The real numbers for home selling potential can boil down to just how many people can actually afford to buy in a given region. With this in mind, C.A.R.’s HAI showed that late last year the percentage of potential home buyers who might buy existing single family homes at median price levels had dropped to something on the order of 48%. Earlier in 2012, this figure was as high as 55% (Q4 2011).

C.A.R. provides these figures not only on the state level, but also   indices for regions and select counties within the California.  This index is also considered the most crucial measure of the health and well being of the state’s residential real estate situation. Extrapolating the figures, the HAI shows that potential buyers need to earn, at a minimum, $66,940 just to qualify for the purchase of a $353,190 median-priced California home (Stetewide). Such a home carries a monthly payment of $1,670, and this is assuming there is a 20 percent down payment.

C.A.R. composite

Further scrutinizing C.A.R.’s report, home affordability showed mixed results regionally in California. Some areas saw market improvement affordability wise, those included: Alameda, Contra Costa, Marin, Napa, Los Angeles, Ventura, San Luis Obispo, Santa Cruz, Fresno, and Kings counties.  Conversely, houses in San Francisco, Solano, Riverside, San Bernardino, Monterey, Santa Barbara, Madera, Sacramento, and Tulare counties became far less affordable in Q4.

With these numbers, San Bernadino and King counties were the most affordable California counties, with San Francisco being the most difficult entry point. However, with the January slowdown in effect, C.A.R.’s figures on the new year housing sales and price situation tells of median prices falling, which is sure to bring affordability more in line with previous results. Still, news of a slowed market does not fully compensate for an upscale situation. C.A.R. President Don Faught (at left) told Recordnet.com:

“The extreme shortage of homes for sale continues to hinder California’s housing market, as demonstrated by the nearly two months’ supply drop compared with last year.”

It seems clear the continued shrinkage of available homes for sale statewide will further constrict affordability as prices are driven up past 2012′s threshold. With sales percentages up for less than median priced homes in the state, one can expect even greater shortages of homes priced under $200,000 also. Meanwhile, controversy over interest rates and the economy, and the potential for the worst securities return the FED ever reported, many other factors play on just how people in America will ever achieve the so called American Dream.

Government Compensation California´interactive map

It remains to be seen just how stable low interest rates will be, even in the short term, and the construction job situation in California is closely tied to these affordability/supply figures as well. In the end, a housing recovery is needed to fuel a housing recovery. One interesting tidbit we found comes from the California State Controller’s Office. Looking at Controller John Chiang’s interactive government employee wages maps here (image above) most California State employees do not appear to fit into C.A.R.’s HAI. We’ll have a look at correlating state wages nationwide with economic stability/trends as well.

For more information on C.A.R.’s research please visit their website or the original release here.

Image courtesy Thom Watson

Brad Schmett is an expert in Palm Springs and La Quinta real estate and spends much of his time helping Canadian homebuyers maximize their investment. He has spent many years in the real estate industry and has a well-earned reputation for providing a high level of service to clients.

Schmett commented on the current conditions, saying:

“A rare combination of economic and local real estate market conditions has created a near “the perfect storm-like” scenario that has set the stage for an incredible residential real estate buying opportunity in Palm Springs, La Quinta, Palm Desert and the surrounding desert cities. And many Canadian baby boomers are taking advantage of what many consider to be a once-in-a-lifetime buying opportunity.”

Property prices are at their lowest level in more than a decade, and although inventory levels have declined there is still an attractive selection of available homes to choose from. When combined with low mortgage interest rates these factors make the opportunity almost irresistible.

Schmett has more than 25 years of real estate experience and has developed a keen understanding of the concerns and needs of his clients, particularly those from Canada. He says “With my Canadian baby boomer clients, the trend is for them to sell their large, primary residence in Canada, move into a smaller property or condominium at home, and then buy a second home here in Palm Springs. They want to slow down and enjoy life more-and they see Palm Springs as a great place to retreat with family and friends, especially during the frigid, blustery Canadian winter.”

