Mortgage lenders, and more importantly the mortgage insurance companies, keep a close eye on declining market values because these distressed markets present the most risk.  Once an area is identified as distressed an extra level of scrutiny occurs on appraisals, mortgage rates and APR may increase, and the maximum loan to value (LTV) is often reduced by 5% beyond what is normal, requiring the buyer to put more money down.  PMI Distressed Markets Policy (pdf).

The Xerox of mortgage insurance companies, PMI, has just announced that it is taking 105 MSA/MSADs off their list on 6/18/2010.  This should help to loosen up those credit markets and make homeownership available to more people in the area.  This, in turn, should create an upward pressure on home prices.  If you are a real estate investor considering investment property in these areas, the tide has clearly turned.

Between the first time homebuyer tax credits, their expansion, abnormally low interest rates, and now the removal of areas from the distressed markets list, we are well on our way of a virtuous circle for real estate.  Look for any recovery in the economy to further spur on housing and increasing the homes for sale and their asking prices.

The following is the list from PMI of areas removed from their Distressed Markets list.

States
Delaware
New Hampshire
Hawaii
Rhode Island

MSA/MSADs and Non-MSA Areas
31084 Los Angeles-Long Beach-Glendale, CA
31460 Madera-Chowchilla, CA
32900 Merced, CA
33700 Modesto, CA
37100 Oxnard-Thousand Oaks-Venture, CA
40140 Riverside-San Bernardino-Ontario, CA
41500 Salinas, CA
41740 San Diego-Carlsbad-San Marcos, CA
41884 San Francisco-San Marcos-Redwood City, CA
41940 San Jose-Sunnyvale-Santa Clara, CA
42020 San Luis Obispo-Paso Robles, CA
42044 Santa Ana-Anaheim-Irvine, CA
42060 Santa Barbara-Santa Maria-Goleta, CA
42220 Santa Rosa-Petaluma, CA
49700 Yuba City, CA
13860 Bishop, CA
17340 Clear Lake, CA
18860 Crescent City, CA
21700 Eureka-Arcata-Fortuna, CA
38020 Phoenix Lake-Cedar Ridge, CA
39780 Red Bluff, CA
45000 Susanville, CA
46020 Truckee-Grass Valley, CA
46380 Ukiah, CA
99999 Non-Metro Areas, CA (Includes the counties of Alpine, Amador, Calaveras, Colusa, Glenn, Mariposa, Modoc, Mono, Plumas, Sierra, Siskiyou, Trinity)
24540 Greeley, CO
14860 Bridgeport-Stamford-Norwalk, CT
35980 Norwich-New London, CT
47894 Washington-Arlington-Alexandria, DC-VA-MD-WV (MSAD)
45220 Tallahassee, FL
25980 Hinesville-Fort Stewart, GA
31420 Macon, GA
40660 Rome, GA
42340 Savannah, GA
30300 Lewiston, ID-WA
38540 Pocatello, ID
16580 Champaign-Urbana, IL
16974 Chicago-Joliet-Naperville, IL (MSAD)
19500 Decatur, IL
28100 Kankakee-Bradley, IL
11300 Anderson, IN
21140 Elkhart-Goshen, IN
23060 Fort Wayne, IN
23844 Gary, IN (MSAD)
26900 Indianapolis-Carmel, IN
29020 Kokomo, IN
33140 Michigan-La Porte, IN
34620 Muncie, IN
43780 South Bend-Mishawka, IN-MI
12700 Barnstable Town, MA
14484 Boston-Quincy, MA (MSAD)
15764 Cambridge-Newton-Framingham, MA (MSAD)
37764 Peabody, MA (MSAD)
38340 Pittsfield, MA
49340 Worcester, MA
13644 Bethesda-Frederick-Gaithersburg, MD
25180 Hagerstown-Martinsburg, MD-WV
38860 Portland-South Portland-Biddeford, ME
11460 Ann Arbor, MI
12980 Battle Creek, MI
13020 Bay City, MI
24340 Grand Rapids-Wyoming, MI
26100 Holland-Grand Haven, MI
29620 Lansing-East Lansing, MI
35660 Niles-Benton Harbor, MI
41060 St. Cloud, MN
11700 Asheville, NC
48900 Wilmington, NC
12100 Atlantic City, NJ
47220 Vineland-Millville-Bridgeton, NJ
(Micropolitan Area) 10740 Albuquerque, NM
(Micropolitan Area) 10580 Albany-Schenectady-Troy, NY
(Micropolitan Area) 21300 Elmira, NY
(Micropolitan Area) 28740 Kingston, NY
(Micropolitan Area) 35644 New York-White Plains-Wayne, NY-NJ (MSAD)
(Micropolitan Area) 39100 Poughkeepsie-Newburgh-Middletown, NY
(Micropolitan Area) 21660 Eugene-Springfield, OR
(Micropolitan Area) 32780 Medford, OR
(Micropolitan Area) 38900 Portland-Vancouver-Beaverton, OR-WA
41420 Salem, OR
10900 Allentown-Bethlehem-Easton, PA-NJ
21500 Erie, PA
39740 Reading, PA
39300 Providence-New Bedford-Fall River, RI-MA
11340 Anderson, SC
24860 Greenville-Mauldin-Easley, SC
43900 Spartanburg, SC
44940 Sumter, SC
17420 Cleveland, TN
27740 Johnson City, TN
28700 Kingsport-Bristol-Bristol, TN-VA
36220 Odessa, TX
36260 Ogden-Clearfield, UT
39340 Provo-Orem, UT
13980 Blacksburg-Christiansburg-Radford, VA
19260 Danville, VA
31340 Lynchburg, VA
40060 Richmond, VA
40220 Roanoke, VA
47260 Virginia Beach-Norfolk-Newport News, VA-NC
13380 Bellingham, WA
14740 Bremerton-Silverdale, WA
34580 Mount Vernon-Anacortes, WA
42644 Seattle-Bellevue-Everett, WA (MSAD)
44060 Spokane, WA
45104 Tacoma, WA (MSAD)
48300 Wenatchee-East Wenatchee, WA
27500 Janesville, WI
43100 Sheboygan, WI
44600 Steubenville-Weirton, OH-WV

