LEVERAGE - What is it?

Let the blogging begin again.  With winter coming on, it looks like a good time to resume posting.  This morning I was thinking random thoughts - a regular occurrence for moi.  And it always leads to interesting random connections in my mind.  This morning my thoughts veered to leverage.  What exactly is leverage?

If you look up the dictionary definition in Websters, leverage is 1) the action of a lever or the mechanical advantage gained by it, 2) effectiveness, power.  Okay, not very helpful when you consider all the uses of leverage in our society, but it’s a beginning.

Checking a thesaurus (I used those from Princeton University and Collins Thesaurus) you find synonyms such as purchase, leveraging, influence, authority, pull, force, hold, strength, grip, grasp, weight, rank, clout, and purchasing power.  Leverage can provide an advantage or bargaining chip.

LEVERAGE - How do we use it?

If you think about it, you use leverage all the time.  Have you ever opened a jar using a rubber lid opener?  Leverage.  Used ski poles to push off down the hill?  Leverage.  Have you purchased a home by using a mortgage?  Leverage.  Purchased anything on credit?  Leverage.  Put some muscle into using a long handled spade to turn over your garden?  Leverage.  Called an old colleague about possible job connections?  Leverage.  Asked a friend for an introduction to someone they know who is knowledgeable in an area you want to pursue further?  Leverage.  I think you get the idea.

LEVERAGE AND WEALTH

We use leverage constantly in our daily lives.  But the leverage I want to address is financial leverage.  Financial leverage can be good or very very bad.  The Great Depression was leverage gone very wrong.  The economic meltdown of 2008 was leverage gone very wrong.  The rise of the US stock market through the 1980s and 1990s was leverage that helped a lot of people amass wealth.  And the rise of the housing market until the latter part of 2007 was also leverage working its magic for homeowners and real estate investors.  Great stories of riches gained were common during these periods.  The technology industry was a great user of leverage in the 1990s.  That is until the bust came in 2000.

If you think about it, our economy is built on leverage.  How many people do you know (and maybe see in the mirror in the morning) who have used credit cards to leverage their income into a buying machine?  How many people used disastrous variable rate mortgages to leverage their assets and income into a home that they couldn’t otherwise afford?  How many people used the equity in their home as an ATM?  We Americans thought the party would never end.  At least those who hadn’t been through the Great Depression thought so.  But the party did end because the use of leverage was out of control.  I could write a post longer than you are interested in reading on all the causes and influences that created the mess we’re in now, but I’m sure you have your own ideas about that.

USING LEVERAGE IN THE FUTURE

So do we just stop using leverage to improve our financial condition?  For most people, that’s not possible when you consider the cost of real estate or vehicles and other big ticket items or the cost of building a business.  Some leverage is needed to allow people to grow into their future income and take advantage (leverage) of the positive factors that are available right now.  But to use leverage effectively, you have to have a good foundation to stand on.  Pulling on a lever in quicksand doesn’t work well at all.  That foundation is what has been lost in our society as envy grew and people felt they were “entitled” to what their neighbor had too.  Maybe the neighbor is in debt up to his eyeballs and about the declare bankruptcy.  Someone looking in over the fence doesn’t know that.  Or maybe the neighbor is the millionaire next door who lived a frugal life for decades to be able to live very comfortably later in life.  Delayed gratification.  Something we all need to grab onto to build that great foundation.

WHAT NOW? 

Things happen for a reason.  If the economy hadn’t failed in 2008, it may instead have failed in 2010 or 2012.  It was going to happen because of the leverage being used in ways it never should have been.  The entire economy was caught up in using financial leverage to have it all now.  But something good happened along the way.  People took it as a wake up call.  The savings rate in the US has increased dramatically.  With no equity left, homes were no longer an option for spending.  People are just trying to hang onto their homes in many cases.  But the frugal people still DO have equity.  Some own their homes outright.  Their frustration is that we are all paying for the foolishness of those who wanted it all now without any thought of how they were using leverage.  We will get through this and those who were wise enough to spend less than they make and have money to invest will be the ones who get to take advantage of the opportunities for wealth that the current market presents.  Our country is full of opportunities if you look for them, but it takes hard work, a willingness to sacrifice rewards in the present for those in the future, and having goals for the future so you are already looking in the right place when opportunities arise.  It’s not magic; it’s being intentional.

READ!