Luxury Homes by Keller Williams-Palm Springs, is an exclusive, elite and sophisticated group of real estate consultants who are intent on raising the bar for service in the upper tier Palm Springs area residential real estate market. Anyone wishing to find out more about opportunities for investing in Palm Springs real estate should click here. With winter set to retain its icy grip on Canada for a good while yet, the attraction of buying property in a warm sunny California is extremely easy to see.

© Dmitry Sunagatov – Fotolia.com

Note that I did not say “what you should charge”, but rather what your tenants likely can afford. Affordability is going to be a huge issue going forward, as renters fight the headwinds of increasing payroll taxes, inflation of food and energy costs, the new health insurance mandate, and stagnant incomes.

One of the challenges most landlords are facing today is the dwindling buying power of most of their tenants. Though not all tenants are in this situation, US Census data shows that the vast majority of wage earners in the U.S. are not making very much money…

Here are some facts it’s helpful to know:

1. According to Social Security wage data, 50% of all wage earners made less than $27,000 in 2011.
2. An additional 16% of all wage earners make less than $42,000 per year.

This means that fully 66% of all wage earners make less than $42,000, with three-fourths of them below $27,000 per year.

As a rule of thumb for lower income renters or buyers, allocate no more than 36% of net take home pay, and that is what the typical tenant should be able to afford in rent. Of course this depends on other debts such as car payments, credit cards, and such, but generally, 36% is a commonly used percentage for calculating how much of a mortgage payment a buyer can afford. The same rule of thumb can be applied to a tenant.

Real estate agents and lenders commonly use the gross income number and calculate from that, but I prefer to keep things rooted in reality, so I strongly recommend using net take home pay for this calculation, because clearly, tenants or buyers cannot make use of income that will be deducted for payroll taxes. You are not doing yourself or a prospective tenant any favors if you try to stretch what a tenant can afford beyond what is realistic.

When looking at a prospective rental property you are considering buying, I recommend using the above rule of thumb to help estimate your likely positive cash flow on the property. Search online to find out what the median income is in the immediate neighborhood where your subject property is located, and calculate an affordable rent rate for the subject property.

For example, let’s say that your property is located Albany, Georgia, a typical, midsized city in the south western section of the state of Georgia. According to the detailed Census Data that is available online here, Albany has a median income of $17,424, well below the average of $25,383 that is shown for the entire state.

Multiply $17,424 by .36 and you’ll get $6272.64 – This is the amount that a person with the median income in Albany, GA can allocate to pay rent for an entire year. Taking $6272.64 and dividing by 12 months, I get $522.72 per month. This is what a single person earning median income should be able to reasonably afford in rent each month.

And conversely, if you are using the 1% rule as a guide for making an offer on a property to be used for rental, you could assume that a 1-2 bedroom unit might be worth $52,272. (The “one percent rule” states that a property should rent for 1% of it’s value, or conversely, a rental property is worth it’s monthly rental amount times ten.)

A three bedroom home rented to two adults, each earning median income, could be estimated to gross $522.72 X 2 or $1045.44 per month. Using the 1% rule as our guide, this property is worth approximately $104,544.

Knowing what your tenants can afford helps you insure that you do not pay too much for a rental property going in, and also helps insure that your tenants will be able to pay on time every month. And when tenants can afford their rent, they are likely to stay longer, which reduces your vacancy and turnover costs.

This is merely a way to work with the fundamentals in your market, because real estate investing strategies work best when your strategy is in line with the general market fundamentals in your area.
Donna S. Robinson is a real estate investor, author and market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her book, “Basics of Real Estate Investing” is now available on Amazon.com for Kindle Readers.

Brad Schmett is an expert in Palm Springs real estate and specializes in helping buyers maximize their investment when purchasing second homes on golf courses and gated communities, and other vacation properties. Over the years he has earned quite a reputation for being able to provide a high level of service to his clientele.

Commenting on the upcoming golf tournament Schmett said, “Year after year I’m always quite pleased to see the heightened level of interest in our real estate as a result of the Humana Challenge. Based on current market conditions and this year’s anticipated tournament turnout, we’re expecting the 2013 Humana Challenge to possibly be the best ever to boost local real estate activity.”

