Washington Times, January 26, 2007
By Henry Savage
Q: I have a $275,000 mortgage with a fixed rate of 6 percent. I also have about $35,000 in credit card debt that I used to purchase a time share. Our home is worth at least $400,000. Although I won't be paying any interest on the credit card debt for another two months, I'm wondering if I should refinance and roll the credit card debt into the loan. Is it wise to eat up home equity to pay off credit cards? Thanks in advance for your comments.
A: As with almost anything in this world, there are good ways and not so good ways to do things. Let's use your dilemma to illustrate what I mean. I believe that no matter how much juggling one may do to remain in the oft-seen "introductory teaser" rates offered by many credit card companies, they usually stick you eventually with some pretty high rates. You are far more likely to find lower mortgage rates for your $35,000. Also, remember that mortgage interest is tax deductible in most cases, while credit card interest is not.
Having said that, it would appear that I am endorsing a refinance to eliminate the credit card debt. Well, I am. Sort of. Financial responsibility must come into play. The biggest problem I see with folks transferring high credit card debt to their mortgage is the tendency to jack their credit cards back up after the refinance. The last thing you would want to do is give up $35,000 of equity in order to bring the consumer debt to zero, just to charge up the cards again. Be disciplined. A $35,000 credit card balance may require a minimum payment of $1,000. A new mortgage with an extra $35,000 might increase the payment by only $200. This $800 in extra
cash flow should help ensure that all credit cards are paid in full every month.
Another thing to remember is that if you refinance to a 30-year fixed rate, the $35,000 is amortized over 360 months. Without making extra principal payments, you will be paying a lot
more interest over the life of the loan. This issue comes up from time to time from folks who ask me if it makes sense to roll an auto loan into a mortgage. The overall monthly obligations will be considerably lower because most auto loans carry terms of five years or less. Spreading it out over 30 years means that the vehicle will be long gone well before the debt that financed it is retired.
The bottom line is this: If you convert $35,000 into long-term mortgage debt, the extra cash should be used in a positive way. Invest it, add it to a retirement fund or make extra payments to the principal balance of the mortgage. Any of these options is good. What you don't want to do is squander it.
If you are, indeed, financially disciplined, the next issue to tackle in deciding whether to refinance is to look at the current interest rates and compare them with your existing rate. A 30-year fixed-rate loan is hovering around 6 percent with no points. Typical closing costs might fall in the range of $3,000.
Taking this deal would keep your rate the same and convert what eventually will be high-interest credit card debt to 6 percent tax-deductible money. This sounds good, but paying $3,000 in closing costs makes the deal questionable.
Another option might be to take out a fixed-rate second trust. You might find a rate in the mid-7s with little or no closing costs. This is probably a better option. If interest rates fall just a little bit in the coming months, you can consolidate the first and second trust at 6 percent or lower with little or no closing costs. If rates don't fall, the $35,000 is locked at a tax-deductible rate that is sure to be lower than the typical rates charged by credit card companies. A good loan officer should be able to get some more details and outline a recommended plan.
28 January 2007
12 January 2007
APR a Poor Indicator of Interest Rate
Washington Times, January 12, 2007
By Henry Savage
The slight drop in long-term mortgage rates over the last few weeks has raised my hopes that rates will continue to ease throughout 2007. If this happens, the savvy-minded American homeowners are sure to line up for refinancing deals that will lower their interest rate.
I want to warn folks who are considering shopping for interest rates by comparing the Annual Percentage Rate (APR). I've written about this subject many times before, as the subject warrants plenty of attention. The bottom line is simple. The assumptions that go into calculating the APR are wrong in almost every instance.
The APR is supposed to give the consumer an idea of the true cost of the mortgage,
expressed as an interest rate, after closing costs, points and other transactional fees are considered.
For example, my often-touted "zero-cost" refinancing might carry an interest rate of 6.25 percent for a 30-year fixed rate. With zero-cost refinancing, there are no fees or points charged to the borrower. Instead, the rate is slightly higher. Since there are no costs associated with obtaining the loan, the APR on a zero-cost refinancing loan is equal to the note rate -- 6.25 percent.
