why now is A gREAT TimE To bUy

2nd QUARTER 2011

TAblE of conTEnTs
OK. You Win. Stop Listening to Real Estate Agents! . . . . . . . . . . . . . . . . . . . . . . . . . . .1 We Think You Should Listen to Grandpa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4 Financial Reasons to Buy Now. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Real Estate: GOLDen Opportunity of This Decade. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Rental Costs Are About to Takeoff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 For Buyers: The Financial Opportunity of a Lifetime?. . . . . . . . . . . . . . . . . . . . . . . . . .7 What Do Homeowners Say About Homeownership? . . . . . . . . . . . . . . . . . . . . . . . . . .9

OK. You Win. Stop Listening to Real Estate Agents!

Buyers often believe that agents are ALWAYS arguing that NOW is the time to buy. For that reason, purchasers question this advice. We want to report on what some members of the investment community are saying:

The Wall Street Journal

Jim Woods wrote an article earlier this year for Market Watch, part of the Wall Street Journals digital network. Its title: Why your best investment is a house. Mr. Woods compared the investment potential of real estate against other asset classes such as stocks and precious metals. Here was his conclusion. One reason your best investment right now could be a home has to do with the relative upside of getting in on an asset class while its at the bottom versus buying into other asset classes that could be near a top. Consider for a moment the tremendous upside weve seen in stocks, precious metals and agricultural commodities over the past 12 months If youre a long-term investor looking to put money to work, now is not really the best time to get into any of these three asset classes. However, with home sales starting to improve, and with prices now possibly forming a bottom, real estate could well be the asset class that represents the best low-risk buying opportunity out there today Mr. Woods went on to talk about the financing portion of the purchase: Yes, mortgage rates still are near historical lows, but if we see these rates rise, then the cost of a new home could climb significantly. So, now could really be the best time to pull the trigger on that home purchase and it could also be your best investment right now.

Fortune Magazine
Shawn Tully, senior editor at large for Fortune penned an article last week which was titled: Real estate: Its time to buy again. In the article, Mr. Tully explained: Forget stocks. Dont bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing. Lets state it simply and forcibly: Housing is back. Two basic factors are laying the foundation for dramatic recovery in residential real estate. The first is the historic drop in new construction The second is a steep decline in prices, on the order of 30% nationwide since 2006, and as much as 55% in the hardest-hit markets. The story of this downturn has been an astonishing flight from the traditional American approach of buying new houses to an embrace of renting. But the new affordability will gradually lure Americans back to buying homes. And the return of the homeowner will start raising prices in many markets this year.

Neither of the two media sources mentioned above has ever been accused of cuddling up to the National Association of Realtors. However, both have come to the same conclusion. Its time to buy real estate. Perhaps we should listen to them.

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We Think You Should Listen to Grandpa

There are those currently debating the financial advantages of owning a home. Some are looking at studies and reporting that homeownership has never really been a great investment. One of these people is Jack C. Francis, a former Federal Reserve economist and professor at Baruch College. He said in a recent CNBC article: For generations, parents and grandparents have been telling us that the way to get ahead was to buy a house and keep making payments with a fixed interest rate and after 20 or 30 years it would be way up in value and that was your nest egg in old age. You could either live in it rent free or sell it and use the proceeds to rent an apartment. The article goes on to explain the rest of Mr. Francis comment: That was good advice until 2006 when home prices collapsed, he says, and it may become good advice 10 years from now, but right now its not. Mr. Francis bases his conclusions on a study he completed which covered the years 1978 through 2008. In his study it showed that home prices increased annually by 5.7% and that the S&P 500 increased by 10.8%. Based on this information, Mr. Francis gives the following advice: To students who come to him for guidance on whether to buy or rent in the near term, however, Francis has one word of advice: wait. I keep telling them this is not the time to buy, he says. Lets take a closer look at this conclusion.

1. We have our own study.

Mr. Francis did a study over a thirty year period which did not include the last 3 years. If we look at the same categories since January 2000 (covering one of the worst decades in American real estate history), we find that home values GAINED 42% while the S&P LOST 4.7%. It all depends on which set of data you choose to use.