The 2013 Humana Challenge is a four-round, 72 hole event being held January 14 to 20th in La Quinta at the historic La Quinta Country Club and PGA’s West’s Nicklaus and Palmer Private courses. In the tournament name coincides with an eight-year sponsorship deal with healthcare conglomerate Humana, a working relationship with former president Bill Clinton, and a four-day, three course format which began with the 2012 Humana Challenge. The tournament still celebrates and honest legacy of Bob Hope and ends with the presentation of the Bob Hope Memorial Trophy.

Schmett went on to say “As in past years, a significant portion of my out of area real estate sales activity during tournament week comes from tournament goers who are also looking to buy real estate in the Palm Springs area. There is always a great deal of excitement about learning more about the incredible real estate buying opportunities here in the Palm Springs area.”

He went on to point out that the area is currently benefiting from some of the lowest real estate prices in more than a decade, and the current inventory covers a broad range of properties giving home buyers a greater choice than ever before. You can find out more by visiting his website.

Assuming there is no agreement forthcoming for avoiding the “fiscal cliff”, real estate investors should be giving some serious thought to how your real estate investments, rental houses and commercial buildings might be impacted. For some there will be little change, but for others who have properties located in or near markets that will be directly impacted, the changes could be swift and severe.

According to reports concerning analysis of the impact, one of the most significant aspects of the sequestration bill would be large cuts in various types of defense related spending. If you own rental real estate in an area near a major military base, chances are you could see a local impact that would potentially reduce demand for rental housing, and could lead to an increase in tenants who would lose their jobs.

One such area that would be dramatically impacted is Fayetteville, North Carolina, home of Fort Bragg. The required automatic cuts in new defense contracts, reductions in personnel, and budget cuts dictated by the sequestration process are designed to reduce government outlays. And as painful as this will be, something has to be done to avoid an even worse situation somewhere down the road. But some communities will experience dramatic changes in their local real estate market, at least for a few years. Unemployment among veterans will rise. Communities where military and defense related jobs are concentrated will see a relatively fast impact that will quickly bleed over into the local housing market.

The government posturing over sequestration is getting somewhat tiresome, as everyone is merely jockeying for position, and no detailed terms for an agreement have yet been identified. Here is a list of the general cuts that would be implemented. Your challenge is to determine how this list might impact your real estate investments, or any investments for that matter.

My guess is that falling off of this particular fiscal cliff might be less painful that waiting for a higher fiscal cliff to arise, so in some ways perhaps we’ve got a better chance of long term survival if we go ahead and accept these cuts now. I get that. But as real estate investors, this is a classic example of a looming change in the fundamentals that will come quickly in some markets. Therefore, it’s important to know whether your properties are located in a market that will be sensitive to these changes.

Other states most vulnerable to military and defense cuts are Virginia, Texas, California and Florida. Virginia has a major concentration of military and defense related jobs and industries. And there will be specific local areas within each state that will be most affected.

Investors located near military and defense related installations or businesses should take careful note as to how the approaching changes might impact your local market. It would appear that a reduction in demand is a very likely outcome if the planned cut backs begin to take hold. The military-defense sector would be one of the first, and would be big enough to have a significant impact on local markets in a variety of areas.

In today’s challenging market, it pays to remain alert and vigilant to follow your local market fundamentals, and be aware of how any negative changes in those fundamentals could impact your properties and your cash flow.
——————————————————————————————————————————-
Donna S. Robinson is a real estate investor, author and residential market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her latest book, Basics Of Real Estate Investing is now available on Amazon.

Image by Seth W. via flickr.com

For various reasons, the home is not being actively offered for sale. Instead it sits vacant. Many neighborhoods have one or more homes that are part of the shadow inventory problem. There has been ongoing speculation that banks are holding many foreclosed homes off of the market because of low home prices.

Banks that have been left holding a large number of foreclosed properties since 2008 are hoping that the housing market will eventually turn so that the value of those foreclosed homes can start going back up. They realize that dumping millions of distressed properties on the market would reduce home values even further. This would lead to more losses for banks, something that they desperately want to avoid.

But it appears that perhaps we have finally reached some equilibrium between home sales and foreclosure numbers. This in turn could be the reason why shadow inventory seems to have stabilized at 2.3 million units.

