New York Times, August 27, 2006
By DAVID LEONHARDT and VIKAS BAJAJ
REAL bubbles pop. They are fully formed one moment and gone the next. Financial bubbles rarely meet with such a definitive end, which has always been the biggest problem with the metaphor. They let out their air in unpredictable bursts, and it’s usually impossible to figure out whether they have finished deflating or are just starting to.
Still, the latest housing numbers seem like they could be a turning point. A real estate crash might not be the most likely outcome, but it certainly seems legitimate to think about what one would look like.
The number of building permits being issued is falling at a rate usually seen only in recessions. In July, 11 percent fewer existing homes were sold than were sold a year earlier; 22 percent fewer new houses were sold. After the new-house data was released last week, Capital Economics, a consulting firm, wrote an e-mail message to its clients that began, “New day, same depressing housing market story.”
The fate of the housing market will influence whether the economy will merely slow over the next year, as the Federal Reserve forecasts, or fall into a recession for the first time since early 2001. Lehman Brothers, the investment bank, said Friday that “for-sale” signs had replaced gas-price signs as the most important indicator of potential trouble.
The collapse of most bubbles does not have a single obvious starting point, like a bad corporate earnings report or an interest-rate rise. Instead, the psychology of buyers and sellers shifts, slowly at first and then sometimes in a cascade.
“It’s always mystified people about why these things turn,” said Robert J. Shiller, a Yale economist and author of "Irrational Exuberance,” a history of speculation. “People want something concrete.”
There seem to be three major paths that housing could follow over the next year: a soft landing, the start of a long slump, or a crash. A soft landing is the one predicted — and preferred — by most economists on Wall Street and at the Fed. A long slump is what many past real estate booms turned into. A crash is the outcome that a small group of analysts say is the only possible ending for the biggest housing boom of all.
Their prediction looks better than it did a few weeks ago, but even they aren’t sure whether this is the beginning of the end or another false turning point. “The funny thing about bubbles,” Mr. Shiller said, “is that you never know when they’re over.”
For a crash to happen, prices would have to decline significantly in some once-hot markets. So far, as sales have slowed and the number of houses on the market has soared, many owners have chosen to sit tight. If they were instead to decide that selling later would be even worse than selling now, this could change quickly.
The doomsayers’ strongest argument may be that too few families can afford prices in some metropolitan areas. In Las Vegas, Los Angeles and Miami, prices have almost doubled since 2003, and they have risen about 50 percent in New York and San Francisco, the National Association of Realtors says.
Jumps of this magnitude have little precedent. To afford homes, some buyers, especially in California, have resorted to aggressive mortgages, like those that allow artificially low payments in the early years. In effect, families seem to be
buying houses they cannot afford, in the hope that their incomes or property values will rise significantly. “Prices just shot up too much,” said Robert T. McGee, chief economist at U.S. Trust, an investment firm based in New York. The firm has forecast a soft landing for housing, he said, but “as time goes by that starts to look like wishful thinking.”
If prices do decline, some of the first victims would be families in a financial bind that are unable to rescue themselves by refinancing their mortgage. Foreclosures would then rise, damaging banks and increasing the number of homes for
sale.
Even homeowners not in danger of losing their home — an overwhelming majority, certainly — might respond to falling prices by cutting spending, particularly if they had been counting on their home’s value to serve as a retirement account. That could force job cuts in a wide range of industries.
Already, the housing slowdown has begun damaging the job market. Builders, mortgage lenders and real estate agencies have stopped adding to payrolls. Defined broadly, the real estate sector has accounted for 44 percent of jobs created since 2000 and employs more than one in 10 American workers, according to Moody’s Economy.com.
Perhaps the biggest reason to be skeptical about a real estate crash is that the country has not really suffered through one before. Not since the Depression has the combined value of residential real estate fallen over the course of a full year. Homes seem to be much less vulnerable to crashes than other assets, because people rarely sell them in a panic.
But earlier booms have been followed by modest price declines in some cities that turned into long periods in which increases trailed inflation. After peaking in much of California and the Northeast in the late 1980’s, house values fell during the recession of 1990-91 and then drifted for years, often rising more slowly than the price of milk.
In inflation-adjusted terms, prices in the New York and Washington areas did not return to their late-80’s peak until 2002. In Boston, it didn’t happen until 2000, and in San Francisco, 1999.
It isn’t hard to imagine a similar chain of events over the next decade. Based on futures contracts traded on the Chicago Mercantile Exchange, investors expect the median house price in Los Angeles, New York and some other regions to fall about 5 percent in the next year, which would be similar to the decline that started the 90’s slump.
