Last week, I posted this picture, and here’s the rest of the story:

“The good news is that I truly out did myself this year with my Christmas  decorations. The bad news is that I had to take him down after 2 days. I had more people come screaming up to my house than ever. Great stories. But two things made me take it down.

First, the cops advised me that it would cause traffic accidents as they almost wrecked when they drove by.

Second, a 55 year old lady grabbed the 75 pound ladder almost killed herself putting it against my house and didn’t realize it was fake until she climbed to the top (she was not happy). By the way, she was one of many people who attempted to do that. My yard couldn’t take it either. I have more than a few tire tracks where people literally drove up my yard.”

So that was the backdrop to the picture – it’s since been confirmed by Snopes.com to be true.  And did you guys ever come through with captions!  I’m kind of surprised no one went year 2000 on me and called him a “hanging Chad”, but nevertheless this was fun.  Thanks to Russ and the Easy Chair Coffee Shop for participating – make sure to go by them and try one of their daily coffees, brewed on site!  And now for the winners:

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Don’t forget – the Caption This contest ends Wednesday!  Get yours in to be entered for a $20 gift certificate to Easy Chair!

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If you have a few moments I’d encourage you to read the whole article; Marc Roth talks about the historical lows that interest rates are at, and gives some insight into how they’ve arrived at these levels.  While I find the constant yelling “interest rates have never been lower, buy now!” a bit tiresome and insincere given the current economic climate, the truth is that they’ve never been lower, and Marc gives a good visualization of that.

Where the post really resonates though, is when you look at the true costs of a loan at today’s interest rates.  Check out the section beginning at “Loan Costs”:

We are at 5%. As you can see by the graph above, as the economy stabilizes, it is reasonable for us to see 30-year fixed rates climb to 6% within the foreseeable future and probably to a range of 7% to 8% when the economy is humming again.  If every quarter of a point is worth $12,000 per $200,000 borrowed, then each point is worth almost $50,000.

Let’s put that into perspective. You have a good stable job (yes, unemployment is at 10%, but another way of looking at that figure is that most of us have good stable jobs). You would like to own a $240,000 home. However, even though home prices have steadied, you may be thinking you can get another $5,000 or $10,000 discount if you wait (never mind the $8,500 or $6,500 tax credit due to run out next spring. Or you may be waiting for the news to tell you the economy is “more stable” and it’s safe to get back in the pool. In exchange for what you may think is prudence, you will risk paying $50,000 more per point in interest rate changes between now and the the time you decide you are ready to buy. And you are ignoring the fact that according to the Case-Shiller index, home prices in most regions have been trending back up for the last several  months.

If you are someone who is looking to buy or upgrade in the $350,000-to-$800,000 home price range, and many people out there are, then you’re borrowing $300,000 to $600,000.  At 7%, the $300,000 loan will cost just under $150,000 more over the lifetime, and the $600,000 loan an additional $300,000, if rates move up just 2% before you pull the trigger.

Am I suggesting everyone should buy a home right now?  Absolutely not, but it’s helpful to see what buying a home at today’s fixed rates (not a resetting ARM) will mean in dollars.  It’s also a good starting point for those planning on buying a home in the future, but not necessarily right now, as you can use his figures.

I can’t think of a clever way to end this post, and so I’ll just end it here.  Maybe some of those people were right when they called me stupid.

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A loan “resets” when its’ initial time period – 1 year, 3 year and 5 years is common – expires and it resets to a different interest rate.  Typically, you’ll see resets in Adjustable Rate Mortgages – mortgages that have an initial rate of say 4.5%, and then will reset to a higher (often 2% or more) percentage rate after the initial time period.  This is what’s gotten many homeowners around the country in trouble, as their low-interest rate payments have jumped significantly to where they’re now unmanageable.  Since the NRV is quite a bit different than the national trends in terms of real estate, I thought I’d ask Brandon Nicely his thoughts on what we should expect to see in 2010.  Keep in mind, we’re both cautiously bullish on the market in 2010.

Just to start out so no one is left in a panic:  Our area will not see a significant hit with adjustable rate mortgages like some other states especially California.  All the talk about ARMS and the fear of more adjustments in 2010 are correct but this is nationally not locally.  Currently we are seeing ~ $2 billion per month of option arms recasting or changing the terms of payment on the loan.  In 2010 we are going to see $8-10 billion per month start to recast.  The majority of these are from California and Arizona, and the big concern here is individuals are not able to refinance do to the sharp decline in property value.  When the ARMs adjust and payments start to increase you will see more foreclosures.

Business Week came out with a chart that shows how Pay Option ARMS will be recasting over the next few years:

To give you an idea of what happens with a Option ARM, here is an example on a $460,000 loan.  Initially, the first year payment is $1,479, which of course is absurdly low.  But by the time we hit the first 5 year adjustment the payment can jump up to $3,747!  The payment more than doubles!  These loans were made throughout the bubble from 2004 to 2007, and a large number of these will have major adjustments in 5 years (that is why we are seeing the first batch now).  The issue you have is that most borrowers who took out these type of loans have lost all the equity they have in the house, as the balance on your mortgage increases instead of going down.  So with rates at historic lows they cannot refinance, and even if they could the payment they are used to at $1500 would be more around $2500 with the lower rates.  What will happen is that once payments start to recast and borrowers realize they have no equity in the home ,they will walk away and another rush of foreclosures will occur.  Again, this is more for the West Coast and specifically California where property values have decreased as much as 50% in 1 year.

