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December, 2006
What do Houses, Gold and Silver have in common?
Money is a medium of exchange—it’s also a store of wealth. Sea shells, corn, wheat, even slaves have been used for money. Long ago people figured out that precious metals, specifically gold and silver, were the best medium of exchange. To make a very long story short, people of many cultures found that it was easier to carry paper notes that represented heavy metals stored in a safe place with a trusted third party, than it was to stuff their pockets with metal coins or bars. When gold was worth $20 per ounce in 18th century America, it was easier to carry three $100 notes and one $20 note—four light, handy little pieces of paper—than it was to carry a pound of gold.
The big problem with paper money was that the third parties holding the metal—eventually banks—were always tempted to print more notes than they had metal in their vaults. A run on a bank that was holding “fractional” reserves could be fatal; not enough metal to cover all the paper notes being cashed in. Banks that were well managed provided efficient paper notes that were immune from inflation.
Eventually the Federal Government decided controlling the money supply was of utmost convenience; if it could not tax enough to meet its needs for wars and government programs, it could print money to cover the costs. It outlawed the private creation of money, and set itself as the sole creator of notes backed by metal—dollars—thus we have fiat money; money created by law. The Federal Reserve was created in 1913 and in a neat stroke of law we had a central bank (owned by private individuals) which allowed fractional banking—banks could have in reserve only a fraction of what they loaned out.
As the Federal Government grew in size, it required more and more money to run itself, its wars, and its programs. By 1971 Richard Nixon found it impossible to continue the gold-backed-dollar charade; by that time there was probably not more than 10% gold for all the “money” in dollars. He took us off the “gold standard.” That allowed the government the ability to create as many dollars as needed without the risk of having foreigners exchange their paper dollars for gold; gold which the government did not have.
So you might ask, what does all of this have to do with houses? Simply put, when you tie real estate to gold or silver, you get a much better idea of house values. In 1920 you might have bought a nice house for $5,000; about the same as 250 twenty-dollar gold coins. Today (December, 2006), 250 twenty-dollar gold coins are worth (at about $600 per ounce) $150,000; about what you might pay for a nice house in the Dallas/Fort Worth area.
There has never been a fiat money system that survives. We’ve had two big failures in the short existence of our country. We will have a third as sure as the sun comes up in the morning. David Galland wrote about this upcoming tragedy in The Daily Reckoning:
“In 1930, the total share of the U.S. economy directly controlled by or dependent on government was about 11%, leaving the balance of 89% firmly in the hands of private enterprise.
“Today, by the late Milton Friedman's calculations, the government's share of the U.S. economy - including the time and resources required to comply with all the regulations - has ballooned to over 50%, reducing the wealth-creating machinery of free enterprise to an auxiliary engine for government.
“No wonder so many people live paycheck to paycheck.
“U.S. government debt now tops $9 trillion, before taking into account its unfunded obligations for Social Security and Medicare - debts that the retiring boomers will soon have their hands out to collect.
“After adding in Social Security, Medicare and all the government's other pay-later obligations, the current debt actually comes in at over $60 trillion - an amount so large, not one person in a million has a real sense of it….
“Amazingly, this unbacked currency of a bankrupt government is still the reserve currency of virtually every nation in the world today. But not, we think, for much longer.
“To service its debt and keep the game going, the U.S. government must sell on the order of $2.5 billion per day in new Treasury bills, much of it to foreigners already sitting on something like $6 trillion of U.S. paper.
“Absent the foreign buyers of U.S. Treasury securities, the whole scam begins to unravel. And once it begins to unravel in earnest, with wealthy foreigners and then governments rushing to switch out of dollars, the speed and steepness of the monetary collapse will be breathtaking.”
Here’s what I’m getting at. Gold and silver might change in value in relation to paper money, but they will never go to zero value. Your home, your real estate investments, might also change in value in relation to paper money, but they also will never go to zero value. Dollars, on the other hand, can and will eventually go to zero. In order to keep the fiat money game going, we might be forced to some day use New Dollars (worth 100 old Dollars), or even Newer New Dollars (worth 100 New Dollars), but real estate, gold, and silver will never have to change their names.
If you buy real estate right, hold it for a good amount of time, delete its debt, and keep it shiny like your gold and silver, it will reward you in the end like no bank account filled with phony paper money ever will.
If you want to know more, call me.
The Housing Wiz
October, 2006
Is Now a Good Time to Sell?