Let's look at a "bought down" rate of 5.50 percent. As of this writing, one might be
charged 2 points, plus the typical transaction fees. Since 1 point is equal to 1 percent of the loan amount, the points alone would total $6,000 on a typical $300,000 loan balance. Other closing costs, such as appraisal fees, title insurance, recording fees, and attorney settlement charges might total an additional $3,400, making the total nonrefundable costs for a 5.50 percent rate $9,400.
Which is better -- the 6.25 percent rate with no fees or the 5.50 percent rate with $9,400 in sunken costs? Most would agree that the answer depends upon how long you hold the loan, which is exactly correct.
I pulled up my mortgage software and calculated the APR on both loans. As expected, the APR came out at 6.25 percent on the no-cost deal. The APR on the 5.50 percent loan came out at 5.703 percent.
Does this mean you should take the low-rate, high-cost deal? Sure, as long as you are certain you will hold the loan for the entire 30-year term. This is where the APR should be thrown out the window. The APR makes the terrible assumption that the borrower will hold the loan until it is paid off in 30 years. It just doesn't happen very often. People either sell their home or, more likely, take advantage of a drop in rates and refinance sometime within 30 years. Early payoff points and fees jack up the APR.
My mortgage software let me use the same fees and the same rate of 5.50 percent, but change the term from 30 years to 10 years. The APR bounced up to 5.990 percent. When I changed the term to five years, which is much closer to the average time a loan is
held, the APR shot up to almost 6.50 percent.
The bottom line: Paying fees and points to the bank in order to obtain a lower interest rate is akin to a layaway plan. If you still have the same loan in about 10 years, then perhaps you will have recouped the upfront fees in the form of a lower payment. But if, for whatever reason, you pay the loan off any earlier than the recoup point, you've lost money. Stick with a refinancing loan that carries little or no costs.
By Henry Savage
The slight drop in long-term mortgage rates over the last few weeks has raised my hopes that rates will continue to ease throughout 2007. If this happens, the savvy-minded American homeowners are sure to line up for refinancing deals that will lower their interest rate.
I want to warn folks who are considering shopping for interest rates by comparing the Annual Percentage Rate (APR). I've written about this subject many times before, as the subject warrants plenty of attention. The bottom line is simple. The assumptions that go into calculating the APR are wrong in almost every instance.
The APR is supposed to give the consumer an idea of the true cost of the mortgage,
expressed as an interest rate, after closing costs, points and other transactional fees are considered.
For example, my often-touted "zero-cost" refinancing might carry an interest rate of 6.25 percent for a 30-year fixed rate. With zero-cost refinancing, there are no fees or points charged to the borrower. Instead, the rate is slightly higher. Since there are no costs associated with obtaining the loan, the APR on a zero-cost refinancing loan is equal to the note rate -- 6.25 percent.
Let's look at a "bought down" rate of 5.50 percent. As of this writing, one might be
charged 2 points, plus the typical transaction fees. Since 1 point is equal to 1 percent of the loan amount, the points alone would total $6,000 on a typical $300,000 loan balance. Other closing costs, such as appraisal fees, title insurance, recording fees, and attorney settlement charges might total an additional $3,400, making the total nonrefundable costs for a 5.50 percent rate $9,400.
Which is better -- the 6.25 percent rate with no fees or the 5.50 percent rate with $9,400 in sunken costs? Most would agree that the answer depends upon how long you hold the loan, which is exactly correct.
I pulled up my mortgage software and calculated the APR on both loans. As expected, the APR came out at 6.25 percent on the no-cost deal. The APR on the 5.50 percent loan came out at 5.703 percent.
Does this mean you should take the low-rate, high-cost deal? Sure, as long as you are certain you will hold the loan for the entire 30-year term. This is where the APR should be thrown out the window. The APR makes the terrible assumption that the borrower will hold the loan until it is paid off in 30 years. It just doesn't happen very often. People either sell their home or, more likely, take advantage of a drop in rates and refinance sometime within 30 years. Early payoff points and fees jack up the APR.
My mortgage software let me use the same fees and the same rate of 5.50 percent, but change the term from 30 years to 10 years. The APR bounced up to 5.990 percent. When I changed the term to five years, which is much closer to the average time a loan is
held, the APR shot up to almost 6.50 percent.