“How do I compare rates?” is the first question to ask when considering mortgage refinancing or when looking at homes for sale as investment property, a second home, or primary residence.  Industry standards are evolving but it is still difficult to compare mortgage interest rates on an apples-to-apples basis between different mortgage lender loan programs.

To compare home loan rates, it is important to compare the same type of bank mortgage loan program – e.g., start with a fixed mortgage and pick a 30 year mortgage or a 15 year mortgage.  Then there are three keys to evaluate the best home mortgage loan for you.

1. Home loan rate (aka interest rate) is the obvious choice because it appears simple and straight forward and dictates the monthly mortgage payment.  You can use almost any good mortgage calculator to get an amortization schedule showing your loan payment as being composed of both principal payments and interest payments.  Unfortunately, mortgage interest rates can be easily manipulated by allowing for lower loan rates when you pay additional mortgage points.  The result was that unscrupulous lenders would advertise the lowest rate in town, drawing people in, but then smacking them with extremely high loan fees.

2. Annual Percentage Rate (APR) attempts to solve the problems of simply comparing home mortgage loan rates by including all of the lender fees to calculate the true loan rate that is effectively being charged by your mortgage broker.  Per the Truth in Lending Act (TILA), mortgage lenders are required to disclose this information as the APR to give you a consistent means of comparing rates and programs.  But, the APR calculations assume that you are comparing 30 year mortgage rates (or whatever your term) and that you will hold your loan until it is paid off in full.

3. Hold Time Context.  Unfortunately, both current loan rates and APR comparisons are insufficient to determine whether or not the home mortgage loan being offered is right for you.  Using either of these is like using a single snapshot to convey motion – you just can’t do it.  The loan rate and the APR typically fail on opposite ends of the spectrum.  It is necessary to understand the context in which your mortgage loans will be used.  Are you likely to own the home (or loan) just a few years?  Then, the higher interest rate and possibly a higher APR might be the better loan for you.  Or are you more likely to hold onto it for 10+ years?  In which case, paying more costs to get a lower interest rate and lower APR is likely better for you.  (Please note, the number of years until a cross-over will vary with the interest rate and the loan closing costs differentials.)

You need to compare rates by manually analyzing the amortization schedule of each loan in question (identifying total principal and interest paid) or else by using a loan comparison tool that will graphically show you the time frame during which each loan is better than the other.

The best home mortgage interest rate is one that fits you, regardless whether it is for a mortgage refinance, bad credit loan, or home loan mortgage.  To determine the best refinance mortgage rate for you, either check the amortization schedule of each loan or use a loan comparison tool.

