Don't Miss a Golden Age for First-Time Buyers
Five or 10 years from now, when the financial crisis has ended and housing prices are up smartly once more, we will look in the rearview mirror and realize that we missed a golden age for first-time home buyers.
Then, everyone who sat on their down payment savings accounts for a few years too long will kick themselves for not taking advantage of what may turn out to be the buying opportunity of a lifetime for those who can qualify for a mortgage.
Unfortunately, we do not know when this golden age will begin, because we will be able to identify a bottom to the housing market only with the benefit of hindsight. But as it does with the stock market, the moment will probably arrive when everyone is feeling the most pessimistic.
That moment is certainly getting closer. Housing prices have fallen drastically from their peak levels in many areas of the country. Rates on 30-year fixed-rate mortgages are already close to 5.5 percent, and this week there were suggestions that the federal government might try to drive them down to 4.5 percent, a truly incredible figure to be able to lock in for three decades.
Meanwhile, first-time home buyers have the same advantage they have always had, which is that they do not have to sell their old place before buying a new one. That is an added advantage in areas where many available houses simply are not moving, because the people trying to sell them will not be bidding against you.
If you’re hoping for a recovery in the housing market, you ought to be cheering on the first-time home buyers. When they purchase homes, their sellers are free to move on or move up, stimulating further sales.
But if you are a potential first-time buyer yourself, or lending or giving the down payment to one, you are probably as frightened as you are tempted by all the “For Sale” signs that have become “On Sale” signs. So let’s quickly review some of the still-grim pricing data in certain areas — and consider the reasoning offered up by first-time buyers who have forged ahead anyhow.
As is always the case with real estate, much depends on location. One study, “The Changing Prospects for Building Home Equity,” tries to predict where today’s first-time buyers in the 100 biggest metropolitan areas may actually have less home equity by 2012 as a result of continued price declines. The verdict was that buyers in 33 of the markets could see a decline by 2012, including potential six-figure drops on an average home in the New York City, Los Angeles, San Francisco and Seattle metropolitan areas.
This is obviously scary. (I’ve linked to the study, a joint effort of the Center for Economic and Policy Research and the National Low Income Housing Coalition, from the version of this article at nytimes.com/yourmoney.) It’s worth noting, however, that these predictions came before the government made its most recent move to reduce borrowing costs.
Also, the price projections in the study are based, in part, on the fact that the ratio of purchase prices to annual rents is still higher in many areas than the historical average, which is roughly 15 times rents. While past figures may well have some predictive value, I have never been convinced that first-time buyers compare a home that they could own and one that they would rent in purely or even primarily economic terms.
When Jaime and Michael Proman moved this fall to Minneapolis, his hometown, from New York City, they craved a different sort of life after two years together in a 450-square-foot studio apartment. “We didn’t want a sterile apartment feel,” said Mr. Proman, who is 28 (his wife is 26). “We wanted something that was permanent and very much a reflection of us.”
The fact is, in many parts of the country there are few if any attractive rentals for people looking to put down roots and enjoy the sort of amenities they may spot on cable television home improvement shows. Comparing a rental with a place that you may own seems almost pointless in these situations, especially for those who are now grown up enough to want to make their own decisions about décor without consulting the landlord.
Still, for anyone feeling the urge to buy, a number of practical considerations have changed in the last year or two. The basics are back, like spending no more than 28 percent of your pretax income on mortgage payments, taxes and insurance. Even if a lender does not hold you to this when you go in for preapproval, you should hold yourself to it.
You will also want to start now on any project to improve your credit score because it may take several months to get it above the 720 level that qualifies you for many of the best mortgage rates.
John Ulzheimer, president of consumer education for credit.com, a consumer credit information and application site, suggests starting to pay down and put away credit cards months before you apply for a loan. That is because the credit scoring system could penalize you if you use a lot of credit each month, even if you always pay in full. Also, check your three credit reports (it’s free) at annualcreditreport.com and dispute errors.
