Archive for the 'Housing Bubble' Category

Date: July 23rd, 2008, Filed under Housing Bubble

Chicago, IL

By A.B. Dada

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Daniel Gershburg Esq., is a Bankruptcy & Real Estate attorney serving clients in Brooklyn, Queens, Manhattan, Staten Island, Long Island and Westchester. Gershburg is a NACA member, an organization I speak very highly of who defends consumers from junk debt buyers and other collector nightmares.

On his blog, Gershburg covers a topic that we’ve spoken about lately: short sales. Gershburg introduces a new thought in the mix:

Furthermore, the remaining balance of the mortgage would be forgiven by the lender and she would be able to live in the house, albeit with a new owner, until such time as she had the funds to repurchase the house. The description is insane.

Read the rest of this article titled Short sale to investor who rents to previous homedebtor? at the Housing Bubble site.

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Date: July 23rd, 2008, Filed under Housing Bubble

Chicago, IL

By A.B. Dada

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Used home sellers for recent years were tricked into believing their homes were worth more than they probably should be: some people bought homes at a huge price, others extracted equity using loans or lines of credit. As the housing market returns to realistic figures, prices are falling, leaving some homeowners upside down on their loans. These people are the most likely to default on their mortgages and lose their homes to foreclosure.

But not every homedebtor bought more than they could afford, many still have equity or are not too underwater. When homedebtors hold to previous year’s ridiculous pricing, the news media loves to quote a common phrase used: “We’re not going to give our house away.”

Read the rest of this article titled Sellers won’t give their house away: smart at the Housing Bubble site.

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Date: July 14th, 2008, Filed under Housing Bubble

Chicago, IL

By A.B. Dada

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It’s a common search term for this site: what banks are bankrupt?

Theoretically, there’s only one way to figure out how solvent a bank is: compare the amounts of money/deposits owed to depositors (people with accounts) versus the amount of cash the bank has on its balance sheets and the amount of assets the bank has as security against loans. The major problem today is that many banks are listing houses on their asset sheets that are far overvalued due to the recent, and expected, housing market crash.

Read this entire article at Bank Bankruptcy and Insolvency at the Housing Bubble site.

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Date: July 11th, 2008, Filed under Finances, Housing Bubble

Chicago, IL

By A.B. Dada

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It’s been a long while since I last discussed the rules one should follow before finalizing the closing on purchasing a house or a condo.  Since I last talked about it, I’ve reviewed my old rules and added some new ones.  This declining housing market is a great way to learn about how to protect yourself in the future from bad decisions.

Rule #1: Ignore Family and Friends.  The sub-part of this rule is “especially if they work in real estate or banking.”  I know quite a few friends who were pushed into buying a house, because of the way family and friends berated them for being renters.  What shocks me is that these friends don’t harbor great resentment and hurt that they were conned into making the biggest mistake of their lives for the next 7 years.  Family and friends can not, and should not, ever entice you to making huge financial decisions.  Whether it is what stock to buy or fund to invest it, or what to do with your living arrangements, family and friends should never be cheerleaders but naysayers.  You want them to give you the bad side of what your decision might bring you, not the good side.

Rule #2: Look at the comparative financial comparisons. If you are buying a house that costs more than 120X what renting a similar house would cost, you’re throwing money away.  If a $300,000 house costs $1500 per month to rent, renting makes much more sense than buying.  As this multiple gets bigger, it means more money you’ll be throwing away that you’ll never gain in equity.  As this multiple gets smaller, it means the house could actually be cash flow positive if you needed to rent.

Rule #3: Look at your realistic financial situation. I highly recommend buying a home that costs no more than 3X your annual income.  The problem with this figure is that it does not include insurance, property taxes, maintenance and other costs such as utilities and filling the rooms.  The 3X number should be a cap, but not a goal.  If you make $60,000 per year, don’t look at anything more than $180,000, and preferably far less.  One more addition to this rule is to try to only use one income earner’s salary for this calculation.  If you make $50,000 per year and your spouse makes $40,000, I’d recommend using one of those numbers for the 3X maximum, preferably the smaller income!  Why is this?  If one of you should lose your jobs, you’ll still be solid in making your mortgage payments.  I prefer to not exceed 33% of gross monthly income as a total of principal, interest, taxes, insurance and basic maintenance.  25% is a better figure, if possible.

