Real Estate Q&A: Revocable Trusts and Wrap-Around Mortgages Date:March 29, 2013 | Category:Tips & Advice | Author:ProfessorBaron.com Each month, San Diego State University lecturer and Zillow Blog contributor Leonard Baron answers two questions from readers regarding buying, selling and investing. Have a question? Send it to Leonard@ProfessorBaron.com Revocable trusts Hi Professor — I keep hearing about trusts and that forming one can be a good idea to save money on taxes and maybe provide liability protection to my assets. What are the basics? Bob. N., Toledo, OH Hi Bob — It depends. Here are the basics on the most common trust, a revocable living trust (RLT). State laws differ, but an RLT is set up to allow the trustor (forming the trust) to skip probate court at death. The trustor would title all their real estate, bank accounts, etc., into the RLT, and when they pass away the assets are distributed via what the trustor detailed in the trust. This can also occur via a will, but a will is “probated” in state court, which takes a big chunk of fees for administering the estate. If you have an RLT, which costs about $2,500, the assets in the trust skip being probated, and your estate skips those probate fees — but talk to an estate attorney in your state for more information. An RLT does not give any liability protection or save money on taxes during the life of the trustor. Other trusts — expensive ones starting at $20,000 and up — could save you money on taxes, hide or protect your assets, etc. But your estate would probably have to be several million dollars to consider these types of arrangements. Wrap-around mortgages Hi Leonard — My daughter is considering buying a property with a wrap-around mortgage because she can’t get a regular bank loan. I’m concerned because isn’t the seller violating their mortgage by selling the property and not paying off the mortgage? Any suggestions? Aaron S., Salt Lake City, UT Hi Aaron — You should be concerned. Yes, the seller could be violating their mortgage terms. There also could be insurance issues, higher transaction/legal costs and all kinds of other issues with a wrap-around loan. Many times rent-to-own or wrap-around deals are purchased by people who don’t have the financial wherewithal to do a traditional mortgage from a bank. They mistakenly think that buying “any” property is better than not buying at all — which it’s not! Renting is not throwing away money; buying a bad real estate deal probably is throwing away money. You should coach your daughter to get into financial shape to qualify for a traditional mortgage, shop all the available inventory in the area and buy when she finds a great property and is ready to become a homeowner. Related: Mortgage Shopping: How to Compare Good Faith Estimates Tips for Preparing to Buy in 2013 Offer Accepted: What Happens During Escrow? Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.
Don’t Be Fooled By These 3 Real Estate Myths Date:March 31, 2013 | Category:Tips & Advice | Author:Brendon DeSimone As the real estate market significantly rebounds, some buyers and sellers are dipping their toes in the waters for the first time. Inevitably, they come into the market with assumptions about how it works. Their assumptions may come from TV reality shows or watching their parents’ house-hunting experiences. Maybe they’ve learned about real estate from a co-worker’s recent home buying or selling experience. The trouble is, the new buyer or seller’s assumptions are sometimes based on outdated or generalized “real estate myths.” Here are three such myths that many less-seasoned home buyers and sellers assume are true. Myth No. 1: Spring is the best time to sell a home Historically, real estate seasons were tied to summer and the end of the school year. Families were the typical buyers or sellers, and they wanted to move during the summer so their kids could start anew in September. That’s how spring became the prime selling season. It’s true there are still more homes for sale in the spring, which means there’s a lot of activity and buzz. But spring isn’t necessarily the best time to sell a home anymore. The reality: The best time to sell is during the holidays and right after Today, more than half of buyers aren’t married, and their decisions aren’t based upon school schedules. So spring isn’t as relevant as it used to be. Instead, the best time to sell a home is in November, December and January. It’s a supply-and-demand issue. Most sellers assume buyers aren’t seriously looking during this prolonged holiday season. And yet, many buyers are looking at properties in person and online right up until Christmas Eve. If the right home goes on the market in mid-December, a serious buyer — and there will be a lot of them — will take