The bottom line: Paying fees and points to the bank in order to obtain a lower interest rate is akin to a layaway plan. If you still have the same loan in about 10 years, then perhaps you will have recouped the upfront fees in the form of a lower payment. But if, for whatever reason, you pay the loan off any earlier than the recoup point, you've lost money. Stick with a refinancing loan that carries little or no costs.
Regional Analysis Promising for Market
Washington Times, January 12, 2007
By Chris Sicks
A reader wrote to me last week, challenging some of my recent columns. I have written several times about the 2007 Washington real estate market, quoting sources who believe it will be a good year. It surely won't be anything like the incredible seller's market of 2000-2005, but there are indications that this could be a healthy year for real estate.
This reader disagrees: "What things are pointing to a decent or strong 2007? What has changed that makes 2007 look better? Please report the facts and not a Realtor agenda -- do you profit for writing this inaccurate column?" Ouch.
Let's look at some data from the George Mason University Center for Regional analysis. These folks have studied the region's economy for years. They are good at it. And they are the ones who predict that sales volume will fall back to the level of 1998-1999, yet home prices will rise 2 to 5 percent this year.
What gives them the confidence to make such a prediction, considering how prices have fallen in recent months? Well, they know this economy, that's what. They know that employment is one of the most significant factors in any regional economy, and this region leads the nation in that category.
Take a look at the chart at left showing how many jobs have been added to the nation's 15 largest metropolitan areas. Who's at the top? The Washington area. Those 359,000 new jobs from 2000-2005 had a lot to do with the hot real estate market during those years.
Then, take a look at the unemployment rates for those 15 markets in October 2006. Which metropolitan area has the lowest unemployment? The Washington area. So, not only are we adding tons of jobs to our local economy, we aren't attracting workers
fast enough to fill those jobs.
Finally, I should point out that the kind of new jobs this region is generating are largely in the area of professional and business services. Of the 65,100 new jobs created between October 2005 and October 2006, 30,000 were in this sector, where workers are well-paid. Many of those workers can afford this area's expensive homes.
Taken together, all these bits of data tell me that we have one of the nation's healthiest local economies. Although it will be quite a while before we see the kind of seller's market that ended in 2005, the strength of this region's economy means that we are likely to see an active, profitable real estate market in 2007 and beyond.
By Chris Sicks
A reader wrote to me last week, challenging some of my recent columns. I have written several times about the 2007 Washington real estate market, quoting sources who believe it will be a good year. It surely won't be anything like the incredible seller's market of 2000-2005, but there are indications that this could be a healthy year for real estate.
This reader disagrees: "What things are pointing to a decent or strong 2007? What has changed that makes 2007 look better? Please report the facts and not a Realtor agenda -- do you profit for writing this inaccurate column?" Ouch.
Let's look at some data from the George Mason University Center for Regional analysis
What gives them the confidence to make such a prediction, considering how prices have fallen in recent months? Well, they know this economy, that's what. They know that employment is one of the most significant factors in any regional economy, and this region leads the nation in that category.
Take a look at the chart at left showing how many jobs have been added to the nation's 15 largest metropolitan areas. Who's at the top? The Washington area. Those 359,000 new jobs from 2000-2005 had a lot to do with the hot real estate market during those years.
Then, take a look at the unemployment rates for those 15 markets in October 2006. Which metropolitan area has the lowest unemployment? The Washington area. So, not only are we adding tons of jobs to our local economy, we aren't attracting workers
fast enough to fill those jobs.
Finally, I should point out that the kind of new jobs this region is generating are largely in the area of professional and business services. Of the 65,100 new jobs created between October 2005 and October 2006, 30,000 were in this sector, where workers are well-paid. Many of those workers can afford this area's expensive homes.
Taken together, all these bits of data tell me that we have one of the nation's healthiest local economies. Although it will be quite a while before we see the kind of seller's market that ended in 2005, the strength of this region's economy means that we are likely to see an active, profitable real estate market in 2007 and beyond.
N.Va. Real Estate Prices Hold Steady in 2006
Arlington Sun-Gazette, January 11, 2007
by SCOTT McCAFFREY
The Northern Virginia real estate market in 2006 suffered through its second-worst decline in sales in the past 30 years, yet still managed to post an average sales price that was higher - if only marginally so - that the year before.
The Northern Virginia Association of Realtors on Jan. 10 reported that sales for the year totaled 20,753, down 29.1 percent from the 29,235 sales recorded a year before and off more than 36 percent from the all-time record sales pace reported in 2004.
