Home Values, Home Improvements, and Decision Making

As a mortgage lender, people constantly talk to me about what they’re doing to their home and tell me what wonderful improvements they’re making that are going make their house’s value go through the roof.  Unfortunately, a lot of these improvements are going to cost a lot more than they’re going to generate.  This week I’m going to give some helpful tips on home improvements and home values.

Before we get into specifics:

People get very hung up on their home’s value. It’s an important piece of a person or family’s portfolio and for most American’s it’s their largest asset.  However, if you have no plans to sell your home and don’t need to create additional value for a refinance, property transfer for estate planning or other life event, don’t be so concerned with fluctuations in this number.  Values are going to do what they’re going to do and over time they will go up.  There’s never been a day in US history when national home prices were lower 10 years after a home’s date of purchase,   Meanwhile enjoy your residence for what it is, a place to live.  If you do home improvements on a home you don’t plan on selling any time in the next few years, do them because you want to utilize the improvement yourself.

Also, think about why you’re looking to increase the value of your home.  Is it for sale or are you just going to be having the house appraised?  While an appraisal is an opinion of value, it does not necessarily indicate the price a home will sell for, particularly in a seller’s market where multiple offers can be higher than an appraiser’s opinion.  If you’re looking to increase appraised value, price per sq foot in your neighborhood and overall condition may be your biggest concerns when deciding on what work to do.  If you’re looking to sell, you’re going to look to do work that may broaden the appeal of a home or you might try to give your home that little bit of edge that makes it stand out from all the others that potential buyers see when looking at open houses over the weekend.  As I’m going to mention time and time again in this blogpost, consult a Realtor for help in determining what repairs or upgrades are right for your home.

Talk to a real estate professional:

If you’re looking to sell your house over the next year or two and are looking to maximize “Sellers should always contact a Realtor before doing capital improvements so that they’re not investing in upgrades that won’t generate a return” says Cindy Lorimer of PLG Estates in Beverly Hills.  A Realtor can also make sure a seller isn’t going to be making changes to a home that differ from current trends in the market place (even if you can find it, avoid that shag carpeting, people) or a particular neighborhood so please make sure that the Realtor you’re talking with is familiar with your area.

Bigger really is better…most of the time:

The things that will almost always add value to a home are square footage and room count.  Turning a 2 bedroom home into a 3 bedroom home or adding an additional 600 square feet can be a great way to bring up the value of your home.   Be careful though. You don’t want to become the biggest house in the neighborhood.  You can start reaching a point of diminishing returns.  When planning an additions, always discuss your cost per square foot with a licensed contractor and discuss the future value of the home with a Realtor.

Be careful when updating

When looking to update a bathroom, kitchen, or other component of a home don’t get ahead of yourself.  If you’re looking to do so before selling make sure that you don’t do that remodel too long before you sell.   Preferences change frequently and what looks great to a buyer today may seem dated in 4-5 years.  Kitchens, in particular are now gathering places and not just where people keep and prepare their food.  If you’re trying to maximize your return, wait until you’re getting ready to look at selling before investing all that money.  Also, don’t overspend on a project that may not yield any return at all.  Many people fall into the trap of paying for top of the line finishes and appliances even if they cost more than they’re worth to a buyer.

Keep it clean

The simplest thing that you can do to maximize the value of your home is to keep it clean.    Appraisers might see a filthy house and assume it’s not properly maintained or they might just be influenced in their opinion on some of the more flexible areas of the report.  Home buyers are looking to by a home that makes them feel comfortable.  Trying to sell a messy house is an easily avoidable pitfall.

