Simple Debt-Free Finance » Real Estate

Are Rising Rent Prices in 2012 Good for the Housing Market? (Video)

Joe — Wed, 25 Apr 2012 01:57:48 +0000

Rising rent prices are bad for renters but is it good for the housing market? I say it is, and here is why.

Rising rent prices and rental rates across the country

Rental rates rising across the country and prices are expected to increase 3.8% this year and 4% projected for 2013. That’s an average for the nation, which means the rise in rent prices could be much higher in cities with high rental demand.

In NYC for example, the rental vacancy rate is just above 1%. Demand is so great that renting often requires the level of paperwork usually reserved for mortgage applications! Rising rent prices have made the rental market so hot that it’s attracting serious investor capital with returns of 6-8%.

This is good, because it will drive rent prices up as more people get in the game.

How rising rent prices are good.

“How can rising rent prices be good?“, I hear you ask.

It does defy common sense up to a point. I mean, higher rent prices mean more of a financial squeeze on renters, leaving them with less disposable income. But this is a short-term view.

In the long term, this is how markets should work. Rent prices rise to point of excess as investors pile in. Higher rental prices make it more affordable to buy a home than to rent one. Especially when the amount of paperwork required to rent is on par with that required to rent.

It doesn’t take Warren Buffet to do the math at this point. When you’re paying very nearly as much for rent as you would for a mortgage, and you need to meet much of the same requirements to rent that you would to buy, it just makes more sense to get the mortgage.

This is of course assuming your lifestyle is suited to being a homeowner. It still doesn’t make sense to buy a home if you travel a lot or don’t expect to live in it more than 7 years. But if you’ve got strong roots in the community and foresee no geographical changes in your future then higher rent prices may be the nudge you need to get you moving.

This is a great time to buy a house – provided you use it as a long term shelter and aren’t looking for a quick profit.

But don’t just take my word for it, here’s a video from BankRate.com:

What Do People Spend Their Money On?

Joe — Thu, 24 Feb 2011 16:38:24 +0000

I came across this article on Yahoo! finance that details the 5 things that consume 50% of your lifetime earnings and thought I’d share it with my readers.

It’s kind of a catchy headline, right? I know anytime I see something about spending 50% of my income, I tend to take notice. But it’s more or less the big ticket items you’d expect. Here’s the list, and what I think about each. Feel free to add your thoughts in a comment.

1. House.

This makes sense since it’s ultimately what led to the collapse of the subprime housing market and implosion of the all those risky mortgages. Too many people simply bought too much house, and could no longer delay the inevitable with ever cheaper credit.

How much is too much?

Experts recommend no more than a third of your annual income should be spent on your housing payments. It’s important to keep in mind that this includes school and property taxes, which are often taken out of your monthly payment. You should also include homeowner’s insurance and upkeep and maintenance costs. An easy way to get a general idea of how much this should be is to assume 2-3% of the home cost. It also pays to shop around for the best mortgage before you start looking at houses.

photo by asianjournalusa.

2. Car Payments.

The fact that a person’s home is a large chunk of their income makes a lot of sense, but too many people spend just as much on their car. Sometimes, they even spend more! In fact, according to the article, most people can “comfortably afford” to spend 1/3rd of their income on car payments – no wonder some many are so deep in debt!

As with buying a home, a car has many additional costs that people often forget – car insurance, maintenance, gas, parking and other transportation costs. Buying a used car that’s 1-3 years old with low mileage is a much better choice.

photo by A. Belani

3. Children

It will cost $220,000 to raise a child from diapers to age 18.

If this statistic is true, I’m in a lot of trouble!

I have 3 children, so that’s pretty much my retirement we’re talking about. My feeling on this is that raising a child costs more than it should. For example, there are so many little things I see parents buy for their infants that are simply non-sensical. A baby (who isn’t even walking yet) doesn’t need a pair of $40 designer shoes!

My wife and I get many hand-me-downs and second hand baby items – strollers, clothes, toys, etc..- that keeps the cost down, and the kids don’t know or care. Obvisouly there is a point at which the child becomes aware that they don’t have the latest gizmo, gadget or toy but that’s where we step in as parents and teach them that being materialistic isn’t so good anyway. BEsides, kids today just aren’t tought the value of a dollar anymore.

Also, I see a lot of stories and know a few personally, of parents who mortgage everything – including their house, several times – to make sure that junior never goes without. i understand the desire of a parent to ensure the best possible everything for their kids, but many time this backfires and they simply end up spending more than they should.

photo by seanmcgrath

4. Education

My parents helped out a little with my tuition to community college, but I paid most of my way myself. But parents today seem to think a free ride to college is a right these days. At the same time, the cost of higher education just keeps going higher , even outpacing inflation incomes and seemingly everything but the U.S. deficit.

How much is too much?

The recommendation is that you don’t borrow more than you can pay back in 10 years. For example, if your dream job pays a median income of $50,000, don’t borrow more than $50,000 in student loans. The problem I see with this is that most kids have no idea what they want to do when they graduate, and even the ones who do aren’t likely to have an idea of how much the profession would pay. But this is where the parents come in.

photo by m00by

5. Retirement

I think is is one of those cases of wishful thinking. Most people probably should spend as much, if not more, on their retirement savings as they do on their car and student loan payments but I think for most people, retirement savings isn’t on the top 10 list of expenses, much less the top 5.

photo by quadriman

Why Are Investors Surprised By Housing Slump?

Joe — Thu, 24 Jun 2010 13:44:57 +0000

Am I missing something here?

The news of the day seems to be that Stocks slip after new-home sales tumble . Really? I mean, I just don’t get this, This assumes that investors were expecting home sales to remain steady, possibly even rising. But that doesn’t make any sense.

I’m not an expert or an economist by any stretch, but even I called this back in May! I don’t point that out to say “I told you so,” rather to illustrate that it’s really common sense that when the government stops paying people to buy something, they buy less of it or stop altogether.

The Homebuyer Tax Credit ended and home sales went down 33% and hit a record low. What happened?

All those people who were thinking of buying a home in the 1st half of 2010 made sure they got in before the credit expired. Essentially, the government failed to stimulate anything and only motivated buyers to shift their timeframe of purchase by a month or two.