If you want to find those opportunities, you have to educate yourself in areas that will help you create a contented future.  A future that is free of financial fear and is one of hope and satisfaction is possible.  Look around and find a path that fulfills your desire to have a good life.  People move themselves out of dire situations all the time when they have the will to make their life different and aren’t willing to let obstacles get in their way.  Desire is a powerful motivator.  Combined with common sense and a frugal outlook, you can move mountains.  Reading books that will improve your skills and listening to and reading about people who have “made it” and share their stories can give you ideas on what your path should be.  Leverage your mind to increase your knowledge and a whole new world will open up.  Leverage can be a very good thing when we use it to improve our lives now for a lifetime of happiness later.

It’s a new month and about to be a new year.  America is still the land of opportunity.  We have over 200 years of leverage working for us.  It’s not over yet!

Wow!  I never guessed that it would take me over 8 months to post again on this site.  Many changes have occurred in my life over the past 8+ months.  The death of a family member in June, 2010 had the impact 0f absorbing months of my life as I helped with the myriad tasks in settling the estate.  It has been an educational process and one I will take time to learn more about as I pursue writing books to help consumers become more savvy in protecting and increasing their wealth.

RETIRED?  WELL, SORT OF…..

I retired from RE/MAX at the end of January.  After almost 8 years, it was a decision that did not come lightly, but I realized the time was right.  I still have a Colorado real estate license and have maintained my membership in Pikes Peak Association of Realtors, CAR, and NAR through 2011.  But I turned in my electronic lockbox key, sold all my lockboxes, and made the decision to spend my days pursuing a new course for my life - as an author and speaker on financial topics.

FIRST, A SABBATICAL

My first goal is to spend some time catching up on my personal life, so a 6 month hiatus from business is in order.  I still have a business association with 2 great RE/MAX agents and refer my clients and friends to them as the need arises.  This works very well for them and for my clients.  I like to help good people stay in business and I want to make sure all my great clients are taken care of when they need help with real estate.  But I also realized that instead of marching headlong into another career, that I needed to take a break, take some time to focus on personal matters, spend more time making art, and catch my breath before jumping into learning about a new industry (for me!) and building a new direction for my life.  So that is what I am doing.

During this time, I hope to post interesting commentaries on topics I consider relevant to the current real estate and financial markets, check out and report on more great local restaurants, and do a few book reviews.  Posting won’t be often or consistent over the next 6 months, but there will be things here from time to time, so stop by occasionally to see what’s new.

VISIT WITH ME

I also realize that I don’t want to become a hermit.  I don’t make a good hermit because I like to talk with people and hear their ideas.  So I am planning regular escapes from the house to work on some writing and meet with people who want to stop by and visit with me.  By April 1st, I plan to select a location or two around Colorado Springs to spend a few hours once a week to get myself out where people are.  I have my art groups and a networking and book club I attend regularly, but that’s different.  I’m looking for a place to hang out and have spontaneous conversations with people I meet.  No networking obligations, just a time to relax, have a cup of coffee, and chat with people.  I hope you will join me!

Live Your Dreams!

So until my next post, Live Your Dreams!  The economy is on the mend, but it won’t be an easy road.  With almost 25% of all mortgages underwater, we are looking at a different version of the real estate market than we’ve seen in the past.  In one way, not posting for months has given me a perspective I don’t think I would have had if I’d had my head in the computer every week.  But we’ll talk about that more in future posts.  See you then!

I’ve mentioned before that I see trends.  I think it is because I look for trends.  Everything we know points us to conclusions that are colored by what we believe.  Yesterday I read an article and thought, “well, duh!”.  Everything said was something that I had already identified and knew to be true.  The article just seems a little late to the party or am I prescient?  Certainly other people must see what I’m seeing.  If you read the popular press it keeps pointing out statistics that seem to show that the economy and real estate markets are improving.  From my perspective, we had an artificial blip produced by the tax credits and we have borrowed buyers from the future.  I don’t see new jobs being created and am not sure where they will come from, but perhaps China loosening their currency will help with exports.  Or perhaps it will help with cost of goods manufactured in the US so that they are more competitively priced so that we Americans will buy goods manufactured in the US.  That would help create jobs here at home.  Luckily for us all, nothing stands still and things will improve, but until people feel secure and feel they have options, the economy will be at a standstill.  The news isn’t all bad because the DJIA is still hovering around 10,000 and that indicates people are feeling more comfortable financially than they were a few years ago.  Let’s hope we can keep improving on that comfort level to the benefit of all Americans.

Oh yes, the article I read is right here for you to read too.  Enjoy!

