10 Timeless Personal Finance Tips

In honor of its 70th anniversary, Kiplinger’s Personal Finance magazine this month released their top 70 ways to build wealth.  Knight Kiplinger, the editor in chief, listed his “10 Timeless Tips” as part of the list of 70.  They are awesome, and I wanted to share them with you here (worth passing along to any young person you know who is starting out).

1.       Wealth creation isn’t a matter of what you earn.  It’s how much of it you save.

2.       Your biggest barrier to becoming rich is living like you’re rich before you are.

3.       Pay yourself first.  Arrange to have your retirement and other savings deducted from your pay-check before the money hits your bank account.  If there isn’t enough left over for your bills, cut your spending.

4.       No one ever got into trouble by borrowing too little.

5.       Conspicuous consumption will make you inconspicuously poor.

6.       The key to stock market success isn’t your timing of the market.  It’s your time in the market – the longer, the better.

7.       Diversify, because every asset has its day in the sun – and its day in the doghouse.

8.       Keep a cool head when others are losing theirs.  When others are selling investments, it’s usually a good time to buy.  The foundations of great fortunes are laid in bear markets, not bull markets

9.       Money can’t buy happiness, but it can make unhappiness easier to bear.

10.   Sharing your wealth with others is more fun than spending it on yourself.

Homebuyer Trends That Might Surprise You

Every year since 2013, the NAR has been writing the Home Buyers and Sellers Generational Trends Report. This report provides insights into differences and similarities across generations of home buyers and home sellers. It is a key indicator of who our customers are.  The data for the report is compiled from the annual Profile of Home Buyers and Sellers. You can download the entire report HERE for those interested, but it is 145 pages long – so I wouldn’t expect anyone to read it in its entirety.  As opposed to just giving you the highlights, I’m going to list some highlights that I think might surprise you – or at least the ones that surprised me.  Here you go:

·      This year’s report reflected an increase in purchases for Millennials (age 36 and under) in suburban locations and for detached single-family homes.  Only 15% bought in the city compared to 21% just 2 years ago (they are having kids and moving out of the city).
·      Generation X (37 to 51 years old) buys the biggest and most expensive homes of all groups (I would have thought it to be the Young Boomers (52 to 61 age range))
·      Older Boomers (age 62 to 70) typically move the longest distance at a median of 25 miles (I assumed the older group was less likely to move far from their current place, but I guess they like warmer climates)
·      The older the buyer, the more likely that the purchase will be new construction (seems backwards)
·      88% of all homebuyers finance their purchase (higher than I thought)
·      Millennials still site student loan debt as a major factor in not buying.  But for those that have student loans, it’s the Gen Xers that have the higher student loan average balance.
·      16% of younger and older Boomers have student loan debt (average of $10,000 per)
·      Gen X buyers have delayed buying longer than Millennials (primarily due to debt or lack of equity in a home needing to be sold to be able to purchase) – hopefully Gen X sellers will fuel the market as they will now have been able to rebuild equity lost
·      Young boomers’ purchase of multi-generational homes jumped 20% in 2016 (due to their adult children needing a place to stay)
·      Roughly 90% of Gen X and Millennials use a Realtor for both buying and selling – ironically, both of these generations are the most likely to go on-line to do their searches
·      The most common reason to buy, for all purchasers under the age of 61, was simply the desire to own their own home
·      76% of all sellers were married couples

It's All About Cash Flow

I had a conversation with a buddy of mine this week and we weren’t really talking about real estate specifically, just investing in general.  But that led to a discussion about some real estate that he bought several years ago when the market was flying high – much like it is now. 

He told me that he learned a valuable lesson when investing in real estate and that was to focus primarily on cash flow that the property is providing versus the potential appreciation.  That may not sound like rocket science, which it isn’t – and this guy was not a real estate professional.  It is simple common sense.  However, he, like many others, forgot that real estate is a commodity and can drop in value just like it can go up.  He had based his returns on his properties increasing in value, not worrying so much about the fact that he was barely breaking even on a monthly standpoint (rents received versus cost of owning the homes and carrying loans).  When the market turned, he got stuck not only paying a monthly tab, but doing so on properties that were worth far less than what he paid for them.

The real estate market in Nashville is flying high right now and I believe it will continue to do so for at least the next couple of years.  But we don’t need to get caught up in the exuberance of the situation and buy long term investment property (or allow our clients to do so) solely on the basis of the expected appreciation.  Granted, a flipping situation is a little different.  But someone buying a property to rent it out needs to make sure that the cash flow works.  In other words, there is more money coming in on a monthly basis than is going out.  And Ideally that number needs to produce a return that is an adequate cash return (amount received above expenses is earning a decent return based on the initial amount invested).  With the requirement of at least 20% down payment for most rental property loans, getting the rental income to exceed the payment is typically doable.  But it needs to be enough overage that there is a return for the money invested.

Sometimes we forget these basic principles when the market is doing so well.  And many times, the market appreciation bails buyers out of less than stellar decisions.  But this is also how investors get burned.  So just a reminder of the lesson my friend learned the hard way.  Investing in rental real estate is all about cash flow.  There are many other benefits - primarily appreciation and tax deductions.  But if the property won’t cash flow, it likely needs to be passed on, if the purpose of the purchase is the long term rental benefit.

