The Jay Garvens Show: Recent Episodes
The Jay Garvens Show
Have you ever wanted to be able to see the future? Of course, who wouldn’t want that. What if I told you I could predict the future, and even teach you how to do it as well. There’s a secret to being able to track the cycles of the economy, that will essentially predict the future. We’ve talked before about the economic changes that happen with the generational changes, and that’s exactly what you should follow to be able to get ahead. Back with the Baby Boomers (born 1946-1965), they are responsible for the largest economic boom on record. Everything they touched prospered. With 78 million people in the Baby Boomer generation, they outnumbered their parents in the Silent Generation (born 1925-1945) by 18 million, causing the huge economic boom of between 1986 and 2006. People are in their prime for consumption between 40 and 60 years old, as they are trying to support families and prepare for retirement, and you can clearly see that the economic boom occurred as the Baby Boomer Generation was turning 40. The Baby Boomers started consuming at a rate like no one had ever seen, simply because there were so many of them. As we reached 2006 and 2007, and the Baby Boomers stopped consuming at such a fast rate, the economy suffered, because with only 45 million members, Generation X (born 1965-1983) could not keep up. But even as the economy slowed, Gen X was still trying to consume and they were trying to provide for their kids, the Millennials (born 1983-2004). The Millennials are the largest generation to date, with 87 million members. This is almost double Gen X, and is going to create a huge boom, as they start reaching their 40s. This is the prediction I am making, our economy will continue to be slow until 2021, when the Millennials start into their prime consumption. The mortgage industry is going to stay strong, as the rates stay at all time lows. You need to invest in real estate now, because 2021 is not going to be a good time for that, the properties will be too expensive. And my final prediction is that the Stock Market is not a good investment right now, because we are due for a correction that will cause people to lose money. Those are my predictions, let’s see how many of them come to pass…
What is a generation juggernaut? The definition of a juggernaut is an substantial and overwhelming force. So how does that apply to a generation? A generation that can overwhelm the economy is considered a juggernaut. Take the Baby Boomers (born 1946-1965), they are responsible for the largest economic boom on record, a huge generational juggernaut. With that in mind, I’ve been getting a lot of questions that can be answered by understanding generation juggernauts. Questions like, why is the rental market so hot right now, why are houses under $200,000 selling in less than 15 day, but houses over $800,000 are staying on the market up to 18 months, why are the car manufacturers and airlines making a comeback when they were failing 5-15 years ago. All of this can be be explained with generational economics. In the last 100 years or so, we had the Great Generation (born 1900-1925), the Silent Generation (born 1925-1945), the Baby Boomers, Generation X (born 1965-1983), and the Millennials (born 1983-2001), and with each generation we have seen a lot of change. We are going to focus on the Baby Boomers, Generation X (Gen X), and Millennials, as they are what make up most of the current economy, and what has shaped our economic climate. With 78 million people in the Baby Boomer generation, they outnumbered their parents in the Silent Generation by 18 million, causing the huge economic boom of between 1986 and 2006. People are in their prime for consumption between 40 and 60 years old, as they are trying to support families and prepare for retirement, and you can clearly see that the economic boom occurred as the Baby Boomer Generation was turning 40. The Baby Boomers started consuming at a rate like no one had ever seen, simply because there were so many of them. As we reached 2006 and 2007, and the Baby Boomers stopped consuming at such a fast rate, the economy suffered, because with only 45 million members, Gen X could not keep up. But even as the economy slowed, Gen X was still trying to consume and they were trying to provide for their kids, the Millennials. The Millennials are the largest generation to date, with 87 million members. This is almost double Gen X, and is going to create a huge boom, as they start reaching their 40s. So how can you prepare for the upcoming explosion that is going to happen to our economy? Well the good news is you have some time, the Millennials are going to be hitting their 40s in about 5 years, and the decades from 2020-2040 are going to be some of the most prosperous this country has ever seen. However, in the next five years you need to make sure you have eliminated your debt, increased your reserves, and that you have a plan. Once our economy starts growing, it is going to grow so fast, you won’t be able to keep ahold of it. The Millennials are going to create the best economy we have ever seen, and you have to be prepared for the generation juggernaut.
Do you ever feel like the economy is dragging you around? Do you get nervous every time the stocks dip? You can break from from this cycle, and free yourself from the “crab in a bucket” ways of the national economy. Crabs in a bucket refers to the way crabs will pull each other down when put in a bucket, so you never have to put a lid on it. Very similar to the way the stock market will pull your investments down as it loses value. On a national level our economy is affected by other countries, on the state level we are affected by other states, and on the local level we are affected by other cities, all the other crabs are trying to keep you in the bucket. So how do you get out, especially with other countries like China and Greece struggling economically?
You learn to adapt, here locally we are not experiencing the same struggles as larger cities, because our housing market was able to bounce back quicker, and our job market is growing again. That’s good news, that means we are already one step ahead to break the cycle. The next step is to make sure you are not overexposed in the stocks and treasuries market. As many finance professionals will tell you, we are due for a stock market correction, even though we just had one in 2008 and before that in 1999. The housing market on the other hand, did have a correction in 2007, but before that the last major correction was in the 1930s. This means the housing market is on an approximately 75 year cycle, as opposed to the stock market that corrects every 9 to 10 years. That makes the housing market a safer investment, especially here in Colorado Springs, where our housing market has grown 6% in the last year. When you buy an investment property or keep your existing home while upgrading or downsizing you are separating yourself from the rest of the “crabs in the bucket” and eventually you will be so far separated that they can no longer pull you down in the next economic downturn.
Another way you can separate yourself is to evaluate what everyone else is doing and do the opposite. Investing in real estate is far less common that stocks, but real estate is going to be a very strong purchase for the next five years. We have the largest consuming generation in history, born between 1982 and 2004. As these Millennials start to hit 30s and 40s our economy will expand regardless of any other countries, who the president is, oil prices or anything else. 87 million Millennials turning 30 to 40 years old with families to raise, houses to buy, student loans to pay, and cars to buy, shows that our economy is growing, and will continue to grow at an unprecedented rate. If you are invest in the markets that are influenced by other slow recovering markets, you will be stuck in a slow recovery time, and may be subject to losses when the market corrects. Colorado Springs real estate is dramatically removed from other major cities markets. Here our housing market is thriving and growing, as our job market is growing and our home values grow. If you make a decision this year that you’re going to buy a home, not sell your existing home when you purchase a new one, or if you decide to purchase an investment property, you are separating yourself from your peers, and the more you separate yourself the more stable your investment future becomes. Let’s make 2016 a year of prosperity and growth, and ditch the crabs in a bucket.
It’s a leap year, but what does that have to do with finance? Well it is a great reminder to leap forward with your plans and goals for the year. Do you plan on buying a house or maybe refinancing the one you’re currently in? Do you need to pay off some debt and start planning for retirement? This is a great time to do both. When was the last time you sat down and reviewed your mortgage? Are you stuck in a high interest loan? Rates are at an all time low right now, which makes it a great time to think about refinancing and lowering your interest rate. Colorado Springs is also one of the most stable economies right now, and even with the Federal Reserve reporting that we are facing a dark global economy, we are not facing the same slow down that our neighbors in Denver are experiencing. We won’t stay ahead of this slow down for long though, so it is important to take advantage now of the good equity in your home and the low interest rates. If you are trying to leap forward by looking into the future and planning for retirement, then make 2016 the year you do just that. Do you want to be paying your mortgage when you are 80, or would you rather pay it off at 65 and be able to enjoy a retirement. If you refinance your home now while the rates are at such a low, you can save hundreds of dollars a month. For example, if you own a 200,000 home and you can lower your interest rate by one percentage point you can save around $160 a month. Now what if you already have a low rate, but you still have 20-25 years of payments left. You could still refinance, your goal would be to get into a 15 year loan instead of a 30 year. If your goal for 2016 is to get out of debt, something very simple you can do would be to consolidate all of your monthly payments into one. Take an inventory of all your unsecured debt, ie student loans, car loans, credit cards etc., and see if you have enough equity in your home to be able to consolidate it all into your mortgage payment, with a much lower rate than you could ever get on those unsecured amounts. Once you have all of your unsecured debt consolidated into your mortgage, take whatever you were paying towards those things and apply that money directly to the principle on your home. This gives you the ability to pay off ALL of your debt in the time you would just be paying your home, while keeping the interest rate low. The key to leaping forward in 2016 is to know your financial standing and figuring out what your goals are and how you can best take advantage of the great rates and stable economy we have here in Colorado Springs.
Are you wondering what goals to set financially for 2016? Are you trying to figure out what your big financial plans are for this year? Well let me help give you some direction. Real Estate is the secret for 2016, here in Colorado Springs, we have to lowest home inventory since 1994. What does that mean for you? It means if you have been waiting for the perfect time to sell your home, this is it. Homes are only staying on the for an average on 59 days, as opposed to the 90-180 days that is used to be even a year ago. Also the values of our homes are up, the average price here is $260,000. That’s up 9% from last year, coupled with the lack of homes on the market means you can price your home on the higher end to help increase your return on investment. Warren Buffet has been teaching people to buy low and sell high for years, and that’s exactly what I am encouraging you to do this year. If you don’t have a home to sell don’t fret, rates are low and we have new loan options, including the Family Opportunity loan and the Bond program. The Family Opportunity loans allows adult children to refinance and take equity from their parents’ homes, as an alternative to a reverse mortgage. The Bond program allows access to the home buyer assistance bond, for those of you that want to put 20% down on a home but may need some help bridging the gap.
As many of you know, the best way to own a home is debt free, so for some of you this may be the year you get debt free, working on paying off your unsecured debt. This is the year you say no and pay off car loans, student loans, credit cards, installment payments, store cards, if you’ve got them it time to get rid of them. They are not doing you any favors, in fact you are losing money on them. Let’s make 2016 the year you get rid of all of your depreciating debt and only make appreciating investments. A great example of an appreciating investment is owning a home. The return on investment (or ROI) for home ownership right now is up between 30-40% and growing. Take a 3 bed, 2 bath home here in Stetson Hills, costs about $235,000 to purchase. If you are renting that home, chances are the owner paid more and has a high interest rate, putting rent between $1600-1750. That same home, if you were to purchase it now for $235,000, and have the worst case scenario for loan options with little to no money down, your mortgage payment will be around $1335, a savings of about $300 -$400 a month. Now let’s say we have a better financial situation and you can put down somewhere between 5-20%, that’s drops your mortgage payment to somewhere around $1150. That saves you $500-$600 a month on the same house. Why wouldn’t you choose to make the smart investment and stop paying someone else’s mortgage? If you can do it, this year is shaping up to be the best time to make the leap into homeownership and make great financial decisions in 2016.
As many of you have seen and heard, the stock market is dropping. As of this recording it was down 10% in just two weeks. For most of you that sounds terrifying. I’m here to let you know this is a great thing, as long as you know how to use this information. If you rely solely on the stock market for your future that can be a problem as it is currently falling drastically, but that means that the mortgage rates are down as well. This is great news for people who are looking to buy a home, whether it’s your first time buying a home, you are looking to refinance your current home, or expand into some investment properties. Now is the perfect time to buy, here in Colorado Springs especially, property values are at an all time high having grown 10% in the last year. We are a growing market in more ways than one, because the trend in home ownership is going to stick around, but for those millennials that aren’t quite ready to buy we are still experiencing a trend in needing rentals. This means we need people to buy investment properties, but you need to do it quick. By mid-year rates are expected to get back up to 6%, which is a great rate, but why wait when you can get something lower. Rates are going to change as the stock market tries to correct itself, it’s been predicted that by 2019, there will be no lower interest rates, as we sit on the cusp of the next generational boom. This boom is expected as the oldest of the millennial generation starts getting into their 40s and start consuming more. That will be the major correction needed to be able to get back to the economy reminiscent of the 1970’s, 80’s, and 90’s, when the baby boomers were the generation with the majority of the consumption power. The market is not done correcting, and you have to take advantage of the low rates while they are here. You have to be able to diversify into the real estate market now that we have stabilized here in Colorado Springs. There are so many first time homebuyers that are taking advantage, but they shouldn’t be the only ones taking advantage. The way I see it is, the stock market is like a bubble, if it pops we all go down, but the housing market is like bubble wrap, a lot harder to pop and a lot more protective. Which would you rather invest in? Not only has the housing market here locally bounced back, but it is better and stronger than ever, making now the best time to diversify into investment properties, as a means of a more secure retirement. Let me leave you with this, the stocks may be down, but that’s good news for you. The housing market is up and we are looking forward to letting the low rates roll. Let’s make this a great 2016!
2015 has proven to be an incredibly busy and exciting year so far. We’ve had constant surprises from Greece, the Eurozone, and China, among other places; the Fed has continued to keep everyone guessing by suggesting rate hikes but refusing to pull the trigger; and our city and statewide housing markets have consistently defied rationality, particularly in Denver. With so much to discuss this year, I have forgotten to return to the single-most important topic of all: demographics. This week’s show is first in a two-part series exploring the fundamentals of demographics and how they affect economic conditions both in America and globally.
Demographics is the study of populations and the subgroups composing a given population. Typically, my show considers the population of the United States and breaks its population into age-based subgroups commonly known as generations. Occasionally we will consider demographics on an international scale to see what effects one country’s demographic composition may have on other nations individually and the world economy as a whole. When we discuss the United States and its generations, we generally divide the population into:
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The Greatest Generation – Those born between 1900 and 1925, who lived through the Great Depression and fought in World War II;
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The Silent Generation – Those born between 1926 and 1940;
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The Baby Boomers – Those born between 1941-1962 as the children of The Greatest Generation.
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Generation X – Those born between 1963 and 1982;
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Millennials – Those born between 1983-2000;
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Generation Z – Those born after the turn of the millennium.
Of these generations, we spend most of our time discussing the Baby Boomers, Generation X, and the Millennials. We do this because each of these generations is markedly different from the generation preceding it, and these differences have had tremendous effects on our economy. The Baby Boomers are responsible for the extraordinary economic growth that occurred between the 1980’s through 2006, and the economic lull that has ensued since then can be attributed to Generation X, which was substantially smaller than the Baby Boomer generation. As the Baby Boomers retire, they are less economically productive and shift their spending habits in ways that are less conducive to robust economic growth. Generation X, because of its relatively small size, has been unable to pick up the slack to keep the economy growing at the same rate it enjoyed for the previous two decades.
The Millennials, however, are not only more numerous than Generation X but even vastly outnumbers than the Baby Boomers. They are also beginning to entire the peak productive years of their careers, which occurs around age 40. This is when a person is no longer studying or building their career skills and is able to devote all their efforts and energy to maximizing their personal productivity. As more Millennials enter their 40s, they will finally be able to replace the lost levels of productivity that Generation X was unable to cover when they entered their peak productive years.
These few paragraphs only scratch the surface of all there is to know about demographics. Next week we’ll continued with this subject by exploring what demographic changes mean for a nation and its economy. We’ll also use our knowledge of demographic trends to make predictions about what the economy will look like in ten, twenty, or thirty years, and explore ways to reshape our present financial and personal situations to take advantage of the unique opportunities these demographic changes will afford.
You may have heard it said that the only constant thing in life is change. People, events, and circumstances are always changing, and they do so in ways that aren’t always easily predicted. While it’s folly to recklessly embrace change in all its manifestations—New Coke anyone?—it’s equally disadvantageous to reflexively resist change whenever it occurs. People need to adopt a “Culture of Change” in their lives, whereby they can identify changing circumstances in advance and adapt themselves to take advantage of any new opportunities that may arise.
As you may have heard by now, Garvens Mortgage Group is transitioning to become a branch of Churchill Mortgage. The last couple months have been a period of extreme change and upheaval for myself and the employees of Garvens Mortgage Group. While the transition has been trying at times, most everyone has identified ways in which the new change will benefit them both professionally and personally. Some are looking forward to the personal security a larger company can provide for themselves and their families. Others are excited to implement new systems, software, and resources in their work lives that are only possible by teaming with a bigger organization. Although the transition had some bumps along the way, each of these individuals will benefit immensely from embracing the necessity of change and letting the new circumstances work for them.
The company itself is benefiting from the transition, too. It seems almost paradoxical that often the only way to fully be yourself is to change, but that’s what has occurred with Garvens Mortgage Group. Philosophically, we have been kindred spirits with Dave Ramsey and Churchill Mortgage for years by preaching and practicing financial prudence and discipline. Now, with the scale and efficiency that Churchill provides, we can offer our clients unmatched loan products while staying true to our guiding principles. At every level of Churchill Mortgage, the focus is on ensuring each client is acting in their best financial interests. There is no pressure to maximize loan sizes or put clients into risky products that they can’t afford. This is a very different philosophy compared to many lenders out there, but it’s a philosophy we have always followed.
It has been a phenomenal few months for us at Garvens Mortgage Group and Churchill Mortgage. By embracing change, we’re hoping to help our clients embrace change of their own and maximize their potential. Whether that means turning renters into homeowners or turning homeowners into rental property owners, I believe a financially sound mortgage can help anyone take that next big step in realizing their financial goals and attaining financial peace. We’re very proud to have partnered with Churchill Mortgage. While our name may have changed, we feel more like ourselves than ever.
You may have noticed lately that the Denver and Colorado Springs rental markets are approaching a level of hysteria unseen since the worst excesses of Beatlemania. Even as new apartment complexes spring up all over town, and downsizing Baby Boomers convert their old homes into rentals, demand continues to outstrip supply and rent prices just keep increasing. It won’t be long before “For Rent” signs are chased down by the same kinds of shrieking, shaking, crying mobs that used to greet the Beatles at airports. The state of our rental market can be either a curse or a blessing, and on this week’s show we discussed how to make sure you’re on the right side of the rental equation.
It has been true for several years now that renting a piece of property is more expensive than owning it. In 2008, house values plummeted and interest rates collapsed, making both the up-front cost of buying and the long-term cost of borrowing relatively cheap. We thought that once property values regained their losses it would again be slightly more expensive to own a home than to rent one, but that hasn’t happened yet. House values are even starting to exceed their 2007 highs, but the cost of renting has increased even faster while interest rates have remained historically low.
Millennials seem largely uninterested in owning homes right now and are instead seeking places to rent. Few property developers foresaw this, and it is taking time for a new supply of apartment complexes to reach the market. Even after the first new wave of complexes are filled, we may still find demand has not been fully met. An improving economy means Millennials who have been living at home the last several years—and there are millions of them!—are now financially secure enough to move out on their own. It is difficult to gauge how many will be entering the rental market and when they will make the leap, so we may find supply is extremely thin for several years.
Homeowners have seen an opportunity here and have jumped in to fill the void, turning their departing residences into rental properties when they downsize, upsize, or move away altogether. Rather than sell their old home, they keep it, refinance it to a low rate, and rent it out. Many are finding they can net a few hundred dollars right from the beginning. They not only have someone else paying down the mortgage on their property but are making a monthly profit in the process! Anyone with rental space to lease out is positively raving about the current state of the rental market. If, however, you’re still renting your living space, you may be raging! Rent keeps increasing, landlords are refusing to renew leases because of better offers, and it’s becoming increasingly difficult to feel financially stable and secure. If this were me, I’d be raging, too.
This is why it’s imperative to become a homeowner as quickly as possible. You’ll not only be paying your own mortgage and building your own home’s equity, but you’ll have the financial security of knowing exactly what your monthly housing expense will be for the next 15-30 years. Each week I hear from more and more listeners who are tired of renting and are ready to finally purchase a home of their own. If you’ve been entertaining the idea of becoming a homeowner yourself, give me a call to find out whether you’re ready to start shopping or to make a game-plan to get you in the market as soon as possible.
Listening to AC/DC’s “Thunderstruck” is not only a great way to start a weekend but also makes a great introduction for this week’s show. It seems like I have spent the last several months being ‘thunderstruck’ every time I turn on the television, read the news, or talk with friends and associates. Practically every day some new event—whether local or national, professional or personal— causes me to be both shocked and puzzled. You may have been feeling the same way lately. That’s why I wanted to spend today’s show discussing these events. Even if we can’t make sense of these events, we can at least take comfort in knowing we’re not alone here.
One puzzling event came courtesy of Empire Title’s Bill McAfee, in which he explained that Denver is still the hottest real estate market in the country, beating out perennial favorites New York City and San Francisco. As great as Denver is, I can’t figure out what is compelling people to move there at an even more feverish pace than people are moving to New York (one of the world’s greatest financial and cultural capitals) or San Francisco, the nearest city to the white-hot innovation hub of Silicon Valley. One theory is that the people who are moving to Denver are the tech entrepreneurs, bankers, and writers that New York or San Francisco would attract if New York or California had passed their own Prop. 64. Who knows?
Another event that leaves me thunderstruck is Colorado Spring’s austere housing inventory. It was strange bicycling and driving through neighborhoods this spring and summer and seeing almost no “For Sale” signs in people’s yards. Our housing inventory is at a 15-year low, and what few houses come on the market are being snapped up instantly. Granted, this has helped drive an 11% rise in house prices versus a year before. But what is causing this city-wide, nearly instantaneous collapse in housing inventory? People seem so desperate to keep the house they’re living in that I’ve even seen a puzzling number of renters coming through my mortgage company to look into buying the houses they’re presently renting.
Then there’s Janet Yellen, whom I just can’t make heads or tails of. She has been signaling for years that the Fed would be raising rates. The market had been pricing in higher interest rates all spring and summer. She had laid out a series of conditions under which the Fed would finally raise rates, and even though the economy has met virtually every one of those conditions, she let her September meeting pass without raising rates. I am baffled by everything she does and have given up hope of ever predicting when she will raise rates and by how much. I’m sure she will raise rates when it makes the least sense to do so, and I’ll have one more thing to feel thunderstruck by!
Speaking of my mortgage company, that has been another source of constant thunder-strikes! If you haven’t heard, we have officially become a branch of the Dave Ramsey-endorsed Churchill Mortgage out of Tennessee. The last several months have been a whirlwind as I’ve met some incredibly talented and successful individuals in the mortgage industry, all while navigating my company and team through the transition. Seeing how larger companies handle their people and pipelines has been an eye-opening experience, and I have been surprised every step of the way—but in a good way. This is one area where I look forward to discovering what will next cause me to feel thunderstruck.
“You can’t change those around you, but you can change who you choose to be around.” This is wise advice that too few people practice. We often make friends with individuals who are less than virtuous, and if you surround yourself with such people you will soon find that their poor choices and bad habits have rubbed off on you. It’s crucial to seek out and make friends who possess qualities that you wish to emulate. This advice applies not just to personal relationships but to business relationships as well. Choosing to do business with the wrong firms can have detrimental effects on your finances and well-being. On this week’s show, we discussed how to find the right kind of firms and how to cultivate lasting relationships with them.
I often think back on my teenage years and positively cringe when I consider some of the friends I had and how I behaved around them. Humans are highly susceptible to peer pressure; we want to adopt the behaviors and customs of those around us. Unfortunately, this isn’t something you grow out of. Adults are just as liable as kids to associate with the wrong kind of people and to let those people negatively affect them. Maybe it’s a handyman or a mechanic that you like on a personal level, who does cheap work and plays fast and loose with the rules. Eventually they’ll play fast and loose with your house or car. They’ll make some big and expensive errors then disappear entirely when you try to have them reimburse you for their mistakes. You’ll soon wish you had hired the more expensive but more honest and reliable individual from the beginning.
