But, the good news is that we have been on a two week cycle from peak to peak. As money flows back, the competition heats up and rates come down. As your mortgage planner, I study this activity on a daily basis so that I can make accurate determinations on the timing of your projects. Even though I stay on top of this, I still want you to be aware of what I see in the market so that you will be able to make sound financial decisions. 

New Alert on Identity Theft! 

      I was listening to the Clark Howard show on KPAM 860 last Friday and he spoke fervently about a new form of identity theft, which is basically unpreventable. I was floored when I heard what these innovative thieves are doing. Fortunately, they haven't hit anyone in Oregon yet, but this has been going on in California, Texas, Virginia, and several other high population areas. It is only a matter of time until someone here does it. Clark Howard even said that it was a miracle that the Secret Service even caught onto this. They arrested 4 people in Southern California in connection with other fraudulent crimes and in the process; they stumbled across this latest scam.

      What the thieves do is go into places where people swipe their credit and debit cards to pay for products or services. Then they distract the clerks and with some slight of hand, they add an electronic device into the card reader itself. You come along and swipe your card to buy something and while your transaction is taking place, all of the information contained on your magnetic strip has been covertly transmitted to a thief nearby. Within an hour, your bank account is emptied or your credit card is maxed out. Clark Howard was explaining how there is not a real way to prevent this other than using cash for all of your purchases.

      The problem is sorting it out after the theft has occurred. With credit cards, you will be able to get a credit back from the company once you catch it and report it. He explained that you have 60 days to report a wrongful credit to your bill. If you pay your credit card bills without reviewing each item carefully, you run the risk of paying for fraudulent transactions. If don't catch it for several months, you are too late and also responsible for that debt. If you use credit cards, be certain to review your statement each month and if there are fraudulent transactions, report them immediately. You should be able to put your credit back together before significant damage has occurred to your credit and your finances. If you don't check your statements, you may end up with some major problems.

      The real danger is to your bank account. For all practical purposes, the thieves have just made a clone of your debit card. When you call up the bank to report the fraudulent activity, the bank is going to say that it was you who used your card. From their perspective, your card was swiped, a pin was entered, and the transaction totally looked like it was you who withdrew the funds from your account. You are going to have a devil of a time trying to get it sorted out. The reality is that if you prefer to use electronic forms of payment, you are better to use your credit cards because recovering from the theft will be a lot easier. You would also be wise to use credit cards with small limits for everyday spending.

      As it turns out, I received an e-mail from a really good friend who sent out a great article on identity theft. Here are some great pointers that I wanted to pass along to you.

1. Do not sign the back of your credit cards.  Instead, put 'PHOTO ID REQUIRED.' 
2. When you are writing checks to pay your credit card accounts, DO NOT put the complete account number on the 'For' line.  Instead, you should only write the last four numbers.  The credit card company knows the rest of the number, and anyone who might be handling your check as it passes through mail channels won't have access to it.
3. Put your work phone numbers on your checks instead of your home phone. If you have a PO Box, use that instead of your home address. If you do not have a PO Box, use your work address. Never have your SS# printed on your checks. You can add it if it is necessary. But if you have it printed, anyone can get it.
4. Make a photocopy of both sides of everything you store in your wallet or purse. That way, you will know which account numbers to call in order to notify them about the theft and you will have their phone numbers handy. Naturally, you will want to keep this photocopy in a safe place. You should also carry a photocopy of your passport when you travel here or abroad. 
5. File a police report immediately in the jurisdiction where your credit cards, etc., were stolen. This proves to the credit providers that you were diligent, and this is a first step toward an investigation.
6. But the following is the most important of all. Call the 3 national credit reporting organizations immediately to place a fraud alert on your name and also call the Social Security fraud line number. 

      The alert requires any company checking your credit to contact you by phone to authorize new credit. This should prevent a great deal of damage to your credit. After a theft or fraud, you will want to check your credit on a regular basis to make certain that your credit worthiness remains in tact. Here are the numbers for the following credit and social security institutions. 

