Real Estate For Atlanta Blog

As a small child, I remember overhearing my parents speak about money and with an over-simplistic, child-like perspective I chimed in and asked them; “If you need more money, why don’t you just go to the bank and get some”. It was then that my parents explained to me that the money they take out of the bank was actually money that they put in there too and finally I got it. From that moment on, I had a new perspective on the value of money. As adults, this sounds somewhat humorous because we all know that is how things work. However, it amazes me how few adults actually get the concept of money at a higher level. Since money is printed by the government, many view the government as an endless supplier of money. In reality, asking the government to print more money to pay for things is equally as absurd as me asking my parents to go to the bank to get more money when they had none in their account. Still, this is what is going on as we speak. In an effort to save the economy, the government is really not left with much choice other than to print more money to pay for things that will hopefully boost the economy. In the short term, it seems that the efforts to prop up the economy are starting to work. However, there are future consequences to actions that are being taken today that many have not thought out fully. As the government prints more money, it devalues the money; effectively making each dollar worth less (on some level, this is simple supply and demand). If each dollar is worth less, it will lead to inflation. Furthermore, if the government issues more treasury bonds to raise capital for some of the proposed spending projects, there will be more bonds; which, in effect makes it harder to find buyers for the bonds and it is likely that higher interest rates will need to be paid on the bonds to entice investors to buy them. If it plays out like that, then the Fed will have no choice but to raise interest rates significantly and quickly to keep the value of the dollar from heading towards worthless. Therefore, it seems that we find ourselves in a delicate race against time. We have no choice but to take actions today that will prop up our economy and put a band-aid on things for now; knowing that our actions will eventually lead to new and very different problems down the road. Our best hope is that the economy is able to revive itself to a point at which it can sustain the next blow before the inflationary problems hit us. If it does, then we’ll be able to pull through on a more permanent basis and enter into a more stabilized economic climate. However, if not, then we may have only seen the tip of the iceberg. So what does this mean to investors and home buyers? There will likely not just be a “bottom” to the market; but rather a small window of opportunity. The window of opportunity is the time period at which the positive effects of our actions of today begin to be felt while the negative longer term effects have not fully set in. During this time, one will have the extremely rare opportunity to have the best of both worlds: low interest rates, bottomed out prices, low or non-existent inflation, etc. before the pendulum begins to swing in the other direction ushering in an age of high interest rates and inflation. In my opinion, that time is NOW. If you have been on the fence about buying property, this really is the opportunity of a lifetime. Once interest rates begin to rise, you will quickly miss out on the window of opportunity. Many people don’t realize that a 1% rise in interest rates has an equivalent effect on home ownership costs as a 10% change in price. In other words; buying a home for $200,000 with a 4.5% interest rate will yield a virtually identical payment to getting the same home for $180,000 and paying a 5.5% rate on the loan. It is foolish not to take advantage of this incredible and short-lived opportunity while it is available.

As I write this blog post, the DOW is up almost another 200 points. One of the major factors that is causing this Wall Street rally is the recent announcement by the FASB (Financial Accounting Standards Board) that they will be relaxing the current mark to market standards for banks. In order to understand why this news is so important to Wall Street Investors and to the housing market, it helps to understand what this accounting rule is and why many economists believe that it was a major culprit in leading us to the financial crisis that we are currently in. The mark to market accounting rule simply states that companies must value all of their assets at a value that could instantly be obtained in the current market. The most recent sale of a similar asset is used under the mark to market rule to determine the value of an asset on a balance sheet. Banks typically fund loans for businesses as well as home loans and personal loans. In order to free up their cash so that they can make additional loans, banks then bundle together these loan assets and sell them to Wall Street investors. Of course, the price that investors are willing to pay for these assets is going to be determined by their value on the balance sheet.