From there, prices might start rising again, but at a slow enough pace that incomes would eventually catch up. Families that now need an exotic mortgage to buy a house in Los Angeles could eventually afford one the old-fashioned way.
Interest rates could play a role in a long slump, too. They have been falling for much of the last decade, helping push house prices higher by allowing buyers to afford bigger mortgages. Most economists expect rates to remain lower than they were a generation ago but not to return to the extremely low levels of a few years ago, making big swings in house prices, in either direction, unlikely.
Christopher J. Mayer, director of the Paul Milstein Center for Real Estate at Columbia University, argues that the recent drop in sales does not suggest that a larger bust is coming. “So far we have only seen people asking pie-in-the-sky asking prices and not getting them,” said Mr. Mayer, who expects housing to continue slowing but not enough to create a recession.
He believes that the boom in house prices was largely a result of the appeal of “superstar cities” like New York and San Francisco that are unlikely to lose their allure. In much of the rest of the country, prices are not unusually high,
considering the relatively low interest rates.
Moreover, few borrowers are falling behind on their mortgage payments, and the economy looks fairly healthy outside of housing. So if prices start falling, new buyers may jump into the market and prevent any extended slump. “The fundamentals of real estate are solid, still,” said James Gillespie, chief executive of Coldwell Banker, the real estate company.
Which is it, then — a brief pause, or a big correction?
“Either argument is very compelling. I can debate myself on it,” said Mark Zandi, chief economist at Moody’s Economy.com. “That’s why there’s a great deal of uncertainty.”
27 August 2006
Agents Hold the Keys to Safer House Buying
Washington Times, August 25, 2006
By M. Anthony Carr
I hate going to the dentist. I've always had good teeth, only one cavity, so why spend all that money -- not to mention the dental insurance -- on a service I've never really needed?
As long as I brush and floss, why do I need someone with a doctor's degree to look over my teeth, clean them and whiten them? I've pulled teeth myself -- when I was just a grade school kid, in fact. So if I can pull teeth at that age, with
just a string and a doorknob, why on Earth do I have to pay a professionally trained tooth-puller now?
As I reminisce on my early tooth-pulling days, I even recall getting paid for pulling my own teeth. That's right ... every morning after pulling my teeth, I had money under my pillow.
Anyone who has received quality dental care sees right through the absurdity of this argument. However, when it comes to real estate agents, everyone wants them to provide their services for discounted prices, even free.
Licensed real estate professionals bring state-mandated training and knowledge to the table for buyers and sellers. In fact, agents have to get as much or more training than it would take for some college degrees before getting a state
license to represent buyers and sellers in a transaction.
By the time a transaction is over, it is full of legally binding documents pulling two parties together to exchange hundreds of thousands of dollars. All this for one transaction. Most people repeat this process only a couple of times in their lives.
Nearly half of the buyers are purchasing for the first time, according to the National Association of Realtors. They only think agents are there to usher them into houses and that's it. And that's because hundreds of thousands of agents
make it look so easy -- like a grade-schooler pulling baby teeth.
Why should you have a real estate agent on your investing team when it comes to building wealth? There's talk on Capitol Hill of how the real estate industry has a "stranglehold" on the business. It makes me want to, not so much defend, as much as bring to the forefront what licensed professionals actually bring to the table for consumers.
You've heard the axiom that "you get what you pay for." That doesn't go wasted on agents. Many sellers would love to get through the transaction themselves without any help from a "middle man" to save the commission.
It sounds like it makes sense: Why pay thousands of dollars to sell a house when you can do it yourself?
It makes me wonder why 88 percent of those each year who try to sell their own homes eventually hire a professional.
First, there is the license regulated by the state. If someone is going to represent someone in the sale or purchase of real estate, they must follow these rules of real estate. They must know various aspects of real estate law, rules and regulations, such as: what rights exist besides land and how they can be traded; how title can be held; and how to ensure clear title to the land. They must know about financing: traditional, nontraditional and owner-held.
They must follow fair housing laws, the federal, state and local limits on the sale and trade of real estate. They must heed state disclosure laws and regulations on the trade of real estate. They have the necessary contracts and forms.
Most sellers and buyers I've talked with, while they might have access to plenty of information from the Internet about sales transactions, do not have a handle on the nuances, pitfalls and inherent legal dangers they can face in the midst of this huge investment.
By M. Anthony Carr
I hate going to the dentist. I've always had good teeth, only one cavity, so why spend all that money -- not to mention the dental insurance -- on a service I've never really needed?
