June 15 (Bloomberg) -- Builders probably broke ground on fewer homes in May, signaling the residential real-estate market remains the biggest risk to growth, economists said ahead of reports this week.
Housing starts fell to a 980,000 pace last month, from 1.032 million in April, according to the median forecast in a Bloomberg News survey. Building permits, a signal of future construction, fell to a 960,000 rate.
Rising foreclosures, higher mortgage rates and declining property values threaten to keep home sales depressed in coming months, discouraging builders from starting new projects. Declines in construction will limit any rebound in economic growth, even as tax rebates give consumers a temporary boost.
``The first signals of stabilization are going to come from new-homes sales, which we haven't seen yet,'' said Julia Coronado, a senior economist at Barclays Capital in New York. Housing ``will be on a downward trend.''
The Commerce Department's construction report is due June 17. Housing starts dropped to a 17-year low 954,000 annual pace in March.
Banks repossessed twice as many homes in May and foreclosure filings rose 48 percent from a year ago as falling house prices trapped borrowers in mortgages they couldn't afford, RealtyTrac Inc. said last week.
One in every 483 U.S. households either lost a home to foreclosure, received a default notice or was warned of a pending auction, RealtyTrac said.
Builder Losses
The five largest homebuilders have reported a combined $3.4 billion in losses in their most recent quarters as new-home sales fell. Stricter lending standards and rising foreclosures are reducing demand for homes.
A report tomorrow from the National Association of Home Builders/Wells Fargo is forecast to show builder optimism held at the second-lowest level on record this month.
The slump in construction will be one factor restraining economic growth in coming months, a report from the Conference Board may show on June 19. The New York research group's index of leading economic indicators was unchanged in May, according to the median estimate. The gauge points to the direction of the economy over the next three to six months.
Another concern is the spiraling cost of raw materials. Wholesale prices jumped 1 percent last month, pushed up by energy and food costs, a Labor Department report on June 17 may show, according to the Bloomberg survey.
So-called core producer prices, which exclude food and fuel, increased 0.2 percent after a 0.4 percent April gain.
Fuel Costs
The Labor Department's report on consumer prices last week showed a jump in fuel costs also contributed to a 0.6 percent increase in the cost of living in May. The core rate rose just 0.2 percent, indicating companies haven't been able to completely pass the increase in expenses along to customers.
``The energy shock not only boosts headline inflation, but also erodes consumer purchasing power and squeezes profit margins,'' said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York.
Federal Reserve Chairman Ben S. Bernanke last week said policy makers are paying ``close attention'' to rising commodity costs and will ``strongly resist'' any surge in inflation expectations.
At the same time, the risk the economy has entered a substantial downturn ``appears to have diminished over the past month or so,'' Bernanke said.
Fed policy makers are scheduled to next vote on the direction of the benchmark overnight lending rate between banks at the conclusion of their June 24-25 meeting.
Rising costs and slowing demand have taken a toll on manufacturing. A report from the Fed on June 17 may show industrial production increased 0.1 percent in May, after a 0.7 percent drop the prior month. Improving sales overseas are helping to prevent a deeper factory slump.
Regional Fed reports for New York, tomorrow, and the Philadelphia region, on June 19, are forecast to both show manufacturing is contracting this month.
Posted by: admin on the 15/06/2008 07:24 | Categories:
General,
How did the nation's biggest banks stumble into the subprime crisis? Consider this: Lax boards dangled huge rewards for short-term performance with little incentive to limit risk.
If you're wondering how otherwise extremely bright people at the top of our country's best banks led us into the subprime mess, here's a simple answer:
There was too much money in it for them to resist.
We hear all the time that companies have to pay top execs tens of millions of dollars a year to "attract the top talent."
But dangling huge payouts in front of bank CEOs in exchange for short-term bursts of growth brought just the opposite: the worst performance by some of the best-paid execs in decades, taking a big toll on homeowners and bogging down the whole economy.
Countrywide Financial (CFC, news, msgs) chief Angelo Mozilo cashed out $400 million in stock options from 2003 to 2007. In 2007 and 2008, the company's stock fell to multiyear lows, and the lender may soon disappear.
Washington Mutual (WM, news, msgs) chief Kerry Killinger took home $24 million in 2006. A crash that started in 2007 as subprime-related problems surfaced has wiped out all shareholder gains since 2000.
The head of Merrill Lynch (MER, news, msgs) got $160 million upon his retirement last year; the head of Citigroup (C, news, msgs) collected $40 million. This happened in the same period both stocks plunged more than 40%.
And former Bear Stearns (BSC, news, msgs) CEO James Cayne got $39 million in bonus pay alone for 2004-06. He left in January of this year, just before his bank had to be bailed out with help from the Federal Reserve to avert a disaster that might have brought down much of the U.S. financial system.
Despite all the problems they helped create, these execs get to keep that loot. For that, blame lousy boards of directors for poorly designed pay plans that encouraged Wall Street's elite to take too much risk on the subprime mortgages that have caused so many problems. Here are four ways the boards erred:
Too much, too soon
Mistake No. 1: Boards awarded too much bonus pay too fast in exchange for fleeting achievements, such as raising revenue or earnings growth in a single year.