Guest Post by Chris Thorman

If a property owner has a growing number of properties, it’s inevitable that a day will come when they ask, “Should I outsource the day-to-day operations of my business to a property management company?”

Deciding when to outsource and which company to hire is one of the most important business decisions a property owner can make. Choose wisely, and an owner will be rewarded with the peace of mind that comes with responsible property management. Choose incorrectly, and an owner will be working harder after hiring a property management company.

Whether an owner has one or one hundred properties, it’s important to consider whether or not they’re prepared to hire a property management company. Handing over the management of property is a major decision. Before making that choice, owners will want to make sure they understand the following:

• The implications of self-owned management;
• The pros of outsourcing management to a third party;
• The corresponding cons; and,
• The alternatives to outsourcing.

Let’s take a look at each consideration in detail.

What’s Involved in Effective Owner Management?
Owning and managing property require two different skill sets. Unfortunately, many property owners purchase property not knowing the full responsibility that management entails. Before a person jumps into purchasing rental properties, they’ll need to understand what is going to be required of them.

• Knowledge of landlord/tenant law. Familiarity with the state laws that govern the landlord/tenant relationship is a must for any property owner. If owners aren’t comfortable with their level of knowledge or experience in this area, they could be leaving themselves open to lawsuits and fines. For example, the federal Lead-Based Paint Hazard Reduction Act requires the disclosure of lead-based paint and hazards before the lease of most units built before 1978. Owners can face a $10,000 fine if they fail to do so. Airtight contracts and leases are also extremely important for protecting owners from lawsuits and recouping lost costs.
• Time and expense spent visiting properties. Rental properties are going to require regular visits to check on the condition of the property, perform emergency maintenance or show vacant units. If owners’ properties are far away from home or each other, they will spend a lot of time in transit. If owners attempt to self-manage too many properties, they run the risk of spending all their time performing routine visits instead of managing the company.
• Responsibility for repairs and maintenance. A landlord needs to have a diverse range of skills to perform maintenance themselves. At the very least, a landlord needs to have basic plumbing, electrical, carpentry and landscaping skills to properly maintain a property. If they’re not well-versed in these areas, they’ll be spending revenue on repair services. While family members and friends can be labor outlets, relying on such help comes with inherent risks.
• Effective tenant screening. An owner will quickly need to become good at weeding out problem tenants during the screening process. If an owner only has a few units and has to replace a problem tenant a few times a year, their profit is likely going to drop dramatically. Credit checks, employment verification and collecting references are key in this process.
• Ability to deal with difficult tenants. Even if landlords screen tenants thoroughly, they will inevitably interact with unhappy or unruly tenants. Whether the tenant is simply unhappy or in violation of rules and facing eviction, a landlord needs to stand firm in the face of adversity and enforce the rules of the lease. If they’re not able to confront people, a property owner risks being taken advantage of by tenants. In the most extreme cases, landlords may even need to rely on lawyers or courts to settle issues and pay hefty fees.
• Good property management software. If an owner is managing a decent number of units, they’ll want to invest in software to manage their properties. Investing in a robust property management system has the ability to increase efficiency by:
  • Accepting rental payments online;
  • Performing credit and criminal background checks;
  • Decreasing advertising costs by automatically posting units to popular listing sites;
  • Automatically reminding tenants to pay their rent;
  • Eliminating poor record keeping by automating certain processes; and
  • Creating letters and tax forms automatically from pre-existing data.

A solid property management system can be a good tool to have, especially for a novice property owner.

Benefits of Hiring a Property Management Company
If a property owner decides that they’re not able to properly manage their property, it’s important to understand what side effects they should expect. In general, a well-run property management company will yield these results for owners:

• Increased revenue. A property management company is more experienced at advertising and usually has access to larger pool of potential renters, meaning units typically stay vacant for shorter periods of time. A property management company also has a better understanding of the local rental rates, putting them in a position to maximize the amount you can charge per property.
• More free time. Naturally, once an owner hands over the responsibility of managing its properties to a company, they’re going to have extra time on their hands. This is perhaps the most obvious – and enjoyable – benefit of hiring outside help. The property management company becomes the owner’s one point of contact for all things related to their property, eliminating the need to juggle a number of different vendors and services. A property owner can also use this extra time to expand their portfolio and focus on growing the business.
• Reduced direct costs. A property management company is be able to perform preventative maintenance, reducing the direct costs to the property owner. Furthermore, a management company will likely have extensive knowledge of local landlord/tenant laws, helping shield the owner from costly lawsuits. One lawsuit avoided may pay for years of property management fees. Finally, the management company likely has more experience screening tenants. This reduces vacancy cycles and damages from poorly screened tenants.