Welcome Home

It’s that time of year again – one of my favorite programs is back (and as usual, it is for a limited time).  We once again get to take advantage of F&M’s relationship with the Federal Home Loan Bank of Cincinnati to provide this special grant that is truly one of a kind.  The Welcome Home fund is taking reservations now (started March 1st) and will be available until funds run out.  The funds have run out by mid-early April in both of the last two years.  Why?  Because it’s free money!  Details are listed below and you are welcome to call me if you have any questions.  Let’s help as many people as we can with this program!

·         Amount available - $5,000 per transaction

·         The funds are provided as a grant and no repayment is required

·         Borrower must have a home under contract (primary residence only) to place a reservation for funds

·         Funds may be used for down payment and associated closing costs

·         Borrower must put at least $500 of his/her own money into the deal (60% of the $500 can be gifted)

·         Most loan programs are available (FHA, THDA, USDA and conventional – but no repair programs like 203K)

·         Doesn’t have to be a first time homebuyer, but all first time homebuyers must complete homebuyer education course

·         Income limits apply (it’s basically 80% median)

o   for Davidson county, the limit is $65,760 for 1-2 person household and $76,720 for 3+ persons

·         These programs take a little longer to process due to the file needing to be underwritten by FHLB in Cincinnati, so please allow 45 days to process)

·         It may be used for new construction, but home must be completed by December 1, 2017

If you have a client that is going under contract any time in the next month to month and a half, it would make sense to at least have him/her look into this if you think there is even a possibility of qualifying for this grant.  It is awesome!

THDA Has A Great New Program

In essence, THDA will now allow a buyer, who is buying in a designated zip code, a second mortgage of $15,000 that is completely forgivable if the buyer lives in the home for 10 years.  Here are the highlights for the program:

·         Available March 1st, but applications may be taken now.

·         Must qualify for the THDA Great Choice (the normal program – standard guidelines, 45% max debt ratio for example)

·         Must meet standard income limits and house acquisition price limits and meet IRS requirement for first-time homebuyer

·         Must be in a designated zip code (see flyer below)

·         New construction is NOT eligible

·         Pre and Post purchase homebuyer education is a requirement

·         Rate and fees for first mortgage are same as normal Great Choice program (nothing added for this program)

·         $15,000 second mortgage available for down payment, closing costs and prepaid items

o   $15,000 second must be taken in full – if more than needed, the first mortgage is reduced accordingly

o   No payments made on second mortgage during repayment terms of the first mortgage

o   If home sold in first 5 years, the full second mortgage must be repaid

o   Starting in year 6, the second mortgage is forgiven at a 20% per year rate through year 10

o   If home is owned longer than 10 years, there is no repayment due for the second mortgage

For additional information on THDA qualifying, go to www.thda.org; the updated guidelines for this new program will be available next week. 

If there are other available options like USDA, VA or our internal bank product, I’m not normally a big THDA fan due to the higher rate and added fees (compared to the traditional FHA program).  However, for a first time buyer who is buying in one of the zip codes listed on the attached document, this is a really good option.  You are welcome to call me if you have any questions.

Check out the flyer from THDA below for more specifics and eligible zip codes:

I Wonder What Dr. King Would Think Today

I often wonder, particularly in election years like the one we’ve just experienced, what the men and women, who molded our country, would think of it today.  Would they be shocked at what they see?  Would they be proud of our great nation or disappointed in it?  As we celebrate one of the most significant men in our country’s history, particularly this past century, I wonder today what he would think of where we are today.  No doubt our country has improved greatly since Dr. King uttered those now famous words “I have a dream!” over 50 years ago, but would he be satisfied with the progress?  As I listen to that speech this morning, I am once again amazed by this man who lived out the conviction of his heart. While I’d encourage you to take half an hour today and listen to the whole speech (or really any of his speeches for that matter), I thought I’d give you a little teaser here (these statements pretty much sum up everything you need to know about MLK):

"I have a dream that one day this nation will rise up and live out the true meaning of its creed: 'We hold these truths to be self-evident, that all men are created equal.'"

"In the process of gaining our rightful place, we must not be guilty of wrongful deeds. Let us not seek to satisfy our thirst for freedom by drinking from the cup of bitterness and hatred. We must forever conduct our struggle on the high plane of dignity and discipline. We must not allow our creative protest to degenerate into physical violence. Again and again, we must rise to the majestic heights of meeting physical force with soul force."

 "I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character."

Happy birthday Dr. King and thanks for your impact!

Loan Limits - Movin' On Up!

Welcome to the New Year!  For the first time in over a decade, Fannie Mae is increasing its loan limits for conventional loans.  It is nothing drastic, but certainly a move in the right direction.  For quite some time, the maximum loan amount for a conventional loan in the Nashville MSA has been $417,000 – anything over that amount went into the “jumbo” category.  The new number for Fannie is now $424,100.  But maybe what is the better news from Fannie is that they moved their loan limit for their expanded program (High Balance Agency product) up to $466,900.  The expanded program has a slight rate bump (typically .125% for 30 year fixed with no more than .25%), but also allows up to 95% loan to value.  So in essence, someone could put 5% down on a home priced at $491,450 with only a slight bump to the rate.  Remember that jumbo loans require 20% down and typically have a rate bump of .25-.375% above the Fannie rates.  So this is a nice option.

