The Home Hunter Blog - TheHomeHunterBlog.com: 5/11/08

Issue 08-05.14

May 2008

Are You Paying the "Procrastination Tax"?

Dear Readers,

In my immediately prior email, I indicated this would be a 4-part series of emails. Well, it just didn't hang together well when separated. So, here is the one-time, 4-section email.

I hope you enjoy. Let me know your thoughts by return email to: mj@milehighhomehunter.com.

Are you paying the "Procrastination Tax"?

It's worth more than your stimulus check -- and the IRS doesn't mind if you avoid it!

For more information, please click to www.MileHighMLS.com

Well, it's a scary market. That's what everyone is hearing, including me. However, I have the benefit of working this business everyday and I see the atrocious spin out there. It's spin that could cause you to be focused on the wrong things in today's market. If one were to listen to the national media, you would think it's time to buy canned goods and shotguns and prepare for the soup lines.

Are there difficulties? Yes.

Are there challenges? Yes.

Are there opportunities? YES! YES! YES!

Let me go over some areas of which to be aware:

It's "The Great Deception", not the "Great Depression"
The Opportunity
The Market
The Cost of Waiting - or "How to Avoid Paying the Procrastination Tax"

THE GREAT DECEPTION

The world is not ending. Birds are chirping. The sun rises and sets everyday, just like normal. Things are not as bad as you hear.

In fact, this country is doing very well. The USA is doing much, much better than you would think from listening to the news. How lucky are we to live in such an incredibly resilient place!

You have likely heard: This is the worst economy since the Great Depression! What incredible garbage!

Great Depression? Just how bad was that, exactly? Just to put things in perspective, here is how today's market compares to the Great Depression.

I consulted an article from Dr. Gary Wolfram called: Econ 101: The Great Depression from the

Business and Media Institute.

Here are some important highlights:

	*The Great Depression (1929-33)* The deepest part of it	*2008 Sub Prime Crisis*
Unemployment	24.75% at peak	5.0%
Gross Domestic Product (GDP)	US lost 29% of GDP World lost 50% of GDP	GDP *grew* 0.6%
Dow Jones Average	Down 85%	Down 11%
Depositor banks lost to closure	10,000 of 25,000 (40%)	6 of 8,507 (7/100th of 1%) FDIC-Insured Institutions only (doesn't include all banks)

So, NO, this is NOT the GREAT DEPRESSION. It IS, however, the "GREAT DECEPTION" from the media.

How bad is this "GREAT DECEPTION"? Well, do you remember hearing about how Colorado was #1 for foreclosures in 2007, then, wound up at #5 for the year?

Well, Colorado had (and still does) have an unusual procedure for foreclosures. In 2007, a home could be in foreclosure multiple times and cured multiple times. So, a home could be counted multiple times. Based on the statistics from the Colorado Public Trustees Association, we are over counted by 37%. YES! Over 1/3 overstated!!

Here are the stats:

RealtyTrac Statistics

The "REALITY TRACK"

Foreclosures

(Public Trustee Sales in Colorado)

39,403

Source: RealtyTrac

(Click here for source)

24,929 (Actual Sales)

Total opened: 39,607

Total RealtyTrac Overstatement: 37% or 14,678

Source: Colorado Public Trustees Website

National Rank

(Assumes RealtyTrac's numbers are correct for other states)

(Based on using the Colorado Public Trustee's Websites' Data, not RealtyTrac's)

However, I bet you thought that we were #1, didn't you? I did, too, until I did the research. Knowledge is power in today's market.

The Opportunity

Truth be told, there is a world of opportunity out there. Let's just share some of it with you:

Historically low interest rates (click here to see the chart from the St. Louis Fed)
- When you add the cost of money and inflation, real interest rates (the return on money over inflation) are negative.
- So, it is unlikely one will see interest rates drop lower from here. You should be locking up long-term fixed rate loans NOW.

30 Year Mortgage History

1 in 3 Homes in the USA has NO MORTGAGE, meaning they are not at risk for bank foreclosure
Denver listing inventories are 6.2% lower than they were in 2006, (March 2006 vs. March 2008).
- Local radio host Mike Rosen added an important point to that statistic: if total listing inventories are lower, then the percentage of total homes listed is even lower than that. After all, there are more homes in 2008 than in 2006, so the percentage of homes listed is comparatively lower in 2008 compared to 2006.
According to the Government's OFHEO Home Price Index, Denver homes only lost 0.5% of value last year, but are up 10.13% in the past 5 years - by the way, the 5 years subsequent to the 2001 - 2002 tech implosion.
- That is UP despite a huge employment setback in the early part of the decade.
The Denver market is at 5.6 months of inventory for homes less than $500k; that's a Seller's Market; at 5.6 months, that is just slightly favoring the Seller. However, not strong enough to firm up prices.
Three market segments are already Seller Markets:
- Less than $100k - 4.7 months of inventory (and trending stronger)
- $100k to $200k - 5.0 months of inventory (and trending stronger)
- $200k to $300k - 5.1 months of inventory (and trending stronger)
Current under contract activity for single-family homes in Metro Denver is running nearly double the trailing 12-months' average.
- Homes under contract as of May 2, 2008: 6,299
- Average homes sold per month (trailing 12 months): 3,143
- Percent change: 100.4% improvement
The Denver market is performing about 33% to 50% better than the national market; depending on the measurement used.
- Denver total months of inventory - 6.7 months (6.0 months in the 20 main communities in the metro area)
- National total months of inventory - 9.9 months

So, what do these numbers tell you? I hear two things: Lowered supply combined with increased demand. I will let you draw you own conclusions. Look at your local gas pump to draw a meaningful analogy.

The Market

Let me share some insights that, perhaps, you might not have considered in regard to YOUR home ownership.