Drawbacks of Hiring a Property Management Company
Of course, outsourcing management involves risks that need to be considered. A property management company that is negligent in responsibilities could cause more headaches for their owners. The most common downsides include the following:

• Cost. A property management company will charge an owner between 3%-12% of the property’s gross monthly rent to manage it, depending on the level of service. For a property with a large number of units, this can be a significant cost.

To illustrate these costs, the table below shows monthly management fees for various amounts of units, assuming a 10% management fee on units rented at $1,000 per month.

Keep in mind that management fees aren’t the only fees that may be assessed by a property management company. Many companies charge additionally for creating or renewing leases, performing maintenance, and advertising vacant properties.

• Possibility of developing a bad reputation. The most vocal tenants in any community are those who are unhappy with management. Unfortunately, as more and more tenants flock to web sites to voice their disapproval with property managers, a property owner can can earn a bad reputation that will be displayed online indefinitely. Many rental property rating web sites have been around for nearly a decade now, which means bad reviews exist long after management has been changed or improved.
• Potential for inadequate record keeping. In most cases, a property management company is solely responsible for all record keeping, including accounts payable and receivable, service records and tenant complaint records. If the management company does a poor job keeping records, the owner may be completely lost once they part ways. Inadequate record keeping can also leave an owner with no ground to stand on if a tenant files a legal complaint.
• Vulnerability to lawsuits. It was mentioned before that a good property management company can help an owner avoid lawsuits. The opposite is true with a poorly run management company. A company that doesn’t keep up to date on changes in landlord/tenant law, or worse, doesn’t have a good understanding of the law in the first place, is leaving the owner open to a lawsuit. A single lawsuit could cripple a owner.

Ultimately, a property owner must determine if the benefits of hiring a property management company justify the expense. Owners who are able to outsource to effective companies and focus on growing the business would likely agree that the pros of outsourcing outweigh the costs.

Not Ready To Hire a Property Management Company?
An in-between option that exists between outsourcing and owner-management is hiring a residential manager. A residential manager is a person who lives on-site in one of the units and takes care of basic tasks related to the management of the property.

These basic tasks may include:

• Showing vacant units to prospective renters;
• Performing light maintenance and clean up; and,
• Coordinating with repair persons to fix maintenance issues.

If owners find themselves stretched thin but still not ready to hire a property management company, hiring a resident manager can be a good bridge between those two options.

Choose Wisely
Whichever route a property owner decides to take, a firm understanding of what property management entails will be essential for success. For the owners who choose self-management, they’ll need to become property management experts. For the owners who outsource their management, not knowing the industry will only lead to trouble down the road.

The lesson here is know the ins and outs of an business, no matter who manages it.

With an annual population growth of 1% and a wave of foreclosures turning borrowers into renters, why hasn’t there been a substantial increase in demand with accompanying rental appreciation?  In fact, why have real estate investors struggled more than ever to find and keep good tenants?

It turns out that the expectation of increased rental demand is exactly the opposite of reality.  Rental demand has shrunk.  A recent report by the Research Institute for Housing America and the Mortgage Bankers Association, titled “What Happens to Household Formation in a Recession?” details a study comparing 80 metropolitan areas in 2005 and 2008.

The model based on the past 6 recessions predicts household formation likely fell by 2- to 4-percent and that the formation of owner households likely fell by 1-percent.  Actual data confirms 3-percent overall.

The recession has caused a loss of 1.2 million households, despite a population increase of 3.4 million (which should have created an additional 1.3 million households).  We are looking at a total swing of 2.5 million households.  It is unclear if the worsening unemployment situation of 2009 (a 60% increase) was taken into account.

[I]ncreases in state unemployment rates depress both rental and owner household formation rates. Higher state unemployment rates have the largest impact on an individual’s decision to form an owner household.  However, conditional on the state’s unemployment rate, being in a recession also lowers the rates of rental household formation.

