Keeping Perspective

Recent news: 8.0 Earthquake Levels Entire Village in Peru; Powerful Typhoon Threatens Taiwan; Hurricane Dean Tears through Caribbean; and ah yes, Mortgage Pinch Causes Domino Effect of Pain. However, the world is not ending and home ownership will continue to be something that pretty much everyone wants.

To be sure, the housing market locally is currently being threaten by higher interest rates and tighter credit requirements—the ‘domino effect’ caused by the crisis in the sub-prime markets. At least for the near term this compounds the problems for the glut of homes on the market. Buyers, afraid of paying too much are now getting an unexpected surprise—what perhaps they hoped to gain in waiting for softening prices they now just lost in the effective increase in acquisition cost because of the higher interest rates.

This is a bit of an ‘I told you so’, as we have warned of this possibility in prior articles. However, we didn’t anticipate that the increase in foreclosures from bad lending policies would result in a credit crisis that would hit so hard and so fast. Still, it is a time to get a perspective: rates are well below the double digits many of us got accustomed to in the 80’s and the fundamental demand for housing in the Valley continues to be robust, as record numbers of newcomers continue to migrate south. Most recently the Feds have stepped in—injecting more funds; more liquidity, to buoy up lenders. This may be a temporary reprieve and something else to factor in if you are a buyer with ‘sticker shock’ over sudden increased rates.

Even so, because of the compounding effect of higher interest rates on top of a record number of homes for sale, we might now expect to see some price declines in average sales prices—something that really hasn’t happened in spite of the over-supply.

Buyers and sellers—what you can do: We are seeing the use of discount points to help offset the consequence of higher interest rates for buyers. Discount points are like pre-paid interest. A 1% discount point equals 1% of the loan amount. 2 to 3 discount points can typically buy the interest rate down 1%. A seller offering to pay discount points to lower the buyer’s interest rate may be offering an incentive worth much more in actual dollars than the equivalent price reduction.

If you’re a buyer or a seller you would be well advised to explore the discount points option as a strategy to mitigate the bad news in the mortgage markets. We also think it would be good for everyone to see this blip in the real estate radar screen for what it is. Keep perspective—the sky in not falling…yet!

By Dominic Scappaticci
CEO and Designated Broker
Russ Lyon Sotheby's International Realty