Total yearly sales in 2006 were the lowest since 1997, when the region was emerging from its last real estate slump. And 2006's percentage drop from the year before was the worst since 1991, when sales dropped 32.3 percent from 1990 figures.
(The reported total includes sales from the inner suburbs of Arlington and Fairfax counties and the cities of Alexandria, Fairfax and Falls Church.)
While the average sales prices of homes ebbed and flowed throughout 2006, the final figure was up ever so slightly from a year before, setting an all-time record of $537,741. That increase of 0.12 percent breaks a five-year string of double-digit growth in average sales prices, and is the lowest since the market recorded a decline in average prices in 1992.
All told, the sales volume across the inner suburbs totaled $11.16 billion, down from a record $15.7 billion recorded in 2005. But - and it's an important one - that 2006 volume was nearly identical to the volume recorded in 2003, in the heat of the Northern Virginia real estate bull market.
Margaret Ireland, president of the Northern Virginia Association of Realtors, said the market sluggishness that descended in 2006 was inevitable, since Northern Virginia's real estate sales had been roaring along for more than six years.
“Buyers in Northern Virginia had been in sprint-mode for a long time - they had to hit the wall eventually, and they did,” Ireland said at a December forum on the state of the market.
Homeowner in it for the long haul have made out all right. At the December forum, NVAR officials pointed to the case of a typical home, purchased in January 2001 for $269,819. That home's potential sales price peaked last summer at $578,689, then slid down more than $55,000 over the last six months of the year - but the homeowner could still likely sell the home for nearly double what it was purchased for.
“Buyers must focus on the long-term appreciation,” Ireland said. “They can be confident that if they plan to stay in their homes for three or more years, their home's value will build and grow.”
At the end of the 2006, there were 7,205 homes on the market across the inner suburbs, up 27.3 percent from a year before. That's a significantly higher number of homes, it appears that the big build-up in inventory that occurred in 2006 is beginning to ebb.
In the broader Northern Virginia market, trends were roughly the same as in the inner suburbs.
Home sales totaled 35,487 for the year, down 33.8 percent. But the average sales price rose 1.2 percent, to $503,855.
Total sales volume for the year across the broader market was $17.88 billion, down from $26.69 billion a year before.
(The broader market includes all of the inner suburbs, plus Prince William and Loudoun counties and other jurisdictions deeper out in the rapidly populating Virginia countryside.)
In the broader market, there were 16,111 active listings at the end of December, up 28.3 percent from a year before.
Sales figures include most, but not all, homes sold during the period. All figures are preliminary, and are subject to revision.
by SCOTT McCAFFREY
The Northern Virginia real estate market in 2006 suffered through its second-worst decline in sales in the past 30 years, yet still managed to post an average sales price that was higher - if only marginally so - that the year before.
The Northern Virginia Association of Realtors on Jan. 10 reported that sales for the year totaled 20,753, down 29.1 percent from the 29,235 sales recorded a year before and off more than 36 percent from the all-time record sales pace reported in 2004.
Total yearly sales in 2006 were the lowest since 1997, when the region was emerging from its last real estate slump. And 2006's percentage drop from the year before was the worst since 1991, when sales dropped 32.3 percent from 1990 figures.
(The reported total includes sales from the inner suburbs of Arlington and Fairfax counties and the cities of Alexandria, Fairfax and Falls Church.)
While the average sales prices of homes ebbed and flowed throughout 2006, the final figure was up ever so slightly from a year before, setting an all-time record of $537,741. That increase of 0.12 percent breaks a five-year string of double-digit growth in average sales prices, and is the lowest since the market recorded a decline in average prices in 1992.
All told, the sales volume across the inner suburbs totaled $11.16 billion, down from a record $15.7 billion recorded in 2005. But - and it's an important one - that 2006 volume was nearly identical to the volume recorded in 2003, in the heat of the Northern Virginia real estate bull market.
Margaret Ireland, president of the Northern Virginia Association of Realtors, said the market sluggishness that descended in 2006 was inevitable, since Northern Virginia's real estate sales had been roaring along for more than six years.
“Buyers in Northern Virginia had been in sprint-mode for a long time - they had to hit the wall eventually, and they did,” Ireland said at a December forum on the state of the market.