2. The proper comparison is rent vs. buy.

All of these comparisons claim that putting your money into a different investment vehicle other than real estate might make sense. What they are not taking into consideration is that the investor will still have a housing expense. They will still need money for shelter. They cannot just take their money for shelter and buy other assets with it. A person cant live in their 401k or their IRA. This leads us to

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3. In most markets today, owning is LESS expensive than renting.

Trulia recently came out with their Rent vs. Buy Index. The report shows: that it is more affordable to buy than to rent a two-bedroom home in 72 percent of Americas 50 largest cities. For more on this issue including a 50 city breakdown, click here.

4. Current mortgage opportunities may never be available again

The government has driven mortgage interest rates to all time lows. You can still get a 5% rate and guarantee it for 30 years. Both of these opportunities may soon disappear. Mortgage rates will increase as the economy improves and the Fed no longer feels pressure to keep rates low. The 30 year mortgage may soon be a thing of the past if suggested mortgage reforms come to be. You can lock in your housing expense for 30 years if you purchase. Renting is like having an adjustable rate loan with no cap that readjusts EVERY year. Which way do you think a landlord will readjust it? For more on this, click here.

5. Most Americans see more to homeownership than financial value.

Last week, Fannie Mae released the National Housing Survey. The survey reported:

96% of all homeowners said homeownership has been a positive experience. 84% of Americans still believe that owning a home makes more sense than renting. Even 68% of renters believe owning makes more sense. 2 in 3 Americans believe that lifestyle benefits of homeownership (65%) are superior to the financial benefits (32%).

There are more and more studies being done on the value of homeownership. We think we will trust in what our parents and grandparents said. Your mortgage payment is money you put into your savings. Your rent payment goes into the garbage.

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4 Financial Reasons to Buy Now

There are currently four great financial reasons why you should not wait before taking the plunge into homeownership.

Interest Rates Are Increasing

Interest rates have increased almost 1/2 of a point in the last six months. Most experts expect rates to continue to increase through the year. Interest rates along with price determine the overall cost of a home. Even with prices softening, if interest rates rise, it may be less expensive to buy now rather than wait.

The 30-Year Mortgage May Disappear

There has been much debate regarding governments role in providing support for homeownership. There are several experts who believe If Fannie Mae and Freddie Macs roles are eliminated, or even limited, it may be the end to the 30-year mortgage. This concern is addressed in MSN Real Estates Is it curtains for the 30-year mortgage?

QRM Requirements Could Be Much More Stringent

Here are proposed changes to the requirements for a qualified residential mortgage:

Certain mortgage types would be eliminated You would need to put a minimum of 20% down You would need a minimum 690 FICO score The ratios of income to both the mortgage payment and overall debt would become much more conservative (28% and 36%)

There would be loans available to purchasers who dont qualify under the new rules. However, they will probably be more expensive to the buyer (both in rate and costs).

Rents Are Expected to Increase

The supply of available rentals is decreasing and the demand is increasing. That will lead to an increase in rental costs throughout the year. The Wall Street Journal this week quoted a report by Reis, Inc: Expect vacancies to continue declining, and rents rising through the rest of 2011 at an even faster pace. You may be waiting on the sidelines to see if prices will continue to depreciate before you purchase a home. The mortgage expense is a major piece in the overall financial picture of homeownership. Make sure you consider it when timing your decision.

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Real Estate: GOLDen Opportunity of This Decade