Summertime and Showings Are Increasing

On Friday I gave you the new Monday market report early so that you could catch up on your web browsing over the weekend.  At that time our company, RE/MAX Properties, Inc (the company with the greatest market share by far in Colorado Springs) showing activity for active listings was down 48% from the best week of the year so far, April 5-11, 2010.  The number of listings was up 7% between April and the week of May 31-June 6, 2010.  The good news is now that graduations, early summer weddings, and the hub-bub that surrounds kids getting out of school here in the West has passed, people are interested in looking at houses once again.  Listings are still increasing (10% increase from the first full week of April), but showing activity has increased 41% in the past week from the week before.  Our company showing activity is down 26% from early April, but we are still hoping for steady sales through the next few months before the high real estate season in Colorado Springs winds down.

Bill to Extend Closing Schedule for Tax Credit Qualifiers

One bright spot is that a bipartisan bill is in Congress to extend the closing deadline for home buyers who have been under contract as of April 30, 2010 to September 30, 2010 rather than June 30, 2010.  This bill is intended to keep the tens of thousands of short sale purchases that were contracted for in play as banks attempt to approve short sales and give buyers enough time to close on those homes.  Without the extension many of the purchasers of these homes could change their minds without the benefit of one of the two tax credits offered this year.  Getting these homes closed could make the difference in how many more homes go into foreclosure between now and the end of the year.  It’s better for those homes to sell at a short sale price rather than an almost assuredly lower price if they go on the market as a bank foreclosure at a later date.

More next Monday!  Get the latest real estate market news here each week.

Great coffee, pastries, and free wifi

This week’s restaurant review is a day late (sorry folks), but it’s a goodie.  I spent some time this morning at La Baguette having coffee and a croissant as I read more of Dave Ramsey’s The Total Money Makeover (I’m preparing a special new book review series for readers, so stay tuned).  I love the new look the Chestnut Street location has been given.  Very fun.  I didn’t need wifi this morning, but some days I do and I noticed when I was at the downtown location this week that they now have free wifi for their customers.  And the food is yummy, too!  I love the apple croissants and when it comes to lunch, they have the best French onion soup in town.  You can take home a fresh baked loaf of bread or rolls and other pastries and surprise everyone in your household with a special treat.  The website only gives 2 locations but you can also find a third restaurant at 1420 Kelly Johnson Blvd, west of Academy near Chapel Hills Mall.  I frequent all three locations.  Tip:  try the creme carmel dessert if you like custard or flan.  Delicioso!

Other free wifi restaurants

But that’s not all!  A long time local favorite coffee house that offers free wifi is Pikes Perk.  They also have multiple locations in Colorado Springs plus an airport coffee shop.  I go to the one on N Academy most often.  It’s a great place to meet friends or clients.  I do!

My final suggestion for great coffee and free wifi is Panera which has been reviewed on this blog.  This is the only one of the three that has locations outside of Colorado Springs and Colorado, so if you want a consistent experience when you are traveling, give them a try.  Good place for coffee, pastries, and also for lunch as they have an extensive sandwich, salad, and soup menu.

I hope to cross paths with you at one of these local restaurants.  Stop and say hi if you see me there!

Real Estate Market Statistics

A new feature on this blog is something you can look for on Mondays.  I’m posting it early this time, so that I can get the new statistics from May 31, 2010 to you to review as you browse the web on your computer this weekend.

The two reports you will receive are actually links to the RE/MAX Properties, Inc company blog (for which I am a featured blogger) because the raw data and charts are posted there for you.  I will give my interpretation of what I’m seeing so you will know when I think the market really is turning up and that better times are ahead for sellers.  For you buyers, that means you will want to know when prices are starting to go up.  Increases in prices are going to have a dramatic effect on the amount of home you can purchase for the money available to you and consequently affects your payment and down payment requirements.  Interest rates are not the only variable when you are trying to decide when the time is right to purchase a home or sell and move-up (or downsize).