Now consider this dynamic in the context of your mortgage, which for most people is the longest-term and most expensive liability they’ll ever have. How much thought do people put into choosing their mortgage lender? Maybe they saw the firm’s advertisement on TV; maybe they were referred by a realtor they found in the phone book; or maybe they searched online and that company was the first to come up. These methods, while convenient, are not wise ways to find a lender. A flashy TV ad tells you nothing about the company’s ethics or products, while most referrals operate on a quid pro quo platform. Realtors or homebuilders may have ulterior motives when recommending a lender.
Lenders are not all created equally. When we’re talking about six- and even seven-figure transactions, that is a lot of money sloshing around and many lenders are there just to get a quick piece of it. Many with originate a loan and immediately sell it to a different investor, so that you end up in a 30-year relationship with a company you never knew existed. Others enlist the help of servicers so that they still own your mortgage but someone else handles your payments. Since these servicers make their money from the investor rather than from the individual, they often provide very poor service on the very loans they’re servicing!
This is why it’s important to choose a lender as you would choose your friends. Get to know them before investing in a relationship. Take the time to understand their philosophy, their process, and their intentions for your loan. If they only seem interested in quickly originating your loan then selling it off, it may be best to look elsewhere for a company that prioritizing your needs over their own. And, yes, such companies do exist. If everyone made a conscious effort to only associate with companies such as these, everyone’s lives would be drastically improved.
Warren Buffett famously said that the trick to investing is to buy low and sell high. In other words, act when conditions are right to act and take cover when things turn sour. Batten down the hatches and lay low until conditions improve. I cite this bit of wisdom frequently and in many different formulations on the show, but lately I have realized this is incomplete advice. Sometimes the best time to act is precisely when things turn sour. Colloquially, it means making lemonade when life gives you lemons.
Life has been pelting us with lemons for several years now, from a housing collapse and a financial meltdown to the constant and perennial threat of European insolvency. Even the few bright spots on the financial and economics scenes have started to lose their luster. After decades of red-hot growth, China is now teetering perilously close to a debt crisis and recession—something unthinkable even a few years ago. Apple, which has experienced exponential growth for 10 years to become the most valuable company on the planet, has seen its stock take a beating as it flounders with new product launches and weakening demand for tablets and phones. This broad and international sputtering is evident in the Fed’s decision not to raise rates. The Fed has been hinting at higher rates for years but cannot commit to it when the nation’s economy shows so many weak areas. Even in Colorado Springs, the double-digit growth in housing values that we saw in 2013 has plateaued and, in the highest brackets, has actually fallen. It’s a torrent of lemons!
So how do you make lemonade out of wheelbarrows full of lemons? First, you need to disabuse yourself of the idea that lemons are sour and therefore worthless. Gold, for example, has been falling drastically in value for a few years now. Some would say now is a great time to buy gold, or they’ll wait for gold to fall even further, until gold is just face-puckering sour, and then buy it. Eventually gold will rise in value again and those who horded lemons when they were at their most sour stages will reap the rewards.
Consider the government’s Troubled Asset Relief Program, or TARP, that was implemented in the immediate aftermath of 2008’s financial crises. Their aim was to purchase “toxic” assets from distressed financial institutions, then sell those assets when the market improved. Those toxic assets eventually became much sweeter and the government has, in fact, made tens of billions of dollars in profits from those assets. Similarly, housing prices have moderated over the last year or two and interest rates are still historically low. Both seem symptomatic of an economy in which everyone has lost faith. Others recognize that there are still toxins working their way out of the economy, such as Chinese over-investment and European debt, and once those issues are resolved the economy will rebound. These people are purchasing houses while both housing and debt is cheap. Once the economy officially recovers, those individuals will still have cheap debt while the underlying asset’s value takes off.
It has been a fairly rough summer for stocks and finances, but the wisest investors have seen it as a great opportunity to harvest lemons and, when the timing is right, to make lemonade. In fact, Garvens Mortgage Group has been busy this summer preparing a great big pitcher of lemonade that we think our friends, clients, and business partners will really enjoy. But that will have to wait until this year’s End of Summer Celebration. Which, if you haven’t sent your RSVP, is coming up soon! So be sure to contact us and let us know you’ll be there!
Have you ever wondered how iron mining in Australia affects your mortgage here in America? No, this isn’t a Proposition 64-induced line of far-out questioning, but rather a question on how well you understand the impact that government policies have on your finances. The actions of governments around the world have a direct and profound impact on the global economy and on your finances as a result. Especially in America, where our mortgage industry is inextricably linked to our government’s standing in the world, it’s crucial to understand how the government and the promises it makes affect your finances. That’s the theme of this week’s show.
Within the last week, we’ve seen the following: US interest rates briefly and severely tanked after several months of being soft; China devalued its currency and lowered capital reserve requirements in its banking sector; and Australia reported more poor figures for its export sector, which for years has depended heavily on Chinese demand. Decades of Chinese over-investment have created supply gluts in virtually every industry, dampening its demand for Australian raw materials and driving down the prices of commodities worldwide. Meanwhile, China has been purchasing US debt to keep interest rates and the US dollar, and thus the Yuan, low in order to boost its own export sector. The price of US Treasuries directly affects the interest rate on your mortgage. So that’s how the policies of foreign governments affect your mortgage.
Domestic policy, though, has an even more immediate effect. The US government, through the GSEs Fannie Mae and Freddie Mac, purchase mortgage debt and securitize it, creating a direct link between US bond yields and interest rates. Interest rates, meanwhile, determine how much of a house a person at a given income level can afford. Beyond interest rates, the relative tightness of industry laws and regulations determines who will qualify for a mortgage and at what cost. As we have seen over the last couple years, overly strict lending regulations have kept many individuals out of the market.
Local laws and regulations can also have a drastic and lasting impact on housing, as we heard from Bill McAfee of Empire Title this week. He had us consider the Colorado Springs market, where we have had yet another month of extremely low inventory and very brisk sales. We are, in fact, at a 15-year low in terms of housing inventory. This is because Colorado Springs—unlike places such as Las Vegas and California—did not allow inventory to build to absurd levels. New housing is still coming online, but as it is we’re largely stuck with the inventory we’ve had for years. Las Vegas, meanwhile, has a lot of excess inventory to go through, and therefore their inventory levels are presently very robust.
These are just some of the ways that government policies and promises affect your mortgage. Given the general outcry we see any time someone proposes axing Fannie Mae or abolishing the home mortgage interest deduction, it’s likely government policy will be affecting us for decades to come. As a consumers and homeowners, the best we can do is understand these policies, appreciate how and when they’ll affect us, and strategize to make them work in to our advantage.
Every few months, I like to dedicate a show to exploring and discussing topics other than mortgages, real estate, and finances. Although I find these topics endlessly fascinating (and I hope you do, too!), I think it’s important to take a break from them and focus on truly important themes like family. The show’s theme this week was ‘The End of Summer,’ and I spent it recapping the adventures I had over the summer with my family, both immediate and extended. We were blessed to have made a lot of great memories throughout the summer, and it’s an equal blessing being able to share them with you.
The biggest event of the summer was our family reunion in Wisconsin, where I got to see and spend time with my brothers and their families. We are all spread out around the country now but can rely on each other to make it to Wisconsin whenever a reunion is planned. We made a lot of great memories this year and had a great time reminiscing about past memories with spouses and kids and pets—although pets are no longer allowed at the cabin owing to an unfortunate incident a few years back with my brother’s and sister-in-law’s dogs who made the ill-fated decision to spend time under the house snacking on rat poison.
The best time of the summer actually began as an accident, when my executive assistant accidentally booked a flight to Minnesota a week early and I was unable to change the date or get a refund. Deciding to ‘make lemonade out of lemons,’ I turned this trip into a father-daughter adventure and got to spend several incredible days with my nine-year-old daughter, Ella. It was great spending time at the Mall of America, letting her indulge in being a kid, going on rides, and eating all the junk food she wanted. But the very best moment of the entire summer came when I asked what her favorite memory of the trip was, and she said it was going down a slide together with me. It’s hearing words like that, and being able to share memories like this with your kids, that makes you realize all the mortgage and real estate deals in the world can’t substitute for the time you spend with your loved ones.
But, of course, the summer isn’t entirely over yet, and there are still more memories to make. That’s why Garvens Mortgage Group is having our 3rd Annual Summer Celebration as a way to get together with our best clients and friends from this year and years past. It’s a great excuse to get together for food, music, and drinks and have a great time. Invitations have been going out, but in case we missed you or didn’t know how to get in touch with you, you can always RSVP by visiting RadioMortgage.com and getting in touch with us. We hope to see you there!
If you’ve read the business section of the newspaper lately, you may have read stories on Colorado’s housing market and how it’s absolutely booming, particularly along the Front Range. Denver, in fact, is the hottest real estate market in the country right now, beating out places like New York City and San Francisco. All across the country, people have ‘been on the fence’ about buying homes, yet the Front Range is now seeing a lot of these “fence sitters” finally take the jump. On this week’s show, we discussed why people are deciding to buy and what this means for the local and national markets.
Places like Denver and Colorado Springs have already recovered from the steep housing declines our markets took in the aftermath of the 2008 housing collapse. Meanwhile, some places, like Las Vegas and Illinois, are still far behind their 2008 highs. This is because there are both micro and macro reasons that people are on the fence about buying homes. The macro reason is simple demographics; as I’ve explained before, the Baby Boomers are retiring and selling their homes, and there won’t be a generation large enough to soak up this excess supply until the Millennials come of age, which is only starting to happen now. The micro reason is that economies on the city- and state-level vary wildly; some economies are still lagging behind while others, like Denver, are positively booming and attracting young talent that is driving their housing market.
As an example, a professional acquaintance of mine told me he was selling his +$1 million home, and I expressed skepticism that he’ll be able to sell this property very easily. As Bill McAfee of Empire Title has been mentioning for over a year on this show, demand for high-end properties ($600,000 and over) has been tepid and is the one housing segment where values have either plateaued or actually declined. There simply isn’t a sizeable population of Generation Xers looking to buy all the housing Baby Boomers are selling as they downsize. Perhaps in Denver, where rising wages allow younger people to buy more expensive homes, this isn’t an issue; but in the Springs and elsewhere these demographic forces are depressing property values on the high end.
Fortunately, Colorado Springs’ large presence of military and non-profit organizations has brought large numbers of young buyers here to drive demand in the lower- and middle-tiers. Our local economy is robust enough to generate demand and nurture a robust and thriving housing market. Although demographics are extremely important on the national level, they aren’t able to predict what will happen at the local level. Nationally we’re still waiting on the Millennials to come of age in meaningful numbers, but all along the Front Range we are drawing the rest of the country’s supply of Millennials into our economy and getting a head-start on everyone else.
If you’ve been on the fence about buying your first home or upgrading to a new one, now is the time to start thinking about making the jump. Our economy and housing market have improved drastically over the last few years while interest rates are still historically low. Many individuals will find that the conditions that kept them on the fence for the past few years no longer apply, and it may finally be the time to jump.
We’ve had an incredible streak of excellent shows throughout July on the Jay Garvens Show, and we’re continuing that streak today by having Chandra Hall of Colorado Mesa Realty on to talk about the different types of properties available for purchase. Potential homebuyers will find that the options available in their local real estate market will range in styles and condition, and it’s imperative that they be educated about the positives and negatives inherent with properties of varying types and quality.
‘Condition’ is the first thing to consider when purchasing a house, as the condition of properties can vary wildly in the same neighborhood, or even on the same block! You can buy a property in virtually any condition depending on what your goals are for that property. Many are comfortable buying a dilapidated house to fix up; for them, an FHA 203K ‘rehab loan’ is an ideal method of financing. Others would prefer for their house to be as move-in ready as possible with as few upgrades or changes as possible. Still others want a brand-new home built to their exact specifications, and for them a new-build home in a new neighborhood is the way to go. The builder can modify the overall design and use the buyer’s preferred paint colors, floors, countertops, etc.
However, there are trade-off when choosing between various conditions. New homes will give fewer headaches and require less patience and elbow grease, but will take between 3-5 years for equity to start building. Rehabs and existing homes offer a better value and will start appreciating immediately, especially after repairs and upgrades have been made. Buyers should consider whether the ‘new home premium’ is worth the benefit of living in a brand-new home or whether the savings of a fixer-upper better fits with their goals. There is no right or wrong answer; it’s all personal.
After condition, buyers should consider what style of home best fits them. The most traditional is the typical single family, stick-build residence with four independent walls and a yard. This is best for families who enjoy solitude, working on their yard, and so on. In many cases there will be no active homeowners association, so the owner can paint his house any absurd or obscene color they want.
Some people, however, do not want to maintain a yard or worry about the exterior of their residence. For them, townhomes and condominiums may better suit them. These are attached units—meaning they share at least one wall with a neighbor—that typically have an active homeowners association that takes care of all exterior maintenance and enforces the HOA covenants. The difference between townhomes and condos is simply that a condo owner only owns the interior of the unit while a townhome owner owns the exterior of their structure and the land beneath it. While most condos will look similar to apartment complexes, it’s possible to find condos that look like townhomes or multi-level patio homes.
Other buyers may want the opposite of the clustered lifestyle of a condo, and for them a manufactured home on land will be the best fit. These can range from mobile homes to manufactured homes, but financing for these properties can start to get tricky. Very few lenders will lend on mobile homes—that is, a home that can be hitched up and moved—while other lenders may have pricing hits and additional requirements for manufactured homes versus stick-build single family residences.
Before you even start buying, it’s crucial to know what’s actually available in your market, what the benefits and tradeoffs for those properties are, and how each property fits with your personal goals and desires. As with individuals, each home is unique and varies by style and condition. Knowing your priorities in advance will help you choose the perfect home.
Would you believe Denver is currently the hottest real estate market in the country, beating out even San Francisco and Dallas-Forth Worth? Well, it is! The median house price in Denver continues to climb, presently standing at $417,000, while the average days-on-market continues to shrink. This is having a tremendous effect not only on Denver’s economy but on Colorado Springs’ as well. Colorado’s current real estate market and the factors contributing to it have the potential to transform the entire state. It’s therefore crucial to understand this phenomenon. To help explain it, we welcomed Bill McAfee of Empire Title into the studio once again.
Bill began by explaining why house prices in Denver are high and will continue to climb: There is a massive shortage of housing; interest rates are historically still very low; Denver’s unemployment rate is hovering around 2%; and Millennials are leaving their parents’ homes in en masse. The local economy is doing extremely well, which enables workers to afford new or upgraded homes while also drawing in new workers from out of state to drive up demand for what little supply there is. As an example, one listing for an average 1,200 sq. ft. house generated over 50 offers and ultimately sold for $240,000—over $200 per square foot!
While Denver, as a housing market, it in a league of its own, Colorado Springs is faring fairly well on its own. The average house price is $260,000—a healthy increase over the last few years—and our unemployment rate stands around 5%. Bill sees many reasons to be optimistic about the near-term performance of the Colorado Springs area, not least because the projected downsizing of the Springs’ military presence turned out to be a lot less drastic than originally anticipated.
Bill also points out that Colorado Springs is directly benefiting from Denver’s wild housing market. Buyers who either can’t afford housing in Denver or who are looking for bargains are passing over Castle Rock and giving northern Colorado Springs a chance. If one breaks down the Colorado Springs real estate market by neighborhood, they’ll see the most rapid increases are occurring in the north. Because comparable homes in the Springs can go for $100,000’s less than in Denver, many Denver residents are moving south to take advantage of the pricing disparity. Naturally all of Colorado Springs will benefit from the infusion of new residents, particularly since those new residents will be making Denver-area salaries while living—and spending—in Colorado Springs. Especially compared to areas of the Rust Belt and the Northeast, Colorado Springs is doing extremely well economically, and this is evident in our real estate market.
The entire I-25 corridor is being reshaped by Denver’s astonishing housing market, yet few Colorado residents have any experience living in such close proximity to a nation-leading real estate boom. The area shows no signs of slowing down anytime soon, and any changes to our state as a result of this boom will be quick to arrive and will endure for decades. It’s important to understand what is occurring right in our own backyard and what the effects will be, both in the coming years and decades down the road.
There seems to be a general impression about homeownership and the home-buying process that it’s all just terribly generic—that it applies and appeals to a very specific segment of society. Many non-homeowners seem to think homeownership is only for married couples that are ready to start a family, and that once they’re ready to buy they just need to get “a loan.” In reality, homeownership appeals to a diverse range of individuals, and there are unique loan products to suit each of them. On this week’s show, I sought to dispel certain myths about who is and who should be buying homes.
While it’s true that married couples make up a majority of homebuyers, they do not command a very large majority over their single counterparts. Sixty-five percent of homebuyers are married, which means that one in three homebuyers are single. The idea that homeownership only makes sense for married couples getting ready to start their family is false. In fact, there are a multitude of great financial reasons to own a home, and we discuss these reasons weekly on the show. Even young, single individuals who anticipate moving out of their area in the near future will benefit from homeownership—and the younger they can start the better!
There also seems to be a misconception that, among single people, men are more likely to buy a home than women. Perhaps people think that the amenities a home offers, like garage and workshop space, are more likely to be utilized by men. In fact, more single women have been purchasing homes than single men. On average, over 16% of homebuyers are single women, compared to just 8% being single men.
Because homeownership can—and should!—appeal to so many different people, it’s important to understand what kinds of loan products are available and which one best suits your specific needs. Just looking at the Garvens Mortgage Group team helps demonstrate the diversity of potential homebuyers and the versatility of the different loan products available. In our office alone, we have had:
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a five-person family that used an FHA rehab loan to purchase and renovate their ideal home;
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a four-person family that used the husband’s VA eligibility to buy a new home while keeping their old home as a rental property;
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a single man who used his VA eligibility to purchase a townhome;
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and a single man who used a conventional loan to purchase his first home.
At Garvens Mortgage Group, we have seen virtually every type of borrower you can imagine come through our office, and in every case we were able to find the right mortgage product for them and their situation. Nobody should be under the impression that there’s a ‘right type’ of homebuyer. There isn’t. Potential homebuyers shouldn’t ask themselves whether they’re the ‘right type,’ but whether it’s the right time. That’s the only question that matters, and answering it is the first step to getting out there and buying a home.
As Wayne Gretzky once famously said, “a good hockey player plays where the puck is, while a great hockey player plays where the puck is going to be.” This is true of every competitive endeavor: most individuals will pursue an objective while always remaining a step or two behind, while the best will position themselves to intercept that objective—that is, they will keep themselves a step or two ahead of their objective. This is, of course, easier said than done, but with patience, practice, and some intuition, most individuals can learn to anticipate where ‘the puck’ will be and how to be the first one to reach it.
For our purposes, we will consider the puck metaphor in terms of the economy and housing. There are innumerable influences affecting where the puck will be and when it will be there, and oftentimes it will be heading in a direction you don’t want to follow. This happen to me right before the housing collapse, when I had just started acquiring real estate and making plans to start adding rental properties to my investment portfolio. I saw where the market was going, and as much as I wanted to stay in, I knew it was time to exit the market and weather out the storm. I sold my real estate holdings (including my primary residence!), moved into a rental house for a few years, and once I was confident the market had bottomed out I decided to start rebuilding my real estate portfolio.
I don’t believe the economy or housing market have returned to full health, but I believe they will eventually. The very slow economic recovery has offered me a chance to really study the market and anticipate where things will be in five to ten years and beyond. I know interest rates and house prices have nowhere to go but up, and I know that with current demographic trends we will start seeing massive demand for rental space as Millennials move out of their parents home and start families of their own. In fact, demand for rental units is already red-hot and will only continue to increase.
For now, I am positioning myself and my financial resources to take advantage of the market as it will look several years from now. I am skating to where the puck will be. But what many people may not realize is that they may currently be standing precisely where the puck is heading. That is, they may be able to take advantage of the present market to accomplish their immediate financial goals. For example, with interest rates incredibly low, it’s a perfect time to buy a house either as a first home or a rental property. With money still relatively ‘loose’ it’s a great time to take out a HELOC or a cash-out refinance to upgrade a kitchen or bathroom and add value to an existing home.
Few people realize how unique our current lending and housing climates are and how to take advantage of them. They can’t even see the puck heading right toward them! But if they know where to look, they’ll be able to see it. And if they dedicate themselves to learning the fundamentals of economics, investing, and real estate, they’ll be able to anticipate where the puck will be years or even decades into the future and how to make sure they’re in the right place to intercept it.
If you’ve wondered why the cost of renting continues to climb, why the recent rise in home values has been comparatively modest, and why there seems to be a new apartment complex being built everywhere you look, you only need to understand that this is all part of the demographic dance—the shuffling of generations into, out of, and between houses.
We are experiencing a massive cultural and economic transition as Boomers begin to retire and Millennials enter the economy in full force with a polite, “May I cut in?” As the largest generation in this “demographic dance,” the Millennials are having the most profound effect on the entire market. Because their behavior and preferences vary so wildly from the behaviors and preferences of past generations, their influence appears even more pronounced. Compared to the Baby Boomers and Generation X, the Millennials’ effect on the market is different in both degree and in kind.
Behaviorally, it seems Millennials have stepped onto the dance floor with two left feet. They have made, and continue to make, several false and clumsy moves: They have acquired massive amounts of student loan debt; they are delaying major life events like marriage and child-rearing; they are living at home with their folks well into their twenties and even thirties; and once they move out, they are electing to rent rather than own. Each of these is a marked difference from past generations. Preferentially, Millennials prefer smaller spaces with fewer rooms, both because a lack of children demands less space and because they enjoy lower-maintenance living spaces. They prefer smaller, higher-quality spaces with luxurious amenities (granite countertops, on-site pools, etc.) versus large homes on large lots.
As a consequence, rents continue to rise much faster than home prices. For those in a position to take advantage of this phenomenon, the benefits could be extraordinary. As an example, I recently spoke with a radio listener living in Pueblo who has acquired three rental properties for less than $60,000 each, and each clears over $600 a month in rent. Demand for homes, particularly in the sub-$100,000 range, is still fairly week while demand for rental space, again particularly in the sub-$1,000 per month range, is very strong.
This will continue to be the case as long as the Fed keeps the music going, and they have given every indication that they will continue their policy of extremely low rates for the foreseeable future. It is this policy that has made the cost of homeownership extraordinarily low and, coupled with Millennials’ preference for renting, allows people like my listener in Pueblo to acquire properties that they can immediately rent out at a profit. Although Millennials will no doubt continue to prefer renting, the Fed will eventually raise interest rates, making it imperative that anyone interested in acquiring rental properties do so as soon as possible, before the cost of financing properties begins to climb.
Here on the Jay Garvens Show, we spend a lot of time looking into the future—making predictions and forecasts in hopes of giving our investment strategies a competitive edge. Savvy investors will spend years and even decades cultivating a sound investment portfolio, but even the best cannot predict the future with absolute certainty. They will, therefore, build strategies that can accommodate events that are impossible to predict. To help explain how this looks in practice, we had Chris Abeyta of Accelerated Wealth in the studio for what may be one of the most important shows we’ve ever aired.