These days, we hear a lot about how subprime loans that shouldn’t have been made are causing our financial crisis. This explanation is perhaps an over-simplified and inaccurate assessment of the real problem. In reality, the so called sub-prime loans were only a very small percentage of the loans that were made in the previous few years leading up to this financial crisis (I remember reading somewhere that it was about 6% of loans; but don’t quote me on that). Furthermore, some banks were much more heavily in the sub-prime business than others and many did not do any sub-prime loans and never made a single loan that had more risk than the bank or any investor should realistically take. Still, in part because of the mark to market accounting rules, the values of all mortgage backed securities were devalued by the few bad apples. The mark to market accounting rules did not take into account whether a loan was sub-prime or not or a borrowers likelihood of default. Instead, the rule forced banks to value all mortgage securities the same. Therefore, when the market started to slow down and investors finally realized that mortgage backed securities were not the risk-free investments that they were touted to be, they quickly lost interest in the bad loans; which is perfectly understandable. So, the banks that had a lot of sub-prime loans were no longer able to find investors who were willing to buy these loans to free up their cash to make new loans. They were forced to sell them at very low prices and, truthfully, that is all those types of loans were really worth. However, other banks that had little or no sub-prime loans on their books now had to follow the mark to market rules and value all of their mortgage securities at the same value that the toxic assets were sold for. In essence, even the perfect loans with 20% down, dual income, and co-borrowers with 800+ FICO scores were devalued by the other bad apples in the bunch. This caused otherwise very healthy banks to appear on paper to be financially insolvent. Banks are required to maintain a certain level of “health” in order to comply with regulations; so many were forced to sell off other assets (equipment, etc.) at fire sale prices in order to boost their balance sheets to levels that would allow them to comply with the regulations. In doing so, they devalued their competitor’s similar assets further and made their balance sheets look even worse. This continued in a downward spiral until we got to where we are now.

Finally, the accounting standards have just been revised to allow assets to be reported based on what they would be worth in a normal (non-distressed) sale. In this way, if one bank is in trouble and has to fire sale their assets, they will not necessarily devalue their competitor’s assets by nearly as much and the system will do a much better job of separating out the banks that are really in trouble from those that are simply being pulled down by others and would be relatively healthy and stable on their own.

There are many critics of this change in accounting rules who fear that it will allow banks to overvalue their assets and get us right back where we were before. It is my belief that this is a HUGE step in correcting the problem we are in today. However, for the long term (after we get back on our feet) we need to find a good compromise. Too much regulation is no good as it causes things like this to happen. Still, not enough regulation can be equally bad as it can lead to the extended periods of over-exuberance and collapse that we’ve experienced. Perhaps one day, investors will learn their lesson and realize that speculative exuberance-based buying AND panic-selling are equally bad and unwise. The right place to be is right in the middle where one should never pay more than an asset is worth due to underestimation of risk; but should be willing to purchase investments that present a fairly balanced risk-reward ratio.

1. Get started early - don’t wait until you’ve found a home to begin investigating lenders.
2. Pick one day to call 2-3 lenders that you wish to comparison shop.  Ask each for what is called a Good Faith Estimate (GFE).  This is a standardized form that will show a complete breakdown of estimated fees and loan terms.
3. Don’t just look at the bottom line - many of the fees are 3rd party fees and government taxes that will be the same no matter which lender you use.  The fees that you want to consider most heavily are those in the first section of the GFE (lender fees).  You can pretty much ignore the rest.
4. Generally speaking, if you plan to be in the house for a shorter time or if you are cash poor and need all of your money to be applied to your down payment, then you are better off with a lower fee structure even if it means a slightly higher rate.  If you are not cash poor and plan to stay in the home for a long time and don’t anticipate refinancing, then it may be better to get the lowest rate even if you have to pay more upfront.
5. The lenders will want to pull your credit report.  Consumers are often afraid to have that done because they fear that it will negatively impact their score to have it pulled many times.  Firstly, although it is true that it can have a negative impact, the impact is so small that it is insignificant for most poeple and very rarely does that alone make the difference between qualifying or not.  It’s a good idea to have it pulled at least once early on to identify any issues that might take time to work out.  Also, there is a rule that multiple credit pulls done during a short window of time are not supposed to negatively impact your score at all.  This was put in place to allow home buyers to shop for loans.
6. Don’t forget about the customer service aspects.  Your lender will play a significant role in how smooth your transaction goes.  Your best option is to select a local lender that you can meet with face to face if necessary (Internet lending does add some difficulty) and who knows the local customs and laws for the state in which you are buying a home.
7. Don’t drive youself crazy - while there will be some differences and it is worth shopping around, you are likely to find that the costs are going to be very close no matter who you go with.
8. You should not generally have to pay an up front fee to lock your rate, etc.  Be leary of anyone that asks you to do so and find out specifically why.