Additionally, the report finds:

• Not having a job leads to a reduction of more than 10 percentage points in renter household formation and a reduction of about 2 percentage points in owner household formation (Again, if this report does not account for continued job loss in 2009, then perhaps we can guess that an increase of 1% unemployment is equivalent to 2 percentage points in renter household formation - which would likely mean we took an additional 7% hit in renter household formation in 2009.)
• No statistical impact of higher house prices on household formation
• Higher median rents in the census tract of residence lowers the rates of rental household formation significantly 

The special report indicates we are likely to return to normal household formation by the end of 2012, but will still have to recover from the current deficit in household formation.

The solution... jobs, American jobs.

Caution.  Just as we have echo boomers, I suspect we are likely to see an echo housing boom.  These recessionary years of high unemployment, over-crowding, and repressed household formation will either create a pent-up demand for people to be out on their own (new household formation) as soon as the economy is relatively improved or else we will have a major cultural shift of families / extended families living together in tighter quarters.  I’m betting on the echo boom – but not until we have a substantial turn around in our economy.

Did you know you may be shooting yourself in the foot when you buy investment property?

Real estate investors owe a civic duty when buying investment property, most specifically condominiums.  As it happens, this duty is also in the enlightened self-interest of the real estate investor.

There is always a greater demand for entry level housing than for mid- to high-end property.  Naturally, this is also something of a sweet spot for real estate investors because it is typically the range where properties have positive cash flow.  As a result, investors, many all cash buyers, are in competition with the first time homebuyer, many of whom are using FHA financing.  Real estate nvestors frequently win - more often than not when they can pay cash and close quickly.

Survival of the fittest you say.  Yes, in a truly free market, but… investors should never forget the government’s influence on creating public policy.  Tax credits to buy, tax deductions in owning, debt cancellation forgiveness, FHA assistance, and investor waiting period for REO purchases are just a few of the rules in place fostering increased home ownership.

What is the point?  Did you know there are specific FHA requirements on the owner-occupancy ratio of a condominium complex?  At least 50% of the units in the project must be owner-occupied or sold to owners who intend to occupy the units.  (REOs are not included in the ratio calculations.)

If, as an investor, you find and buy a good deal, but that deal now puts the complex below the 50% minimum requirement, then you have just killed your buyer pool*, eliminating all borrowers who might need an FHA loan.  Killing your buyer pool kills demand, which kills upward pressure the value of your investment.  That’s like blowing off your big toe.  Ouch.

On top of this, most lenders are not lending on condo projects if the buyer is a real estate investor.  Got the pinky-toe that time.  You can’t even resell to an investor unless they are an all cash buyer.

Although some portfolio lenders will ignore the owner occupancy ratio if the buyer will occupy the property and puts down at least 20%, but conforming loans (to be sold into the secondary market) must comply with the Fannie Mae guidelines of 51% occupancy.

Next time you are looking at a possible condo / townhome purchase, look closely at the occupancy.  Leave a margin for the FHA condo owner occupancy ratio.  You don’t want to shoot yourself in the foot.  Invest in real estate responsibly.

* Technically it would be the investor after you, because your unit might be bought by an owner occupant, bringing the ratio back up to the minimum.
+ There are many more FHA restrictions.

Are we facing a double dip in real estate prices (most markets nationwide)? YES.

Are there specific actions real estate investors can take to prepare for this risk? YES. 

The Argument for a Double Dip 

It is getting harder and harder for people to argue a sustainable recovery is in progress. Admittedly only time will tell, but there are several strong arguments against a near term recovery. 

• Unemployment continues to hover around 10-percent.
• Unemployment correlates to serious mortgage delinquencies.
• Serious mortgage delinquencies correlate to foreclosure sales.
• Foreclosures put downward pressure on prices.
• Low prices leave many owners “upside down”
• Strategic foreclosures perpetuate and exacerbate the cycle

The above chart shows the close relationship of unemployment to serious mortgage delinquencies to loans in foreclosure.  The crest of serious delinquencies historically trails unemployment by one to two years.  And, it does not yet appear as if our unemployment trend is heading the right way.  Until the overall economy gets turned around, we should expect to see more of the same. 

In fact, the massive rise in serious delinquencies has yet to fully translate into short sales and foreclosures.  It is interesting to note that the loans in foreclosure are beginning to crest while the delinquencies continue to climb.  Many experts are predicting a flood of foreclosure homes to hit the market.  I believe that philosophy is flawed because, unlike a damn giving way releasing all the water at once, foreclosures and short sales have to go through a human process which necessarily limits the rate.  I would argue this is the only reason we are not completely drowning in foreclosures already.  Perhaps the cresting in the number of loans in foreclosure is telling us the threshold of human capacity.  (Of course we won’t know that for some time to come.) 