While no one can easily predict the likelihood of losing a job, Friday’s startling unemployment figures suggest the need for caution if you think you might be vulnerable. A. C. Panella, who teaches communications at Pasadena City College in California, waited until she had a tenure-track job before buying a home in the Highland Park section of Los Angeles with her partner, Amy Goldman, a lawyer for a nonprofit organization. “We could afford the mortgage payment on one salary, were something to come up,” Ms. Panella, 31, said. “It’s really about being able to stay within our means.”
For many first-time home buyers, that philosophy stretches to the down payment, too. Ms. Panella and her partner put down 20 percent when they bought their home in September, as did the Promans when they bought their home in the Lowry Hill neighborhood of Minneapolis.
Alison Nowak, 29, put just 3 percent down on a Federal Housing Administration-backed loan last month when she and her partner, Lacey Mamak, bought a $149,900, 800-square-foot home several miles south of where the Promans live. “Anything that is an opportunity also has a bit of risk,” she said. Her house was in foreclosure before a plumber bought it and fixed it up. “One way we mitigated it was that we bought a really tiny house in a very good neighborhood.”
One other strategy might be to buy new instead of used. Ian Shepherdson, chief United States economist for the research firm High Frequency Economics, says he believes that a steep drop-off in inventory of new homes is coming soon, thanks to a rapid decrease in home builder activity.
Since prices generally soften in the winter, it may make sense to start looking seriously once the mercury bottoms out. “If you look at new developments next spring, you may not have the choice you thought you would have or be in the bargaining position you thought you would be,” Mr. Shepherdson said. Also, if you wait after June 30, you will miss out on a $7,500 federal tax credit for income-eligible first-time home buyers that works like an interest-free loan.
Finally, allow yourself to consider how it would feel if you bought and then prices dropped another 10 or 15 percent. It might not bother you if you plan to stick around. Plenty of people seem to be making a longer commitment to their homes. According to a survey that the National Association of Realtors released last month, typical first-time buyers plan to stay in their home 10 years, up from 7 last year.
Perhaps people are more aware that they will not be able to build equity as rapidly as others did in the real estate boom. Or they simply have more confidence in hard, hometown assets now than in other markets.
“We wouldn’t let another decline bother us,” said Michael Proman. “You can never time a bottom. This is a long-term investment for us, and it truly is the best investment we have in our portfolio right now.”
By Ron Lieber for the New York Times
Tuesday, January 6, 2009
2009 Could Be Better Than You Think!
Why focus on the negative? Here are five good reasons why 2009 could, if you make the most of it, be good for your financial health.
1 This will be a good year to invest in stocks.
No one can tell you exactly when or where the market will bottom. But most business-cycle experts agree that the bottom will be found sometime this year, and that it probably won't be too far below where the market is today.
So a smart strategy will be to put some money in the market today, and keep doing it over the course of the year. If you're still shaken over massive losses from last year, this may be hard advice to swallow. But the biggest mistake you can make as an investor is to ride the market down, lose faith, pull out and miss the upturn.
Even in the Great Depression, the market bottomed out in 1932, with the Dow Jones Industrial Average at 41, down from a peak of 381 in 1929. By 1937, it had climbed back to a respectable 194. That didn't make investors whole. But for those who stayed in, it certainly soothed the wounds.
2 It will be a good year to invest in real estate.
This one's a bit trickier, since real-estate prices are "sticky" on the downside. Homeowners don't like to admit that the value of their pride and joy has fallen by 30%. So they'll put their house on the market at an inflated price and hope some fool will bite.
I was at a Vermont ski resort last month and noticed this oddity: Brand-new condominiums were selling at a price considerably below those of second-hand condos of roughly equal size and location. The reason? I assume it's because the resort owners have a better sense of the market's real value than the average person, still desperate to recoup a bad investment.
But here's the thing: Fixed-rate mortgages are already at historic lows, and the government is going to use every tool in its bag to get them lower over the course of the year. So if you find a piece of property you want, if the seller is willing to recognize how far the market has truly fallen, and if you have good credit -- three big ifs -- you can benefit from a once-in-a-lifetime double bonus of low prices and low interest rates.