Homeowner in it for the long haul have made out all right. At the December forum, NVAR officials pointed to the case of a typical home, purchased in January 2001 for $269,819. That home's potential sales price peaked last summer at $578,689, then slid down more than $55,000 over the last six months of the year - but the homeowner could still likely sell the home for nearly double what it was purchased for.
“Buyers must focus on the long-term appreciation,” Ireland said. “They can be confident that if they plan to stay in their homes for three or more years, their home's value will build and grow.”
At the end of the 2006, there were 7,205 homes on the market across the inner suburbs, up 27.3 percent from a year before. That's a significantly higher number of homes, it appears that the big build-up in inventory that occurred in 2006 is beginning to ebb.
In the broader Northern Virginia market, trends were roughly the same as in the inner suburbs.
Home sales totaled 35,487 for the year, down 33.8 percent. But the average sales price rose 1.2 percent, to $503,855.
Total sales volume for the year across the broader market was $17.88 billion, down from $26.69 billion a year before.
(The broader market includes all of the inner suburbs, plus Prince William and Loudoun counties and other jurisdictions deeper out in the rapidly populating Virginia countryside.)
In the broader market, there were 16,111 active listings at the end of December, up 28.3 percent from a year before.
Sales figures include most, but not all, homes sold during the period. All figures are preliminary, and are subject to revision.
08 January 2007
The Tide Is Turning
Washington Post, January 6, 2007
By Kenneth R. Harney
What's the shape of a post-bubble, post-correction real estate market? And more to the point: What does that mean for you?
Those questions are becoming increasingly relevant as the latest sales data show a small but unmistakable uptick in activity and declining unsold inventories. In late December, the National Association of Realtors reported that existing home sales were up by a hair in November, 0.6 percent, the second straight month of modest increases off the cyclical trough in September.
That same week, the Commerce Department reported that sales of new houses rose 3.4 percent in November over the prior month, while builders' unsold inventories dropped.
All of which suggests that the 18-month market correction that followed the four-year housing boom has just about run its course. From a national statistical perspective, we're somewhere near slack tide -- but no one's looking for another frothy high tide anytime soon.
Some local markets are moving contrary to the relatively flat national trend. Three dozen metropolitan areas -- primarily markets with moderate prices and solid employment growth -- were still racking up low double-digit house price inflation at the end of the third quarter of 2006, according to federal data. Dozens of others, primarily where unemployment has been a persistent and increasing economic drag, showed continued signs of modest deflation in home values, according to the same data.
In the main, however, the housing market appears to have weathered the correction phase of the cycle without the blood running in the streets that some bubble-bust bears had forecast. Median prices of resale houses have fallen 3.6 percent nationally year to year, and anecdotal reports of 10 percent to 20 percent asking-price reductions in formerly hyperinflated markets are commonplace. But that's what corrections are all about, as opposed to outright busts.
Moderate price cuts also eventually stimulate buyers who had been sitting on the sidelines wondering when the market might bottom out to wade back in and start shopping. That's where we appear to be at the moment, and where we are headed in 2007, absent unexpected economic jolts to the global capital markets that could send mortgage rates spiking. In that event, all bets are off.
So what are smart strategies in a slowly recovering real estate environment?
One good rule: Think baby steps instead of big leaps. Sellers shouldn't assume that with the trend turning positive they can suddenly price their house for what they might have commanded in early 2005. Forget about it. In most places, buyers still have the upper hand. There's plenty of inventory to choose from; shoppers are picky; and unrealistic pricing is a guaranteed route to sitting dead in the water for months, unvisited and unsold. Be real on pricing. And be happy there are buyers out there again.
On the other hand, smart shoppers should recognize that the game is changing, the spring buying season is just on the horizon and lobbing lowball offers at already marked-down properties isn't a winning strategy. If you are seriously in the market, be prepared to pay a price that may not be as low as you had hoped, but that just might be your last shot at a particular house before it sells for closer to the asking price a few weeks from now.
Shoppers also need to understand that today's prevailing mortgage rates -- a little above 6 percent for 30-year money, and the high-5 percent range for 15-year loans -- are less than a point above 40-year lows. They won't be around indefinitely, so a fairly priced house combined with a low-cost mortgage adds up to a potentially great deal.