This tempted execs to create a lot of fireworks in the near term without regard for how sustainable growth really was. After all, they got no reward for building lasting shareholder value. They could take the money right away and run, which is exactly what many did.
"Their bonuses and long-term incentives were largely tied to earnings targets," says Alexandra Higgins, a researcher at The Corporate Library, which tracks pay and corporate-governance issues. "Those earnings targets were directly linked to loan production."
So execs created as many mortgage loans as possible -- to heck with the consequences down the road -- in what The Corporate Library's Nell Minow describes as an "après moi le déluge" (after me the deluge) dynamic.
Home-mortgage lender Countrywide stands out as Exhibit A. Mozilo's huge stock-option grants vested quickly -- in equal slices over just three years. And a big chunk of bonus pay came in the form of cash paid immediately. His board offered no reward for creating lasting value.
Mozilo and his fellow execs had every incentive to stoke the subprime machine as hard as they could to rev up earnings and drive the stock higher. By 2004, Countrywide had become the largest U.S. mortgage lender, in part by lowering lending standards and pushing exotic mortgages that allowed borrowers to qualify for bigger loans.
Countrywide's performance responded, allowing Mozilo to exploit a compensation package that rewarded him for short-term gains. In 2006, Mozilo pocketed a $20.4 million cash bonus because earnings had advanced 4.6% to $4.30 a share. His total compensation that year was $102 million, if you include other kinds of pay and profits on options. Between 2004 and 2007, Mozilo cashed out options worth $414 million.
That's money Mozilo doesn't have to give back, even though Countrywide's fall has cost shareholders 88% losses since the start of 2007.
"Countrywide is probably the worst example," says Daniel Pedrotty, a corporate governance expert at the AFL-CIO's Office of Investment. But you see the same scenario across the financial sector.
At Wachovia (WB, news, msgs), for example, execs were richly rewarded for short-term earnings growth -- even through acquisitions. By 2006, this enticed them to buy Golden West, a California bank that was knee-deep in option adjustable-rate mortgages, known as ARMs.
ARMs can help borrowers because their interest rates are held artificially low for an initial time frame. But they are riskier, too: Homeowners eventually need to refinance or face much higher payments, but many people have found they can't refinance because home values are falling and loans are now harder to get.
Wachovia acknowledges that buying Golden West near the peak of the housing boom was bad timing, but it thinks the purchase of Golden West will pay off in the long run.
"We purchased a solid company, and as the market begins to turn we feel we will be very well-positioned," a Wachovia spokesman says. The option ARM portfolio that Wachovia picked up through Golden West is also performing above industry averages, the spokesman says.
Meanwhile, executives at Wall Street investment banks such as Citigroup (C, news, msgs), Bear Stearns and Merrill Lynch all reaped big annual bonus rewards in part for repackaging subprime loans into risky debt instruments that spread the damage around the globe.
Pay for risk
Problem No. 2: Bonus pay was linked to measures that encouraged execs to take on excess risk.
At virtually all of the major culprits in the subprime mess, including Countrywide, Wachovia, Washington Mutual, Merrill Lynch, Citigroup and Bear Stearns, executive bonuses were directly linked to increases in return on equity, or ROE, which measures net income growth against stockholder equity.
Because one quick way to boost ROE is to assume more debt to increase growth, tying bonus pay to ROE encouraged execs to take on higher levels of risky debt linked to subprime loans.
For example, to keep up with competitors during the housing bubble, Washington Mutual shifted its loan mix away from standard fixed-rate mortgages toward riskier subprime and/or adjustable-rate mortgages that presented "much greater risk of default," says William Patterson, CtW Investment Group's executive director.
This helped prop up Washington Mutual stock in 2006 so that chief Killinger could realize $15 million by cashing out options and collect total pay that year of $24 million, according to The Corporate Library. But the next year, problems related to subprime loans hit the stock, costing shareholders $28 billion in a 71% stock price decline that "wiped out all of the shareholder value created since 2000," Patterson says.
Guaranteed windfalls
Problem No. 3: Boards offered execs huge guaranteed retirement pay and golden parachutes, regardless of how they performed.
Execs knew they could collect big severance and retirement pay even if their companies flamed out as they left. So they had little incentive to avoid getting their banks in trouble. For example:
Even though former Merrill Lynch CEO Stanley O'Neal oversaw Merrill's involvement in the subprime mess, he got more than $160 million in stock and retirement benefits when he left the bank in October. That's because it's Merrill Lynch policy to give employees, if they have worked there long enough, all of their restricted stock and unvested options from prior years. But much of the money was from stock awards granted during the six years O'Neal was CEO. Did he really deserve the money? Merrill Lynch stock lagged the S&P 500 Index ($INX) during this period, and shareholders lost 41% last year alone. In fairness, before he left Merrill Lynch, the company's policy also required O'Neal to keep 60% of the stock he was given, so he felt some pain along with shareholders.