This strategy requires some patience. Just as real-estate prices don't fall as precipitously as the stock market, they don't rise as rapidly, either. You may have to wait a decade to reap the full benefits.
3 Americans will learn to live within their means.
Around our house, the crisis is already having a salutary effect. Our teenagers suddenly seem to understand that unlimited dinners out with friends aren't a birthright, and that blue jeans don't have to carry triple-digit price tags.
Multiply that by 300 million, and you have a nation that has rediscovered that you can't spend what you don't earn. Houses are no longer ATMs, and credit cards no longer come with each day's mail.
That sudden realization, of course, is what's causing the economy to swoon. But this reckoning was inevitable, so it's best to get on with it. Let's hope these lessons last for decades.
4 President Obama will have a historic opportunity to reshape public policy.
Speaking at the Wall Street Journal's CEO conference in November, Mr. Obama's chief-of-staff-designate, Rahm Emanuel, said the words that have become his team's rallying cry for 2009: "You never want a serious crisis to go to waste. This crisis provides the opportunity for us to do things that you could not do before."
The Obama team is busily preparing a stimulus package that, when all is said and done, will total between $750 billion and $1 trillion -- far larger than any fiscal stimulus in the history of the world. And with the economy still sliding downward, it's a good bet few politicians will want to stand in the way.
That will give the new president an opportunity to do things his predecessors could only dream about. Roads will be rebuilt, schools will be refurbished, medical records will be computerized, and windmills will be constructed, all across the land.
Will some of that money be wasted? Of course. But the sums involved are so huge that there's a good chance someone, somewhere, will benefit.
5 Your (federal) taxes won't rise.
Never mind those campaign calls for higher taxes on the wealthiest Americans. Truth is, no politician is going to push for general tax increases in the midst of a severe recession.
You may wonder: How is the government going to pay for that trillion-dollar stimulus package? Or the multitrillion-dollar bailout of financial institutions, auto companies and anyone else sideswiped by the current crisis? Or the continued wars in Iraq and Afghanistan? Or the (still) rapidly rising cost of the baby boomers' retirement?
Well, that's the sweet secret of the current crisis. While the American people are learning to live within their means, the new American government has discovered an unlimited (for now) line of credit. The United States may have led the world into this crisis, but the world now seems more than willing to lend us unlimited amounts of money to lead the way out.
ENJOY THE NEW YEAR!
Taken from Alan Murray's Post in the Wall Street Journal online
1 This will be a good year to invest in stocks.
No one can tell you exactly when or where the market will bottom. But most business-cycle experts agree that the bottom will be found sometime this year, and that it probably won't be too far below where the market is today.
So a smart strategy will be to put some money in the market today, and keep doing it over the course of the year. If you're still shaken over massive losses from last year, this may be hard advice to swallow. But the biggest mistake you can make as an investor is to ride the market down, lose faith, pull out and miss the upturn.
Even in the Great Depression, the market bottomed out in 1932, with the Dow Jones Industrial Average at 41, down from a peak of 381 in 1929. By 1937, it had climbed back to a respectable 194. That didn't make investors whole. But for those who stayed in, it certainly soothed the wounds.
2 It will be a good year to invest in real estate.
This one's a bit trickier, since real-estate prices are "sticky" on the downside. Homeowners don't like to admit that the value of their pride and joy has fallen by 30%. So they'll put their house on the market at an inflated price and hope some fool will bite.
I was at a Vermont ski resort last month and noticed this oddity: Brand-new condominiums were selling at a price considerably below those of second-hand condos of roughly equal size and location. The reason? I assume it's because the resort owners have a better sense of the market's real value than the average person, still desperate to recoup a bad investment.
