Archive for August, 2009

What More Will It Take

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If you live in Silicon Valley and are thinking about buying your 1st house this is probably the best ever time to do so. 

1. Santa Clara County has a new 1st time buyer program which gives a 30 year, $40,000, Down Payment Assistance loan at 2% interest, with no payments required for the 1st 4 years. After 5 years the interest rate becomes ZERO. The maximum total interest over the life of the loan can never exceed $3,200. THIS IS FANTASTIC. 

2. 90% of the Cities in Santa Clara County have one or more special 1st First Time Buyer programs to help get a foot on the Home Ownership ladder. 

3. Federal Government and the State of California have several different 1st Time Buyer programs. 

4. Many of these programs can be combined to provide affordable ways for the majority of people who at present believe they can’t afford to buy. 

5. The Santa Clara County Association of Realtors has a new program which will provide 6 monthly payments of up to $1,500 per month for a Home Buyer who loses their job. 

6. The IRS is giving an $8,000 Tax Credit to any 1st time Buyer who buys before Nov 31st this year. This is a CREDIT not an allowance. It means that even if total Fed Tax was $6,000, not only would that be wiped out but you would get an additional $2,000 rebate. That’s an $8,000 gift from Uncle Sam. 

In addition to all this Mortgage Interest Rates remain at historically low levels, while home prices have come down substantially from the peaks of 2007. 

There will never be a better time than this for that 1st purchase.

The 401-K Puzzle

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Government is often criticized for putting all its efforts into helping business and nothing for the ordinary citizen. However, when they do put programs in place we have a tendency to ignore them.

Here’s just one example:

A 401-K plan usually involves an employee putting up to 6% of their salary into a company sponsored program. Typically the employer increases that contribution by adding in up to 50% of what the employee puts in. (this is increasingly being reduced but is still at least 25% in most cases). This means the employee is getting between 25% and 50% interest on their savings, plus their contribution is exempted from Income Tax for the year it is made.

So how come only 7% of people eligible for this benefit actually use it up to the max allowed? (Source Putnam Investments).

How come 20% of participants in these plans have actually reduced the level of contribution during the past 2 years?

My guess is that a large number of these people would like to maximize the use of these plans but don’t know how it could be done.

I also suspect that a large percentage of them could solve the problem with a mortgage better suited to their circumstances.

Real Estate is a Fun Job

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It’s all about meeting new people and helping them realize their dreams.

From the 1st meeting to the close of escrow, maybe 3-6 months, you go through the equivalent of 20 years of getting to know people well, and developing the ability to work toward a common goal.

 Then you may do nothing more than exchange xmas cards and sending out occasional marketting info. However, if the result of your initial business experience was positive, you will be hearing from their friends and family.

 Then, about 5 years later you will be renewing close aquaintance helping them with their next move.

There is nothing more gratifying than that phone call regarding new business coming from a past client or a referral from them. That is a FUN call.

The Fed and Mortgage Rates.

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I’ve lost count of the number of times I’ve been asked “I see the Fed lowered it’s rate(s) today, how much have mortgage rates dropped by”?

When I answer, as is most often the case, “they’ve not gone down, they’ve gone up”, the response is “how can that be.

So let’s try to explain it once and for all.

First the basics.

There are 3 actors in this story.

1.The Federal Reserve Bank.

2. Mortgage Backed Bonds/Securities.

3. Inflation.

FACT: There is no direct relationship between the Federal Reserve and Mortgage Interest Rates.

FACT: Despite the continued repetition from the Talking Heads in the mainstream media, there is also no direct connection between the 10 year Note and Mortgage Interest Rates. In fact the two will often go in opposite directions after a Fed action.

SUPER FACT: Mortgage Interest Rates are directly affected ONLY by the prices of Mortgage Backed Bonds, commonly referred to as Mortgage Backed Securities. For the most part these are Long Term Bonds issued by FANNIE MAE and FREDDYMAC, and it is their price going up or down which drives Mortgage Interest Rates.

As with all Long Term investments, Bonds are most directly affected by the outlook for Inflation, which makes it likely they will be paid back in the future with inflated dollars. Inflation reduces the current value of all Fixed Investments such as Bonds.

The Golden Rules:

1. Prospects of higher Inflation drive down prices of all Bonds.

2. When Bond prices go down, Mortgage Interest Rates go up, and vice versa.

Here is where the Fed comes in. Drastic lowering of rates by the Federal Reserve Bank will always lead to fears of Inflation and put downward pressure on all Bonds. This is precisely what we have seen since the start of this current lowering cycle.

The sole exception to this is your Home Equity Line of Credit (HELOC) which is usually tied to the Prime Rate. The Prime rate is historically 3% more than  the Fed Funds rate; so in today’s topsy-turvy world you will often  find your Equity Line loan having a lower interest rate than your 1st. Mortgage.

Seniors Tax Break

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For all Home owners in California above 62 years old, or those with parents in that age group, the State Controllers Office has a program which allows long term postponement of Property Taxes. Go to and select “Public and Gov, Services” tab, then select “Property Tax Postponement”.

Consider a 68 year old Grandmother living alone in the old family home in North San Jose. All her children and grand children are living in Pleasanton, about 30 minutes freeway driving away. She would love to sell up and move closer to the family, and could afford a suitable house using her sale proceeds. However, the price of the house in Pleasanton would be higher than the sales price of the San Jose house, so thanks to California’s Proposition 13 and the incomplete Propositions 60 and 90, she would not be able to carry her existing Property Tax payment over to the new house. This would increase her Property Taxes by $600 per month. This makes the whole thing impracticable as she cannot afford this extra expense. and her children are unable to subsidize her, even if she would accept it.

Here’s how the numbers work:

Grandma’s house, bought in 1980 for $50,000, is now worth $600,000 and has no mortgage.

Thanks to Prop 13 her property taxes are only $90/month.

The replacement house in Pleasanton will cost $750,000 and she can easilly handle the small mortgage needed.

However, thanks again to Prop 13, her new property taxes will be $781/month. This she cannot manage.

Using the Property Tax Postponement program she is able to make the move and simply allow the accrued Property Taxes to reduce her final estate. A result with which the whole family can be happy.