note. After New Year’s Eve, most buyers jump back into their routine with a resolve to get into the real estate market, even though many sellers wouldn’t even consider listing in January. The net effect: Savvy sellers will face less competition for a still-strong pool of buyers during this period. And that makes November-January a great time to sell. Myth No. 2: Always start with your lowest offer There’s no generalized strategy for making an offer on a home anywhere, ever. A seller could have overpriced or underpriced the home on purpose. Some markets may be more competitive than others. But, somehow, in the back of the buyer’s head is good old Uncle Bob saying “never offer the full asking price.” That strategy might work if you’re trying to buy a used computer on eBay. And it worked in some real estate markets years ago. But times have changed. The reality: A low offer may get you nowhere fast A buyer in a strong, tight inventory market today would be wasting their time making low offers right from the start. It’s likely a home that’s priced right and shows well can receive multiple offers, sometimes even over the asking price. In this environment, constantly throwing in low offers because that’s what your Uncle Bob advised you to do will likely lead to disappointment. Instead, work with a good local real estate agent to understand the market. You’ll quickly learn after a few weeks on the open house circuit (and maybe a disappointment or two) that starting low may not get you anywhere. Myth No. 3: A cash offer trumps all There’s an assumption that a seller, considering two different offers, will always go with the cash offer because there’s less risk. As a result, many buyers who hear they’re competing with a cash offer assume they won’t get the home. They may not even make a formal offer. At the same time, many cash buyers assume that because they’re paying cash, they can make an offer below the asking price, and it will likely be accepted. The reality: A savvy seller may be more tempted by a solid financed offer Consider a seller with a home priced at $399,000. The seller receives two offers: One is a cash offer of $375,000. The other is an offer for the full asking price, with 25 percent down, a bank pre-approval letter and swift contingency periods. A good buyer’s agent, upon learning their client is competing with a cash offer, will arm the seller with lots of data supporting their client’s finances, such as a credit report and verification of income or assets. The agent might even arrange a call between the seller and the buyer’s lender. Learn your market When you become a buyer or seller, especially for the first time, the most important thing you can do is learn your market. Talk to a savvy local agent, and don’t make assumptions based on what you think you know. Real estate is local. Every market is different, with its own customs. If you believe there are general rules for real estate strategy that apply everywhere, anytime, you’ll likely be fooled — not only in April, but every other month of the year. Related: 5 Ways to Find Your Home During an Inventory Shortage Tips for Gen X and Gen Y Home Buyers Is Pricing Low the Way to Go? Brendon DeSimone is a Realtor & HGTV real estate expert. He has collaborated on multiple real estate books and his expert advice is regularly sought out by print, online and television media outlets like FOX News, CNBC and Forbes. An avid investor, Brendon owns real estate around the US and abroad and is licensed to sell in two states. You can find Brendon online or follow him on Facebook or Twitter. Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.
30-Year Fixed Mortgage Rates Down Slightly Date:April 2, 2013 | Category:Finance | Author:Alexa Fiander Mortgage rates for 30-year fixed mortgages fell this week, with the current rate borrowers were quoted on Zillow Mortgage Marketplace at 3.43 percent, down from 3.47 percent at this same time last week. The 30-year fixed mortgage rate hovered between 3.44 and 3.5 percent for the majority of the week, dropping to the current rate this morning. “Rates were unchanged last week, with limited news to move markets during a holiday-shortened week,” said Erin Lantz, director of Zillow Mortgage Marketplace. “This coming week, we expect rates to remain relatively calm, with little economic or political news to push them significantly higher unless Friday’s employment report is much stronger than expected.” Additionally, the 15-year fixed mortgage rate this morning was 2.58 percent, and for 5/1 ARMs, the rate was 2.29 percent. What are the rates right now? Check Zillow Mortgage Marketplace for up-to-the-minute mortgage rates for your state. *The weekly rate chart illustrates the average 30-year fixed interest rate in six-hour intervals.