Everyone wants to comment on the current real estate market. They want to talk about how now is not the time to buy a home. Some even argue owning a house has never been a great investment. Most say it will be a long time before real estate again begins to appreciate. It all sounds so familiar to me. It was just a decade ago that many made the same arguments about gold as an investment. Gold had dropped from over $400 an ounce to $250 an ounce (a 40% decline) from February 1996 to August 1999. People ran from gold as though it was a plague. Lord William Rees-Mogg, the current Chairman of The Zurich Club, in 1997 said: No investment has been so thoroughly exploded as gold; most people think that there will no more be another gold boom than there will be another boom in tulip futures in The Netherlands. Two years later in 1999, Don Wolanchuk author of the Wolanchuk Report explained: Everybody hates gold. You cant have a bottom until everybody is out. And everybody is out of the gold sector. Everyone knows what happened next. The proclamation of golds death was rather premature. Gold rose from $250 an ounce to over $1,400 an ounce in the next twelve years. I see the same situation with real estate today. I am not predicting that real estate will see the same levels of appreciation. I do believe however that the market will rebound strongly. Those who continued to believe in gold as an investment were rewarded. Those who continue to believe in real estate as a sound investment will also be rewarded. Here is what Adam Hamilton wrote in October 2000 in an essay titled Is Gold Dead? The road for gold investors has been long and parched in the last five years. They have wandered through a seemingly endless desert, occasionally tempted by what proves to be an illusory mirage. Many have fallen beside the sun-cracked path, their white bones picked clean by buzzards and gleaming in the sun. Nevertheless, a brave contrarian core continues to march forward. They have studied history, currency, gold, investments, economics, and finance. They understand the timeless value of gold, the cyclical nature of the markets, and the vagaries of human psychology. They realize it is darkest before the dawn, and the journey most difficult right before the homestretch is reached. Gold is in an INCREDIBLE position, and it will have its day. Nothing goes up in price forever, and nothing goes down in price forever. Investments are cyclical. Gold is NOT dead, it is simply biding its time, waiting for its next earth-shattering mega-rally. The spoils that go to the few remaining gold investors when that day inevitably arrives will be fantastic. The stunning victory will quickly blot out the painful memories of the long struggle You could replace the word gold with the words real estate throughout this essay and it would apply today.

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Rental Costs Are About to Takeoff

People often wonder whether it is better to rent or buy in the current housing market. The answer to that question is: It all depends. There are certain situations where renting short term probably makes sense. It may make sense if you are retiring to a different region of the country and are not yet sure where you want to set down roots for the next 25 years. It may make sense if you have a one year employment contract which will probably require a move to another place upon termination. However, in most other cases, renting right now makes little sense for several reasons.

Even though prices may still soften, waiting to buy makes no sense as the cost of owning a home may still increase. Mortgages may soon become much more expensive than they are right now. Owning a home is less expensive than renting a home in 72% of major U.S. cities. Rental costs are about to explode.

Lets take a closer look at the last reason. We have often said that the cost of anything is based on supply and demand. The number of widgets for sale and the number of widget buyers together create the price for widgets. That will also apply to rents. There is a much larger demand for rentals right now. The economy has forced many to leave their foreclosed homes and other buyers are afraid to plunge into homeownership. At the same time, the supply of rentals is rapidly decreasing. Here is a graph from Calculated Risk showing the apartment vacancy rate in the United States: When supply is rapidly decreasing and demand is quickly increasing, prices have only one place to go and that is UP! That is exactly where rental prices are headed. Is now a good time to rent? We think not. You can buy a home today at a discounted price and get a 30 year mortgage at a historically low interest rate. You can set your housing expense for the next thirty years. On the other hand, rental costs are poised to increase for years to come.

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For Buyers: The Financial Opportunity of a Lifetime?

A buyer should be more concerned about the COST of a home rather than the PRICE. Price obviously is a component of cost. However, unless you buy all-cash, you must also be concerned about the financing of the purchase. The price and the financing together determine the cost of a home. Today, we want to look at only the financing piece.
An opportunity exists today because of recent government involvement; an opportunity that may never again be available in our lifetimes. There has been much discussion about what role the federal government should have in supporting homeownership. We will leave our opinions on the debate for another time. However, we want to alert you to two advantages available to a purchaser today that may disappear in the future:

Historically low interest rates The ability to lock in these rates for thirty years

Interest Rates
Because of the financial crisis, the government stepped in and instituted a series of programs which pushed mortgage interest rates to historic lows. If we look at 30 year mortgage interest rates before and after government intervention we see the impact these programs had (see chart). According to Freddie Mac, from 2006 to the start of the financial crisis (the fall of 2008), the average rate was 6.29%. Since then, the average rate has been 4.92%. A purchaser can still get a 30 year-fixed-rate-mortgage at approximately 5%. However, interest rates this low may soon disappear. The government has questioned its role in supporting homeownership. In the administrations REFORMING AMERICAS HOUSING FINANCE MARKET: A REPORT TO CONGRESS, they are very strong in voicing their thoughts on this issue: our plan also dramatically transforms the role of government in the housing market. In the past, the governments financial and tax policies encouraged housing purchases and real estate investment over other sectors of our economy, and ultimately left taxpayers responsible for much of the risk incurred by a poorly supervised housing finance market