As long as I brush and floss, why do I need someone with a doctor's degree to look over my teeth, clean them and whiten them? I've pulled teeth myself -- when I was just a grade school kid, in fact. So if I can pull teeth at that age, with
just a string and a doorknob, why on Earth do I have to pay a professionally trained tooth-puller now?
As I reminisce on my early tooth-pulling days, I even recall getting paid for pulling my own teeth. That's right ... every morning after pulling my teeth, I had money under my pillow.
Anyone who has received quality dental care sees right through the absurdity of this argument. However, when it comes to real estate agents, everyone wants them to provide their services for discounted prices, even free.
Licensed real estate professionals bring state-mandated training and knowledge to the table for buyers and sellers. In fact, agents have to get as much or more training than it would take for some college degrees before getting a state
license to represent buyers and sellers in a transaction.
By the time a transaction is over, it is full of legally binding documents pulling two parties together to exchange hundreds of thousands of dollars. All this for one transaction. Most people repeat this process only a couple of times in their lives.
Nearly half of the buyers are purchasing for the first time, according to the National Association of Realtors. They only think agents are there to usher them into houses and that's it. And that's because hundreds of thousands of agents
make it look so easy -- like a grade-schooler pulling baby teeth.
Why should you have a real estate agent on your investing team when it comes to building wealth? There's talk on Capitol Hill of how the real estate industry has a "stranglehold" on the business. It makes me want to, not so much defend, as much as bring to the forefront what licensed professionals actually bring to the table for consumers.
You've heard the axiom that "you get what you pay for." That doesn't go wasted on agents. Many sellers would love to get through the transaction themselves without any help from a "middle man" to save the commission.
It sounds like it makes sense: Why pay thousands of dollars to sell a house when you can do it yourself?
It makes me wonder why 88 percent of those each year who try to sell their own homes eventually hire a professional.
First, there is the license regulated by the state. If someone is going to represent someone in the sale or purchase of real estate, they must follow these rules of real estate. They must know various aspects of real estate law, rules and regulations, such as: what rights exist besides land and how they can be traded; how title can be held; and how to ensure clear title to the land. They must know about financing: traditional, nontraditional and owner-held.
They must follow fair housing laws, the federal, state and local limits on the sale and trade of real estate. They must heed state disclosure laws and regulations on the trade of real estate. They have the necessary contracts and forms.
Most sellers and buyers I've talked with, while they might have access to plenty of information from the Internet about sales transactions, do not have a handle on the nuances, pitfalls and inherent legal dangers they can face in the midst of this huge investment.
09 August 2006
As Data Point to Slowdown, Housing Market May Land Harder Than Economists Predict
Wall Street Journal, August 7, 2006
By MARK WHITEHOUSE
NEW YORK -- Home prices in some parts of the country are falling. Builders are scaling back. Bubble or not, the biggest housing boom in recent U.S. history is coming to an end.
Now here is the big question: How bad will the aftermath be? At this point, most economists expect a "soft landing," a gradual decline that won't derail the nation's economic expansion, now in its fifth year.
But there is a good chance they are being too optimistic. The boom has depended heavily on the upbeat psychology of consumers, builders and lenders. As moods swing, the landing could be very hard indeed.
"We could be underestimating the dark side," says Mark Zandi, chief U.S. economist at Moody's Economy.com and among the first to seek to quantify the housing boom's broader effects. "Euphoria could turn into abject pessimism very quickly."
With each passing data point, signs of the housing slowdown grow stronger. In June, total single-family-home sales fell 8.7% from a year earlier, to an annualized rate of 6.9 million -- the sharpest year-to-year drop since April 1995.
The government's report on second-quarter real gross domestic product, the inflation-adjusted value of the nation's output, showed that fixed investment in housing by companies and individuals declined at an annual rate of 6.3% in the quarter. That was a sharp change from a year earlier, when it was increasing at an annual rate of 20%. As of Friday, futures markets were predicting about a 5% drop in house prices by May 2007.
Still, judging by most economists' forecasts, the fallout from a slowing housing market doesn't look all that unpleasant. Typically, they expect the decline in housing -- and housing-related activity -- to shave about a percentage point off inflation-adjusted GDP growth in 2007, compared with the estimated one percentage point the sector contributed to growth in 2005. If business investment and exports accelerate as expected, that would bring inflation-adjusted GDP growth to about 2.8% in 2007, down from a forecast 3.5% this year.
Economists, however, have few clues on which to base their predictions. Today's housing boom differs radically from its predecessors. For one, it has been bigger and longer-lived. House prices are still more than twice the level of 1991, when the boom began. Even after the recent decline, June's rate of home sales is 40% above the 20-year average.
