experts: real estate column Wednesday, October 29, 2008

Questions, Questions...

Ozzie answers questions on the market cycle, mortgage rates and more.

By Ozzie Jurock

I receive a surprising amount of questions. I love it and try my best, but can't get to all of them right away. Today I pick some of the most frequently asked. Thanks for all your queries.

QUESTION: I am a regular reader of your column in the Van Sun which I enjoy every Thursday. I hope you don't mind my sending you this email to enquire on our present Vancouver market.

(a) With recent worldwide developments over this weekend and the election results will it change your views that we have reached the end of our current cycle?

(b) What are the chances that our market could enter into another upward spurt after these recent developments over the past week?

ANSWER: a) I assume that you mean the worldwide bank bailouts, guarantees, joint lowering of rates etc. Unfortunately, markets are the stories we tell/hear/retell about them. The stories are now all negative. Fear always is stronger than euphoria. While we have a propensity to overshoot our upward cycles driving prices higher than we ought to, we also - alas - have the propensity to drive prices lower than we ought to when markets turn - as now. The losses in the stock market, the crash in oil, gas prices and the ongoing barrage of talking about (even just the talk) the recession and job losses, may well overshadow the real bright future outlook we have in BC. b) None for at least 12-24 months. It is not just a 'worldwide' issue. We have overshot our targets on affordability (70 plus percent), we have a sharp reversal in sales and a substantial increase in listings.

Several mortgage questions:

QUESTION: Here's my dilemma: I purchased (pre-sale) a small loft 3 yrs ago in Mount Pleasant, Vancouver. I have a 5-yr fixed mortgage at a rate of 4.3%. My mortgage renewal will become due in Dec/2010. In addition I have a line of credit which is being used at a rate of prime + 0.5%. I'm a little concerned of the timing of my mortgage renewal falling at the tail end (or maybe even smack in the middle) of an economic downfall, do you think it would be prudent to re-finance now instead of in late 2010?

ANSWER: You do not say what the mortgage amount is, but you currently have the very best 5-year rate EVER and you have 2 years left. Your credit line will fluctuate with the prime ... likely downwards for at least till spring. However, if you - like Harry Dent - feel, that there will be a depression at the end of 2010 ... you must govern yourself according to your beliefs. (Harry also sees interest rates much lower by end of 2012.) I would wait and watch the interest rates carefully ... have a predetermined goal ... if rates hit x% ... then lock in. In the meantime enjoy the very low rates. You may wish to read the following answer as well.

QUESTION: I am in a 5-year variable rate at prime - 3/4% of approx $400,000 now for 1 year. I heard Bob Hoy say on Moneytalks that interest rates would go 'through the roof'. Should I refinance and lock myself into a 5-year term?

ANSWER: That is the crazy world we live in. One forecaster (Harry Dent) sees rates go to 7% by next summer and then down to 2% by 2012 ... Hoy sees them head to 8%. I have had spectacular success forecasting real estate values. I have a very poor record forecasting interest rates. I have always felt they should have been a lot higher (since 1998) then they actually were. So, no one really knows for sure. The estimable Bob Hoy notwithstanding, what we do know is that you will likely pay only 3.25% (after this Tuesday's decline in the interest rate - .25%), whereas a new variable rate mortgage would be prime plus 1% or 5.25% to 5.45% at most banks. (As I write this, banks have not followed the BOC rate and cut their prime rate.) A quick aside ... different banks have different prime rates ... TD until today was 4.35% plus 1% (5.35%) ... HSBC and BOM stood at 4.25% plus 1% (5.25%) ... so check it out with your mortgage broker. If prime rates were to stay the same or go lower for one year (as many pundits predict), you would save likely 2% or $8,000. The prime rate would have to go up to 6.50% for you to have to pay the net 5.75% that is the current 5-year rate. If I were to take out a new mortgage ... I would be more likely to lock in. But ... it is your decision. To sleep or not to sleep that is the question. In the last 25 years we have seen 5-year rates as low as 4.3% and as high as 16.5%. Today's 5-year term is close to the all time low.

QUESTION: If re-financing now I would like to add a line of credit to my mortgage for use in a few years (to buy rental property), is this financially wise?

ANSWER: In a real credit crunch your bank may pull your unused credit lines. (It is happening all over the US currently and here as well - mostly commercial credit lines for now.) Also, a credit line is reported to Equifax as a debt, most mortgages are not. Depending on your overall objectives (and world outlook) ... you may be better off to get a mortgage for the whole amount, put the amount you do not need into a GIC and consider the difference between the interest you pay and the interest you earn as insurance. These and similar questions should also be asked and debated with your accountant. Can you make your home mortgage or your credit line tax deductible for instance?

QUESTION: Daily there are many ads on the radio to invest in various real estate offerings by various companies - some direct real estate, units or just mortgages some of the fixed return ones offering 12% to 18% returns. Where can one obtain independent info on these various companies as my Google searches have not come up with anything helpful? Are there things to look out for?

ANSWER: The safest investment today is a Treasury bill. It will pay you 1.6%, a Savings Bond at 2.25% is next, a corporate bond pays around 3%. A corporate bond has 50% more risk to the investor than a Treasury bill. Get a pencil and figure out how much more risk is there at an offer of 18%. If it sounds too good to be true it always is. Anything that offers 12% to 18% has a commensurate risk. People always say to me: "Yeah, but Ozzie a GIC only pays 4%". My answer: "No it does not. It is 104% ... you get your money back!" In today's uncertain world, protecting what you have has to be No. 1.

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As last week: When markets turn into a buyer's market it is often difficult to adjust quickly. To all of you that have questions about having a hard time selling your home ... go to Jurock.com and read the 26 ways to make your home sell faster' story ...

Warren Buffet says: "Be fearful when others are greedy and greedy when others are fearful." Be a contrarian ... act when others run. You make the most money on the day you buy ... and that is more often than not in a down market.

Published in the Vancouver Sun, October 23, 2008




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Related Links:

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