I hope this week’s version of Mortgage Insights has been useful to you.  If you need a Realtor to give you any advice on how to prepare your home for sale, please give me a call at 310-867-2750 or email me at jason.hecht@dignifiedhomeloans.com and I’ll be happy to arrange for you to speak with one of the wonderful professionals whom I deal with on a daily basis.

back to blogging and the direction of interest rates

It’s been a quite a while since I’ve posted and it’s nice to do so again. In fact the last time was 2013 and what a difference 16 months can make. Since the last time I wrote an article for this blog there has been a new Fed chair installed, the Republicans now control both houses, Greece has defaulted on their debt, inflation has become incredibly tame, ISIS has emerged, unemployment has dipped to pre-recession levels, Russia has been in conflict with Ukraine, and a new presidential election cycle has started to heat up.
What do each of these mean for the direction of interest rates? There is no one answer. Individual events may have an impact on markets including the bond markets which move interest rates, but more than one factor will affect their general path. For example, on a daily basis the crisis in Ukraine may move rates lower due to what people refer to as a “flight to quality”, a search for the safe haven of bonds that often occurs when international tensions and conflicts can impact global markets. Events like this, however, tend to have short term impacts on markets over a period of days or weeks.
The Greek debt crisis has been having a more lasting effect on the direction of rates as European Union leaders and Greek officials have struggled to reach a consensus on how to work out Greece’s ability to pay its bills. This will have a longer impact on rates not only in Europe but here as well as Greek default will weaken European debt, strengthening ours by comparison and driving down US rates.
The installation of the new Fed chair will have perhaps the biggest impact on interest rates as its up to Janet Yellen to decide when its time to raise the federal funds rate as the economy and inflation start to heat up. He’s done a brilliant job showing restraint and successfully winding down QEIII and Operation Twist. It will be interesting to see what happens in the months ahead.
All of that being said, when is the best time to lock YOUR interest rate? If you’re comfortable with the rate and payment you’re receiving it’s a great time to lock.

Friday’s jobs report, GDP, and the future of interest rates

Update…Presumptive future Federal Reserve Chair Janet Yellen has made some very dovish comments regarding future  Fed policy.  More to come on this soon.

 

It’s rare that a jobs report is as surprising as the report issued last Friday and the ramifications for long-term interest rates could be huge.  Most experts expected the economy to have added 100,000 new jobs in October.  The employed work force grew by double that number, adding 204,000 new jobs.   Almost as significant was the revision upwards in the September and August estimates as it turns out 60,000 more jobs were added than initially estimated.  This, coupled with a GDP growth rate that is heating up (not that 2.8% growth is a sign of inflationary worry) signals stronger growth overall, and more importantly, better sustained growth than most economist had believed were present to day.  While there was an uptick in the actual rate of unemployment, this data was shrugged off by economists since it was attributed by most to the government shutdown and temporary furloughs.

What does all of this mean in practical terms?   If positive numbers keep coming over the next several weeks, the federal reserve board’s December meeting could have a very big impact as they decide whether to keep supporting mortgage rates with their QE3 bond buying program.  Some Fed members have been looking for the opportune time to begin tapering off QE3 and reports like last Friday’s give them all of the cover that they need.  Mortgage bond prices fell (raising rates) on Friday as much as they have in a single day since the Fed made comments about the possibility of a taper back in June.

While the market seems to have stabilized this morning, one thing is certain.  There will be a lot of volatility before the Fed meeting scheduled to take place next month as every report is scrutinized with a fine tooth comb and every comment by a fed member is parsed for signs of their intent for the rate market.  Stay tuned for further updates.

When Should I Lock My Interest Rate?

One of the most common questions that I get from clients is when should I lock my interest rate.  My answer tends to be pretty consistent.  I almost always advise clients that as long as they are comfortable with the payment at the time that they apply, they should lock in their interest rate.  While everyone wants to lock in when rates hit their bottom, few people ever do. The lowest rates any cycle tend to last for a day or sometimes only hours.  Trying to get the lowest rate in any given cycle can be as much about luck as it is about skilled advice.

The reasons to lock in early are plenty, but chief among them is this;  you’re buying a home that you are going to be paying for over a period of up to 30 years.  Making sure that you are comfortable with your payment is a key piece of creating financial security for yourself.  By locking in a rate at application you are ensuring that you won’t need to start stretching your budget beyond what you had in mind.

