August, 2002 Newsletter
+++++++++++ August 1, 2002 +++++++++++++++++++
Introduction: Mixed Readings on Home Sales
Mortgage Rate Update: Rates at Historic Low
This Month’s Tip: A Common Sense Approach
Introduction: Mixed Readings on Sales
Welcome to the August edition of the Home Buyer’s Newsletter. Home sales in June were definitely a mixed bag, with new home sales up 0.5% (to a record annualized pace of over one million). At the same time, though, existing home sales dropped nearly 12%, the largest decrease since 1995. This indicates an annual rate of 5.07 million units.
What do the numbers mean? They could indicate nothing more than a one month anomaly. Or, they could signal that the market is slowing a bit, since the lead time on new home construction is longer than for the purchase of an existing home. It surely, though, is something that bears watching in the upcoming months, especially since sales have been so strong for the last two years. A decline in sales rates could indicate a future softening in price appreciation.
Mortgage Rate Update: Rates at Historic Low
Due to a large degree to the rush out of the equities market and into the bond market, both 30-year and 15-year mortgages were at historic levels at the end of July. According to mortgage company Freddie Mac, 30-year fixed rate mortgages averaged 6.34% as of July 25th, while 15-year fixed rates dropped to 5.76%. These rates do not include any points paid to the lender up-front.
Betting on lower rates from this point out could be a real gamble. The odds seem to be stacked much higher that rates will either stabilize from this point or begin to rise again, even if it is a slow climb. If you are in the market for a home, it would probably be wise now to take a good look at your personal financial situation as well as where you are in the home hunting process, to see if the present is not a good time to make a move.
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This Month’s Tip: A Common Sense Approach
Buying a home is an emotional time–you’ll experience both highs of emotion (like when you find a house you love) and lows of emotion (like when the mortgage company want “just a little more information”). There is no real way to avoid the emotional swings you will encounter, but the CA keep them in check. The easiest and most effective way of doing that is to simply take a common sense approach to the whole home buying process.
Throughout the Home Buyer’s Information Center site, and in dozens of our newsletters over the past 3 years, we’ve campaigned for this common sense approach. Why? Because it will be the home buyer who will gain the rewards if they keep the process within the bounds of common sense–or, who will suffer the pain if they don’t. Not the lender, not the Agent, not the appraiser, not the insurer, but you, the home buyer.
Common Sense Qualifying Ratios
This is the first place that common sense frequently gets thrown out the window, and it can be where the most financial damage occurs.
Qualifying ratios indicate your ability to pay a mortgage. One ratio, the front ratio, is determined by the lender by taking the amount of your proposed total mortgage payment and dividing it by your total monthly income. For example, say you are looking at a total montly payment (including principal, interest, taxes and insurance) of $1025 per month and you have a total income–before tax–of $4000 per month. The ratio of your mortgage payment would be 25.6% of your income. A second ratio–the back ratio– is also determined by the lender. This is your total monthly debt (including credit card payments, car loans, student and personal loans, etc.) PLUS the proposed mortgage amount. Say you have an additional $395 in monthly debt payments. Your total debt, then, would be $1420 ($395 plus the $1025 mortgage) and using the same income figure of $4000, your back ratio would be 35.2%.
Although they vary by type of mortgage selected, these ratios have traditionally been around 30% or less for the front ratio (total mortgage payment) and 41% or less for the back ratio (total debt payments). These ratios were time-tested over the years because those who qualified under those figures had a better chance of NOT being faced with foreclosure. Recently, though, we’ve watched as those qualifying ratios have crept upward, especially for good credit buyers.
The risk, however, is obvious. The more of your income you devote to your housing costs, and to your total debt payments, the less you will have available for other needs or, perhaps most important, for savings. You run the very real risk of finding yourself “house poor”–a nice house but little or no money left over for enjoyment (or, in the worst case scenario, for an unforeseen emergency).
The common sense approach: Don’t bury yourself in house payments that can cause problems down the road.
Common Sense Prices
Repeat the following several times: “Real Estate does not always go up. Real Estate does not always go up. Real Estate…” Got it? Like those with very short points reference who figured that the U.S. stock market was on and endless upward ride (and who found out, painfully, that they were wrong) we now hear a growing mantra that “Real Estate is the perfect investment vehicle. It always goes up in value.” Sounds great, even if it is not true. Yes, in the long run the trend in prices is up. That doe not mean, though, in shorter periods of time–like less than 10 years–that prices are always increasing.
Do we think that there will be a crash in Real Estate prices? Absolutely not. Do we think, though, that in areas where appreciation has been at a breakneck pace over the last couple of years that there could at least a period of stagnation if not outright declines. Very possibly. Do we think that paying too much for a home can bite you hard in such an environement? Absolutely.
Prices for all investment vehicles–whether they be stocks, bonds, soy bean futures or homes–tend to move in cycles. Ask folks who owned homes in areas of Texas, California or New England in the 1980s and see if they don’t agree. A prime example is Houston, where average prices peaked in 1983 and then proceeded to fall in 1984, 1985, 1986, 1987 and 1988. They began rising again in 1989, 1990, 1991 and 1992 but it was no until 1993–a full 10 years after the peak–that they returned to the average pricing of 1983.
Since values CAN stagnate or go down, it is imperative that a buyer not pay more than a reasonable market value. Sounds fairly obvious, but every day we watch buyers, caught in the heat of the moment, pay thousands– and sometimes TENS of thousands–more than a house is worth. Part of this is probably due to the buyer not having a clear idea of what the true value is and part of it is due to bidding wars that push prices beyond–and sometimes ludicrously beyond–listing prices and true values.
The common sense approach: Have all pricing information in hand BEFORE you begin negotiations on a home. NEVER get caught in a bidding war unless the home is priced considerably BELOW market value. For more information, see the section of the site devoted to determining a fair value.
Common Sense Buying for Resale
Be careful not to get so involved in “the moment” that you buy (or build) a “dream house” that may not be anyone else’s idea of a dream. It is much better to stick with what is tried and true (and then personalize that home to your tastes) rather than to be groundbreaking and unusual. For example, a 2 bedroom 4 bath house may be just what you’ve been dreaming of, but will be very difficult to unload when it comes time to sell.
In addition, try to avoid the latest “trendy” fashions in homes. Today’s trends are tomorrow’s has-beens. What is fresh and “up-to-date” today tends to look very dated just a few years down the road. Remember all white kitchens? A few years ago EVERYBODY seemed to want an all white kitchen. Now, they are becoming harder and harder to find, as buyers have moved to new (and different) decorating touches.
The common sense approach: Stick more with what is “timeless” and less with what is “timely”.
Buying a home will likely be one of the happiest moments in your life. Take some time, though, to “take a breath” (with a good dose of common sense) to make sure that the time you spend LIVING in the house is every bit as happy as when you first moved in.
The Home Buyer’s 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.
As always, if you have suggestions for improving the site, or topics you would like to see addressed in this newsletter (or, if you have used the Home Buyer’s Information Center to successfully purchase a home), drop us a quick line here. or access our feedback page.
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