The family is happy and well. I spent most of the 4th weekend cleaning our Mesa rental property. Handling the grime of turning a trashed rental home is cathartic for me and actually satisfying. Whild plunging a mop in and out of a black oven I repeated my recent Economics Professor's Mantra:
When someone doesn't own it, they don't take care of it
When someone owns it, they take care of it
When everyone owns it, no one takes care of it
I kept reminding myself that I own it and that it is going to be worth it 13 years from now when it is paid off...
An article I came across this morning talking about the worsening housing market in Phoenix said, “Making matters worse, rates on 30-year mortgages have been above 6 percent since late May, leading to a steep decline in new applications…”
These graphs show what 30-year mortgage rates have done since 1971 and what they are doing now:
Rates have been rising the last 5 months or so. Spreads between owner-occupied and non-owner loans have been widening, underwriting guidelines are becoming more strict and the mortgage industry is starting to undergo a major regulation overhaul--including a bill the governor just signed requiring all mortgage agents and originators be licensed.
With oil doubling in the last 12 months, everything is more expensive and I believe inflation will become more of a problem through year-end 2008. The Fed will have no other option but to raise rates to curb inflation. The UK equivalent of the Fed sees it's primary and only objective to as controlling inflation, in the US, we are a bit more liberal and we drop the rates quickly to dump money supply into the economy when people crash planes through buildings or when we have a credit crises. This liberal policy is not without risk and the liklihood of higher rates in the coming years is significant.
Historically, anything under 8% for a 30-year mortgage has been very attractive. I believe (and have money on it) that we will be back above 8% within the next 36 months. As most home buyers purchase based on a monthly payment number they can afford (and with the disaster we are going through now, the banks will err on the conservative side in the coming years...) higher interest rates will further drive down real estate prices on a macro level.
Where is the opportunity in all this?
As interest rates rise, residential investment properties will be selling at higher CAP rates, which means they will be selling for lower prices. I believe downward pressure on prices will be significant enough to drive prices down to a point at which savvy and well-heeled investors will be cash-flow positive on day 1 with a 20-30% down payment. Such an environment has not existed in the Phoenix area for a few years now.
Big money is made in real estate buying in the trough of a correction. We are entering that stage now, and buying opportunities will multiply over the next 36 months!