Days Supply and Target Market Analysis

The two reports you will see are the RE/MAX Properties Days Supply and Target Market Analysis.  The Target Market Analysis is weekly information on changes in the number of listings and showings generated through RE/MAX Properties, Inc.  Since we have the largest market share in the Pikes Peak Region, our numbers reflect the market as a whole very well.  The second report you will find monthly is Days Supply.  This is a chart of different areas and price ranges and the changes in the rate of sales over the previous 4 months.  It reflects one point in time and shows you the number of homes that are on the market and have sold during the period.  From those numbers are calculated the number of days it would take to sell all homes currently available as if nothing new were coming on the market.  A negative number is an improvement and for May 31st, that number overall is -16.52%.  In the same period (07/01/09-10/31/09) prior to the last $8000 tax credit expiring (which it never really did) that number was -9.98%.  So we saw more than a 65% improvement with the latest tax credits than we did last year.  But remember, we have borrowed buyers from the future so that they could take advantage of the tax credit and I expect to see less improvement in coming months.  Our showing activity has decreased 48% since the top of the market the first week of April and listing activity has increased 7% since then.  Sellers need to be realistic in this market if you want to sell at all.  Those first to the party with the best price and condition will win because it will still be a buyers market for the foreseeable future.

Remember Mondays for new information

So check back here weekly for new Target Market Analysis information and monthly for the latest Days Supply numbers.  We want you to be on top of the market so that you can be an educated consumer when it comes to real estate.  We’re here when you need us.  We’ll put a light on the market for you.

Less Restaurant Consumers in 2008

After the stock market tanked in October, 2008, Colorado Springs restaurants were ghost towns for awhile.  We stopped eating out as much, which is better for our waistlines anyway, and apparently a lot of other people decided also that eating at home saved money.  I’m sure it was a very scary time for restaurant owners as they tried to keep their employees working with virtually empty dining rooms.  The good news was that when you went out to eat, you were seated right away, but at a huge cost to the local economy. 

Do You Think Service Has Improved?

Now, it is June, 2010, and when we do go out to eat we see more people in the restaurants, but I don’t think it’s at the same level it was during the summer of 2008.  I know we personally have cut down on how often we eat out and we made that decision first in an effort to eat healthier and also to save more money as we build our assets to get to retirement.  The thing we have noticed is that restaurants also seem to be appreciating their clientele more.  Service is much better in general than it was 2 years ago.  I don’t think we are the only ones not eating out as often so restaurants are competing for less customers.  If we get bad service we will think twice about going back.  If we get great service, we notice, and appreciate the effort of the servers and the training they are obviously getting to help them serve customers better.

Let’s Keep Good Service Going

When the economy is roaring, all boats float.  But when times get tough, you get to see who is left standing - those who understand what business is about and understand the value of their customers.  We aren’t past seeing changes yet.  In the long run, everyone will have a new perspective of what is important in life and I think we’ll be better for it.  Restaurants are not the only businesses affected by less business.  The real estate industry has definitely lost a lot of jobs.  We are seeing tightening across most industry segments.  As things improve and people “go back to normal”, I don’t think normal will be the same as it was 3 years ago.  We can all hope the lessons of providing good service continue to be kept top of mind.

I try not to indulge in pizza very often because it just screams calories, but when I do I want a good one.  So we try different pizza places to see whose pizzas rise to the top.  So far my favorite overall pizza place is Borriello Brothers.  They have 8 different locations around town and you get to enjoy a fun atmosphere while chowing down on a pizza that definitely is a value for the price.  And it tastes scrumptious!

For a more uptown environment and a crispy pizza with fresh fresh fresh ingredients, give Piazza in Rockrimmon a try.  They have a great lunch special that includes a personal pizza and salad.  Nice spot to take clients when you want good food and a quiet place to talk.

Buon appetito!

Real Estate Stimulus in Retrospect

Last spring the federal government sprung the $8000 home buyer tax credit on the real estate market in an attempt to spend stimulus money and nudge the real estate market forward.  Many buyers took advantage of the tax credit and sales increased, even though prices haven’t really.  Then when it was apparent that the real estate market, especially new home sales, needed further resusitation, the $8000 tax credit was extended to April 30, 2010 and a new $6500 tax credit for current home owners who have been in their home 5 consecutive years out of the past 8 years was launched.  These homeowners now had the opportunity to buy one of those higher priced homes languishing on the market or to build the home of their dreams up to $800,000 and with very low interest rates (if they qualified for a loan).  Many people have taken advantage of these programs as well.  It has been a boon to the real estate market — but a temporary one, in my opinion.

Sellers Tired of Languishing Market?