Rule #4: Do not listen to people who make money from your transactions. Real estate agents are NEVER your friend.  Mortgage brokers aren’t either.  These people will profit only if you close a deal, so it is in their best interest to persuade you to do so.  I prefer to negate what an industry agent says to try to consider the flipside.  If a real estate agent says “Now is the best time to buy,” I tell myself “Now is the worst time to buy” and try to solve that with proof.  If they say “They’re not making any more land,” I tell myself “They are developing more land.”  In the past 4 years, almost all of these agent adages proved to be false, so the negation rule would have saved millions the calamity of buying too much house.

Rule #5: Never get an adjustable rate mortgage. It doesn’t matter if you qualify for one and that it might save you a little money in the short run.  Get a fixed rate loan.  If you don’t qualify, don’t buy.

Rule #6: Never get a 0% down loan.  I recommend against even a 3% loan.  If you can not save 20% down over the years you are renting, you’re living beyond your means.  Get more roommates.  Cut your living expenses.  By putting 20%, you are insuring against market declines which happen cyclically.  20% is just a start, the more you put down, the easier life will be.

Rule #7: Ignore the tax breaks or deducations for home ownership. The IRS is not one to give good tax breaks.  They let business owners write off large SUVs, but that ignores the cost of maintenance and fuel.  They give parents a write off for children, but the write off is less than the cost of caring for a child.  They give homeowners a break on interest, but many homeowners are upside down on their homes for years because of the easy money policies from the same people who control the IRS.

Rule #8: Consider the lifetime costs of where you want to live. We’ve seen gas hit $4.30 per gallon in the Midwest.  If you have to drive 30 miles round trip to work, 60 miles per day, with an average car getting 20 mpg, you’re blowing almost $15 per day in just fuel costs, not including other maintenance.  That’s up to $5000 a year in overall maintenance and fuel supplies.  How much will you lose per year living far from work?  Also, consider the time you lose in the distance.  A “great deal” on a home does not mean you will save money or time.

Rule #9: Consider the anchor a home straps to your feet. The moment you buy a home, it reduces your chance of improvement in your career.  Those who are mobile (renters, usually) can change cities in a heartbeat, just paying the cost to break a lease.  If your job takes you elsewhere, you can do it on a whim.  Owners are stuck paying a mortgage until the house sells, if it does at all.  Many employers also know who is a renter or an owner, and you may miss pay raises or advancements once they know they have you trapped under your home’s mortgage.

Rule #10: Homeownership is not the American Dream. The American Dream is having the opportunity to work hard and do better than the previous generation.  Homeownership does not give you roots or stability, it actually takes away from both.

For most people who pay a mortgage, they are much further back in reaching their goals because they broke one or many or all of these rules.  If you want to be happy, follow the rules perfectly, and you’ll see that homeownership is not always beneficial, and many times it is destructive to one’s goals for their lives.

Comments: 1

Date: June 19th, 2008, Filed under Housing Bubble

Chicago, IL
By A.B. Dada
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With the housing market quickly finding its equilibrium (meaning prices are down and will continue to drop), the Realtor’s favorite proclamation that “Now is a great time to buy!” keeps rearing its ugly head. Now is not a great time to buy. The last great time to buy was when interest rates were in the double digits, a hefty down payment was required, and a would-be homedebtor had no other debts to contend with. Thanks to your unelected Federal Reserve (and other Central Banks around the world), homeownership is something few families or individuals will ever realize: ownership means having a clean title. Debtorship means borrowing from others for decades, if not a lifetime.

I have friends lately asking me what is a good starter home in a good starter community. These friends are recently married (or planning on it), have newborns (or are planning on it) and are just out in the job market for the first time in their lives (usually less than 5 years from graduating college, usually burdened with school loan debt). My answer is: “It’s always a great time to find a starter home to rent.”

Starter homes make no sense. Purchasing a home historically has meant the following steps have been completely successfully:

1. You, and your spouse, are in a job market that has been consistent and secure for many years.
2. You, and your spouse, are clear of all debt burdens, including student loans, credit cards, personal loans, auto loans, and other debts.
3. You, and your spouse, have a significant amount of money to put towards a down payment, preferably 20%. This shows the banks, and yourselves, that you can actually save enough money each month to cover down periods of unemployment or illness.
4. You, and your spouse, can find a home with a total sale price of less than 3X the income of one earner. By trying to qualify for a mortgage using your entire household income (HHI), you’re taking a risk that you’ll both be employed at the current salaries forever. This is a tragic mistake that many families make, and one big reason why home prices skyrocketed once women entered the workforce en masse in the 70s. By finding a home that is less than 3X one salary, you can afford to have one spouse take time off to raise children or at least weather a job loss. Even if both lose their jobs, they can both return to work at a lower salary and still cover their mortgage.
5. You, and your spouse, have at least 1 year of mortgage payments, insurance, taxes and maintenance set aside beyond your down payment.

