Thursday, April 06, 2006

More confidence in market

Consumers make buying decisions based upon how confident they feel about things. Do they feel confident that their job will continue? Do they feel that buying a home is a good investment? That home prices will continue to increase?
Last year at this time there was much discussion about the “real estate bubble” popping. It didn’t. No serious student of the housing market thought we were ever in a bubble but it made for good headlines. Many who could afford a home have held off making the investment waiting to see if home prices were going to retreat from last year. They didn’t.
Despite the gloomy spring weather, homebuyers are having more confidence in the real market and making buying decisions. This restoration of confidence follows a nations trend measured by the Conference Board. Their Consumer Confidence Index increased in March to 107.2 up from 102.7 in January.
The Consumer Confidence Index measures how buyers feel about jobs, the economy their financial stability etc. The overall assessment of current conditions remains favorable while those claiming conditions were good rose and those claiming conditions are bad decreased.
As more realize that the sky didn’t fall on the housing market and confidence in the economy continues, sales of existing and new homes will increase to a historically normal level. We will not experience a 20 percent increase in property values this year but neither will we see a significant drop in values from last year.
This spring and early summer may be the best time for buyers to negotiate a sale of a home. Before sellers learn that confidence in the real estate market is returning.

Wednesday, April 05, 2006

New regs for heating and air

If you’re thinking about upgrading your Heating and Air Conditioning Systems, you may want to start early this year or wait until next. You should know that changes have recently been made that will affect your future cost of operation.

Congress recently passed legislation that will require Manufacturers of Heating and Air Conditioning systems to “increase the efficiency” of the newly manufactured air conditioning units. The efficiency is rated utilizing a term called SEER. Currently, most existing air conditioning units have a 10 SEER rating (some 8 SEER and some 12 SEER). All units “manufactured” on or after January 23, 2006 must have a 13 SEER or higher rating. The 13 SEER central air conditioner standard is predicted to save the nation 4.2 quads (quadrillion British Thermal Units) of energy over the next 25 years. This is equivalent to the energy consumed by nearly 26 million American households annually. The standard is expected to save consumers $1 billion over the same period. (www.energy.gov/)


Manufacturers will continue to sell 10 and 12 SEER units until their sizable inventories are depleted, and will continue to manufacture and sell parts to service the existing 8, 10 and 12 SEER units for the foreseeable future. However, during the 2006 calendar year, the lower SEER inventories will deplete and manufacturers and distributors will then only be selling the new 13 SEER air conditioning units, which will be larger and more expensive. There may also be additional costs associated with incorporating 13 SEER units with existing systems.

Tuesday, April 04, 2006

A few more homes

In the Capital Region 77,000 new homes have been built and sold since 2001. But wait, there’s more………..In Rancho Cordova, thirty thousand additional homes are either under construction or approved to be built, another 21,000 are in the pipeline in south Placer County and 7,800 in Elk Grove. But wait, there’s more…..According to a report released earlier this month by the California Building Industry Association (CBIA) there are 128,000 new homes in the planning stages for the Capital Region and the CBIA says that’s still isn’t enough. So what’s up with that?

The CBIA study “Homeownership in California” (www.cbia.org) discusses the disparity between the homeownership rate in California, presently at 57 percent and the higher national ownership rate at 70 percent. The builders believe adding another 62,000 homes to the 128,000 already in the pipeline, will increase the percentage of homeowners and life will be beautiful. I am not so sure.

The study points out the many social and economic advantages of home ownership. A society of homeowners is usually more affluent, better educated, employed, and pay more taxes than renters. Thus the logic that more is better. The average price for a new home in California is $300,000 more than most anyplace else, contributing to our lower percentage of homeowners.

While it’s true that California is near last in the nation (in the company of New York, Hawaii and Washington D.C.) in our percentage of families who own their own home, I am not convinced that building another gazillion homes is going to increase that percentage significantly. The price of a new home, not the number available for sale, determines affordability. California also has some unique demographics not found in Alabama, Minnesota, and Indiana, a few states with higher than average homeownership rates.