But here's the thing: Fixed-rate mortgages are already at historic lows, and the government is going to use every tool in its bag to get them lower over the course of the year. So if you find a piece of property you want, if the seller is willing to recognize how far the market has truly fallen, and if you have good credit -- three big ifs -- you can benefit from a once-in-a-lifetime double bonus of low prices and low interest rates.
This strategy requires some patience. Just as real-estate prices don't fall as precipitously as the stock market, they don't rise as rapidly, either. You may have to wait a decade to reap the full benefits.
3 Americans will learn to live within their means.
Around our house, the crisis is already having a salutary effect. Our teenagers suddenly seem to understand that unlimited dinners out with friends aren't a birthright, and that blue jeans don't have to carry triple-digit price tags.
Multiply that by 300 million, and you have a nation that has rediscovered that you can't spend what you don't earn. Houses are no longer ATMs, and credit cards no longer come with each day's mail.
That sudden realization, of course, is what's causing the economy to swoon. But this reckoning was inevitable, so it's best to get on with it. Let's hope these lessons last for decades.
4 President Obama will have a historic opportunity to reshape public policy.
Speaking at the Wall Street Journal's CEO conference in November, Mr. Obama's chief-of-staff-designate, Rahm Emanuel, said the words that have become his team's rallying cry for 2009: "You never want a serious crisis to go to waste. This crisis provides the opportunity for us to do things that you could not do before."
The Obama team is busily preparing a stimulus package that, when all is said and done, will total between $750 billion and $1 trillion -- far larger than any fiscal stimulus in the history of the world. And with the economy still sliding downward, it's a good bet few politicians will want to stand in the way.
That will give the new president an opportunity to do things his predecessors could only dream about. Roads will be rebuilt, schools will be refurbished, medical records will be computerized, and windmills will be constructed, all across the land.
Will some of that money be wasted? Of course. But the sums involved are so huge that there's a good chance someone, somewhere, will benefit.
5 Your (federal) taxes won't rise.
Never mind those campaign calls for higher taxes on the wealthiest Americans. Truth is, no politician is going to push for general tax increases in the midst of a severe recession.
You may wonder: How is the government going to pay for that trillion-dollar stimulus package? Or the multitrillion-dollar bailout of financial institutions, auto companies and anyone else sideswiped by the current crisis? Or the continued wars in Iraq and Afghanistan? Or the (still) rapidly rising cost of the baby boomers' retirement?
Well, that's the sweet secret of the current crisis. While the American people are learning to live within their means, the new American government has discovered an unlimited (for now) line of credit. The United States may have led the world into this crisis, but the world now seems more than willing to lend us unlimited amounts of money to lead the way out.
ENJOY THE NEW YEAR!
Taken from Alan Murray's Post in the Wall Street Journal online
Positive Real Estate Changes in the Air
Legislation Aims to Shore Up Housing Industry
There’s no question that news in the real estate industry has taken on a negative tone in recent years, with the collapse of the sub-prime market and the resulting foreclosures, not to mention the continuing decline in home values — especially in Michigan, where the foreclosure crisis is coupled with job loss and the economy continues to flail.
The good news is federal, state and local officials have been working toward implementing a number of reforms to help stimulate both the housing market and the economy.
“There’s a rule of thumb that approximately 30 percent of the value of the purchase of a home, let’s say the home was purchased for $100,000, 30 percent over and above the purchase price is going to go into the economy, and that starts with the transaction itself,” said Nanci J. Rands, a Realtor with SKBK Sotheby’s and director of the Michigan Association of Realtors (MAR). “Money goes to pay the commissions, title insurance … movers, painters … the purchase of furniture — the list goes on and on and on. The purchase of the house is just the beginning — it begins the whole process … and has a good effect on the economy.”
The FHA has already implemented a number of improvements, including increasing loan amounts and offering more programs for first-time and low-income buyers; and banks and mortgage brokers have reverted back to traditional mortgages, tightening the reins on the types of loans offered and the amount needed for a down payment, and increasing credit score and income verification requirements.