The rest of 2010 will be little more than limping through with even less buyers than might otherwise have been there.

I just don’t get how these people get so caught up in their bubble and believe their own spin even when it is in direct opposition to reality. It’s simply amazing…

Government Stimulus Doesn’t Work in Housing Either.

Joe — Thu, 20 May 2010 14:06:52 +0000

Remember when the government subsidies for buying new cars ended and car sales tanked? Looks like we’re seeing the same thing in the housing market. It shouldn’t be surprising that Mortgage Purchase Applications Plummet As Tax Cuts Expire because when you subsidize an activity, you get more of it. When you take that subsidy away, you get less of that activity.

This is a pretty good indicator because the number of refinances rose 14.5%, while applications for new home purchase dropped 20% over the previous month. Rates are still very low, so it’s a logical conclusion that people are no longer as motivated to buy a house since the new home buyer tax credit expired in April.

In fact that is the conclusion of the Mortgage Bankers Association:

” The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season. In fact, this drop occurred even as rates on 30-year fixed-rate mortgages continued to fall, and at 4.83 percent are at their lowest level since November 2009,”

This is exactly why government subsidies and stimulus don’t work. They only provide artificial economic activity over the short term, but they cannot correct for imbalances in the market. They cannot prevent a recession or a pullback in economic activity, they can only postpone it.

Things have been looking good lately – on the surface. But how much of that economic “recovery” has been an illusion created by stimulus spending that only masks the underlying problems?

Will Refinancing My Mortgage Save Me Money?

Joe — Mon, 29 Mar 2010 13:53:03 +0000

A while ago, my wife and I were looking to sell our house and upgrade to a larger home. Our family was outgrowing our starter home. We had made some pretty dumb decisions when we bought that home. We had no idea what we were doing. We didn’t shop around for the best mortgage, we simply used the mortgage broker recommended by the real estate agent.

Things were different when we bought our next (and current) home. I wrote about some of the things I learned the first time around in 4 Tips For Applying For a Mortgage.

Another dumb thing we did was refinancing about a year into owning the home. We had just had our 1st baby, and had a tough time making ends meet so when the broker called and said we could cut our monthly payment by “as much as $50!”, well we jumped on that deal.

Of course, that $50 set us back a year on paying off the loan, not to mention all the extra financing involved because we rolled the refinancing cost into the new loan.

That’s not to say that refinancing your home is a bad idea. It just depends on the circumstances. A year into the loan, with not much lowering of the rate (we shaved about 0.25% off our rate) doesn’t make much sense, unless it’s trading an ARM for a fixed.

Well, back when I was shopping around for the best mortgage rate I contacted lendingtree.com. I ended up using a local bank instead, but lending tree still sends me their newsletter from time to time.

This week’s newsletter had a link to their article 4 steps to evaluate your current mortgage loan.

I thought I’d share some thoughts on their list, but feel free to read the full article on your own.

Here’s the gist of their list of when it makes sense to refinance your mortgage.

You have an adjustable-rate mortgage (ARM)
If you have an ARM, and the terms don’t specify a prepayment penalty then it may make sense to refinance to a fixed rate loan. The prepayment penalty may be costly if you refinance, since you are in essence making one, big prepayment on the entire loan itself.

Your current mortgage rate is considerably higher than current mortgage rates.
I interpret “considerable” to be about a percentage point or more, also known as 100 basis points or more. I just don’t think it makes good sense to lengthen your loan (which refinancing does) to save less than a percentage point. You’re better off making an extra payment or more every year. You’ll save more interest AND own your home free-and-clear sooner.

You expect to be living in your home for another 7 years or more.
The Lending Tree article mentions doing the math to make sure you stay in the house past the point at which you break even and make up the cost of the refinance, but there are other market conditions involved. If you stay to the break even point, and then decide to sell you may still lose out if the market hasn’t risen. 7 years may not be enough time for your home to appreciate, but it seems like a point at which the odds are in your favor.

Lastly, it doesn’t always make sense to refinance your mortgage. For example, I don’t think it makes sense to refinance my mortgage because the change in rate isn’t enough and I have my own plan to pay the mortgage off sooner anyway, which will save me more in interest payments over the long run.

Whether or not you will really save money by refinancing your mortgage is more than just using a mortgage calculator to see what your new monthly payment is. You need to think big picture too, as I laid out in my explanation of why I’m not refinance my mortgage.

New Home Sales Down 7.6% In December.

Joe — Tue, 02 Feb 2010 12:39:56 +0000

According to this article from the AP, new home sales fell 7.6% last month.

The Commerce Department said December sales fell to a seasonally adjusted annual rate of 342,000 from an upwardly revised November pace of 370,000. Economists surveyed by Thomson Reuters had forecast a pace of 370,000 for December.

It’s mildly surprising given that the home buyer tax credit was still in effect at that time, but it could be due to a lag. It usually takes about 2-3 months to finalize the purchase of a home from the initial offer to the closing date and it could be that new home buyers at stopped looking by early November, when the tax credit was originally set to expire. If this is true, then we could expect to see a jump in new home sales in the January/February time frame.

I suspect the big reason however is that unemployment remains near historically high levels, and people simply don’t have or cannot plan to have the required, steady income needed to be able to afford a home.

The article never really mentions or even speculates about a reason for the ‘unexpected’ drop.

:-/

U.S. Mortgage Refinancing Applications Rose in the First Week of 2010.

Joe — Sun, 17 Jan 2010 14:56:14 +0000

It seems like only yesterday that we were hearing about Option ARM Mortgage rates resetting, and that holders of those loans were unable to refinance because their house was worth less than the mortgage…. Oh, wait… it was yesterday.

Well, even so, things appear to be confusing in the housing market and mortgage industry still.

According to a recent Reuters article, the rise in mortgage applications the 1st week of this year is a reflection on the demand for refinancing loans. Demand for mortgages for new purchases only rose marginally.

According to the Mortgage Bankers Association, the index of mortgage applications (both purchase and refinance mortgages) was up 14.3%, though the index was less than half of what it was a year ago. And the 4-week moving average of mortgage applications was down 6.4%.