Real estate markets go in cycles; these cycles normally last seven to ten years from bottom to top. Prices will hit bottom and it will be some time before people realize that properties won't get any cheaper. It will then take seven to ten years for prices to reach the norm and eventually exceed it and hit a top. The norm comes along on the way up as well as on the way down; it is almost always exceeded. So if prices are on the way up, a house that should be worth $100,000 might end up selling for $120,000 at the peak of the market. If prices are on the way down, it could sell for no more than $80,000 at the very bottom of the market. This happens in most markets, whether it is houses, gold, or stocks.
Currently some housing markets around the country have peaked and are taking a heavy hit; prices are coming down fast. It looks like the DFW area didn't go way above the norm the last few years, so prices might not take a huge tumble in the coming downturn.
One reason our prices didn’t exceed the norm is that we have a huge inventory of existing houses as well as new houses; not only are a good number of home owners selling, but foreclosures are up considerably, so lenders add REO properties to inventory, and it appears homebuilders don’t know when to quit building.
The answer to whether now is a good time to sell should be a big NO; however, the answer can be a big YES under certain conditions. The first condition is obvious; if a home owner has to sell—for whatever legitimate reason—the house must be sold, whether it is a good time or not. The other condition is if the home owner will sell AND buy in the same market. In fact, selling and buying in the same market can be a huge advantage if the switch is made to a much more expensive house.
Let’s say John and Mary own a house that is worth $100,000, but it won’t sell for more than $80,000 in the current market. Simply put, the sellers will get beat up if they sell in this market. But let’s say John and Mary have been consistent savers and currently have a nice sum of cash stashed away, and they have strong incomes that would allow them to jump from their modest house to a million dollar property. Not too long ago one of our bank listings sold for $627,000. A year and a half before it had sold new for $1,016,000. It was a gorgeous, million dollar house selling for sixty cents on the dollar. It was such a bargain that John and Mary could have given away their $100,000 house and they would still have been ahead to sell NOW and not when the market gets better for sellers.
Don’t always assume a buyers’ market is a bad time for sellers.
Maurice Dubois
October, 2006
Trading Places to Buy a Home
There are a lot of folks in trouble with their house payments in the current economy. Dallas is number three in foreclosures, only after Indianapolis and Atlanta.
A large number of people have been through tough times; some of them have made a complete turnaround and are doing well economically. But a quick economic turnaround doesn't guarantee a revitalized credit score. Borrowing money to buy a house can be challenging; sometimes impossible. Even if a loan is available, it might be at an astronomical interest rate.
Wouldn't it be nice if someone who has a great, low-interest loan, who is delinquent on payments, could transfer the loan and the house to someone who cannot get a loan but has the ability to service the loan and enjoy home ownership? In other words, trade places.
It would be so simple except for one little catch: the “due on sale” clause. Also called an acceleration clause, it states that if title or a beneficial interest in the property is transferred (except for a few narrow exceptions), the lender has a right to accelerate the loan; in other words, demand that the loan be immediately paid in full; if the note is not paid in full, the lender can foreclose.
Currently, all mortgages and deeds of trust have one of those nasty little clauses. The clauses are inserted for the benefit of the lender, in case interest rates rise far beyond the rate of the house note. Years ago, the due on sale clause made some sense; today, most loans are sold on the secondary mortgage market and the lender has no exposure to rising interest rates.
While most people, including the majority of real estate agents, believe it is impossible to go around the due on sale clause, I can tell you categorically that it is possible to do so on all loans because I have done it countless times during the past fifteen years. The process is complicated but straightforward. The most difficult part is not the original transfer without an acceleration, but ongoing follow up with the lender.
I talk to many buyers and sellers each week. A good number of the sellers I speak with simply want to get out of a difficult situation; they're in trouble. Some of the buyers have substantial credit blemishes and cannot get a loan. From my standpoint, it’s very difficult connecting the right seller with the right buyer and have them “switch.” It is much more efficient for the buyer to find the right seller and let me help them make the switch.
If you know someone with credit problems who wants to buy a house, have them call me; there’s no obligation.
Maurice Dubois
September, 2006
So Homes Depreciate Like Cars?
It’s a given that the minute you drive a car out of the showroom floor it will depreciate ten, maybe twenty percent of its value. So if you just paid $30,000 for a brand new Zip Mobile with leather seats and a hemi-head-super-turbocharged engine, you would probably only get $24,000 to $27,000 if you wanted to sell it the very next day—that’s if you’re lucky. If the market if flooded with used cars, you might only get a buyer at $20,000. The same is often true—to a certain extent—with a used car bought from a dealer.