So what will happen now?  Past posts on this blog have addressed this issue, but an update would be timely given that the clock is ticking on all the sales generated through April.  Many transactions have already taken place and new homeowners have the keys to their new home.  Congratulations new homeowners!  Builders have until the end of June to get all those new home starts closed for first time homebuyers and repeat buyers alike.  Sellers whose homes are currently available for sale have been making price adjustments to try to capture the attention of buyers who haven’t pulled the trigger yet.  Some sellers who would like to sell and have been sitting back waiting are putting their toes into the water, but they haven’t had a market reality check yet and many are probably too optimistic in their pricing.  This could have the effect of making homes with recent price reductions look more attractive, but it also increases competition for buyers.  Only sellers who have decided they must sell now and are willing to price their homes competitively will capture the buyers who are actively pursuing a home.  And those buyers know they are in the driver’s seat.  That isn’t going to change for quite awhile.  Even in a good market, all homes don’t sell.

Just what is median price?

But, wait a minute you say.  I’ve seen reports that the median price is going up.  Doesn’t that mean that sellers are getting more for their homes than they were in the past?  Not necessarily.  Here is how the dynamics of the recent market works.  Since the first round and second round of tax credits were aimed at first time homebuyers, the segment of the market that has been in demand has been the entry level home market.  In 2009 that meant that the median price of homes that sold were lower than if the sales distribution fell along a more normal curve with sales throughout all price ranges.  In Colorado Springs, the entry level market is primarily homes under $200,000 and definitely below $150,000.  The sales during the past year have been skewed to the lower end having the effect of lowering the median price.

Homes priced over $400,000 have a lot of competition because those are typically move-up homes in our market and there haven’t been many move-up buyers.  The over $1Million home market has been abysmal.  The middle ground ($200-400K) is a mixed bag since some first time buyers buy in this price range.  The good news is that by targeting first time homebuyers, former renters now own homes and the sellers of those entry level homes have had a lot of well priced homes to select from for their next home.  The sales of those homes has had the effect of increasing the median price this spring as sellers of entry level homes now have the opportunity to buy.  More higher priced sales brings the median price up.  The bad news is that about 1/3 of the sellers locally are either short sales or bank sales of foreclosure properties, so those sellers won’t be moving up into a nicer home.  They are back in the rental market.  So there’s not as much help for sellers of more expensive homes as we’d like to see even though the median price has gone up in recent months.  Those increases are not due to increased prices for sellers.  They are a function of what the sales curve looks like.

That brings us back to the repeat homebuyer tax credit.  If someone who has been in their home for the past 5 years or longer wants a nicer, bigger home, the government offered $6500 for them to take their shot.  Of course, all those underwater homeowners who purchased since late 2005 are out of luck.  Chances are they would have to bring cash to closing to sell anyway and are unlikely to move unless they have to.  Do you think the government stimulus plan architects knew that?  Their goal was to get homeowners who had equity in their homes to move that money to a new home thereby generating commissions to market professionals and increasing mortgages that can be bundled and sold to Fannie Mae and Freddie Mac.  An underwater homeowners best option may be to stay put, accelerate their mortgage to gain equity faster, and create a selling opportunity in the future.

Future Trends?

The next 3 months is the remainder of the best selling season in a lot of markets.  Once school starts again in the fall, people tend to stay put and sales slow during the cold winter months.  We are keeping a close eye on local activity in the Pikes Peak Region so we can try to anticipate what the future trend will be in 2011.  With the government financial incentives gone, sellers will need to create those in the marketplace to encourage buyers to keep buying.  If they aren’t willing to do so, they may as well stay put.  My expectation is that activity and prices will decline, with declining median prices once again, until buyers start feeling secure in the job market and we reach an equilibrium that starts to generate demand once again.  Classic economics.

We Can Help You!

If you are a seller sitting on the sidelines or a buyer who is uncertain what to do now, I work with a team of professionals who can help.  By understanding the underlying factors in the market and knowing our local market, we can provide you with the knowledge you need to make the right decision for you.  We love to help!

Don’t forget to come back here every week for updates on the real estate and financial markets.  And don’t forget restaurant reviews on Thursdays.  Tomorrow - where to get a great pizza!

Recent Statistics of Interest in Foreclosed Properties

According to a recent Harris poll, less buyers are interested in purchasing foreclosure or short sale properties.  And when they are interested, a whopping 36% have unrealistic expectations that bank owned properties will sell for a discount of 50% or more off the price of a non-foreclosure property.  For more details, here is the link to the article.

Walking Away

In the article, new statistics are also provided concerning what percent of the population would consider walking away from an underwater mortgage.  This topic seems to keep showing up in the press.  The good news is 59% of respondents would not walk away from their homes.  One percent would make walking away their first option.  In other posts on this blog, we’ve learned that those whose loan to value ratio exceeds 125% are the most likely to walk away.  This one percent may already be there and see no other option out of their situation.