Former Citigroup chief Charles Prince pocketed $40 million when he left the company last year, including a discretionary bonus of $10.4 million and more than $28 million in unvested stock and options that vested immediately, according to the AFL-CIO. As with Merrill, he got the stock and options automatically because he had worked at Citigroup long enough, almost 30 years. Shareholders haven't done so well, at least recently. They lost 2.5% a year while the S&P 500 was posting average annual gains of 12% during Prince's tenure as CEO from 2003 to 2007. Shareholders lost 45% last year alone.
Countrywide's Mozilo will collect $23.7 million in pension benefits and $20.6 million in deferred compensation when he leaves the company, according to The Corporate Library, despite the mess he helped create.
If Washington Mutual were to get bought out like Bear Stearns or Countrywide, its chief, Killinger, would get a golden parachute worth more than $22 million, according to the AFL-CIO.
Money, it's a gas
Mistake No. 4: The sheer size of the pay packages granted by boards created a hazard.
If you dangle huge potential rewards in front of someone, they are more likely to do dumb things in order to take a swing at the piñata.
Bear Stearns, for example, created a bonus pool for execs worth $165 million in 2006. The only restraint -- other than that the company had to meet minimal targets for things such as annual sales and earnings growth --- was that no single exec could get more than 30% of the pot.
With that kind of temptation, it should be little surprise that then-Bear Stearns chief Cayne led his bank into the subprime morass. Doing so helped him get $33.8 million in pay in 2006 alone, including a cash bonus of $17 million.
Cayne paid dearly along with shareholders when Bear Stearns blew up, because he owned a lot of stock. But he managed to keep enough dough to pay cash for a $25.8 million luxury condo recently on New York's Fifth Avenue.
Likewise, CEOs at Countrywide, Merrill Lynch, Citigroup, Wachovia and Washington Mutual all reaped annual pay of $20 million to $40 million during the go-go days of the housing boom. Because of the way their pay plans were structured, they knew all along that they could keep it no matter what happened.
If these kinds of stories tick you off and you want to make a difference, vote shares of stock you own in ways that bring about stronger boards. If you don't own stocks, make sure your mutual funds do this. Many shareholders don't bother to vote.
Activists have placed a variety of measures on ballots that allow shareholders a voice on executive pay and promote independent boards:
"Say on pay" proposals give shareholders a vote on executive pay packages.
Other proposals do things such as adjust board elections so that all members are voted on at once, which makes it easier to oust a bad board.
Some votes even go so far as to suggest companies vest stock options only after enough time has passed to see whether management decisions really pay off.
These votes are generally nonbinding, but they send a message.
It also pays to follow news reports on efforts by activists to oust board members. CtW Investment Group, for example, this year successfully challenged Washington Mutual board member Mary Pugh. As the chairwoman of the bank's finance committee, part of her job was to monitor Washington Mutual's exposure to subprime risks.
CtW asserted in an open campaign against Pugh that her role might have been compromised by the fact that her company, Pugh Capital Management, managed a significant amount of money for Washington Mutual. Washington Mutual recently accepted Pugh's resignation after she did poorly in a shareholder vote.
They also need to deploy pay packages that hold back a portion of bonus pay until it's clear that executives have created lasting value. Without strong boards looking out for shareholders, it's not clear this will happen.
"A lot of executives don't like this because it really does hold them accountable," Bloxham says.
At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.
Posted by: admin on the 07/05/2008 10:28 | Categories:
General,
The spring home-buying season is upon us. In small towns and big cities alike, "Open House" and "For Sale" signs are sprouting like crocuses. But it will take more than pleasant weather to thaw the ice-cold real estate market.
Many buyers—especially now that the housing slump is in its third year—are reluctant to take a chance on real estate in the face of continuing price declines, foreclosures, record gas prices, job losses, and general economic uncertainty.
Spring is traditionally the busiest time for real estate, largely because parents, readying for a summer purchase, don't want to move during the school season.
A Silver Lining
"Certainly it will be a big test," says James Hughes, Dean of the Edward J. Bloustein School of Planning & Public Policy at Rutgers University. "If it doesn't pick up this spring, then we'll have another year on the down cycle. If it does pick up, we'll have modest stabilization."
Where some see despair, others see hope. Sellers, who were once clinging to boom-time expectations, are trimming asking prices. But the news isn't all bad for buyers. In fact, for some the timing couldn't be better. The lower prices—at least in some markets—are making homes affordable for first-time home buyers and more attractive for investors on the lookout for fire-sale discounts.
Of course, a flurry of foreclosures is also responsible for pushing down prices and adding to the glut of unsold homes, even in many of the nation's most affluent cities and suburbs.
Some Good Deals
BusinessWeek.com, with the help of Mountain View (Calif.)-based Altos Research, a real-time housing research firm, ranked 14 of the country's largest cities based on how much sellers have slashed listing prices. At the top of the list is Sacramento, where the median asking price on Apr. 11 was $226,978—a 41% drop from a year earlier, according to Altos.
Other markets with declines of 20% or more include Phoenix, Los Angeles, Las Vegas, Atlanta, and San Diego. On the other hand, Texas markets such as Houston, Austin, and Dallas, where inventory is relatively tight, have been doing much better. (It probably helps that the oil and gas industry, a key element of the state's economy, is booming.) The annual asking price in Dallas actually increased 6.4%.