Boomerang buyers return to market after foreclosure By Les Christie @CNNMoney March 11, 2013: 6:12 AM ET Susan and Dave Edwards lost their home to foreclosure in 2010. Just two years later, they have bought a new place. NEW YORK (CNNMoney) Borrowers who lost homes to foreclosure during the housing bust are starting to buy again. Since the housing bubble burst, 4.8 million borrowers have lost their homes to foreclosure, and another 2.2 million gave them up in short sales, according to RealtyTrac. While many are still struggling to recover financially, a growing number are starting to bounce back — and they are looking for a new place to call home. Susan Edwards and her husband, Dave, lost their Palmdale, Calif., home in 2010 after Susan’s severe arthritis made it impossible for her to work her medical device sales job. The medical bills soon piled up and the couple could no longer afford their $2,300 monthly mortgage payment. In addition, their home’s value had plunged 40% below the $325,000 mortgage balance. “We were living under such pressure,” she said. “We looked at the numbers and knew we had to default.” After the foreclosure, Susan’s credit score had taken a 70-point hit; Dave’s score fell even further. Related: Million-dollar foreclosures By paying all of the bills on time, they nursed their credit scores back to health. And in December, two years after they lost their old home, the couple was able to buy a new home with a loan backed by the Veteran’s Administration. VA-insured loans can be obtained just two years after a foreclosure, according to the Mike Frueh, director of the VA’s Loan Guaranty Program. The new house is a lot like the Edwards’ old one, with one big improvement: The mortgage payment is $1,150 a month — roughly half the amount they used to pay. “[After bankruptcy], foreclosure is one of the things that hits your credit score the hardest,” said Anthony Sprauve, a spokesman for FICO. Foreclosures and short sales usually knock about 85 to 160 points off a credit score. Scores suffer less if you pay at least the minimum on all your other bills on time and only allow your mortgage payments to go unpaid, said Jon Maddux, the CEO of YouWalkAway.com, which offers advice to defaulting mortgage borrowers. Once the damage is done, it can take three to seven years for a score to fully recover. But some lenders are willing to work with borrowers earlier than that. Related: Zombie foreclosures: Borrowers hit with debt that won’t die Mortgage giants Fannie Mae and Freddie Mac, for example, require defaulters to wait five years — and have a minimum credit score of 680 and put 10% down — before they can purchase a home again. If they don’t meet that criteria the wait is seven years, at which point the foreclosure is expunged from a person’s credit report. If defaulters show that extenuating circumstances caused the foreclosure — such as a health issue that prevented them from working, a layoff, a divorce or other one-time event — the wait may be reduced to three years. The Federal Housing Administration allows banks to issue FHA-insured loans to borrowers three years after a foreclosure or a short sale in which the borrower was in default. Tony and Ginger Read, who live with their three kids outside of Boise, Idaho, took four years to rebuild their credit after they sold their home in a 2008 short sale. Tony had been laid off and the couple had already sold their camper and other valuables in a fruitless effort to keep their home. Eventually, a broker convinced them to sell. “It was the hardest thing we ever had to do but we couldn’t afford the payments,” said Ginger. Tony now has a job supervising a sand and water pumping crew for the fracking industry and the couple’s credit score has regained more than half of what it lost. In January, they were approved for a 4% interest FHA loan on a $280,000 house in Fruitvale, Idaho. They close April 12. Related: Best places to buy foreclosures Mike Edgar, the broker who worked with the Reads to sell their home and buy a new one, has worked with several clients to help them repair their credit and, when they’re ready, buy new homes. In 2012, he worked with 15 “boomerang” buyers, about a quarter of his sales. He expects that number to double in 2013. Tim Duy, a business manager in Verrado, Ariz., and his wife Christina, lost their house in April 2011. They’re eager to become homeowners again, but for now they’re concentrating on repairing their credit. The foreclosure, which knocked Duy’s credit score down 200 points to below 600, has since rebounded to 730. Meanwhile, the couple window shops. “We’re in the penalty box for another year, maybe,” said Duy. “I see houses just what we want selling for $185,000. I would jump all over that if I could.”