The Capital Region already has a higher percentage (62 percent) of homeowners than does the rest of the state. Our regional percentage would be even higher without Sacramento since both Placer and El Dorado counties have 65 and 70 percent homeowners. Our region actually has a higher percentage of homeowners today, albeit with higher home prices, thanks to Placer and El Dorado County than it did in 1994 when the ownership rate was at 59 percent.

The report does a good job of pointing out that it’s more than lumber and labor that make up the cost of a home. The additional environmental, legal expenses, fees and permits contribute to our high cost of housing. The builders make the argument that if there were fewer obstacles to building, the price of their product would be less and “presto” another 1.6 million people would be able to afford to buy a new home.

The building industry has a legitimate beef. They continually face over zealous regulations, excessive litigation, costly building permits, impact fees, restrictive zoning and bureaucratic delays before the first shovel of soil is displaced. The substantial environmental and impact cost, however, is not absorbed by the industry. It is passed along to the eventual homebuyer

If all environmental and government restrictions were lifted on new developments, it would reduce the development costs but there is no guarantee that the average price of a home would be any less and certainly not by the $300,000 difference between here and Kansas. Other economic principals besides the actual costs of production play an important role in determining value.

If the social impact of growth is to be paid, then it will either come from the specific development and/or everyone collectively. The builders are pointing out that the high development costs are preventing affordable home ownership. They are right but their solution of immediately building another 200,000 homes in the region is too simplistic. We are having difficulty enough solving the social and environmental problems caused by the people already here. Maybe, we should work on a few solutions first before the next construction boom.

Monday, April 03, 2006

"What's the point?"

Freddie Mac, the housing agency that buys millions of residential loans, analyzes a lot of numbers, and one of the numbers is perhaps one of the most widely published … their weekly interest rate survey. Freddie Mac has people who contact 125 lenders or so, get their rate quotes on different mortgage programs, specifically the 30 and 15 year fixed, 5/1 hybrid and 1-year ARM, then publish those averages for all to see.
Not a bad way for the consumer to get a handle on just how their current or quoted interest rate stacks up with the rest of the country. Just this past week for example, the 30-year fixed rate average as reported by Freddie Mac was 6.32 percent, with 0.6 percent in points.
This means the "average" consumer in this poll got a 30 year fixed rate at 6.32 percent and paid $1,200, or 0.6 percent on a $200,000 loan, in discount points. Okay, that's pretty neat by itself. Nice of Freddie to do that, don't you think?
Freddie has been doing this for a long time, since 1971. I think Nixon was President then. The highest this rate has ever been was 17.48 percent in 1982 (can you believe it!) and the lowest recorded was 5.23 percent in 2003.
But looking a bit deeper into those numbers, one trend is also definite: People are paying less and less in points to get those rates. In fact, if you go back twenty years, the average points paid on a 30-year mortgage were 2.3 points paid on every 30-year mortgage.
Again on a $200,000 loan that's $4,600. Okay, yeah rates were higher then (10.89 percent) so people paid more to get a lower rate but that doesn't explain why when rates were 10.39 percent in 1979 consumers only paid 1.6 points. But enough of those numbers, the important point is … why pay any points at all?
Clearly, consumers are paying less at the mortgage pump. Point-wise. Why? Because, rarely does paying points, make good financial sense. At least in getting a return from the points paid.
A discount point, at 1 percent of the loan amount, usually benefits the borrower by .25 percent. For each point paid, the borrowers rate is reduced by .25 percent. At least that's the way it should generally work. Some consumers get screwed right out of the gate by paying 2 or 3 points just because their loan officer told them they had to.
For instance, on a standard 30 year fixed rate today at 6.50 percent with a $300,000 loan the payment would be $1,896. At no points. Now pay one point and get a .25 percent lower rate at 6.25 percent and the monthly payment drops to $1,847, or $48 lower. But that lower payment costs $3,000. Tax deductible usually, but still $3,000.
If you divide that $3,000 by the $48 monthly savings it would take 62.5 months to "recover" that discount point paid at purchase. That's a long time in my book. One could take that $3,000 and put it into a retirement fund or something and get a better return. Or even take the $3,000 and make a principal pay-down with that same money. Often the trade-off between discount points and lower payments rarely makes sense. Each situation is different but paying points to obtain a lower interest rate seams to be ending.