A second essential for the emerging market: Smart buyers and sellers need to be well-informed. They need to plug themselves into all the key local information that shapes pricing and dealmaking: time on the market, inventory declines and increases, the overall pace of sales, and the average gap between asking prices and closing prices. Be in command of these numbers and you will be well equipped to play heads-up ball, whether as buyer or seller.
A lot of these numbers are available online and offline from real estate Web sites, regional or local multiple listing services, Realtor associations, and mortgage lenders and brokers. It's also available person-to-person from the front-line experts on any given micro-market: the real estate agents who work in specific neighborhoods or market segments. They make their living, in up cycles and down, by listing, selling and thoroughly knowing what's happening inside their target areas.
Better yet: There are no commissions for information from these specialists. All you need to do is show that you're serious and you can compile a lot of valuable market intelligence for free.
By Kenneth R. Harney
What's the shape of a post-bubble, post-correction real estate market? And more to the point: What does that mean for you?
Those questions are becoming increasingly relevant as the latest sales data show a small but unmistakable uptick in activity and declining unsold inventories. In late December, the National Association of Realtors reported that existing home sales were up by a hair in November, 0.6 percent, the second straight month of modest increases off the cyclical trough in September.
That same week, the Commerce Department reported that sales of new houses rose 3.4 percent in November over the prior month, while builders' unsold inventories dropped.
All of which suggests that the 18-month market correction that followed the four-year housing boom has just about run its course. From a national statistical perspective, we're somewhere near slack tide -- but no one's looking for another frothy high tide anytime soon.
Some local markets are moving contrary to the relatively flat national trend. Three dozen metropolitan areas -- primarily markets with moderate prices and solid employment growth -- were still racking up low double-digit house price inflation at the end of the third quarter of 2006, according to federal data. Dozens of others, primarily where unemployment has been a persistent and increasing economic drag, showed continued signs of modest deflation in home values, according to the same data.
In the main, however, the housing market appears to have weathered the correction phase of the cycle without the blood running in the streets that some bubble-bust bears had forecast. Median prices of resale houses have fallen 3.6 percent nationally year to year, and anecdotal reports of 10 percent to 20 percent asking-price reductions in formerly hyperinflated markets are commonplace. But that's what corrections are all about, as opposed to outright busts.
Moderate price cuts also eventually stimulate buyers who had been sitting on the sidelines wondering when the market might bottom out to wade back in and start shopping. That's where we appear to be at the moment, and where we are headed in 2007, absent unexpected economic jolts to the global capital markets that could send mortgage rates spiking. In that event, all bets are off.
So what are smart strategies in a slowly recovering real estate environment?
One good rule: Think baby steps instead of big leaps. Sellers shouldn't assume that with the trend turning positive they can suddenly price their house for what they might have commanded in early 2005. Forget about it. In most places, buyers still have the upper hand. There's plenty of inventory to choose from; shoppers are picky; and unrealistic pricing is a guaranteed route to sitting dead in the water for months, unvisited and unsold. Be real on pricing. And be happy there are buyers out there again.
On the other hand, smart shoppers should recognize that the game is changing, the spring buying season is just on the horizon and lobbing lowball offers at already marked-down properties isn't a winning strategy. If you are seriously in the market, be prepared to pay a price that may not be as low as you had hoped, but that just might be your last shot at a particular house before it sells for closer to the asking price a few weeks from now.
Shoppers also need to understand that today's prevailing mortgage rates -- a little above 6 percent for 30-year money, and the high-5 percent range for 15-year loans -- are less than a point above 40-year lows. They won't be around indefinitely, so a fairly priced house combined with a low-cost mortgage adds up to a potentially great deal.
A second essential for the emerging market: Smart buyers and sellers need to be well-informed. They need to plug themselves into all the key local information that shapes pricing and dealmaking: time on the market, inventory declines and increases, the overall pace of sales, and the average gap between asking prices and closing prices. Be in command of these numbers and you will be well equipped to play heads-up ball, whether as buyer or seller.
A lot of these numbers are available online and offline from real estate Web sites, regional or local multiple listing services, Realtor associations, and mortgage lenders and brokers. It's also available person-to-person from the front-line experts on any given micro-market: the real estate agents who work in specific neighborhoods or market segments. They make their living, in up cycles and down, by listing, selling and thoroughly knowing what's happening inside their target areas.