Most people don’t look at new houses that way, but the same is often true in residential real estate. I’ll give you some background information first, and then I’ll explain why houses are not much different than cars. When I was in college in 1965 I worked for a small homebuilding company in San Antonio—owned by a couple of nice guys, both named Jack. Our houses were modest 3-2-2 structures with a bit of brick. The average price was about $10,000. Flash forward and those homes, assuming they have been well-kept, sell for ten times that amount: $100,000. The common thought is that those houses “appreciated” a huge 1,000 percent; however, the hard fact is that the dollar has been devalued by that amount due to the government’s overprinting of dollars; the houses did not gain value. It now takes $100,000 to buy what took only $10,000 back then.
What if we’d bought one of those houses in a stable currency in 1965? Say, gold. Gold was officially worth $35 per ounce back then. Simple math says that 285 ounces of gold would have bought one. Today gold is trading at around $600. Wow! You can now buy a house currently worth $100,000 for less than 165 ounces of gold.
What has happened? Quite simply, the dollar has lost a huge amount of buying power when compared to things that have real value; in other words, a precious metal and houses have real value; little sheets of paper have only the value forced on us by government law or fiat (hence the description of a dollar: fiat currency). Although one asset can vary in value in relation to another asset from time to time, the fact that it takes less gold to buy a house now indicates that the value of gold in terms of dollars was being held down by government intervention back then.
You can see that the value of houses, as a general rule, has remained relatively constant in relation to gold, and it holds true if you compared the value of eggs, clothes, and other tangibles to houses. If you could buy a house for the cost of five new cars in 1965, you can buy one now for the cost of five new cars. You just cannot buy one for the same number of dollars any more.
Now let me explain why new houses emulate cars right after they are bought, especially in our current market—much of this pertains to existing houses as well. Assume you buy a new house for $200,000. You move in and a month later you lose your job. You find a great job three states away and you must sell your new house. In trying to sell the house you have these things going against you, in their order of importance to your pocketbook:
- The cost of selling a house;
- The homebuilders still building in your subdivision—they are selling brand new houses, you are selling a used house;
- Existing houses for sale (currently about 51,000 in the Dallas/Fort Worth area, over 90,000 if you happen to be in the Chicago area).
The cost of selling a house is often the most costly. Even if you paid zero commission, in our current market you can count on about 5% cost by the time you pay title and escrow fees, and some of the buyer’s closing costs that are included in the majority of contracts these days. That’s a $10,000 hit on a $200,000 sale price.
When you compete with your own builder, he has the upper hand, you are left begging for buyers. The serious builder has serious model homes that make buyers drool. Unless it is a strong sellers’ market, expect to have to cut your price below that of a new home to entice prospects to buy your “used” home.
Finally, the market as a whole can be your enemy. If there are too many properties on the market, you are competing with thousands of used houses. The fact that yours is almost new won’t help against very nice older houses with lush landscaping and well-established neighborhoods.
To a certain extent, these three points can work against anyone selling any age house. Houses only “appreciate” after five to seven years when inflation—currently running a REAL 7%-8%—kicks in and the $200,000 house has to be bought for over $280,000 as you can see in the little spreadsheet below:
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After year
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Value
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Real inflation
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$200,000.00
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1
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$214,000.00
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7%
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2
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$228,980.00
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7%
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3
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$245,008.60
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7%
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4
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$262,159.20
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7%
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5
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$280,510.35
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7%
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Selling a house within the first two years after purchase can be frustrating and costly; however, if it has to be done, there are ways to do it and mitigate losses. Want to know how? Call me, I’ll give you some ideas.
Maurice Dubois
The Housing Wiz.
September, 2006
Housing is a Great Indicator of “Real” Inflation
Housing and inflation have always had a strong relationship; that is, homeowners and investors always tie house values with inflation. When inflation goes up, house prices go up. These same folks say that, “My house has appreciated ten thousand dollars in one year.” The house has not typically appreciated; it has simply indicated a weakening of the value of the dollar.
True inflation is simply an overprinting of dollars. Rising prices—an increasing CPI figure—is the effect of overprinting of dollars.
Stephen J. Church, writing for SafeHaven.com, reports, “Our research indicates that inflation is approximately 3% to 4% per year higher than the CPI.” He explains that “…the best opportunities to measure monetarily-induced price change [inflation]” is in the following list of items:
- Education;
- Food;
- Oil;
- Gold; and
- Real Estate.