Institutional investor activity has grown to unprecedented levels in the single family market. This has resulted in a surprising price increase of some 4% from 2011 levels and is increasing demand for foreclosed properties. At the same time, foreclosures remain elevated to near record levels, as new FHA 30 and 60 day delinquencies have increased to some 17% of their insured mortgages. The investors are spending tens of millions of dollars buying up individual houses at courthouse auctions, especially in places like Georgia, Florida, Texas, California and Michigan, where foreclosure activity is still at very high levels.

This has resulted in a housing market that remains soft due to new foreclosures and rising delinquencies, even as investor buyer activity ramps up to record levels. The buying is putting upward pressure on prices with more demand for better quality homes in better locations. Fortunately the result is an offset that has helped stabilize home prices to some extent. The downside is that it also masks what is essentially a housing market that is fundamentally very weak at it’s core, and is not really expanding.

Notably all of this is leading to a tectonic shift in the housing industry. Ownership has dropped back from a high of around 68% at the market peak to about 65.5% today, which is a historical average that dates back to the 1960′s. In spite of the federal government’s 34 year effort to foster home ownership through various programs and policies that helped lead to the housing crash, little to no long term results have been achieved. When you consider this point, it stands to reason that we’ve got a significant percentage of vacant homes but no actual end user buyers available to buy them. The 65% that can afford to own a home will, and the other 35% are going to end up renting no matter what government policy is in place.

Without investor buyers, and particularly the institutional buyers, home prices likely would still be falling. Shadow inventory would be growing at a much faster rate, especially in the states with the most foreclosure activity. The large amount of inventory being picked up by well funded Wall-Street-connected investment companies is helping reduce the total amount of vacant inventory on the market, but it also speaks to the fact that fundamentally the market remains over supplied in the areas hardest hit by the foreclosure crisis.

The banks who are selling the foreclosures to the institutional investment companies are also lending them the money to buy those properties. In a sense the banks have helped create and fund companies to buy up their inventory. This is creating a sense of “recovery” but it’s not a fundamental recovery.

I believe that this underlying weakness could persist for years before we reach a true balance in housing. To do that we must increase the number of first time home buyers and therefore increase real end-user demand for housing. And it has to be genuine, natural demand created by a robust economy that has millions of new, good paying jobs. Until that happens we won’t have a sustainable housing recovery based on legitimate demand, but it will look like things are improving to some extent.
——————————————————————————————————————————-
Donna S. Robinson is a 17 year real estate industry veteran, author and housing market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults and read her blog at www.RealtyBizConsulting.com

Image courtesy SurvivalWoman via flickr.com

Today, some 30 years later, current Federal Reserve Chairman Ben Bernanke, is telling us that inflation is not the problem, that “deflation” is instead the real problem, and as a result, Bernanke has been making aggressive attempts to force interest rates down by injecting trillions of dollars into the U.S. economy, in hopes that those low interest rates would spur the housing market into recovery. But so far, most agree, this has not worked, as home prices are essentially flat, and home sales have yet to improve to any degree that could be called a legitimate recovery.

But it is having a very real impact in another area that has been conveniently omitted from the Consumer Price Index – food and fuel. In Bernanke’s world, these items can be removed from the data set, so that the inflation numbers can be held to whatever level is desired to achieve political or economic ends.

But in the real world, the one that 99% of regular Americans live and work in, the inflation problem is getting worse, reducing the amount of funds consumers have to spend on housing. Prices for food and gasoline have reached levels never before seen in the U.S. Rising food prices are fast becoming a problem for average consumers – you know, the same folks who buy or rent houses. These people have to live with reality, they can’t remove food and fuel from their data set.

Recently, California made news as gas prices hit $5.00 a gallon for the first time ever. Thanks to a record drought in the farm belt, corn prices are up 60% just since June of this year. All food commodities are up significantly. And the only real “tool” the Fed can utilize to stop prices from rising too much would be to raise interest rates. And this means mortgage costs would also rise, making homes less affordable.

According to a detailed regression analysis of the history of inflation correlated to interest rates and housing prices, published on the ZeroHedge.com blog in 2010, inflation simply does not generate significant increases in housing prices.