Also, and probably even better news than the Fannie loan limit increase, is that FHA is also increasing their loan limits.  The new limit for the Nashville MSA (which now includes Maury County) is $466,900.  So with a 3.5% down payment, someone could buy a property at $484,000 and still do a maximum FHA loan.  This becomes an even bigger benefit for a buyer with a sub-720 credit score (and dramatically for a sub-700 score).  So keep that in mind when you have a client with minimal down payment but who qualifies for close to $500,000 in price.  These options could come in handy – and we always have the combo option available (where we keep the first mortgage at the Fannie limit and do a second mortgage up to 90% so that a buyer can buy a more expensive home and only put 10% down (versus taking a jumbo loan and putting 20% down).  You are welcome to call me if further explanation is needed.

Lastly, I want to touch on rates very quickly.  Hopefully the jump in rates post-election wasn’t a shock to anyone – we’ve been discussing it for several months.  The 30 year conventional fixed rate jumped about .75% in the 2 weeks after the election.  The big question now is whether or not we are done with the rate jumps.  My personal opinion, and this is based solely on instinct and how the charts read from a technical standpoint, is that we will see rates hanging between 4% - 5% throughout 2017.  I think we’ll push 5% by summer and then drop back down into the mid 4’s by year end.  But I definitely believe that the sub 4% rates on conventional loans are likely a thing of the past.  Not to worry – sub 5% rates should not slow down our market at all.  It will be another very good year for real estate in Middle Tennessee!

Be a Fountain, Not a Drain

What a long month this has been!  I think this election has weighed more heavily on most of us than any other I can ever remember.  All the buildup, and certainly the fall-out over the past weeks, has left us feeling somewhat divided as a nation.  Whether we like who won the election or not, I hope that we all agree that we each want to do our part to make our country better. 

A couple weeks ago I heard probably the most profound commentary that I think anyone could have stated, fromthe last place I was expecting it, my beloved late night NBA action.  TNT’s Ernie Johnson, who moderates the pre and post-game shows with his cast of Shaquille O Neal, Charles Barkley and Kenny Smith, opened the show with quite an elegant commentary. (I’ll stay up and watch sometimes just to hear the rhetoric between Chuck and Shaq)  I’ve included a link to the short video if you are interested in watching it yourself https://www.youtube.com/watch?v=ayU5kw7Kf5U&sns=em. I was very appreciative of what all three of the former players had to say, but I was enthralled by Ernie’s sincerity, candor and boldness.

While Ernie was talking about how best to respond to the recent election and that our responsibility is to be better individuals by loving others and being a “better neighbor, citizen and American”, he said something that resonated with me: Be a fountain, not a drain.  As I tend to do, I relate almost everything back to real estate and finance.  So while his comments were made as a suggestion on how best to deal with the current state of happenings in our country,  it made me take an introspective look, and ultimately make a decision to try to give my clients exponentially more than I receive.  I am paid well for what I do, so this is no small challenge.  My desire is to have every single one of my clients feel that they have received more from me (communication level, wise counsel, and personal availability) than they ever imagined. 

So regardless of where you stand politically, or what your thoughts are about our new president-elect, I hope you will join me in getting better at what we do. Let's make the dream of home ownership become a reality for as many who desire it, and serve those people well.  Let’s be fountains in their lives!

If you are interested in the full (~10 min version) check it out here: https://www.youtube.com/watch?v=l-8bqfD69SA&sns=em

Do We Really Understand How Good It Is Right Now???

I’ve included a chart below that hopefully sheds some light on how incredibly low rates are right now.  I think that because rates have been so good for so many years now (we’ve been under 5% since late 2009), we have almost become numb to the fact that we are living in the best rate environment ever seen - at least in our lifetimes.  Sure, prices have gone back up.  And in our market, it feels almost painful – like a bubble about to burst.  But the reality is that the nation on a whole is just now getting back to where we were, based on the national house-price index, to where we peaked in 2005.  And rates then were a full 2% higher than they are now.  2% on a 30 year loan at $200,000 is about a $240 per month difference in payment.  So the reality is that in most areas, you can actually buy more for the same payment today than you could then.

About three years ago, I quit saying “you better act now while these rates are so low, they are bound to go back up soon”.  Now I just tell people “rates are great – if you are thinking about buying, it is a phenomenal time to do it”.  The truth is, we have no idea if/when rates are going to go back up – or continue to get even lower than they are now.  I’d probably still lean towards the thought that rates have to go back up sooner than later (55% of economists recently surveyed believe the Fed will begin further rate hikes by December – following the election).  But the reality is that with rates where they are now, purchasing power has outpaced market appreciation going back to 05.  And that is all because of the rate!

30 year fixed rates were 10.5% when I started my mortgage career.  So I probably appreciate where we are now more than the average Joe.  Just thought it would be a good time to remind you as well.

"Buy a lottery ticket..." Seriously!?!?