Freddie Mac failing homeowners, watchdog says By Les Christie @CNNMoney March 21, 2013: 2:03 AM ET NEW YORK (CNNMoney) Freddie Mac and its regulator are not doing a good enough job bird-dogging complaints by homeowners about the companies handling their mortgages, a federal oversight official said Thursday. The mortgage giant’s eight largest mortgage servicers resolved more than 25,500 “escalated” complaints from homeowners between October 2011 and November 2012, but failed to take care of 21% of them within the required 30-day window, according to a report from the inspector general overseeing the Federal Housing Finance Agency. In addition, the report found that the vast majority of complaints were never reported to Freddie Mac (FMCC, Fortune 500) and that FHFA, the agency that oversees Freddie, did not have the proper procedures in place to handle some of the most serious borrower complaints — including allegations of servicing fraud and improper foreclosures. When such issues aren’t resolved quickly, borrowers don’t have adequate time to explore alternatives and, in some cases, end up losing their homes to foreclosure, said Russell Rau, deputy inspector general for audits. Under guidelines that were put in place in 2011, servicers are supposed to observe strict protocols when a borrower lodges a complaint. Related: 5 best places to buy a home Complaints are often fielded by an agent manning the phones for the servicer. If the agent can’t immediately resolve the problem, it gets kicked upstairs to a specialist. Once that happens, the complaint is officially an “escalated case” and the servicer must report it to Freddie and resolve the problem within 30 days. However, the report found that four out of Freddie’s eight major servicers — Bank of America, CitiMortgage, Wells Fargo and Provident — never reported any cases between October 2011 and November 2012, even though the group handled more than 20,000 during that time. In addition, the inspector general said Freddie did an “inadequate” job of making sure its servicers complied with the rules and failed to establish any type penalties for servicers who failed to report escalated cases. Related: Zombie foreclosures: Our debts won’t die Freddie Mac didn’t immediately return calls seeking comment. The watchdog also alleges that when FHFA assessed Freddie’s implementation of the new guidelines, it did not even address the failure of servicers to resolve and report all cases within 30 days. The inspector general recommended that FHFA and Freddie immediately improve the reporting of escalated cases by servicers and impose fines for servicers who don’t comply. At the end of 2012, Freddie Mac owned or backed more than 10.6 million mortgages.
Home prices: Biggest rise since housing bubble By Chris Isidore @CNNMoney March 26, 2013: 11:26 AM EST Home prices posted their biggest gain since 2006 in January. NEW YORK (CNNMoney) Home prices continued their recovery, rising 8.1% in January, although a separate report showed a slight slowdown in new-home sales. The S&P Case-Shiller index, which tracks the 20 largest markets in the nation, showed the biggest year-over-year gain in prices since June 2006. “This marks the highest increase since the housing bubble burst,” said David Blitzer, chairman of the index committee at S&P Dow Jones Indices. Related: 5 best markets to buy a home In a separate government report Tuesday, new homes sold at a 411,000 annual rate in February, down nearly 5% from the January sales pace but up 12% from year-earlier levels. The typical price of a new home sold in the month was $246,800, up about 3% from both the January and a year earlier. Joseph LaVorgna, chief U.S. economist for Deutsche Bank, said that bad weather in February could be partly responsible for the slowdown in sales. But he said market fundamentals suggest that the market for new-home sales should remain strong. “Despite the pullback in sales in February, the uptrend in housing remains clearly intact,” he said. He is forecasting even stronger sales in the second half of this year. The Case-Shiller report shows the recovery in home prices is widespread. All 20 markets posted a year-over-year gain, and the pace of increase picked up in every market except Detroit. Some of the markets hurt the most by the bursting of the housing bubble have enjoyed the biggest gains, led by a 23% rise in Phoenix. Prices were also up more than 10% in San Francisco, Las Vegas, Detroit, Atlanta, Minneapolis, Los Angeles and Miami, all markets that had been hit hard by foreclosures. New York posted the smallest rise, up only 0.7%. Even with the recent rise in home prices, the overall index is down 28.4% from the 2006 peak. Related: Big money betting big on housing But experts say they see a lot of strength in the current market. “The market still has a long way to go nationally, but the healing process — and a return to a normalized housing market — is definitely well underway,” said Jim Baird, chief investment officer for Plante Moran Financial Advisors. Home prices have been helped in recent months by a number of factors, including tight inventory of homes available for sale, near record-low mortgage rates and a drop in homes in foreclosure. A decline in unemployment is also helping the housing recovery. The housing recovery itself is helping support overall economic growth, as builders scramble to hire workers to meet the renewed demand. The lift goes beyond the impact of increased construction on the economy, as the rise in home prices lifts household wealth. Rising home prices also reduce the number of people owing more on their mortgages than their homes are worth. That, in turn, can help them to refinance those loans at a lower rate, freeing up money to spend on other goods and services.
