January 10, 2009

About a month ago I wrote you on the interest rate situation, TBills and TBonds, mortgage rates and other related items. Today we have seen much of what I stated begin to see fruit. Interest rates have risen on TBills and TBonds. On December 18, 2008 the 30 year TBonds hit a low yield of 2.546% return, on January 6, 2009 the yield rose to 3.06%. Mortgage rates declined and money became available for mortgages.
As to mortgage rates, money is available. An example is Countrywide, you remember them don't you? The rates on $1 million 5 year one year adjustable, interest only is 5.125% with no points and 4.75% with one point, full documents, owner occupied and 60% loan to value. That means 40% deposit. To those of you who are looking at first time purchases and below the $625,000 mark there are 85% loans out there.
I have two loan brokers who can get 5.25% rates on 75% LTV with seller take backs of 10% with buyer downs of 15%.
As a result of the weekly letters to you I have had a number of inquiries on what to do with 401 K plans and can you use them for real estate purchases. The enormous hit that has occurred in 401K plans is leading many people to re-consider their asset allocation options. You can use the 401K to help finance your real estate purchases. Rather than taking a risk on a mutual fund or your company stock, try yourself! Lenders are willing to take on first position mortgages with your 401K plan as the second mortgage. The interest you pay yourself is tax deductible and the interest you earn is tax deferred. That is a pretty good deal! If you have any further questions, write or call me. Check with the administrator of your 401K plan for their terms. If there are rollovers IRA's in your name or spouse’s name the proper administrator will allow real estate to be purchased in the account. Again, talk to the plan administrator regarding the terms.
2009 and where do we go? The first thing to remember is that money in circulation is inflationary. Sooner or later the money from TARP and the Bailouts will be taken off the balance sheets in the form of TBills and TBonds and go into the economic system. When it does it will cause prices to rise. If you haven't notices, the price of gas is now up 10-15 cents a gallon and oil is up over $10 a barrel.
There have been 14 properties go pending with firms offers in hand in Palo Alto, one in Portola Valley ($3,980,000), two in Woodside, One in Atherton, and 5 in the Prime Areas of Menlo Park and three in the over $1.7 million to $2.2+ million range in the past 10 days. It is time to re-visit your home searches and get financing lined up.
Financing is the final comment. Where do I expect rates to be this year? I do not expect 4.5% mortgage rates to last long if ever available in the 80/20 full doc level for 30 year fully amortized loans. Why? The yield on 30 Year TBonds is 3.06% the FED has stated that they want the spread between mortgages and TBonds to be 1.5%. The spread is now at 2% points. I believe rates on TBonds will go up rather than mortgage rates going down. Why? The banks must sell Bonds to offer mortgages. When bonds are sold and the banks were the natural buyers, yields go up, if there are no willing buyers. If you look at the Treasury Inflation Protection Bonds the yield is 2.5% the CPI is 2% for an adjusted yield of 4.5%. That means the non-protect 30 year TBonds will go to at least 4.5% and mortgages could go back up to 6%. Lock in rates as fast as you can and get looking at property.
Inflation will mean home prices in the Location, Location, Location areas will firm up and possibly increase.
See you next week and keep you encouraging letters coming in!