Annual listing price information was not available for Manhattan, one of the world's tightest markets. But a recent report indicated that the median Manhattan condo and co-op sales price in the first quarter rose 13% compared to the same quarter a year ago.
"Yes, there is some opportunity for buyers and investors to find good deals but the conditions for them to get financing are tougher," says Michael Simonsen, Altos co-founder and CEO. "People in the strongest positions might be able to take advantage of it. But clearly there is far more inventory than investors to pick it up."
"A Redistribution of Wealth"
David Zugheri, co-founder of First Houston Mortgage, says the best properties located in or near downtowns in Texas are selling briskly. But owners of new homes built miles from job centers are seeing steep price declines.
Zugheri is optimistic the spring will help to awaken the Texas housing market. "There are going to be first-time home buyers coming out of the woodwork," he says. "Some people get tax refunds, and they're going to use them for a down payment. One man's loss is another man's gain. There will be a redistribution of wealth here that we haven't seen since the mid-1980s."
Sellers in Las Vegas are having to compete with a flood of heavily discounted bank-owned properties, says local mortgage broker Colleen Jane McGrath. But investors are returning to the market and scooping up houses, sometimes at 50% of the last list price. And they're renting the homes to people who lost their own houses to foreclosure, she says.
Not the Best Time to Sell
In Los Angeles, buyers are concerned about the uncertainty in the market, says Simon Bliss, marketing manager for American Financial Realty & Mortgage in West Hollywood. "It has scared people so much that there's a huge standstill in the market," Bliss says. "It's like trying to second-guess a hurricane."
Rick Sharga, vice-president for marketing at Irvine (Calif.)-based RealtyTrac, an online marketplace for repossessed real estate, says it's a bad time to be a seller.
"If you're a seller, it's a good time to take the 'For Sale' sign off the front lawn," Sharga says. "If you don't have to sell, now is a good time to be on the sidelines. That's one of the reasons that the jury is out on how active the spring buying season is going to be."
As some lenders collapse under the weight of bad mortgages, others are getting pickier. Now you have to have a real down payment -- and actually be able to afford the house.
With the news full of stories about the collapse of lenders that sell mortgages to people with less-than-perfect credit, the survivors are clamping down, leaving first-time homebuyers to wonder, "Will I still be able to buy a house?" People with loans nearing the end of low-interest introductory periods are asking themselves, "Can I qualify for a refinance I can afford?"
The short answer, of course, is that it depends.
"The prime people will still be able to get loans. You'll just have to have a down payment, documentation and a higher credit rating, (although) I think there will be even some tightening in the prime," says Christopher Cagan, director of research and analytics for First American Real Estate Solutions in Santa Ana, Calif.
"It's the marginal people going for the subprime, low-doc loans who'll feel the change," he says. "They're going to be asked, 'Where's your documentation? Let me check that appraisal. What's your income?' "
In a nutshell, here's what the changes are likely to mean to you:
With a FICO score roughly above 620 and a stable income, you're likely to be a "prime" customer, although factors like other debt you're carrying and how much you want to borrow also enter the equation. Experts differ on whether they expect lenders to get fussier in evaluating customers for prime loans. Most say that with a strong record of paying bills on time, a documented, steady income and a loan request no bigger than 80% of the value of a property, you should be able to borrow easily and at a low rate. In fact, if you are in the prime category, now is a great time to refinance, since 30-year fixed rates are dropping to 6%, says Mike Fratantoni, senior economist with the Mortgage Bankers Association.
If your FICO score is below 620, you may still get a loan, but it's likely to be an expensive subprime product.
The new environment
Until early 2006, the overheated lending market was pumping out money. Brokers competed to sell mortgages, and, in many cities, incentives to sell stoked home prices into double-digit yearly appreciation. Loans covering 100% of a home's purchase price were not uncommon, with no down payment required. Borrowers, even with badly damaged credit, were breezing into lenders' offices and emerging with loans that sometimes even locked them into paying more than they earned.
Now, "it's back to the old-fashioned rules," Cagan says. With less money available, and with fewer buyers and a glut of houses for sale, lenders are requiring detailed application forms and documents detailing finances and income.
Cagan is predicting that 13% of the 8.37 million adjustable-rate mortgages sold from 2004 to 2006 will fall into foreclosure in the next six or seven years, and that certainly will be disastrous for the 1.1 million families involved. But he's adamant that "this will not break the economy."
Still, talks with regulators and mortgage finance experts reveal some major implications for homeowners in the changing lending climate.
The three primary changes are:
A sharp reduction in "no-doc" loans.
A big reduction in 100% financing.
The return to strict, traditional standards in qualifying borrowers.
Most change will be concentrated in the riskier subprime market. That affects borrowers who can't document a steady income or an income substantial enough to make payments on the loan they want. People whose bankruptcy was discharged fewer than four -- or even as long as seven -- years ago may have to wait awhile to borrow, experts say.
While interest rates are expected to rise, they'll rise higher on subprime loans. For some borrowers, the question won't be "Can I get a loan?" but "Can I get a big enough loan to buy the house I want?"