Zillow Chief Economist Says Strong Housing Recovery Is Under Way Date:March 29, 2013 | Category:Zillow | Author:Jill Simmons Zillow Chief Economist Stan Humphries appeared on Fox Business today to discuss foreclosures, inventory constrictions and how mortgage rates are driving home affordability. Watch the segment here or by clicking on the image below.
Buying a Home 44% Cheaper than Renting Despite Rising Home Prices Low mortgage rates have kept homeownership less expensive than renting in all 100 large metros Even though asking home prices rose 7.0% in the last year, outpacing rent increases of 3.2%, the gap between buying and renting has narrowed only slightly. One year ago, buying was 46% cheaper than renting. Today’s it’s 44% cheaper to buy versus rent. In fact, homeownership is cheaper than renting in all of America’s 100 largest metros. That’s because falling mortgage rates have kept buying almost as affordable, relative to renting, as it was last year. According to Freddie Mac, between February 2012 and February 2013 the 30-year fixed rate dropped from 3.9% to 3.5%, though rates have been rising in March. To determine whether renting or buying a home costs less, we do the following: Calculate the average rent and for-sale prices for an identical set of properties. For this report we looked at all the homes listed for sale and for rent on Trulia from December 2012 to February 2013. We estimate prices and rents for the similar homes in similar neighborhoods in order get a direct apples-to-apples comparison. We are NOT just comparing the average rent and average price of homes on the market, which would be misleading because rental and for-sale properties are very different: most importantly, for-sale homes are 47% bigger, on average, than rentals. Calculate initial total monthly costs of owning and renting, including maintenance, insurance, and taxes. Calculate future total monthly costs of owning and renting, taking into account price and rent appreciation as well as inflation. Factor in one-time costs and proceeds, like closing costs, downpayments, sales proceeds, and security deposits. Calculate net present value to account for opportunity cost of money. To compare the costs of owning and renting, we assume people will get a 3.5% mortgage rate, reside in the 25% tax bracket and itemize their federal tax deductions, and will stay in their home for seven years. We also assume buyers get a 30-year fixed-rate mortgage and put 20% down. Under all of these assumptions, buying is 44% cheaper than renting nationwide, taking into account all of the costs and proceeds from buying or renting over the entire seven-year period. We also look at alternative scenarios by changing the mortgage rate, the income tax bracket for tax deductions, and the number of years one stays in the home. Our interactive map shows how the math changes under alternative assumptions. And if you’re interested, check out our detailed methodology which explains our entire approach, step by step. Savings from Buying Versus Renting Smallest in California and New York, Biggest in the Midwest Buying a home is cheaper than renting in all of the 100 largest metro areas, but buying ranges from 19% cheaper than renting in San Francisco to 70% cheaper than renting in Detroit. The financial benefit of buying instead of renting is narrowest in San Francisco, Honolulu, San Jose, and New York. Over the past year, the gap between renting and buying has narrowed most in the Bay Area. One year ago, buying was 35% cheaper than renting in San Francisco and 38% cheaper than renting in San Jose; now, the difference is 19% and 24%, respectively. These metros have seen strong price increases year-over-year. In contrast, the gap didn’t narrow at all in New York, where buying remains 26% cheaper than renting, both now and a year ago. On Long Island, the difference actually widened from 34% one year ago to 36% today. New York, Long Island, and other Northeastern metros have seen more modest price rebounds over the past year, despite rising rents: Where Buying a Home is a Tougher Call # U.S. Metro Cost of Buying vs. Renting (%), 2013 Cost of Buying vs. Renting (%), 2012 1 San Francisco, CA -19% -35% 2 Honolulu, HI -23% -26% 3 San Jose, CA -24% -38% 4 New York, NY-NJ -26% -26% 5 Albany, NY -30% -34% 6 Orange County, CA -32% -41% 7 San Diego, CA -33% -42% 8 Los Angeles, CA -35% -37% 9 Long Island, NY -36% -34% 10 Ventura County, CA -36% -43% Note: Negative numbers indicate that buying costs less than renting. For example, buying a home in San Francisco is 19% cheaper than renting in 2013. Trulia’s rent vs. buy calculation assumes a 3.5% 30-year