I may be old school, but I'm fine with it - I don't really like the new school, particularly when it comes to finances.  I heard a radio advertisement recently and I about drove my truck into a tree it made me so mad.  It was about two guys that were about to go back to college and they didn't have any money because they wasted their summer playing too much. I admit that it was funny and I laughed at first.  Then they announced the recommendation to the two slackers that would solve all of their financial problems: "Go buy lottery tickets".  Are you kidding me? And we wonder why our younger generation doesn't understand how to be successful financially. 

What happened to working hard and saving money? Where did we go wrong in allowing our newest generation to believe that they should have whatever they want, and have it now?  I want my kids to dream big and believe they can do anything they want with their lives. But I think there's a difference between believing big and working hard with realistic expectations. Real success is only going to come if both are combined. But this radio ad was just another reminder of the message our young people are consistently getting – and that is why the average age of our first time homebuyers continues to climb.  They don’t know how to save money and they exit college anchored down by school debt and completely clueless about personal finance.

We have to teach our kids, and their kids, a new measurement for success when it comes to finance.  There is nothing wrong with getting a good education (albeit one that is incredibly deficient in educating them on personal finance) and buying nice things such as clothes, a car or even a house.  But that can’t come at the cost of sabotaging their futures by not understanding the right way to go about obtaining those things and keeping debt in the proper perspective -  basically not having any other than for a personal business or an appreciating asset.  We have to be intentional about it, because if we are not, the message they will be getting everywhere else they turn will lead them in the wrong direction.

OK, I’ll get off of my soapbox now….

Mortgage Tax Credit - This is a Really Good Deal!!

TAKE CREDIT is a brand new program that has just been rolled out by THDA and F&M was the first local bank to get approved to offer it.  Take Credit is a Mortgage Credit Certificate (“MCC”) program administered by THDA. An MCC is not a loan. An MCC permits an eligible homebuyer a federal tax credit up to a maximum of $2,000 per year based on the mortgage interest paid by the homebuyer. Notice that I didn’t say “deduction” – I said CREDIT! 

With this program, a homeowner can get up to a $2,000 reduction in his/her tax liability per year based on interest paid – not just use the interest to offset taxable income at the applicable tax bracket.  If the client is eligible for the program, he gets to reduce his tax liability for the full $2,000 of interest paid.  If more interest than that is paid, the rest may be used in the normal way as a deduction against taxable income.  The tax credit may be used to lower a homebuyer’s income tax liability each year the home remains owner-occupied by the certificate holder (the homebuyer).  And it is available to the homebuyer for the life of the mortgage loan as long as the homebuyer lives in the home and as long as the MCC has not been revoked – so up to a $60,000 potential savings over the life of the loan!

So what is required?

The homebuyer may be eligible for TAKE CREDIT if all of the following conditions are met:

• The homebuyer is purchasing a primary residence in Tennessee
• The homebuyer is a first-time homebuyer, is an honorably discharged U.S. military veteran, has not owned a home in the last three years, or buys a home in a “targeted” area
• The homebuyer occupies the home as a primary residence
• The household income falls within the income limits for the county in which the primary residence is purchased
• The purchase price of the home is within the limits established for the county in which the primary residence is purchased
• The homebuyer completes the required Homebuyer Education course

Click here to see a list of Income Limits and Purchase Price Limits
Click here to see a list of Targeted areas

Ironically, the program may not be used with a THDA mortgage loan. So to be eligible for the program, the homebuyer must be eligible for a THDA loan, but actually be getting another type of loan (conventional, FHA, VA, etc…).  The homebuyer must apply for the program and receive approval for the MCC prior to closing on the home being purchased.  That is important to know as we would need to engage the application for this program as part of the mortgage process once a client has gotten a home under contract.  While this program may not be helpful to the masses, there is certainly a good size group of first-time homebuyers that could benefit greatly from it.  And we love helping our clients be financially successful!  This is definitely a program to keep in mind.

I Kinda Ruined My Life By Going To College

“I Kinda Ruined My Life By Going to College”

That statement is on the cover of Consumer Reports’ August issue.  College expense and the debt totals being amassed in student loans is a HUGE hot button for me, so I immediately devoured the magazine.  I’ve shared before, and Consumer Reports backed it up, that we now have 42 million people in our country carrying $1.3 trillion (yeah, that is 11 zero’s behind the 3) in student loan debt. That alone is heartbreaking enough.  But reading the stories of the many individuals who just had no clue what they were getting into with student loan debt, who are now debilitated by the debt load they are carrying, just ticked me off even more. 

But there was some specific instruction given, not just in how to avoid/minimize debt, but also prepping strategically for college, that I thought was very beneficial.  So as opposed to beating a dead horse – hopefully we all agree that that student loan debt is out of control, I want to share some of the insights I found very helpful.  So here goes:

1. Start talking early and often with your kids when they are in their younger high school stage about what they ultimately want to do with their education as it relates to what they will spend their careers doing.  Too many kids are going to college with no clue of what they want to do with their lives, much less what they want to major in.  Only 39% of students graduate in 4 years (thus incurring additional expenses) and the main reason is taking and paying for classes that aren’t relevant to their degree because they don’t know what they want to do when they go to college in the first place.