“A lot of fly-by-night appraisers and brokers have already closed up shop,” said Kim Miller of Landmark Appraising, regarding the effect of more stringent lending standards.
“The sooner we eliminate risky lending due to fraud, the foreclosures will slow down. Although I don’t know what percentage of foreclosures are fraud related, one less foreclosure is good for this market. With the spring market under way, I see positive things in the future for our market,” said Mason Miller, assistant vice president of sales at Flagstar Bank, of the need to better regulate the housing industry.
While that’s a start, more needs to be done; however, there may be a light at the end of the tunnel, as new legislation to help shore up Michigan’s housing market and stave off fraud continues to be implemented, and industry professionals remain positive that the changes will be for the good — eventually.
“I think some of it will help,” said Rands of the legislative measures being taken. “I think we’re starting to see glimmers of light. My overall opinion is Michigan is coming out, has begun to see improvement. It’s not over, though — but it’s looking more encouraging.”
In response to the whole sub-prime fiasco, local and state officials, as well as MAR and other real estate professionals, have already taken measures to improve matters, including the April 8 passage of the Principal Residence Exemption, Public Act 96, which will give homeowners who had to move and can’t sell their old house a tax break in that they can claim two principal residences as long as they meet certain requirements: The home must be on the market; it can’t be leased or used for commercial purposes; it must be for sale; and the homeowner must reside in Michigan.
“It’s meant to support the Michigan market — if they have a house here and moved out of state, then they’re not contributing to Michigan’s economy. It’s definitely made to be an incentive for people who choose to remain in the state,” said Rands.
New legislation to help clean up Michigan’s mortgage loan industry was also recently passed. The legislation, which was signed into effect April 3 as part of a 13-bill package — Senate bills 826-833 and House bills 5287-5291 — by Gov. Jennifer Granholm, is meant to protect consumers from real estate fraud and unfair lending practices by giving the Office of Financial and Insurance Service (OFIS) more authority to track mortgage loan officers.
“I believe this act is intended to clean our industry of unethical loan officers. This alone should help consumers regain their confidence in the mortgage market. … This is good and will also help our industry — an educated consumer forces loan officers to step up to the plate and do the right thing or get out of business,” said Miller.
The 13-bill package also stipulates mandatory background checks, strengthens licensing and education requirements for mortgage loan officers, and implements changes as to how appraisals are done to help stave off fraud.
“Many homeowners were appraised too high, and now they’re upside-down and can’t refinance, and they can’t pay their mortgage. … Certain appraisers would cave into lenders and increase a home’s value. This will make it so that appraisers have no direct contact with loan officers, which is good — a little late, but good,” said Miller, adding that homeowners should definitely look into having their homes re-appraised so that the state equalized value, or taxable value, of their home reflects the current market.
“Typically with property tax reviews, 50 percent are approved for reductions and 50 percent are told no; however, they can appeal to the tax tribunal. A tax tribunal may sound ominous, but it’s just a judge, an appraiser and you, and the judge only looks at the facts, unlike a city, which is looking to keep its tax base. … There’s been very good success with the tax tribunal,” said Miller, adding that recent amendments to the Tax Tribunal Act of 1973 should also help.
For more specific information on these acts, and more, visit www.legislature.mi.gov and click on the Public Acts (Signed Bills) link, or call the State Law Library at (517) 373-0630 with questions regarding legal matters.
By Christa BuchananC & G Staff Writer
There’s no question that news in the real estate industry has taken on a negative tone in recent years, with the collapse of the sub-prime market and the resulting foreclosures, not to mention the continuing decline in home values — especially in Michigan, where the foreclosure crisis is coupled with job loss and the economy continues to flail.
The good news is federal, state and local officials have been working toward implementing a number of reforms to help stimulate both the housing market and the economy.
