Fredericksburg Texas

While the negotiations between TimelessLuxury Homes and the City of Fredericksburg to provide “affordable housing” viathe Barons Crossing proposed PUD reached an impasse last Friday, everyoneinvolved in this process should be congratulated on their hard work. The silverlining is that there are some very smart, very dedicated people trying to clearthe regulatory burdens that stand between the problem and its resolution.

It remains clear that much needsto be addressed within the regulatory environment for the private sector tohave a clear understanding of the rules under which they are challenged tobring a needed product to the market. While eagerly awaiting the recommendations of the affordable housingsubcommittee task force, it is clear from listening to the discussions, thoughtprocesses, etc. I have been privy to that while many options remain to beexplored, the right questions are in fact being asked.

Anyone with an interest in thisimportant community discussion should be aware that there is only so much“government” can/should do to help. Short of going into the business of providing a “government product” (notan attractive solution at present) it will take a level of commitment andparticipation from everyone involved in the development process to solve theproblem.

Upon receiving clarity andcommitment to a new set of “rules for the game” (subd. requirements,incentives, waivers, etc.) land owners, developers, realtors, bankers,attorneys, title companies, surveyors, land planners, engineers, architects,road builders, material providers, homebuilders, appraisers, etc. must begin tothink beyond the traditional development models to create scenarios that areconducive to placing a product on the ground in Fredericksburg Texas that istruly affordable both in the present and in the future. Its being done all overthe country, we can do it too.

Further echoing the messages fromprevious posts, the real estate market in Fredericksburg, Texas continues toface downward pressure as rising interest affect both the availability ofcredit and the ability of many borrowers (buyers) to access it.  With tighter, more expensive money asthe rule, buying power is reduced and prices (by necessity) must continue tofall.

All is not doom and gloomhowever.  The good news is that thereappears to be plenty of buyers still searching for their Fredericksburg Texasdream property so sellers should not panic.  Sellers should, however, be aware of factors affecting theiraudience (interest rates, increased competition, etc.) and set (or re-set)their expectations accordingly.

Clearly the real estate market inour community is experiencing an “adjustment” but this is simply a sign thatmarket factors are at work balancing the supply and demand and that all isworking as it should.

Mortgage Rates Near a Year High

ByRUTH SIMON and JAMES R. HAGERTY

July 23, 2008; Wall Street Journal Page C14

Home-mortgagerates are nearing their highest levels in a year, adding to pressures on thealready weak housing market.

Rateson conforming 30-year fixed-rate mortgages rose by nearly 0.40 percentage pointin the past week to an average of 6.71%, according to HSH Associates in PomptonPlains, N.J. Rates on jumbo loans, which are too big to be eligible for purchaseby Fannie Mae or Freddie Mac, currently average 7.84%.

Thehigher rates are making it more difficult for borrowers to refinance andputting another crimp on weak home sales. "It's a tough market and ratesgoing up isn't helping it," said Steve Walsh, a mortgage broker inScottsdale, Ariz.

Mortgagerates typically move in line with rates on 10-year Treasurys. Treasury rateshave risen, but so has the spread between rates on 30-year mortgages and10-year Treasurys, said Nicholas Strand, a mortgage strategist at BarclaysCapital.

Banksset their interest rates on mortgages based on demand for those loans frominvestors, including Fannie Mae and Freddie Mac. When demand is weaker, theymust offer investors a higher interest rate.

WalterSchmidt, a senior vice president at FTN Financial Capital Markets in Chicago,said the latest increase largely reflects fears that Fannie Mae and Freddie Macwouldn't be able to buy as many mortgages in the months ahead as they haverecently. The two companies are the biggest buyers of mortgages and relatedsecurities. Both are facing heavy losses on defaults, and investors believethey probably will have to raise large amounts of capital to cope with thoselosses.

Freddieadded to jitters last week by saying it might sell some mortgage securities toreduce capital needs. And some smaller Asian banks have been selling mortgagesecurities, said Arthur Frank, a director at Deutsche Bank Securities in NewYork.

The interconnectedness of WallStreet and Main Street continues to manifest itself with ever-increasing signsthat today’s (relatively) low interest rates are about to increasesignificantly.  For buyers or sellersof real estate in Fredericksburg, Texas, this has serious consequences.

Among the unintended consequencesof having kept interest rates artificially low is the fact that low interestrates have weakened the value of the dollar, thus increasing the “real” pricewe pay for any and all goods that are imported into this country (oil, food,clothing, steel, concrete, copper etc.). As the cost of these things climb, so too do the price of the “things”they ultimately create (e.g. housing).

As the cost to build more housingincreases, the demand to buy this housing decreases.  Attempting to offset this price pressure by holding interestrates low (e.g. making money “cheaper” to borrow and therefore more attractive)has run into the perfect storm of economic factors that has lead to the exactopposite effect than what was intended.

Adding to the mix are thecontinuing credit woes at Fannie Mae and Freddie Mac (quasi-government agenciescurrently owning or backing $5.2 trillionin home mortgages) whose stock prices are off almost 75% from their highs inthe early 90’s.  As these criticalcapital markets lose their ability to raise capital via the stock market theyare increasingly turning to the bond markets as a ready source of liquidity.  The problem with that is investors seethe stock price suffering and rightly have concerns about the financialviability of these institutions and, as a result, demand higher rates on thebonds being offered.  As the costof Fannie and Freddie’s funds increase, what do you think happens to interestrates being offered on home mortgages?

