Rates, Not Home Prices, Worst Enemy In Affordability

With all the talk of softening markets, many buyers have moved to the sidelines hoping to wait out high prices, believing that lower prices will help them along the path to homeownership or to move up into the house they really want. Instead of prices, buyers should really keep their eyes on interest rates ? the most powerful component of the home-buying process.

In a nut shell, if you wait for prices to level and drop while interest rates increase -- your ability to purchase that now-affordable home may have just vanished with interest rates running up along side the price drops.

An information sheet came to my desk from a national mortgage company comparing buying power on a household annual income of $100,000 to demonstrate this point and it was quite telling. Now, I know the national median household income is about half that amount, however, the principles are the same of how powerful interest rates affect purchase power.

For instance, in this example, if you?re waiting for prices to drop $50,000 before you buy, hoping to get a better deal ? well, quit waiting. If interest rates increase as the Mortgage Bankers Association of America forecasts, your payment won?t come down with the lower prices. In fact, you may still sit on the sidelines.

MBAA is predicting 6.7 percent rates into next year. Even with that level of increase, historically, that rate is some of the lowest rates you?ll ever see. However, at that amount, the above buyer will only be able to buy about $399,411 worth of house. Last June (just 5 months ago) that same borrower could have borrowed $450,000 at 5.63 percent on a 30-year fixed mortgage. Neither the buyer?s income nor the home price decreased the buyer?s buying power -- just the interest rate.

Here are the nitty gritty details:

The 30-year fixed rate mortgage for $450,000 at 5.63 percent would cost a borrower $2,591.87 per month. For that same borrower waiting for prices to drop, but watching interest rates jump to 6.7 percent, that same $2591.87 will only fund a mortgage of $401,667.91.

If you want to see what that would do in a lower financial stratosphere: let?s say it?s a loan for a $60,000 household budget, instead of $100,000. The purchasing power for this buyer would be roughly $1,550 per month ? that?s a loan for $217,024 at 5.63 percent (including $300 for taxes and insurance). That same money at 6.7 percent will only purchase $193,715 -- a difference of roughly $24,000.

Two words of advice. To those who are thinking about buying -- look at all your options and run your personal numbers. How long can you wait for prices to reduce while interest rates are on the march upward before you?re priced out of your favorite home again. If housing inventory is on the rise in your market area -- then move sooner than later. Smart sellers are willing to negotiate again -- you may be able to get that lower price just by asking for it.

Case in point: Just a couple weeks ago in the D.C. market, a Realtor told me of how he saved his buyers nearly $75,000 from sellers who realized they needed to get going instead of hanging on to their price. In essence, make an offer -- the worst that can happen is the seller will counter your offer or reject it. What is it they say? Nothing ventured ...

Secondly, if you know you?re going to buy -- lock in early and move in on the contract. By locking in you save money by having a lower rate for your mortgage. Some mortgage programs let you lock in for up to 120 days.

Average interest rates have risen by more than half a percentage point in just the last 6 months from 5.62 percent to 6.28 percent, according to Mortgage-x.com?s rate calendar. Depending where rates go, even one month delay in locking in your rate could make a difference of several hundred dollars on your monthly payment.

Published: December 9, 2005

Selling House May Have to Satisfy Three "Buyers"

When placing a house on the market, the seller must remember early and often that there are going to be three "buyers" who must be satisfied with the eventual price of the property. The buyer, appraiser and underwriter must all agree with the price of the house before it can go to settlement (particularly if there is no large down payment involved.) Here's how it happens.

The Buyer
When you go to the grocery store and look at prices of produce, you normally don't walk up to the check out and offer less than what's on the sticker. The eggs are $1 per dozen all day long and most everyone will pay that amount or go without eggs.

In real estate (and other large ticket items), the price is not necessarily what you're going to pay. It's the list price or asking price. While real estate agents may have a handle on if a house is overpriced or under priced, they're not buying the house -- so the real decision maker is the buyers. Thus, the buyers must be convinced that the value of the house is reflected in the price and/or terms.

The smart seller will make sure the price s/he is asking for is as close to the realistic price to draw offers. In particular, in a transitional market or dropping sales price environment -- don't waste time "waiting for the right buyer" to come along and pay your price. Price trending is price trending both ways -- up and down. Thus the smart seller will recognize the trend and move in front of it.