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Going forward, the governments primary role should be limited to robust oversight and consumer protection, targeted assistance for low- and moderate-income homeowners and renters, and carefully designed support for market stability and crisis response Under our plan, private markets will be the primary source of mortgage credit and bear the burden for losses. What are the probable results of this decision? The Royal Bank of Scotland: The (government) currently provides 95% of housing finance in the U.S.; any reductions of their involvement in supporting mortgages mean interest rates will have to go up to induce private lending. AnnaMaria Andriotis, writer for SmartMoney: In the proposals were changes that will mean more expensive mortgages, with higher fees and, probably, higher interest rates, larger down payments and, in the near term, fewer lenders to choose from. The day of a 5% rate seem to be coming to an end.

Locking in a rate for thirty years

We must also realize that having the ability to lock-in a rate for 30 years may soon be a thing of the past. There are a growing number of people who think that our mortgage industry should imitate those of other industrial countries around the world. If we do start limiting government support for the mortgage process, the 30year-fixed-rate mortgage may disappear. Other countries, like Canada, only allow a purchaser to lock in a rate for a five year term. After that, the borrower must renegotiate a new mortgage at current rates. Could that happen here? Mark Zandi, Chief Economist of Moodys Economics.com addressing the administrations recent report: A private system would likely mean the end of the 30-year fixed-rate mortgage as a mainstay of U.S. housing finance. A privatized U.S. market would come to resemble overseas markets, primarily offering adjustable-rate mortgages. Based on the experience overseas, the fixed-rate share in the U.S. would decline to an average of between 10% and 20% of the mortgage market compared with a historical average of closer to 75%. The COST of a home is dramatically impacted by the mortgage component. Today, we can get a 5% mortgage and lock it in at 5% for the next thirty years!! Both of these opportunities may disappear in the future. You should take this into consideration if youre looking to purchase a home.

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What Do Homeowners Say About Homeownership?

There is no shortage of experts that want to let us know how Americans feel about owning a home after the collapse of the residential market in the last five years. They MUST be devastated. They MUST feel trapped like prisoners in their own homes. They MUST be sorry they ever bought the house. These assumptions seem logical at times and can occasionally be supported by anecdotal evidence. However, we want to go to the only people who truly understand how homeowners feel - the homeowners themselves. There have been three major surveys done this year that can shed light on the issue:

The National Housing Survey

This survey conducted by Fannie Mae showed:

96% of all homeowners said homeownership has been a positive experience. 64% consider buying a home as a safe investment. Buying a home was considered safer than buying stocks by over three times the number of people (64% vs 17%).

The top four reasons to buy:

1. It means having a good place to raise children and provide a good education 2. You have a physical structure where you and your family feel safe 3. It allows you to have more space for your family 4. It gives you control over what you do with your living space (renovations & updates)

American Attitudes About Home Ownership

According to this survey conducted by Harris Interactive for the National Association of Realtors, home owners believe that home ownership benefits individuals and families and strengthens our communities. The vast majority of home owners say that owning a home is a smart decision over the long term. Even in todays challenging economy, 95% of owners believe that over a period of several years, it makes more sense to own a home. Home owners are much more likely to be satisfied with the quality of their family and community life than renters. While more than half of owners (56%) are very or extremely satisfied with the overall quality of their family life, only about one-third (36%) of renters report the same levels of satisfaction. Also, 43% of home owners are very or extremely satisfied with their community life, compared with 30% of renters. An overwhelming majority of home owners are happy with their decision to own a home. A full 93% of owners surveyed would buy again.

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Pew Research Center Survey

This recent survey titled Home Sweet Home. Still delves into homeowners current belief in homeownership as a long term investment: Homeowners whose home value has fallen only a little are equally enthusiastic about housing as a long-term investment: 85% say buying a home is the best long-term investment a person can make. Among those who say their home has maintained it value or increased in value, 88% agree Even those who have seen their home values plummet are still committed to the idea that buying a home is a solid, long-term investment. Among those who say their home has lost a lot of its value, 80% agree that buying a home is the best long-term investment (36% strongly agree, 44% agree somewhat).

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