"Those higher rates are going to be fed through to borrowers immediately," says Fratantoni, the Mortgage Bankers Association economist. "Some portion of the subprime market will no longer be able to qualify for loans."
Subprime products won't completely disappear, says Dustin Hobbs, spokesman for the California Mortgage Bankers Association, but the range and availability are likely to shrink.
No-doc loans
No-documentation or low-documentation loans will be considerably harder to find. "We are going to crack down on the use of these low-documentation products," says Sharon McHale, spokeswoman for Freddie Mac, the congressionally chartered nonprofit corporation that works to create housing affordability.
With no-doc and low-doc loans, lenders waived income documentation requirements, taking a borrowers' word for their income or not asking at all. Such "stated-income" loans are sometimes called "liars' loans," and no doubt plenty of borrowers did overstate their incomes. But stated-income loans are a godsend for self-employed people who have a good, if erratic, income or take a lot of tax deductions, creating a low net number on their income tax returns, the document lenders use to verify income.
"Lenders are going to be doing more to verify incomes as standards tighten," says Hobbs, of the California Mortgage Bankers Association.
100% loans
Look for the return of the traditional down payment as it grows harder to find a 100% loan, particularly a subprime one. No-down loans "will still be an option for those with good credit but more difficult with imperfect credit," predicts Hobbs.
Nervous lenders are becoming acutely interested in ensuring that borrowers don't overcommit. "You still are going to be able to buy (a home)," says Cagan, "but you will be expected to put something down."
Here's how the 100% financing has worked: Lenders sell borrowers two loans -- one, a mortgage for the bulk of the house cost, and another to cover the down payment. The big loan is a first lien on the house, the second takes a subordinate position in case of default, so it goes for a higher interest rate. The loan package is split into two because most lenders require borrowers to buy private mortgage insurance (PMI) -- to cover the payment in case you cannot -- on mortgage loans greater than 80% of the value of the house they're buying.
PMI may be a good idea, but it's expensive. If you borrow the full value of a $300,000 home at 7%, your monthly payment would be $1,995.91 in principal and interest, plus $260 monthly for mortgage insurance. But put in $60,000 cash from savings and your monthly payment drops to $1,596, with zero insurance. (Use this PMI calculator at the site of lender goodmortgage.com to run your own numbers.)
Now, not only are lenders (slowly) concluding it was risky to have borrowers overloaded with debt, they are also seeing, in the recent tide of foreclosures, evidence that when homeowners have no own money tied up in a house, it's emotionally and financially easy for them to walk away. They "were homeowners, but they really weren't homeowners," says consumer attorney Ira Rheingold, executive director of the National Association of Consumer Advocates.
A return to tradition
A down payment is a good idea for other reasons, too. By increasing the proportion you pay of the purchase price, you lower your loan-to-value ratio, one of the important metrics that lenders use to figure your interest rate.
Another important metric is your debt-to-income ratio. The less you borrow, the better your ratio. This calculator from the nonprofit Credit Counseling Foundation will give you an idea of where you stand and show you how different loan amounts affect your ratio.
A cash down payment "helps throughout the whole (loan) deal," says Hobbs. "The more commitment you show, the better terms you are going to get."
Mark Hicks, a San Jose, Calif., real estate agent and mortgage broker, says he is finding 100% financing, particularly in the subprime market, is hard to get. "A lot of first-time buyers, that's how they got their homes," Hicks says. "Usually, it was important (because) a lot of them couldn't qualify. They had good credit scores but couldn't qualify on the income."
Taxes and insurance
The return to traditional loan requirements includes ending the practice of removing taxes and insurance from the payment for which a borrower qualifies, says McHale at Freddie Mac. In recent years, some lenders qualified borrowers based just on their ability to cover the monthly mortgage payment. Now, be prepared to demonstrate that you can make not just the monthly mortgage but the entire ball of wax, including taxes and insurance.
For example, to qualify for a 30-year loan of $120,000 at 5.875%, your income must support an $896 monthly payment, including taxes and insurance. But if the taxes and insurance are removed from the formula, you could squeak into the same loan with a smaller income, since the payment would appear to be only $709, although you'd still have to pay the $187 in taxes and insurance each month.
Qualifying standards are tightening
If Freddie Mac can help it, purchasers of adjustable-rate loans with cheap introductory periods will have to qualify on the basis of the higher, "fully amortized" interest rate, not the cheap introductory rate.
"We will not buy loans that are underwritten to the teaser rate," says Freddie Mac's McHale. "They have to be fully amortized rate."
That means if you got a loan with an introductory period at 5% that adjusts to 12% after two years, you'll be evaluated on your ability to pay off the loan at the 12% rate, not 5%, as before. For example, if you're borrowing $200,000, you'll have to qualify on the basis of the 12% rate, for a monthly payment of $2,057 (plus taxes and insurance), rather than the 5% rate, with a $1,073 monthly payment -- a difference of $984 a month. (Use the MSN Money mortgage calculator to punch in your own numbers.)
What to do
The key to a new mortgage is to make conservative decisions. Here are five steps you can take to protect yourself as the housing market changes.
