Friday, June 10, 2005

The Cable Guy Could Be Costing You $8,000 in Buying Power

Housing sales prices keep breaking records quarter after quarter on a national level. The Office of Federal Housing Enterprise Oversight released the 2005 first quarter numbers, showing a 12.5 percent increase in home prices over the same period 2004 first quarter. That's the highest jump in prices since third quarter 2004 -- which presented the highest quarterly jump in more than 25 years.

The National Association of Realtors® confirmed the high-price index recently with its existing-home sales index hitting a record high in April, "defying expectations of a modest slowing trend in 2005," according to its website.

"Single-family home sales rose 4.5 percent in April to a record seasonally adjusted annual rate of 6.28 million from a level of 6.01 million in March. Last month's sales activity was 5.0 percent above the 5.98 million-unit pace in April 2004. The median single-family home price was $203,800 in April, up 15.1 percent from a year earlier," according to the site.

The cost of housing has always reflected the largest output of investment for most taxpayers. Income has not kept pace with the price of housing in many metropolitan areas, putting pressure on mortgage providers to find even more creative programs so that purchaser can buy homes that were once financially out of reach.

The fastest growing mortgage product today is the interest-only adjustable rate mortgage. It starts with a low interest rate AND the consumer has to pay back only the interest on the loan -- hanging their equity growth hopes on inflation, rather than pay down of the loan.

As home prices increase, purchasers are seeking for the ever-elusive low-payment mortgage. Even with low interest rate, low payment mortgages -- it's hard to make even that payment work. Or is it?

I have found with many buyers and readers, it's not about whether you can qualify to purchase a high-priced home, it's the comfort level of the move up in your mortgage payment. You can always go with an interest only or the revived 40-year mortgages to push down the price -- or you can start tightening the belt and develop a real, livable spending plan. A savings of a few hundred dollars per month dedicated to your housing payment can make the difference in so many ways.

For instance, $100 per month in today's low-interest mortgage programs, represents buying power of $17,135 in a mortgage payment (30-year fixed, 5.75 percent). While that might not sound like a lot, buyers have a threshold of financial pain, as it were, and it starts happening in $5,000 increments.

"I don't have a problem with a $300,000 mortgage, but I just can't see going up to $305,000 or $310,000," they'll say -- but then, they'll hang on to the $130 cable payment -- a payment which could be converted into more than $22,000 worth of buying power at 5.75 percent interest.

It's the payment that scares people. With taxes and insurance, a $322,000 mortgage at that interest rate can eek over the $2,000 mark. Which, I might add, seems to be the new threshold of pain for homeowners. I remember when people used to think $1,200 per month was ludicrous in the home buying scenario -- now, many homebuyers would give their right pinky to have such a "low" payment.

It's rare to find the homeowner who will actually borrow as much as the mortgage guy tells them they can qualify to borrow. "What? Borrow a mortgage up to $2,500 per month? Are you crazy?"

Nevertheless -- what's keeping you from purchasing your dream home? Is it the cable guy? Or some other luxury item you just can't live without?

Below, I've calculated some monthly payment items we find ourselves with and what they could purchase in regards to buying power if you were to cancel them and put them to work for you in your dream home. (While you may not be able to cancel all the services below -- you could reduce your output so your budget could reflect more real estate buying power.)

Premium Channel Cable TV: $100/month = $17,135

Lawn service: $60/month = $10,281

Cell phone (2,500 minutes family plan): $150/month = $25,703

Dinner Out ($50/week): $200/month = $34,271
With these items budgeted out or reduced, a purchaser would have up to $87,390 in purchasing power -- equaling $510 per month in extra cash to throw at a mortgage payment instead of modern-day comforts/wants. There are plenty of items you could find in your own budget that would increase your buying power.

Another thing to keep in mind about mortgage payments -- the average consumer hangs on to the mortgage for about 5 years, thus you're not making a permanent decision, it will more than likely change in the near future. And also, most household incomes increase over the years, thus, what is expensive today could be come a more palatable item to pay for in the future. Finally, real estate has consistently beat inflation and the stock market over the years -- the extra cash you throw toward it has proven to pay for itself over the years.

Published: June 10, 2005

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