Much of the recent increase has been driven by an unprecedented flood of cash into U.S. capital markets. Global demand for U.S. mortgage bonds, competition among big national lenders and the advent of exotic loans have made it easier than ever to borrow money to buy a house -- and to turn rising home values into cash.
Because the market has risen so far, economists worry it has the potential to fall much harder than their main forecasts would suggest. As Janet Yellen, president of the Federal Reserve Bank of San Francisco, put it in a speech last week: "We can't ignore the risks of more unpleasant scenarios developing."
One big question is how much the housing slowdown will affect consumers, whose spending accounts for more than two-thirds of the economy. If house prices plateau or fall, homeowners will feel poorer, and thus less willing to go out and buy more cars, boats and refrigerators. Typically, this "negative wealth effect" would be only about three to five cents of spending for each dollar of wealth lost.
But modern mortgage finance has magnified the effect of home values on spending, says Jan Hatzius, chief U.S. economist at Goldman Sachs in New York. He estimates that when people take cash out of their homes through home-equity loans and refinancings -- which they were doing at an annualized rate of $558 billion in the first quarter -- they tend to spend about 50 cents of every dollar. If house prices merely stabilize, people's diminished ability to use their houses like automated-teller machines would subtract about 0.75 percentage point from annualized GDP growth in 2007, Mr. Hatzius says.
Another question is how fast home sales, and consequently home building, can fall. Even after the second-quarter decline, investment in residential construction accounted for about 6.1% of the economy -- close to a 50-year high. If, as some economists expect, housing investment merely returns to the long-term average of about 4.6% over the next two years, the decline also would shave 0.75 percentage point from annual real GDP growth.
But there is reason to believe home builders will have to pull back more sharply. That is because the leveling off of house prices changes the equation of homeownership. When mortgage rates were less than 6% and house prices were rising at about double that rate, people could reasonably expect to make more on their house's appreciation than they would pay in interest on their mortgages. Now, though, inflation-adjusted mortgage rates -- the interest rate on a typical 30-year mortgage minus the percentage rise in home prices -- are on track to turn positive for the first time since 2001.
When housing took a similar turn in the 1970s, new-home sales quickly fell to their long-term norm. This time around, that would entail about a 50% decline in sales, says Ian Shepherdson, chief U.S. economist at consulting firm High Frequency Economics. He estimates that the resulting decline in residential construction would subtract about 1.5 percentage points from annual GDP growth in each of the next two years. "It's a 15-year bubble unwinding in two years," Mr. Shepherdson says. "It's going to hurt."
If Messrs. Hatzius and Shepherdson are both right, the effect of the housing slowdown on construction and consumer spending alone would subtract more than two percentage points from economic growth in 2007, bringing it well below 2%.
But that isn't all. Economists can't quantify some risks, including the biggest: the chance that a sharp drop in house prices -- what economists call a "disorderly downturn" -- would leave many homeowners owing more on their mortgages than their homes are worth. If that led to a wave of foreclosures and losses on riskier mortgage-backed securities, banks and investors could get spooked and cut back on all kinds of lending -- a move that could snuff out economic growth.
"For me, the risk of a disorderly downturn is the greater one," Mr. Hatzius says. "That's a scenario that people would worry about a lot, because typically recessions are the result of a general unwillingness to lend."
By MARK WHITEHOUSE
NEW YORK -- Home prices in some parts of the country are falling. Builders are scaling back. Bubble or not, the biggest housing boom in recent U.S. history is coming to an end.
Now here is the big question: How bad will the aftermath be? At this point, most economists expect a "soft landing," a gradual decline that won't derail the nation's economic expansion, now in its fifth year.
But there is a good chance they are being too optimistic. The boom has depended heavily on the upbeat psychology of consumers, builders and lenders. As moods swing, the landing could be very hard indeed.
"We could be underestimating the dark side," says Mark Zandi, chief U.S. economist at Moody's Economy.com and among the first to seek to quantify the housing boom's broader effects. "Euphoria could turn into abject pessimism very quickly."
With each passing data point, signs of the housing slowdown grow stronger. In June, total single-family-home sales fell 8.7% from a year earlier, to an annualized rate of 6.9 million -- the sharpest year-to-year drop since April 1995.
The government's report on second-quarter real gross domestic product, the inflation-adjusted value of the nation's output, showed that fixed investment in housing by companies and individuals declined at an annual rate of 6.3% in the quarter. That was a sharp change from a year earlier, when it was increasing at an annual rate of 20%. As of Friday, futures markets were predicting about a 5% drop in house prices by May 2007.
