Thursday, March 29, 2012



Interest Rates vs Mortgage Rates | PV Brokers Residential Real Estate

Over the past 2 years, the Federal Reserve has lowered short-term interest rates to nearly zero by a total of 3.50 percentage points. (This lowered the federal funds rate, NOT the prime lending rate, though that falls in lockstep with the former.) The Fed stated that it plans to have rates remain low and for a "considerable period of time".  Perhaps through 2013!!  Many people are excited because they believe this will lead to lower rates on fixed-term mortgages, meaning the average person may be able to save big bucks by refinancing.

The Fed has been on hold for quite a while now. Many would like to know if this means it may be a good time to consider refinancing their primary residence. Most homeowners are currently locked at considerable higher rates .

Our research suggests something surprising. Contrary to popular belief, the federal funds rate does not directly affect mortgage rates. (Not even adjustable rates, from what I can tell.) According to Bankrate:

Mortgage rates have declined dramatically over the past 2 years. But the Federal Reserve’s present stance on unchanged interest rates does not guarantee that rates will stay low. In fact, mortgage rates often climb following a cut in the federal funds rate, and actually rose about 50 basis points after the Federal Reserve announced its emergency 75-basis-point cut Jan. 22.  Similarly, it is possible for Mortgage rates to rise while the Fed funds rate stays the same.  So, we suggest that buyers and homeowners consider that just because the fed may be on hold through 2013, it does not mean that mortgage rates cannot climb.


That chart may be a little difficult to read. This one from Bankrate is not:

[[posterous-content:pid___0]] The blue line represents the U.S. national average on 30-year fixed mortgages.  The green line represents the federal funds rate. . Both lines trend downward, but otherwise seem unrelated. If anything, the mortgage rate appears to be a precursor to the federal funds rate. Again, it seems clear that the federal funds rate does not directly affect mortgage rates.

So, then, what does affect mortgage rates? According to an HSH Associates article on the subject, the answer is very complex. “Fixed mortgage rates, like other bonds, track US Treasury bonds quite well,” the authors write. However, they’re quick to add, “There is no specific ‘lockstep’ relationship between Treasuries of any term and fixed mortgage rates.”

GRS reader Jericho Hill is an actual economist. When I asked for his comments, he noted, “Thirty-year rates are largely affected by the supply and demand of funds available for long-term loans, and by the anticipated inflation rate. If the Fed’s moves lead to expectations of higher inflation, guess what that would do? Raise mortgage rates!”

Now may or may not be a good time to refinance your home. But don’t count on a drop in the federal funds rate to yield a corresponding drop in mortgage interest rates.  Also, don't wait too long as a rise in mortgage rates could still occur regardless of a Feds Fund rate increase.


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Wednesday, March 7, 2012

Real Estate As An Investment | PV Brokers Residential Real Estate

In today's turbulent real estate market, it is important for investors to take an objective look at real estate as an investment.  Depending on your individual situation, real estate may be something better off rented than owned!  Of course, timing and other factors can have an influence on whether or not to consider real estate as an attractive investment vehicle.  Historically, real estate has been attractive due to it's ability to be leveraged.  This factor has enhanced real estate's return on inventment.

For example, Rich Arzaga owns a luxury home in San Ramon, California, but he's not betting on it as an investment.

Founder and CEO of Cornerstone Wealth Management, who bought the 5,000 sq. ft. property in 2005 for $1.8 million and has spent $500,000 improving it, considers the abode a wonderful place for his family. But ask him to rate his home -- or any home, for that matter -- as a financial investment, and Arzaga balks.

"It's the American Dream to own a home, but whoever said that didn't do the analysis on it," says Arzaga, knowing he's taking a contrarian stance to conventional wisdom.

In examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, "100 percent of the time it was better to rent, rather than own."

That's right: 100 percent.

The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs - what's needed to hold and maintain the asset - range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas.

"I don't have the emotions a lot of people do surrounding real estate," Arzaga says. "I have steely eyes for how investing in real estate works, and I'd better be a prudent investor for my clients."

Owning a dream home, he says, creates a drain on other financial priorities, causing homeowners "not to meet their financial goals. They were going to fail."

[Also see: America's Top Turnaround Towns]

Some real estate experts thought there was some truth to Arzaga's argument, albeit with several conditions.

"To state that owning a home is or isn't a good investment is too simplistic," says Jeffrey Rogers, president and COO of Integra Realty Resources. "It depends. In times of relatively higher rents, low home values, and low interest rates, it makes sense to own a home. But in a reverse market, it wouldn't be economically feasible. Over time, those who purchase in down or flat markets with low interest rates come out ahead."

"Our lifetimes are a long time, and when we look over the long term, real estate and other investments tend to have a positive return," says Jed Kolko, chief economist at,

a real estate search and research website. "But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it's probably a bad investment for you. It also depends on your job market. If you're in a one-company town and the company goes down, there goes your job and there goes your home value."

Greg McBride, a senior analyst at, agrees with one point of Arzaga's. "Home ownership is not so much a creator of wealth as a store of wealth," he says. "The promise of home ownership is that over the long haul, it can rebate many or perhaps all of your costs, unlike rent, which doesn't rebate a dime."

The trouble, he says, is that many Americans want a home so badly, they neglect other ways to grow wealth and financial security.

"You have the other financial bases covered: emergency savings, retirement savings, paying off debt, saving for the education of your children," McBride says. "There's no sense in buying a home if it's going to deplete your emergency or retirement savings."

McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga's view credence: "Homeownership may not be the moneymaker you think it is."

Then there's the emergency fund, a must for when a home requires unexpected repair work.

"As far as emergency savings is concerned, six months of a cushion is adequate," McBride says. "But only 24 percent of people have that kind of cushion, and about 65 percent own homes."

So while home ownership may sound glamorous, you need a lot of money to make it work, without much guarantee of positive returns in a post-bubble era. Indeed, Arzaga cites himself as an example of how home ownership doesn't pay off. His residence is today worth $1.5 million, about 17 percent less than what he paid.

So why not sell? For Arzaga, it's a lifestyle choice, and one that he doesn't regret, since his big money-making investments are elsewhere.


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