“The Big Picture”

Considering what has transpired in our economy and with the real estate market the last several years,  it is no surprise that the real estate buying public has questioned whether real estate  is (still) a good investment.

We have all heard many horror stories of property owners who are underwater, “lost” a lot of money because of a need to sell or have even lost their home to foreclosure.   This has been the news of the day, month and year.  Though unemployment has had a terrible impact on some property owner’s income, many of these underwater cases are examples of all the equity (or profits) refinanced out of the property.   We can get much deeper into all the reasons this happened but that is for another day.

It is human nature to clearly remember the short term pain and forget the long term gains or rewards.

The fact of the matter is that real estate has been and will continue to be the best investment when compared with other alternatives.

If we compare the return over last 10 years from January 1, 2000 to December 31, 2009 for both the stock market and real estate, there is no comparison.

Below is a graph that really drives this home….no pun intended!

On January 1, 2000, the DOW was at 11,522.  As this post is being written, the DOW is slightly over 10,000 which indicates an even further decline in stock values from the graph since Dec 31, 2009.

Where I believe we all become confused is that what we all remember is the peak of our property values in 2006-2007 and believed that’s how much money we had in the “Bank of House”.  We saw double digit appreciation in many years and we felt like all of a sudden, we were rich.

The fact is that from the year 2000 thru 2006, our properties appreciated an astounding 89% or close to 15% per year average.  This was just incredible since the average appreciation over the previous 20 year time frame in 5 year increments was about 25%, or 5% per year.

I have often spoken with sellers that lament about what their property was “worth” and how much less it is worth today.  Of course, we will never know what their property would have sold for as it never really was put on the market and sold.

Here is the simple way I look at the stock market (and real estat market) to keep my personal sanity:

If I bought Microsoft Stock at $25 per share and it rose to $45 per share at it’s peak, but I was ready to sell it later when it was valued by the market at $35 per share, did I make $10 per share or lose $10 per share?  Any logical investor would state, I made $10 per share or a 40% return on my investment.  The IRS would look at it as a purchase (or basis) at $25 per share, and a sale at $35 per share with a taxable profit of $10 per share.

When compared with any other investment available, whether you consider the stock market, CD’s, saving accounts (at .2%), no other investment, even after adjusting for the current real estate down turn has over the last ten years, performed as well as real estate.

In addition, we need to reminded that there is a major difference between the word “investment” and the word “speculation”.  An investment is a low risk, good steady return over time.  Speculation is a high risk, great win or great loss over a short term….some call it gambling, day trading or flipping.

Real estate certainly performs over the long term but if you speculate on anything, including real estate, you can win or loss big.

Aside from the slow steady increase in values over time,  real estate ownership has a number of additional advantages over any other investments.

Real estate ownership advantages include:

• You can live in your real estate and your kids can play in the yard….tough to live in stock or a savings account.

• Home ownership is a income tax benefit as you can deduct the interest and the real estate taxes on your income tax return.  Try to deduct the interest on a loan to buy stock and Mr. IRS will be knocking at your door.

You pay taxes on the first dollar of interest you earn on a savings account.

And remember, if you are a renter, you can’t deduct a thing.  You are making the landlord’s payment and he gets all the income tax deductions.

• When you sell your home and have a profit, you are exempt from paying federal income taxes on the first $500,000 of profit or gain as a married couple ($250,000 as a single person).  If you make a profit on the sale of stock, you pay capital gains taxes starting at the first dollar of gain.

• If you own a rental property, you can not only deduct the interest and the real estate taxes but also take additional income tax benefits as depreciation of a property.  There is no depreciation benefit as you hold stocks.

There is a lot of feeling that we have hit or are very close to the bottom of prices.  We certainly are at the bottom of interest rates with historic lows probably not to be seen again in our lifetimes.

If you want to buy your first home or investment property, there is no better time.  A monthly payment is affected by two factors: purchase price and interest rates.

If you are a current homeowner and you want to move to a different location, school system or larger home, you may sell for less…but will buy for less as well.  That’s a wash.  But, you will probably never see these low interest rates again.