Chris began his segment with an anecdote about walking along a local hiking trail and coming upon a fallen tree that had been destroyed by lightning. It was clearly a tremendous and destructive force that felled that tree, and it got Chris to thinking about the devastating effects that arise from being in the wrong place at the wrong time. While it’s exceedingly rare for people to be struck by lightening, it does happen. Similarly, while severe economic recessions and depressions are rare, they do happen.
Consider the 2008 recession that seemed to have come out of nowhere. Even those who predicted a collapse in the housing market did not predict a global financial meltdown on such a scale and of such severity as that we had witnessed. It was as random and rare as a lightening strike, but it affected billions of people worldwide. Fortunately, most people had time to recover from the recession. A comparatively small number of people had their retirements coincide with the recession, but for those who did the timing was absolutely devastating.
Between 2007 and 2009, the stock market lost 57% of its value. In 2002, during the fallout of the dot-com bubble bursting, the market dropped 42%. Those whose retirements were exclusively, or even substantially, tied up in the stock market lost a substantial amount of their net worth within a period of just a few weeks. That is, the nest eggs they spent their entire lives building were decimated inside a window of just a few weeks.
One couple Chris advised had nearly a million dollars invested in mutual funds when they came to him for advice. It’s scary to think that, had they been set to retire in 2008, they could potentially have lost about $600,000 of their retirement! Still, even though we have weathered the worst of the recession, there is no telling what our economy and the stock market will look like in just a few years, or even whether that million-dollar nest egg will be enough for retirement. In the end, he restructured their investments into an annuity that was guaranteed to pay out for the rest of their lives, plus an actively managed investment account that could take on more risk and more returns. This gave them both security and potential for robust growth.
Even those who spend their entire lives being diligent by saving for retirement can end up blindsided by unfortunate economic events. And even those who retire during great economic times find themselves burdened by the same set of questions and concerns, chief among them “Do I have enough to retire?” and “What will I do if and when the money runs out?” That’s why it’s never too early to start planning for retirement, and why it’s important to have a plan that can handle future events, regardless of what those future events look like.
This week was ‘bubble bath’ week on the Jay Garvens Show. But before you go and find your rubber ducky, keep in mind we’re talking about speculative bubbles—stock bubbles, housing bubbles, etc.—and the metaphorical baths people take when they burst. On this subject, I can think of no better expert than Chandra Hall of Colorado Mesa Realty, whom we were fortunate to have in the studio with us this week. With almost 20 years in the industry, she provided a first-hand account of the last housing bubble and explained why the present increase in housing prices should not be considered a bubble.
The story of speculative bubbles unfolds in the same way as Hemingway described going bankrupt: gradually, then all at once. The bubble inflates slowly, then starts to expand faster and faster until, suddenly, it bursts without warning. Chandra explained that most people don’t know they’re in a bubble as it’s expanding, and therefore nobody thinks to slow down. Everyone assumes rapid increases in prices for a given asset—whether tech stocks, precious metals, houses, or tulip bulbs—are merely expressions of an underlying, organic increase in demand. Prices may plateau, people think, but few ever believe prices will fall, let alone collapse.
Eventually, however, they do, and almost everyone takes a bath. Suddenly the asset people thought was worth a fortune isn’t, and many who borrowed to pay for that asset decide it’s not worth it and simply default on the debt. The repercussions can last for months or even years. People are hesitant to re-invest in an asset that proved extremely unreliable and dangerous.
So how do you know if it’s safe to get back into the real estate market, especially when prices have seen double-digit annual increases that harken back to the beginning of the housing bubble? The best way is to understand the fundamentals of the market and consider whether the increases we have seen in housing prices are warranted. Since home prices dropped by 30-50% or more after the financial crisis, any increase in value is merely covering lost ground. The increase in values over the last few years has been relatively consistent and don’t show the rapid fluctuations typically associated with speculative bubbles.
Also, the price increases we’ve seen are consistent with underlying economic and demographic fundamentals in our area. For one, Denver’s hot housing market is being driven largely by an influx of workers in the tech sector. For another, the so-called “basement dwellers” that have propagated over the last few years (by which I mean Millennials who finished college with massive amounts of debt and moved back in with their folks) are finally leaving their parents’ homes and purchasing homes of their own. And these former basement dwellers are taking advantage of the last key force behind the increase in home values: interest rates are extremely low. It’s very cheap to finance a home, and people are taking advantage of this while they can. This includes not only first-time homebuyers but also Baby Boomers who are retiring, downsizing, and deciding to keep their old home as a rental since it’s just so cheap to carry that mortgage debt.
We were positively blessed to have Chandra Hall with us this week. She not only confirmed a few things I have been saying for years but also taught us all a lot of new things. She brought unique perspectives and insights into the studio and I hope to have her and other guests like her back into the studio to share what they’ve learned with me, as well as my listeners.
Here’s an idea: Take a blanket, add sleeves, then sell it for $14.95. You could call it a “Snuggie” and sell thirty million of them. Or how about this: Make a phone that’s just a big screen and a single button. You could call it an “iPhone” and sell hundreds of millions of them. These are just two examples of simple ideas that took the world by storm and proved the maxim that simple ideas win. The most successful ideas are almost always the simplest—just look at Google’s homepage—so on this week’s show, I shared a simple idea I had come across that is proving to be a great success.
I must first confess that I didn’t stumble on simple and successful this idea myself. Others had discovered it before—most famously Warren Buffett—but I did take the idea and make it my own through investing in real estate. And that idea is this: Buy Low, Sell High. Buy assets when their value is depressed, then sell them when they’re higher. Warren Buffett has made billions navigating business cycles, snapping up high-value companies during recessions and selling them when the economy is booming.
I applied this same principle to real estate and have had tremendous success with it. I started buying real estate in the early- to mid-2000s when house prices were relatively low, especially compared to the highs of 2007-2008. I realized we were in the midst of a massive and catastrophic bubble in 2008 and immediately sold off all my real estate holdings. I then rented throughout 2009, 2010, and 2011, knowing home prices were unlikely to rebound and could even potentially fall further. It wasn’t until late 2011 that I was convinced prices were poised for a steady rebound and I again began rebuilding my real estate portfolio, first by purchasing a primary residence to live in and then accumulating rental properties over the next couple years.
From 2011 until now, house values have been low. They are now starting to approach, and in some places exceed, their historic averages and have nowhere to go but up. It’s a great time to buy. Meanwhile, rents are at historic highs and keep climbing. If you have rental space, it’s a great time to ‘sell.’ I spent the last few years acquiring rental properties so have plenty of rental space to lease out. See how that works? Buy low…sell high. And in the future, when house prices are substantially higher than they are at present, I can sell off the houses altogether.
This is an incredibly simple idea, but the execution of it can be difficult. That’s why I stress education and strive to help my listeners get into the real estate game themselves. In fact, I have another real estate investment class on June 16th, and encourage all interested individuals to get in touch with me and reserve their spot in the class. I suspect house prices may take a slight dip in the second half of this year, offering another opportunity to acquire real estate at historically low prices, and attending this class is a great way to prepare for it!
6-6-15 Simple Ideas Win
The “Dog Days of Summer” started a little early in the Garvens household, as we are now the proud owners of two new puppies: a Vizsla and a Yorkie. We picked up the Vizsla, whom we named Redford, over the Memorial Day weekend. The trip, while impetuous and 1,400 miles long, afforded me a lot of time to think about this country and all the blessings to be found in it. Driving through the Midwest always shows the best of what our nation has to offer, and I thought I’d share a few of the blessings I noticed along the way.
The first blessing I noticed was the simple fact that I could drive through three countries without being stopped or marauded by drug cartels. And yes, I meant to use the word “country” even though we stayed inside America. Our states are geographically equivalent in size to entire nations in Europe and Africa and just as diverse. But here you can easily zip through each state with efficiency and security.
Efficiency is the theme of a different blessing: our interstate highway system is a marvel. It’s a comprehensive network of quality roads—especially compared to some other nations—that allows everyone to freely move all around the country, from the very edge of the Florida Keys to the Pacific coast. Of course, to take advantage of the highway system you need something to drive. And so I consider the modern automobile to be a blessing worthy of mentioning. It’s extraordinary to be able to pack the family into an automobile for a 1,400-mile trip without even worrying whether the car will make it. And the level of comfort and luxury is something our parents couldn’t even imagine in the most pricey luxury cars of their time.
With my two kids in the backseat working on their homework, I was able to consider our local school system and how immense of a blessing it is that every individual in this country can acquire a high-quality education and that a top-tier education is within the reach of most families. But they didn’t spend their entire trip doing homework, thanks to the blessing of modern technology and things like mobile hotspots. I was literally able to turn my iPhone into a hotspot on the highway and have everyone in the car access the Internet: my wife studying Spanish, my son playing Minecraft, and my daughter watching YouTube.
But the biggest blessing of all was the ability to make family memories such as this one: an impromptu trip half-way across the country, all to add a new member to the family and make even more memories. And really, that’s what ties this show into the broader theme of personal finance. Things like wealth, and the ability for each individual in this country to acquire wealth on the scale that we do, are ultimately good for one thing: to create a safe, secure, and healthy life for yourself and your loved ones. With all the talk of saving and investing, never forget that wealth is merely a means to a higher quality of life.
5-30-15 Dog Days In America
I have been broadcasting for several years now, and I’d like to think I devote more time to facts and statistics than most other broadcasters. Regular listeners will have by now acquired a robust knowledge base on the real estate and mortgage industries, as well as on our local and national economies. But facts, figures, and statistics only go so far. A theoretical knowledge of how these industries function is little help when it comes time to make a home purchase and you suddenly find yourself in a frenzied and frantic state of mind. This week’s show is devoted to managing expectations, tempering emotions, and remaining calm and collected throughout the home-buying process.
The surest way to prevent episodes of panic and frustration is to know your market before you start shopping. When making a purchase as large as a house, it’s common to consider how that house fits into its local market and how that local market will affect the house in the coming years and decades. Once you sign a purchase contract, you may start wondering whether the market is going up or down; whether waiting a year or two would make better economic sense; and whether the neighborhood you’re buying in is improving or hitting the skids. It’s better to have these answers before you start shopping—to know your city, understand its neighborhoods, and be able to anticipate where those neighborhoods are heading in the near-to-mid-future.
To help understand where the Colorado Springs and Denver markets are heading, I had Bill McAfee of Empire Title in the studio this week to discuss these two markets. The big take-away this week is that Denver is absolutely a seller’s market, and Colorado Springs is heading in that same direction. Inventory is still incredibly low, the few houses listed are selling incredibly fast, and sellers are able to sell their homes without making many, if any, concessions to the buyer. In Colorado Springs, the mean house price has reached $225,000—a new record. While there is still more value to be found outside of Denver, homes anywhere along the I25 corridor will no doubt be appreciating in the coming years.
It would be difficult to make a bad purchase when considering Denver, Colorado Springs, or the surrounding towns as a whole. But you should consider the neighborhood that a house is in before deciding whether to purchase it. For example, I had one radio listener who told me she was interested in purchasing a home in the same neighborhood she had grown up in. Her interest was entirely sentimental, and the unfortunate fact is that neighborhoods go through roughly thirty-year cycles of decline and rejuvenation. It’s likely that the neighborhood a person grew up in is presently in a worse state than he or she remembers it. This radio listener would be wise to study her neighborhood thoroughly and understand where it’s been and where it’s likely to be in the near future before deciding to purchase in it.
I regularly hear from radio listeners who began the home-buying process with confidence but suddenly find themselves panicking about the entire process. It’s a natural response that helps focus the mind and forces the buyer to consider all aspects of the purchase. But it can become overwhelming and lead to bad decision-making. If you’re beginning the home-buying process and are beginning to feel uncertain about the process, please feel free to give me a call to discuss your uncertainty. I’ll try to collect anecdotes from listeners to share on the air, and hopefully help other listeners who may be having the same uneasiness.
5-23-15 Shelter Skelter
It’s safe to say I have more experience than most when it comes to real estate investing. I’ve been investing personally for years; I regularly network with other real estate investors; and I’ve helped educate hundreds of individuals on the subject through my investment property seminars, classes, and radio shows. But once the basics of real estate investing are covered, it’s time to turn the focus to strategy and consider how real estate will fit into your broader investment portfolio and your future plans.
With real estate, it’s important to differentiate between properties as assets and as investments. An asset is a thing of value—a stock, a house, etc. An investment is merely an asset that generates income. Every homeowner has an asset: the house. But the point of real estate investing is to turn that asset into an investment, and the best way to do that is to use a house to generate income. While houses will almost always appreciate—with the housing collapse a notable exception to that rule—you will see far greater returns through renting the house out.
It used to be that investing in rental properties had two steps: first, one would use the rental income to help pay down the mortgage; then, once the mortgage is paid off, the house would be ‘cash-flowing’ and generating positive income each month. However, the last few years have allowed both steps to occur at once. Since it now costs less to own a home than to rent, an investor can take out a standard 30-year mortgage—and sometimes even a 15-year mortgage—and collect rents in excess of the mortgage and maintenance costs. With my last few properties, I immediately achieved positive cash-flow. Now, my renters are both paying down the mortgage at no net-cost to me and putting a couple hundred dollars in my pocket each month.
Compared to investing in the stock market, real estate has obvious and immediate benefits. You can entirely leverage the asset, have someone else pay down the mortgage over time, accumulate equity as the house appreciates, and earn income month-to-month. That is impossible to do with stocks and most other investments. It would be like taking out a loan to buy stocks, having someone else pay down the loan for you, while you collect dividends plus the value of the stocks once liquidated. Furthermore, the returns on real estate are far higher. Once a rental property is paid for, it will on average cash-flow at five times the rate of return on stocks. That is, $1 million in real estate will generate the same returns as $5 million in stocks.
But, of course, stocks are always an integral part of any investment portfolio. It would be foolish to invest entirely in real estate. Heaven forbid a person has 100% of their net worth in real estate and then retires during a time like the Great Recession. It is always important to diversify—to hold stocks, property, and cash so that each acts as a hedge against the others.
There are, of course, unlimited strategies investors can deploy to achieve their goals, both short-term and long-term. But considering the cost of real estate, it’s unwise for amateur investors to experiment with actual houses. That’s why education is crucial: take time to study the market and study others who have invested in real estate. Talk with people who have done it, talk with real estate agents, and read books by real estate investors. Learn as much as you can before investing in earnest, and you’ll reap the rewards with as little risk as possible.
5-16-15 Real Estate Investment Strategies
Every week, I hear from listeners who are considering becoming first-time homeowners. This has been true every since I started broadcasting. But lately it seems more and more are considering it because renting no longer makes sound financial sense. In both Denver and Colorado Springs, the cost of renting continues to climb while the cost of homeownership has remained relatively stable. This is causing many current renters to reevaluate their financial situations and to finally understand what I have been preaching for years: Most people are far better off owning their home than renting.
Ever since long-term, fixed-rate financing became widely available in the 1930s, it has made better financial sense to own a home rather than rent. Historically, a mortgage was only slightly more expensive than renting, and the simple act of paying off a mortgage left the homeowner with more equity rather than giving away their monthly rent to a landlord. Starting about five years ago, renting no longer had this advantage over homeownership; the cost of a mortgage has been lower than the cost of renting, thanks to historically low interest rates, a depressed housing market, and the Great Recession that greatly increased the number of renters.
Although interest rates and the price of homes have increased since then, both are still extremely low by historical standards. And although they have increased slightly, the cost of renting has increased even faster. While tighter lending standards may be partially to blame, the larger culprit is cultural. People are starting families later in life, are choosing to spend more time in school, and just aren’t as enamored by the dream of homeownership as past generations were. Various factors are pushing people to accept renting rather than owning.
To see the effect this is having, consider the rental markets in both Denver and Colorado Springs. In Denver, the average cost of renting is $1,300 per month. In Colorado Springs, it’s $879 per month. This is practically highway robbery, except that these renters are willingly paying these exorbitant rates! Too few people understand the benefits of building equity and owning a home, and therefore don’t even know what they’re forfeiting by continuing to rent.
Since these people are content with throwing their money away, I have found it enormously beneficial to put myself in a position to catch it. I now own four rental properties that already have positive net cash-flow; that is, they collect more in rents than it costs to service the mortgage and property taxes—all because the cost of renting is higher than the cost of owning. I am not only making money each month but also building equity in these properties so that in 20-30 years, I’ll own over $1 million in real estate outright without it costing me a thing.
This approach to wealth creation is not a secret. It’s out there and available for anyone to take advantage of—but too few are interested in doing so! For my part, I am working hard to educate my listeners on the benefits of homeownership and to provide tangible resources to help them become homeowners themselves. That’s why I host regular educational seminars on the process of becoming a homeowner, with the next one on May 19th, 2015. I encourage anyone interested in becoming a homeowner to inquire directly with me and begin their journey to owning a home as soon as possible.
5-9-15 Rents Are On The Rise
This week was the third part in our series titled “Serving Those Who Serve,” dedicated to, and focused on, those who have served in the military and who are interested in learning what the VA loan program in general, and what I and my mortgage company in particular, can do for them. The first two parts of the series explored the basics of the VA loan—the facts and figures of the program. This week, we’re looking at what the VA loan looks like in practice, how to use it, and what to use it for.
I can say without reservation that the VA loan program is the best loan product on the market and is almost always the best option for those who are eligible to use it. It offers better rates than comparable conventional or even FHA products, and it does not have mortgage insurance regardless of the loan-to-value ratio. There is no minimum down payment, either, so oftentimes a veteran can close on a home with no money out-of-pocket.
You will notice that I said the VA loan program is almost always the best option for veterans. There are instances where the benefits of the VA loan program are lost on a borrower. For example, if the borrower is putting 20% or more down on a property, a conventional product will be better than the VA loan because the conventional loan will have neither a funding fee or mortgage insurance. There are circumstances where a veteran would be better off with a different mortgage product for a given property, or they may find a better use for the VA loan program a few years down the road.
It is important to use the VA loan prudently, as it is not a limitless product. Each veteran has a set level of eligibility that is used up when a home is purchased or refinanced using the VA loan program. The eligibility is restored when the loan is re-paid or the house is sold. But once eligibility is tied up in a property, the veteran can only use whatever eligibility is left over—if any—and must pay the difference between the loan amount and eligibility amount if there is a disparity between the two. (Note that this is not a dollar-for-dollar trade. Generally, a veteran will pay $1 for every $4 of the loan being guaranteed by the VA in excess of their eligibility amount.)
There are also certain quirks in the VA underwriting guidelines that can cause problems. For example, a veteran must have sufficient residual income to qualify. Residual income is the amount of income left over after all monthly liabilities, such as taxes, car, and credit card payments, have been deducted from the veteran’s pay. The VA has set amounts of necessary residual income depending on the size of the veteran’s household, and this standard must be met in order to qualify. The VA lending guidelines are also extremely strict as to the condition of the property, so certain minor deficiencies such as peeling paint of a wobbly handrail may make the property ineligible for a VA loan. Oftentimes the seller will fix these issues, but if they won’t the VA loan offers no recourse.
Although the VA loan is an exceptional loan product, problems may arise if the veteran does not do their homework. That’s why it is imperative to seek out qualified mortgage specialists with years of experience originating VA loans. A qualified loan originator can consider all aspects of the transaction—from the borrower to the property itself—and identify any potential issues. This is where Garvens Mortgage Group can help serve veterans the most.
5-2-15 Serving Those Who Serve Part III
On last week’s show, we discussed the VA home loan program, its history, and my personal experience using it to acquire not only my primary dwelling but also to build a portfolio of investment properties. I also explained how my long history of originating home loans in Colorado Springs, coupled with my employees’ personal histories of both serving in the military and using the VA loan product, helped make Garvens Mortgage Group the premier home loan resource for veterans in the region. Due to the response to last week’s show, I wanted to spend this week filling in the details of how the VA loan program works.
The greatest advantage of the VA home loan is the ability to purchase a home with no money down. The VA does not require a down payment, unlike conventional or FHA loans which may require anywhere from 3-5%. However, to ensure the program’s viability, the VA does require a ‘funding fee’ for both purchase and refinance loans. These funding fees are diverted to a pool of money that is used to cover any guaranteed loans that have defaulted. The funding fee varies based on service type, down payment, and whether the veteran has used their VA benefits before, but generally a first-time veteran homebuyer putting no money down can expect a funding fee of 2.15%. The funding fee is waived, however, for veterans with a registered disability. And, most importantly, the funding fee can be financed into the loan; you do not have to come up with the funding fee out-of-pocket.
Many individuals who have served in the military ask whether they are eligible to use the VA home loan program. Eligibility varies based on the type of service and when they served. Retired or discharged veterans generally need to have served for 24 continuous months or for 90 days of active duty service. Current active duty service members need only 90 days of active service. Reserves and National Guardsmen need 6 years of service with 90 days of active service.
Occasionally we are asked by surviving spouses of veterans whether they are eligible to use the VA home loan program. While there are certain conditions by which a surviving spouse may inherit a veteran’s eligibility, they do not apply to most people. The surviving spouse cannot have remarried (unless they are 57 or older at the time of re-marrying) and their spouse’s cause of death must have been service-related. It is often difficult to establish a surviving spouse’s eligibility, but is possible.
Many individuals who come into our office are often surprised to learn they are eligible for a VA loan. Many served for a few years two or three decades ago or have a service-connected disability that makes them eligible. If you have served in the military for any amount of time, it’s best to check with your loan officer to see if you are eligible for a VA home loan. VA loan products offer more flexible terms, better rates, and additional help and resources from the regional VA office than conventional or even FHA products. It is a benefit veterans have earned, and I am sure more will take advantage of it as they learn more about it.
4-25-15 Serving Those Who Serve Part II
As someone who has been originating mortgage loans in Colorado Springs for almost 20 years, I have a better understanding than most about the unique housing and financial needs of veterans. I have served in the military; most of my personal and professional acquaintances have served; and I have made it a priority to staff my mortgage company, Garvens Mortgage Group, with veterans and military-connected individuals. I have spent years building a company that is peerless when it comes to serving our city’s veterans, and I wanted to share some of what I have learned with you today.
It is, of course, crucial to first discuss what we learned from Empire Title’s Bill McAfee this week, as no one has a better understanding of our local lending and real estate market. Inventory is still incredibly low, especially for this time of year. Most market watchers were anticipating a spike in listings as we moved into spring, but that spike has not materialized. And velocity is still very high; that is, houses aren’t staying on the market long. This should ultimately have the effect of raising house prices, as there seems to be very high demand for what little inventory is out there. We will, however, need to wait until the end of the summer to see what the net effect on prices will be.
The cause of this strange state of the market is two-fold. First, many people—not just millennials—are preferring to rent rather than own, so would-be sellers are deciding instead to keep their old home and rent it out. Second, new housing developments have practically ground to a halt. There is very little new inventory coming onto the market. Therefore, fewer houses are being listed, and those individuals looking to purchase a home have very little to choose from.