1. Equifax:  1-800-685-1111 
2. Experian: 1-888-397-3742
3. Trans Union : 1-800-916-8800
4. Social Security Administration (fraud line): 1-800-269-027

Lesson from Mac 

      I was having a conversation with my Father in Law a few weeks ago about defensive driving. I have noticed on my long trek into work that Highway 30 through Columbia County provides an unrelenting series of auto accidents; some more spectacular than others. I don't know if you do this, but I find myself asking this question every time I pass a wreck, "How did they manage to do that?" My Father and I were discussing the importance of leaving some extra space between cars and paying attention to the flow of traffic and in so doing, you have wiggle room to avoid an accident if something happens that is unexpected. It suddenly reminded me about something my Grandfather used to tell me; ALWAYS THINK AHEAD!

      Since Mac was a Navy pilot in combat and he was in harm's way, he spent a great deal of time thinking forward about things that might happen, so that he had a way out or around the danger. One tragic example of this came when he was a test pilot at China Lake in Southern California. The Navy was designing and testing a new rocket named "Tiny Tim" that was capable of slamming through a concrete fortification. The picture at the right is an SB2C-4 Helldiver, which the Navy used in the test firing of this rocket. It was a big rocket for the time and the way that the engineers set up the launching sequence really concerned my Grandfather. It was designed to drop a few yards before the rocket engine would arm and ignite. My Grandfather thought ahead of all the possible dangers and he asked the Navy why there were not any protections in place to prevent an early ignition. He suggested some sort of physical arming device that would ensure a safe launch. At this, he received a lot of complaining and nay saying and he heard a lot of things like, "That would never happen!" Does that sound familiar?

      Anyways, Mac firmly declined to fly the mission on safety grounds and the Navy asked his best friend to fly it in his stead. Even against my Grandfather's concerns, Jack flew the mission. Sadly, on August 21, 1944 my Grandfather's concerns were warranted and his prophetic forecast ended in tragedy. Jack dropped the missile on a dive and as Mac foresaw, it ignited early blowing one of his outboard elevator tabs into a fixed position, which kept Jack's airplane in a dive. A few moments later, Jack's Helldiver crashed and he was instantly killed. If you type China Lake into Wikipedia, you'll see that the airfield is named Armitage Field in honor of my Grandfather's friend.

      My Grandfather used this story on several occasions to remind me to always be thinking ahead in order to avoid danger. In the case of the financial world, anything is ALWAYS possible! Never forget that. It is always possible that the Fed will go crazy fighting inflation as Chairman Paul Volcker did in the 1980's. I don't believe that this is likely, but it is always possible. It doesn't matter at all what your personal situation is, you should always pre-determine a solid strategy in the event that something unexpected occurs. Be prepared!

      It doesn't matter if you have lots of wealth or you are just starting out with very little. What are you going to do if you lose your job? What are going to do if the market falls apart and you have a rising adjustable? What are you going to do if you are injured and lose your ability to work? What are you going to do? There are many such questions that you can and should ask yourself. Unfortunately, most people go blissfully along in life without a contingency plan. This does not mean that you should live life in constant fear of the unexpected. Simply, we should look forward to identify possible dangers and then we can create effective plans to avoid or mitigate them. Look ahead and make sure that you are prepared! 

STRATEGIES 

      The best strategy to avoid financial pitfalls is to always have a backup. For the most part, this is overcome by possessing financial reserves. If you lose your job or something happens, having money in the bank will help you keep the bills paid and the electricity on while you scramble to figure out your next move. It will give you time to get your house sold if that becomes necessary. Furthermore, if you purchased your home correctly, your odds of earning solid appreciation are much greater and you will be in a better position to dump your house if you become pressed to do so. If your loan to value is around 85% or less, there should be enough equity that a quick sale dump is possible. This is where most people went wrong. Because they didn't have enough room in their loans, they could not unload their properties as their funds dwindled and they were forced to simply surrender their home to the bank.

      Strangely though, I have seen some sellers act in a completely irrational fashion. Seraina and I just came across a situation in which the sellers hung onto the dream of getting some cash out of their sale. Instead of lowering their price to move the property, they held the property through the foreclosure process. In lieu of lowering the price and walking away, they still walked away, but with a foreclosure on their record, which will remain with them for 7 years. Have a backup plan.

      If you don't have the right insurance safeguards in place, you are asking for it. I recommend that all my clients and especially those with family members acquire the right amount of insurance; both life and disability. Spend 10 minutes with your loved ones this month and discuss how the bills would get paid if the primary wage earner happened to get into a serious accident on the way home. Pretty quickly you would see that you are probably not prepared. Most people aren't. This would be a great month ever to carefully consider your escape plans and create a strategy to be properly prepared for tough times. If you need some counsel, call me to set up an appointment and I'll work with you to create a strategy. 