Still, judging by most economists' forecasts, the fallout from a slowing housing market doesn't look all that unpleasant. Typically, they expect the decline in housing -- and housing-related activity -- to shave about a percentage point off inflation-adjusted GDP growth in 2007, compared with the estimated one percentage point the sector contributed to growth in 2005. If business investment and exports accelerate as expected, that would bring inflation-adjusted GDP growth to about 2.8% in 2007, down from a forecast 3.5% this year.
Economists, however, have few clues on which to base their predictions. Today's housing boom differs radically from its predecessors. For one, it has been bigger and longer-lived. House prices are still more than twice the level of 1991, when the boom began. Even after the recent decline, June's rate of home sales is 40% above the 20-year average.
Much of the recent increase has been driven by an unprecedented flood of cash into U.S. capital markets. Global demand for U.S. mortgage bonds, competition among big national lenders and the advent of exotic loans have made it easier than ever to borrow money to buy a house -- and to turn rising home values into cash.
Because the market has risen so far, economists worry it has the potential to fall much harder than their main forecasts would suggest. As Janet Yellen, president of the Federal Reserve Bank of San Francisco, put it in a speech last week: "We can't ignore the risks of more unpleasant scenarios developing."
One big question is how much the housing slowdown will affect consumers, whose spending accounts for more than two-thirds of the economy. If house prices plateau or fall, homeowners will feel poorer, and thus less willing to go out and buy more cars, boats and refrigerators. Typically, this "negative wealth effect" would be only about three to five cents of spending for each dollar of wealth lost.
But modern mortgage finance has magnified the effect of home values on spending, says Jan Hatzius, chief U.S. economist at Goldman Sachs in New York. He estimates that when people take cash out of their homes through home-equity loans and refinancings -- which they were doing at an annualized rate of $558 billion in the first quarter -- they tend to spend about 50 cents of every dollar. If house prices merely stabilize, people's diminished ability to use their houses like automated-teller machines would subtract about 0.75 percentage point from annualized GDP growth in 2007, Mr. Hatzius says.
Another question is how fast home sales, and consequently home building, can fall. Even after the second-quarter decline, investment in residential construction accounted for about 6.1% of the economy -- close to a 50-year high. If, as some economists expect, housing investment merely returns to the long-term average of about 4.6% over the next two years, the decline also would shave 0.75 percentage point from annual real GDP growth.
But there is reason to believe home builders will have to pull back more sharply. That is because the leveling off of house prices changes the equation of homeownership. When mortgage rates were less than 6% and house prices were rising at about double that rate, people could reasonably expect to make more on their house's appreciation than they would pay in interest on their mortgages. Now, though, inflation-adjusted mortgage rates -- the interest rate on a typical 30-year mortgage minus the percentage rise in home prices -- are on track to turn positive for the first time since 2001.
When housing took a similar turn in the 1970s, new-home sales quickly fell to their long-term norm. This time around, that would entail about a 50% decline in sales, says Ian Shepherdson, chief U.S. economist at consulting firm High Frequency Economics. He estimates that the resulting decline in residential construction would subtract about 1.5 percentage points from annual GDP growth in each of the next two years. "It's a 15-year bubble unwinding in two years," Mr. Shepherdson says. "It's going to hurt."
If Messrs. Hatzius and Shepherdson are both right, the effect of the housing slowdown on construction and consumer spending alone would subtract more than two percentage points from economic growth in 2007, bringing it well below 2%.
But that isn't all. Economists can't quantify some risks, including the biggest: the chance that a sharp drop in house prices -- what economists call a "disorderly downturn" -- would leave many homeowners owing more on their mortgages than their homes are worth. If that led to a wave of foreclosures and losses on riskier mortgage-backed securities, banks and investors could get spooked and cut back on all kinds of lending -- a move that could snuff out economic growth.
"For me, the risk of a disorderly downturn is the greater one," Mr. Hatzius says. "That's a scenario that people would worry about a lot, because typically recessions are the result of a general unwillingness to lend."
07 August 2006
Price Dips Make Loan Plan Droop
Washington Times, July 28, 2006
By Henry Savage
Q:I have read several articles about interest-only loans. One thing they all say is that an interest-only loan is good for people who don't plan on holding the home for a long time. Because very little principal is paid off in the first few years of a loan that's amortized over 30 years, we might as well take out an interest-only loan and lower the payment.
Because we plan on selling within three years, our objective is to tie up as little cash as possible. Do you agree that an interest-only loan is right for us?
A: Actually, I disagree with your planned strategy, although I have read the same articles with the same advice.
Interest-only loans simply swap principal curtailment in exchange for a lower monthly payment. Interest-only loans are fine when the rate is low and the borrower is financially responsible, but to be frank, I have never understood the correlation between an interest-only loan and a short holding period.