If you can't make your mortgage payments, call your lender, says Rheingold, of the National Association of Consumer Advocates. It is not in a bank's best interest to foreclose on your home, so there's an incentive to try to help you by reducing your payment and restructuring your loan.
If you're shopping for a loan, get the safest, most economical product, the 30-year, fixed-rate mortgage, Rheingold advises. Newer 40- and 50-year loans cost too much, and ARMs are risky, and growing riskier, with mortgage rates rising for many borrowers.
Don't buy any loan that you do not thoroughly understand. "If you were buying a used car and you saw some things that were a little bit the matter with it and you didn't understand, would you buy it anyway?" asks Rheingold.
Wait to buy and save for a down payment. House prices could easily go down in many markets, so put off your purchase if you can. Sock your money away so you can get score better terms from the lender when you do buy.
If you do buy, scale back your expectations and buy a less-expensive house. Even if a lender lets you, don't break your personal bank trying to get into a house you really can't afford.
Posted by: admin on the 22/11/2007 15:00 | Categories:
General,
Fear stampeded a lot of people into buying a home during the recent real estate boom. Now we're seeing the even more fearsome fallout.
People who were terrified about being priced out of the real estate market are now horrified by their ever-rising mortgage payments. People who were afraid of missing out on the "easy money" of home-price appreciation are now anxiously realizing that what goes up can also come down.
Foreclosures are spiking. Sales and prices are stalling. Lenders are finally tightening up ridiculously loose lending standards, just at the point where many people are realizing they can't afford the mortgage they have and desperately need a new one.
Despite all of this, I still hear from people who are pressuring themselves into buying a house even when it's not something they necessarily want or need.
It's a fact that homeownership is a great way for most people to build wealth over time. But that doesn't mean everyone should be a homeowner. It's a bigger commitment and more expensive than most first-time buyers ever realize. You should have a clear idea of what you're getting into before you commit to 30 years of payments -- and you shouldn't let any of the following popular legends guide your decision.
'It's a good investment'
Sometimes yes, sometimes no.
Nationally, home prices rose 50% between 2000 and 2005, and in more than 30 cities -- including San Diego, Los Angeles, Miami and Washington, D.C. -- prices doubled.
But that's not the norm. In the 30 prior years, from 1969 to 1999, the average appreciation for homes exceeded the inflation rate by a little more than 1 percentage point. Compare that to stocks, which bested inflation by 7 percentage points in the same period.
And appreciation isn't a given, as homeowners in Detroit, Santa Barbara, Calif., and Kokomo, Ind., are learning.
So far, the price declines have been pretty mild. Let's hope we don't see a repeat of the real estate recessions that gripped Boston, Dallas, Houston, Anchorage and Southern California in the 1980s and 1990s.
After dropping more than 20% in the 1990s, for example, Los Angeles home prices took almost 10 years to regain their peak, says real estate expert John Karevoll, an analyst with DataQuick Information Systems. Anyone who lived here during that time knows people who were upside down -- owing a bigger mortgage than the home could be sold for. Thousands of people simply walked away from houses they couldn't sell, trashing their credit ratings in the process. Lenders slashed the prices on foreclosed homes to get rid of their burgeoning inventories, which further drove down property values. It was an ugly cycle that, once started, was hard to stop.
Even when prices are perking along normally, though, your home may benefit your bottom line less than you think. Home-price appreciation figures don't take into account the considerable amounts homeowners shell out along the way. The Wall Street Journal once estimated a typical homeowner over 30 years would pay nearly four times the house's purchase price in maintenance, repairs and improvements.
A home is primarily a place to live. Its value as an investment is secondary and certainly is no replacement for a well-diversified portfolio of stocks and bonds.
'I'm tired of throwing away money on rent'
Normally, renting is cheaper than owning. But in some cities, soaring real estate prices have made renting so much cheaper that it's getting really tough to make the case for becoming a homeowner.
For many people, the choice is between renting an affordable place in a good neighborhood and straining to buy either a less desirable place or one that requires a tortuous commute.
And as we're seeing, many people stretched themselves way too far to buy houses. They opted for adjustable mortgages or loans with exotic terms; what initially seemed like reasonable payments suddenly spiked, throwing financial lives into chaos and contributing to the current high delinquency rate.
You're not really throwing money away when you send a check to your landlord, anyway. You're exchanging it for a place to live. You're also getting flexibility and freedom -- things you sacrifice when you buy a home.
When you're a renter, it's the landlord, not you, who is generally responsible for maintenance, repairs and the toilet that blows up in the middle of the night. If the neighborhood should start to slide, or you get or lose a job, you can up and move, often with just a few weeks' notice.
It's true that you may have to deal with rising rents and recalcitrant landlords. Homeowners, however, are often stuck with rising taxes and maintenance costs, as well as recalcitrant neighbors.
Moving is never fun, but moving when you own a home is an expensive, time-consuming process. Finding a buyer can take months in all but the hottest markets, and you should figure selling costs will eat up about 10% of your home's value, once you add agent commissions and moving expenses. On a $250,000 home sale, that's like piling up $25,000 in cash and setting fire to it -- that much of your equity is gone for good.