REAL ESTATE OUTLOOK 

      The real estate market is still moving upwards in most communities within the Portland Metropolitan area. There are still pockets that are slowing and some are even negative, but on the whole the Portland market is up. Most of the professionals that I talk with all agree that business is increasing at a healthy pace and their schedules are definitely filling up. As I mentioned in the first paragraph, this is still a strong buying opportunity to acquire new properties in most areas. For the best profits, you may be advised to look at the markets that are currently down. Not only are you more likely to secure better terms on your acquisitions, but you will save money in the process. 

Build Your Dream House 

      Another avenue that every one of you should consider is building your own home. I have done this myself and I personally understand the value that comes from building versus buying retail. Our home in St. Helens only cost $250,000 including land and the construction of a 3,300 square foot Kentucky Colonial. The last time it was appraised, it was valued at $450,000. Even if the real estate market cuts the equity in our home a bit, we still made really good money on our investment. At $450,000, we enjoyed an 80% return on investment in a 5 year period of time. Honestly, this has been one of the wisest investments I have ever made. I believe in home construction and if you are up to the challenge, you will be so glad you did it.

      I have begun working with a building company that offers the kind of service that one would hope to find but rarely does. David and Elizabeth Wilkening run a company named Craftbuilt Fine Homes and they are amazing to work with as well as being completely transparent in the services and costs of your construction project. Unlike most builders who pad the construction budget by adding profit to the cost of materials, fixtures, and labor; the Wilkenings charge a flat fee for their services and ALL of the construction costs are truly at cost. You get to decide which sub-contractors you will be using in addition to every other aspect of the project. You will receive invoices and receipts ensuring that you will literally know what it cost you to build your home. I admire and respect this approach a lot and I do not have any reservations referring my construction clients to them.

      As I have discussed the possibility of home construction with several of my clients, I have been amazed that most people seem to think that building your own house is either a crazy nightmare or out of their reach. The reality is that it is very possible to build your own home. The only challenge is that you will need to have good credit and some decent financial reserves. If this is something that you possess or could possess in the future, we would like to extend a special invitation to you to meet the Wilkenings and learn about how you can build your home the right way the first time around. 

Seminar on Home Construction 

      Seraina and I are hosting a home construction seminar on June 26^th at the Lincoln Tower next to Washington Square Mall beginning at 6:30 in the evening. David and Elizabeth will come and talk about the construction industry as well as their unique approach. They will discuss a couple of scenarios in which their clients were pleasantly surprised to discover that there was a significant amount of equity, naturally built into their homes at completion of those projects. How would you like to be $50,000 wealthier at the end of a home purchase? This is a real possibility when you build your own home. I would like to invite you to attend our event if have ever dreamt of building your own home. If you haven't, I still think you should come because this is an option that is worth learning about as you move forward. Come and learn how affordable and easy it can be. David and Elizabeth will be available for your questions and you will be glad you came. We look forward to seeing you there. Please call me to reserve your seat! 

Real Estate Statistics through April 2008

      Inventory has increased to 10.3 months, which brings it level with February numbers. I was disappointed to see this, but it makes perfect sense and it definitely follows the trend of the previous two years. As the summer months approach, many people who have been waiting to place their homes for sale until there are more buyers out, suddenly jump in. The biggest question that will truly determine the direction of this market will be whether or not the average trend line will continue on its upward course or will we start to see it begin to level. The National Association of Realtors is expecting 2008 to land in one of the top 5 years for most houses sold, which leads me to believe that we should start

to see this trend peaking. This trend will become more evident as the summer progresses. The important point is that we are still seeing appreciation continue to grow in many areas.

      As you can see on the area report graph, North Portland is doing the best in the area at 7.7% appreciation. Pending sales are certainly down and compared with other townships, North Portland is off by the least. It is not really surprising to me that Government Camp is not doing that well since it is primarily a tourist destination. In tough times, tourism always takes a beating. I was surprised to see that Milwaukie and Clackamas are doing as poorly as they are. You can see that the median home price is closest in value to homes in Lake Oswego but without the prestige. (That pretty much sums it up!) This could be an indicator that home values increased in this area at an accelerated rate and now they are coming back down to reality.