Now, I hear that a lot of folks say they are waiting for the "bottom of the market". You might have heard me say on the radio that the market is not the buyer's market that everyone thinks it is. In fact, the market is incredibly different than you would expect.

The data I see (shown the national/local chart below) indicates Denver hit its peak in about August/September of 2007 and has been making inroads despite the national mortgage crisis. Now, I am not offering an oracle's view of the future as nobody knows the future; however, there appear to be many market indicators that indicate fundamental strength at this point in time:

· Decreased supply

· Increased demand

· Favorable interest rate environment compared to historical levels

Here are some charts to show how the Denver Market is looking compared to the national market:

Months of Inventory

Source: National Data - National Association of Realtors® Click here for data location

Source: Denver Data - Based on information from Metrolist, Inc. for period April 4, 2008, until May 2, 2008.

Note: This representation is based in whole or in part on content supplied by Metrolist, Inc. Metrolist, Inc. does not guarantee nor is in any way responsible for its accuracy. Content maintained by Metrolist, Inc. may not reflect all real estate activity in the market.

Here is how that difference of inventory impacted price appreciation (statewide) compared to the rest of the US. Colorado is at 1.4%, only 0.6% from being a light blue shaded state at 2.0%.

USA Appreciation

Do you think this means Denver is doing better than the nation? Do you think the national media really have an accurate picture of our market? What is the data telling you?

The Cost of Waiting - or "How to Avoid Paying the Procrastination Tax"

So, given all this, doesn't it make sense to wait? Not really. There is a potential cost associated with waiting, that I like to call "The Procrastination Tax". You pay it, and don't even realize it! And it's likely the biggest tax you will pay!

Well, remember when you bought that Jan Michael Vincent "AirWolf" Leather Jacket back in 1984, instead of putting that $500 in Apple Computer stock? Well, that $500 of Apple Computer stock, if bought on September 7, 1984, would be worth over $31k today.

What is the "AirWolf" Jacket worth today? Not so much, not even if it were signed by Jan Michael Vincent AND Ernest Borgnine!

Don't you wish you could have THAT decision back?

Like that decision you wish you could have back, here is an opportunity to avoid as costly a mistake by waiting in the market. I have shared this exercise with some active clients and they appreciated it -- the insight about the money lost to waiting.

So, let's assume this is you:

You have a $250k home
You want to buy 50% up (as most folks do) to a $375k home
You put down 20% (or $75k) with a $300k loan on your new home and are able to get a 6%, 30-year fixed mortgage
BUT, you wait, because you think you can get that last $1k or $2k out of the market and rates creep up.

What does that cost you? Well, depending on how long and how far rates move, potentially, a lot!

Take a look at this table.

*Equity Consumed by Change in Interest Rates*

				*Equity Consumed Due to Incremental Payments Resulting from Interest Rate Change Based On Estimated Loan Balance of $ 300,000*
	*Interest Rate*	*Pmt per $100k*	*Based on Est Loan Balance*	*1 Yr*	*5 Yr*	*10 Yr*
	6.00%	$599.55	$1,798.65	$0.00	$0.00	$0.00

	6.50%	$632.07	$1,896.20	($1,170.63)	($5,853.15)	($11,706.30)

	7.00%	$665.30	$1,995.91	($2,367.07)	($11,835.35)	($23,670.71)

	7.50%	$699.21	$2,097.64	($3,587.90)	($17,939.52)	($35,879.03)

	8.00%	$733.76	$2,201.29	($4,831.71)	($24,158.53)	($48,317.06)

Even if you make no decision, you really actually HAVE made a decision - or acquiesced to the decisions the market is making for you. Even waiting and losing 1/2%, can cost you nearly $1,200 per year. The longer you delay, the more you pay, all for waiting. The market made that decision for you. I call it the "Procrastination Tax".

Now, if you think rates will go down, then you get some uplift.

Have rates come down? Do you think they will again? Conventional wisdom is betting against you.

Think about it: at 6%, rates can go only go down a numerical maximum of 6%, but they can go up INFINITELY!!! Though unrealistic that they would go up infinitely, it is more probable that an upward change would occur rather than a downward change.

BUT, that isn't the only cost of waiting.

You also have the cost of lost appreciation, too!

*Lost Appreciation Opportunity*

			*Appreciation*
	*Price*	Appreciation Rate *	*1 Yr*	*5 Yr*	*10 Yr*
Current Home	$ 250,000.00	2.03%	$ 5,065.00	$ 26,372.17	$ 55,526.31

Future Home	$ 375,000.00	2.03%	$ 7,597.50	$ 39,558.26	$ 83,289.46

Lost Appreciation Opportunity (from the time you first wanted to move until you actually did)			($2,532.50)	($13,186.09)	($27,763.15)



* Appreciation Rate Uses OFHEO Home Price Index for the trailing 5 years
Source: http://www.ofheo.gov/media/pdf/4q07hpi.pdf

So, you can lose on the front end with interest rate changes and on the back end with missed appreciation opportunity. If you waited one year to pull the trigger on the $375k home with the $300k loan, and saw rates go from 6% to 7% and held onto the home for 10 years, how much did you lose?

Incremental payments due to interest rate change (year 1 to year 10): $23,670.71
Lost appreciation (you only lose the 1 year of waiting, assuming prices stay relatively the same on both homes): $2,532.50
- Remember, 2.03% is a fairly low appreciation rate for Denver and is only indicative of the past 5 years, not the next 5; the historical, national average is over 5%.
Total incremental cost of ownership caused by delayed decision: $26,203.21 or 7% of the $375k home price (new home). That's the cost of your "Procrastination Tax".

So, consider this email my $26,203.21 gift to you, but it's only good if you use it. So, knowing me just made you $26,203.21 - how many other Realtors® have done that for you today?