This data shows that there is a strong correlation between rising interest rates, and reductions in home prices. It’s not obvious to the casual observer or the typical buy and hold investor, because the analysis discovered that there is a 6 month or longer lag time. It takes about 6 months for an increase in mortgage interest rates to begin to translate into a reduction in home prices. Conversely, in the historical past, falling interest rates stimulated home sales, and the resulting increase in demand led to rising home prices when interest rates were falling. But not this time. The near-zero interest rates have done nothing to stimulate home sales.

But the money pumping is beginning to have a significant impact on consumer prices. Grocery stores are now filled with packaged items in which significant reductions of the net contents have been used to mask commodity prices that are rising rapidly. Fuel prices have doubled in just the past three and one-half years. When you combine those facts into the equation, Bernanke is clearly caught between a “rock” of deflated mortgage backed securities, (which he is trying desperately to re-inflate), and a “hard place” of food and fuel prices that have begun a run-away inflationary spiral.

Also lurking in the shadows for housing is the continuation of high unemployment, still officially near 8%, while non-government analysts at Shadow Government Statistics place the real unemployment rate well above 20%.

I believe that the lack of real demand, from real-end-user buyers is being masked in the housing sales data, because sales data does not differentiate between end-user buyers and investors. Yes sales are up, and demand is up slightly, relative to the bottom, but it’s not the general public doing much of this buying. Instead, big investment companies are making an unprecedented push into the housing market, in anticipation of rising rental rates that may not materialize in many markets.

In short, we’ve been lying to ourselves for so long about economic data that the government and the housing industry don’t seem to realize the economic headwinds that consumers are facing.

This being said, I believe the best approach is a conservative one. All home buyers as well as real estate investors should continue to buy at the lowest possible prices, and not project any benefits from property appreciation or significant rental increases for at least the next 5 years.

An old time rental property owner, now in his 80′s told me the other day that “the rental property business just isn’t what it used to be when I was your age.” He still has rental properties that have been paid off for many years, but their tenants are struggling more than ever to pay a rent rate that has not risen in 5 or more years, while taxes and insurance costs continue to escalate.

It’s important to be realistic about the fact that rent rates can’t rise much in the markets that are not supported by strong job growth sectors. If you are in metro Washington DC, demand will remain strong because the government complex grows ever larger by the day, and is a major job growth leader nationally. (at least until Uncle Sam runs out of money) But if your properties are in metro Atlanta, GA, Phoenix, AZ, Las Vegas, NV, central Florida, Riverside California, or the “rust belt”, you should be very realistic about flat rent rates, systemic unemployment and rising consumer prices.

Personally, as a real estate investor, I’d love to see a big housing recovery, complete with rising property prices, rising employment, rising incomes and a new housing boom, but unfortunately this is 2012, not 1993. The only thing rising right now is the cost of living. As investors, it’s in our best interest to be realistic about the financial challenges that are still ahead for would-be home buyers and rent paying tenants.
——————————————————————————————————————————-
Donna S. Robinson is an investor, author and residential market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults and read her blog on her website at www.RealtyBizConsulting.com

The increase from 2011 to 2012 is expected to be 5.1 percent. The state association expects sales to jump about 1.3 percent in 2013 to approach 530,000 units. Some 523,300 units are projected to be sold by the end of this year.

www.freedigitalphotos.net

The California median home price is expected to go about about 5.7 percent to $335,000 in 2013. The jump from 2011 to 2012 is projected to be 10.9 percent.

“The housing market momentum which began earlier this year will continue into 2013,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young.  “Pent-up demand from first-time buyers will compete with investors and all-cash offers on lower-priced properties, while multiple offers and aggressive bidding will continue to be the norm in mid- to upper-price range homes.”

“The actions of underwater homeowners will play an important role in housing inventory next year, with rising home prices inducing some to stay put and others to list and move forward,” she said.

Despite the overall outlook for the state, some regions are being hit with low inventory.

“The market has improved moderately over the past year, and we expect that to continue into 2013,” said C.A.R. President LeFrancis Arnold.  “Sales would be even higher if inventory were less constrained in REO-dominated markets, particularly in the Central Valley and Inland Empire, where there is an extreme shortage of available homes.  Sales will be stronger in higher-priced areas, where there are more equity properties and a somewhat greater availability of homes for sale.”