In other words, homeownership is more like marriage; renting is more like living together. Make sure you're ready to be wedded to a house before you propose to leave behind life as a renter.
'I need the tax deduction'
Buying a house just for the mortgage break would be like giving somebody a buck just to get 35 cents or less in return.
That's because your write-off is limited to your tax bracket. If you're in the top federal tax bracket, every dollar you pay in mortgage interest only saves you 35 cents in taxes. Most people get even less, since they're in the 25% or lower tax brackets.
Don't misunderstand -- the tax break is nice, and you need somewhere to live. But you should make sure you can really afford to own a home before you take the plunge.
Remember that many of the real costs of owning a home aren't deductible. Uncle Sam won't give you a break for insurance, repairs or maintenance, for example -- and those costs can really add up.
Most homeowners should plan to spend at least 1% of their home's purchase price each year on maintenance and repairs, says finance expert Eric Tyson -- and more if they plan to hire someone else to do all the work. Tyson, a co-author of "Home Buying for Dummies," recommends setting aside some money each month in an emergency fund. You may not spend the whole amount every year, but sooner or later a big expense will come along -- a new furnace or roof, for instance -- that will consume several years' worth of savings.
If you fail to maintain your home properly, you'll pay even more when it comes time to sell. Many buyers won't even bid on a property that shows significant neglect. Even in hot markets, buyers are likely to ask for expensive concessions to pay for the repairs you should have been doing all along.
The key tests
The best advice on the issue of whether to buy remains the time-tested version: Do it when it's right for you. That means being able to agree to all the following statements:
I plan to stay put for at least three years. If the real estate market in your area is weak, you may need even longer for price appreciation to offset the costs of selling and moving.
I can swing all the costs involved. That requires, most importantly, having enough cash for a decent down payment (which in today's lending environment may mean at least 5% of the purchase price). I'm also a fan of using good, old-fashioned fixed-rate mortgages -- either the 30-year variety or hybrid loans that are fixed for as long as you plan to remain in the house.
If you can't swing the payments with one of those loans, you probably can't afford the place. (If you are contemplating a less traditional loan, make sure you find out how high the payments can go and determine whether you could afford to pay them.) Then make sure you can afford all the incidental costs, including taxes, insurance, homeownership association dues and assessments, repairs and maintenance. It's not a bad idea to limit your total housing outlay to 25% or 30% of your gross income, especially if you want to have money left over to save for retirement, fund your children's college educations and take the occasional vacation.
I want to be a homeowner. Houses are expensive and complicated to buy, finance and maintain. Appreciation is far from a given. If you don't have a strong desire to own your own walls, and do what it takes to keep them in good shape, you're probably better off remaining a renter -- at least for now.
Posted by: admin on the 05/10/2007 11:59 | Categories:
General,
While house prices were soaring, fueled by low interest rates and risky borrowing practices, wages barely kept pace with inflation.
By The Associated Press
An Associated Press analysis of new census data provides insight into the reasons for the slumping housing market: Since 1990, homeowners have faced a growing gap between their incomes and the price of their homes.
The widening gap in all but a handful of the nation's 500 largest cities helped make the recent boom in housing prices unsustainable, according to analysts. The rising prices were fueled largely by low interest rates and risky borrowing, rather than increasing incomes.
"We had an artificial economy," said Brad Geisen, founder of Foreclosure.com, a Web site that lists foreclosure properties. "There was all this wealth created in real estate, and it wasn't really created."
Nationally, the median household income grew by about 60% from 1990 to 2006, roughly matching inflation. At the same time, the median home value -- the point at which half were more and half were less -- more than doubled, to $185,200.
The gap between incomes and home values was even bigger in many cities.
For example, incomes in Miami roughly kept pace with inflation -- meaning they were effectively stagnant -- while the median home value quadrupled, to $315,900. In places such as Bend, Ore., and North Las Vegas, Nev., incomes about doubled, but home values increased fivefold.
Mark Zandi, chief economist at Moody's Economy.com, likened the current housing market to the dot-com boom and bust a few years ago, when stock prices for many high tech companies soared -- before some of them ever turned a profit -- and then crashed.
"The parallels are quite similar," Zandi said.
The Census Bureau today released 2006 housing data for every state, county, metro area and city with a population of at least 65,000. Income data were released last month.
Together, the figures provide a snapshot of the nation's economy just as housing prices were peaking in many areas. Since then, housing prices have decreased in many markets, fueled by a crisis in the subprime loan market and dwindling credit even for some wealthier borrowers.
Long-term trends converge
The AP compared the 2006 figures with data from the 1990 Census for the 499 cities that were included in both reports, providing an analysis of long-term trends that helped create today's housing slump.
The analysis showed that homeowners in nearly every city are spending significantly bigger shares of their incomes on housing costs. From 1990 to 2006, the share spent on housing costs increased in all but 13 of the cities examined. Nationally, the share increased from 21% to nearly 25% for homeowners with a mortgage.
Many of the cities with large increases in home values were fast-growing cities or places with thriving economies. However, there were also large disparities in incomes and home values in some distressed cities, mainly because incomes effectively dropped.