      Due to my contrarian mindset, I would suggest that investors focus on these depressed areas in order to find the best deals. Clearly, sellers will be more motivated in areas that are getting hit harder. However, remember that good investments will be found in each of these areas and that area appreciation is only a function of what is going on in general. It is always good to know these figures, because it will give you a snapshot of the market activity in those different locales.  

SERAINA AGUAYO 

There is so much more to relocation and the purchase of "Real Estate" than interest rates, rate locks, investment capital, brokerage fees, home-inspections and appraisals. Last week, I spent some time with Dave Smith conversing with neighbors in the North Portland area and it really opened our eyes to a very significant neighborhood transformation that has really picked up in the last 5 to 7 years.  Gentrification is a phenomenon that is changing the face of Old Portland Homes and like all changes; it brings the good and the bad.

      The effect of this dramatic transformation is what is known as gentrification.  According to Wikipedia, "gentrification is a number of processes of change in demographics, land uses and building conditions in an area accompanied by rapid increase in a neighborhoods property prices and influx of investment and physical remodeling and renovation."

      At a glance, areas such as Piedmont, Irvington, Alberta, and Sellwood are radically changing shape. Take a stroll down any of these characteristic neighborhoods and you will immediately notice many home renovations, in fill developments, and many projects aimed at improving "curb appeal".  Beyond the colonial columns, white picket fences and arborvitaes, there is a great deal of history and those homes can still remember the sounds of families playing and living together. On the breeze of the old maples and dogwoods, one can hear the whispers of life long since past. Gentrification changes this and builds new memories for the world of tomorrow.

      One of the primary results of gentrification is a shift in the demographics of a neighborhood. As properties are improved and prices increase, lower-income residents can no longer afford to buy in these areas. Another consequence is that an increase in property values results in an increase in property taxes. Residents, who find themselves unwilling or unable to pay the difference, typically sell or even transfer the difference to their tenants by increasing rents.  So, gentrification usually moves lower-income residents out of a neighborhood. For better or for worse, this is a natural result of the general improvement of the neighborhood.

      There are many people who are very un-happy about gentrification. We spoke with one member of the community who felt guilty for contributing to the renovation of her community.  She said, "I have seen good and bad come of this.  It is just shocking for me to see a house that 10 years ago sold for $100,000.00 and recently within the last month I watched it go for over $600,000.00." Yes, it is true that if you build up the value of the community, prices will increase as a result. It's also true that the increased prices will shut out certain demographic groups. These are tough issues and there isn't an easy answer.

      On the other hand, there are also many wonderful results that naturally come from gentrification. As a native Oregonian, I have many memories of the North East and North Portland areas and I remember numerous homes that were poorly maintained and in terrible shape. Many of the homes in these communities were run-down, neglected and abused.  My family and I always admired the 3 story, 5,000 square feet historic Craftsman style homes (circa 1900) and the grandeur of historic colonials with their enormous columns boasting incredibly ornate detail. At the same time, we were usually admiring these gems for their potential, because so many of them had fallen to the wayside. To have such a unique piece of history slide into disrepair is such a shame. Although gentrification alters the face of history, neglect can have a worse impact on both the value and the history of those old neighborhoods.

      A positive aspect of gentrification is that old, run down neighborhoods are making a huge comeback. Remodelers and renovators are buying some of these homes and they are bringing them up to modern standards while maintaining their original charm and character. Sometimes this doesn't happen and a total demolition occurs. But on the whole, these neighborhoods are now becoming very desirable places to live and this is resulting in the revitalization and renewed vigor of these communities.

      What is  attracting so many renovators and remodelers to these areas? Most of them are admired for their character, developed neighborhoods, mature growth, history, and charm. Take Piedmont for example, which is located on the East side of the Willamette River in the N and NE of Portland. The boundaries for Piedmont include Interstate 5, Northeast Columbia Boulevard, Northeast Martin Luther King Jr. Boulevard and North Ainsworth Street. Within Piedmont's general boundaries, it includes approximately 616 acres, 2,518 residences and 6,427 residents.  Piedmont is highly sought after because it is an "Ideal Urban Village" and it is widely praised for its easy access to popular neighborhoods like Kenton, Boise, Alberta, Irvington, Mississippi and Humboldt. Piedmont, which literally means "foot of the mountain", was established in 1895 as an upper middle-class suburb (it's not a suburb anymore) and it was previously known as "The Emerald and Portland's Evergreen Suburb."