Competition for homes is fierce, so those with access to superior lending products will be at an advantage. This is where the VA home loan really shines. VA loans require no down payment, meaning a buyer is limited far more by income (that is, how much they can afford on a monthly basis) rather than savings (how much they have saved in the bank at the time of purchase). The underwriting guidelines are less stringent than for conventional or even FHA loans, so borrowers with past bankruptcies, foreclosures, or poor credit will find it easier to qualify. Interest rates on VA loans are typically a quarter to a half-point better than conventional products. And the VA offers a plethora of housing counseling and homeownership resources for veterans at no cost.
The unique demands of the military lifestyle require unique financing solutions. Veterans aren’t likely to stay in one place for too long and therefore require access to lending products that fit this lifestyle. As both a veteran and a property investor, I understand how the VA home loan can be put to use building a portfolio of investment properties. Naturally, I encourage individuals and families to own home rather than rent. But I also encourage them to take advantage of the red-hot rental market by keeping their homes when they move rather than selling it.
The VA home loan allows a veteran to start amassing rental properties, but as there are restrictions on the types of properties that can be financed and how much can be leveraged, it’s imperative to understand all aspects of this mortgage product. As someone who has used the VA home loan for this very purpose, I have a thorough understanding of the entire process, and I’ve built a company with like-minded individuals who can share their knowledge with other veterans. It’s our way of serving those who have served.
It occurred to me recently that, with my expansion into Denver, I have the potential to reach over 3.5 million people. Yet few listeners know my backstory: where I’ve come from, where I’ve been, and how I came to be the man I am today. I thought it might benefit my new listeners—and even those who have been listening for a while—if I devoted a show to sketching out my background and biography.
As most listeners will know, I am originally from Wisconsin, where my family has wide and deep roots. The Garvens family has been settled in Wisconsin since 1848 when Karl Otto Garvens settled a farm near the very new, and very rural, town of Milwaukee. Every generation since has mostly stayed in that same area, though each generation has one or two black sheep that wanders away. I am the black sheep of my family, having developed an early sense of independence. I learned early that I should follow own path to happiness wherever it may lead. For example, I spent a short time in high school on the wrestling team even though my primary interest had been in gymnastics. My parents, my wrestling coach, and my high school’s gymnastics coach all pressured me to stay committed to wrestling. I decided against it, however, and finished out high school on the men’s gymnastics team.
From there, I went on to the University of Wisconsin – Lacrosse on an athletics scholarship. My dad, who had a background in engineering, stressed two things throughout my entire childhood: the importance of self-reliance and the importance of education. He offered to pay my way through college, despite his devotion to self-reliance, but ultimately only had to pay for half a semester, with my remaining semesters covered by both ROTC and athletics scholarships until, finally, I graduated with a Bachelors of Science.
My time in ROTC introduced me to the military lifestyle and persuaded my to join the military right after college. I went in as a care-free and rebellious individual—earning the nickname “Jesus” because of my long hair—but matured and grew quickly. Looking back, it’s extraordinary to think of the man I was going into the military as a Medical Amin. Officer in early 1991, and who had I become by the time I shipped off to Germany in August of that same year.
Eventually my military career brought me to Colorado Springs, where I met my Wife, Marlo, and we decided to stay in the Springs upon my retiring from the military. I then joined Top Gun Mortgage in 1998, struck out on my own in 2004, and established Garvens Mortgage Group in 2005. The next few years were an absolute rollercoaster, with the mania of the housing bubble and the catastrophe of the financial collapse. I was one of the few mortgage loan officers to make it through that period relatively unscathed, and the wisdom I gained during those years has guided my approach to mortgages to this day.
So that is my biography in a few paragraphs. I’ll continue to fill in this sketch every week on my show, with both personal and professional anecdotes. I hope this brief biography helps my listeners understand more about me and why I am the way I am, why I believe what I believe, and why I try to teach what I’ve learned to as many people as possible.
Last week’s show, titled “Anatomy of a Mortgage,” covered many topics that are rarely associated with mortgages but which play an integral part: the home itself, the housing market, and the broader economy. This week, we’re looking at the most important part of a mortgage—the loan—in-depth and as thoroughly as possible. With so many changes to the lending industry, and so many vague and esoteric terms constantly thrown about, it’s important for everyone to be proficient, if not fluent, in the language of lending.
As mentioned last week, a mortgage is a loan secured by an asset. The loan itself can take many forms, but the vast majority of residential mortgage loans are 15- or 30-year fixed rate loans. This means the loan is amortized over 15 or 30 years—that is, the starting principal and the interest projected to accrue are calculated and the total payoff is divided into regular monthly payments for the life of the loan—and the interest rate cannot change. Most individuals shopping for a mortgage will eventually consider whether to opt for a 15 year or a 30 year. While the 15-year mortgage will have a substantially higher monthly payment than the 30-year, it will save tens, if not hundreds, of thousands of dollars in interest throughout the life of the loan. Individuals should consider their personal financial goals to decide whether it’s more important to free up money now or to save money for the future.
Outside of fixed rate loans, some people may opt for Adjustable Rate Mortgages (ARMs), as those loans typically offer better initial rates than fixed rate loans. These loans can, however, adjust periodically throughout the life of the loan. With interest rates at near-historic loans, it would be unwise for most people to choose an ARM over a fixed rate loan. From where we are now, interest rates have nowhere to go but up. It’s also worth taking a moment to acknowledge that fixed rate loans covering up to 30 years are found in few countries around the world, and the vast majority of the developed world uses medium term (10 to 15 years) adjustable rate mortgages as they are far more fiscally sound that long-term fixed rate loans.
The rate offered on a given day is the result of innumerable economic factors, but is generally tied to the 10-year US Treasury—whose price is also the result of innumerable economic factors. A lender will set a par rate, which is the rate offered without either discount points or a credit, but consumers may choose to select a higher rate if they want a lender credit or a lower rate if they wish to pay extra for it out-of-pocket.
There is no right or wrong answer as to whether one should choose a higher or lower rate. Those buying a house or refinancing from a much higher rate may want a lender credit to help pay closing costs to keep their cash needed to close lower, and may therefore choose a higher rate. Those who expect to keep a home for the entirety of the loan may choose to buy discount points upfront since the interest saved over the life of the loan far outweighs the initial cost of lowering the rate. A consumer should choose the rate that best fits with their financial goals and helps accomplish them.
There are many factors to consider when shopping for a mortgage, and no matter how much I’m able to cover in a given week there is still a lot more to know. It’s my hope to cover every aspect of the mortgage loan as this year progresses, but any listeners with specific questions should feel free, as always, to reach out to me personally to have their questions addressed. A home loan will be the biggest financial decision most individuals make in their lifetime, so it is imperative that they are as informed and knowledgeable about the product they choose as possible.
4-4-15 Anatomy Of A Mortgage: Part II
When most people hear the word ‘mortgage’ they immediately think ‘house,’ and they know a mortgage is a loan used to by a house and…well, after that things get a little vague. Few people understand the anatomy of a mortgage: the process, the components, and how it all fits together. On this week’s show, we looked at the details of a mortgage, got down to brass tacks, and hopefully helped illuminate a concept that everyone knows but too few understand.
A mortgage is a loan secured by real property. When you take out a mortgage to buy a home, you are not financing the home—you are financing the property beneath it. The actual house on the property is considered an improvement to the land, which increases its value. The loan becomes a lien on the property, with a lien being a person’s or an entity’s claim on a property until said debt is paid. The land cannot be transferred to a new owner until the lien is and released.
This lien could potentially be on the property for 30 years. The United States is one of the few countries on earth where such a thing as a 30-year mortgage exists. This is made possible by the existence of Fannie Mae and Freddie Mac. Without these government-sponsored entities (GSEs), it would be impossible for lenders to offer long-term fixed loans.
The upside of stretching a loan over 30 years is that the monthly payment is reasonable. More people can afford to finance an entire house than they could without such generous loan terms. The downside is that, due to the inevitabilities of compound interest, the cost of financing the mortgage is substantial. Paying off a 30-year mortgage could cost double the principal amount just in interest, depending how high interest rates are at the time of taking out the loan. That is, a $200,000 mortgage at 5.5% (which is below the historical average as far as interest rates go) would end up costing about $408,000 in total.
This is why it’s imperative to either buy or refinance now, while rates are still extremely low. That same mortgage at 4% would save $50,000 versus at 5.5% over the life of the loan, which would put you $50,000 ahead for retirement. Similarly, you should consider a shorter loan term—say, 20 or 15 years—to save even more on interest. Further, such low rates are having a profound effect on the real estate market. Low rates allow more people to afford more expensive houses, allowing them to drive up the price. Denver especially has been witnessing robust price growth for several years. In just a year or two, not only will houses cost a lot more themselves but the cost of financing them will be substantially higher as well.
This has only scratched the surface of what you should know about mortgages, and in the coming weeks I will be covering other aspects in-depth to help my listeners gain a better understanding of the mortgage and lending industries. A home will be one of, if not the, biggest financial decision most people will make in their lifetimes, and it’s essential they understand them thoroughly before committing themselves to a 30-year liability.
3-28-15 Anatomy Of A Mortgage Part I: Fitbit Your Finances
If the state of today’s economy seems incomprehensible to you, you’re not alone. Nobody can make any sense of it. You can’t, I can’t, and even Janet Yellen can’t. The global economy has gone mad, and this madness is manifesting itself most potently in the financial and real estate markets. This, unfortunately, means every other sector of the economy will see the secondary effects of this insanity, and we won’t see any semblance of a healthy economy until order is restored.
Bill McAfee of Empire Title was back in the studio to explain what’s happening in the Colorado Springs and Denver real estate markets. Notably, he stated that he has not seen a real estate market quite like our present market since 1991. It is showing signs of both deep lethargy and robust health. The current number of active listings—2,429 in El Paso County—is the lowest since 2003. The velocity of sales, however, is at levels last seen in 2005 during the ramp-up to the housing bubble. There is a 12-year low in the number of houses presently on the market, yet they are moving as fast as they did during the bubble. In short, there are precious few homes on the market, yet they are selling very quickly.
The madness doesn’t end there. 10-year US Treasuries, to which mortgage interest rates are tied, have been on a roller coaster for years. Some months they’re skyrocketing to suggest the economy is roaring back to health; other months they collapse to near-historic lows. Their behavior is being driven by two factors.
First, Janet Yellen can’t make sense of the US economy, and investors can’t make sense of Janet Yellen. She suggested the Fed would start raising rates when unemployment hit 6.5%. It is presently at 5.5% and yet at her last press conference she intimated that rates would not be raised in the near future. Like all commodities, Treasuries have the future projections of investors baked into their price. The price depends on what investors expect to happen to them both now and in the future, and Yellen is giving no indication that rates, and therefore Treasury yields, will rise.
Second, turmoil in Europe is, again, driving investors to US Treasuries, which in the grand scheme of investment instruments are incredibly safe investments. Greece is talking out of both sides of its mouth while Germany is remaining intransigent to Greek demands to loosen the conditions of its bailout. Counties such as Sweden and Switzerland are abandoning their respective currencies’ pegs to the Euro since the cost of maintaining those pegs is enormous and only likely to get more expensive as the Euro becomes more volatile. This has caused the dollar to surge in value (many investors expect it to reach parity with the Euro this year) and European investors to seek safer refuge for their capital—which, presently, means parking it in the United States.
The smorgasbord of absurdity we’re seeing is likely to continue for years. Bad policy in the European Monetary Union, China, Russia, Japan, and, to a lesser extent, the United States is compounding with good policy on the part of Switzerland and, to a lesser extent again, the United States to wreak havoc on the global economy. Nobody can predict how the various entangled financial institutions of the world are going to act and react to each other’s moves. Until things settle down and return to some state of normalcy, we will continue to see such bizarre market conditions as we’re seeing in our local economy today.
3-21-15 Market Madness
Regular listeners of my show will recall that I have been an avid real estate investor for several years. I took a brief hiatus from investing around 2008 when I realized the housing market was heading for a massive crash, selling off all my rental properties. I waited out the economic uncertainty of the next couple years before I began acquiring new properties, and I am now under contract with my fifth property. Clearly the current rental market offers a golden opportunity for savvy investors, but surprisingly few people understand how to take advantage of it!
Real estate has always been a smart investment, but it’s only been within the last seventy years or so that the financial tools necessary for such investments have been accessible to everyone, namely through long-term financing by Fannie Mae and Freddie Mac. Home-ownership rates in America are among the highest in the developed world, and this is largely thanks to relatively easy access to such products as 30-year mortgages that just don’t exist in most countries. Therefore, the United States offers everyone the opportunity to not only own their own home but to start acquiring rental properties, too.
This has been true for several decades, but it’s only within the last few years that the disparity between renting and owning has become so severe. The return on investment is almost immediate, and allows for instant cash flow and long-term equity building. It used to be that rental income would help offset a mortgage or, at best, help one break even throughout the duration of mortgage. But with interest rates so low, home prices relatively depressed, and rental prices continuing to climb, it’s very common for properties to command rental prices that are higher than the cost of the mortgage!
Why is this, exactly? It’s because every relevant trend since the housing market collapse of 2008 has been conducive to depressing house prices and driving up the cost of renting. Among them:
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Housing prices collapsed and took years to recover. Many places are still below their 2008 highs, and those that have recovered are only marginally higher than they were seven years ago.
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Interest rates are hovering around historic lows. With slow-downs in China, uncertainty in Japan, and perpetual chaos in Europe, the US Treasury is in high demand, which drives interest rates down.
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Many homeowners foreclosed during the financial crisis and have not recovered sufficiently to qualify for a new home. This has increased the number of renters, even has the supply of housing remains constricted.
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Young people are graduating with massive amounts of debt. Many cannot qualify for a home because their incomes are relatively low and they have tens, if not hundreds, of thousands of dollars in debt.
Because none of these trends seem likely to reverse in the near future, the rental market will remain robust and the homeownership market will remain incredibly lucrative. This will be a continuing topic on the show, and I will also be hosting regular, free classes on the subject in person at the Garvens Mortgage Group offices in downtown Colorado Springs. As there’s no telling when interest rates will begin an irreversible trend upward, it’s imperative to take advantage of the present opportunities as soon as possible!
3-14-2015 Grand Illusion: Renting vs. Owning
I do love finding a good metaphor, and earlier this week I found myself literally tripping over one on my front porch—tripping, slipping, and stumbling over it, several times a day. It’s a sheet of ice caused by packed snow that had melted and re-froze. I was out of town when the snow came and nobody was around to shovel the snow off the porch. There is now an immovable impediment on my porch which, had it been addressed early, would have been far easier to remove. I can’t help but see this as a perfect metaphor for how we live our lives.
All over town I still see snow piled up on the north side of buildings, covering driveways and sidewalks and porches. Oftentimes, the same street will have houses alternating between shoveled walkways and un-shoveled walkways. Clearly some people take the ‘shovel early’ approach to life while others take the ‘shovel later, or wait for it to melt, or just deal with the consequences later’ approach.
I, of course, take the ‘shovel early’ approach and encourage others to do the same. Time has a way of compounding small problems into much more difficult, or even impossible, problems. Instead of moving a couple inches of snow early, you’ll end up chiseling away solid ice later. If you leave a bill unpaid now, you’ll end up with a collection, excess fines, and damaged credit later.
This isn’t limited to addressing current problems, either; it applies equally to structuring your life and finances now to make things easier down the road. It means, for example, taking out a small loan or credit card early in life to start establishing a credit history. It means paying your bills on time to avoid collections. It means saving money even if you don’t have a particular savings goal in mind, such as purchasing a house or paying for college tuition. Contrary to popular belief, it is far more difficult to secure a loan for a borrower who has no credit than terrible credit. A borrower with a 580 credit score is more likely to get a loan than someone with no credit score or no credit history, simply because the lender can’t be sure whether than borrower will behave like an 800-FICO borrower or a 400-FICO borrower. The 580-FICO borrower is at least a known quantity. It’s remarkable how many late-20s to early-30s borrowers I see who have no established credit history. Those who began building their credit history early, ideally as soon as they turn 18, are in a much better position than those who have procrastinated.
As the snow starts to melt—or, to leave the metaphor for the real world for a moment, as the economy starts to improve—we’ll all have an opportunity to start over. We should use better weather as an opportunity to correct our behavior and prepare for the next winter. As the economy continues to improve and the housing market continues to recover, more opportunities will present themselves to more people. Those best positioned to take advantage of them are those who started preparing their finances early.
3-7-15 The Snow and Shovel Approach to Life
We were once again fortunate to have Empire Title’s Bill McAfee on the show with us this week. He offered a great update on the Colorado Springs and Denver real estate markets with his typical blend of wit and insight. Most notable was the contrast between the two real estate markets, with Denver seeing higher demand in the higher-end brackets than we see in Colorado Springs. But even with the differences, both markets are similar in one important respect: they both overwhelmingly favor homeownership over renting.
Bill offered a snapshot of the real estate market, and that snapshot explains why homeowners will find themselves in better financial situations than renters. Inventory is incredibly low and is not moving. The current average days-on-market in Colorado Springs is 106 days; it takes the average home 106 days to sell. While the typical winter slowdown explains some of this, it doesn’t explain everything. Rather, homes aren’t selling quickly at present because demand is depressed. More people are electing to rent. Because of this, many people who are buying new homes are wisely deciding to keep their old home as a rental. Therefore, it never even goes on the market to be counted as inventory.
With lower demand in the housing market, construction companies have reigned in starts on new developments. Supply of new homes is therefore constrained and the cost of renting is driven up since there simply isn’t enough housing in which to put everyone! Competition is also more intense for rental units since leases generally expire every 6-12 months, and a renter can easily be refused a new lease if somebody else decides to out-bid them.
On the purchase side, historically low rates and a softer real estate market have made it relatively inexpensive to own a home for those who can get, or who care to get, financing. Home prices have plateaued since 2013, when a mild, investor-driven buying frenzy caused prices to spike. In some higher-priced brackets, average home prices have actually contracted. It’s a great time to purchase a home since deals are abundant and financing is still cheap by historic standards. FHA has even relaxed its mortgage insurance premiums, so even government-insured loans are cheaper than they were even a few months ago.
These two factors—high demand for rental units and the cheap cost of homeownership—have caused a great disparity between the cost of renting versus owning. This disparity looks set to continue growing as young people put off owning their own home and baby boomers continue to retire—downsizing their current homes while holding onto them as rentals. These disparities become even more pronounced as you move up into larger homes in higher brackets. The difference between renting and owning a 4-bedreem, 3-bathroom home, for example, can be as much as $500 a month!
The reality of renting has always been that you’re basically throwing money away. You aren’t building equity in an appreciating asset. Instead, you’re giving money to someone else, who is building equity in an appreciating asset with your money! This is even truer today since not only are you losing money, you’re paying more to do so! Any wise and prudent individual should consider the realities of renting, the new realities of the purchase market, and plan to get on the right side of the two.
2-28-15 The Realities of Renting
Any candid observer of our government’s approach to welfare would conclude that over-generous handouts are incredibly destructive. In fact, states that restricted how long an individual could collect unemployment witnessed faster improvements in their employment rate than those that didn’t, and the national employment rate improved faster after Congress voted to stop extending benefits. Why should it be any different? If people are comfortable on welfare, why would they elect to work? This seems obvious when you think about it, but few parents consider this when dealing with their own children. Many put their kids onto “parental welfare” and are baffled when their kids stay and home and refuse to work. This week’s show was a wake-up call to welfare-dependent Millennials and the parents who enable them.
Millennials today are better educated and have more material possessions than past generations, but they’re far more indebted and impoverished, too. As of January 2015, the unemployment rate for 18-34 year-olds was over 10%–18% for those under 20!—compared to a national average of 5.7%. More >30 year olds are living with their parents and fewer are getting married and starting households of their own.
To be fair, the 2008 recession and subsequent state of the job market has not been easy on Millennials. They left college with high levels of debt and dim employment prospects. But the recession was 7 years ago! All other age groups have recovered to their pre-recession states except Millennials. Clearly it is no longer the state of the economy keeping this demographic down. Rather, they have become comfortable living at home and are refusing to mature: to get jobs, move out on their own, and start their own families.
But, as the saying goes, it takes two to tango. Millennials could not enjoy such a regressed state of near-infancy if parents were not there to enable it. It is, of course, a natural parental impulse to want your kids to be happy and to give them as much as you can—to make sure they have more than you did—but at some point this abundance of charity becomes oppressive. It obliterates their work ethic and prevents them from wanting to achieve more for themselves. There are, however, three simple steps you can take to prevent this from happening:
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Teach kids to fish early – Don’t just hand them fish; teach them to fish! Give them chores and responsibilities early on to help them understand the value of earning things for themselves.
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Give them a hand-up, not a hand-out – The founder of Kinkos, for example, took out his first business loan with his father as a co-signor on a $5,000 loan. His father did not give him $5,000 outright, but did help him secure financing for his business. Helping your children is not an all-or-nothing issue. It is, rather, an issue of balance.
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Connect yourself and children with others to seek advice – Mentors are invaluable. Entrepreneurs of all ages should connect with others who share their interests and aspirations and gain as much knowledge from them as possible.
The role of parents is to teach children to support themselves. Parents don’t have to be as callous and ruthless as, say, waterfowl—throwing their offspring from great heights and hoping they figure out how to fly before hitting the ground—but the principle is the same. Oftentimes the most compassionate thing you can do for your kids is to force them to fend for themselves.
2-21-2015 Parental Welfare
I don’t know whom to blame more for the poor image millionaires have in this country: Scrooge McDuck or Rich Uncle Pennybags. Maybe both are to blame in equal measure. Either way, when Americans think “millionaire” they think of swimming pools filled with gold bullion or cars racing around Park Avenue with money flying out the window. This is the wrong way to look at wealth. Fortunately, most actual millionaires know this. For many, their wealth is the product of extreme thrift and financial discipline. Any individual aspiring to great wealth needs to ‘get in the mind of a millionaire’ and learn not only how to amass a great fortune but also how to keep it.
Did you know Sam Walton, the founder of Wal-mart, drove the same old pickup truck his entire life? Or that Warren Buffett still lives in the same house he purchased in 1958 for $31,500? Most wealthy people exercise extraordinary thrift, which is the principle behind Thomas Stanley’s “The Millionaire Next Door.” You could not identify most millionaires by their appearance or profligate spending habits because, if they behaved in such a way, they would not be millionaires for long! Wealthy people do not just earn money but save it, which is why the aphorism “a penny saved is a penny earned” is wisdom of the highest order.
Most wealthy people have mastered the art of having their money work for them. They abhor wasteful spending—on fancy clothes, large mansions, and other frivolities—but they are not opposed to debt, either. They abhor useless debt, such as credit card or student loan debt, but many will use debt to make more money, with the idea being that they can use a given amount of money to earn more from it than the lender charges in interest.
Sam Walton, for example, used his highly efficient supply chain to make debt work for him. He could turn over his entire inventory in three days, but would only have to pay his vendors every 30 days. He used this fact to grow his inventory exponentially, earning his return on several generations of inventory before he had to pay his vendor for even one!