fixed-rate mortgage, 20% down, itemizing tax deductions at the 25% bracket, and 7 years in the home. At the other extreme, homeownership is most affordable in Detroit, where buying is 70% cheaper than renting. This means it costs less than one-third as much to buy a unit than to rent a similar unit in a similar neighborhood. In fact, buying is less than half the cost of renting (more than a 50% difference) in 46 of the 100 largest metros. Where Buying a Home is a No-Brainer # U.S. Metro Cost of Buying vs. Renting (%), 2013 Cost of Buying vs. Renting (%), 2012 1 Detroit, MI -70% -69% 2 Dayton, OH -63% -70% 3 Gary, IN -63% -60% 4 Cleveland, OH -63% -57% 5 Warren–Troy– Farmington Hills, MI -63% -64% 6 Toledo, OH -62% -59% 7 Memphis, TN-MS-AR -62% -61% 8 Kansas City, MO-KS -60% -55% 9 Birmingham, AL -59% -60% 10 Indianapolis, IN -58% -56% Note: Negative numbers indicate that buying costs less than renting. For example, buying a home in Detroit is 70% cheaper than renting in 2013. Trulia’s rent vs. buy calculation assumes a 3.5% 30-year fixed-rate mortgage, 20% down, itemizing tax deductions at the 25% bracket, and 7 years in the home. In the largest metros, the rent-versus-buy decision depends largely on location. Within the New York metro area, buying is just 6% cheaper than renting in Manhattan, but 53% cheaper in suburban Westchester County. This, however, is an extreme example. The differences within most metros aren’t quite so stark. In the Los Angeles metro area, buying is 22% cheaper than renting in the Pasadena / San Gabriel Valley area (telephone area code 626), while buying is 36% cheaper than renting in the San Fernando Valley (area code 818). The difference between the 626 and the 818 is a lot smaller than the difference between Manhattan and Westchester. Here’s How Renting Could Be the Better Deal Three factors have a real impact on the rent-versus-buy math: mortgage rates, tax deductions, and how long you stay in your home. Change any of these factors, and buying a home won’t look quite as inexpensive relative to renting. Using our baseline assumptions of getting a 3.5% mortgage rate, deducting at the 25% bracket, and staying in your home for 7 years, buying is 44% cheaper than renting nationally. Here’s the “but”: Lower mortgage rates lower the cost of owning. While buying is 44% cheaper than renting with a 3.5% mortgage, buying would be 39% cheaper than renting at 4.5% and only 33% cheaper at 5.5%. Higher rates mean a higher cost of owning, but prices today are low enough relative to rents that buying would beat renting even if mortgage rates rose two full points. Itemizing deductions lowers the cost of owning. Mortgage interest and property tax payments are typically deductible. If you itemize deductions (at the 25% tax bracket) regardless of whether you own or rent, buying is 44% cheaper. Without itemizing (read: you’re just taking the standard deduction), buying is still 35% cheaper than renting. This means that even if tax deductions were eliminated entirely – don’t worry, no one in Washington is seriously proposing anything that drastic – the rent-versus-buy decision probably wouldn’t change that much. Though it would probably encourage people to buy smaller or cheaper homes. Staying put longer lowers the relative cost of owning. The combined cost of buying and then selling a home can easily total more than 10% of the home’s value. Staying put longer means, in effect, spreading those costs over more years. Buying is 44% cheaper than renting if you stay put for 7 years, 37% for 5 years, and 20% for 3 years. In other words, depending on your circumstances, buying could be a bad deal. Suppose you stay put for only 3 years AND don’t itemize your deductions (lots of homeowners with mortgages don’t itemize, by the way). Even with a 3.5% mortgage, buying would be only 9% cheaper than renting nationally. And in many markets, buying would be MORE expensive than renting if you stay put for 3 short years and don’t itemize: buying would be 2% more expensive than renting in Boston, 9% more in Los Angeles, 26% more in New York, and 45% more in San Francisco. Clearly, buying is not for everyone — especially if you live in a more expensive housing market. Remember, also, that owning carries a lot more risk than renting. Some of the factors affecting the cost of ownership involve a lot of uncertainty. One uncertainty: you might plan to stay in your new home for a long time, but unexpected family or employment circumstances could make it necessary to move sooner and incur those closing costs after just a few years. A second uncertainty: unforeseen maintenance or renovation problems could