TOM CRONE'S Quick Information on Investment / Income Property Action

It is said that we cannot consume what we fail to produce. I’m listening to friends and associates whose great concern is that America produces very little product, that our Gross National Product is weak. We have a “Paper Economy”. Perhaps you share those concerns. Still, I think it noteworthy that people are also asking my Realtor’s perspective on this question, “Aren’t too many new homes being built?” Homes, after all, are product. We also produce an overabundance of agricultural product. I’m not certain about clothing, because much of what we wear seems to be made in China or some off-shore location. So, of the big three - food, clothing and shelter - we have the food and shelter part taken care of. If visits to Rag Stock and Value Village are anything to go by, we have plenty of clothing that we don’t wear, so I suspect we won’t all end up running about naked (a ghastly thought).

Maybe, maybe not . . . MY THEORY: The new home construction market, it is said, is a haven for big money investment. The massive money is not in the stock market and the money markets as much as it is finding bedrock in the new homes game. This helps keep interest rates down. Why? Because in order for someone to buy the new home, they usually have to sell their existing home, and often to someone who has to sell their home or condo. The"Movin' on up" game involves more second home buyers than first time buyers. To protect the Big Money investment folks, the interest rates have to assure this process, from the bottom up.

Fixed Mortgage Rates Continue To Ease As Housing Starts Reach Record Levels In August

Freddie Mac (NYSE:FRE) released the results of its Primary Mortgage Market Survey in which the 30-year fixed-rate mortgage (FRM) averaged 5.70 percent, with an average 0.7 points, for the week ending September 23, 2004, down from last week when it averaged 5.75 percent. Last year at this time, the 30-year FRM averaged 6.01 percent.

The average for the 15-year FRM this week is 5.10 percent, with an average 0.7 points, also down from last week when it averaged 5.13 percent. A year ago, the 15-year FRM averaged 5.30 percent.

One-year Treasury-indexed adjustable-rate mortgages (ARMs) averaged 4.00 percent this week, with an average 0.7 point, down from last week when it averaged 4.03 percent. At this time last year, the one-year ARM averaged 3.81 percent.

"This new millennium has proven to be very homeowner friendly. For instance, in the last four years we have set records in housing starts, housing sales, low mortgage rates, refinancing volumes and total mortgage originations," said Frank Nothaft, Freddie Mac vice president and chief economist. "As a matter of fact, low mortgage rates in August led to housing starts in that month that were the second highest in over two decades."

"Our Primary Mortgage Market Survey results this week show mortgage rates slipping again, which will all but guarantee that the housing industry will continue at its robust pace and set, yet again, another record for both new construction and overall home sales."
Published: September 24, 2004

In the long run, I believe this sort of reverse domino effect also creates more affordable housing, particularly of the non-subsidized variety. Homes on the lower price levels become affordable for renters, who can now purchase homes and begin to build equity (call it "wealth", and I’ll happily argue with those who don’t define this equity as such).

Are you ready for the real jump in economic logic? This process creates a renter's market. In such, properly priced rental of houses, duplexes and quads competes better against high-priced, perhaps over priced rental properties with large numbers of units. People with marginal but improving incomes and credit situations, who are looking for "rent with option to buy" opportunities, also emerge. Consequently, it's a good time to consider purchasing certain types of rental income properties. If the rental property is small, well maintained and can rent competitively against the less affordable newer units, it will give good returns. Properties that have the potential for "Rent with option to buy" are also a good bet.

Are too many new homes being built? We also cannot consume what we produce too much of. It is often the case that some folks will"gold rush". Don't you suppose that somewhere there might be a surplus of hula-hoops? It is also the same people who are afraid we are not keeping up with creation of product who worry that we might be building too many homes.

In the first two months of the second quarter, 15,408 jobs were added to the payrolls of Hennepin County. Resultantly, average monthly unemployment fell from 4.2% to 3.9%.

Average Hennepin County home price Q1-'04 = $264,100 / Q2 = $280,300 (5.8% increase, and just for one quarter)

The forecast is for further increase in home prices.

3,309 homes were sold in Q1, and 6,215 in Q2.

With new jobs and assuming favorable mortgage rates (which we’ve had), Q3 should bring us into the usual Q4 leveling off period in fine shape.

Go back and read the Realty Times excerpt and see if you think anybody of knowledge and credibility could write a similar piece touting the value of stocks during the past four years.

For those who ultra-simplify the concept of Value Investing into: "Buy low, sell high," it would seem that being able to purchase property with leveraged money, at interest rates that are low, have it maintain itself as a strongly protected asset, then sell it at a significant percentage increase is indeed Value Investing.

That's it for now. Except this:

1. If you have interests or questions, please e-mail me or give me a call.
2. Check out my website HERE