2. As part of the discussions, be honest and very clear about how much you, as a parent, are going to be able to help from a financial standpoint.  Make sure they understand the funds that are needed and available from your contribution.  If you are planning on sending your child to college for the “experience”, then you should be prepared to pay for it – and not make them borrow to go.  Otherwise, there needs to be clarity on how you are going to help.

3. Analyze the cost of the education versus the payoff in employment compensation down the road.  Make sure the degree, and cost to get it, line up with the pay the student will earn by getting that degree.

4. Get down to the net price of attending any school your child is interested in.  All universities that participate in the federal financial aid system are required to have a net price calculator on their websites that will allow you to get down to the true cost of your specific child’s education.  Know your numbers – don’t be surprised.

5. Gap year!  Have them take a year off between high school and college.  This is particularly effective for those that don’t know what they want to study.  Let them work a real job for 12 months – that should provide some clarity.  And if the concern from a parent is “I’m afraid that if they don’t go straight to college, they’ll never go”, then there is a very good chance that they wouldn’t have survived to earn a degree anyway.  And that’s even worse, because any money spent on an unearned degree is an even bigger waste.

6. Tennessee Promise.  I’m not going to spend much time on this as I dedicated an entire blog to it a few months ago.  But this is another great option and Tennessee is one of the only places you can get a deal like this.  Basically it’s 2 years of community college (almost for free) that allows the classwork to transfer to a 4 year state school when the two years is up.  That alone could cut college costs in half.

7. Make sure you understand all scholarship/grant type options thoroughly.  Many schools will offer more generous options for freshmen as an enticement to get them to enroll, only to reduce or remove those offerings as time goes by or if certain qualifications aren’t met.

8. If borrowing is the only option, make sure your child has a firm grasp on what he/she is doing.  Help them understand the payment that is waiting for them when they are on their own and the impact to their finances.  To me, this alone is the most significant disconnect that we have.  Get real with them.

Other interesting tidbits from a survey (1,500 respondents) that Consumer Reports did in March:

• 45% of people with student loan debt said that college was not worth the cost

• 47% said that if they had it to do over again, they would accept less financial aid (gone to a cheaper school or figured out another way to pay for it)

• 44% said they had to cut back on day-to-day living expenses when they had to start paying back the student loans

• 37% put off saving for retirement

• 28% delayed buying a house

Money Management Must Be Intentional

About a month ago, I did a “10 day cleanse” where I filled my body with nothing but nutrients and allowed it to remove all the toxins from consuming food and drink that are not ideal. There was nothing necessarily magical about that process. I did feel better physically. But more than anything else, I proved to myself that I could have the discipline to accomplish something like that. What left the most lasting impression is this: for me to be more physically fit, I had to be much more intentional about what I consumed.  It required not just a mindset of eating better, it required me to actually plan out each day – what I would eat and when. In this case it was simply planning and monitoring my diet so that I could be healthier physically. It has helped me immensely as I’ve now changed many “bad habits” about my daily routine from a dietary standpoint. 

A day or two after I’d completed my cleanse, I came across the list below of 10 habits that financially stable people have. It reminded me that being successful with finances is really no different than being successful with a diet. You simply have to be intentional with your efforts. You’ll notice that at least 7 of the 10 items on the list all involve intent and planning (and I guess you can argue that all 10 do to some degree). Dave Ramsey teaches that having a budget is simply your way of telling your money where to go and not vice versa. It amazes me the number of people I come across who simply let their lives dictate where their money goes. It doesn’t have to be that way. It might not be a bad idea to do a “10 day financial cleanse” where you monitor every penny that you spend and see if there are some tweaks that you can make to your budget. Long term financial success is won by making great daily decisions on all of the little things. They add up. Be intentional with your money.

10 habits of financially stable people

• Save. Spend less than you earn and put the extra away.
• Budget. Make a budget to have a framework for what you spend.
• Track your spending. Every month, look at what you spend and adjust your budget if necessary.
• Don’t spend impulsively. Only indulge in what’s important.
• Don’t procrastinate. Pay your bills on time so debt doesn’t grow.
• Invest. Put some money into long-term investments for college education and retirement.
• Ditch costly bad habits. These just cheat you out of things you could enjoy in the future. What makes you happy shouldn’t wreck your finances.
• Monitor debts. Know what you owe and pay off high interest debt, such as credit card balances.
• Plan. The way to afford the house, car or vacation of your dreams is to plan for them, setting down dates and goals for the money you’ll need.
• Stay healthy. Illness can be costly, but much of your well-being is in your control—protect your health with a healthy lifestyle.

The Government Finally Figured Out a Way to Make Money

When our Federal Government bailed out Fannie Mae and Freddie Mac back in 2008, the bailout was an estimated $187 billion.  Granted, it was a move that saved the two entities and provided some stability to a housing market that was sinking fast.  Personally, I’m grateful that the two were seen as “too big to fail” because it kept the mortgage lending industry in business and ultimately prevented the recession from becoming a depression.  But what has happened since is anything but fair. 
 