push the annual care and upkeep costs much higher than 1% of the home’s value, which is what we included in our model. And, of course – as if this needs to be said after the last few years – there’s no guarantee that home prices will rise. We’ve used a conservative estimate of a little over 2% home price appreciation per year, varying a bit by metro – which is just slightly above the rate of inflation we’ve included. But actual appreciation could be much higher or lower than that. Price declines are always a risk, and not just in Las Vegas and Detroit. Even metros that didn’t see huge price declines during the most recent housing crisis have sustained price declines in the past. For instance, prices fell by more than 20% in much of Texas and Oklahoma in the late 1980’s, and by 10-20% across much of New England and upstate New York in the early 1990’s, according to FHFA. Buying Probably Won’t be This Cheap Relative to Renting Next Year How will the rent-versus-buy math change over the next year? Two factors matter most: (1) whether prices or rents are rising faster, and (2) what’s happening to mortgage rates. Looking forward, the gap should narrow more sharply because both factors should work together to raise the cost of buying relative to renting. First, home prices are likely to keep rising faster than rents. The continued economic recovery will make people more able and interested to buy a home, boosting the demand for housing while inventory remains tight, fueling price increases. At the same time, the increase in multi-unit-building construction should add more supply, especially to the rental market, which will keep rent gains modest. Second, mortgage rates are likely to rise in the next year as the economy improves, even though they fell in the past year. The consensus among macroeconomic forecasters is for 10-year Treasury bonds –which 30-year fixed-rate mortgages track pretty closely – to rise 6 or 7 tenths of a point over the next year. This translates roughly into a 7-9% higher monthly payment for a given mortgage. Together, prices outpacing rents and higher mortgage rates will make buying less affordable next year relative to renting than it is now. By this time next year, the cost of buying could even exceed the cost of renting in some of the priciest metros. The rent-versus-buy decision depends on so many factors, both economic and personal, and next year the math could look very different.
Why higher mortgage rates will help the housing market By Nin-Hai Tseng, Writer March 18, 2013: 10:57 AM ET Borrowing is still relatively cheap, so more potential homeowners may dive into the market. FORTUNE – Mortgage interest rates have been rising on signs that the U.S. economy is improving. Last week, the 30-year fixed rate reached the highest level in more than six months, climbing to an average of 3.63%, compared with 3.52% the previous week and 3.92% a year earlier. The current rate is the highest it’s been since the week of Aug. 23 when the 30-year fixed rate averaged 3.63%, according to Freddie Mac. With economic prospects improving, rates could rise even higher this year. This increase could mathematically make buying a home more expensive, but it’s unlikely to stall the housing recovery. To the contrary, higher rates could actually support it. For the past few years, mortgage rates have sunk to new lows as the Federal Reserve continues to buy up hundreds of billions of dollars worth of bonds. The policy is meant to get everyone from investors to consumers to borrow and spend more. While it has driven many homeowners to refinance existing home loans, it hasn’t spurred nearly as many mortgages for home purchases. In 2012, refinances made up 71% of all mortgage originations, according to the Mortgage Bankers Association, a group that tracks mortgage rates and home loan trends. MORE: Former London Whale boss: I was misled Home sales last year rebounded more than most ever thought. Even if mortgage rates edged higher, the recovery could last for a few reasons. For one, those who’ve been eyeing to buy a home may finally pull the trigger once they realize that borrowing is still cheap and it would be wise to lock in today’s mortgage rate rather than wait and see where rates could fall tomorrow or months from now, says Andrea Heuson, finance professor at the University of Miami. “It could bring serious purchases back to the market.” To be sure, the Great Recession has proven that mortgage rates have almost no influence over home prices. And so the sustainability of the housing recovery will depend more on factors such as jobs growth than the cost of taking out a home loan. If anything, slightly