He uses a series of graphs and mathematical formulas to show that, for measuring rise in prices, and therefore inflation, “Real estate is clearly the best of the five available choices.” His conclusion on REAL inflation: “It appears that real inflation has been close to 8% per year during the last few years. Based on our calculations, real inflation only exceeded this level during the 1970s.” You can read a synopsis of the full paper HERE if you want more information about REAL inflation, REAL interest rates, and REAL house “appreciation.”
Maurice Dubois
The Housing Wiz.
August, 2006
Bargains on the Horizon
We have an interesting situation developing in the Dallas/Fort Worth housing sector. Not only are we getting a larger number of listings year over year, but we are seeing more listings from one month to the next. At the end of June we hadn’t reached 50,000 residential properties. At the end of July we’ve gone over the 51,000 mark.
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In real estate there is one sure thing: FIGURES DON'T LIE. If houses in a neighborhood are selling in the $200,000 range, there is virtually zero chance that someone can get $250,000 for a similar house.
By the same token, statistics don't lie. At the end of July the Dallas/Fort Worth Multiple Listing Service had 51,123 residential properties for sale. Compare that to 23,414 at the end of July, 2000.Bargains are on the horizon.
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Some sellers are getting beat up; that includes builders. Here’s what an email I received today offered: A $25,000 to $30,000 discount to the buyer, and 7% commission (in lieu of the normal 3%) to the selling agent. A couple of years ago we rarely heard from builders. Now we receive daily specials from a multitude of builders—large and small.
We’ve certainly turned the corner onto a Buyer’s Market situation. Only time will tell if it becomes a full-blown Buyer’s Market. At this point we’re starting to see some bargain prices. In a rising market, a low price is a bargain for sure; however, in a declining market, today’s low price might turn out to be tomorrow’s high price. Care must be taken when buying.
I say this from an investor’s point of view. The homeowner-buyer doesn’t always place a heavy emphasis on price. The house must fit the budget, of course, but functionality is more important, and emotions (beauty, prestige, comfort) generally take precedence over price. But pay close attention to values and price, whether you’re an investor or a buyer looking to be a homeowner. I get a good number of calls each week from people wanting to sell three or four years, even three or four months, after they bought their homes. Very few people will keep a house ten, fifteen, or thirty years.
What am I getting at? Buy the bargain—one that fits in with your other parameters. And it is truly becoming bargain time.
What if you’re a seller? Expect to get beat up—not always, but often enough. It’s part of modern real estate life. Look at the bright side. If you’ll be buying in the same market, you’ll get to beat up a seller and you might end up better off in the long run.
One thing is for sure. In this type of market, you need expert help to buy and sell.
Would you like to buy a house with no qualifying, bad credit, and no recourse (you’re not responsible for the debt)? It takes a little bit of money; but not much. I’ll have more to say about that in the next few weeks. Meanwhile, if the subject interests you now, call me. It is a great way to buy; I’ve done it countless times and would be happy to help you.
Maurice Dubois
The Housing Wiz
June, 2006
Organizing Your Home
Some people have an easy time keeping things neat at home; it’s tough for others. For those who struggle, Karl Thompson has some great ideas in an article called How To Start Organizing Your Home:
Where do I start organizing my home? While some home organization specialists will tell you to start in the kitchen, I’m going to advise beginning in another area. The kitchen will be the third place we attack and this doesn’t make it less important, but I will explain why I’m starting elsewhere.
First, if you look around your home, you probably see lots of clothes. Am I right? You’ve got clothes in closets, you’ve got clothes in piles (meaning to put them away and not having time, eventually just pulling them out of the pile and wearing them), and you’ve got clothes in laundry baskets. You might even have rumpled clothes in the dryer or (heaven forbid!) the washer. If it’s the former, the clothes are only rumpled. If it’s the latter, they’re probably rumpled AND smelly and (potentially) mildew-y. Yuck! If you don’t have a laundry room but have a laundry closet (with room for the washer, dryer, and some shelves), I’m betting you haven’t seen the top of your dryer for weeks or even months. It’s covered in rumpled clothes and towels, right?
Have you guessed where we’re starting? That’s right! The laundry area of your home. And here’s why: if you get your laundry room cleaned and organized, you’ll be much more apt to actually DO the laundry that plagues you and helps your home to be disorganized. And because you won’t want to undo the work you’ve done in the laundry room, you’re more likely to fold the laundry when it’s done, and put it away. There’s something that’s a breath of fresh air about a straightened laundry room, sort of like when you walk in to a closet where everything is hanging neatly.