The article quotes Bob Walters, chief economist at Quicken Loans as stating:

“What makes the (applications) increase interesting is that nothing exceptional occurred to prompt people to return to the market,”

But I’m wondering if it isn’t the threat of those option and interest only ARMs resetting staring people in the face. But, I’m only a blogger, what do I know?

Another factor that ties in with the ARM reset is the anticipated rise in mortgage rates when the Federal Reserve stops buying mortgage-related securities at the end of March. Part of the purpose of this program was to bring rates down and keep them down to allow the market to at least stabilize, if not start to see some growth.

Things look to stay rough for the time being though. The Mortgage Bankers Association forecasts that mortgage originations will drop a further 40% in 2010, to the lowest level in a decade. And the Yale University economist Robert Shiller has said that he expects housing prices in the U.S. to continue falling in the next few months.

What you need to know about buying a foreclosed home.

Joe — Thu, 16 Jul 2009 16:01:48 +0000

To say that this is a buyer’s market is an understatement to be sure, but that doesn’t mean it’s a no brainer. While there are an unprecedented number of homeowners walking away from their mortgage, creating a record number of foreclosures, it’s still easy to make costly mistakes. Here are some tips to ease the process.

1. Know where to look.

Start without even leaving your home. Check out websites like RealtyTrac.com or ForeclosurePoint.com. These sites allow you to find listings of houses in foreclosure.

2. Know who to buy from.

In short, a bank. Buying a foreclosed home at auction requires you to pay cash, and you don’t even get the luxury of inspecting the property first. Contrast this with a bank owned foreclosure, where any liens have been cleared and you do get to inspect the property first, and you’ll see which is the better option.

3. Hire a contractor.

Foreclosed homes were either owned by people who didn’t care about tending to the property, or people who did not leave on their own terms. This often leads to vandalization and disrepair. Bringing a contractor to inspect the property before you buy, eliminates the possibility that you will underestimate the cost of repairs.

4. Aim low.

There’s a glut of foreclosed homes on the market the likes of which are rarely seen. This means banks are more likely to accept a lower price, just to be rid of the house. Start 20% below the market value, and be prepared to haggle.

5. Be patient.

While the glut of foreclosures means you can score a big discount on the price, it also means the bank has a lot of homes to process. This means it will likely take some time to finish the deal. Be ready to wait.

How Not to List Your House.

Joe — Wed, 01 Jul 2009 13:54:34 +0000

If you’re bored, or just want a quick giggle at some of the most bizarre and ridiculous real estate listings world wide, check out It’s Lovely! I’ll Take It!

Each listing comes complete with a photo and a link to the original listing (see need to be seen to be believed!).

If you’re thinking of listing your house, this site can serve as a cautionary tale of what not to do. For instance, you’ll learn:

When a letting in a little too much light might be a bad thing.

When you need a professional stager.

And you must see this bizarre fireplace – I’m pretty sure it doesn’t meet the fire code!

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Worst Foreclosure Rates Found in 4 States – Can You Name Them?

Joe — Fri, 08 May 2009 14:32:26 +0000

Pop quiz:

The majority of foreclosures are concentrated in which four states?

If you’ve paid even minor attention to housing news for the past two years or so, you should at least be able to guess Florida and Nevada.

My guess was: Florida, Nevada, California and ???

I wasn’t quite sure where the 4th state was. It turns out it was Arizona.

This is according to a recent AP article.

It’s not surprising since these states saw unprecedented double-digit growth in the year or so leading up to the collapse. All this goes to show that old adage of what goes up must come down is alive and well.

Are reverse mortgages a Scam or a Good Deal?

Joe — Tue, 17 Mar 2009 12:03:12 +0000

Reverse mortgages have gotten a lot of buzz over the past 6 years or so, but are reverse mortgages a good thing?

First of all, to answer that question, you need to know exactly what a reverse mortgage is. A reverse mortgage is a home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can then be paid to you.

Sounds great, right?

Well, maybe not.

There’s the little matter of paying this money back. You see, it’s not truly the reverse of traditional mortgage. If it were, you would “loan” the bank your equity stake in the home in exchange for monthly payments to you until that equity “loan” was paid off. At that time, the bank would lay claim to the full value of the home. But in a reverse mortgage, you get to live in the home as long as you can make tax and insurance payments on the home. When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.

There are literally hundreds of disreputable individuals and companies who use reverse mortgages as a scam. They load them up with so many fees, that you really end up with very little left in payments and you or your heirs may even owe more once the home is sold!

One such company, Financial Freedom Senior Funding Corporation, was hit by a lawsuit for their hard-sell tactics. The suit essentially alleges that they scammed seniors out of their homes and equity, pushing them to use the money for the “special things you’ve always wanted to do, such as travel or hobbies.” Financial Freedom Senior Funding Corp. also encouraged seniors to take out the maximum allowed under the law, regardless if it was wise, and even engaged insurance agents to sell insurance products on top of the reverse mortgage, tacking on more fees.

Despite this, the company sports a rating of C from the BBB and has 0 complaints in the past 36 months.

It sounds like reverse mortgages are not such a good deal. I suppose they would be for seniors who have no heirs and don’t plan on ever selling their home, but that may not be the most responsible thing to do.

For more info on Reverse Mortgages, head over to the U.S. Department of Housing and Urban Development website.

Photo by docsplatter

Record Drop in Home Prices Not all it Seems?

Joe — Tue, 17 Feb 2009 14:02:31 +0000

Here’s an article from the AP that now reads “S&P index shows plunge in November home prices“, though when I found it yesterday the headline was “S&P index shows posts sharpest decline in home prices on record”!

I think you’ll agree the latter is a bit more eye catching, if not dramatic.

The point is though, that there really isn’t much of a story here since the index they are talking about (the S&P/Case Shiller Home 20-city housing index) only covers prices since 2000!

Essentially, after housing prices posted one of the largest (if not THE largest) increases in history, they have now falling dramatically. Sorry, but isn’t this to be expected? Assets don’t increase in value forever.

This is like using the value of the NASDAQ from 1998 – 2003! Using an index with an 8 year history is akin to basing your entire world view on your experiences in a single week of your life! There’s no historical perspective here.

We already know that the housing market is in decline, but skewed statistics like these don’t help the situation.