Better yet: There are no commissions for information from these specialists. All you need to do is show that you're serious and you can compile a lot of valuable market intelligence for free.
Trend Spotting for 2007
Washington Post, December 30, 2006
By Benny L. Kass
At the end of each year, some people look back, while others look to the future. There's nothing we can do to change 2006, so let's look forward.
What will 2007 hold for American home buyers?
Interest rates: Last December, along with most economic forecasters, I predicted mortgage interest rates would be at least 7 percent by the end of the year. We were wrong. However, I am confident that interest rates will rise as we move into the new year. The state of our economy is still fuzzy, which in my opinion means rates will start rising in the months to come.
Home sales: If you read the newspapers, you know that real estate sales are down, especially for condominium units. Developers who are faced with many unsold units are offering such things as free plasma television sets or free car rentals to lure buyers. However, there are anomalies, especially here in the Washington area. I recently learned of one cooperative apartment that generated five contract offers. That may be unusual in today's marketplace, but it's not unique.
More important, a bunch of new members of Congress (and their staffs) are coming to Washington. That will clearly generate some sales. We all know that when members lose an election, they often stick around to become lobbyists. Thus the new people will be looking for good places to live, and that's good news for this area.
Foreclosures: Unfortunately, too many Americans did not listen when former Fed chairman Alan Greenspan warned against no-money-down, interest-free mortgages. According to the Mortgage Bankers Association, about 4.7 percent of homeowners were late on their mortgage payments in July through September of 2006. This was up slightly from 4.4 percent in the same period for 2005.
If you have an old adjustable-rate mortgage that will adjust soon, you should seriously consider refinancing while rates are still hovering around 6 percent. Furthermore, if you have an "interest free" loan, you should carefully read your mortgage papers. You will learn that your loan includes a variable rate that can adjust on a daily or monthly basis. It also may turn into a fixed-rate loan within the next year or two -- and the rate will be based on the then-current mortgage rate. Be warned and act before it is too late.
Predatory lending: Everyone talks about this problem, but little if any real action has taken place. Low-income consumers are vulnerable to the tactics of some mortgage lenders, especially because they often are unable to get loans from legitimate companies.
Recently, for example, the Montgomery County Council passed a law that would have gone a long way toward assisting consumers, but the Circuit Court ruled the council exceeded its authority and that the law was unconstitutional and unenforceable.
The judge held that only the Maryland legislature was able to enact such a law. So, when will that body tackle a problem faced throughout the state -- in Baltimore City as well as Prince George's and Montgomery counties?
And when will Virginia and the District address predatory lending? While hopes are high, expectations are low. Consumers do not have the same legislative muscle that mortgage lenders have.
RESPA violations: The Real Estate Settlement Procedures Act prohibits kickbacks between service providers, including mortgage lenders, title companies and lawyers. Recently, it appears there has been a growing trend toward enforcing this law. Consumers pay good money to purchase their houses; kickbacks add to these costs. Prospective home buyers shouldn't just go to a lender or a title company recommended by their real estate agent without shopping around. Often, selecting your own lender or title company will save you money.
New-home sales contracts: If you decide to buy a newly constructed house, the builder will present you with a form contract. In the past few years, when sales were strong, it was take it or leave it. Unfortunately, too many of these contracts are one-sided in favor of the seller. Now that the market has cooled, you should carefully read the contract and consult your legal and financial advisers before purchasing. Builders want to sell, which means their form contracts now can -- and should -- be negotiated so that you get the best terms possible.
For example, many such contracts do not have a fixed time as to when settlement will take place. In recent years, many potential home buyers have been faced with extraordinary delays, because the builder was unable to deliver the house on a timely basis.
This can be a problem, especially when interest rates may rise. You may have thought you could get a low 6 percent loan, but by the time the house is ready for settlement, interest rates might be much higher -- and obviously even if you can afford the new loan, it will crimp your finances.
Insist on a specific time for delivery with a penalty in case the builder cannot produce on a timely basis.
Loan documents: I repeat my long-standing plea: Lenders, please consolidate your loan documents. Home buyers should not have to sign multiple truth-in-lending statements, affidavits of residency and a host of other documents. In the good old days, we had to sign only three papers -- the settlement statement (called a HUD-1), the promissory note and the deed of trust (the mortgage). Although I may want to look forward, in the case of loan documents, the past was the better course.