Look at real estate as an investment over time and it can’t be beat.  Look at real estate as a speculation and take your chances.

If you are a first time homebuyer, you can still qualify to obtain the First Time Home Buyer Credit up to $8,000. You must close on your first home on or before November 30, 2009. December 1st will be too late.
Here are some steps that could insure that you can get your home closed on or before November 30th:
1. CREATE GAME PLAN AND TIMELINE: Meet with your Realtor and prepare a reverse timeline that includes each step in the buying process up to closing day. Remember you must close before Dec 1.

2. ASSEMBLE YOUR TEAM: Ask your Realtor now for recommendations for a good lender they have worked with in the past, an attorney, and home inspectors so there is no delay when you do find your property. Determine now what home inspections you will want including general, radon and/or termite.

3. FINANCING: Make sure you have your mortgage ready to go. Check with your lender in advance about what paperwork they will need from you and get it done now. Ask your lender to insure that your property can close by the deadline. Many good lenders can get a conventional mortgage closed with in 2-3 weeks. FHA can take longer. Make sure you check with your lender about timing. TIP: There are both conventional and FHA lenders that can underwrite and fund mortgages out of their own offices. Most lenders cannot and therefore the process before closing can often take twice as much time. If you are going to use an FHA mortgage, make sure your lender is an FHA Designated Endorsement lender.

4. LOOK FOR YOUR HOME: Define your criteria and start looking with a Realtor right away. Narrow down to search to price range, neighborhoods and size. Schedule blocks of time with your Realtor for showings times now.
Do not look at short sales. You do not have enough time.
Ask your Realtor when making appointments to ask the listing agent if the sellers are willing to move before Dec 1. If they cannot, ask if they would consider closing before Dec 1 but renting back for a week or two.

5. OFFER and CONTRACT: Once you have successfully negotiated a contract on your new property, be ready to SNAP your plan into action for loan applications and inspections. It will be critical to give the lender everything he needs immediately and to stay on schedule. Again, your Realtor will help you with this.

Click here to watch me discuss the credit on WGN Money Matters.

From the time you get a contract, the expedited mortgage/inspection process can take 2 ½ – 3 weeks so act now.

If you have any questions, please contact
Dean Rouso, Broker, ABR, CRS, GRI, Certified Negotiation Consultant at
Prime Property Partners.
Office 708-354-7355
Dean@PrimeAnytime.com

Insuring your home with the proper coverage is so incredibly important since your home is almost always your biggest investment – and it is where you stay dry and warm. Following are some things every person who is looking to purchase a policy should know:

• Always insure your home for 100% of the cost to rebuild. To figure out that number you can go to buildingcost.net to use their free calculator.
• Flood, earthquake, war and nuclear accident coverage is extra beyond what your basic policy will cover.
• The contents of your house is usually covered at 50% of what the value of the structure is. You must make sure this is adequate coverage for all of your belongings by making an inventory. Use knowyourstuff.org’s free home inventory software to determine this number.
• Take pictures of all of your valuables in case you do need to file a claim. Pictures make the process so much easier.
• Make sure you buy enough liability coverage – you need enough to match your assets.
• Always buy “riders” for any expensive artwork or jewelry that you own. If it is worth more than $2,000, you may consider buying a separate policy for it.
• Shop around as prices vary dramatically. Start with your car insurance company, because they often give discounts to multiple policy owners. You may also go to insure.com to compare prices. 
• Keep your deductible high. Starting with a $1,000 deductible is wise, as most people do not make claims for less than this amount as there are insurance companies that will drop you if you make more than two claims per year.
• Always ask about discounts. Many insurers have them, but you must ask for them. Discounts for installing smoke detectors, an alarm system or a fire-retardant roof are common. Also, if you are 55 years of age or older, mention that as you are considered low-risk – and can get a price reduction.
• Keep your policy up-to-date! Changes to your home, such as a re-model, need to be covered.