Interestingly, the index itself goes back 20 years, so I’m not sure why they only cover from 2000 in this article…

Don’t Look Now, but Home Sales are Rising!

Joe — Tue, 27 Jan 2009 13:55:07 +0000

Las Vegas, of all places, is seeing an increase in home sales!

This is a good sign, because Vegas was one of the hardest hit when the bubble burst. Since last year, home sales have risen 15%.

The flip side of this coin is that the home prices have fallen 28%. Ouch! But this is all part of what has to happen.

The nature of a bubble is that prices get bid up to an unsustainable level. When the bubble pops, or deflates, prices must fall in order to reach the sustainable point.

I found this in an article on Yahoo! finance:

“The reason? Motivated sellers–those in distress or foreclosure–or banks with too many homes on the books are slashing asking prices in order to unload their properties.”

I think it’s also non-foreclosure sellers coming to terms with reality.

Back when we sold our house, my wife an I were in awe at the other houses in our neighborhood. Every house was identical, save for a window or two over the front door, it was a real cookie cutter neighborhood. Great starter homes though.

Our house was the first (and only in the last 6 months!) to sell. Our secret was that we priced our house at fair market value. There were 7 other homes for sale at the time our sold. Each one of them was asking a price that was the going rate – 6-12 months earlier! They were out of touch with the market place. I can understand that, but I never did understand what realtor in his right mind would take a client that was going to ignore reality and ultimately bring down the realtor’s sales statistics.

Eventually, even these stubborn and fanciful sellers face reality and lower their prices (usually much lower than where they could have started).

That’s what’s happening in Vegas, Phoenix and San Diego where home sales are up 10% and 90% respectively.

Eventually the prices will bottom out, sales will level off and prices will begin to rise again.

Also, remember that real estate is local, even in the post-bubble era. The part of the country where I live never saw the outrageous hyper-inflation of housing prices, and the median home price has gone up 3% over the past year.

Whether you’re a buyer or a seller, you must know your market.

Millions of U.S. borrowers owe more on their mortgages than their homes are currently worth!

Joe — Mon, 03 Nov 2008 16:58:22 +0000

7.5 million homeowners "underwater"

CNNMoney had an article last week titled 7.5 million homeowners ‘underwater’. It’s primarily a breakdown, by state, of what percentage of mortgages are higher than the value of the underlying asset. The technical term for this is negative equity, but it’s also know as being underwater or upside down on a loan.

No one wants to find themselves owing more on their mortgage than the house is worth, but is it as big a problem as people feel it is? Negative equity is obviously a problem for the investor, but are you a homeowner first or an investor first?

Negative equity is not necessarily a problem for a long term homeowner. I think too many people have become accustomed to using their homes as ATMs; constantly withdrawing the equity from value appreciation, all the while thinking it will go on forever upward. That’s when negative equity becomes a BIG problem. For those old school home owners who never built their financial lives upon such a flimsy premise, negative equity is hardly a factor. For the fixed rate mortgage holder, declining home values don’t affect his ability to make his mortgage payments.

Negative equity is a requirement for foreclosure, and here we venture into the debate over how many people are simply going to walk away from their obligations to pay back their mortgage. But again, if these people bought the house thinking it was an investment, then they should pay the price. But if they were looking to buy a home to settle down in for the long term, and they’re upset they paid too much – just accept the timing was bad, and that the market will turn back up again over time. It’s only a problem if you have to sell in these conditions.

I am reminded of something a local financial planner once told me:

“The reason the stock market is so tough psychologically is that you get constant feed back on what your portfolio is worth. With a house, you don’t see the day-to-day changes because it’s a relatively non-liquid investment. Mr. Market isn’t coming to your door at the end of every day offering to buy your house for more or less than he was yesterday.”

I think with all the news of sub-prime foreclosures and borrowers being underwater, we’ve found ourselves in an environment where we do get daily feedback on the values of our homes. But how relevant is that feedback?

Just because the news is largely negative on a national scale, doesn’t mean it’s representative of what your home is worth. Homes are not stock certificates. We don’t all own a piece of the same house.

We must focus on why we buy real estate, and remember that real estate is largely a regional investment.

Photo by lorkatj

ING: A mortgage without surprises?

Joe — Thu, 16 Oct 2008 16:50:22 +0000

I just bought a new home, and unfortunately my evil plains of world domination of the financial markets has net yet been realized, so I had to take out a loan.

I’ve been an ING member for 4 years now. I have a Direct Savings account and an Electric Orange Checking account with them. I even have a ShareBuilder account, though I created that before ING acquired ShareBuilder in 2007. I have to say I LOVE each account I have with them. The customer service is excellent, and web sites are intuitive and easy to use. They pay a good rate on their bank accounts. But I didn’t actively consider them for my mortgage. Why?

I got a mailing recently about the ING 5/1 Orange Mortgage:

“We believe you have the right to a mortgage that fits your needs and isn’t filled with surprises. That’s why we offer the 5/1 Orange Mortgage:

* Low Closing Costs and No Bank Fees
* Options that match most homeowners needs
* Save thousands during the initial fixed rate of 5 years”

Sounds great, and as I said, I love their other offerings. It was that 5/1 part that bugged me. The phrase “initial fixed rate of 5 years” was the clincher. It’s an adjustable rate mortgage that resets after 5 years.

Now, there’s nothing wrong with this. They even point out that the average American only stays in their house for 7 years or less. I’m just not that average this time around. My wife and I lived in our last house for less than 5 years, we knew going in it was a starter home and we weren’t planning on staying around. But this house we would like to stay in until we retire, so the 5/1 adjustable rate was a deal breaker.

Having said that, I must also say that ING is entirely up front about the offer. Many people have said that they got duped into adjustable rate mortgages, not knowing what they meant, and now can no longer afford to make the payments. ING does a good job of stating what they’re offering. I think if I was in the market for an adjustable rate mortgage, I’d probably give them a call.

I’m wondering, does anybody have an experience with an ING Mortgage, or an adjustable rate in general?

Photo by Secretly Ironic

Casey Serin: Housing Crunch Poster Child? Or Just Damned Unlucky?

Joe — Thu, 07 Aug 2008 18:19:17 +0000

I stumbled on this video a few days back, and it made me wonder: how representative of the housing crunch is this guy?