The artificial stimulus of homebuyer tax credits is about to expire.  Looking solely at the momentum of exsiting home sales in San Diego, we can clearly see the effects of the temporary stimulus as a short-lived spike in activity which shows every indication of crashing upon the removal of the tax credit. 

If delinquencies and foreclosures continue to increase the number of homes for sale (supply), while the demand dies because it is no longer artifically high, then prices are most likely to fall back a notch or two which feeds into the vicious cycle.

The market really only has two things going for it. 

1. Current diminished supply in certain price ranges in some areas.  Here, an increase in foreclosures and a decrease in demand will cause sellers’ markets to revert to neutral or possibly buyer’s markets.
2. Low interest rates.  Although there is some risk of increase, the Fed recognizes that continued low interest rates are crucial to a recovery.

Robert Campbell wrote a great book some years ago called Timing the Real Estate Market, wherein he describes a scientific method of monitoring market momentum to determine optimal buying and selling periods.  He looks at the trends of key determinants (existing home sales, new home building permits, notice of defaults, foreclosure sales, and 30-year fixed interest rates) as indicators to signal the coming peaks and valleys of real estate cycles. 

Using Campbell's key indicators, we see only one positive indicator of five – that is, interest rates are awesome.  But, when 4 out of 5 indicators are against a recovery… it really is kind of hard to argue against a stagnant or double dipping market.

How to Prepare – 10 Specific Actions

1. Maintain a long time horizon.  Unless you happen to be flipping properties, know that you should not expect much appreciation for a while.  HOWEVER, keep an eye on the increasing potential for inflation or hyper-inflation.  The U.S. has printed a ton of money lately and other than limited devaluing of the dollar, we have yet to see the true effects of all that new money.  See this newsletter Bernanke Running Amuck.  The higer inflation is, the cheaper your investments become because the nominal dollar amount remains the same for the life of your fixed rate loan while the purchasing power of those same dollars diminish.  A small drop in price can be easily erased by hyper-inflation.
2. Look for the best house (or at least not the worst) in the best neighborhood.  The price difference between average and best is as small as it will ever be.  School districts often help define the best neighborhood – go for the highest regarded school system.
3. Follow people and websites that backup their claims with supporting facts and data.
4. Fix and flip is high risk right now.
   1. Work areas with which you are intimately familiar.
   2. Take extra care accounting for all costs, especially the transaction costs.  If the ARV were only half the distance from the purchase price, would the deal still make sense?
   3. Be sure to use tools like FinestExpert.com to ensure you are buying property at a discount and that could cash flow if you got stuck with it.
   4. One interesting strategy right now is to flip properties to other investors: Find that sweet deal, get a tenant, and then resell with a lease in place.
5. Stick to cash-flow properties because they can provide you an infinite hold time.  Don’t worry so much about finding the property that is going to appreciate best, (all ships rise with the tide), right now you need to withstand the rough weather.
6. Some sellers are more desperate than others.  Use FinestExpert.com to search for properties that are listed at a discount from the comps.
7. Stay in a cash position until you find just the right property.  Rinse.  Repeat.  (If you have a 1031 exchange, try to use your full timeline – although that is seldom a problem.)  Be picky!  Even if the market as a whole is declining, there are still properties that just make sense.  Don’t let these slip by because the market is generally off.  BUT, do not pick up an average property at this time.
8. Take advantage of the crazy low interest rates.  Consider the tradeoffs between a 10% price drop and a 1% interest rate increase.  You might be surprised. Although you have missed the rock bottom interest rates and there is risk of them increasing, rates seem to be stable for the moment.  Keep an eye out for a general economic improvement before we see much movement in interest rates.  I don't think Bernanke will spike it again (as in 2004).  But even if 30-year fixed rates go to six-percent, that is still pretty dang good.  When I bought my first home, interest rates were in the high 9’s.  My preferred lender is W.J. Bradley.  They also have access to some private lenders for investors above the 10-loan limit.
9. Keep an eye on the pending sales counts.  I expect them to start dropping (seasonally adjusted) after May 1st.  This is the “must be under contract” deadline of the homebuyer tax credit (although it might take a month or two to clear the queue of buyers who got off the fence because of incentives, missed their window of opportunity, but decide to buy anyway).  As long as pending sales continue to drop, hold off on purchases (except for the killer deal, of course or signs of inflation).
10. Unless you happen to find the rare find, I recommend investors hold-off on purchases for four to six months… and then review the situation again.  I recommend against selling to avoid the loss because the transaction cost is just as heavy.  Also, I believe the inflation risk is a good reason to stay in the market.

