This is an open-letter that I sent to my clients earlier this evening.
Based on the ‘rapid-fire' news that has come our way over the past few weeks I felt it necessary to give an update as well as my views moving forward.
"Uncle Sam is turning into Uncle CEO. But will the new corporate suit be a good fit?" - Jim Puzzanghera, Los Angeles Times, 9/21/08
Although this all truly started back in March with JP Morgan Chase's buy-out of Bear Stearns (with $29 billion of loan guarantees by the US Government), the past few weeks have been a roller coaster ride as it pertains to our economy and, more importantly, the real estate market. Lehman Brothers filed for Chapter 11 bankruptcy. Bank of America agreed to acquire Merrill Lynch. The US Government took over Freddie Mac, Fannie Mae - which together hold or guarantee $5.4 trillion in mortgages or about ½ of the nation's mortgages. The US Government saves insurance giant AIG from bankruptcy by taking an 80% stake in the company in exchange for $85 million in loans over the next 2 years while they break the company apart/dismantle it in an orderly fashion. Now the federal government is putting the final touches on a $700 billion bail-out of the mortgage industry by buying mortgages from financial institutions in an effort to get their books in order and to get them lending again. Add to that the news that will be coming regarding companies such as Morgan Stanley, Goldman Sachs, Washington Mutual and others and it gets even more interesting.
Since we live in the information age, we are being deluged with information on the comings and goings of the economy which is causing a lot of confusion on how this affects you and me, the individual taxpayers, the American family.
Long-term, as it pertains to you and I, the turmoil and government intervention that we are experiencing today should ultimately shorten the amount of down-turn in the economy, allowing us to begin recovering as a whole in 6-12 months rather than 12-24 months as some have predicted. That being said, we do have an election on November 4th (PLEASE VOTE - no matter who you support, you have a voice, use it!) plus, the measures taken today will have lingering effects in the global marketplace for several years to come (value of the US dollar, etc.).
In effect, what we are doing now is wringing-out a lot of the bad debt, seeing consolidation in the industry (some based on need and others based on perception of need) while putting measures and regulation in place to prevent this type of convergence of issues from happening again. In addition, with phase II of the $700 billion plan proposed to include additional assistance to those in jeopardy of losing their homes (caps on rates, easier to renegotiate terms, etc.) along with additional economic stimulus (to be determined) it is shaping-up to be a comprehensive economic package.
Prior to a turn-around though, a few things need to happen. First, there needs to be a decline in the number of homes going into foreclosure. Homes in foreclosure are adding unnecessary supply to the market, causing prices to fall, compounding the issues we have been experiencing for nearly 2 years. Hopefully the ideas discussed above will aid in stemming the number of foreclosures, allowing individuals and families to keep their homes, stemming the decline in home values and aiding in the recovery.
Second, there needs to be a flow of money to ready, willing and able buyers to generate demand for housing. With hindsight being 20/20, this needs to be accomplished in a sensible way - having buyers prove (via documentation) that they are able to purchase a home, make payments on-time and keep their financial house in order (not over-extending themselves). Credit is tight right now but, if we are going to move forward from this point, we are going to have to find a way to allow qualified homebuyers to borrow money (at reasonable rates) and buy homes.
Third, inflated prices on gas and other ‘staples' need to return to some sense of normalcy. If we take a look at mid-March and early April this year, when a barrel of oil was near where it was this past Friday ($104.55/barrel), the national average price of a gallon of gas was hovering around $3.30. The best I have found this week in our area is $3.78 in Kane County. With prices returning to normalcy, this will free-up some cash in our pockets to start spending again. It was the consumer that kept the last period of growth going and I believe that it will take the consumer to get it going again (www.CBSMarketWatch.com and http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_history.html).
Ultimately, if this situation has taught us anything it is this - we need to get back to the basics. We need to save more money, not over-extend ourselves and balance our long term investment portfolios for the long term.
So, where does this leave you, my clients along with other buyers and sellers of real estate?
If you are a seller my advice is hang-tough and, if you can, let the market come to you, don't go to the market. What I mean by that is I am not a believer in a price reduction just for the sake of a price reduction. If you can, hang in there. Times are tough and showing are sparse (or non-existent in some cases). On the whole, it is the same for everyone in your area. If there is market activity on similar homes with a lower price, and you can afford it, then we can discuss a price reduction or other incentive to stimulate activity, but if nothing is moving, there is simply no need to reduce the price. Here are some additional resources for you to take a look at:
If you are a buyer my advice is to get pre-qualified and lock-in a rate with a solid lender (I have a list of great referrals, if necessary). With a solid, credible pre-qualification letter in hand, let's go find you a great home. Selection is plentiful and there is even an occasional "deal" out there to be had. Stay with what you can afford and set your expectations accordingly, unlike the Southeast and West, prices here in the Midwest did not rise as much or as fast from 2002-2006, hence they did not fall as fast in 2007 & 2008. Mortgage rates are still hovering around 6% - historically this is a GREAT RATE. If you are ready, willing and able, now is a GREAT time to buy a home! Here are some additional resources for you to take a look at:
If you are a firs-time homebuyer and looking to buy a home, make sure you purchase a home before June 30, 2009 - there are several tax incentives available if you do:
Hopefully this makes some sense of it all and gives you some insight as to where I feel we are and where we are going. If you have any questions, comments or concerns, please do not hesitate to call or e-mail me at your convenience - I am here to help.