So start with small steps:
Can you see the floor? No? Then pick up what’s on the floor and put it in laundry baskets. If you don’t have enough laundry baskets to accomplish this, then just sort the things in to piles outside the laundry room. I make piles of light clothes, whites, darks, and towels/rags.
Can you see the top of the dryer? If not, put the excess clothes in the aforementioned piles. Grab one rag to dust and have two plastic grocery bags, one to collect junk, and the other for later. Dust the dryer from the lint leftovers and use a little window cleaner if it doesn’t come off readily. Don’t neglect the area where the “start” button is, that can be grimy, too!
Ok - now you’ve got your washer & dryer cleaned off. Congratulations!
Now take a critical look at your supply shelves. Do you have empty bottles or boxes lying around from spent detergent and/or fabric softener? Clean those out. Use that grocery bag that you’ve put excess dryer lint in and pitch those empties. Then organize what’s left. If you need to add things to your shopping list, now is the time—now you know what you’ve got and what you need to buy. When you organize your supplies, I recommend putting the detergent and any liquid softener above the (gasp!) washer. Make it easy to reach. Put the dryer sheets over or on the dryer why reach more than you have to? If your shelves are higher than you’d like, use the top ledge of your washer & dryer to hold supplies! I’ve never seen a washer and dryer that didn’t butt up to a wall for the electrical plugs they need. So use that space to your advantage. Put the detergent box or bottle on the top of the washer, along with whatever other washing supplies you have.
If you have wire shelves above your washer & dryer, you’ve got a built-in place to hang a trash bag. Use that extra grocery sack and cut one of the handles in half. Then tie those two ends around some of the wire shelf and use the bag to collect dryer lint and empty containers from your emptied laundry supplies. When it’s full, cut it down and put it in the trash and put up a new one.
Now look at your floor. Does it need sweeping? If so, grab a broom and sweep. It won’t take you more than 5 minutes and you’ll feel much better about your room and your work, especially if something you’ve just washed falls on the floor as you’re transferring stuff to the dryer.
Congratulations! You’ve done the preliminary work of organizing your home, you've won the battle in your laundry room! Take a 15 minute break and enjoy this victory. Then start the task of doing the excess laundry that you’ve been collecting, one pile at a time. When the first is done, swap it out immediately to your dryer or to hangers, if that’s more appropriate. Take it one pile at a time, in other words, small steps! Soon, you’ll find that it really only takes 5-10 minutes to fold warm clothes from the dryer and put them in laundry baskets, ready to transfer to the appropriate rooms, closets, and drawers. Now that you have some extra time, you can start on another room. How to start organizing your home wasn't all that hard after all!
June, 2006
Insulating to Save Energy
The cheapest way to save on your home energy costs is to insulate. Erica Bosworth, in an article called 5 Reasons To Choose Blow In Insulation, writes as follows:
Insulating your home is pure and simple the number one way to save money on energy costs. In the old days floors and walls were lined with just about anything to keep the moisture and cold air out of home. Renovations have revealed that even old newspapers were found packed into wall and floor boards.
Today insulating is a science all its own. There are R-factors assigned to different material and methods of insulating that give homes and buildings an appropriate amount of protection for their geographic region. The higher the R rating, the better insulated the home.
One of the top rated insulations is relatively new to the industry – probably no more than a couple of decades old – and that is blow in insulation.
The Benefits of Blow In Insulation
There are several benefits to blow in insulation over rolls of fibreglass insulation. The benefits include the method of installing it, its energy efficiency and where it can be used. Here are the top 5 reasons to consider using blow in insulation:
- Blow in insulation is adjustable. Depending on how much material is used, it can create a protection with an R value of 15-38.
- Only virgin materials are used to create most blow-in varieties of insulation. This means there a reduced chance of allergies.
- Blowing the material into the crevices allows for a tighter fit and seal. It can be directed around corners, beams, or wiring that may already be in the walls.
- Installing blow in insulation is fast. A barrier, referred to as a blanket is stapled to all of the 2x4s to keep the material from floating away and adhering where it isn’t wanted. Then a small slit is cut into the blanket. A hose is inserted and measured amounts of the insulation are blown into place.
- This type of insulation is extremely energy efficient. As it is blown in it expands and adheres to the surrounding surfaces. It fills even the tiniest of cracks as it does this.