For sellers over the last few years in various markets -- they have had the benefit of price trending upward. Negotiation for buyers kind of went up on its head -- "You want $350,000. What, are you crazy? I'll pay $375,000 and not a dollar less." Of course, they got beat out by the guy willing to pay $400,000 and include a vacation for the sellers.

When a market levels or begins trending downward, get in front of the trend. This is even more important than a market heading upward if you don't want your house sitting on the market. Every week you wait you literally lose money -- sometimes thousands of dollars each week. Don't wait. When prices trend downward, sellers must forget what their neighbor's sales price two months ago -- it has no bearing the day you receive your contract.

Thus the buyer must believe the house is worth the asking price. Next, you have to convince the appraiser.

The Appraiser
Despite what others may say, this is the most important visitor you're going to have come by your house. Sometimes even the appraiser downplays his/her visit to the property. I've had some say, "Oh, don't worry about cleaning up. I'm going to just be a few minutes." Famous last words.

If you have to "wow" the buyer to write a contract, then you better "mesmerize" the appraiser. This is the person who is going to take a first stab and confirming that the seller and buyer have come up with a realistic price for the property.

With a contract price of $351,990 you want an appraisal of $351,990 or higher. If the appraisal is high, it has no bearing on the contract. If the price comes too far below, and the buyer doesn't have enough down payment funds to cover the difference, then the buyer and seller will have to renegotiate who is going to take the financial hit to make the loan work. Is the seller coming down in price, the buyer up in price or are they going to split the difference?

The Underwriter
Finally, you have to satisfy the person in the back office, the underwriter of the mortgage. Underwriters are determining risk factors for the lending company or group of investors. If they underestimate the risk of default on a loan and the buyer defaults on the mortgage in the future, their investors lose or they must sell the loan at a loss. Because of this, while they are not on the street watching housing prices increase, if their analysis demonstrates that the house may not be worth what the contract is asking, they can halt the loan process and the negotiations must begin anew. (By the way, here's an informative, yet, tedious, document from the University of Illinois' business college on the underwriting rules. Click here.)

So, for example, I could love to sell my house for $1 million. The problem is, while I might think it's worth that amount, I keep running into buyers who don't agree. Thus it's worth $1 million in my mind alone. I must satisfy three other people to get my price. In pricing my property, I must keep these three other people in mind if I want my "asking" price to become my "sold" price.

Published: December 2, 2005

Real Estate Bubble Theorists No More Than Squealers

Have you ever squirted a little kid in the back with a stream of cold water on a hot summer day? I've seen this throughout our neighborhood and it's actually sadistically humorous to watch the little tykes squeal and run away from their parental tormentors.

Those who keep whining about the coming "burst" of the "real estate bubble" remind of these squealers. Sometimes I feel like the lone voice of reason crying out in the wilderness.

The real estate bubble naysayers whine about the "bubble" as if the whole national real estate market were nothing more than another over-inflated stock exchange -- like the New York Stock Exchange and Nasdaq. Folks -- it's not. Real estate, like politics, is local and I wish those real estate journalists scaring the buyers with quotes from their stock market experts would just stop what they're doing and consider some real facts.


Fact: The top hot real estate markets in the U.S.A. are also the top hot job markets.

Fact: Houses are where the jobs go at night.

Fact: Without enough houses in a hot job market, your housing inventory will escalate in price.

Fact: There are "pockets" of over inflated real estate

Fact: Unlike the stock market -- you have to live somewhere. Whether renting or buying, there is an automatic necessity for the ownership of real estate -- either by a homeowner or an investor.
There is no built-in necessity for owning stocks, thus all comparisons between the two products is moot.

In the midst of the hot markets across the country (where the squealing is the loudest and most piercing) citizens of those jurisdictions must look to the local economy to determine their risks.

In the Washington, D.C. area, the Northern Virginia Association of Realtors looks at those numbers every single year at its annual Economic Summit held at George Mason University. Unfortunately, most of the press gives it passing coverage -- I think especially this year, because the economists did not fall in line with "the sky is falling" mantra heard by critics of a strong housing market.

The summit was reported on in the trade association's latest monthly publication, The Update. "In a nutshell, you couldn't be in a better market," according to Dr. Stephen Fuller, Director for the Center for Regional Analysis and School of Public Policy at George Mason University. "If you're worried about some bubble, or slow down, or something that's evil, just put yourself in any other market," he said. "They envy us."