For those of you who haven’t heard of Casey Serin, he was a self made real estate speculator. A guy who watched a video, read a couple of books and became a real estate flipper – at precisely the wrong time.

I wonder if the majority of those hit by the crunch were speculators or flippers… I have heard that bandied about a bit, but it’s surprisingly difficult to find any hard data on just who is in foreclosure. I feel pretty confident however that there are a fair number of people like Casey in the mix.

Think about it – this guy is potentially responsible for 8 foreclosures alone! Maybe the spike in foreclosures isn’t really a bunch of families struggling to make ends meet, but inexperienced speculators caught in the collapse of the real estate bubble.

The video outlines a bunch of mistakes he made:

He paid $15k for “seminars” on flipping.
Bought at the top of the market (an over priced one too!)
He lied to lenders.

It’s mostly the last one that irks me most. Guys like this not only run up the prices of homes, but they also game the system making it harder for honest home buyers to afford a home they might need. And they factor in that this guy will probably get bailed out by congress if he doesn’t go to jail first. It really burns my bacon.

I think he’s just a kid who got into something he didn’t understand to a point where he was way over his head before he realized what was happening. But there needs to be some personal responsibility somewhere as well.

Casey Serin had his own blog for a time at iamfacingforeclosure.com, but he seems to have let it go so he can “move on” from the experience.

Technorati Tags: casey serin, housing crunch, foreclosure

Harper Family Extreme Makeover: Where Reality TV meets Reality.

Joe — Tue, 29 Jul 2008 22:52:32 +0000

Three short years ago ABC’s “Extreme Makeover” reality TV show demolished the Harper Family’s old home to make way for a new, 4 bedroom Mc Mansion. Flash forward to today, and the Harper’s are one of the latest families to face foreclosure.

My first thought when I read this story was, “How can this be possible? Don’t the families receive their homes mortgage free?” That got me thinking about what kind of money mistakes the Harper family made.

Apparently they used the home as collateral when taking out a $450,000 loan. Yikes!

As if that wasn’t bad enough, they then used the proceeds of that loan to start up a construction business that has since failed.

To me, this just proves the necessity of financial literacy and learning good money management skills. Giving this family an asset like this at a time when the housing bubble was just taking off is like giving a fully loaded howitzer with a hair trigger to someone who’s never even seen a handgun before.

The article states:

“ABC said in a statement that it advises each family to consult a financial planner after they get their new home. “Ultimately, financial matters are personal, and we work to respect the privacy of the families,” the network said.”

Which is indeed the saddest part of this, to have to sit idly by and watch someone not take heed of the advice they are given and knowing the eventual outcome won’t be pretty.

“”It’s aggravating. It just makes you mad. You do that much work, and they just squander it,” Lake City Mayor Willie Oswalt, who helped vault a massive beam into place in the Harper’s living room, told The Atlanta Journal-Constitution. “

How I Sold My House In a Down Market.

Joe — Thu, 26 Jun 2008 18:14:59 +0000

WE SOLD OUR HOME!

Words cannot express the joy and relief my wife and I feel. We were certain we would sell our home in time (by following the points laid out in this post), but we were getting very tired of the disruption to our life from numerous showings.

In the end, our home was on the market only 18 days less than the average when we listed, but as you’ll see that is quite a bit less than our neighborhood competition.

Staging.

People shell out big bucks for professional stagers, and while some will argue that it is money well spent, especially in a buyer’s market, there are a lot of things you can do yourself. This is how we sold our house in a down market, for 97% of our asking price (the average for our area is currently 94%).

Keeping Up Appearances.

OUTSIDE.

This is more than just curb appeal. First impressions count – make sure your lawn, hedges, driveway etc look well kept. Plant some flowers, or hanging baskets out front to add color to the overall appearance. Remove dead branches, cut grass and other debris. Clean the sidewalk and patch the driveway.

If you’ve got lawn equipment lying about the yard or cut wood in a pile, neaten it up. Store what equipment you can in the shed or garage, and stack the wood neatly.

Make sure the front door, and siding look fresh and not faded. Powerwash the siding or paint the front door if you need to.

Make sure the mailbox isn’t leaning like a certain famous Italian landmark.

Fix broken windows and screens. You wouldn’t go to a job interview dressed in rags, why send your house to one like that?

Clean out the shed and garage. If you’re selling your house in the spring, put the snow blower into storage. The perfect garage contains only a car – do your best.

INSIDE.

Eliminate the clutter.

Sell what you don’t need or use at a yard sale or on eBay. Rent a storage unit if you must, but streamline and eliminate what you don’t absolutely need for the next 3 months or more. We put our 6ft entertainment center in storage and put the T. V. on a table just big enough that we borrowed from the in-laws. The result: the living room, which looked like a tight-fit previously, became positively spacious.

Brighten the rooms with a fresh coat of paint, but be careful – stick with neutral colors or risk turning prospective buyers off with too bold a color.

Clean the windows.

Shampoo the carpets.

Polish the hardwood.

Replace the light bulbs with a higher wattage – you want the house to sparkle and gleam with newness, or at least the impression of it.

Clear off the countertops and clear out the cabinets.

Clean the oven and the refrigerator.

Vacuum under things – eliminate dust and debris.

Tighten loose door knobs, and cabinet doors.

Replace or remove peeling wallpaper.

Tips for showing your home.

Do your best to impart a welcoming feel to the home. Light some scented candles, but make sure they are a subtle aroma and only do so about an hour before the showing. You do not want your home to smell like the Yankee Candle Shop when your buyers walk in the door.

Clear out the kids, toys, cat and dog.

Turn on as many lights as you can – you want to make the home appear bright and clean!

Put out a vase of fresh flowers on the table.

Put out your best towels. My wife and I called these our “hotel towels”. Not because they were stolen from a hotel, but because they were new and neatly pressed. We never used them, but we would hang them before a showing.

Make yourself scarce. This is huge. My wife and I looked a dozens of homes, and we were surprised at how many had the owners still inside! Another major DON’T is leaving the television or radio on. You want your buyers to feel like the home is theirs or could be theirs. If the T. V. or radio is on it’s a strong reminder that someone else lives there and the buyer feels like the real owner could return at any moment. Not the vibe you want to create when selling your home.