You can read information similar to this in countless home improvement publications; it’s good, valid advice; but nobody explains what R value is, and how it’s calculated. Here’s a very short explanation. R value indicates how much heat transfer is prevented by a material of a certain thickness—heat transfer is the only thing that matters in heating and cooling; you gain heat in the summer, and you lose heat in the winter. Since the vast majority of homebuilders in this country continue to build houses out of wood, and fiberglass is the cheapest and easiest material to use on those houses, R value is designed to determine the amount of heat transfer fiberglass prevents for a certain thickness in—and this is the catch—STILL, DRY AIR.
That’s the laboratory determination of R value. Pile on more fiberglass thickness and less heat is transferred. Unfortunately, people’s homes don’t reside in perfect-condition laboratories; they are more often located in windy, damp places. Since humidity transfers into the walls, and since wind blows through minute openings in the walls, air and moisture go in and out of the walls. Since the attic is ventilated, air and moisture go through the ceiling insulation all day and all night. Over time, fiberglass picks up moisture, causing it to lose its insulating properties. And since air is constantly moving through the fiberglass, you can throw the R factor out the window; the insulating value is considerably less at the structure than it is in the laboratory.
So, bright as you are, you immediately ask, “What’s better? How can I best insulate my home to save energy and dollars wasted in energy use?” The most efficient insulation is a closed cell system. Foam insulations are composed of millions of little bubbles that trap air. That makes them good insulators. Air cannot blow through them. Very little moisture gets through the foam. Polyurethane and Styrofoam are two examples of better insulation. Both are available in sheets. Polyurethane is typically sprayed in place and three inches thickness is, in the real world, about as good as 12 inches of fiberglass. Polyurethane is not cheap, but insulating the attic with it would pay for itself in a very short time.
Even if you don’t use polyurethane, adding more plain old insulation to the attic will pay off over time.
The Housing Wiz.
May, 2006
Ooops Windows and the Summer Sun
Pass by any Dallas/Fort Worth housing subdivision built in the last few decades, and you will notice a peculiar covering over any west facing window. We affectionately dubbed these fenestrations as “Oops Windows.”
Oops windows happen when builders don’t think through the consequences of orienting a window to the west, where sun temperatures can rise to uncomfortable levels. Your typical OW has a special-fit screen mesh (heavier than your everyday window screen), sometimes with angled louvers which help filter out sunlight. OWs are easily recognizable since their color and texture differ from the house’s other windows. Their screens are never intended in the beginning, but are later retrofitted to the window out of necessity. Shouldn’t builders be aware of this? Sure, but it’s the unsuspecting homeowner who discovers it the hard way during their first summer living in the house.
As any good Texan will tell you, summer turns our lone star state into a blazing oven, and anything facing west during afternoon hours gets baked like a steakhouse potato. It isn’t unusual for our daytime highs to get into the low 100’s Fahrenheit (that’s around 40 and above for Celsius readers), and for chickens to lay boiled eggs.
If you’ve ever left your car in a sun baked parking lot during summer, you know exactly what happens to the inside. The same holds true for any room in your house with west facing windows. Egads! Never mind the discomfort, imagine the utility bills.
Why does something so simple get overlooked in our area? Big builders often draw plans in off site (maybe even out of state) offices without taking site and solar orientation into account; or where designers are unfamiliar with this issue. In addition, housing plans are sometimes finalized before the subdivision, and the layout of its streets, are even thought out.
East windows don’t fare much better either. During summer, we often pass the 90 degree mark before lunchtime.
If you’re in the market for a home, be sure the house you purchase doesn’t have any major windows facing east or west. You don’t want to get stuck with outrageous utility bills—especially when we’re on the verge of an energy crunch! Remember, whether your compass works or not, always check with The Housing Wiz before making a real estate decision.
We’ll have another glass of iced tea, please.
John Dubois
The Housing Wiz Assistant
Cell (214) 418-4829
March, 2006
Real Estate Investing Success Story
We receive daily calls from many new investors. To determine their experience level, the first question we ask them is “How many properties do you have?” Usually the answer is “none.” At which point we start our spiel on the necessities of successful investing in the current Dallas/Fort Worth market.
With many real estate investing gurus and courses floating around today, we generally expect many callers to be first timers. But on occasion we run across some who have achieved a level of success we hope all our clients attain over time.
As an example, I recently visited a vacant property whose owner was trying to sell by owner. The property was in great shape with new paint and carpet, and his asking price was reasonable. We got to talking; I asked him his reason for selling. He mentioned it was a rent house where his tenant had just moved out, and he was tiring of his landlord duties. As I asked more questions, I found out that he and his wife owned 5 rent houses free and clear of loans—all occupied with good tenants.