Over the past 8 years, Fannie and Freddie have paid back the government in the form of their profits being seized.  The amount exceeds the bailout by over $50 billion!  That’s right, Fannie and Freddie have paid the government over $237 billion since the bailout. 
The funny thing is that they are no closer to paying back the debt than they were when they got bailed out.  For us math nerds, that is about a 16% annual return on the “loan” that our government made to Fannie/Freddie.  What would your investment portfolio look like if you had similar returns over the past 8 years? 
 
In 2012, Congress changed the rules on the bailout and in effect, made it impossible for Fannie and Freddie to ever pay back the money owed.  Uncle Sam decided that the only way to “protect the American consumer” was to provide Fannie and Freddie with their own liquidity instead of allowing the two institutions to once again build up their own capitol and operate on their own as free standing companies.  They’ve just been keeping the profits that Fannie and Freddie could have been using to re-capitalize.  The one thing we can’t accuse the government of here is not knowing a good thing when they have it. 
 
It is estimated that Fannie and Freddie would have been the most profitable companies (if they were still operating as individual companies) in the world over this time period.
Please don’t take this as a bash against our government.  There is nowhere else I would rather live than here in America and I love my country.  Yesterday was one of my favorite holidays where we honor the men and women who have bled and died for us to live in this great country.  But I’m here to tell you, at least from a financial perspective, that Fannie and Freddie are now permanent fixtures as GSE’s (Government Sponsored Entities) – they will never be privately owned again.  And unfortunately, in my opinion, this is another step our government has taken in the wrong direction.  And one, like many others, that is forcing the American people to be overly dependent on their government.  I’m pretty sure it’s not what John Hancock, John Adams, Ben Franklin, and Thomas Jefferson had in mind when they signed the Declaration.

Bubble or Not? Warren Says "No"

I keep getting the same question – “Is Nashville experiencing a real estate bubble?” While it certainly feels like it, and anyone who has been in a contract battle with 10 other prospective offers on the same property – that winds up selling thousands of dollars over asking price might agree, I’m not sure we should consider it a “bubble”.  The reality is that real estate nationwide continues to improve from the low point reached in 2012 and Nashville just happens to be a market that is more desirable than most. 

If you look at the first chart below, you will see that nationwide, average prices are still below the high’s reached in 2007 – which would indicate that we still have room, at least from a national perspective, for prices to move up just to reach the pre-recession levels.  And the second chart, which represents the median home prices in the Nashville market for the past 16 years, shows a steady increase that is still under a 5% annual appreciation rate over that time period.  So while we are certainly outpacing the rest of the country on average, I’m not sure that warning signs of a bubble about to burst should be going off.

The weekend before last, Warren Buffett spoke at his company's annual meeting and the "Oracle of Omaha" asserted that the housing market is on stable footing. He said the likelihood of another crisis brought on by falling home prices is "very low." "I don't see a nationwide bubble in real estate right now at all. In Omaha and other parts of the country, people are not paying bubble prices for real estate." A leading real estate information firm agrees. They reported home prices were up 6.7% year-over-year in March and the firm forecasts that prices will come in 5.3% ahead, year-over-year, in March 2017.

I do think that sooner than later we will see some leveling and some of the “irrational exuberance” (to use a quote from Mr. Greenspan) will diminish.  And I do hope that homebuyers remember that homes are a commodity, subject to ebbs and flows in pricing.  We do ourselves a disservice when we start to think, like we did in 2004-2007, that real estate is isolated from drops in value.  It can and will happen at some point in the future.  But I believe, as Warren does, that we are not about to walk off of a cliff any time soon.

Median Home Prices for Nashville, TN (from Trulia)

The Solution

Last week we talked about my friend, whose daughter is graduating from high school next month and wants to go to the college of her choice.  My friend and her husband haven’t saved the money needed to send her there and she isn’t getting any scholarships or financial aid.  The cost for the school is around $35,000 per year.  My friend doesn’t know what to do other than let her daughter take out student loans to pay for school.  As I’ve mentioned before, I’m all for getting a college education.  But I hate the idea of borrowing that kind of money for it.  So what should they (or any of us) do?  I have two suggestions:

1.   Reality Check
2.  Tennessee Hope (and Tennessee Promise to go with it)

The first suggestion is to do a reality check – and this is the tough one.  Our kids are growing up in an “entitlement” environment, where they think they are owed certain privileges.  I’m not blaming them – the truth is that our generation is probably to blame for this.  But somewhere along the way, and it is best that this conversation is had prior to the kid’s senior year in high school, expectations need to be delivered to them what to expect as it relates to continuing their education.  I suggest:

·       Encourage them from as early of an age as possible that they are expected to continue their education after high school.  Statistics clearly show that those with a college education have a much better likelihood of higher earning potential throughout their working years than those that do not.
·       Teach them that education is a privilege, not a right.  While college can and should be fun, it is really just a means to an end.  As a parent, I want my child to have a great experience in college – but not at the expense of sabotaging their future with unnecessary debt to make that happen.
·       Borrowing for school is not an option – start teaching them at as early of an age as possible that debt is not a solution.
·       Let them know what your plan is to help them financially (this will vary depending on each situation).  This can range from paying for their education, providing them housing (at your home or elsewhere), paying for books, fraternity memberships, etc…
·       Let them know what their responsibilities are going to be – paying for the things you are not going to pay for.  They are now adults and for the rest of their lives they are going to be faced with the reality that they are responsible for their own well-being (and a critical part of that is how they handle their finances).