Similarly, many wealthy people will leverage their homes or other assets, even though they could purchase those homes outright for cash. Instead of owning a home free-and-clear, they will take out a mortgage on it for, say, $250,000. They can then invest that $250,000 to make 8-10% returns or more on some other investment, while the mortgage debt only costs 3-4% per year in interest. This is a smart application of debt. Of course, most people should start on a smaller scale and resist the temptation to cash-out their entire house and shove the proceeds into the stock market.
Images of Scrooge McDuck diving into a pool of gold coins gives people the wrong impression of wealth. It is not a fun and frivolous enterprise. Wealth demands extraordinary discipline and a dedication to thrift, both to earn it and to keep it. Short of winning the lottery, you cannot hope to become a millionaire without first thinking like one. This will be a continuing theme of this show, so be sure to stay tuned for tips and examples of the lost art of thrift.
2-14-15 Get in the Mind of a Millionaire
If you’ve been following the Jay Garvens Show since the start of the year, then congratulations! You’ve completed my crash-course in real estate and demographics. You know where the economy has been, where it’s going, and, most importantly, why it’s going where it’s going. You’re now ready to build on that knowledge, practice what you’ve learned, and prepare yourself and your family for the immediate future, when numerous financial and economic opportunities will present themselves.
Most individuals and households already know what to do to make their financial situations stronger and less precarious. Few, however, are disciplined enough to actually do it. Presently, I am less concerned with knowledge here as I am with action. Lord knows you have had sufficient time to learn all you need to know by reading books by Ramsey, Maxwell, and Stanley. Our concern now is to take what you’ve learned and formulate an actionable plan that will deliver results.
Your first priority should be to find a mentor—someone who has achieved whatever it is you hope to achieve and can offer you immediate and enduring guidance and counsel. If you’re interested in purchasing investment properties to rent or flip, seek out someone who has done this successfully. If your dream is to run a business, find someone who has established one of their own. Successful individuals are rarely shy about sharing their knowledge and expertise with those following a similar path.
There is a substantial element of risk in all endeavors, and you need to position yourself to make taking these risks easier. You need to take a step back to get a running start. This means cutting out excess expenses in your budget. It means paying off debt. It means getting rich by acting poor. Recently, I downgraded from a Mercedes to a used Ford Escape. I flew halfway across the county to pick it up and drive it back to Colorado. Most people would consider the transition from a Mercedes to a Ford to be a step back. In reality, cutting excess fat from my budget by opting for a practical car versus a luxury car makes me better situated to, say, take on more mortgage debt or put more money into savings.
I started tightening my belt right before the real estate bubble of the early 2000s. I unloaded several investment properties and moved my family into a sensible house. Recently I have started acquiring more investment properties with my wife. Had I acted rashly by snapping up properties while the real estate bubble was inflating, I would have been in far worse shape once it burst. Instead, I acted prudently to seek out value rather than wealth, and today I am much better off for having done so.
To be successful, you must look at every transaction—from grocery shopping to car buying—as value propositions. Seek out the best value you can so your money goes as far as possible. You need to reform your household budget and start acting in a value-minded way as soon as possible. This will allow you to pursue opportunities as they emerge over the next several years. This is, however, only the beginning. Stay tuned as we discuss the next steps over the next few months.
2-7-15 Let’s Get This Thing Started
January was quite the demographics marathon on the Jay Garvens Show, with this week’s show being the fourth in a row on the subject. I know you’re wondering: “How can someone stack four shows on top of each other and not reach a conclusion?” Well, this week’s show reaches a conclusion of sorts; it takes the knowledge we’ve gained throughout the month and explains what it all means to you.
Demographic data and trends have real, tangible effects on all individuals. They aren’t just abstract economic trivia you hear about on the news; they’re the reason the economy has been depressed for over seven years and why interest rates are currently hovering near historic lows. They’re also why everything is going to reverse in 2020 and we’ll be set for a generation of rapid and high-quality economic growth. The Baby Boomers have been exiting the labor market since the mid-2000s, taking their productivity with them. They spend less in their retirement years and Generation X was simply too small to make up the difference.
Of course, demographic data changes as you zoom in to micro-economies like states and cities. Denver and Colorado Springs have fared far better than the American economy as a whole, and for good reason: Our demographics are younger than the US population generally. The Millennial wave that is set to sweep the country is arriving early to the Front Range cities. We managed to avoid the excesses of the real estate bubble and have seen steady—and at times rapid—growth in property values. Granted, the state of the broader US economy will affect local economies and national demographics will limit how rapidly we can grow in Colorado. But at any given time, Colorado will out-perform the rest of the country simply because we have a larger proportion of younger individuals reaching their peak productive years.
But where does this put you? As I’ve stated on every show this year, it puts you in a unique position to capitalize on the inevitable. Unless we’re hit by a plague or alien invasion that only affects our youngest citizens, the Millennial wave cannot be stopped. We know the economy will putter along for a few more years and then take off around 2020. We know that those who prepare now will be in a better financial position to take advantage of the new opportunities this economic growth will offer. And preparation largely means financial preparation. It means maximizing your earnings potential and paying off debt. It means getting rid of your student loans and refinancing your home immediately. These are the golden years of mortgage interest rates, and by 2020 people will look back at the 3-4% interest rate as a fond yet distant memory.
2015 will be an interesting year for both the economy generally and the mortgage/real estate industries specifically. Denver and Colorado Springs are well-positioned to enjoy an earlier-than-expected economic recover, but mixed economic date both domestically and internationally may dampen those prospects. We’ll have a lot to discuss this year on these topics and more, but it was great to be able to spend January discussing demographics in depth and to introduce the principal theme of this show to our new Denver audience.
1-31-15 Your Demographics in America
We are absolutely thrilled to welcome a whole new listenership to the Jay Garvens Show, as this week marked our inaugural show on 760 AM in Denver. They will be joining our established audience on 1240 AM here in Colorado Springs. To mark the occasion, we brought in Colorado Springs’s premier real estate expert, Bill McAfee of Empire Title, to talk about our local markets and treat our new Denver audience to the keen insights and unique analysis that our Colorado Springs audience has come to expect each time Bill is a guest on our show!
I’ve discussed demographics a lot over the last few years, but listeners in Denver may not have been up to speed on what we have covered so far. To help them out, I reviewed many of the key concepts that we have covered on this show previously. With Bill’s help, we were able to take these concepts and apply them to the Denver market. This helped acquaint Denver’s listeners with these concepts while giving Colorado Springs listeners a new and probably very familiar market to contrast with Colorado Springs’s market to see how demographic variables can change an entire market.
Many are surprised to learn that Colorado Springs is the 44th largest metro area in the country—probably because the city is so spread out and doesn’t feel very large. Denver, meanwhile, is the 21st most populous metro area. Those who watched the real estate markets in both areas, however, saw that Denver was a red-hot market throughout 2012 and 2013 when Colorado Springs’s market saw only moderate gains in house prices. Our market, while robust, lacked the dramatic increases that Denver witnessed.
What accounted for this difference? Demographics! Denver’s population is generally younger and less fluid than Colorado Springs—which is to say they don’t have as high a proportion of highly mobile people as the Springs does as a result of the various Army and Air Force bases. Denver residents move there to start careers and stay put long enough to start families and move to bigger homes. Denver has a vibrant tech sector that attracts young, relatively wealthy professionals that prefer to concentrate themselves inside the city.
While differences can be seen between the Denver and Colorado Springs metro areas, even bigger differences can be seen within the Denver metro area by contrasting areas such as Cherry Creek and Capitol Hill with places like Aurora or Littleton. Areas closer to downtown Denver saw much faster appreciation than Denver’s suburbs, and the values have remained high even as the state and national real-estate market has softened over the last year or so. Like us, Denver was also fortunate to have escaped the worst excesses of the early-2000s construction boom that afflicted places like Phoenix and Las Vegas. This probably helped control the housing supply and is now helping drive up the demand of housing.
We are absolutely thrilled to introduce ourselves to Denver, and I am looking forward to hearing from Denver listeners for new insights into their market and hopefully teach them some new things in return. The differences between our two markets offer an ideal laboratory to analyze the effects demographics on local markets, and it will be incredibly fascinating to see how both our markets evolve over the next few years as the Millennials begin to reach their peak productive years. Stay tuned!
1-24-2015 Demographics in Your Own Backyard
This economy is really booming, ain’t it? They said it would happen. All last year we heard stories of the economy finally picking up and predictions that 2015 would be the year the US economy finally turned the corner. And it’s finally here! Wait, what? It isn’t? The economy is still idling? Record numbers are still out of the workforce and wages have declined? Interest rates have cratered since the fall? How is that possible? Well, if you’re a regular listener of this show you know this wasn’t only possible but inevitable. Demographically speaking, a meaningful economic recovery is still years away.
After hitting a two-year peak in September, rates are now at a 20-month low with little chance of improving. Mostly this is because of global economic uncertainty, but it also reflects the fragility of our so-called economic recovery. Jobs reports oscillate between underwhelming and treading water, and the marked decline in the jobless rate—presently at 5.8%–is both historically high and still misleading; it does not factor the record-high number of US workers who have left the workforce. Beyond this, wages have actually declined in recent quarters.
There are many theories to explain the softness of this recovery—now entering its 7th year—but the one I find most convincing is the one posited by such writers and thinkers as Harry Dent, which is that the demographics of America’s population are preventing a meaningful economic recovery. As the Baby Boomers exit the workforce and tighten their spending, we are relying on Generation X to pick up the slack. Since Generation X was the first generation in US history to actually be smaller than its preceding generations, they have found it impossible to replace the Boomers. There simply aren’t enough Gen Xers to produce the kind and quality of economic activity that the Boomers produced.
Consider the most recent statistics on home-buying. The breakdown of the ages of homebuyers is as follows:
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31% are ages 23-34
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37% are ages 35-49
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30% are ages 50-70
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and 2% are 71 or older
One-third of homebuyers are over the age of 50, and another one-third are in the financially-immature years of 23-34. The kinds of homes these two demographics are buying are typically small, older, and have recently-though-no-new appliances. The housing industry cannot thrive with the buying habits of these demographics, and such ancillary industries as furniture manufacturers and appliance makers cannot thrive, either.
Fortunately, with the Millennials set to come of age beginning in 2020, we are set for a massive economic expansion. The Millennials will start to become financially and economically mature, and will not only replace the lost economic activity of the Boomers but far surpass them. In the meantime, we will no doubt continue to hear stories of “green shoots” and lower unemployment, just as we heard throughout 2014. But as today’s low rates show, those stories are not convincing anyone. There is still great uncertainty about our economy and its capacity to grow, and this uncertainty will persist until the Millennials finally come of age.
1-10-2015 21 Demographically Speaking
What makes a great leader? How does an individual not only pursue a goal but convince others to pursue it with him? As the founder of a company, and the co-founder of a family, I have learned that no group of individuals can survive, let alone thrive, without good leadership. And one of the best books I’ve read on the topic is John Maxwell’s 21 Irrefutable Laws of Leadership. These laws address the nature of leadership, of leaders, and of followers, and are essential knowledge for anyone hoping to lead a group toward a single and collective goal—whether that group is a family, a group of friends, a church, or a business.
People tend to take good leadership for granted since there are few occasions when a bad leader finds himself in a leadership position; few people know what bad leadership looks like. Because of this, most people don’t put much thought into the nature of leadership. First and foremost, leadership is a process—not a goal. The interaction between leaders and follows occurs minute-by-minute and is a continuing process of learning and developing (Law #3 – The Law of Process). Leadership depends on momentum; just as it is easier to push a rolling car, it is easier to push a group when there is already momentum to be found (#16 – The Law of Big Mo). And as the group grows and progresses, it will do so more rapidly with more leaders. Many people in leadership positions only lead followers; the best leaders lead other leaders so that the group can grow exponentially (Law #20 – The Law of Explosive Growth).
Many of the best leaders have an innate understanding of these laws. They have an intuitive leadership bias (Law #8 – The Law of Intuition). They see the world with a leadership bias and process information differently than people who follow. This isn’t to say leaders are born and not made, but simply that some people will have an easier time of it and the very best will naturally find themselves in leadership positions. These people will assert themselves, which others find an attractive quality when deciding whom to follow (Law #7 – The Law of Respect), and their personal characters will determine the kinds of people they attract in the first place (Law #9 – The Law of Magnetism).
While leaders typically have an intuitive understanding of what makes good leadership, they often don’t understand the nature of their followers. This can impede some leaders from continual growth as their followers get sick of them and leave to find a more accommodating leader. Followers needs to have a positive example set for them (Law #2 – The Law of Influence) and need to be guided toward purposeful action. They often need leaders to help bring out the best in themselves, to let each individually contribute to the group’s success (Law #5 – The Law of Addition). Finally, they need to respect the leader and buy into the leader as an individual. Only then will they proceed to buy into that leader’s overall vision (Law #14 – The Law of the Buy-in).
We only touched on a handful of the 21 Irrefutable Laws of Leadership here. If you’re interested in learning about all of them, be sure to check out this week’s show in the online archive, and pick up Maxwell’s book, The 21 Irrefutable Laws of Leadership. These laws are as applicable to households as to businesses, and I believe everyone can benefit from learning them, practicing them, and mastering them.
12-27-2014 21 Irrefutable Laws of Leadership
I’ve been offering advice on finances and mortgages for over 15 years, and have helped hundreds of individuals and families—both in person and through the radio—resolve every financial problem imaginable. In that time, I have heard the phrase “easier said than done” countless times. And, indeed, most of the common-sense solutions to financial problems that you hear from radio and TV hosts or book authors are much easier to say—to package into simple, single-sentence platitudes—than to execute. For many individuals, this is because the advice runs counter to their nature; some individuals may be genetically predisposed to unwise behavior. This week’s show explores this idea and offers solutions.
Oftentimes the difficulty in executing certain advice, sound as it may be, reflects the difficulty of the situation. Mountains of debt, large monthly financial obligations, or a sudden loss of a job create conditions that make the practice of sound financial advice difficult. That is understandable and, fortunately, can often be easily remedied by making better choices—forgoing expensive dinners to instead pay off debt; downsizing an unnecessarily large house, using the saved money toward monthly bills, and saving the excess. But for some people, the accumulation of debt and large monthly financial obligations isn’t the result of a sudden shock but the result of undisciplined decision-making that they often cannot help.
It’s difficult for most people to empathize with an individual who has a genetic pre-disposition toward certain behavior. We can’t understand how other people willfully allow such things as alcohol, gambling, or shopping to ruin their lives. For most of us, it’s easy to say ‘enough.’ But for others, the thrill of immediate gratification is more important than delayed reward. In the realm of finances, this means spending whole paychecks or going into debt to buy new things rather than squirreling away money for future use—or, if you’re like my father, squirreling away money just for the sake of squirreling away money!
Some people are temperamentally inclined toward disciplined saving; others are temperamentally inclined toward reckless spending. Obviously it is far wiser to save than to spend, and so it seems those who are inclined toward saving are luckier than those inclined toward spending—although, truth be told, the only people that are immune from the temptation of spending sprees are ascetic monks. Everyone has to resist temptations to buy unnecessary things or assume financial obligations that they can’t afford. It’s just that the impulse to behave this way is far stronger for some people than for others, and often this is the result of genetics.
But genetics is not fate. As human beings, we’re not only able to make choices but to understand that one choice is inherently better than another. People are naturally inclined toward being brutish, selfish, and mean-spirited, but we’re able to act against our natures and decide we would rather be charitable and kind—most of the time. This is equally true for financial decisions. Just because it’s more difficult for some people to make the right decision does not mean it’s impossible; it simply means they need to exercise more resolve and discipline.
It’s easy for my to ignore this reality when giving advice. Since I only have one hour, I often condense advice into bullet points to tell people what they should do without fully recognizing the difficulty often involved in doing it. This show was meant to acknowledge the difficulty involved in practicing my advice, and to acknowledge that some people will find it far more difficult than others. As I give advice in the coming months—and especially during the start of the New Year—keep in mind that easy and simple advice is not meant to be easy and simple in practice, and although it can be difficult,
If you have been monitoring interest rates over the last several years, you may have noticed that rates don’t take a holiday during the winter months. The fourth quarter often sees a lot of activity with large movements in rates. After a sharp spike in the third quarter of 2013, rates have been trending downward, and even created a miniature refinance boom similar to 2012. For many people, this has renewed their interest in personal finances and made them more aware of Financial Seasons—both within their own household and within the broader economy.
As with all organic and complex systems, the economy goes in cycles. It ebbs and flows and follows a consistent, if unpredictable, pattern. We generally know what it will do, but we never know when it will do it. After the optimism of 2013, we’re now seeing more pessimism in the markets. Interest rates, consumer confidence, and business confidence all trended lower in 2013. Market data in the US, Europe, and Asia were mixed, and typical financial hotspots like Europe and South America either exploded or seem poised to. The world seems to be on the verge of something significant, although nobody knows whether that something will be good or bad.
Market-watchers pay close attention to consumer habits during the holiday season since this may indicate their mood for the entire next year. If they’re feeling more confident they will likely buy more. Early figures suggest holiday spending will be higher than last year, though a disappointing Black Friday—or Black Thursday, if we’re being technical—indicated consumers aren’t in a hurry to spend money. They seem both more confident and more cautious, perhaps because 2013 was good to them but they aren’t sure 2015 won’t disappoint.
This development—feeling confident while acting with discipline—is a very good development. It means people are taking the winter months as an opportunity to evaluate their own finances—to use it as their own personal Financial Season. For decades now, people have used the holidays as an excuse to go ballistic with spending. While this was never a good thing, it was less dire in years past when the economy was generally very good and people could easily recover from an imprudent spending binge. But now, people feel those massive Christmas bills for the rest of the year. It begins the year with the wrong tone—with bills that feel overwhelming and distract from other, more important financial goals.
For this reason, I recommend everyone do two things this holiday season. First, use discipline with your holiday shopping. Don’t go crazy with it. Although this is a hard thing for natural gift-givers to avoid, the immediate gratification of buying and giving a great present is not as important as starting the year on more sound financial footing. Second, use this firmer financial footing to address your other financial goals, like paying off debt or saving for a house. Starting the year with debt is discouraging and makes your other goals seem unreachable. But starting with less extra debt—or, ideally, no extra debt!—allows you to spend more energy and resources on other, non-Christmas-related financial issues.
As we move toward the New Year, it’s imperative to avoid the temptation of using the Christmas season as one last irresponsible hurrah. Start your New Years resolutions early! If your goal is to lose weight, resolve to eat less during the holidays. If your goal is to save money or pay off debt, resolve to spend less on gifts and frivolities. Done right, it may even allow you to go nuts next year without going into debt.
12-6-2014 Financial Seasons
I was blessed to spend Thanksgiving this year in New Mexico with my wife’s side of the family. Growing up in Wisconsin, my Thanksgivings were always fairly routine: turkey, cranberry sauce shaped like a can, potatoes, etc. This year, however, our Thanksgiving was infused with traditional New Mexican flavors like green chilies and tomatillos. It was different, to be sure, but the most striking difference at the table was less the ethnic divide as the generational divide between the three generations gathered there. Culturally, my parents and my wife’s parents could not be more different. But in terms of worldview and temperament, I noticed a lot of similarities.
In the United States there are, at present, five distinct generations living, from Generation Z, the youngest, to the Greatest Generation. Because of this, it’s easy to compare the characters of each generation. As I saw over Thanksgiving, members of a generation are defined more by the historical events unique to their times than by their own ethnic or religious backgrounds. Although my wife’s parents are Southwestern Hispanics and my parents are Midwestern Germans, they are all of the same generation, which is evident in their lifestyles and spending habits. They believe all debt is bad and made all purchases, from groceries to houses, in cash. The believed savings was its own reward, which is why my father died with millions in the bank.
The following generation—the Baby Boomers—could not have been more different. They have historically had net-negative savings, have been spending wildly for almost forty years, and carry incredible levels of debt from high-balance credit cards to mortgages. The positive effect of this has been the extraordinary expansion the US economy has experienced since the 1980s; the negative effect is that household finances are fragile and cannot easily recover from shocks like the Great Recession.
My generation, Generation X, has been more fiscally prudent than the Boomers, with higher levels of savings and less debt, but we are not as strict with our finances as our parents’ generation. We carry mortgages, often carry balances on our credit cards, and most have student loan debt. And although we’re relatively productive, our numbers were not large enough to make up for the loss in economic activity once the Boomers started retiring. We are, in fact, the first generation that was actually smaller than its predecessor.
I am a firm believer that the Millennials will make up for the lost economic activity as they begin to come of age around 2020. Numerically they are the largest generation in American history and one of the best educated (at least on paper). They are more savvy with using technology to save and invest, so although their purchases of homes and cars tend to be less extravagant as Gen Xers and Boomers, the average US household should be on much firmer footing then we have seen in decades.
The next time your extended family gathers together, take notice of the generational similarities between the different sides of your family. It is astounding how people from different parts of the country—or even different countries altogether!—and different ethnic backgrounds can be so similar. The same broad influences that have affected specific generations in the past will continue to do so, and we’ll eventually see the effects of this on our economy, which can’t happen soon enough!
11-29-2014 Family Reunion
We cover a lot of diverse topics on The Jay Garvens Show, from mortgages and real estate to finance and global markets, but every once in a while it’s crucial to focus on a smaller and more immediate topic: ourselves. As individuals we seldom make headlines and therefore think our actions don’t matter; we’re more interested in the grand scale and scope of global markets, and so we put ourselves on the back burner. And so, for this week’s show, I pivoted away from our usual focus on markets and finance toward more personal issues.
But, before we pivot, I should offer a brief snapshot of our local real estate market as outlined on the show by Bill McAfee of Empire Title. The local real estate market is still healthy, if not red-hot as we saw in 2013. Listings are below the ten-year running average at 3,500 active listings, and there is a pronounced shortage of listings in the sub-$250,000 range. Overall, the local market is up 4% versus last year in terms of median home prices, but homes under $250,000 have appreciated even faster. This suggests a healthy local market that will continue to see consistent gains without any major surprises.
The consistency of the market, coupled with a pronounced drop in rates, allowed many people who had started seeking change in their lives to fully realize it. Through my radio show and mortgage company, I met dozens of individuals that became first-time homeowners, and I was fortunate to learn each of their stories—specifically, when they decided to pursue homeownership and what they changed in themselves and their lifestyles to make it happen. Through our periodic first-time homeownership and investment property classes, I got to meet dozens more who were just starting to implement personal change in their lives and who will probably realize their dream of homeownership next year.
I was also given a poignant illustration of all the forms that personal change can take when one of our clients had to cancel his loan application days before closing. I suspected something was slightly off when I first met him, and it turned out he was struggling with drug dependency and his family finally staged an intervention to get him into rehab. As excited as I was that this man was pursuing his dream of homeownership, I was humbled to learn of his personal struggles and thankful that he had a family in his life to intervene. It was a reminder that we sometimes have to take a step back to move forward—and I hope, eventually, he’ll use this step back to get a running start on his future.
