August, 2003 Newsletter
+++++++++++ August 1, 2003 +++++++++++++++++++
Mortgage Rate Update: Rates Take Big Jump
This Month’s Tip: Overbuying: When Is It Too Much?
Introduction: Welcome to the August edition of the Home Buyer’s Newsletter. During the month of July, we saw sales of existing homes fall somewhat, sales of new homes rise and average mortgage rates take a big leap upward.
Sales of existing single-family homes eased slightly last month but were still at one of the strongest levels on record, according to the National Association of Realtors®.
Existing-home sales slipped 0.3 percent in June to a seasonally adjusted annual rate of 5.83 million units from a downwardly revised level of 5.85 million units in May. Last month’s sales activity was 8.6 percent above the 5.37-million unit pace in June 2002, and was tied for the fourth highest month on record.
Monthly sales rates have been revised going back to 1989 using updated seasonal adjustment factors; there are no changes to annual sales totals or home price data. David Lereah, NAR’s chief economist, said low interest rates continue to fuel the market.
“The strong number of existing-home sales is consistent with high levels of mortgage applications, new home sales and housing starts,” he said. “The slight easing of sales in June may reflect some weakness in the labor markets, but historically low mortgage interest rates are helping new households to afford homes and allow existing owners to sell their homes and purchase another – this is the primary reason we expect a new sales record this year.”
On the new home side, sales of new one-family houses in June 2003 were at a seasonally adjusted annual rate of 1,160,000, according to estimates released jointly on June 25th by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. This is 4.7 percent (±9.8%) above the revised May rate of 1,108,000 and is 21.0 percent (±11.5%) above the June 2002 estimate of 959,000.
The median sales price of new houses sold in June 2003 was $187,000; the average sales price was $243,500. The seasonally adjusted estimate of new houses for sale at the end of June was 345,000. This represents a supply of 3.6 months at the current sales rate.
Mortgage Rate Update: Rates Take Big Jump
Although they are still historically very low, mortgage rates took one of the biggest jumps in recent history during the month of July. According to mortgage company Freddie Mac, average rates for 30.-year fixed-rate loans stood at 6.14%, an increase of nearly 3/4% since the beginning of the month and nearly 1 full percent since the recent low, in the period ending June 19th of this year, averaging 5.21%. 15-year fixed-rate mortgages also rose to an average of 5.44% after beginning the month averaging 4.63%.
What does the future bring for mortgage rates? Estimates of both increases and decreases are all over the map, so it is very difficult to sense a trend. Much has to do with the outlook for the U.S. economy, though, so an individual can do their own hedging for what they think the direction will be for mortgage rates. If you feel confident that the economy is, and will continue to be, in recovery, then you may need to plan for higher rates. If, on the other hand, you are nervou about the strength of the recovery, or feel that we may slip back into recession, then the chances of rates going back down could be a real possibility.
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This Month’s Tip: Overbuying: When Is It Too Much?
Few areas of American life indicate the belief that “bigger is better” than the current trends in housing. Although family size has declined noticeably since the 1970s (an average of 3.11 persons per family to 2.59) the size of homes has exploded, with the average new home size increasing from 1400 square feet in the 1970s to around 2200 square feet (or more) today. Where it was once pretty common to have a living room, dining room and kitchen in addition to bedrooms, it is now not unusual to find living rooms, family rooms, great rooms, dens, offices, even media rooms all in the same home. And, we have more bedrooms today than in the past. It is much less common to have children of the same sex sharing a room than it was 25 years ago. 4 and 5 bedroom homes are becoming more and more common, even with smaller families.
With the increase in home size has come a number of positive features. More families, for example, can have enough space for amenities such as home offices for computer equipment, children have the opportunity to have their own bedroom and there are more informal areas of the home for relaxation.
These larger homes, though, can wield a two-edged sword. Buying or building more home than you need (size strictly for the sake of size) can have some obvious–and some not so obvious–negative consequences. Consequences which can cost time, money and aggravation that may not be expected.
When we speak of “too much” home it is not that we believe that there is anything inherently wrong with large homes–if they are needed and if they are affordable. It is our belief that “too much” is simply buying far too big a home for your needs and stretching your budget to the limits (or beyond) to do it. “Too much” is living in a huge home and not having enough money to furnish it or enough financial resources to enjoy any time outside of it. It is the “McMansions” and trophy homes we see popping up all over North America, purchased by many buyers who can just barely afford them. We watch budgets pushed to the extreme just to afford vacant space in a larger home. We see people “upgrade” from perfectly adequate homes to mini-mansions and then watch them as they have difficulty making ends meet.
Impacts: The Obvious
The most obvious impact, of course, is the additional costs associated with a larger home. In virtually every instance, a larger home will cost more to buy or build than a smaller home if all other factors (e.g. quality, condition and location) are equal. More square footage means more money out of your pocket, pure and simple. Higher costs will also equate to more interest charges, and, of course, a higher monthly payment.
Other obvious costs are additional heating and cooling costs, additional costs for electricity, higher insurance premiums, higher property taxes and mor upkeep, repair and maintenance costs throughout the ownership period. These additional costs can add 10%, 25%, 50% or more to your monthly housing expenditures.
Impacts: The Less Obvious
One of the less obvious consequences is the need to furnish and decorate all of the extra space found in these larger homes. For some reason, many buyers are unable to conceptualize the empty rooms that will need furniture, window treatments and the like. This is no small expense when you are starting out from scratch. All of that extra space will mean lots more expenditure, and since the extra space will be “permanent” the extra costs will continue as long as you own the home.
Another less obvious but important consequence may not be even considered until years later when it is time to sell the home, and that is the resale value. As the population ages (and if families continue to decrease in size), big homes could become less popular than they are today. This could mean that the premiums that are being paid for large homes in 2003 may have little or no return in 2015–the extra money spent would be lost. This loss can be justified, to a great degree, if the additional space is necessary. But a large home of unnecessary size becomes not only wasted space but wasted money–money hat is lost during the ownership period and then again when it comes time to sell.
This “downsizing” process may already have begun. Reports from the National Association of Home Builder’s convention in Las Vegas indicate that some of the homes shown there in 2003 are actually smaller than those in recent years. This may not have a huge impact on home purchases and building today, but may signal a shift in the trend.
One final factor that is rarely considered is the way that these huge homes tend to decentralize the family. With so much space to be “utilized”, we see more and more families spending more and more time away from each other–even though they are under the same roof. We’ve actually seen 2 members of a family communicate over the internet– through instant messaging–while they are in the same house!
Buying as much home as you need–and possibly a bit more for breathing room–is a smart approach to home ownership. Buying wasted size and space, though, for whatever reason (ego, keeping up with the Jones, fads, etc.) usually is a pretty poor financial move. Even if you are able to recoup the additional purchase expense of the home, you will most likely never get back the money wasted on unused and/or unneeded space that is spent on utilities, furnishing, decoration, taxes, insurance, etc., etc.
Next Month’s Topic: Sharpening Your Budget
The Home Buying Checklist
Many of our visitors have said that one of the most valuable aspects of the Home Buyer’s Information Center is the Buying Checklist, where they can make sure that all the bases have been touched. You can find the checklist here:Home Buyer’s Checklist
A special thanks to all those who have written to let us know that they have found the Home Buyer’s Information Center a helpful resource in their buying process. Have a great month and good luck in your home buying process!
The Team at the Home Buyer’s Information Center