Although it's true that very little principal is curtailed in the early stages of a loan that's amortized over 30 years, that has nothing to do with the holding period of the property. In fact, I recommend against highly leveraged financing and interest-only payments in cases where the property will be sold in just two or three years.
Why? The answer is simple. In the event of a market downturn, selling the property could result in writing a big check at the settlement table.
Let's take a look at some numbers.
A property purchased for $350,000 with no down payment and interest-only payments will carry a loan balance of $350,000 until the borrower decides to pay down the loan. Such a plan fits in with your objectives because you want to tie up as little cash as possible.
Now, let's say you sell in three years. How much does the property have to appreciate to prevent your writing a check at settlement? Real estate commissions typically are 6 percent, and it's not uncommon in a balanced market for the seller to accept an offer that requires a contribution toward the purchaser's closing costs. Let's assume 2 percent. Your total cost to sell the house is equal to 8 percent.
This means that you will have to sell the property for about $380,000 in order to break even — 8 percent of $380,000 equals $30,400, leaving you with $349,600 to pay off a $350,000 mortgage.
Although it is perfectly reasonable to assume that the property will appreciate by $30,000 over a three-year period, it's certainly not guaranteed.
A short holding period and the desire to put little or no cash into the home have no correlation, except risk. Any asset is likely to appreciate over time but is just as likely to experience dips along the way. By the same token, financing a property 100 percent simply equates to higher borrowing costs over time and a bigger debt to pay off when you decide to sell.
Folks who buy a house with the intent of a short-term hold need to understand that timing the market is much more crucial for them than for folks who buy a house and hold for the long term.
By Henry Savage
Q:I have read several articles about interest-only loans. One thing they all say is that an interest-only loan is good for people who don't plan on holding the home for a long time. Because very little principal is paid off in the first few years of a loan that's amortized over 30 years, we might as well take out an interest-only loan and lower the payment.
Because we plan on selling within three years, our objective is to tie up as little cash as possible. Do you agree that an interest-only loan is right for us?
A: Actually, I disagree with your planned strategy, although I have read the same articles with the same advice.
Interest-only loans simply swap principal curtailment in exchange for a lower monthly payment. Interest-only loans are fine when the rate is low and the borrower is financially responsible, but to be frank, I have never understood the correlation between an interest-only loan and a short holding period.
Although it's true that very little principal is curtailed in the early stages of a loan that's amortized over 30 years, that has nothing to do with the holding period of the property. In fact, I recommend against highly leveraged financing and interest-only payments in cases where the property will be sold in just two or three years.
Why? The answer is simple. In the event of a market downturn, selling the property could result in writing a big check at the settlement table.
Let's take a look at some numbers.
A property purchased for $350,000 with no down payment and interest-only payments will carry a loan balance of $350,000 until the borrower decides to pay down the loan. Such a plan fits in with your objectives because you want to tie up as little cash as possible.
Now, let's say you sell in three years. How much does the property have to appreciate to prevent your writing a check at settlement? Real estate commissions typically are 6 percent, and it's not uncommon in a balanced market for the seller to accept an offer that requires a contribution toward the purchaser's closing costs. Let's assume 2 percent. Your total cost to sell the house is equal to 8 percent.
This means that you will have to sell the property for about $380,000 in order to break even — 8 percent of $380,000 equals $30,400, leaving you with $349,600 to pay off a $350,000 mortgage.
Although it is perfectly reasonable to assume that the property will appreciate by $30,000 over a three-year period, it's certainly not guaranteed.
A short holding period and the desire to put little or no cash into the home have no correlation, except risk. Any asset is likely to appreciate over time but is just as likely to experience dips along the way. By the same token, financing a property 100 percent simply equates to higher borrowing costs over time and a bigger debt to pay off when you decide to sell.
Folks who buy a house with the intent of a short-term hold need to understand that timing the market is much more crucial for them than for folks who buy a house and hold for the long term.
Builders Optimistic While Buyers Worry
Washington Times, July 28, 2006
By M. Anthony Carr
Why aren't builders running scared? Because the underlying principles of a good market remain sound despite scurrying potential buyers who are afraid of buying at the height of the market. Although nationally the industry has cooled to "more sustainable levels," the Bureau of Labor Statistics "reports strong job gains in many of the fastest-growing states, with 37 states exceeding their pre-recession peak levels of employment in 2005," according to the National Association of Home Builders (NAHB).
A cooling of the market this year still will result in the third-highest level of housing starts in the past few years, the builders association says in a midyear housing report released recently on its real estate trends Web site (www.HousingEconomics.com).