By Benny L. Kass
At the end of each year, some people look back, while others look to the future. There's nothing we can do to change 2006, so let's look forward.
What will 2007 hold for American home buyers?
Interest rates: Last December, along with most economic forecasters, I predicted mortgage interest rates would be at least 7 percent by the end of the year. We were wrong. However, I am confident that interest rates will rise as we move into the new year. The state of our economy is still fuzzy, which in my opinion means rates will start rising in the months to come.
Home sales: If you read the newspapers, you know that real estate sales are down, especially for condominium units. Developers who are faced with many unsold units are offering such things as free plasma television sets or free car rentals to lure buyers. However, there are anomalies, especially here in the Washington area. I recently learned of one cooperative apartment that generated five contract offers. That may be unusual in today's marketplace, but it's not unique.
More important, a bunch of new members of Congress (and their staffs) are coming to Washington. That will clearly generate some sales. We all know that when members lose an election, they often stick around to become lobbyists. Thus the new people will be looking for good places to live, and that's good news for this area.
Foreclosures: Unfortunately, too many Americans did not listen when former Fed chairman Alan Greenspan warned against no-money-down, interest-free mortgages. According to the Mortgage Bankers Association, about 4.7 percent of homeowners were late on their mortgage payments in July through September of 2006. This was up slightly from 4.4 percent in the same period for 2005.
If you have an old adjustable-rate mortgage that will adjust soon, you should seriously consider refinancing while rates are still hovering around 6 percent. Furthermore, if you have an "interest free" loan, you should carefully read your mortgage papers. You will learn that your loan includes a variable rate that can adjust on a daily or monthly basis. It also may turn into a fixed-rate loan within the next year or two -- and the rate will be based on the then-current mortgage rate. Be warned and act before it is too late.
Predatory lending: Everyone talks about this problem, but little if any real action has taken place. Low-income consumers are vulnerable to the tactics of some mortgage lenders, especially because they often are unable to get loans from legitimate companies.
Recently, for example, the Montgomery County Council passed a law that would have gone a long way toward assisting consumers, but the Circuit Court ruled the council exceeded its authority and that the law was unconstitutional and unenforceable.
The judge held that only the Maryland legislature was able to enact such a law. So, when will that body tackle a problem faced throughout the state -- in Baltimore City as well as Prince George's and Montgomery counties?
And when will Virginia and the District address predatory lending? While hopes are high, expectations are low. Consumers do not have the same legislative muscle that mortgage lenders have.
RESPA violations: The Real Estate Settlement Procedures Act prohibits kickbacks between service providers, including mortgage lenders, title companies and lawyers. Recently, it appears there has been a growing trend toward enforcing this law. Consumers pay good money to purchase their houses; kickbacks add to these costs. Prospective home buyers shouldn't just go to a lender or a title company recommended by their real estate agent without shopping around. Often, selecting your own lender or title company will save you money.
New-home sales contracts: If you decide to buy a newly constructed house, the builder will present you with a form contract. In the past few years, when sales were strong, it was take it or leave it. Unfortunately, too many of these contracts are one-sided in favor of the seller. Now that the market has cooled, you should carefully read the contract and consult your legal and financial advisers before purchasing. Builders want to sell, which means their form contracts now can -- and should -- be negotiated so that you get the best terms possible.
For example, many such contracts do not have a fixed time as to when settlement will take place. In recent years, many potential home buyers have been faced with extraordinary delays, because the builder was unable to deliver the house on a timely basis.
This can be a problem, especially when interest rates may rise. You may have thought you could get a low 6 percent loan, but by the time the house is ready for settlement, interest rates might be much higher -- and obviously even if you can afford the new loan, it will crimp your finances.
Insist on a specific time for delivery with a penalty in case the builder cannot produce on a timely basis.
Loan documents: I repeat my long-standing plea: Lenders, please consolidate your loan documents. Home buyers should not have to sign multiple truth-in-lending statements, affidavits of residency and a host of other documents. In the good old days, we had to sign only three papers -- the settlement statement (called a HUD-1), the promissory note and the deed of trust (the mortgage). Although I may want to look forward, in the case of loan documents, the past was the better course.
Subscribe to:
Posts (Atom)