This gentlemen had his own non-real estate related business, and didn’t do house investing full time. But over the years he haphazardly accumulated several rent houses which provided him with a handsome passive income.
At that point I asked again why he was selling. Except this time, it wasn’t to find out his motivation to sell, but to question why he was giving up a solid investment. I told him I would gladly help him sell if it was his ultimate decision, but reminded him that the property was a cash cow.
He spent a few seconds thinking it over and said, “Yeah...I’m going to have to mention that to my wife.”
When I passed by the property a couple days later, I noticed their “For Sale By Owner” sign had changed to a “For Rent” sign. It made me smile.
Happy housing.
John Dubois
The Housing Wiz Assistant
Cell (214) 418-4829
March, 2006
A Cautionary Tale of a Bad Investment and a Hint of Tulips
It seems like every market goes from a “normal” state to one of “malinvestment.” The stock market went crazy with overvaluations in the late 1990s until the bubble collapsed in 2000. We don’t want to scare you with horror stories of a real estate bubble; we simply want you to be well informed.
Real estate IS and WILL ALWAYS BE a great form of investment. As long as you understand that an investment—no matter what it’s in—MUST provide you regular income as well as a hedge against inflation, you are not being fooled by smoke and mirrors. What too many people are calling real estate investing (the same holds true for stocks) is actually speculation—gambling, like what people do in Las Vegas. Buying something only so you can hold it till someone pays more for it is speculating, and not investing.
On Monday I had two interesting calls from people whose real estate “investments” had gone bad. A lady called me from Georgia. She said she found me on the internet and was in desperate need of help; she had to get out of her bad real estate investment as soon as possible.
An acquaintance convinced her that his company had the ideal real estate investment and she fell for his game—hook, line, and sinker. He promised that she would be able to sell the property in a couple of years for $50,000 profit, plus get money up front. She closed on a brand new house in December of 2004. She didn’t put a penny into the deal; in fact, she received $30,000 at closing.
She was promised a government tenant that would take care of the $1,600 monthly payment. Instead of a tenant, she got a call from the people who set up her investment and asked for $5,000 of the $30,000 back; it appears she had received too much money up front. Meanwhile she made payments until May when they finally provided her a tenant. The rent was not covering the payment, so she refinanced the house.
Not long ago she got a call from the IRS. She was informed that she owed taxes on the $30,000 she had received. I won’t try to explain how this lady’s “investment” became such an albatross around her neck because I didn’t understand the specifics of the transactions. But I’m seeing things that are more weird than what I saw during the 1980s. In fact, here’s a very brief explanation of the Dutch Tulip Mania; this lady’s dilemma has a faint resemblance to the dilemma of many tulip owners from long ago.
Conrad Guestner brought the first tulip bulbs from Constantinople to Holland in 1559. People fell in love with them and soon tulip bulbs became a status symbol for the wealthy because they were scarce.
Early buyers prized the lovely flowers, but later buyers got in for the money; soon speculators got involved. Trading activity was created, so eventually tulip bulbs were placed on the local market exchanges. By 1634 the tulip rage had spread to middle class Dutch society. Merchants and shopkeepers began to vie with one and another for single tulip bulbs.
At the height of tulip mania—known as Tulipomania—in 1635, a single tulip bulb was sold for the following items:
- Four tons of wheat
- Eight tons of rye
- One bed
- Four oxen
- Eight pigs
- 12 sheep
- One suit of clothes
- Two casks of wine
- Four tons of beer
- Two tons of butter
- 1,000 pounds of cheese
- One silver drinking cup
Today’s value of these items is almost $35,000! The mania got so crazy that people were selling everything they owned—homes, livestock, everything—to buy the tulips. It was expected that the bulbs would continue to appreciate in value. Prices in today’s dollars went from $17,000 up to $76,000 for a single bulb.
By 1636, tulips were on the Amsterdam and several other European stock exchanges. Interest shifted from hobbyists and collectors to speculators—just plain gamblers. All kinds of people sold their homes and other possessions at bargain-basement prices to speculate in tulips.
Laws and regulations were developed to control the craze, notaries and clerks were appointed to record transactions. By 1636 prices began to weaken after some liquidated their tulip holdings. Tulip prices weakened, first slowly, and then more rapidly. Confidence was quickly destroyed, and there was panic in the market; tulip prices crashed by 90% in six weeks. Contracts were defaulted, liens were placed on owners. The Dutch government refused to get involved; it merely advised tulip holders to agree on plans to stabilize prices. When the plans failed, assembled deputies in Amsterdam declared all contracts made at the height of the mania—prior to November, 1636— null and void, and contracts made after that date were settled if buyers paid 10% of the price to which they had earlier agreed.