Baby boomers are making the reverse mortgage more popular than ever, but just know the potential pitfalls before you consider one.

1. 1. Repayment Rule: If you sell your home or for some reason must live at a hospice, a nursing home or you simply plan to use the home as your second home, you will have to repay the cash you received from the reverse mortgage as well as interest and other fees back to the lender.
2. High Closing Cost and Interest: Don’t forget to shop around and compare prices. Many seniors fail to do this, as they are not as familiar with the reverse mortgage as they are with a traditional mortgage. If offered, reject the adjustable interest rate option. There are many fixed rate reverse mortgage programs available to choose from.
3. Maintenance and Taxes: Always ask the bank to be clear what your monthly payment will be per month, less your escrow payment. Make sure you know the lender’s policy on the home’s maintenance. You might consider taking enough money up front to have for future repairs, so that your monthly payment will always be the same.

Every home needs maintenance repairs over time, but if you are putting your house on the market you may want to know the top four places to put your money so that you will get the biggest return out of it. According to a survey done by HomeGain, in order to get the highest return on your investment, spend your repair dollars on the following in this order:

1. Cleaning and de-cluttering
2. Lightening and brightening
3. Home staging
4. Landscaping

Obviously the monetary returns may vary slightly based on where you live in the country, due to the cost of a repair and the importance of each particular improvement to buyers in that area. HomeGain estimates that making the above repairs and spending between $5,000 and $8,000 on them, you may see a price increase in the West as high as $22,762, in the East as high as $23,532, in the South as high as $21,740 and in the Mid-West as high as $20,279.

Other things never to overlook when putting your house on the market are dirty windows, electrical repairs, plumbing problems, old carpeting, old paint and damaged floors.

To learn more about home improvements go to HomeGain.

Most people keep safety knowledge filed away in their heads, but what every household really needs is an actual checklist that can be posted and referred to yearly to keep everyone safe. Here are some tips and reminders about some of the things that may not be so obvious:

• Fire Safety includes keeping pot and pan handles turned away from the outside of the stove when cooking, so they can not be bumped into.
• Keep all space heaters at least one foot away from anything that is flammable, such as furniture, draperies, even people.
• Never store propane tanks indoors.
• Electrical safety includes never putting electrical cords across doorways or under carpets.
• Never plug major appliances into extension cords; separate outlets only.
• Consider an electrical inspection for your home. 400,000 fires per year are due to faulty electric wiring.
• Test smoke and carbon monoxide alarms periodically and change batteries yearly.
• Devise a home fire escape plan that includes more than one exit and that every family member knows about.
• Teach children to call 911 from a neighbor’s phone in the event of a fire.
• Affix rugs to the floor to avoid slipping.
• With children in the home, always attach brackets to bookshelves.

Monday, March 3, 2008:  The National Association of Realtors 2008 Conventional Finance and Lending Committee passed the following motion:

" That NAR suppport a permanent national conforming loan limit no less than 50 percent higher than the current conforming loan limit ($625,000 or higher).  In addition, that NAR support making the temporary loan limit increase for high cost areas as porvided in the economic stimulus legislation permanent.  Accordingly, for high cost areas, the conforming loan limit should be increased to 125 percent of the local median home sale price, not to exceed $729,750".

If passed, the greater Chicago metro area (considered a non-high cost area) which currently has a conventional loan limit of  $417,000,  would be increased to $625,000 giving relief to home buyers and sellers who are currently subject to a minimum of a1% higher (unconventional or Jumbo) interest rate for mortgage loans which can greatly pressure affordability and therefore stunts new construction and higher priced existing homes in much of suburban Chicagoland.   

This new NAR policy proposal will be presented to the Senate Banking committee on GSE reform on Thursday, March 6, 2008.  There is hope that Congress’ new willingness to raise conforming loan limits by enacting a temporary increase as part of the economic stimulus lesgislation will drive them to consider this permanent and effective modification to the the legislation.

Dean Rouso, Broker-Owner, Prime Property Partners and Committee Member of NAR Conventional Finance and Lending Committee.