Another study echoes the fact that some regions of the state aren’t seeing any signs of improvement.

Fiserv, a real estate data company that recently evaluated 384 of the largest housing markets, found that several Central Valley markets aren’t showing signs of recovery because of high unemployment and foreclosure rates.

In fact, the top three markets are in California:

• Merced. This Central Valley city experienced a 69.7 percent decrease from the peak to the first quarter of 2012.
• Modesto. A 64 percent decrease over the same time period.
• Stockton. This city saw a 62.8 percent drop during the period.

Other markets that saw decreases more than 50 percent are Vallejo-Fairfield, Bakersfield-Delano, and Riverside, San Bernardino, Ontario.

Michele Dawson is a freelance writer based in Phoenix, Arizona. She spent seven years as a newspaper reporter and has written for various magazines and web sites specializing in real estate and home improvement, including Realty Times, SmartHomeowner, California Builder, and the Sacramento Business Journal.

Image courtesy: www.freedigitalphotos.net/

As one who has been both a real estate agent and a real estate investor, and sold properties in both markets, I’ve experienced both sides of the business. For purposes of this article, we’re going to discuss the thought process that goes into making money selling real estate as an investor.

Investors who are planning to sell a property themselves are usually working with one of two different kinds of buyers – investor buyers or owner occupant buyers. This is an important distinction.

Those who are attempting to “turn” a property very quickly with a minimum of work are usually selling to other real estate investors who are likely planning to rehab the property and hold it for rental. These investor buyers want the lowest possible price so that there is plenty of room to allow for positive cash flow after any necessary repairs or renovations are completed. Their objective is cash flow. If you want to successfully sell properties to this type of buyer, “the numbers” are everything. Location is also important, but at the end of the day, the numbers have to be right to attract an investor who will want the property.

Essential skill number one at this level is knowing how to negotiate great deals so that you can leave plenty of profit margin for your investor buyer.

Those who are planning to rehab a property and sell it to an owner-occupant buyer are not so concerned about the potential cash flow. When your buyer will be living in the property, the focus is on making the property attractive to the type of buyer that will want to live in that particular area. Location is also more of a factor when selling to owner-occupants.

Higher priced properties in better locations can expect buyers who are better educated, have higher incomes and more sophisticated tastes. Any updating or rehab work must be chosen and planned carefully for buyers with distinctive tastes and desires.

On the other hand, selling properties to owner-occupants in middle to lower income areas will tend to have more of a focus on affordability and perhaps creative financing techniques to help the buyer get in the home.

Entry level home owners with average incomes often have more difficulty qualifying through traditional channels, and may need the seller to take back a second mortgage so that the buyer can qualify for an 80% first mortgage. If the investor is smart enough to get in the deal with the right numbers, they can sell the house and make all their money back, plus some cash profit from the 80% LTV on the first, then hold a note for monthly income in the form of a 20% second mortgage. This is a selling skill that can yield an up front cash profit along with a sustained cash flow. As long as I am getting my costs back and making a decent net profit at closing, the risk of holding the second is much lower.

Lead generation for investor buyers or owner occupant buyers is relatively easy because buyers are trained to look for sellers. Getting buyers to call you can be as simple as running a classified ad, putting up a few bandit signs on the roadside near your property, (make them READABLE from the car, please), or putting up a simple website that says you have properties for sale. Photos are a must. Include flyers in the window of the property so that any potential buyer stopping by can see your price and terms clearly, along with contact info. Buyers will find you if you make it easy enough for them.

Selling skills for real estate investors are much more along the lines of creating a transaction that fits the type of property you have to sell, and the type of buyer you want to attract. Whether you wish to sell to other investors quickly for cash, or you wish to go for a higher potential cash profit by selling to owner occupants, the real objective is to understand the needs of your buyer and cater to those needs. Your buyers will reward you for it.
—————————————————————————————————————
Donna S. Robinson is a 17 year real estate industry veteran, investor and author located in Atlanta, GA. Follow her on twitter at donnaconsults and read her blog on www.RealtyBizConsulting.com

© cartoon11 – Fotolia.com

According to the official history of interest rates, the official prime interest rate on December 19, 1980 was 21.5 percent! (this is the all time record)

I bet most folks today don’t even realize that interest rates for those with the best credit scores could actually go that high, but they did back then. Given that interest rates are a fundamental factor in real estate financing, the market response to such a high interest rate was to look for alternative ways to finance a home purchase. This was the dawn of the original era of creative finance.