Most people’s experience with change won’t be as drastic as this, and we should reflect on stories like this to understand that most of us are already starting from relatively good positions in life. Most of us aren’t struggling with dependency issues, and the worst we have to deal with is breaking bad habits and adopting better ones—for example, being more disciplined with our money and budgets, and using our leisure time to read rather than watch TV.
Earlier this year, I spent several shows discussing New Years resolutions, developing good personal habits, and so on. I figured I should get an early start for next year to let people go through the binge-spending and binge-eating holidays while keeping in mind the dedication and willpower than will be required to affect real and lasting change in 2015. I met dozens of individuals this year who completely transformed their lives, and I look forward to meeting dozens of the same next year, too.
11-22-2014 Let’s All Reach For Change
There’s an old quote, variously ascribed (though Google suggests it’s by Will Rogers), that goes: The surest way to double your money is to fold it in half and put it in your pocket. Rogers also said people spend too much money they don’t have, buying things they don’t need, to impress people they don’t like. Whether you lose money on a bad investment or waste money on a silly purchase, the effect is the same: you have lost money with little to show for it. It’s as though you never earned the money to begin with. We have discussed the various ways of earning money on past shows. On this week’s show, we discussed how to keep it.
At least since the original consumer credit boom of the 1920s, our culture has used debt to create the illusion of prosperity. Throughout the 20th Century, Americans on average had an extremely low, if not outright negative, savings rate. New appliances, automobiles, and large houses have been staples of the American household for nearly a century. This impulse has, fortunately, weakened since the Great Recession; Americans are now saving and paying off debt at historic rates, and are keeping things like large appliances and automobiles for longer than ever. People are being more financially prudent and conservative than they’ve been in decades.
This trend is not isolated to older generations, either. The after-effects of the Great Recession, which are still being felt today, plus massive levels of student debt have nudged Millennials toward more basic, less flashy lifestyles. They prefer smaller, more practical cars and homes. Most prefer renting to owning, and many live at home with their parents well into their 20s, if not 30s. The younger generations, even more than the older Gen Xers and Baby Boomers, show tendencies toward frugality and thrift.
We can see this financial conservatism translate to political conservatism, as evidenced by the most recent mid-term elections. Regardless of personal politics, everyone should consider the demographic, gender, and racial makeup of the new wave of Republican politicians, which saw a substantial number of young people, women, and minorities elected as Senators and Representatives. This may portend a growing trend of traditionally liberal spenders, such as African-Americans and women, adopting a more conservative approach to spending. Whatever the political consequences of the last election, it’s likely the cultural consequences will be immediate and lasting.
The outcome of the most recent election is only the latest evidence that American culture is shifting toward fiscal prudence. This doesn’t seem to be translating to social conservatism per se, but the last decade has seen American consumption and spending habits trend toward more discipline and less reckless splurging. This will ultimately cause people to feel more secure about their budgets; as they waste less money to poor investments and useless purchases, they’ll realize their earnings power has always been stronger than it’s felt.
11-15-2014 Spend Less Earn More
You’ve no doubt noticed a gradual increase in the number of radio and TV commercials directed at senior citizens. In between the advertisements for adult diapers and golf-oriented retirement communities in Florida, you may have heard advertisements for reverse mortgages. Although these are relatively rare mortgage products today, they are becoming more popular as more and more Americans reach their senior years; eventually, a reverse mortgage may be the right financial product to suit your, or a close family member’s, life circumstance. This is why it’s imperative to understand what a reverse mortgage is, who they’re for, and what risks may be involved.
First things first: What is a reverse mortgage? Well, it’s exactly what it sounds like. Instead of money going from your pocket into a house to pay off a mortgage and create equity, a reverse mortgage depletes the home’s equity to pull money from the home and put it in your pocket. The lender places a lien on the property that becomes due once the home is sold or the last surviving spouse passes away.
I heard a few gasps at that last sentence. “A lien?!” you say. “Isn’t it dangerous to have a lien against the property? Won’t that put possession of my home at risk?” No! There are several myths and misgivings about reverse mortgages that demand clarification. Among them:
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Whether the owner loses ownership/title. As with a traditional mortgage, the owner maintains ownership and title, while the lender merely places a lien on the property.
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Whether an owner can be forced out of their home. The laws governing FHA-backed reverse mortgages prohibit a homeowner from being evicted from their home by the lender. A homeowner cannot out-live a reverse mortgage. The owner must still pay property taxes and homeowners insurance, though.
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Whether the income from a reverse mortgage affects current benefits like Social Security or military retirement. No! The income from a reverse mortgage does not affect eligibility or entitlement amounts for government benefits. Similarly, the income from a reverse mortgage is not taxable.
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Whether your current property is eligible for a reverse mortgage. As long as you occupy the property as your primary residence, it should be eligible for a reverse mortgage. This includes duplexes, townhomes, and even mobile homes. Investment properties, however, can not be used for a reverse mortgage.
There are a lot of benefits to a reverse mortgage, but as a complicated product there are other factors to consider. The original purpose of the reverse mortgage was to provide low-income senior citizens with reliable income while keeping them in their home; it was not meant to provide free money for vacations. Reverse mortgages should not be used for frivolous purposes; as the largest asset most people will have, a home’s equity should not be treated lightly.
We have only scratched the surface of reverse mortgages so far. This is why I’ll be hosting a special educational class specifically on reverse mortgages on Tuesday, November 18th, 2014, with one of my loan offers who has years of experience originating reverse mortgage. This is a free class with an open Q&A session, and anyone interested in learning more about reverse mortgages should RSVP immediately to reverse their seat.
11-8-2014 Reverse Responsibly
When the market goes up, everyone cheers; when the market goes down, everyone panics. This year alone saw the stock market reach record highs and the bond market reach near-record lows—several times! People react to every sign and omen, even when those signs and omens tell them contradictory things. They obsess over each detail so incessantly that they miss the broader trends. That is, they can’t see the forest through the trees.
One recent example of this phenomenon occurred on October 15th, 2014. In a blink-and-you-miss-it moment, US Treasuries dipped below 2% for the first time in almost 18 months. This, of course, translated into lower interest rates on mortgages, and almost instantly the phones at Garvens Mortgage Group were slammed with clients wanting to refinance. Many legitimately benefited from refinancing, but some were so anxious to trim an eight of a point off their interest rate that they didn’t stop to consider the consequences of a refinance—such as whether the savings on the interest rate would cover the closing costs of the loan by the time they sold that home. They saw the opportunity of instant savings but didn’t consider the upfront cost, or whether it would make sense over the medium- and long-term.
Rates are still substantially lower than they were over the spring and summer, even though they’re rebounded from the psychologically exciting 2% barrier. And, really, anyone who can legitimately benefit from a rate-and-term refinance has already done so by now. Most of these people saw the forest—that is, an extended period of depressed interest rates—and took the time to consider all aspects of a refinance before deciding to apply for one. They didn’t obsess over the day-to-day market fluctuations.
(Actually, one did obsess over the day-to-day details: He saw a small dip in rates and decided against locking his rate in case rates dipped even further. Instead, they skyrocketed and he missed his chance to save money entirely.)
Another example of seeing the forest through the trees was the clients—and there were a few of them—who did refinance and decided against refinancing into a 30-year mortgage which, as you know, I consider a government-sponsored scam. In any case, these borrowers didn’t want to reset their mortgages to 30 years after paying down 5 to 10 years already, so instead elected to refinance into 15- and 20-year mortgage products. In most cases, this resulted in higher monthly payments, but over the life of the loan they will have saved tens of thousands of dollars in interest.
In the age of Twitter, 24-hour news, and instant communication, we’re all inundated with data and details every hour of every day. With all this information, it’s difficult to distinguish between the fleeting and the permanent—to know what’s just noise in the data and what’s actually a trend. It takes effort to ignore the insignificant minutiae and focus on the forest, but learning to do so will offer extraordinary benefits.
11-1-2014 Can’t See the Forest Through the Trees
I’m not sure if you noticed, but it’s election season. And while the title of this week’s show is “Term Limits,” it fortunately has nothing to do with politics. Rather, it’s a continuation of various themes we have discussed on prior shows—namely, how to use your knowledge of coming economic trends to structure your finances and how to use smarter mortgage products to come out ahead once those trends subside.
I have said repeatedly (but not too forcefully, since I have to make a living!) that the 30-year mortgage is the biggest government-sponsored scam around. Even loans financed with today’s historically low rates will, once amortized over 30 years, cost double the principal amount because of interest. As an exercise, look up a mortgage calculator online (most banks and lenders have one on their site) and compare the same principal amount at 4.5% amortized over 15 and then 30 years. Then consider that 4.5% rate you’re will probably increase over the next couple years. The difference in interest will shock most people.
This is, in essence, what I meant by ‘term limits.’ The terms of different mortgage products will have different limits. It’s crucial to familiarize yourself with those limits and decide which best suits your financial needs. While most will agree that a 30-year mortgage is easier to carry—that’s why they exist—they should ultimately understand that a 15-year mortgage is, in fact, better.
To understand why, recall what I have said on past shows about the anticipated trajectory of the US economy over the next several years. Those of us who subscribe to a demographics-based view of economics believe we are in for another six years of poor economic performance before things start accelerating in the year 2020, when Millennials begin reaching their peak productive years. This leaves six years of spinning our wheels and probably another five or six years before the economy really takes off.
Where will you be in 10 to 15 years, and where will your friends and neighbors be? If you have a 15 year mortgage and they have a 30-year mortgage, here’s where you’ll be: 15 years ahead of your neighbor. You’ll own an asset outright while they’re still paying on theirs. You’ll have more resources to invest and save. You’ll also be tens of thousands, if not hundreds of thousands, of dollars ahead because of the money you saved on interest.
Now, where will you be over the next 10 to 15 years? If you opt for a 15-year mortgage, you’ll have a few hundred dollars less to spend each month. Your house will probably be slightly smaller than you could have afforded with a 30-year mortgage. There are costs—sometimes painful costs—associated with more prudent loan options, but ultimately you will be far better off than if you’d chosen the alternative.
If you’re more concerned with instant gratification than long-term planning, then by all means choose the easier program. But if a few extra hundred dollars a month is worth the tens of thousands saved over the life of the loan, you should absolutely choose the shorter term. You’ll not only be far better off in the future, but you’ll likely make a smarter home purchase. Spending less makes you more conscious of value, and rather than buying whatever you want, you’ll be forced to buy what you need. That is one limit of a 15 year term, but sometimes limits coax us into doing what we should have done anyway.
10-25-2014 Term Limits
It’s commonly said (erroneously, it turns out) that the Chinese use the same word for both ‘crisis’ and ‘opportunity.’ That may not be true in fact, but I agree with the sentiment behind it: moments of crisis present opportunities for those patience and prescient enough to wait out the storm. On this week’s show, I applied this idea to our current economic situation and showed how individuals who take a little initiative now will be steps ahead of their peers when the economy ultimately recovers.
During times of crisis or uncertainty, our natural impulse is to hunker down and wait out the storm. When things look bleak, it is of course unwise to pursue bold and risky ventures. Too often, however, this prudence quickly becomes idleness, and people will have wasted an entire downturn being unproductive. It’s commonly said that you should make hay while the sun is shining; the corollary is that you should sell your hay and plan your next sowing when it isn’t. You may not see instant returns for your efforts, but you will see returns when the economy recovers. But if you remain idle, you will someday regret not having invested your time and effort when conditions were conducive for disciplined planning.
Opportunities are all around if you know where to look. As business shut down and liquidated, they unloaded vast amounts of capital and productive equipment that can now be re-purchased at great discounts. Commercial real estate is still depressed. Rents are cheap. Residential properties offer great investment opportunities. The sad fact is that most of the economy is still reeling from the recession.
The Fed’s QE policies have only worked to inflate asset classes like stocks, leaving the rest of the economy tremendously depressed. These other, depressed assets are where the best investment opportunities can be found. Often, the best opportunities aren’t so much in what they are as in what they can replace. For example, your dream job—whether at a different firm or at a firm you start yourself. Economic downturns are perfect times to assess your employment situation and make drastic—though prudent!—changes.
When times are good, people will stay with a job they hate because it pays well. But when employers have universally cut hours, postponed raises, and reduced perks and incentives, you’ll find other more ideal jobs are competitive with your current wages. It becomes less of a financial sacrifice to pursue a new job or career when the economy is depressed. And with so many Americans unemployed or under-employed, better prospects are available to those with the initiative and foresight to look for jobs now rather than waiting for the economy to recover.
As regular listeners know, I predict another six years of poor economic performance. Many people will spend this time being idle, never considering the abundance of opportunities out there. Paradoxically, the absence of opportunities creates its own opportunities. For example, because of low interest rates, a 15 year mortgage today costs the same each month as a 30 year mortgage did in 2006. Imagine that: Someone getting a 15 year mortgage today will be no worse off than their friends who got a 30 year mortgage in 2006, but will be 15 years and a tens of thousands of dollars ahead by the time they pay off their mortgage!
Examples like this abound if you know where to look. If you spent the last six years being idle, now is the time to start engaging with the opportunities out there and planning for life once the economy recovers. Those who take initiative now will be immeasurably better off than those who don’t.
10-18-2014 Gaining Strength from Weakness: Quantitative Easing (QE)
If you presently have a mortgage, your mailbox has no doubt been inundated with fliers from mortgage lenders advertising extremely low rates. And it’s true: the days of the 3% mortgage are back. But less than a month ago, most experts were predicting a steady increase in rates. What happened? How did we get back to the 3% mortgage, and how long can we expect to stay here? The answer lies with the Federal Reserve, their quantitative easing program, and the projected performance of the US economy.
As a brief refresher, the Federal Reserve began its policy of Quantitative Easing (QE) in the immediate aftermath of the 2008 housing collapse and subsequent recession. Because interest rates had been effectively zero since 2006, the Fed had limited options to stimulate the economy. Typically, the Fed reacts counter-cyclically to extremes in the economy: they will raise the interest rate to cool an overheated economy or lower the interest rate to stimulate a dragging economy. Since the prime interest rate determines how expensive it is to borrow money, cheap money will provoke increased economic activity and vice versa.
QE is a method of artificially lowering the cost of credit by purchasing longer-maturing debt, like Treasuries, and thereby keeping rates low while simultaneously expanding the monetary base. The Fed is in the middle of its third round of QE. It had pledged to purchase a set amount of mortgage-backed securities each month until the US economy reached certain inflationary and employment goals. Throughout 2014, the Fed signaled that they would begin ‘tapering’ their bond purchases on account of the unemployment rate dropping and inflation remaining well below target.
However, recent economic news has not been encouraging. Wages and average hours worked have remained stagnant; the number of jobs being created is sub-par considering we’re 6 years out from the recession; oil prices are dropping; retail figures are week; and Europe is once again making headlines for the fiscal catastrophes set to erupt in Greece, Ireland, and Spain.
Responding to this news, the Fed has been less forceful with its insistence that it will begin tapering. Some experts are even speculating that they will be forced to institute a fourth round of QE—although that seems unlikely. They’re far more likely to avoid shocking the economy with a sudden taper in asset purchases. This is what investors are expecting and is why Treasuries recently dropped 20 basis points overnight. Speculation that the Fed will continue buying mortgage-backed securities coupled with capital flows from under-performing economies like Japan and Germany are depressing bond yields and will continue to do so until the picture improves.
As Yogi Berra said: “Predictions are hard—especially about the future.” Nobody knows what the future will bring. Just a month ago, everyone was certain that we were on the brink of a great recovery. Now everyone has retreated to a state of pessimism. Domestically and internationally, events are unfolding that demand appropriate reactions from the Fed. Everything seemed to have been contained until earlier this week; suddenly, we are getting bad news from all corners. Nobody knows how long the present bout of bad news and low rates will last, but I do know one thing: it won’t last forever. If you missed out on the historically lows rates of 2012 and 2013, now is your chance to take advantage them.
10-11-2014 Infinity and Beyond
You’ve no doubt heard the expression, “make hay while the sun is shining.” When conditions are favorable for productive endeavors, you should use that opportunity to get things done! Well the sun has been shining for several years. It may not feel like it, but the economic malaise of the last few years has provided an opportune time to be productive. With few negative shocks but also few high-return opportunities, our current economy is a perfect environment to structure your finances and prepare for times when the sun isn’t shining—or, hopefully, when it’s shining extra bright.
If you subscribe to a demographic approach to economic modeling (as I do), you should be prepared for six more years of economic malaise. Simply put: Boomers have been leaving the labor market and tightening their spending habits in large numbers since 2006, and it won’t be until the Millennials enter their high-productivity years in 2020 before the Boomers’ lost economic activity is recovered and, eventually, surpassed. The false-starts and meager economic growth of the last six years seem likely to continue for another six.
What, then, should you be doing over the next six years? On the show, we discussed twelve action- and thought-items (that is, things you should either be doing or be thinking about) that are perfect for such lean years as we’ve been living in. They are:
1) Know your goals and choices – You should decide now what your personal and financial goals for the future will be. When the economy is booming, a multitude of opportunities can present themselves and distract you from settling on disciplined goals.
2) Remember history repeats itself – There is nothing new under the sun. Economies ebb and flow, and you should anticipate that the economy will recover—and, eventually, contract again. You should prepare for the next recovery and, also, the next contraction.
3) Debt is the grim reaper – Since there are few high-return investments around, your best bet is to eliminate debt and save on the interest. If your debt isn’t being productive, get rid of it!
4) Build your cashflow – There are many high-value properties for sale. Use the recovering-but-still-depressed real estate market to add investment properties to your portfolio and build your cashflow.
5) Follow the fixed income play – Capital gains may prove lucrative, but they’re highly volatile. The fixed income model of consistent income, such as through rental properties, is more stable, secure, and is easier to plan around.
6) Time yourself in and out of stock market – The market is cyclical, and often it isn’t too difficult to spot upswings and downswings from a mile away. It’s crucial to use advisors and your own intuition to time yourself in and out of the market.
7) Play Monopoly with your home – Use your properties to generate income. Rental income is far more valuable than appreciation.
8) Buy stuff cheap – As Warren Buffet says, “buy low and sell high.” Often this is easier said than done, but having cash reserves makes it easier to buy cheap assets when their value is deflated.
9) Commercial real estate will be last sector to recover – Commercial real estate lags the residential market considerably. We won’t see a rebound in the commercial sector until the residential sector is in full swing.
10) Avoid government and rising taxes – Structure your income to avoid the uncertainty of government action and future taxes. Different savings programs, such as IRAs or Roth IRAs, allow different approaches to avoiding the taxman as much as possible (but not completely).
11) Work for and with professionals – Your employer and business network should be populated with professionals. People who devote full-time attention to their careers are more reliable,
“Fortune favors the bold!” “Nothing ventured, nothing gained.” Really, there is no shortage of aphorisms and clichés meant to convey this simple truth: If you want to succeed, you must take risks. You must get into the arena and play. We live in a very fortunate moment in which credit is cheap, opportunities abound, and yet few people are intrepid enough to seek those opportunities out. This week’s show explained why you need to get into the arena, and how even a little risk goes a very long way.
There’s an old proverb (probably Chinese) that says: “The best time to plant a tree was 20 years ago. The second best time is now.” I think this is wise investing advice. An early start is always preferable, but those who have delayed their investing shouldn’t be discouraged from starting. Now is the second best time to get started, and in another twenty years you might be kicking yourself for not starting sooner.
I started investing in real estate in the early 2000’s, just after leaving the military. I saw the trajectory that house prices were on and knew early investments would see remarkable returns. I also saw the writing on the wall in 2007 and immediately started liquidating my real estate holdings. When you’ve seen and studied various bubbles—from oil to tech stocks to real estate—you get better at identifying ‘irrational exuberance’ and risky investments. I knew what was coming and managed to avoid the worst outcomes of the housing collapse. Many, however, are still shell-shocked from the real estate bubble bursting and believe it will happen again. In reality, the real estate bubble was just the latest in a never-ending series of manias and crashes. Real estate today is nowhere near bubble-levels, and with new restrictions on mortgage lending it’s unlikely we’ll experience another real estate bubble in our lifetimes.
Real estate is on a slow and steady growth trajectory. Last year, we witnessed double-digit gains because the price floor had been so low; real estate had a lot of ground to make up just to get back to the historic mean. Op-eds and talking heads lamenting a new ‘real estate bubble’ were speaking prematurely. We still live in a value-oriented real estate market, where real estate is generally commanding less-than-typical prices but is steadily appreciating. Naturally, the best deals have been claimed—most distressed and bank-owned properties have been purchased, flipped, and sold—but many great deals are still out there.
The professional flippers and real estate investors have slowed their purchases since they’re no longer able to realize 20-40% returns on their investments. But for beginning investors, it’s still possible to buy a distressed property, improve it, see an immediate 10-20% appreciation from repairs, 4-6% annual appreciation as the market improves, and net cash-flow from renting the property out. Those with a little foresight, initiative, and pluck are well positioned to take advantage of the great deals out there. And with programs like the FHA 203K, they can start investing with relatively little start-up capital.
It’s common to hear stories in person or on TV about investors who saw an opportunity, seized it, and are better off for it today. The best investors seem to have uncanny instincts for such opportunities. But it’s often less about knowing where to invest as actually getting up and doing it. Real estate has been a safe and attractive option for almost six years. It will remain an attractive option for decades. As of today, you cannot claim ignorance as an excuse for not pursuing the opportunities out there. You know what’s out there. Now you just have to get out there and act on your knowledge.
9-27-2014 Get Into The Arena
As much as I know about our local real estate market, I don’t know everything. So once a month, I bring into the studio a man who does know everything: Empire Title’s Bill McAfee. As the owner of one of Colorado Springs’ most successful title companies, Bill sees trends and patterns in the real estate and lending markets first-hand, and once a month he stops by to share his insights with me and my radio audience.
His biggest insight this time around was that the inventory glut of the last several years seems to be leveling out. The number of homes listed on the local MLS is at a 10 year low. And while sales for 2014 are so far 3% down versus 2013, the third quarter of 2014 saw the most activity since 2006. Year-over-year, home prices are up 4%. We aren’t seeing the double-digit gains of last year, but 4% growth is a solid and healthy development.
These numbers vary across price brackets, however. Homes over $750,000, and especially over $1 million, have extremely high inventory levels, show no growth in value, and are staying on the market far longer than lower- to moderately-priced homes. For whatever reason, the high-end market is sputtering while the rest of the market appears very healthy. Inventory has normalized, interest rates are still very low, and prices are no longer accelerating wildly.
The developments in our local housing market, and the disparities between the lower and higher ends of the market, are the result of the choices we as a community have made. It is, in a sense, “the house we built.” This is evidenced throughout the country. Right now, the hottest sectors of the economy are oil and technology. Silicon Valley and Seattle have extremely hot real estate markets. But the fastest growing markets are in oil-producing areas, with Texas and North Dakota well represented in surveys of the fastest-growing areas. In fact, 8 of the top 10 fastest growing areas are directly linked to oil exploration.
We see this locally in Colorado. Our state’s fracking and drilling ventures are generating a lot of money for a lot of people. As many oil companies have their regional headquarters in Denver, that city is seeing the benefits of expansive drilling. El Paso County, unfortunately, does not have oil to drill. And Fort Collins is scrambling to preserve their local ban on hydraulic fracturing. Which is fine. It’s their house to build, and they can build it any way they want. But they shouldn’t expect Denver-levels of growth, especially after the higher education bubble bursts.