When making a decision, it’s also important to know that rates tend to rise more rapidly than they decline.  While news that is considered beneficial to rate markets can have a positive impact on interest rates, price improvements tend to occur over days or even weeks.  When their is negative news for bonds, the effects can be instantaneous.  Consider that when the Fed met in June and announced plans to taper off their stimulus program bonds were up almost 1/2% overnight and a full percent over the next week.  Last week, the Fed announced that they will not immediately start tapering as people had though, and the positive effect on the retail rate market was only about 1/8% overnight, and in the week since, the total price improvement has been about 1/4% to most fixed rate products.

Additionally, given the right circumstances a locked rate doesn’t mean that you can’t take advantage of a falling rate environment.  Many lenders offer what’s called a “float down” option, allowing you to take advantage of any sharp decline in rates that may happen during your transaction.  These options usually require that the market move by at least 1/4% and may have fees associated with their execution, but they can be a great way of giving yourself peace of mind while still allowing you to try to reap some benefits if pricing moves the right way.   Asking your loan officer whether or not your interest rate can be floated down is always a good idea.

Finally, if there is no float down option, you still haven’t necessarily missed the boat.  After closing you still have the opportunity to refinance down the road.    Refinancing can be a low cost or no cost way to lower that rate  in the future, further improving that price that you’re going to be paying for your new home.

Fed Taper? It’s still too soon.

Most surveys of respected economists still agree that the on Wednesday the Federal Reserve Open Market Committee (FOMC) is going announce that the Fed will start tapering their buying of bonds also known as quantitative easing, the powerful weapon that they have used to keep interest rates low in order to stimulate the economy.  While this needs to be done at some point for the purposes of preserving their balance sheet and eventually staving off inflation, this months meeting of the FOMC is the wrong time to start.  There are a few key reasons including some data just released today

1) Inflation still isn’t a threat.   The indicators for rapidly increasing prices aren’t there.   The core PPI(Producer Price Index) which measures the cost of producing goods and services (excluding fuel and food) is up only 0.1%, which is practically nothing.    Retail sales (excluding automobiles) were also increasing at the same anemic pace.  Both of these numbers are indicators not only inflation, but of the direction of economic growth in the months to follow.  The next big measuring stick for inflation is the CPI (Consumer Price Index), which isn’t going to be released until Tuesday when the Fed meetings begins.

2) We’re confident but not that confident.  While consumer confidence remains high, this month’s number really missed the mark.  While 76.8% seems like a lot of American’s are confident in the economy, that number is more than 5% below last month’s 82.1%,, meaning that 1 of every 20 American’s went from having faith in the direction of our economy to losing that faith  over the last month  It’s also 5% below the 82% level of confidence that most economists expected.

3) It’s time to talk about the debt ceiling.  Bonds are debt, a promise to repay an investor principal and interest on their investment.   Most experts agree that there will be a contentious fight, when it’s time to approve another increase in the debt ceiling.    Last time this debate occurred, the US had it’s credit down-graded by one of the three major bond rating agencies,  This gave pause to the institutions and people who buy bonds.   By tapering the number of bonds purchased by he Federal Reserve at the same time, rates for treasuries and home loans could rise much quicker than the Fed would like.

4) Most families still aren’t better off than they were at the start of the economic crisis.  While incomes have increased since the start of the economic crisis, most of those increases have been realized by the top 10% of US earners.  Excluding that top 10%, real income has only increased by about 1%.    Affordability in a rising rate environment can be further impacted as, particularly in the housing sector, stalling the housing recovery that began 2 years ago

While the Federal Reserve can’t keep purchasing bonds forever to help keep our economy going, timing and the pace of tapering will be important as to the impact on our country’s economic health.  The next several months will be very telling, and as Chairman Bernanke’s tenure as head of the Fed draws to a close, we could even see a shift in the Fed philosophy on that tapering in the middle of the process.

 

 

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Jason Hecht has been a leading mortgage expert since 1995. He lives in Los Angeles, CA