Part 2 of my suggestion comes into play when we as parents don’t have the financial capacity to help with the higher education costs.  If part 1 has been done successfully, then part 2 is much easier.  The state of Tennessee offers a program called the Tennessee Hope Scholarship.  I’ve included a link below if you are interested in learning more.  But basically, it pretty much pays for 2 years of tuition at a state endorsed community college.  As long as the classes line up with the intended degree, those classes will transfer to a 4 year state university.  Also, the Tennessee Promise can be added to the Tennessee Hope.  It is an additional scholarship that will cover the difference between the actual cost and what the Tennessee Hope provides (can come in especially handy when the student is taking more than 12 hours in a given semester the first 2 years).  It also requires the student to perform 8 hours of community service per semester which is a nice lesson.  The informational link to that program is also provided below.  This leaves only 2 years of “college expenses” to conquer.  And assuming grades are where they need to be, students are eligible for an additional $4,500 per year for the remaining two years of schooling at the 4 year university via the Hope scholarship fund.

So back to my friend.  Is the best option really to have their daughter borrow $140,000 to go to the “school of choice”?  By having her live at home for two extra years, while attending a local community college, then finish out at a state school (and let’s assume the cost for that is $20,000 per year), they have reduced their cost from $140,000 to $31,000.  Even if they decide to borrow to help pay for it (and I’m not excusing their daughter from getting a job to help), the $31,000 they’ll have to pay back puts their daughter in a position of starting life without a titanic “debt anchor” around her neck.  Sure, she’ll miss out on going to the school she really wanted to attend.  But life is often times about making tough choices and sacrificing things today to provide a better future.  Tough lesson to learn at 18, but a lesson that will serve her well in her future.
https://www.tn.gov/collegepays/article/tennessee-hope-scholarship
 http://www.tnpromise.gov/about.shtml

The Dilemma

I’ve stated before how I despise student loan debt and how I believe that it could be what ignites the next financial crisis. That’s not completely the point today, but sort of. 

We do need to remember that according to NAR, the millennial generation is our number one home buying segment (close to 35%). And we need to remember that the main factor slowing down our number one home buying segment is student loan debt (~55% of those millennials who said they delayed their purchase because of debts cited student loan debt as the number one obstacle). So I still feel very strongly about the importance of helping young adults avoid student loan debt or at least minimize it. But at the same time, I understand that to have access to an upwardly mobile career, most need an education beyond high school as well.
 

I had a heartbreaking conversation with a friend of mine this week, whose excitement the week before from learning that her daughter had been accepted to the college of her choice, was now deflated with the knowledge that there would be no financial assistance provided for the cost at that school. She and her husband have no college savings and no option other than borrowing the money if their daughter is going to the school of choice. I encouraged her to do everything she could to keep from having her daughter go down the road most popularly traveled and take on debt to pay for the education. I told her that if she felt she and her husband had an obligation to pay for her daughter’s education, then the decision would be up to them as it related to borrowing the money.  I still don’t like that idea, but told her that in my opinion, it would be better for them to borrow the money than putting that debt burden on her daughter – particularly if they felt an obligation to pay for her education.
 

Unfortunately, this scenario plays out a lot more regularly than it should.  But does it have to come down to a choice of either skipping/delaying college or moving forward by adding debt?  Shouldn’t there be a better way?  I have some thoughts on that and will share next time.  Have a great week!!

The New Fannie Mae Home Ready Program is Awesome!

Fannie Mae has a new program out and it is a homerun!  Granted, it may not fit everyone, as there are potential income limits depending on where the property is located. But for those folks that fit within the income limit and are looking to put minimal down (program goes up to 97% loan to value), it could be perfect for them.
Here are the highlights:

• Pricing – when the credit score is 680+, there are no pricing bumps (so someone borrowing 97% with a 680 credit score could in effect get the same rate as someone with a 760 score putting 20% or more down).  Today the rate would be 3.625% for a 30 year fixed with no points, as an example.
• Mortgage insurance – the coverage for this product is 30 basis points lower than a typical 97% loan to value (for those with a 680+ credit score, the MI is cheaper than FHA on a monthly basis and has no up-front MI like FHA does).  The monthly mortgage insurance is cancelable when the proper loan to value has been reached after paying it for two years (so just like any other conventional loan) – unlike the MI for an FHA loan that is permanent.
• Down Payment – Only 3% is required and it can be a gift.  There is no minimum investment from the borrower required.
• Seller contributions are allowed for closing costs and prepaids.
• Income limits – depending on the location of the property, there will likely be income limits.  It is completely driven by the census tract of the property being purchased, so each property has to be looked up individually.  For properties falling within a designated census tract, there is no income limit (you’d be surprised – there are more in Nashville than you think, particularly in areas like the Nations that are up and coming). If the property is not in a designated census tract, the income limit is 80% AMI (average median income) which for most of our area will be $53,520 annually.
• Property must be a single family residence for the buyer to be eligible for 97% financing.
• The buyer does NOT have to be a first time homebuyer.  But they can’t own any other property at the time of closing.
• Condominiums follow standard Fannie guidelines for approval (so doesn’t have to be on FHA list for qualification).