The Single Biggest Thing You Can Do To Sell Your House Fast.

Set the proper price.

It’s that simple. But that doesn’t mean it’s easy. There is a lot of research and psychology that goes with pricing a home.

When you hire a Realtor, he will show you the “comparables” in your neighborhood. This is what recent homes sold for, what listings are active and what houses were pulled from the market without selling. The recent sales will give you a ball-park idea of what people are currently willing to pay for a house like yours, the houses that were de-listed will tell you what is too much to ask for, and the current listings will show you your competition.

The biggest mistake people make when pricing their home is to start high with the thinking that it provides “bargaining room” to move down when the negotiation phase begins. The problem with this thinking is that if you start too high, you’ve already dropped your price precipitously by the time the negotiation phase begins.

Here’s why.

When your house is priced too high, it attracts lookers, not buyers. It brings the busy bodies and gossiping neighbors out. It brings out the people who wonder, “What have they got that makes that house worth so much?”

When your house is priced too high, it implies you aren’t motivated to sell.

When your house is priced too high, it keeps people away, which reduces showings and eliminates the potential buyers that never make to the negotiation phase.

When your house is priced too high, it makes the competition look better.

When your house is priced too high, may make it difficult or impossible for a buyer to secure a loan if the bank doesn’t appraise the house’s value for the amount you’re asking.

When your house is priced too high, you usually end up dropping significantly and waiting much longer to get a buyer and by that time you have weakened your negotiating position.

The best offers come when the property is newly listed. If the price is right, this creates a “buzz” among realtors and the buyers they represent. Realtors want to find the right home for their buyers as quickly as possible, and when the see a home that fits the needs AND is priced fairly, this makes their job much easier. That translates into more action and offers for you.

I had the opportunity to see all of this first hand. Our neighborhood is approximately 50 houses. They are cookie-cutter, starter-homes, meaning that they all have about the same amenities. Some have gas fireplaces, some don’t, etc.. but they all have the same square footage, number of bedrooms and lot size. There’s very little to distinguish one from another. Given that, you’d expect the price of the homes to be in line with the similarities, but that’s not the case.

Our home was on the market for 72 days. The average time for our area is 3 months (90 days). There are 7 other homes for sale in our development. Only one has sold in that 72 day period. It was ours, and we only had one offer. This means there is serious competition to attract serious buyers out there. In a market with these conditions it’s not about getting top dollar, it’s about getting the buyer.

I am certain that the main reason we got the only buyer to come through the neighborhood in 72 days was that our price was fair market value. Of the 7 other homes in the neighborhood, 3 are priced at $10k more than what we sold our house for (they started at $15k more), 3 of the other 4 homes are $15k more (they have yet to reduce) and the last home is a stunning $20k more (they came down from $25k more!). The average time on the market for those 7 homes is 110 days!

My wife and I loved those homes. With competition like that, it made the process much easier for us.

It will be interesting to see how it plays out, but I would wager that IF those 7 homes sell, they will end up at less than what ours sold for and after much more of a headache.

Technorati Tags: Real Estate, Selling a Home, Home Sales, Buyer’s Market, Home Sales

How to Invest in Real Estate Without Buying Property

Joe — Tue, 06 May 2008 22:09:16 +0000

Since the housing bubble burst and the subprime lending mess hit the headlines, it seems like I can’t take a virtual stroll down the information suburbs of personal finance blogs without tripping over posts about why people shouldn’t buy homes, or real estate.

My Two Dollars, for instance, has a very good post about why people should wait to buy a house until they can really afford to AND actually need a home.

To be fair, that post is really more about buying a house for housing with investment as a secondary goal. It’s not what this post is about, but it is an important distinction that often times people forget to make. All too often we hear what a great investment real estate is as if that alone were justification for buying a home. (HINT:) It’s not.

Free Money Finance wrote about his take on a Money Magazine article comparing the performance of real estate assets vs. equities in his post “Investment Smackdown: Are Stocks or Real Estate a Better Investment?”

But sometimes people don’t really need (or want) a home. Sometimes renting makes more sense, but they still want to diversify and own real estate as well as stocks. It isn’t always an either/or proposition.

For those who want some real estate exposure without the hassle of finding, maintaining and selling the physical piece of property, they should investigate REITs.

Just last month, The Dividend Guy was Considering REITs In a Dividend Portfolio. He does a fine job of highlighting why dividend or income investors are drawn to REITs.

What the hell is a REIT?

OK, sounds good so far, but what exactly is a REIT?

A REIT (Real Estate Investment Trust) is a type of security much like a stock, that invests only in real estate. REITs were created in 1960 when congress ratified the Real Estate Investment Trust Act. This act allowed small investors to invest in large scale real estate. A REIT is traded on the major exchanges, just like common stock.

It is because they are traded publicly that REITs offer investors the ability to diversify their portfolios with real estate without actually owning the underlying property. Often times, REITs are used to provide stable income in a portfolio, much like bonds. Unlike bonds however, REITs are not eroded as much by inflation. This is because REITs often generate their income from commercial properties with long lease periods and they can pass along the cost of inflation in rent increases.

REITs can either hold real estate property directly, or hold the mortgages to those properties. There are three general classification of REITs: Equity, Mortgage and Hybrid.

Equity REITs invest directly in properties. They derive their name from the fact that they are responsible for the equity (value) of their real estate assets. The majority of an Equity REIT’s revenue comes from the rent collected on the property. An Equity REIT might hold commercial or residential property, or a mix of both.

Mortgage REITs invest purely in mortgages by either lending the money to borrowers directly, or buying existing mortgages or mortgage-backed securities. A Mortgage REIT’s revenue comes from the interest earned on the mortgage loan.

Hybrid REITs are just as the name suggests, a mix of Equity and Mortgage REIT qualities. They generate revenue from Mortgages and physical properties.

These are important distinctions as I write this post, because the subprime fiasco has so panicked many investors that some REITs are down considerably from their highs in many cases simply because they are too tightly coupled to real estate. The reality is that Equity REITs shouldn’t really be affected as much as Mortgage REITs, because the physical property held by Equity REITs is still worth something while a defaulted mortgage is probably worthless.