      Gentrification is renewing and reenergizing "Historic Piedmont" and this is a substantial improvement to the devolution that has been occurring there over the past 30 to 50 years.  Just as Dave spoke about waves in real estate pricing; Piedmont is experiencing a tremendous increase in both status and popularity. Within the last 5-7 years, Piedmont has become one of the highest appreciating cities of all surrounding Portland neighborhoods.  Advancing from "starter home" to "fixer-upper" and now to "established" categories; the neighborhood has made a major transformation. Some properties in the Piedmont area have appreciated at an astonishing rate of 80% or greater in the past 5 years. This is one of the reasons that I write these articles. I want my clients to be highly informed about the pockets of real estate that show the most promise.

      Personally, and I believe Dave would agree, I am delighted with the renovation of these Portland neighborhoods and even though there is a lot of controversy surrounding this topic, this process is better for the homes, the neighborhoods, and the history.

      Bear with me as I make a case for gentrification because there are so many positive outcomes. I concede that this process is changing the nature of the neighborhoods that are found in North and Northeast Portland, but these changes have revitalized the community atmosphere. This is a testimony to property rights and the freedom of land ownership. This progression has taken place freely and gradually as more and more purchasers began to take an interest in the abundance and diversity that these neighborhoods boast. There is also a profound sense of community that seems to be lacking in the some suburban neighborhoods. We were talking with local residents in the Alameda and Piedmont areas and they were happy to tell us about their block parties, community barbeques, neighborhood awareness and the like.

      It will be interesting to learn more about these neighborhoods and to further investigate the development and effects of gentrification. I highly recommend these communities to my clients because there is still a tremendous amount of untapped potential. I will continue to work in this area and I look forward to speaking with more community members who are usually kind enough to share their intriguing stories with me. This is perhaps the greatest thing about these neighborhoods; you are not only living in history but you become part of it. 

Seraina Aguayo, Broker, Realtor, GRI

John L. Scott/Sandy

(971) 322-9878

If you would like more market data on your specific market area or would like a FREE comparable market analysis, please contact me at greshamagent@johnlscott.com or Dave Smith. *Data gathered from the National Association of Realtors® and the Regional Multiple Listing Service^TM of Oregon. 
 

JUNE ACTION STEPS 

• If you are considering a home purchase in the next 6 months, you should not wait any longer to start getting your ducks in a row. Sometimes, buying a home takes a considerable amount of planning and it is best to do that when you have time to devote to it.
• The Fed has declared that rate cuts are over. If you have a mortgage tied to an index and you are worried about your payments rising, please call me to talk about a strategic refinance. If you have the Home Ownership Accelerator, this will not apply to you because your accelerated principle reductions will still occur in a rising rate environment. Rising rates will only increase your payoff times, which will still be greatly reduced from your 30 year fixed.
• I hope that you have all been working on increasing your financial reserves by 1 month. At the end of July, Bonnie and I will have reached this goal.
• Make copies of everything in your wallet/purse and store that in a safe place. You may also want to include the 4 phone numbers to the credit bureaus and social security hotline in the same place. This will expedite the process of reducing damage to your credit.
• Make sure that you check all of your credit card statements when they come in for fraudulent activity. If your credit is damaged because of identity theft and you haven't caught it, you will not be able to get a home loan without fixing your credit. It is best to stay on top of it.
• Have a great June and I look forward to serving your financial and real estate needs.

All the best,

Dave Smith 

I am a Mortgage Consultant with Mortgage Express. You can contact me at my office number, (503) 517-8763 or at my e-mail address, which is dsmith@mtgxps. If you are interested in purchasing, selling, or refinancing a home, I would love to work with you to find the best strategy that will fit into your short and long term personal and financial goals.

I recognize that the financial situations of each of my clients and anyone who reads this newsletter do vary widely. Therefore, the strategies stated herein should be explored further with your financial advisor or advisors to be sure that these strategies are beneficial. The opinions expressed in this newsletter are not intended as specific investment advice or as a proposal for providing mortgage lending services.