2009 "Dear Client" Letter - Part One

Rational Moves in an Irrational Market

Warren Buffett, Chairman of Berkshire Hathaway (the ultimate parent company of Edina Realty), writes a renowned annual shareholders' letter read by tens of thousands. Buffett's letters contain nuggets of wisdom, pithy quotes (his line about credit derivatives being "weapons of mass destruction" was from 2003), and his general take on market conditions.

In my capacity as a Twin Cities realtor, I write an obscure annual letter that I send to a couple hundred people offering . . my general take on market conditions. Here is the most recent edition, headed to clients this weekend:

Dear Client:

Happy 2009!

As the year begins, consider some of the more unusual -- if not unprecedented -- features of today's financial and real estate markets, and the economy in general:

--Zero per cent. As of mid-December, that is the Federal Reserve's target number for short-term interest rates (the one it controls). That's also the interest rate on U.S. T-bill's (actually less than zero, net of fees).

--From $60 a barrel to $150 to $38 to . . .??? After their moon shot during the first half of 2008, commodity prices -- including oil -- suffered a historic collapse the second half of the year. At $1.80 or so per gallon (less at Sam's Club and Costco), gas prices are near their lowest in 5 years, and more than 50% off their $4-plus peak last Summer (seemingly another lifetime ago).

--Falling stocks and housing. Unless you're over 80 years old and started buying stocks when you were a (very small) child, you just experienced your worst-ever year in the stock market: down 40% over all. By comparison, housing turned in a stellar performance: only down 15% nationally, and now 20%-25% off its 2006 peak (again, nationally).

--Not everyone has savings and investments, but fortunately, most people have jobs (almost 93%, to be specific). However, with the economy clearly slowing, many experts predict that the unemployment rate will be significantly higher in 2009.

Comforting, huh?

"Lemonade Recipe" (or, Rational Moves in an Irrational Market)

When things are so uncertain, it's tempting to do . . nothing. In fact, depending on your circumstances, doing nothing may be the smartest move of all (it worked for Seinfeld).

However, even in a sour economy -- perhaps especially in a sour economy -- there are three tried-and-true strategies most people should at least consider. In that vein, here is my 2009 realtor's advice to clients -- past, present, and, hopefully, future -- on how to turn today's, shall we say, challenging environment to your advantage.

--One. Take advantage of cheap money. The flip side of anemic rates on savings are historically low borrowing costs. Long-term mortgage rates have literally collapsed since Thanksgiving, falling from over 6% to 4.75% or even lower. If you plan on staying in your home long-term, you'll easily recoup the expenses associated with re-financing. Even if your time horizon is as short as 5 years, you may still benefit, depending on your current interest rate and mortgage balance.

Talk to a lender to find out. Better yet: talk to two or three (money is fungible), and be sure to ask for the required disclosures: the Truth-in-Lending ("TIL"), and Good Faith Estimate of Settlement Costs. Also ask whether the lender offers a re-lock option: in an environment of volatile (and for now, falling) rates, paying a nominal fee for a "second bite at the interest rate apple" can be a good idea.

Cont: 'Dear Client Letter - Part Two'