Here is a good comparison for someone with a 720 credit score buying a home priced at $200,000 comparing FHA to Home Ready:

Down payment:  FHA - $7,000Home Ready - $6,000
Payment (P&I and MI):  FHA - $993.75Home Ready - $997.91
The loan amount is less on Home Ready versus FHA ($194,000 versus $196,377 due to FHA’s up-front MI premium) thus less to pay off when time to sell.  And if the buyer keeps the property long term, he/she has the opportunity to get out of the monthly MI and lower the payment (in this case by $113 per month).
Granted, FHA is still a great program and is a super option for our buyers – particularly with credit scores between 620 and 680 or when income exceeds the Home Ready limit.  But for those that fit the income limit (or house in designated census tract), have good credit and want an option with minimal down, Home Ready is definitely worth a look.

Why Do You Not Have a Home Equity Line of Credit??

Obviously this question doesn’t apply if you either don’t own a home or don’t have very much equity in the one that you do own.  However, if you have a home with decent equity (more than 10%), then the question certainly applies.  In my opinion, everyone should have a home equity line of credit (HELOC) in place if they are able.  Also, understand that I’m suggesting that you have a credit line in place, not necessarily that you use it – and I’m certainly not suggesting that you borrow on it without a plan in place to pay if off quickly.  A HELOC is kind of like a gun.  It can be a very dangerous thing if not used properly.  But when used in the proper manner, it can be a great weapon in your overall financial arsenal.

It provides two very important components:  the first is liquidity if needed and the second is a great source of temporary funds if needed for an immediate purchase.  I see scenarios all the time where people have a ton of equity in their homes but don’t have much liquid cash in the bank.  A HELOC is a phenomenal emergency fund in that situation.  Because you only pay interest on funds you have actually borrowed, you can have a HELOC in place with no cost to you.  For someone who has equity in their home, but little cash on hand, having a HELOC in place is a great safety net as it provides funds that can be drawn immediately in times of emergency.  I’m not telling you that you don’t need an emergency fund – the lack of an emergency fund is probably the biggest thing that gets folks into debt (well, maybe other than the lack of discipline to save for purchases versus buying on credit – but that’s another discussion).  Having a HELOC in place is just a safe back-up while you build up your cash savings.  If an emergency occurred and you couldn’t cover it with cash, the HELOC is there if needed.

A second great use of a HELOC is for when you have a financial opportunity to make a purchase (house flip for example) that will make you money.  I would never suggest this as an avenue to finance anything that depreciates or an investment that did not allow the HELOC to be paid back quickly.  But it is great to have available if an opportunity like that comes along.  And having one in place might give you the encouragement needed to be looking for these types of opportunities.  Remember that a HELOC is normally tied to prime, so the rate can fluctuate.  That is why it is not a good long term borrowing strategy.  But the interest payments are typically tax deductible and the payments are interest only.  So when used properly, it can be a good source of funds to buy investments where you can make your money and get out (pay the balance of the HELOC off) quickly.

If you have the equity needed to get a HELOC, it’s my opinion that you should – unless you know that you just can’t trust yourself to use it wisely.

First Time Homebuyers - Are We Asking the BEST Questions?

 was asked this week by a national publication to help answer the question “What are the best loan programs for a first time homebuyer?”  I gave them my opinion, but came to the conclusion that this really isn’t the best question that needs to be asked. Most first time homebuyers get so wrapped up in trying to maximize their purchase that they lose sight of how that affects their day to day and financial future. The 2 best questions to ask are these- How is this purchase going to affect my budget? And what is my exit strategy?

Most people in general don’t seem to have a budget. Money simply comes and goes with the hope that there is more coming in than going out. First time homebuyers therefore, are more interested in where the home is located, how big it is, what the amenities are and its curb appeal. These are all very important things, but how the payment will fit their budget is the thing that is going to be most life impacting.

I’ve written on this topic before, but as a brief recap, I personally believe it is critical to establish a monthly budget where ALL monthly expenses total an amount that is no more than 80% of the monthly net figure. This allows for a comfortable cushion that permits any individual to give or save up to 20% of their bring home pay every single month. What kind of value could we as real estate and finance professionals add to our clients if we had this in mind throughout our work? Can we accept the challenge of finding the house that meets their wants within the proper boundaries of what’s best for their budget? That is real care and concern for the success of the people we serve.

The next step is to have an exit strategy for any purchase. Both the home specifics as well as the financing are critical to this part of the equation. It is just as important to consider the home’s desirability by the general population as it is determining how well it fits the immediate needs of the current buyer. For a first time homebuyer, the likelihood of them staying in the home until retirement is unfathomable. Most don’t stay in the home more than 5-7 years. So considering the ability to sell in the future needs to be of utmost consideration in the purchase now.

I’m encouraged to be working with individuals as great as you all reading this blog. Together we have the opportunity to help our clients succeed financially. And as you know, the right home purchase, especially for a first time buyer, is a huge part of that equation.