“There’s a rule of thumb that approximately 30 percent of the value of the purchase of a home, let’s say the home was purchased for $100,000, 30 percent over and above the purchase price is going to go into the economy, and that starts with the transaction itself,” said Nanci J. Rands, a Realtor with SKBK Sotheby’s and director of the Michigan Association of Realtors (MAR). “Money goes to pay the commissions, title insurance … movers, painters … the purchase of furniture — the list goes on and on and on. The purchase of the house is just the beginning — it begins the whole process … and has a good effect on the economy.”
The FHA has already implemented a number of improvements, including increasing loan amounts and offering more programs for first-time and low-income buyers; and banks and mortgage brokers have reverted back to traditional mortgages, tightening the reins on the types of loans offered and the amount needed for a down payment, and increasing credit score and income verification requirements.
“A lot of fly-by-night appraisers and brokers have already closed up shop,” said Kim Miller of Landmark Appraising, regarding the effect of more stringent lending standards.
“The sooner we eliminate risky lending due to fraud, the foreclosures will slow down. Although I don’t know what percentage of foreclosures are fraud related, one less foreclosure is good for this market. With the spring market under way, I see positive things in the future for our market,” said Mason Miller, assistant vice president of sales at Flagstar Bank, of the need to better regulate the housing industry.
While that’s a start, more needs to be done; however, there may be a light at the end of the tunnel, as new legislation to help shore up Michigan’s housing market and stave off fraud continues to be implemented, and industry professionals remain positive that the changes will be for the good — eventually.
“I think some of it will help,” said Rands of the legislative measures being taken. “I think we’re starting to see glimmers of light. My overall opinion is Michigan is coming out, has begun to see improvement. It’s not over, though — but it’s looking more encouraging.”
In response to the whole sub-prime fiasco, local and state officials, as well as MAR and other real estate professionals, have already taken measures to improve matters, including the April 8 passage of the Principal Residence Exemption, Public Act 96, which will give homeowners who had to move and can’t sell their old house a tax break in that they can claim two principal residences as long as they meet certain requirements: The home must be on the market; it can’t be leased or used for commercial purposes; it must be for sale; and the homeowner must reside in Michigan.
“It’s meant to support the Michigan market — if they have a house here and moved out of state, then they’re not contributing to Michigan’s economy. It’s definitely made to be an incentive for people who choose to remain in the state,” said Rands.
New legislation to help clean up Michigan’s mortgage loan industry was also recently passed. The legislation, which was signed into effect April 3 as part of a 13-bill package — Senate bills 826-833 and House bills 5287-5291 — by Gov. Jennifer Granholm, is meant to protect consumers from real estate fraud and unfair lending practices by giving the Office of Financial and Insurance Service (OFIS) more authority to track mortgage loan officers.
“I believe this act is intended to clean our industry of unethical loan officers. This alone should help consumers regain their confidence in the mortgage market. … This is good and will also help our industry — an educated consumer forces loan officers to step up to the plate and do the right thing or get out of business,” said Miller.
The 13-bill package also stipulates mandatory background checks, strengthens licensing and education requirements for mortgage loan officers, and implements changes as to how appraisals are done to help stave off fraud.
“Many homeowners were appraised too high, and now they’re upside-down and can’t refinance, and they can’t pay their mortgage. … Certain appraisers would cave into lenders and increase a home’s value. This will make it so that appraisers have no direct contact with loan officers, which is good — a little late, but good,” said Miller, adding that homeowners should definitely look into having their homes re-appraised so that the state equalized value, or taxable value, of their home reflects the current market.
“Typically with property tax reviews, 50 percent are approved for reductions and 50 percent are told no; however, they can appeal to the tax tribunal. A tax tribunal may sound ominous, but it’s just a judge, an appraiser and you, and the judge only looks at the facts, unlike a city, which is looking to keep its tax base. … There’s been very good success with the tax tribunal,” said Miller, adding that recent amendments to the Tax Tribunal Act of 1973 should also help.
For more specific information on these acts, and more, visit www.legislature.mi.gov and click on the Public Acts (Signed Bills) link, or call the State Law Library at (517) 373-0630 with questions regarding legal matters.
By Christa BuchananC & G Staff Writer
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