To profitable investing,

Robert T. Boyer, Ph.D.
Co-Founder FinestExpert.com

Hi, I thought I'd try something a little different today.

Homebuyers discover FinestExpert.com helps them make good financial decisions when buying a home using FinestExpert's FREE property report detailing value and costs. Rent vs buy has never been easier. Homebuyers can use FinestExpert's financial search criteria to find discounted property for a good buy and cashflow property for good long term investment potential.

The following article was published in Property Wire, Economists warn of severe shortage of property in US as construction dives, indicating we are soon to be in dire straights because we are not building enough new housing.

I DISAGREE !

The article claims, “Several leading economists are warning that not enough new properties are being built to keep up with expected population growth.”

 - Brian Wesbury, chief economist at First Trust Advisors, says the US needs “1.6 million or more per year.  Right now we’re down to about six and a half, seven months’ inventory.”
- “William Strauss, senior economist at the Federal Reserve Bank of Chicago, said that though he sees a growth in housing production, he foresees a potential shortage in housing units.”
- MIT economist William Wheaton has come up with similar figures. ‘If we conservatively add 200,000 demolitions per year, the US economy will need at least 1.25 million new units yearly in the near future.

What is the real number?  Is it 1.25m or 28% larger than that at 1.6+ million homes?

Government figures show we net one person growth every 11 seconds (about 1% annually against a population of 3.07m) and an average of 2.59 people per household, we need 1,106,915 more homes this year.

I am inclined to go with the estimate by Wheaton at 1.25m.  Now, working back to 2000 using housing permits, we get the following chart:

Housing Permits vs Population Need

* Charts show permits vs actual units built.  I don’t have the completion counts or ratio, but even if only 80% reach completion, there is a problem.

We have been over producing for many years.  I have to assume for at least several years prior to the beginning of this chart in 2000, we were also over producing homes.

If you only look at the current year, it could look like we are going to have a shortage very quickly as Wesbury claims.  However, when you look at the cumulative effects, you can see that years of over production have left us with:

If these calculations are right then we have approximately three years (not six months) of excess housing.  But, remember, there is still new construction occurring.  If we can keep the new housing construction at about half the growth need would indicate, then in about six years we'll be on track with the right amount of total housing.

6 years – not 6 months

Now, surely not as many units were built as there were permits.  So, it is probably something less than 6-years, but I seriously doubt it could possibly be as short at 6 months.

Of course, housing needs are not uniform as job and economic growth and population migration vary.

Welcome to the next installment of how to get the most out of FinestExpert.com – How to Use FinestExpert HeatMaps.  Previously, we had:

-         Getting Started with FinestExpert.com
-         Financial Search Criteria for Real Estate Investors
-         How to Get the Most Out of FinestExpert.com Property Search Criteria

Perhaps it is best to take a moment to describe the various characteristics of the map. 

Map - although the map speaks for itself, there is actually a lot more going on in the scene that can give you important information about your markets of interest at various levels of detail.  We refer to these as the heatmaps, because the color coding follows the typical “heat” coloring, where a “hotter” color represents a higher value.

Each time you zoom in, the system recalculates the heatmap appropriate to the area displayed, whether you are viewing at the granularity of entire states or down to the census tract level.

Because a “high” priced area is generally considered high relative to the areas around it, the values of the legend vary dynamically.  Following are a few snapshots of a heatmap legend at various zoom levels.

Whether you are using the heatmaps for regional analysis or to find the right neighborhood for your home they are the right tool to provide a ton of data that is easy for your brain to synthesize.

 On the left side of the map, about halfway up, there are five icons that allow you to control search and display characteristics.  The fourth one, the flame, is where you go to control the heatmap settings, allowing you to choose from any of the following options.

When you see the term "price discount", you can think about there being equity in the property.  Because you never really know until you see a property whether and how much equity is built in, we have chosen to use the term discount.

 Once you refresh the map, the bottom right legend will be updated as well, so that you know the value ranges and can refer back any time to remember which search term is displayed.