That's why you keep seeing building projects going up. Not as many houses are being constructed as were last year, to be sure, but the NAHB report points to several positive market growth indicators in various regions across the country.
Job growth is continuing upward. Unemployment is dropping. Businesses
continue to expand, and economists across the country continue to estimate that the need for more housing will stretch beyond the current inventory surplus.
The National Association of Realtors is holding to projections of 2006 being another very strong year -- the third-highest on record.
NAHB members are still bullish on the housing market.
What we're seeing, it seems, is a transition year. People who have no choice but to buy because of social or lifestyle reasons -- the birth of a baby, marriage, retirement, in-laws moving in, job relocation -- will buy now and unwittingly pick up a great deal.
Buyers who are too skittish about the market will miss a finance-boosting opportunity. In markets that have normalized -- Washington, Miami, Chicago and Phoenix -- buyers who buy based on rock-hard economic evidence will be excited in a few years to realize they bought a house low and stand to earn a handsome profit.
Ask anyone in the Washington area if he or she would have bought a lot of property in 1990 -- the last time the market took a timeout -- and held it until today. Everyone would grin. At that time, the average home price was about $179,000. Prices were dropping, and the job market was faltering. Today, housing prices are up by 4 percent over last year, employment is up by nearly 64,000 jobs compared to a year ago, and the job market is still chugging along.
Home sales have leveled off, and rentals are skyrocketing. I smell opportunity.
We have 20 percent more jobs headed this way in the next four years compared to job growth over the previous four years, according to the George Mason University Center for Regional Analysis. That's 256,000 jobs. While other areas may not be as robust, they still are growing. If the new employees don't buy houses, they'll rent. That's causing pressure on rents as they begin growing nationally at a double-digit rate for some areas.
M/PF YieldStar, a real estate market intelligence firm, estimates that 2006 and 2007 will be boom years for rental markets and multifamily housing starts. Occupancy rates surpassed an average 95 percent mark in the fourth quarter of 2005 for the 57 metropolitan areas the group tracks.
The real item for buyers to watch is interest rates. As buyers keep waiting for prices to "bottom out," their buying power evaporates with the ever-growing interest rates. Just a year ago, a household with an income of $100,000 could afford a house in the $450,000 price range. Today, the home price that same income can finance has dropped to about $394,000 simply because of interest rate increases. Experts are talking about interest rates hitting the 7 percent mark before the end of the year.
In addition, as jobs keep growing, rentals will disappear. Pent-up demand will burst forth in another few months. Buyers, pull out your checkbooks and get onboard now while the market has leveled.
There's a reason they call it a buyer's market.
Why aren't the builders fearful? Job growth. You have to live somewhere. Workers will purchase or rent one of the new residences under construction.
By M. Anthony Carr
Why aren't builders running scared? Because the underlying principles of a good market remain sound despite scurrying potential buyers who are afraid of buying at the height of the market. Although nationally the industry has cooled to "more sustainable levels," the Bureau of Labor Statistics "reports strong job gains in many of the fastest-growing states, with 37 states exceeding their pre-recession peak levels of employment in 2005," according to the National Association of Home Builders (NAHB).
A cooling of the market this year still will result in the third-highest level of housing starts in the past few years, the builders association says in a midyear housing report released recently on its real estate trends Web site (www.HousingEconomics.com).
That's why you keep seeing building projects going up. Not as many houses are being constructed as were last year, to be sure, but the NAHB report points to several positive market growth indicators in various regions across the country.
Job growth is continuing upward. Unemployment is dropping. Businesses
continue to expand, and economists across the country continue to estimate that the need for more housing will stretch beyond the current inventory surplus.
The National Association of Realtors is holding to projections of 2006 being another very strong year -- the third-highest on record.
NAHB members are still bullish on the housing market.
What we're seeing, it seems, is a transition year. People who have no choice but to buy because of social or lifestyle reasons -- the birth of a baby, marriage, retirement, in-laws moving in, job relocation -- will buy now and unwittingly pick up a great deal.
Buyers who are too skittish about the market will miss a finance-boosting opportunity. In markets that have normalized -- Washington, Miami, Chicago and Phoenix -- buyers who buy based on rock-hard economic evidence will be excited in a few years to realize they bought a house low and stand to earn a handsome profit.
Ask anyone in the Washington area if he or she would have bought a lot of property in 1990 -- the last time the market took a timeout -- and held it until today. Everyone would grin. At that time, the average home price was about $179,000. Prices were dropping, and the job market was faltering. Today, housing prices are up by 4 percent over last year, employment is up by nearly 64,000 jobs compared to a year ago, and the job market is still chugging along.
