I attended a presentation at Evangelos Restaurant in Wasilla by Ted Jones titled “Bubblettes and the Economy”. He is the chief economist and senior vice-president of Stewart Title Guarantee Company.
Here is the gist of my notes, I just wrote down the parts of the talk that interested me so the points do not really string together.
- Investment or speculation. If you are buying a house with the hopes of making money it is only an investment if the property will pay for itself. The house should rent for about 1% of it’s market value. If you are purchasing it with the hopes of making money because of appreciating values you aren’t investing, you are speculating. Jones says there are two new Latin words for speculators…Californian and Floridian.
- Now is the time for a fixed rate loan. The interest rate difference between a fixed rate loan and an adjustable rate loan, (an ARM), is extremely small. Yet, 21% of current mortgages are still ARMs. He blames some lenders for encouraging ARMs because they make more money on them. He says many of these are time-bomb loans because they will blow up in a few years and result in a massive increase in foreclosures.
- Interest rates will increase to 7% by the end of the year. Some economists believe the interest rate will remain at about where it is now…the low 6’s, but Jones thinks the rates will likely be close to 7% by years-end for 30 year fixed rate mortgages. If you are waiting and watching before you buy think about what that 1% will do. It will increase the monthy payment for a $200,000 loan by about $130 per month. Multiply that times 60 months, (five years), and you just payed $7,800 more for your house because you waited to buy. Of course, he could be wrong. Interest rates may go down, but no one is betting on that.
- Oil prices have not risen because of greed. They have risen because of the devaluation of the dollar. 75% of our oil is purchased from overseas. Most of the dollars we spend for overseas oil is changed into euros which have gained in value compared to the dollar. So the Saudis and others need to charge more for the oil to maintain the value.
- 79% of home buyers begin their search on the web. I am convinced that an even higher percentage of Alaskans use the web for real estate. Yet, Realtors and sellers still spend most of their money on print advertising. I am moving most of my marketing efforts to the web for this reason. I noticed long ago that I receive more from online advertising than from print media.
- Land costs are high in Alaska. Compared to the rest of the US, the cost of land here is high in relation to the total cost of building a house. The cost of land has risen much faster than the labor and materials cost to build a home. That is the reason many builders keep building homes because they need to get some return on the land that they purchased.
- Job growth in the Matanuska Valley is much higher than the national average. The growth of jobs in Alaska is significantly higher than the national average, and the growth in the Palmer and Wasilla areas is almost twice the national average. Increasing jobs means an increasing population and the need for more housing.
- We do not have a real estate bubble in Alaska. Because we did not have the huge increases in real estate prices seen in other parts of the county, we are not seeing a correction. Real estate prices may not increase like they did in 2005 but because of the continued need for housing, they will not decrease either. Some areas of the country ARE seeing huge decreases in real estate values…namely parts of California and Florida. But Ted Jones does not expect to see prices in Alaska to go down.
More on the economy in Alaska and the Mat-Su Valley.