Before you go, can you do two small favors for me?

1. Would you tell me what you think?
2. Can you tweet this, tell others, and ask them what they think to?

Have you found a specific way of using the FinestExpert.com that makes your life a whole lot easier?  Or, is there some, “how do I …” question you’d like answered, please comment and we’ll keep answering until the questions stop.

Last week we started a series on how to get the most out of FinestExpert.com:
- Thursday: Getting Started with FinestExpert.com (two most commonly used components of the financial criteria search – by discount and by cash-on-cash return).
- Monday: Financial Search Criteria for Real Estate Investors (our users report that the financial search saves over an hour per property being considering).

Today we are going to consider the common property criteria options.  From the main search, the property type list is immediately available letting you select only the specific property types of interest – e.g., look only for single family homes and ignore all condos.

When you want to control additional property criteria in your search, click the “+ More” button which expands the available criteria to look like this:

The checks and values shown are the ones I typically use as a starting point.

In the current environment, a single family home (i.e., detached) is more desirable for both renters and owners.  These properties move the fastest; and, when prices are as depressed as they are today, this is usually a better buy because you get more home for the same amount and you get to avoid home owner association dues.  These homes also have more potential for appreciation. 

A three bedroom, two bath home is the most popular type of home.  I usually allow my search to increase to a four bedroom, three bath, but seldom larger as they become more difficult to find good comps and the larger size typically reduces the future buyer pool.  Only when I cannot find a 3br / 2ba in the right price range will I consider a 3br / 1ba (unless I happen to have a client looking to do serious rehab willing to add a bathroom).

The modern homeowner (and renter for that matter) expects a larger home than 20+ years ago.  I typically set my minimum to 1,150 sqft.  Only when I need to look in a specific area of smaller homes will I reduce or eliminate this criteria.  When I see a 3-bedroom home that lists above 1,600 sqft (in my area), I am immediately suspect of room-additions which are, as often as not, not beneficial.  The ones that seem to make a positive difference, when the construction is good, are the extension of the primary living area and usually include a kitchen remodel.  Bedroom additions are theoretically good, but I’ve seen too many additions where these are little more than a thoroughfare to another part of the home.

“Newer is better,” is a common mantra for both investors and new homeowners as it typically implies less deferred maintenance.  Out west, a 30-year old home is a good baseline.  Again, in certain areas (or price ranges), this has to be eliminated.

The checkboxes provide the ability to search for either active “for rent” or “for sale” properties.  Under the “for sale” category, there are four stages of foreclosure of which I check only the first and last options.

1. No foreclosure – this will either be a short sale or a traditional sale.
2. Pre-foreclosure – these properties have received a Notice of Default.  The asking price shown for these properties is typically the default amount (as compared to a true asking price).  As I am usually most concerned with properties available today, I do not find these types of property useful.  However, sometimes it is valuable to track the quantity pre-foreclosures as a potential indicator of values or to track specific properties of interest.
3. Foreclosure – these properties are to be sold at auction or at a trustee’s sale.  Again, the asking price shown for these properties is typically the default amount.  These can represent great potential deals, but are subject to serious bidding escalation when there is substantial equity in the property.  Such sales typically require cash buyers.  There are people who will team with you and provide the cash if you don’t have it – but you need to be sure about the property and know your risk.
4. Real Estate Owned (REO) – Bank Owned Property – Bank Owned Foreclosure – Lender Owned Property – Other Real Estate Owned (OREO) are a few of the common references.  In any case, these are properties that have already gone through the foreclosure process and are now owned by the lender (e.g., bank).

I usually only check #1 and #4 because these are listed with what I call, true asking prices – the property can be bought for the amount shown (plus or minus a little).  Sometimes the REOs are even a better choice than the short sales found under “no foreclosure” because the lender has already “accepted the loss” on an REO and can readily move through the sale process, but this is not the case for the short sale where the homeowner, lender(s), and mortgage insurance companies are all pointing fingers at each other to determine who will have to eat the loss.

Hopefully you can begin to really see the power available to you when you combine these property criteria with the financial criteria.

Finally, after you have selected your property criteria, click on the “- Close” button and then press “Search”.  This will then take you to a map (or list) of potential properties satisfying your search criteria.

Before you go, can you do two small favors for me?

1. Would you tell me what you think?
2. Can you tweet this, tell others, and ask them what they think to?