Home ownership rates are among historic highs, at 67.3% nationally. And booming home values have increased wealth for many families, allowing them to use the equity in their homes to take out second and third mortgages to finance home improvements, pay for college or buy automobiles.
Dreams on hold
But many others who bought at the height of the market will have a harder time realizing their financial dreams.
Shawn Talbot and Gerry Woodruff bought a three-story condominium just outside San Diego in 2005, hoping to stay for about three years before trading up to a single-family home.
They were first-time homebuyers, paying $431,000 and financing it with two loans. They didn't have a down payment, but they hoped the value would increase enough to give them a sizable one for their next house.
That dream is now on hold, as the market value of their condo is in flux. The couple both have good-paying jobs -- Talbot works for a trade association and Woodruff is a financial analyst for an aerospace company. But the median home value in San Diego was $579,000 in 2006, among the most expensive in the country.
"Houses out here are almost like a 401(k)," Talbot said in a telephone interview. "It grows and grows until you get older and you need it.
"But a year or so ago all that changed," she said. "I'm not sure we will ever be able to afford a single-family home in San Diego."
Mortgage loans eating up incomes
State
Paying at least 30% on mortgage
Median cost per month
California
51.8%
$2,142
Hawaii
45.7%
$1,959
Nevada
45.4%
$1,617
Florida
44.9%
$1,425
New Jersey
44.7%
$2,130
Rhode Island
43.5%
$1,707
Massachusetts
41.8%
$1,925
New York
40.9%
$1,789
Washington
39.8%
$1,573
Connecticut
39.6%
$1,870
Oregon
39.1%
$1,412
New Hampshire
39.0%
$1,702
Illinois
38.7%
$1,566
Colorado
38.5%
$1,534
District of Columbia
37.8%
$1,949
Arizona
37.4%
$1,359
United States
36.9%
$1,402
Vermont
36.5%
$1,342
Michigan
35.2%
$1,302
Maryland
35.0%
$1,736
Montana
34.7%
$1,108
Alaska
34.2%
$1,611
Virginia
34.2%
$1,540
Idaho
33.9%
$1,099
Minnesota
33.9%
$1,436
Georgia
33.6%
$1,289
Maine
33.4%
$1,177
Wisconsin
33.4%
$1,338
Texas
33.3%
$1,309
Mississippi
33.1%
$940
Utah
33.1%
$1,294
Pennsylvania
32.6%
$1,271
Ohio
31.8%
$1,216
South Carolina
31.8%
$1,055
Tennessee
31.5%
$1,072
Delaware
31.3%
$1,371
North Carolina
31.3%
$1,144
New Mexico
31.0%
$1,076
Alabama
28.8%
$988
Louisiana
28.7%
$1,017
Missouri
28.7%
$1,097
Kentucky
27.7%
$989
Nebraska
27.5%
$1,163
Arkansas
26.9%
$908
Wyoming
26.9%
$1,059
Oklahoma
26.8%
$971
South Dakota
26.8%
$1,076
Indiana
26.7%
$1,089
Kansas
25.8%
$1,141
Iowa
25.1%
$1,063
West Virginia
24.5%
$853
North Dakota
23.0%
$1,043
Posted by: admin on the 17/09/2007 10:40 | Categories:
General,
As the demand for apartment housing rises, Apartments.com conducted a survey to current renters to find out why they choose to rent. The results of the survey reveal that maintenance free living, cost and flexibility are the most common reasons to rent!
The largest number of respondents (43.7%) rent primarily for the maintenance free living apartments provide. Many respondents have a strong desire for the convenience of a maintenance person available for common household repairs as well as the freedom of not needing to tend to a lawn, garden or landscaping.
More than twenty-three percent of renters choose to rent for financial reasons. According to the National Multi-Housing Council (NMHC), if an individual plans to live in one place for less than five years, it may make the most financial sense to rent. The costs of buying and selling a home can total 10 percent or more of the price of the home. Additionally, home ownership in a desired neighborhood may be much more expensive than renting in the same neighborhood. Some of the survey respondents indicated that they chose to rent in a preferred school district when owning in the area was not within their budget. Renting also affords individuals the freedom to invest in a variety of stocks, bonds and mutual funds that can provide a higher return on investment as opposed to property ownership. According to the NMHC the average home value increases only five percent each year, whereas the average stock value increases seven percent and bond value increases eight percent each year.
Nineteen percent of respondents indicate that relocation flexibility and the lack of a long term commitment in an apartment is the primary reason they choose to rent.
The NMHC suggests that renting may be a good choice for the following types of individuals:
Young adults just beginning their careers.
Single parents who do not have time for maintenance or the money to buy a house in a desired school district.
Empty nesters who want to travel.
Anyone tired of long commutes to work.
Anyone who wants abundant amenities and social activities where they live.
Professionals who transfer often.
For those who choose to rent, apartment selection hinges on specific available amenities and community features. Our survey revealed that in-unit washers and dryers and air conditioning are the most desirable amenities. Properties that allow pets and have ample parking for tenants top the list of community features that increase renter satisfaction.
Posted by: admin on the 25/07/2007 15:18 | Categories:
General,