REITs can invest in residential or commercial properties and mortgages. For example, a REIT might invest in private rental properties or in public shopping malls and business rentals. They may even be focused on specific geographical or demographical segments, retirement communities in Florida, for example.

REITs and Taxes

REITs were created to allow investors to invest in real estate in the same way an investor could invest in stocks through a mutual fund. Because a REIT is an investment entity, and not a business, it receives special tax benefits limiting its corporate tax liability. This means that REITs are required to pay out 90% of their income in the form of dividends to the investor that holds them. So you have an asset that trades like a stock, has significant real estate exposure and often carries a high yield – and you don’t have to shovel out a cranky tenant or repair leaky toilets!

REITs are not without disadvantage however. In 2003, Congress enacted legislation that cut the rate of taxation on dividends to 15% regardless of the recipient’s income tax bracket. This does not affect REITs dividends however – they are exempt and investors will most likely have to pay taxes on any dividends received from a REIT at their ordinary income tax level.

There are times when REITs pay out distributions that are considered “Nontaxable” distributions that are considered capital gains for the recipient and taxed accordingly. See Things to look out for when buying a REIT below for more detail.

The Inner Workings of a REIT.

Publicly traded REITs begin life on the exchange just like common stock – an initial public offering (IPO). The REIT accumulates capital from investors purchasing shares of the IPO, and uses these funds to buy, develop and manage real estate. The investor receives partial ownership in the pool of realestate assets owned and managed by the REIT. The REIT then passes along any income generated by the renting, leasing or interest on a mortgage to the share holders in the form of dividends.

Investing in REITs.

NAREIT (The National Association of Real Estate Investment Trusts) categorizes REITs into 3 types: private, publicly traded and non-exchange traded.

REITs that are classified as private or non-exchange traded are not registered with the Securities and Exchange Commission, and raise capital from individuals, trusts and other entities. These are for a privileged few, and will not be part of the remainder of this discussion.

But do not despair – even after eliminating these types, we’re left with almost 200 publicly traded REITs! These REITs are listed on the New York Stock Exchange (NYSE), NASDAQ, and American Stock Exchange (AMEX) and are open for trading like any other common stock.

Buying REITs is as easy as buying stocks. Shares in REITs can be purchased individually on the open exchange through your brokerage firm, or through mutual funds that focus on real estate. Another key factor here is that they are just as easy to sell. They carry some more risk that traditional real estate holdings, but they are much more liquid and provide a positive cash flow without the overhead of being a landlord.

Things to look out for when buying a REIT.

While past performance is no guarantee of future return, investors should pay special attention to the history of a REIT’s dividend payments. If they seem unduly high (in relation to other REITs) then there is something to be concerned about. It may mean the REIT is paying out more than its income, and that means decreasing capital or equity over time. Sometimes an increase in capital gain distribution can be a sign of non-recurring events (maybe the REIT has sold a property that it had been renting out for income). While such events are not necessarily a warning sign, they do cause the yield to increase for the short term and are not likely to continue. However, if an equity REIT is selling off large portions of its property it relies on for rental income, then it is likely one to avoid.

The most popular method of valuating a REIT is by measuring the funds from operations (FFO). The definition (from NAREIT ):

“FUNDS FROM OPERATIONS means net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.”

FFO is essentially a means to measure a REIT’s cash flow, less administrative and financing costs.

In case you’re wondering where FFO originates, money.howstuffworks.com describes it so:

Under generally accepted accounting principles, net income typically assumes that the value of assets goes down over time — somewhat predictably. Real estate generally retains or even increases in value. On the balance sheet under GAAP, however, land remains at its historical cost and buildings gradually depreciate to zero. Since a REIT’s primary business involves real estate, the depreciation charges negatively skewed the company’s true profitability. FFO was adopted to address that problem by excluding depreciation costs from the net income figure.

Beware - not all REITs calculate FFO using the NAREIT recommendation. Sometimes items such as maintenance, and repairs can skew the figure. Be sure to read the company’s full report for supplemental disclosures!

While a REIT must distribute at least 90% of its income to shareholders in the form of dividends, a REIT can sometimes distribute MORE than its income. This is termed a “return of capital” and if it reduces the basis cost of the REIT to zero, then the remainder of the return is taxed as a capital gain. Even with FFO it is sometimes difficult for investors to predict which category of income (capital gains or dividends) a REIT will distribute in any given year. The good news is that NAREIT has reported that each year since 1998 the proportion of distributions qualifying for the lower tax rate has risen.

REITs are typically considered an income producing asset, but they may at times produce growth (stock price appreciation) when certain conditions are favorable, such as an appreciation in the underlying market (property appreciation for equity REITs, or changes in interest rates for a mortgage REIT for example).

REIT ETFs and Index Funds.

Remember – REITs trade like stocks, and that means they come in ETFs and Index Funds just like stocks. These can make convenient alternatives to buying individual REITs. ETFs are a basket of REITs and so offer instant diversification within the REIT class of investment instruments.

Barclay’s offers two REIT index ETFs: one based on the Dow Jones U.S. Real Estate Index (IYR), and one based on Cohen & Steers Realty Majors Index (ICF). ICF has an expense ratio of 0.35% and IYR is 0.60%. A third alternative is the Vanguard REIT ETF (VNQ) with an expense ratio of 0.12%. Oh, and here’s one more for a round 4 ETFs to choose from: the Dow Jones Wilshire REIT index (RWR) with an expense ratio of 0.25%.

The performance of these ETFs track very closely together, which is not surprising since they each hold the same underlying REITs, albeit in differing proportions.

As I write this, the ICF yields 4.16%, IYR 4.55%, RWR 5.01% and VNQ yields 5.03%. All things being (mostly) equal, except the expense ration, I would probably lean heavily toward the VNQ. But that’s just me.

4 Tips For Applying For a Mortgage

Joe — Thu, 01 May 2008 15:29:27 +0000

My wife and I are currently in the process of selling our home, and looking to upgrade our living space. The house we live in now is getting smaller everyday. Personally, I blame the kids – they just keep growing!? I tell my wife that’s because we keep feeding them, but she doesn’t think that’s an option. But I digress..