Alas, tulip prices continued to fall. The provincial council in The Hague was asked to invent some measure to stabilize tulip prices and public credit. The efforts failed and tulip prices fell even lower. In Amsterdam, judges refused to honor tulip contracts; they regarded them as gambling activities; gambling debts were not debts in the eyes of the law; payments would not be enforced. Those holding the bag—tulips that is—at the time of the collapse were left with huge losses.
Tulip prices went from a high of today’s $76,000 to less than a dollar each; a huge collapse in only six weeks. The shock was so severe to Holland’s commerce that it didn’t recover for many years.
In 1841, Charles MacKay wrote Extraordinary Popular Delusions And The Madness Of Crowds. He talks about the Mississippi Scheme, the South Sea Bubble, Tulipomania, and many other crazy human delusions. Had Charles MacKay lived during our time, he would have included the current real estate craze in his work.
There’s a happy ending here. You don’t have to join those who have followed the madness of crowds. You can prepare yourself to reap the benefits of the bargains we’ll see in the coming years. Join us in our FREE Real Estate Seminars. Learn how to buy, how to sell, how to invest, without joining the crowds.
Happy Housing.
Maurice Dubois
The Housing Wiz
Cell (214) 418-4829
March, 2006
Pump Prices Affect Housing Prices
One of the smaller national homebuilders has a subdivision development underway in our area. In front of their neighborhood they have an advertising sign. Only a few months ago, this sign said “Homes from the $170’s.” Two or three months later it read “…from the $180’s.” Again, a couple of months later it changed to “…from the $190’s.”
They are not the only homebuilder displaying a quick rise in prices.
While many factors such as location and supply/demand affect housing prices, one of the more recent ones is the rise in fuel costs. Most of us have noticed the skyrocketing numbers at the pump and felt our wallets take a resultant hit. The average consumer isn’t the only one.
As fuel prices rise, so do the costs for homebuilders (and any other business that relies on energy and transportation); because now it costs more to fuel the vehicles that transport labor and materials, and fuel the plants and factories that produce the goods to build houses.
How does this affect housing? Homebuilders feel the squeeze on their profits, and consequently pass it to the consumer via their prices. While this is bad for homebuilders, it is good for sellers of pre-owned homes since it makes their properties more competitive in price. In other words, there’s no cost to transport materials in a pre-owned home. The house is already built.
Keep an eye on energy prices. They play a major part in the value of any real estate you own, or are thinking of selling or purchasing.
Happy housing
John Dubois
The Housing Wiz Assistant
Cell (214) 418-4829
March, 2006
Paying Off Your Mortgage Early
Judging by the way some people refinance their homes—and borrow on their equity—some people are under the impression that they’ll live forever. Less than 80 years ago a thirty-year mortgage was basically unheard of. People made a good down payment and expected to pay off their mortgage in years, and not decades.
Times change, as do paradigms. It is now “standard practice” to figure house loan amortizations in thirty year terms. From conversations I’ve had with many homeowners, it seems standard practice for many of them to use their home as an ATM machine, borrowing against their equity to buy other things or pay off high-interest loans. I don’t believe it makes sense to pay off unsecured loans with secured loans—especially loans against a home.
That said, here’s some information on your savings if you decide to pay off your loan early. This spreadsheet shows a loan for $150,000 at 6.5% interest over 30 years. The total interest that will be paid is more than the loan amount, even at this modest rate.
Look down the figures and see what happens if every month a small additional amount is paid to principal. Paying only $50 more per month reduces the term from 30 years to 25 years and 11 months. There is a savings of over $30,000 in interest. $200 extra per month brings down the term to less than 19 years, and pushes the interest savings to almost $80,000.
Look at what an extra $450 per month does. If you are 35 years old right now, you’ll only be 48 when you own your house free and clear. It’s a great feeling.
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Original loan terms
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Amount borrowed
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$150,000.00
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Interest rate
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6.50%
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Length of loan in years
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30
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P&I payment (plus taxes and insurance)
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$948.10
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Total interest over term
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$191,316.73
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Amount of savings if additional
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amounts are paid each month
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Additional amount paid each month
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$50.00
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P&I payment (plus taxes and insurance)
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$998.10
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Length of loan in years
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25.95
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Interest savings over life of loan
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$30,498.04
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