Home sales have leveled off, and rentals are skyrocketing. I smell opportunity.
We have 20 percent more jobs headed this way in the next four years compared to job growth over the previous four years, according to the George Mason University Center for Regional Analysis. That's 256,000 jobs. While other areas may not be as robust, they still are growing. If the new employees don't buy houses, they'll rent. That's causing pressure on rents as they begin growing nationally at a double-digit rate for some areas.
M/PF YieldStar, a real estate market intelligence firm, estimates that 2006 and 2007 will be boom years for rental markets and multifamily housing starts. Occupancy rates surpassed an average 95 percent mark in the fourth quarter of 2005 for the 57 metropolitan areas the group tracks.
The real item for buyers to watch is interest rates. As buyers keep waiting for prices to "bottom out," their buying power evaporates with the ever-growing interest rates. Just a year ago, a household with an income of $100,000 could afford a house in the $450,000 price range. Today, the home price that same income can finance has dropped to about $394,000 simply because of interest rate increases. Experts are talking about interest rates hitting the 7 percent mark before the end of the year.
In addition, as jobs keep growing, rentals will disappear. Pent-up demand will burst forth in another few months. Buyers, pull out your checkbooks and get onboard now while the market has leveled.
There's a reason they call it a buyer's market.
Why aren't the builders fearful? Job growth. You have to live somewhere. Workers will purchase or rent one of the new residences under construction.
Market Slow, but Values Hold
Washington Times, July 28, 2006
By Chris Sicks
Last month, the Washington metropolitan real estate market felt like the Twilight Zone. It was 1998 all over again, as sellers sat and waited months to sell their homes and buyers took their time to make their selections.
Sales chances were only 18 percent in the metropolitan area -- exactly where we were in June 1998. We are back in that place because the ratio of inventory to sales was the same last month as it was eight years ago.
Dividing sales figures for the month by the inventory on the last day of the month results in a percentage that I call "sales chances." A figure below 20 percent indicates a buyer's market. Higher figures mean we're in a balanced market or a seller's market.
Almost every market in the region was a buyer's market last month, as home shoppers enjoyed the abundance of homes for sale and the time to think through their decisions.
There were 48,000 homes to choose from on a given day in June -- the highest inventory ever recorded in our area. Yet only 8,500 homes were sold in June, down 34 percent compared to June 2005.
Homes are selling much more slowly than they did last year, but not as slowly as they did in 1998. I don't know if it will lift the spirits of area sellers, but homes were selling more slowly eight years ago.
For instance, homes sold last month in the District had been on the market for 49 days. Those in June 1998 took 158 days to sell. Almost every home in the region took more than 100 days to sell eight years ago.
Still, 40 to 50 days must seem like an eternity now, considering that homes were selling twice as fast last year.
Despite the slow sales, homes in the region have retained the value they gained during the fast-paced seller's market of 2000-2005.
In some counties, sales prices are down by a thousand or two compared to last June, but, in most jurisdictions, prices are actually up a bit over last year.
By Chris Sicks
Last month, the Washington metropolitan real estate market felt like the Twilight Zone. It was 1998 all over again, as sellers sat and waited months to sell their homes and buyers took their time to make their selections.
Sales chances were only 18 percent in the metropolitan area -- exactly where we were in June 1998. We are back in that place because the ratio of inventory to sales was the same last month as it was eight years ago.
Dividing sales figures for the month by the inventory on the last day of the month results in a percentage that I call "sales chances." A figure below 20 percent indicates a buyer's market. Higher figures mean we're in a balanced market or a seller's market.
Almost every market in the region was a buyer's market last month, as home shoppers enjoyed the abundance of homes for sale and the time to think through their decisions.
There were 48,000 homes to choose from on a given day in June -- the highest inventory ever recorded in our area. Yet only 8,500 homes were sold in June, down 34 percent compared to June 2005.
Homes are selling much more slowly than they did last year, but not as slowly as they did in 1998. I don't know if it will lift the spirits of area sellers, but homes were selling more slowly eight years ago.
For instance, homes sold last month in the District had been on the market for 49 days. Those in June 1998 took 158 days to sell. Almost every home in the region took more than 100 days to sell eight years ago.
Still, 40 to 50 days must seem like an eternity now, considering that homes were selling twice as fast last year.
Despite the slow sales, homes in the region have retained the value they gained during the fast-paced seller's market of 2000-2005.
In some counties, sales prices are down by a thousand or two compared to last June, but, in most jurisdictions, prices are actually up a bit over last year.
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