Our communities are the houses we built together. Looking around the country, from Seattle to Houston to Fargo, you can find a multitude of successful ways to build a house, and many unsuccessful ways to do so. Locally, we have gathered military contractors, non-profits, and military installations to create a relatively stable house showing all the qualities that Bill illustrated on the show. Any changes in the market can be attributed to decisions our community made for itself in the past; and if we want to see any particular changes in the future, we need to make the required decisions today.
9-20-2014 The House We Built
It’s not difficult to predict the future if you know where to look. Soothsayers used to make predictions by reading tealeaves, which isn’t a terribly effective method for real estate or investing (believe me, I’ve tried!). But I’ve had better luck since I started looking for leaves outside the teacup. There are tealeaves all around us, from economic data to consumer habits to local construction projects. The trick is knowing what to look for and how to make sense of what you find.
They call economics the “Dismal Science,” and for good reason: it’s the only discipline that makes weathermen look competent. Economists spend all day reading tealeaves in the form of economic data. Employment, consumption, household debt, demographics, and manufacturing data—virtually any kind of data you can imagine. The trends in the data give economists an idea of what to expect in the short, medium, and long terms, even if most economists are almost always wrong. But occasionally they get things right. They knew a housing collapse was imminent in 2007; they knew the banking sector’s reliance on mortgage-backed securities would be disastrous; and they knew the banking system would suffer a catastrophic meltdown without TARP.
Today, they data are telling them different things. They know we’re in a demand-side slump because the Boomers are retiring and spending less, and the Millennials haven’t yet arrived to replace them. They know credit card, mortgage, and auto debt are shrinking while student loan debt is expanding rapidly, meaning consumers will have less short-term, easy-to-pay debt and more long-term, non-dischargeable debt. This will have—and in fact may already be having—profound consequences for the economy. Student loan debt is becoming the sole difference between being able to afford a new home and not. Every piece of economic data is a tealeaf, even if they are unreliable tealeaves. The data takes months to be released and is often subject to future revisions. But reliable or not individually, they generally point to the same conclusion when taken together.
There are other more reliable tealeaves around. The largest I’ve ever seen is five stories tall; it’s right off the freeway near Nevada and I-25. There are other multi-story tealeaves off Powers and up north. There’s a dozen-acre tealeaf off Marksheffel. I’m talking about new apartment complexes, new condo projects, and new neighborhood developments that sprung up overnight in 2006 then stayed dormant until this year. Eventually, these projects will become data for the economists to parse. But right now, it’s data for you to use immediately!
Construction projects tell us a lot based on their size, scope, and type. The boom in apartments and condos suggests housing demand is concentrated among young, single individuals. Many will be renters for years. If they marry, they typically put off having families—and thus needing larger homes with yards. Neighborhood developments have once again ground to a halt, after modestly recovering over the last couple years. Single-family residences are simply not in high demand at present.
You may have noticed recently that TV commercials are focused on older demographics. This is because older people have more disposable income than younger people. It’s also because younger people aren’t watching TV anymore. Something as benign as a TV commercial contains a substantial amount of information about the broader economy. Tealeaves can be found virtually anywhere you look. They are data and trends that offer insight into the future. Once you learn to identify them, you can start using them to plan for your future.
9-13-2014 Reading The Tea Leaves
Contrary to what you may have heard, investing should not be sexy. Fast-paced, high-risk, get-rich-quick trading is not investing—it’s gambling. Good investors should be prudent, patient, and bored to death, and the investing instrument most conducive to this approach is real estate. Unfortunately, real estate has a reputation for being complicated, risky, and reserved only for elite and extremely savvy investors. In fact, real estate is an ideal investment for everyone, regardless of income level. On August 19th, I’ll be holding a home-buying class specifically for investment properties. This week’s show laid the groundwork for that class.
After proposing a home-buying class specifically for investment properties, my office manager at Garvens Mortgage Group, Kay, mentioned that I should cover the basics on the radio before hosting the class. Many individuals interested in real estate investing may not even know what they don’t know, after all. So let’s get the basics covered.
When investing in real estate, you’ll realize returns in two ways. First, you will realize returns as appreciation, or the increase in value of the asset itself. Real estate generally appreciates consistently, if not at spectacularly high rates. There are exceptions, such as the housing bubble and subsequent implosion in 2008, or local markets that are either over-heated or in decline. But in most cases, real estate appreciates. Second, you’ll realize returns as cash flow, or net rents, from the property (assuming it’s being rented). Even with a mortgage on the property, competent investors can typically manage a 9-15% annual return just on net rents—that is, the difference between the cost of the mortgage and the revenue from rent.
Once the mortgage is paid off, all net rent goes right into the investor’s pocket. This typically won’t be for 15-30 years, depending on the terms of the mortgage and how quickly the investor pays down the mortgage. This is what I meant by a good investor being patient. An investor who accumulates rental properties early can have them paid off by retirement and secure a steady income from those properties.
Obviously, a home is an expensive asset, so most investors will need financing. Those looking to buy a property specifically for renting out will need to put 25% down to secure financing on the property. This makes sense since an individual facing tough financial circumstances is almost guaranteed to foreclose on his investment properties before his primary residence.
For those who don’t have 25% to put down, one option is to use upgrades or downgrades as opportunities to turn their old property into a rental. A family upgrading from a starter home to a larger home can keep their starter home and simply rent it out. Similarly, a retired family looking to downgrade can keep their larger home as a rental. In these instances, they will only need between 3.5% to 5% for the down payment to buy their primary residence which, in a few years, will be turned into a rental. (And, no, you can’t just say you’re moving into a property as a primary residence and then rent it out from the start. This is called occupancy fraud and is a major crime.)
I have only scratched the surface of real estate investing here. For more information on the basics, I encourage you to check out both hours of the show in the radio archive. And for even more information, and to have any questions you might have answered, sign up for the investment property homebuyer’s seminar scheduled for August 19th. We’ll cover the real estate side, the mortgage side, and you’ll hear about the experiences several of my team members at Garvens Mortgage Group had when getting into real estate investing on their own.
8-9-2014 Ready, Set, Invest! Part I
8-9-2014 Ready, Set, Invest! Part II
I come across a lot of statistics in my day-to-day readings, and the statistic most pertinent to today’s show is this: The percentage of 18-34 year olds living with their parents is 30%. This is up significantly from a decade ago. Besides spending more time living at home, this age group also spends far longer in school and delays important life decisions, such as getting married and buying a home, until later in life. This is the shape of the Millennial Wave, and it’s set to make landfall in just a few years.
On last week’s show, we discussed the early formation of this wave: how historic events and trends that were set into motion decades, and even centuries, ago determined the shape and intensity of the Millennial wave. This week’s show is the second installment in the series on Demographics in America and covered the current state of the Millennial Wave. It is still six years until the first Millennials begin to enter their most economically productive years (roughly age 40-60), but the current state and composition of this demographic is having immediate effects on the housing market and broader economy.
As mentioned, Millennials are delaying many life decisions far longer than previous generations. They’re graduating college later, leaving home later, finding a spouse later, and having children later. This is having an immediate effect on the housing industry. A substantial portion of Millennials still lives with their parents, while those who have moved out are largely electing to rent rather than buy a home. This has caused a booming rental market and significant increase in construction projects for apartment complexes.
Another factor affecting Millennials is a weak job market. Many Millennials graduate from college with severely diminished employment prospects. Some neglect to even look for a job, while others can only find employment in fields far below their education level. This, more than anything, contributes to the Millennial habit of delaying maturity. Few find themselves in the kind of thriving financial situation necessary to start a family.
The bleak future outlook for Millennials is having an effect on the Baby Boomer generation right now. As Millennials delay buying homes and starting families, Boomers are finding demand for their current residences severely weakened. Many Boomers that had planned to downsize their home are finding it difficult to sell their current large homes quickly and at the price they had anticipated. Worse, uncertainty in the economy is making it difficult to make near-term financial plans. The economy has been oscillating between no growth and anemic growth for several quarters. Second quarter GDP grew at a relatively brisk 4%, but nobody is sure what to make of this. Interest rates have been tracking this uncertainty. Depending where the economy is a year from now, rates could be at their present levels or much higher. Nobody is quite certain where they’ll be!
What this means to current homeowners is that wherever interest rates are when they go to sell their home will determine how high demand is for their home. If rates are higher, buyers will have to devote more money to the interest rate and less to principal, meaning they may decide to buy a smaller and cheaper home to offset the rate increase. This could alienate many buyers from higher-priced homes. This, in turn, makes it difficult for individuals to plan for the near future with any certainty.
These are just a few ways the current shape of the Millennial Wave is affecting the housing market. I spent the second hour illustrating this point with further examples. Inquiring minds will want to check that out in the archive. And don’t forget to tune in next week for the concluding installment of my series on Demographics in Ame...
It is an under-appreciated truism that all of history has been leading up to the present. While we can shape our futures, we do so with clay inherited from past generations. Like an earthquake beneath the sea and its resulting tsunami, we know what to expect based on what has already happened, though we may not know its exact features, severity, or duration. We know only that a tsunami is coming. And today, we’re discussing the generational tsunami of the Millennials.
To understand what effect distinct generations can have on America’s broader economy and culture, consider the economy’s performance over the last few decades. Our economy’s two-decade boom from the mid-1980s through 2006 was the direct result of the Baby Boomers entering their productive peaks. Generally, people are at their most productive between the ages of 40 and 60. The first Boomers, born immediately after World War II, entered this stage in the mid-1980s. As the largest generation in American history, the Boomers brought unprecedented levels of productivity and consumption to the US economy, until they began retiring in 2006.
The housing crisis and financial meltdown of 2007-2008 were short-term trends that culminated in a mania and a crash. The aftermath, however, has been the result of long-term macro trends in our economy. The sluggish growth and anemic economic performance of the last six years can be traced directly to one fact: The Baby Boomers are retiring, and Generation X is not large enough to pick up the slack.
When individuals retire, they stop working and they cut back heavily on their consumption, both of which have a detrimental impact on the economy. In the past, each generation was larger than the one preceding it, so the effects of one generation retiring were not felt so acutely. Generation X, however, is almost half as small as the Baby Boomers. The homes, cars, appliances, electronics, etc., that were being sold to Boomers just a few years ago suddenly have a far smaller market. Fewer goods and services are being consumed because the generation currently at its productive peak—Generation X—is not large enough to offset the reduced consumption of the Boomers.
This will change, however, once the Millennials begin to enter their most productive years around the year 2020. At 87 million, the Millennials are the largest generation in US history. They will produce far more than Generation X could, and ideally consume far more as well. Many demographers and economists project this massive influx of productivity and consumption will finally return the economy to a period of robust growth.
There are, unfortunately, some trends that might dampen the Millennials’ contributions to the economy. They are delaying many life decisions until later in life, such as home buying, marriage, and having children. This means all the items and consumables necessary for raising a family—a larger home, more food, children’s clothes, and so on—aren’t being purchased until later. Also, Millennials are deeply in debt—particularly student loan debt. Because of how student debt repayments are structured, many will shoulder a significant debt burden for decades. Rather than contributing to the economy through consumption, their earnings will instead go to banks or the government to service their debt.
Millennials will enter the national stage in due time, but it’s unlikely they will arrive with quite the same vigor and health as previous generations. While their numbers are substantial, there are many factors that may diminish their ultimate impact on the economy. As mentioned earlier, we know what’s coming but not exactly what form it will take. We can, however, make predictions on what form it will take, and that will be the subject of future installments of this series on the Millennial tsunami.
The subject of this week’s show is the most riveting subject on earth: Budgeting! I say this only half-jokingly because once you know the power and importance of budgeting—and most people don’t—it becomes an fascinating topic. Sure, a lot of fun stories involve mismanaging money and blowing your mortgage payment at the roulette table. But when you’ve found financial peace after years or decades of debt, you’ll never want to go back to being a profligate spendthrift—and when someone starts talking about budgeting, you’ll listen closely!
For most of us, our financial habits are inherited from our parents. We typically spend 18 years being exposed to one small economy (our family’s), and we practice the lessons we learn there for the rest of our lives. Unfortunately, most families practice very poor budgeting skills. Household debt is high, too few have emergency reserves, and the virtues of prudence and frugality have been all but forgotten. Every individual should consider the household they were raised in and whether it’s a model that should be followed. At the very least, it can be used as a guide on what not to do.
For example, my parents were extremely frugal people. My father was the personification of the ‘Millionaire Next Door.’ They paid for virtually everything in cash, and the only debt they ever carried was a 30-year note on their mortgage. They never spent exorbitantly on items, saved eating out for very special occasions, and squirreled away money their entire lives. The notion of buying a new phone because a marginally improved model was just released would be sacrilege to them.
My parents never worried about money because they managed it well. As John Maxwell says: “Having a budget simply means telling your money to do, instead of your money telling you what to do.” That is, in fact, what you see with people who are bad with money: their money runs their lives. They’re constantly shuffling money between accounts, divvying up expenses between this credit card and that, and figuring out what to sell so they can make ends meet.
The vast majority of people aren’t in debt because they’re poor. It takes money to get into debt. Most people in debt got there because their income doesn’t agree with their living situation. But rather than adjust their living situation—buying fewer luxury items, clipping coupons, canceling their cable bill—they decide to sustain it until they have no choice but to change. That is an extremely dangerous practice, and it’s unfortunately all too common.
If you’re just starting out in life, or if you’re established in life but find it difficult to make ends meet, I cannot recommend Dave Ramsey’s Financial Peace University enough. His 9 steps for financial peace are all you need to eliminate debt, budget well, and plan for the future. They include such things as:
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Establish a $1,000 emergency fund as quickly as possible
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Work toward building a 3-6 month emergency reserve
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Save at least 15% of your income for retirement
These are basic, easy rules that have a profound effect on your immediate and long-term budgeting. But, of course, they don’t cover all topics. Certain life choices, like buying a home or investing in real estate and rental properties, require additional planning and unique budgeting techniques. For these, I encourage everyone to give me a call, ask me questions, and continue listening to the Jay Garvens Show.
7-19-2014 Law of Gravity: Money and Budgets
71-19-2014 Law of Gravity: In the Trenches with Your Budget
“Buy low, sell high” is about the only investing advice you’ll ever need. For many investors, this means buying an asset when its value is low then waiting for the market to raise its value. If you’re like me, you’re not patient enough to wait for the market to do its thing: You’d rather have a little influence in how quickly, and by how much, that asset appreciates. This week’s show was all about using houses as investment vehicles—both as a primary residence and as investment properties.
I have spent dozens of shows discussing the economic and financial aspects of homeownership. For the vast majority of responsible individuals, there are no good reasons to rent instead of own. It just makes financial sense—especially with today’s low rates. For roughly what it costs to rent, you could be living in an appreciating asset that you’ll one day own and which can be turned into a cash-flowing property. But as with all investments, nobody should rush into homeownership without exercising caution and prudence.
The first thing to consider before purchasing a home is how much you can afford. Forget your dream home; you should only concern yourself with what your budget will allow. You need to consider not only the cost of the mortgage, but also taxes, insurance, utilities, and potential maintenance. Rather than visualizing your dream home, consider your current residence and think of things that would offer an improvement. Maybe an extra bedroom? A laundry room? A bigger kitchen or more spacious living room? These will be the qualities you look for when buying a home—not the wrap-around porch and Olympic swimming pool and ten acres of land that you see in your dreams.
Once you’ve found a home, you need to do your homework on it. You should consult with the assessor’s website for its ownership history. If there have been several owners over a short time, that raises questions. You should also pay for a home inspection and not be afraid to request fixes from the current owners. Going under contract and not getting an inspection is the most egregious error a person can make. You also need to consider the area the home is in and consider whether it’s a neighborhood that’s likely to appreciate, or whether it’s in decline. This could have severe implications ten or twenty years down the road.
That was advice for people looking to purchase a home to live in. If you’re more daring and are considering purchasing a home—or homes—for investments, there are further things to consider. The first is whether the home you’re looking at has qualities that make it a prime candidate for appreciation. It’s common today, and was especially common during the housing bubble, for investors to buy any old piece of junk and turn it into not-as-much-of-a-piece-of-junk. But it’s still a piece of junk. A coat of paint, hardwood floors, and new appliances don’t add $50,000 in value, but it’s common to see these as the only improvements a house flipper makes. They figure since the buyer won’t see the old pipes, cracked foundation, and old wiring, they don’t need to address them.
On the other hand, my mortgage company recently did a loan for woman who bought a flipped home, and the investor who sold it to her did an exemplary job flipping that house. He selected a home with obvious potential, completely renovated, made repairs, and finished the job with close attention to detail. He picked a house with a lot of potential value, rather than finding a severely distressed property and making it cosmetically appealing. This is the right way to do it. He legitimately added a substantial amount of value to the home.
This has only scratched the surface of this important topic. As always, I encourage you to check out the show in the archives for more details and a more thorough discussion. And stay tuned over the coming weeks as I come back to this and...
Everyone has a story worth telling. I’ve learned this from my time in the mortgage industry and on the radio, having helped thousands of individuals with their mortgages and having talked with thousands more who have called into the show. This is inevitable, I suppose; when you help finance someone’s home—the place they live or want to live—you’re bound to hear their story: where they’ve been and what brought them to this place in their life. Being in Colorado, most of these stories involve the military in one way or another. That’s why this week’s show was dedicated to the stories and biographies of military members.
I’m an avid reader, and recently I’ve become absolutely hooked on military biographies. This started after reading No Easy Day by Mark Owen and Kevin Mauer, which is the story of the mission to kill Osama bin Laden. Other notable entries in this genre are Outlaw Platoon by Sean Parnell, Fearless by Eric Blehm, and Robert’s Ridge by Malcolm MacPherson, which features the story of one of my past mortgage clients. Each book tells an extraordinary story and features extraordinary military veterans.
Just because these stories are extraordinary, though, does not mean they are the only stories worth telling. I’ve spoken with thousands of veterans during my time in the military, on the radio, and in the mortgage industry. From them, I’ve heard hundreds of similarly incredible stories that, sadly, may never be written down. I’ve also heard hundreds of phenomenal stories from non-veterans detailing significant events in their lives and incredible things they have done and experienced.
Many of these people, both veterans and non-veterans, never seem to think their stories are extraordinary. People seem to have an innate bias against their own experiences. Perhaps things don’t seem as exciting when you’re in the moment and remember them in retrospect.
This is the impression I get even when reading the biographies and journals of our Founding Fathers. These were the men whose average age was 47 and were instrumental in one of the most radical revolutions in human history. But during and after the fact, they treated the events and their involvement in them as business as usual. It’s only through excellent biographers that the events receive the reverence and profundity they deserve. Jefferson and Franklin certainly didn’t seem to grasp the enormity of their actions.
But, of course, men can’t get all the credit for having incredible stories. That’s why the second hour of the show is dedicated to extraordinary stories featuring women. These are stories that were lived and are being told with all the intensity, passion, and gravity of any of the men’s stories. I encourage everyone to listen to both hours of the show.
As the radio show’s audience grows, and we reach more and more clients through Garvens Mortgage Group, I’ll doubtless hear even more incredible stories from new individuals. Hopefully I can retell more of these stories on future shows. As always, if you have a story to tell, my line is always open, so give me a call. And if your life story has brought you to a place where you’re buying a new home or just need general real estate of financial insight, you can always give me or anyone at my mortgage company a call.
Patriots Tale Band of Brothers
Patriots Tale All About the Women
Summer is allegedly vacation season, but it hasn’t felt that way to me in years. Summer is the busy season for mortgages; kids are out of school or back from college; neighborhoods are bustling with people moving in and out. I really should start taking vacation in the winter; summer seems to be when everyone is doing everything.
The honest truth is that there is no vacation season—especially not in today’s world. Society is too fast-paced, and keeping a competitive edge means never taking a break. Naturally, some people place a high value on leisure time. They’re often the same people working below their talent level so they can go home each night without having to worry about work. If those are your priorities, great! But if not—if you regularly leave your work at work, take regular vacations, and can’t figure out why you’re not reaching your career goals—you must accept that leisure and productivity are mutually exclusive.
This is a difficult compromise considering the high value we place on leisure and down-time, and the increasing number of people we see relaxing all the time. If you’re a Baby Boomer, you’ve probably noticed an entire generation of Millennials moving back home, working less-than-full-time (if they’re working at all), and generally avoiding all responsibilities. It may seem an envious position to be in, but it’s not. Millennials may work less, sleep later, and live at home, but the plight of Millennials is dire. They’re living like bums because they have no better prospects. They’re burdened with student loan debt; consumer credit is tight; job prospects are dim; and there seems to be no relief in sight.
The student loan bubble may end up being the most disastrous credit bubble in modern history. As with all credit bubbles, it disproportionally redirects resources from some sectors of the economy toward others. The massive building booms and campus expansions seen at colleges across the country come at the expense of homes, cars, and furniture that would have been bought if Millennials hadn’t already pledged a trillion dollars (and counting!) in tuition to these colleges. Those homebuilders, car dealers, and furniture companies, in turn, can’t hire new employees (that is, Millennials) because nobody is buying their products.
See how that works?
Millennials are largely on vacation because they have no choice. But the rule still applies: leisure and productivity are mutually exclusive concepts. Millennials are so far not as productive as past generations, and they’re putting off homeownership and marriage far later than past generations as well. The decisions they’ve essentially been forced to make are having effects throughout the broader economy. Worse, there is no second chance for them: student loan debt is one of the few types of debt that is not dischargeable in bankruptcy.
There is hope, however. Many young individuals who are burdened with student loan debt are working diligently to pay it off. Many have moved back home with their parents to save money and get themselves on stronger financial footing. These are positive things and should be encouraged as much as possible.
It feels like the whole country has been on vacation since 2008. People are working fewer hours in jobs that don’t fully utilize their skill sets. Young adults are spending 6, 7, or 8 years in college. Unfortunately, this is largely involuntary. It’s this way because there are no better options. Some demographers and economists predict we will snap out of this in 2020, when the Millennials reach the productive peaks of their careers. Let’s hope they’re right. If this vacation goes on any longer, the stress might kill us!
6-21-14 Summer Vacation? What Vacation?
Natural disasters are a fact of life in Colorado Springs. You can nearly set your watch to them. Every year we are guaranteed at least one moderately destructive hailstorm, one large wildfire, and at least one severe flood. In fact, the threat of flooding in places like West Colorado Springs and Manitou have grown exponentially over the last few years, as extensive burn sites have created large runoff areas. The water no longer soaks into the ground, but instead runs downhill to the streams and rivers.
If you look at the topography of Colorado Springs, you can see the path rainwater takes to find its way to Fountain Creek. In 2012, heavy rainfall caused a rush of water and severe flooding down Circle and Union. Flood maps of the city are extremely precise, and show that one home can be in a flood zone while its immediate neighbor is not.