Item #1 is a key factor in finding your home. Starter homes are a green light to employers: “This employee now has a mortgage, so they’re stuck with us.” Renters are hated by employers; I know, I’m an employer. When an employee has no roots holding them back, they can always take better opportunities, maybe even in other cities. The moment you have a mortgage with little “skin in the game” (i.e., real equity), you can’t move at a moment’s notice. Even if your rental lease requires staying in the rental for the full term of the lease, at most you’re “stuck” for 12 months, and usually quite less if you’re really investigating where to make roots in the future.

If you’re new to town, renting gives you an opportunity to navigate different neighborhoods, find somewhere close to work to live at, and look for the best jobs and schools for your household’s future. Renting means no property taxes, maintenance, or general insurance. Instead you’re just covering the rental (and renter’s insurance) costs for a short period of time.

In terms of item #2, paying off all debt before purchasing a home is not just prudent, it’s safe. By allowing yourself to remove all payments but your home costs (and possibly healthcare), you’re giving yourself a nice cushion to increase your savings and investments. This also gives you the option of paying down your mortgage faster. I like to see people try to pay off a mortgage in 15 years, not 30. Some can even do it in 7 years if they don’t live beyond their means, by using both spouse’s incomes to pay down the principal on the loan. Having other debts means having to remember to pay everything each month, and a short-term burp in income can be destructive to a marriage, a family, and livelihood for years to come.

Item #3 sounds impossible for most families, but it is very possible if you consider how much money the average 20-something spends on frivolous items. Video games, pub crawls, new cars, new toys, expensive vacations, and expensive clothing are items you can easily take advantage of in your 30s, and by avoiding them when you’re young and finding your stable goals, you can maximize your work potential when you’re young and have the time and energy to take risks. Saving 20% is as easy and living with your parents (yes, it used to be done for generations) or renting with friends in a small 2 bedroom. Privacy lost means dollars saved. It’s not cool to be in debt but have your own place that you can barely afford. The late nights staying awake wondering how you’ll pay the bills can haunt your for years.

Item #4 is great advice: find a home that is not expensive based on one salary. When you do add the second salary in, you may have almost double of your money available to pay down your mortgage, save for the future, and plan for emergencies. If one spouse has a $50,000 annual income, buy no more than $150,000 in terms of the overall price of the home. The home I live in in Lake County, Illinois is worth around $130,000 currently. The mortgage on such a home can be paid off in 5-7 years with our household income. We also have a renter who covers the property tax portion of the cost of ownership, since there are no children in the home (other than me).

By buying less than you can afford, you can then afford to pay it off faster, putting you in place to be at the top of the saving pyramid in the country. Few people save, because they’re paying too much to live. Why not pay less to live so you can save more? Comfort, security, safety and ease in living all come with buying well beneath your means.

Item #5 is just common sense: if you have 1 year of payments in the bank, you can both go one year without working, which would be ridiculous to do unless you’re both lazy.

Don’t look for a starter home: look for a home. Don’t hope to spring up to bigger and bigger homes unless you’re planning on a huge family or planning to take care of a relative or parent in the near coming years. 1 bedroom per two people is more than enough, and what you save in purchasing price, utilities, and insurance will more than make up for that “lack of privacy” that people worry about. The average family of 4 could get by with 2 bedrooms, not 5. The cost difference may be the difference between retiring at 50 with a summer home and retiring at 70 and having to live with your kids.

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Date: December 13th, 2007, Filed under Housing Bubble

This article is going to infuriate quite a few people I know. I’m not a fan of the HELOC, or what some call the Home ATM. A HELOC, or the Home Equity Line Of Credit, allows you to take a loan out against the equity you’ve built in your home. HELOCs have been very popular even without equity built through paying down a loan, just due to the Federal-Reserve created inflationary pressures that have caused housing prices to rise — giving people more equity in a home than they actually earned by paying their mortgages. Of course, many of these equity values are now falling, leaving some people with mortgages and secondary loans (HELOCs) that are valued over the current value of the home.

First of all, I do believe the HELOC can be useful for a few things: investing in a new business, paying down high interest debt permanently, and emergencies (health or other). HELOCs are terrible ideas for those who want to use the money to buy a new car, take a vacation, or spend on frivolous and unnecessary consumer goods. Let’s look at why that is.

Read this entire article at the housing bubble site

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