To put it bluntly folks, we're going to have a housing problem in the future -- but it's not the bursting kind. It's the "How can I make $60,000 a year and have to live out of the trunk of my car" kind. You see, in the Washington, D.C. area and other hot job market areas, the reason housing is climbing in value is simply because there's not enough of it.

Dr. Fuller reports the regions surrounding Washington, D.C. have done a fantastic job of drawing jobs to the area -- 287,000 in the last five years. However, they have done a sorry job in providing houses for all these people. This year, there's a deficit in housing in this region of 463,300 units. That means that while people can take jobs here, they won't be able to live nearby to work them. They'll have to commute in a couple of hours.

The numbers don't get any better, Fuller says. By 2030, there will be a shortfall of housing units in the Washington, D.C. area of 716,000 units.

Okay, bubble squealers -- where's the bubble?

The vocabulary being used by journalists is leftover from when the stock market inexplicably rose in value when there was no reason but hype driving the market. Companies were raising lots of venture capital and creating products that they couldn't sell, meaning they ate through the borrowed funds and finally burst.

In hot real estate markets, there's no hype. There are real jobs being created by real companies, creating real products and selling them to real consumers. Real money is being made and these real companies need real employees to make it happen -- local governments should wake up and realize that we need real houses to put them into as well. If you want to quell the fear -- build more houses.

Now -- would all the squealers please stop? You're giving me a headache.


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Mr. Carr has covered real estate since 1989. He is the author of Real Estate Investing Made Simple. Got a personal real estate issue? Post your questions and comments at Anthony's blog.

Published: November 25, 2005

Decluttering Before Remodeling Key to Sanity

If you're looking to remodel your house this year, as thousands of Americans do, be sure to look beyond just the color swatches, carpet samples and appliances. Remodeling is more about shoveling out the junk than anything else.

Particularly true is if you're redoing several rooms at the same time. When I finished my basement, a week after preparing for the contractor, I figured out that I had to actually get a storage unit to put all my earthly belongings into. So I visited Fred.

Fred is that quintessential good-guy neighbor that you see on the television programs. He's not perfect, but pretty darn near it. He's the one the wife says, "Go ask Fred, he'll know what to do." So I knew he had recently remodeled some parts of his house for a wedding and I knew he had chucked a lot of stuff and stored the rest, because he had borrowed my truck to do it. (Hmm ? who's the good-guy neighbor, now?)

Talking to Fred, I found where he had a storage unit and turned to go back to the house and call, but Fred kind of grimaced and shook his head. "What?" I asked. "Well, I got that unit and it was supposed to be for just a couple of months. I really need to dump all that stuff -- I've now had it for two years." We stood there and calculated it for him and the reality hit that he could now be the owner of a very nice multimedia center in his basement with the latest in surround sound technology for the price of what he had put out on the storage unit. Guys take note -- when the wife is touting you to get a unit just for a while, you may be kissing what really matters in life, good-bye.

What is this connection we have with stuff? We really have a hard time getting rid of stuff that we've purchased and won't let go. There are a myriad of websites on this topic and now television shows on major cable networks where we sit amid our own clutter, watching a professional team of cleaners, declutter someone else's house (i.e., Clean Sweep, Mission: Organization, etc.).

The best thing about all these resources is that they all have the same process, and as you look at remodeling, you most definitely need to follow their steps. While these programs point at three boxes to label: Keep, Give Away, Toss (or some derivative of the three); that's fine if you're doing one room at a time. When it comes to remodeling your house -- you may need to pull in three crates outside on the lawn to go through all your earthly belongings.

During this declutter/chunk/giveaway process, you may need to bring in some help, as well. A trusted friend may be able to counsel you in what can be kept and what can be given/thrown away. If you treasure your marriage -- this trusted person is not your spouse. Every excuse is used to hang on to an item -- "Aunt Sally gave that to me, God rest her soul," "Oh, Fred's wife wants that, don't throw it out," or "That's for the baby when she grows into it," while all sounding harmless are really lies from the very pit of hell designed to clutter you into oblivion.

On the other hand, if you and your spouse have moved everything from three rooms into the living room, making room for the contractors, painters, etc., the frustration of having dinner every night right next to your bedroom furniture, can sometimes help both of you overcome all objections and begin to give all your earthly belongings to every tax-deduction-giving charity in the region.