Pressure to strengthen the dollar(and thus lower the cost of all import) necessitates an increase in interestrates.  Pressure to shore up FannieMae and Freddie Mac necessitates an increase in interest rates.  Increased interest rates translate intoan increased cost to homebuyers. Increased costs to homebuyers will further weaken demand for existinghousing stock.  This decreasingdemand will translate into lower prices paid for homes and increases in thetime it takes to sell a home (and we all agree that time is money).

For Fredericksburg real estatespecifically, this should be yet another sign to buyer that they shouldstrongly consider acting now, before rates increase, as a higher rate addstremendously to the overall “cost” of a 15-30 yr. mortgage.

For sellers of Fredericksburg, TXreal estate, this should be a further sign that already anemic demand will dryup even more and show that if, indeed, you are serious about selling, you’dbetter reconsider your price position and do so soon.

The time to act is now…

What’s the difference between a“deal” and a “steal” for buyers in the world of Fredericksburg Texas realestate?  A “deal” can loosely bedefined as contract negotiated for between 10%-15% off of the asking price(assuming of course the asking price was reasonable to begin with, but that’sanother story). A “steal” can be defined as something you won’t find in thismarket (at least not yet anyway).

As mentioned in earlier posts, weare a discretionary market to a very large degree (e.g. buyers don’t have tobuy here and most sellers are not being “forced” to sell) and while theevidence is clear that the real estate market has softened in Fredericksburg,TX, it is also clear we are not in panic mode.

Buyers, if you’re looking for a“steal”, try Miami, Las Vegas or Detroit. If you’re looking for a “deal”, now is the time to be aggressivelylooking at the wealth of offerings in the market.  You are best off doing so with an experienced professionalrepresenting your interests. Remember that the listing agent works for the seller, not you. Whileagents who are members of the Gillespie County MLS all have access to the sameinformation, it’s what an agent does with that information (combined with yourneeds) that makes all the difference in the “deal” you end up with.

Sellers please know that thebuyers in the current Fredericksburg real estate market are “deal hunters” andwill gravitate to what they perceive as the best bargain under their particularcircumstances.  Does this mean youhave to give you property away?  Ofcourse not, it simply means you have to price your property “right” from thebeginning and be flexible in your expectations and potential negotiations.  There appear to be plenty of buyers outthere but remember that there is also much more for them to choose from thatusual.

Buyer’s should consider makingtheir offers sooner rather than later as interest rates are sure to increase.  Sellers should consider putting theirbest price forward as soon as possible as interest rates are sure to rise andthe economy shows few signs of recovering anytime soon.  You heard it here first!

Peering into my crystal ball fortrends affecting (for better or worse) the Fredericksburg Texas real estatemarket I see:

1.    1.  Mortgageinterest rates will rise.  Bumpingalong near historic lows for the last several quarters, these rates are undertremendous pressure to increase as they are the single largest factor affectingthe current weakness in the value of the U.S. dollar.  The weak dollar is reflected most prominently in the recordprice we are now paying for oil (and hence, gasoline), food and other consumerstaples.

2.     2.  Itis only a renewed strength in the U.S. dollar (created, in part by risinginterest rates) that will ease our pain at the pump (in the sort term) but lookfor the price of oil to remain well over $100/bbl and gas to remain above $3.00/gal.for the foreseeable future.  Theever-increasing global demand will not be abating.  The silver-lining in this is that folks will travel but staycloser to home which has traditionally benefitted the community ofFredericksburg TX with our proximity to Austin, San Antonio, Dallas andHouston.

3.     3.  Painat the pump will continue to translate into decreased US demand for oil/gas,increasing pressure on politicians to produce more “supply” and more downwardpressure on consumer spending.

4.     4.  The“credit markets” will recover from the sub-prime fiasco but lenders will beever-more cautious about extending credit to all but the most well-qualifiedborrowers.  This, in turn, willcontribute to a continued “softening” overall of real estate markets whereprices in most areas will not return to their pre-2007 levels for some time.

5.    5.   Thevalue of and demand for rural real estate will recover quickly be the lead thesector in sales volume and appreciation (especially land with surface waterand/or capable of producing a consumer crop).  Provided existing tax rules (valuation methods, exemptions,capital gains, etc.) remain relatively constant, there is no place else toinvest sizeable funds with very little risk, very low carrying costs andhistorically favorable returns.

6.    6.   Evermore savvy real estate buyers/investors/sellers will rely more and more on theinternet to research purchases/comparable sales, etc. and appreciate thatmarket knowledge, experience and outside-the-box thinking will increasingly befound outside the doors of the more traditional “branded” models of brokerageservice providers.

7.    7.   Asthe internet continues to be the “great equalizer” in the real estate industry,consumers will realize that bigger is not necessarily better and that industryknowledge and market experience will trump “branded name recognition” everytime.

8.    8.   Fractionalreal estate offerings and purchases will emerge as the single most importantinnovation in property ownership in the last 25 years.  Popular in high-end resort-orientedcommunities for years, this “new” form of ownership will open a door to luxuryownership that simply has not been available before now.  The ability to own a deeded,mortgage-able, depreciable and inheritable share of high-end property (one thatwill likely appreciate and can be bought or sold as easily as a single familyresidence) will unlock billions in baby-boomer wealth that has heretofore beenunable (or unwilling) to pursue the second home of their dreams at a fractionof the traditional price.

Remember, you heard it here first!