The Problems are the Path: Yield Curve Threatens and Benefits Economy
The last letter I detailed the yield curve, as seen below.
TREASURYS
Prior to the Hamas attack on Israel, the 10 and 30- year bonds were on the verge of breaking 5%. Monumental; in that, the break would mean bonds will be competition to any investment decision. The Institutional Investor; which dominates our investment markets, can now look a long term treasury bonds to finance the actualarial returns they are to provide to their clients. The rise in interest rates is a major threat to growth stocks; such as technology, as the high return is more competitive to volatility and the lack of a current return in dividends. Technology has had a great run in equity values and fed much of the real estate growth and price appreciation in the U.S.. In the past prices in Silicon Valley and other areas of the U.S. were stressed as the need for employees and the movements of employees created strength in home prices. Today, Silicon Valley is not really where the employee lives but where he works as a virtual employee. That could be Hawaii, Auburn, El Dorado Hills, Lake Tahoe Nevada, Texas or anywhere desire has taken the employee.
The review of home prices in California and across the U.S. are showing a general trend downward in list and sales from comparative period in the past years. The real challenge is how will buyers and seller operate in a high interest rate environment?
The Commercial market is taking the lead in this case. SBA loans are 10.5% or higher. Commercial lenders put a high risk factor onto their loans that make the standard lender not the lender of choice. Seller Finance transactions are common. These types of loans are dependent on the equity of the seller in his property and whether the underlying loan has a "due on sale" clause. Should the buyer be able to provide enough of a deposit to pay off the debt the carry by the seller has a note of 5-10 year term, interest only or a loan term with a long term amortization schedule; such as, 25 years. This type of loan has the concept belief that within the period of the loan interest rates will decline. Buyer can then refinance the loan into a standard loan with Bank or lender of choice.
On the residential side Wrap Mortgages were the vogue in the 70's and 80's during another period of high interest rates. A mortgage for the sale of the property was wrapped around the existing mortgage. As an example; the seller has a pre-existing mortgage of 3% from the past refinance, The current seller financed mortgage is 6%. The seller earns interest on the difference between the 3% and 6% or 3% on the amount financed and another 6% on the new mortgage. The only thing that makes this Wrap Mortgage impossible is a "due on sale" clause. That means the seller will have to pay off the loan when sold.
Seller Financed is then the next option to the failure of a Wrap Mortgage. In this case the buyer down payment needs to cover the existing mortgage. The interest rate charged by the seller is less than current rates and secured by the home the seller once owned. The concept of "Price and Terms" comes into effect. The seller is giving good terms they get in return price.
Installment Sales are another vehicle used during the 70's and 80's for property with low cost basis and little o no mortgages. A special contract is used to create the offer, title company records and monitors the transaction. Interest earned on the unpaid portion of the transaction. Capital gains a allocated based upon the % or principal paid.
A word of caution. Sellers contact your lender and accountant to determine if these suggestion are for you. Buyers, you too, need the advise of your accountant and financial planner to determine if any of these strategies are in your best interest.
As before, call or write for any question you may have and think of me of your "in the know real estate agent".
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