Short of fire, floods are the most damaging catastrophe homeowners face. Cleanup is expensive, and damage can persist for years if not properly handled. Flood insurance, however, is an extremely expensive addition to homeowners’ insurance policies. All homeowners in the area should consider the threat of flooding and decide whether to carry a flood insurance policy on their home.
This is not a light decision. From my experience in the mortgage industry, I have seen several individuals decide against purchasing their dream home simply because it sits in a flood zone and, therefore, would require flood insurance to be financed. Flood insurance premiums can range anywhere from the same as hazard insurance to several thousand dollars a year.
When purchasing my newest home, I discovered it sits in a flood zone and requires flood insurance. At first, every flood insurance quote I received was in the $4,000 to $7,000 range! Through persistence and shopping around, I eventually found a company who would provide a flood insurance policy for about $1,100 per year. This is not a cheap policy by any means, but it is far cheaper than most quotes I received, and a steal compared to cost of cleaning up after a flood without insurance!
If you suspect you may need flood insurance, or believe the peace of mind that a flood policy would provide is worth it, the best thing you can do is to start shopping around with various insurance brokers to find the right policy for you. You may discover that your home is nowhere near a flood zone; or, you may discover you’re in a very active flood zone. In that case, right now is the time to assess your options and acquire coverage if needed. As with hail, fire, and sub-zero cold snaps, floods are just a part of life in Colorado Springs.
5-25-15 Let the Biblical Floods Subside
As a radio host, it’s important that I remain assiduously topical. There are times when people aren’t talking about mortgages; it’s rare, but it does happen. In such instances, it’s my duty to contribute to the topic of the day by tenuously relating it back to housing or mortgages or finance. So with last week’s hailstorm and the resulting catastrophic damage, I have no choice but to join the rest of the Pikes Peak region in talking about it.
Some hailstorm, eh?
I didn’t know this before consulting Wikipedia, but Colorado Springs is the epicenter of Hail Alley—the most hail-prone region in North America, where Wyoming, Colorado, and Nebraska meet. Although Colorado Springs doesn’t experience the same frequency of hailstorms as Cheyenne, Wyoming—ten to twelve each year—or the severity of softball-sized hail seen during tornado season in Kansas, it’s still a nuisance to deal with. As though torrential flooding and epic wildfires aren’t bad enough, God added hailstorms to the mix. If it starts raining frogs, it’s time to hightail it out of here!
Now, why are hailstorms so common and severe here? It’s because of how hail forms: tiny water droplets are forced up into the upper-atmosphere, where they collect more moisture, freeze, and then descend. Air moving across the Rocky Mountains toward the Midwest is thrust upward as it climbs over the Front Range, and the resulting hail falls all across the eastern side.
Fascinating, eh?
In retrospect it’s quite fascinating. At the time of the hailstorm and immediately after, it was terrifying, frustrating, and maddening. But a few days and several thousand dollars in insurance payouts later, I can look back at the hailstorm with intrigue and admiration. It’s an awesome force of nature, to be sure. And I’m sure every auto body and dent repair shop in the region was positively elated when the hail started smashing into their windows—as was, I imagine, every window installer, roofer, landscaper, and practically anyone who will be contacted for cleanup.
Which brings us to that tenuous link I promised earlier. This is a housing and mortgage show, and so far precious few words have been spent on housing. So here it is: Hailstorms can cause extraordinary amounts of damage, and your home’s only defense is, in fact, no defense at all: its roof. As one of the most expensive components of your home, it’s a bit like stopping a baseball bat with a Faberge egg. The damage can be immediate and lasting, so should be dealt with by a competent professional.
Every roofer and contractor I know suggests having the damage assessed by a general contractor, or a trusted roofer. Immediately after a storm, you’ll probably be inundated with advertisements for roofers. Naturally, they make money when they find damage, so of course they’ll try to sell you on a roof. A general contractor, meanwhile, will assess your roof, siding, windows, vents, and so on. Their inspection will be more thorough and will identify issues most roofers will miss.
Crucially, it’s important to have your roof’s singles inspected for damage. Typically, the worst damage comes not from cracks in the shingles’ asphalt layer, but in cracks to the fiberglass layer beneath the shingles. These need to be inspected to ensure systemic damage is not missed just because cosmetic damage isn’t evident. And all this doesn’t even begin to cover the potential damage to tile, wood, or T-lock roofs.
Your home is your most significant investment, and odds are it was just hammered by hail. It’s imperative to have your home inspected as soon as possible to ensure any damage suffered does not cause more problems, and to ensure a timely insurance claim should repairs be necessary. Most insurance companies have limits on how long after a disaster you can file a claim. This is, in fact,
Much as I enjoy talking about the real estate and mortgage industries, I find it refreshing to dedicate the occasional show to other important topics. This week, the subject was veterans and their stories. If you’ve ever met a veteran, or a relative of a veteran, then you’ve no doubt witnessed the passion and reverence with which people talk about them. Every veteran has a story, and it’s a true blessing to share these stories with you.
During my time on the air, I’ve made constant reference and allusion to my time in the military. The first hour of this show was the first time I’ve gone into detail: How I joined the military during college, where I went afterwards, who got me there, and how I ultimately ended up in Colorado Springs. This was a life-changing experience, and I met countless life-changing people throughout it. You can listen to the full narrative in the archive for all the delightful details. But so far as this post is concerned, the details aren’t so important. What’s important is the significant impact the military made on my life for the better, and how there are literally tens of millions of similar stories out there.
At Garvens Mortgage Group, my mortgage company, several of the loan officers and managers have similar stories—similar, that is, in how the military changed their lives and contributed powerfully to who they are as people today. Whether a West Point graduate or Air Force electronics specialist, a submarine captain in the Navy or an infantry soldier in the Army, each has a powerful story to share, and often can’t help sharing the equally powerful stories of other men and women with whom they served.
Similarly, with our company’s strong focus on the VA loan program, we meet hundreds of veterans each year—again, each with fascinating stories to tell. Some are still active, others retired. We have met veterans from each major conflict since the Korean War. But no matter their current status, their length of service, or their time out of the service, each brings the same wild-eyed passion to their stories, and each will go on for hours if you let them—which, during an application, we typically do.
If you have a story of your own, or stories of your spouse’s/children’s/siblings’ that you’re eager to share, I am eager to hear them. Please don’t hesitate to call into the show or email and share these stories. And, truly, write these stories down. Share them with family and friends. Preserve them for posterity. For the vast majority of people, the legacy they leave is in their stories. If they aren’t preserved in writing, they will be lost forever.
5-24-14 Story of a Vet
Impulse buys are seldom reasonable, but most are at least excusable. The World’s First Flying Tricycle, for example, has a multitude of practical uses. To impulsively buy a house, however, is neither reasonable nor excusable. Many folks dream of owning a home, so it’s understandable when they become exuberant over mortgage products that may—finally!—put that elusive dream within reach. But a home is not a flying tricycle. It is a serious financial commitment that should be purchased only after careful planning and preparation. But how do you know if you’re ready to purchase a home? Where do you start? What do you look for? That’s what today’s show is about.
There is no shortage of real estate agents and lenders who will push clients into homes and mortgage products they can’t afford. And, truth be told, there is no shortage of buyers who will delude themselves into thinking they can afford whatever they want, or whatever they’re being sold. Real estate agents work on commission, and many encourage their clients to buy as much house as they can afford—if not more. They understand there are creative financing options out there to get practically anyone into a home whether or not they can afford it. This is what ultimately caused the housing crisis of 2007.
This is why it’s imperative that any prospective homebuyer has the prudence to plan their housing budget in advance, and the discipline to stick with it. Before you even begin looking at homes, you should work out your budget and settle on a housing expensive figure that you can comfortably afford—remembering that the mortgage is only part of the expense. There are also property taxes, homeowners insurance, and perhaps even flood insurance and homeowners association dues. Once you figure out a comfortable monthly housing expense, you can determine your price range and begin shopping.
From here, the question becomes: What am I looking for? Oftentimes, when people dream of homeownership, they already have dream home in mind. Not to throw a wet blanket on your dreams, but…sssschlplop. (That’s the sound of a wet blanket.) If you’re a first-time homebuyer, your first house will not be the house of your dreams—unless your dream home is a 2-1 fixer-upper in an “up and coming neighborhood.” Then you’re in luck. Everyone else should adjust their dreams to be far more practical. Newlyweds don’t need a four-bed, three-bath McMansion. Empty-nesters don’t need a larger home with fewer rooms just because the kids are gone; more likely, they’re better off with a smaller home and fewer rooms. As with cars and clothes and televisions, you need to prioritize and realistically assess features: which ones you’ll actually use versus which ones you may use versus which ones you’d like to have but honestly won’t ever use.
On TV and the radio, you’ve no doubt heard news stories and advertisements about the red-hot state of the local real estate market. That’s mostly hype…mostly. Contrary to the news and advertisements, there is no need to act right now. Prices may appreciate between now and when you’re finally ready to purchase, but the appreciate won’t affect how much of a house you can buy enough to warrant making a hasty decision. Hesitating to purchase might cause disappointment if you miss out on a great house. But rushing to purchase can, and likely will, cause disappointment, regret, remorse, and a lot of financial trouble.
5-17-14 When and What? Buying a House
Did you call your mother? Did she remark that she can’t believe it’s snowing in Colorado on Mother’s Day? “Easter, sure, but Mother’s Day?” This seems to be the template for most conversations with mothers: 50% things she can’t believe; 40% advice; 10% miscellany. It’s the 40% we’re concerned with today. You should never make a major decision without consulting your mother, and since home-buying is one of the biggest decisions you’ll make, you really should take the time to ask her opinion—or at least stop and consider what she might say.
Now, although I can to tell the difference between mauve and medium lavender, I’m not a mother. I am confident, however, that I can channel my own mother. Motherly advice is sensible, prudent, and practical—exactly the right approach when buying a home.
Her first piece of advice would be: stay within your means! You’re finally old enough to know the value of a dollar, so you should know better than to buy a house you can’t afford. Before you even start looking for a home, work up a budget and settle on a firm amount that you’re comfortable paying each month. This is, after all, a liability you will have for 15-30 years. You should consider the principal and interest, taxes, insurance, and factor in a cushion for unforeseen repairs. The mortgage may be the most expensive part of homeownership, but it’s not the only expense!
Next, prepare for homeownership! Remember that puppy you begged your mother for? The one you promised you would feed and bathe and care for? Well, a house is not a puppy; your mother won’t take over when you lose interest. You need to prepare for the responsibility of homeownership. This means resolving any debt, delinquency, or credit issues. It means saving for a down payment. It means having a reserve in the bank of at least six months that will cover your housing and living expenses. There is nothing more damaging to your credit than a bankruptcy and foreclosure. And 9 times out of 10, the steps you take before you acquire a mortgage will determine whether you foreclose in difficult times.
At some point, your mother might have advised you to keep your friends close. This is especially true in the home-buying process! You need friends—people you trust—to guide you through the various parts of the process. From a reputable real estate agent to a sensible insurance agent to, finally, an honest mortgage broker, you simple must build trusting relationships with each person in the process. Real estate, insurance, and mortgages are too complex for most people to grasp fully. If someone wants to pull a fast one, they probably can. It’s imperative that you find someone who has your interests in mind—someone whose primary business goal is ensuring their clients are in a better place after the transaction than they were before.
The home-buying season is starting to kick into high gear. In the mad dash to not only find a home but also put in a successful offer, it’s easy to lose your senses. Whether you’re currently shopping or just deciding whether homeownership is for you, it helps to take a moment and consider what advice your mother would give you. Or, even better, give her a call. She may give you a list of 83 reasons you’re not ready to own a home. Or she may encourage you and offer some down-payment assistance. Odds are, she knows what’s best for you and will push you in the right direction.
5-10-14 Momma Knows Best
You prepared for it all winter. You dreaded it, accepted it, then bit the bullet and tackled it. You scrubbed the floors, purged the closets, and shook out the rugs. Now—finally!—you feel you’ve finished with Spring cleaning and you can relax until next year. Sorry, but you can’t; you’re not done yet. You left a lot of personal and financial clutter lying around, and now is the time to address it. That is the theme of this week’s show.
Like clutter in upstairs closets or all that Tupperware in the very back of a cabinet, personal clutter is often forgotten because we hide it away rather than dealing with it immediately—as though ignoring it will make it go away. Maybe it’s a small overdue bill or collection. Maybe it’s a credit card that needs paid down. Or maybe it’s a poor mortgage product that’s draining your finances. It may be any number of things, but whatever it is, it needs to be resolved now.
The first step toward resolution is taking inventory of your clutter. I encourage everyone to spend a week or two considering all the clutter in their lives, and then consider ways of getting rid of it. In fact, here’s some hard truth: the most common type of personal clutter is other people. That is, people who are a negative influence in others’ lives. To illustrate this, consider an overweight dog. How did he get that way? He didn’t do this to himself; he doesn’t have thumbs to open the dog food container. Someone gave him the excess food, and since he doesn’t have sufficient willpower to control himself, the negative habits of his owner ultimately has negative effects on him.
This is true of people, too. It’s common to have people in our lives that influence us in the wrong way. Often, it’s lax personal standards that rub off on us. Or maybe they enable us to cut corners or adopt the wrong set of priorities. Sometimes, it’s their negative attitude that becomes contagious and poisons our own outlook. Whatever it is, the best thing to do is clear them out of your life! It is not worth keeping negative, burdensome people in your life.
To offer an example, one of the loan officers at my mortgage company, who is a retired veteran, had a client come in who began speaking disparagingly of the military and veterans. Eventually, the loan officer had had enough and told the client to leave the office and escorted him out of the building. Some may consider this a lost business opportunity, but the emotional and personal cost of dealing with this individual far outweighed any potential pecuniary benefit. The entire company benefited from not having to deal with the negativity that client brought into the office.
Another area that needs constant upkeep, and the occasional deep Spring cleaning, is finances. Even people with great credit profiles allow their financial houses to become a bit messy with a late payment here or an unnecessary expense there. Eventually these little messes compound to become one large, cluttered nightmare. To address this, you need to identify any areas of your finances that need help, prioritize them, and start fixing them. This might mean paying off a small bill now, then another later; or, it might mean restructuring your debt entirely.
Now, in fact, is an ideal time to take drastic action on your debt by using your home as a financial tool. This February marked the first time in 23 months that average home prices actually fell. We had nearly two solid years of increasing home prices, which means most homeowners who were originally unable to refinance their homes now have the equity to do so. Furthermore, the recent run of poor economic news—from anemic GDP growth to a bad jobs report—has kept interest rates low. It seems likely that the Fed will reevaluate, and perhaps even suspend, its policy of tapering to allow the economic to regain its footing.
Spring is here—finally!—and I for one am glad to bid farewell to winter. Economically, this winter was a season of uncertainty. The economy was sputtering, the full effects of the sequester had been realized, new housing starts had plummeting, home purchases evaporated, and yet the Fed continued tapering. Interest rates spiked then receded, and we have been riding a subtle rollercoaster ever since.
Nobody was quite certain what the new year would bring, and many worried that the fourth quarter slowdown in home purchases would continue throughout the first and second quarters of this year. Happily, this is not the case; the real estate sector seems to be rebounding. We began this week’s show with Bill McAfee, owner of Empire Title. As one of Colorado Springs’s most successful title companies, his understanding of the current residential real estate market is second to none.
His experience over the fourth quarter of 2013 and first quarter of 2014 matched what I noticed in my mortgage firm: the late-year interest rate spike sapped consumer confidence and had a detrimental effect on home purchases. Purchases between November and January were only a small fraction of what they had been throughout the prior year. In fact, home listings on the Pike’s Peak MLS were at their lowest level since 2007. Since January, however, listings have rebounded and are presently looking very healthy. Even better is the composition of listings and sales: since January, 66% of sales have been for homes under $250,000.
Throughout 2013, the market was reacting unpredictably to two sources of uncertainty, namely the economy and the Federal Reserve. Nobody could predict the economy’s performance, and nobody could predict the Fed’s reaction to this performance. During the last few quarters, however, the Fed has become much more predictable. No matter the news, they are determined to continue their policy of QE tapering. While interest rates are still fluctuating based on economic indicators, they are not fluctuating as wildly as they had throughout the last year.
Given the market data over the last quarter, I believe we are poised for a purchase boom during the coming spring and summer. And with the strong demand for homes below $250,000, it’s imperative that any prospective homebuyers prepare themselves now. Competition will be fierce in this segment of the real estate market, and any competitive edge could mean the difference between closing on a home or being outbid.
The question of where to start is different for different people. For those who keep their financial house in order, it means finding a real estate agent and mortgage broker. And I can help with both. As a mortgage brokerage, Garvens Mortgage Group has a comprehensive network of fantastic real estate agents. And since most selling agents give preferential treatment to pre-qualified buyers, it’s best to get your financing settled first before going out to shop for a house.
For other buyers who may have been hit hard by the recession and subsequent anemic recovery, the question of where to start may be much earlier in the process. Often it means assessing your current finances and credit. From there, you may be in for a few months of credit repair and belt-tightening; or, you may be able to proceed with a government-backed mortgage product. Regardless, it’s imperative to start this process the moment you think you’re ready to buy a home. Nothing is more frustrating that finding your dream home, only to realize your past credit mistakes or current credit profile make you unable to qualify for financing.
It’s been several years since we had a booming housing market. If this year is different, I expect to see a lot of first-time homebuyers in the market—many of whom do not understand the complexities of the real estate and mortgage industries.
We are now effectively five years into the government’s 2009 stimulus program. How’s that going for us? To save the banking system and revive the economy, the government tried TARP, tax cuts, tax hikes, and stimulus spending. It went nuclear with QE, and then went nuclear again with QE2 and QE3. I suspect this will go on for QE-ternity. All this to say: When it comes to stimulating the economy, the government is all thumbs.
The government believes it can achieve prosperity through fiat—that the right combination of regulation, spending, and tax hikes will produce wealth. This is folly. Reallocating resources within an economy does not create wealth; it merely shuffles it around, often less efficiently than when left to the market.
Nowhere is this more acutely clear than in the student loan market. The government decided everyone should go to college, and so the government has essentially nationalized the student loan market to make loan terms as attractive as possible. And so students are accumulating tens of thousands, if not hundreds of thousands, of dollars in student loans to acquire worthless degrees.
Of all consumer debt—whether for auto loans, consumer credit, mortgages, etc.—the only type of debt that has not declined over the last 10 years is student loan debt. Nationally, student debt is worth over $1 trillion. And it’s rising fast. As more individuals finance their educations with cheap credit and drive up demand, schools raise their tuition. Thus individuals take out more debt and colleges raise tuition more. This is what’s known in the field of economics as a Stand-Back-It’s-Gonna-Blow Death Spiral.
If you tour a college campus like UCCS, you’ll notice a flurry of new construction. Universities are booming from this incredible, debt-fueled bubble. Beyond the campus, however, graduates are being crushed by their newly acquired debt. They can no longer afford cars, homes, or furniture; they will be stuck servicing their student loans for decades. The government has, through generous student loan programs, allocated future resources to today’s universities. But the future arrives quickly, and once it does everyone is left wondering: Where’s my wealth?
This is the sad state many young adults are finding themselves in. But the consequences of their past, very thoughtless profligacy can be overcome. To start, they can begin prioritizing their purchases. Instead of iPads and sneakers and $100 a month in iTunes purchases, they can direct this money toward a mortgage. “But Jay,” you ask. “What if they can’t afford the down payment on a house?” To which I say: “Ask to borrower it!” There is nothing wrong with accepting down-payment assistance from parents, friends, or relatives. In fact, 1 in 3 home purchases involve borrowed or gifted funds for the down payment.
If you’re considering homeownership, now is a perfect time to re-structure your student loan debt and take on a mortgage since interest rates are still historically low. I mentioned this during the radio show, along with a long, but not exhaustive, list of observations about the home-buying process. I encourage everyone to head to the archive and listen to the full list. But for our purposes in this blog post, a few will suffice:
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People have a tendency to shop outside their price range. They settle on a budget, then immediately make allowances for homes with new kitchens, whiz-bang gadgets, and extra rooms. Before you start shopping, settle on a budget. Then find a mortgage broker a get pre-qualified according to that budget. That way you won’t be able to exceed your budget.
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Ever notice how the minute you buy a car, you start noticing them everywhere? The same happens when shopping for a home: You start noticing all the a...
2014 promises to be a year of possibilities—a year of change, progress, and success! Or not. It may be another bust. For most, it will surely be another bust. A year is what you make of it. That’s why many Americans—45% to be exact—wisely resolve to make their new year better than the year before. Unfortunately, only 8% of the 45% who make New Years resolutions actually succeed, with 25% quitting within the first week! That’s why we’re focused this week on New Years Resolutions: what they are, why they fail, and how to approach them to ensure success.
Each year, various publications and groups conduct surveys on New Years resolutions. And each year, financial resolutions make up a greater and greater portion. This year, 33% of individuals’ resolutions were finance-related, compared to 36% for weight and 31% for relationships. The top ten resolutions for this year are:
Eat healthier
Drink less
Learn something new
Quit smoking
Create a better balance between work and life
Volunteer more
Save and be more responsible with money
Get more organized
Read more
Finish an unfinished project
And of course I stumbled on some amusing resolutions when researching this show, such as:
To stop procrastinating about procrastinating
To actually laugh out loud when typing “LOL” into a text
To never again take a sleeping pill and laxative at the same time
Even these ridiculous resolutions show a desire to exercise discipline and seek wisdom—although I’m not sure how much wisdom is actually needed to achieve that last one. The point is, silly and trivial resolutions are often the best places to start. Too often, people make unrealistic resolutions, or too many resolutions, and give up entirely when progress proves elusive. It’s better to settle on a handful of small resolutions, achieve them, and then gradually pursue more daunting goals. Instead of resolving to eliminate all your debt, decide instead of eliminate one or two credit card balances.
I was disappointed to see financial responsibility so high on the list of resolutions at number 7. Maybe too few people realize that money problems often contribute to eating worse, drinking more, smoking, and having an unhealthy balance between work and life? And if they’d address number 7 then numbers 1, 2, 4, and 5 would be easier to achieve, if not take care of themselves entirely? Regardless, that is the area I am most familiar with, so I can attest to its importance in most people’s lives. Virtually everyone I meet through this show or through my mortgage company have goals or aspirations that are directly related to getting their finances in order—whether they realize it or not. You would not believe how powerfully financial strain contributes to domestic tension and personal unhappiness.
As you’ve no doubt heard, the first step to recovery is admitting you have a problem. And the best way to admit you have a problem is to have a third party confront you with your spending habits, have you explain yourself, and then scold you like a Catholic nun. The single most important factor in succeeding at your goals and resolutions is to have someone in your life hold you accountable. At Garvens Mortgage Group, we do this all the time. If you want an objective analysis of your spending habits and a sensible plan for rehabilitating your finances, we’re more than happy to assist at no cost. Most commonly, the habits putting a household over the edge are things they have complete control over: the amount of money spent eating out; the super-high car loans; the recurring charges for unused gym memberships or Hulu Plus accounts.
I recently read an article comparing the habits of financially responsible and irresponsible people. The defining difference between these two groups is simply discipline. For example, financially irresponsible people will