Fed Rate Cut

Real Estate Outlook: Fed Rate Cut
by Kenneth R. Harney

There's no other way to put it: Things got pretty tense in the financial markets earlier this week -- with the Federal Reserve's dramatic steps to inject billions of dollars of liquidity on Wall Street, plus the failure of giant investment bank Bear Stearns.

Then came the Fed's big three quarter of a point rate cut on Tuesday -- and promises by Fed chairman Ben Bernanke to keep supporting the capital markets in creative ways for as long as needed to spur new economic growth.

When the global financial system shakes and shudders like it did, the tremors are felt in every major segment of the economy that depend on capital -- and of course real estate is high on the list.

So what might all this mean for home buyers and sellers?
Number one, focus your attention on what Mr. Bernanke said: The Federal Reserve is NOT going to let the economy go down the drain because of some dumb subprime loan investments made by Bear Stearns and other large banks during the boom.

The Fed is probably not finished cutting interest rates -- and ultimately that should exert downward pressure on mortgage rates and help housing and real estate.

But we've got to be frank here. There's a potential dark side that is not getting much public attention yet: Major lenders may not pass along all those lower rates to home buyers.
What we're seeing this month from Fannie Mae, Freddie Mac and big banks are a series of new "add on" costs to loans plus higher minimum downpayments.

The add-ons are for credit scores below 680, houses located in "declining" markets, and new "jumbo" loan amounts above $417,000 authorized by the economic stimulus package. The net effect may be to limit -- or even cancel out -- the beneficial effects of the Fed's cuts to base interest rates.

Now despite all this, there continue to be clear signs that the housing market itself is finally bottoming out of its nearly three year post-boom correction. One sign we saw this past Tuesday was in new housing starts, which came in at a surprising 1.065 million annual rate, well above the 980,000 to 990,000 most analysts had predicted.

Ara Hovnanian, CEO of Hovnanian Enterprises, a major builder, told CNBC's "Squawkbox" program Tuesday that three straight months of essentially flat housing starts means the worst of the housing slump -- at least for new construction -- is probably now past us.

That doesn't mean happy days are here again, but it does point to gradually improving real estate conditions in the months ahead.

We'll see and we'll keep you posted every week.

Published: March 20, 2008

Special thanks to Kelly Ewert of Heritage Title Company of Austin for sending me this article.

A Smart Buyer

A Buyer is very excited once they locate and have an executed contract with a Seller. At times, this excitement translates into wanting to see the property as much as possible before taking ownership.

Buyers begin their search with a list of homes, and when they locate their target purchase/investment, they should make their offer. From the time of seeing their target future home, to an accepted contract with the current owner, the Buyer might have seen their future home a total of 20 minutes to around 1 hour. After going under contract, there is a general inspection which could lead to further specific inspections on very specific items (A/C, Termite, Plumbing, etc.).

An issue I see occur is a Buyer gets too excited over what future plans they have for the house which translates into an excessive amount of time and energy towards contractor appointments before they own the property. Getting bids and pricing is important for a Buyer. However, there has to be an acceptable understanding of how much can be done with a small window of time before taking ownership.

Buyers need to set themselves some boundaries for their benefit and all other parties involved. Too many pieces of the buying puzzle will confuse everyone involved, which leads to misunderstandings, poor memory, and confusion.

With a re-sale home which is occupied, this could negatively affect how repair negotiations go. Buyers who visit the property so often for too long, can chip away at the seller's level of tolerance and thus hurt future negotations on a repair. New home construction is even more problematic because if there is work being done by owner/seller/builder to complete the project by close date, the buyer could engage in a conversation with the owner / builder.

I have rarely seen a situation where builder and buyer during a new home transaction, see eye to eye on all aspects if the property being sold is a Spec Home. Spec Home & New Home Construction are critical times for a Realtor to provide value for a Buyer. If the Realtor for that Buyer is not present during one of these question and answer periods, then promises could be made or facts could be misunderstood. Always go through your Realtor; buyers should accept a ''point man'' for the work prior to closing and that point man is their Realtor.

And of course, there has to be a healthy understanding of what exactly is being done AND exactly what meetings take place prior to closing (and those contractor bids than are personal changes of buyer which could be done AFTER the closing).