A lot of individuals are under the assumption that low rates the past 12 months have allowed all sub-prime and option ARM clients to refinance and we are now moving forward.  That is an incorrect statement.  The individuals who are refinancing are clients who are not in trouble with their mortgage but simply clients who have some equity and have paid their mortgage on time. All banks have tightened underwriting guidelines, and unless you have a strong financial situation with a good equity position in your home you cannot refinance and take advantage of the lower rates.  No lender is going to take a $400k mortgage on a home that is worth $300k.

My outlook for the New River Valley is a good one in 2010 with home sales increasing slightly as we did not see a rush of Pay Option ARMs like other states.

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Brandon is a branch partner at Alcova Mortgage. He enjoys doing his taxes, firewalking and competitive eating, but not necessarily in that order. You can reach him at brandon@alcovamortgage.com, or 877-552-7150.

(ZKFUFT6USSPY)

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A friend sent this to me earlier in the week, and although I can’t vouch for its’ validity (update 7:00pm – Snopes is researching – we don’t care, we still think it’s funny) it’s funny nonetheless and so I thought we’d play “Caption This” with it.  To play, include your thoughts in the comments below on what the most appropriate caption should be for the photo.  Multiple entries are allowed.  At stake this week will be a gift certificate to Easy Chair Coffee Shop, and we’ll choose the winner next Wednesday, December 16th.

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I was thinking that there are a lot of people in the Valley who know where the great spots are, so I thought I’d create a map we can all share – know where we can all find some really great Christmas lights? Just insert the location on the map yourself by adding a placemark, or email me the address and I’ll put it on for you!  Let’s see how many we can add leading up to Christmas – click on “View Christmas Lights in the New River Valley” below and start spreading the Christmas cheer!

View Christmas Lights in the New River Valley in a larger map

Oh … and Merry Christmas!

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But how about a little light reading first?

The State of the New River Valley Real Estate Market – November 2009

You can download the report here.

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Q: There is a perception in the town that smart growth in Blacksburg actually means no growth in Blacksburg.  How do you respond to that perception?

A:  I disagree with it.  There’s so many different definitions of smart growth. … I would like to maybe just throw that whole concept, or the word smart growth, out and let’s talk about sustainable growth.  And that’s using current infrastructure – that includes roads, water, sewer – and how do we look at focusing that development within that set of criteria that we’re mostly utilizing what we have as opposed to throwing that away and building something new. … I think Blacksburg, if you just look at what we have done over the last three or four years, I don’t think you can say at all that we’re a no-growth community.  There’s realization that we’re going to grow, so how do we do it in the way that’s best for Blacksburg?  (This will require a reexamination of our current building requirements, and an overhaul of what is now seems to be a fluid and changing building environment.)

Q: During the recent election campaign, some candidates talked about the First & Main center and their concerns that without a big anchor store to draw shoppers to that center it may not succeed. What do you think the council should do to ensure and encourage the success of First & Main?

A:  I think now that the election is over it’s time for the Blacksburg Town Council and the owners and developers of First & Main to sit down and talk in an open public session. (Great idea, long overdue – and a public forum should be mandatory, there’s too much suspicion and secrecy surrounding both council and the development.)

I think that their views and what they feel like they need, they need to present to town council. I think some of maybe our [council's] views and concerns and questions need to be presented and we need to move forward from there. There certainly are things that I think they would have liked to have seen happen, like the theater, that have not happened … that could be built at any time. That’s also part of the economy. Arby’s has not been built. That’s part of the economy. That’s not something that our rules and regulations have stymied.  (Is it possible that the rules, and the implementation of those rules, have kept many retailers out of the development?  I’d bet so.)

At the same time, I think that we can help and we need to have that dialogue because it’s so important for that gateway into town to be successful.

You can read the whole text of the interview on Roanoke.com.  But let’s be honest – for all of it’s charm, Blacksburg’s murky and fluid rules regarding development have kept many projects out of the area, and forced others to the sidelines.   Planning is crucial – no one’s arguing that.  So is consistency.

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The video below talks about the site, how it’s laid out, and what buyers – and sellers – can expect to find.  I’ll be working on NRVLiving.com/Properties over the next couple of weeks to finish things up, but I was so excited about getting this going that I had to share.

Several people I’ve shown this to have asked the same thing – “what’s the point?”. One of my goals in real estate is to provide as much information as possible to buyers and sellers alike, and as home buyers are out riding around I want them to have the things they want to know at their fingertips.  That’s why the signs were redesigned, and now – with just a web-enabled cell phone, they can find out even more.

NRVLiving Real Estate – maybe the tagline should be modified to read “Transparent AND Simplified.”

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Before you decide whether you should pay any points you need to know what points actually are, how long you intend to be in the loan and to compare current rates to historical trends.

Points are up front fees paid to obtain a better interest rate on a loan.  One point equals one percent of the loan amount, so if you pay a point up front it will result in a lower interest rate, and a lower monthly payment.

If you are taking out a $200,000 mortgage and decide to pay 1 point that will be a cost of $2,000.  The savings per month on average by paying the point will be around $50 per month.  It will take you about 3 years and 3 months to save the $50 per month to get back your investment of $2,000.  This means if you plan on selling the home within 3 years, do not pay any points.  If you are planning on keeping the home for 10 years it would end up saving you $4,000 over the 10 year period.  When rates are at historical lows it is sensible to pay points only if you plan to live in the home for an extended period of time because it is unlikely rates will go down.

Small extra:

Do you think the Tax credit is working?  45% of all existing home sales last month (October 2009) were purchased by first time buyers.

Photo from Chris Owens.

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Brandon is a branch partner at Alcova Mortgage.  He enjoys doing his taxes, firewalking and competitive eating, but not necessarily in that order.  You can reach him at brandon@alcovamortgage.com, or 877-552-7150.

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