There are some wise steps to take, as referenced earlier. I like the way that OrganizedHome.com Editor Cynthia Townley Ewer does it using the Four Box Method, which is really three boxes and a large trash can (my addition is a trash can on rollers). Identify the boxes as: Put Away, Give Away/Sell and Storage. The large trash can acts as the Fourth Box and thus, this is why Ms. Ewer wins my award for best method. All the other online resources want you to have four boxes the exact same size ? that's a crock. You have to have the much larger "toss" box or you'll just end up moving "stuff" from one end of the house to the other and never really declutter.

To apply this method to a remodeling project, I would suggest again, putting these items in piles in your garage, carport or one room you're not remodeling at the moment. In addition, instead of a Give Away box, go rent a trailer or truck, which becomes your Give Away (and possibly Trash) box.

Just like moving, the remodeling of your house becomes that once in a lifetime opportunity to really chuck out all the stuff that you've been collecting over the years to make room for the things that really matter in life -- your family -- as they gather around your new plasma, 50-inch, digital surround sound media center in your newly remodeled movie room.


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Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.
Published: November 18, 2005

Should You Remodel or Move?

Unless you've taken a new job in a new location, the decision to move up may involve deciding on whether to remodel or move altogether. Homeowners nationwide will spend $192.8 billion this year to either remodel or repair their homes, according to the U.S. Census.

The Remodeling Index, provided by National Association of Home Builders' Remodeling Council, determines minor alterations at $25,000 or below and major alterations above that amount. Where do you stand? Is it worth $25,000-plus to remodel or should you move up?

There are reasons in favor of both. Let's deal with the remodeling first.


Your community is great, why move? For some homeowners they already live in the best community for their family and lifestyle. The schools are great, it's near their worship center, shopping and they are plugged in with neighbors and the community. So instead of moving, it might be best to expand or remodel.

Sometimes, it's just time to upgrade the house -- even if you're planning on selling in the future. If you bought a home with 15-year-old appliances and décor, it may be time to switch them out, now that they are 20 or 25 years old. I always get frustrated with homeowners who want to remodel right before they move -- they've never had the opportunity to enjoy the house they've just remodeled. Upgrades may include flooring, bathrooms, kitchen, exterior facelift, paint, curtains, furniture -- not just the house itself.

It might be cheaper than selling. If you're needing more space, the remodel may actually be cheaper than selling, especially if you're looking at finishing or remodeling the basement. The basement remodel is the easiest and most affordable remodel available to homeowners because the exterior walls, plumbing and most electric may have already been run throughout.

You're a do-it-yourselfer. Okay, you love those Old House, Fix-It or Nix-It, Saturday morning programs. Living in a dust-ridden environment with tools and power cords strewn throughout is your vision of heaven on earth. Go for it.

You'll have to remodel the new house anyway. Most new homeowners spend upwards to 30 percent of the value of the new house they just bought fixing it up the way they want -- so why move? Just spend that money where you are.
Now, there are just as many reasons to move instead of remodeling.


The move could take less time and hassle. Depending on the condition of your local market, you may be able to list, sell and move in a shorter period of time than it would take to actually remodel your current home. Time is a major factor in our busy lives, and many times it would be quicker to just move.

Remodeling would disrupt your lifestyle more than you're willing to deal with. You have to hire a designer, then a contractor, move furniture from one area to another in your house, find storage for the rest, live with dust, workmen, etc., for several months and then HOPE you like what you get at the end of it. Better to buy the house that's already finished the way you want it than betting on a finished product you're not sure about.

You don't want the hassle of dealing with contractors in case they don't get it right. The challenge for remodelers is that they are being told by a remodeling-challenged homeowner what they want and then try to create that environment. If the homeowner doesn't like it at the end -- it's very expensive to change once it's done.

Remodeling could cost more than moving. For some people, to get what they really want, they would have to double their mortgage anyway -- so it might be better to check out what's available in new construction or even in a move up in the community. Plus, builders in some markets are starting to offer free upgrades -- including rec rooms, decks, and other add-ons that usually are the subject of a remodel job.

Finally, you're family has enlarged. You just may need a larger home because you have more children or your parents/au pair/adult children have moved in with you.
When it's time to remodel, look over the local real estate market before making your final decision, it might be in your best interest to make that move instead of knocking down a wall.

Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.

Published: November 11, 2005