higher rates could reflect that slightly more risky borrowers are being offered credit following years of tighter lending standards. And this could be a good thing, says Barney Hartman-Glaser, real estate finance professor at Duke University. “Although important, rising interest rates alone are not enough to slow down the housing recovery,” says Hartman-Glaser, adding that “my sense is that underwriting standards are getting easier to satisfy, and so we would expect rates to rise as slightly more risky borrowers are brought into the fold.” MORE: SAC Capital settles insider trading charges However borrowers interpret higher rates, the increase ultimately reflects an improving economy. Which, in turn, is something that would support the housing recovery rather than stall it. Investors have increasingly turned to riskier investments since the start of the year. The stock market has reached new highs, making bonds look less attractive and therefore pushing mortgage rates higher. Heuson adds the rise in mortgage rates coincides with growing demand for loans across U.S. businesses – a marked turnaround from the dark days of the financial crisis and subsequent economic recession. At the end of January, commercial and industrial loans stood at more than $1.5 trillion, up more than 12.5% from a year earlier. What’s more, the current level is more than 75% above the low point of $870 billion in mid 2004, according to Federal Reserve statistics. “From that perspective, the recent increase … bodes well for the future of the U.S. economy,” Heuson says, adding that when businesses borrow more, that will typically boost the economy in all kinds of ways, from spurring jobs growth to raising consumer confidence. And last but not least, it could encourage more home sales.
Get more out of your closet space By Josh Garskof @Money March 22, 2013: 7:17 AM ET To figure out the most effective solution, you need to determine the size of your challenge. Start by weeding out what you don’t wear. (Money Magazine) For those lucky enough to have a spacious walk-in closet, an organizing system is a no-brainer. There’s plenty of space for all manner of sweater shelves, lingerie drawers, shoe cubbies, and tie racks. So what about the rest of us, who live with reach-in (or squeeze-in) closets? No storage contraption can radically expand inside-the-closet capacity, but you don’t necessarily have to install it there. Here are two ways to create organized and tidy wardrobe cargo space for practically any closet-challenged house. Thin and restructure Before you buy any closet gizmo, force yourself to weed out what you don’t wear. “About 70% to 80% of what’s in most closets never gets taken off the hanger,” says Newton, Mass., professional organizer MJ Rosenthal. An organizing system will make what remains easier to access. “The standard pole-and-shelf setup leaves loads of wasted vertical space,” says Chesapeake, Va., cabinetmaker David Alderman, who tricks out about 35 closets a year. He typically lowers the pole to four feet high and, above it, installs either a second pole or numerous adjustable shelves designed to keep piles of folded clothing to at most five items tall. When he’s working with closets that are deeper than they are wide, he may hang everything from one of the sidewalls. Related: Find the best handyman for the job Know that a custom system won’t come cheap: You’ll pay $800 to $1,200 for a one-door closet, and $1,500 to $2,500 for a double-door. Almost all are made from melamine — a waterproof plastic board — which you can get either in white or a faux-wood finish. Somewhat handy? You can save about 20% with a modular do-it-yourself kit from easyclosets.com or containerstore.com/elfa. Either way, invest only if you’re staying in your home; realtors say this typically isn’t an improvement that impresses buyers. Think outside the closet Closets that are outrageously undersized require you to look beyond their walls for a solution, says California Closets’ chief design officer, Ginny Snook Scott. If you want something that can move with you, pick up an armoire (for as little as $100 at Ikea). Related: 4 tips from a serial home remodeler Alternatively, a closet company or cabinetmaker can craft a built-in wall cabinet for your master bedroom and fill it with hanger poles, shelves, and cubbies. You’ll pay about $2,000 to $4,000 for an eight-foot-wide wall of doors and drawers. (You can add a spot to hang your flat-screen TV.) Because it’s useful, attractive, and permanent, it may even yield some payback when it’s time to sell — not bad for something that you’ll reap dividends from at least two times a day.