It would be July 2 of 1992 before interest rates would again be pegged at “only” 6 percent. Even though this rate was destined to climb back to levels as high as 9 percent before the new millennium began, new government policies designed to increase home ownership were making it much easier to qualify for a mortgage, and the money floodgates began to open wide. As a result creative finance strategies were all but forgotten by the early 2000′s when easy money dominated the housing market until the crash in 2008.

Today we find ourselves with a totally different set of fundamentals, and in spite of the low interest rates, most buyers can’t qualify for a mortgage. Today the official prime rate is 3.25 percent. The last time the prime rate was at 3.25 percent or lower was on August 4, 1955. But in 1955 the U.S. was the number one manufacturing powerhouse in the world and civilian unemployment was 4.4 percent compared to 8.9 percent today.

Our money is not the same either. Today it takes $8.55 dollars to equal the purchasing power of $1 in 1955. Since 1955 the cumulative inflation rate is 754.9 percent. At the same time, income growth is virtually flat for the vast majority of the population, according to census data.

So we are in a situation today where unemployment is near all time highs while housing prices, though significantly lower over the past four years are still above general affordability levels, and the vast majority of the public has debt or income issues that are keeping them from qualifying for a home mortgage through traditional channels.

Even though the fundamentals are drastically different from the early 1980′s, I believe that today’s fundamentals are going to drive a new era of creative financing strategies for both buyers and sellers.

For buyers, the need to avoid qualifying is obvious. Home sales, though up in recent months, are still dragging the bottom compared to the boom years. I don’t believe that there is a shortage of interested buyers, but the tight credit qualifying standards in place today are simply forcing many to rent instead.

For sellers, issues with appraisals, high foreclosure rates in the neighborhood and/or reduced home values have been a deterrent that has forced many home owners to keep a home that they would rather sell. I’ve seen hundreds of homes sitting on the market for months or even years waiting for the stars to align so that they can sell their property at a price that is satisfactory to them.

The viable solution to today’s market fundamentals is creative financing strategies for buyers and sellers. Buyers who want a home but cannot qualify through traditional channels are a great target for sellers who want to sell but can’t get an offer from a buyer who can get approved for a new loan.

Creative financing strategies include things like “Lease-Options”, “Wrap-Arounds”, “Subject to the existing mortgage”, “contract for deed”, “taking back a note”, or outright seller financing where a seller owns the property free and clear.

Personally I LOVE seller financing. For sellers it’s an opportunity to be your own bank and pocket the tens of thousands of dollars in interest that the mortgage company would otherwise get. And in today’s era of very low interest rates on savings accounts, financing a home can be a great way for a seller to create a long term income stream that pays much better than a savings account.

Buyers can also use funds from IRA’s and other retirement accounts to fund a purchase. Sellers can improve their return on retirement savings by using the money to buy cheap foreclosures that can be resold to an owner-occupant buyer with seller financing, creating a much better return on your investment than a savings account will yield today.

It’s always possible to buy or sell a home when you know how to use creative strategies to get around the traditional system and it’s vast maze of rules and regulations. If you want a home of your own, or you need to sell a home that’s been waiting for a buyer, it’s time to get creative. It’s likely that the housing market will take years to recover and return to it’s pre-2008 era of easy qualifying, if it ever does. Waiting for things to improve could mean waiting for many years to come.

Creative finance has been primarily the territory of real estate investors, but when you think about it, anyone who wants to buy or sell a home IS a real estate investor because no one purchases or sells a home with the intention of losing money.
——————————————————————————————————–
Donna S. Robinson is a real estate market analyst, investor, coach, author and speaker, with 17 years in the real estate industry. Follow her on twitter at donnaconsults and read her blog at www.RealtyBizConsulting.com