While the U.S. housing market is not so great for selling, it’s pretty nice for buying. That doesn’t mean we can buy the house of our dreams with no money down, and an interest only mortgage though. That’s the kind of thing that got the market where it is today. Besides, we’ve worked hard to put ourselves on strong financial footing, and we don’t want to take the wrong actions that send us back to square one with a mountain of debt, and no money to pay the bills.

Buying a home is the single biggest investment that most people will ever make. It’s either a huge amount of money that you’re parting with or a huge amount of debt that you are taking on, most likely the latter. It’s a big deal, so it pays to do your homework and get it right. This article is about getting it right, when it comes to applying for a mortgage.

1.) Check Your Credit.

Nobody likes surprises when it comes to money, especially when borrowing large sums of money. Having a good credit score can save you thousands of dollars in interest AND get you a lower monthly payment. If you’re thinking about buying a home years from now, keep your credit in good condition. You’ll want to get your score up to 650 at least, to qualify for the better rates that are available. There are many things you can do to improve your credit score, like paying your bills on time and paying down debt.

If your time frame is much nearer, then you’ll want to check your credit report and credit score at the very least. I suggest AnnualCreditReport.com since it’s free! It’s best to do this at least 3 months before applying for a mortgage; since it will give you time to dispute any discrepancies or false accusations that you may find.

2.) Determine How Much House You Can Afford.

As a general rule of thumb, multiply your total annual income by 2.5 and that will give you a good idea of how much you can comfortably afford. I would guess that most people with a mortgage today, have a mortgage that is at least 4x their income. If you have a mortgage, feel free to leave a comment at the end of this post about it – I’d be very interested to learn where other people are regarding their mortgages. My mortgage is currently 1.75x my annual income, but I was lucky to buy before the housing boom. I don’t know if I could do as well today.

But the key here is that lenders will tell you that you can afford more than 2.5x your income, but this factor will ensure that you can afford your home AND continue to save for the future, without eating cat food.

If you’re looking for a better idea than the general rule of thumb, you should calculate your loan-to-value (LTV) ratio. This is one of the formulas lenders use to determine how much they will lend to you as well as how risky that loan will be for them. To calculate your LTV, divide the loan amount by the value of the property. Rates will likely be significantly higher if this value is greater than 80% (.8). This is where the often talked about 20% down payment factor comes from. Responsible lenders want to know that the property is worth more than they are lending you, in case they can’t collect what you owe them, they can salvage their investment.

The companion ratio to the LTV is the D/I, or debt-to-income, ratio. This is another big factor for lenders. Just like the LTV, your D/I ratio should be as low as possible. Calculate your debt to income by dividing your total monthly debt by your monthly income. A ratio of less than 20% to 30% is considered good, so if your debt-to-income is higher than that – pay down your debt!

3.) Start Small and Increase if Needed.

Just because your prospective lender says they’ll give you 5x your annual salary to buy a house, doesn’t mean it’s the financially smart thing for you to do. Start with low to medium priced houses. If you find it difficult to meet your needs with what’s available in that price range, then gradually work up toward the larger figure. For example, if the bank says they will lend you $300,000 for a new home, but that figure is 4-5x your annual income then start closer to the 2.5x figure ($150,000 – $187,000) and work up to what you think is affordable. If you find that there isn’t anything in that price range, then you should probably go back to saving some more for a bigger down payment, and try again at a later time.

4.) Pick the Right Mortgage.

There are more types of mortgages than there are opinions. Well OK, not really, but sometimes it seems like a close competition. A few of the major types are: Fixed Rate, Adjustable Rate, Short Term and Long Term.

Fixed Rate mortgages are the simplest type. You (the borrower) agree to borrow a specific amount of money and pay the lender a fixed interest rate for the term of the loan. If the interest rate is 5.5% at the time you sign the contract, and 5 years later the rate is 8%, you still pay only 5.5%. Fixed Rate loans are great for the stability that they offer, but may have slightly higher rates in the beginning than an adjustable rate mortgage.

Adjustable Rate mortgages start at a low, teaser rate but will change, or adjust, to the going rate at a fixed period of time in the future. For example, a 5 year adjustable rate loan will start at an initial rate that is lower than other fixed rate mortgages at the time you sign, but will automatically adjust in 5 years time to the going rate. This kind of loan is great when the rates go down, but when rate increase over that 5 year period you can get a nasty increase in your monthly mortgage payment. It’s basically a bet on where you think rates will be in the future. I am not a fan of these loans for most people, though they can be beneficial if conditions are right.

Short Term mortgages are loans for less than 30 year terms. These mortgages typically have lower rates, but higher monthly payments. A 15-year mortgage fits this category.

Long Term mortgages are loans of 30 years or more. Long Term mortgages have higher rates than Short Term mortgages, but they also have lower monthly payments. Because the payments are lower, they tend to be easier to qualify for (they have less impact on your D/I).

Many people recommend getting a 30 year fixed rate, but making at least an extra payment per year. This has the effect of paying off the loan in little more than 20 years, thus giving the borrower the best of both long and short term worlds. The key with this is that your lender must allow for extra payments with no pre-pay penalties, and you have to be disciplined in making those extra payments.

We have already secured approval from a local bank for a 30 year fixed rate with bi-weekly payments and no pre-payment penalty. This will enable us to pay off the loan in about 22 years automatically, or sooner if we have the cash.

Every borrower’s situation is a little different, and there are many opinions on this subject. These are tips I’ve learned from going through the process, but I’m sure there are many more out there. Perhaps you have had some experiences you’d like to share?

Resources:

Mortgage payment and refinance calculators

Search for the best rate mortgage in your area

Simple Debt-Free Finance » Real Estate

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WE SOLD OUR HOME!

Staging.

Keeping Up Appearances.

Tips for showing your home.

The Single Biggest Thing You Can Do To Sell Your House Fast.

Related Posts:

How to Invest in Real Estate Without Buying Property

What the hell is a REIT?

REITs and Taxes

The Inner Workings of a REIT.

Investing in REITs.

Things to look out for when buying a REIT.

REIT ETFs and Index Funds.

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4 Tips For Applying For a Mortgage

1.) Check Your Credit.

2.) Determine How Much House You Can Afford.

3.) Start Small and Increase if Needed.

4.) Pick the Right Mortgage.

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