FORT LAUDERDALE, Fla. – Nov. 13, 2007 – Three years ago, home builders held lotteries to deal with hordes of people, mostly short-term investors, overwhelming their sales centers. Today, with housing markets crashing, builders practically beg for buyers.
“During the boom, you were developing strategies to manage demand,” said Jill DiDonna, a vice president of Sunrise-based GL Homes. “Now your whole modus operandi is trying to stimulate demand. It’s come 180 degrees.”
GL has grown substantially since beginning as a small local company in 1976. At the end of 2006, GL was ranked as the 36th largest builder in the nation, according to Professional Builder magazine.
The privately held builder also is one of the largest in Palm Beach and Broward counties and is feeling the brunt of the slump because its business is concentrated in the Sunshine State. California, Nevada and Florida were out front in the housing boom and now are leading the downturn.
GL, with revenue last year of $871.7 million and about 250 employees, builds homes for young families and retirees in Broward, Palm Beach, Indian River, Lee and Hillsborough counties. About 35 percent of its business is the growing active-adult segment.
“People are still moving to Florida to retire, and retirees don’t have time to wait on the sidelines,” said DiDonna, 37, in her 14th year at GL.
She discussed the state of the home-building industry during an interview last week at the company’s headquarters. Portions of her answers are paraphrased.
Q: In your opinion, when will the housing market improve?
A: Home builders and sellers are reducing their prices. Over time, the market will be stimulated by that adjustment. How long do I think that will take? Eighteen months to two years.
Q: Until then, can builders afford to keep offering deep discounts?
A: Buyers’ psychology today is that they expect to get good deals. Very few sales are happening without incentives. We just sold 40 homes in Vero Beach. We knocked anywhere from $60,000 to $100,000 off the price of the homes. That seemed to be the magic number. If a house is selling for $300,000, and it cost you $250,000 to build, and you have to sell it for $225,000, at least you have some cash flow coming in. Something is better than nothing.
Q: Are there any silver linings in this slump?
A: The active-adult market is very encouraging. That 55-and-older segment hasn’t seen the downturn that other segments have. At our Valencia Pointe development in Boynton Beach, we’re selling 26 homes a month during season. I go in there when I’m really depressed.
Q: How can consumers take advantage of a buyer’s market?
A: Get pre-approved for a mortgage before making an offer. You will have more credibility. Base your offer on something, like a comparable sale. Negotiate for items that carry value and affect the total purchase price, such as lot premiums, options, closing costs, deposit requirements, closing dates and interest rates. Builders are motivated by quick closings. If you can close quickly, that can play to your advantage in negotiations.
Q: What tactics should buyers avoid?
A: Don’t lowball. It gets the process off to a bad start, and builders won’t take you seriously. Don’t expect the builder to rebuild the house for you to include some unusual feature. Don’t blow the deal over $10,000 or $15,000 when you’ve already negotiated significant savings. Finally, don’t expect that a home will be there when you’re ready. Unique properties at the right price will sell quickly.
Wednesday, November 14, 2007
UF: Florida population growth slows but still remains high
GAINESVILLE, Fla. – Nov. 8, 2007 – According to the University of Florida (UF), Florida’s population growth slowed considerably last year as the housing boom went bust, but it remained relatively strong and likely will stay that way for the next few years.
“There have been a number of news articles lately focusing on the idea that population growth has fallen off the table top in Florida and practically come to a standstill, and that simply isn’t true,” says Stan Smith, director of the UF’s Bureau of Economic and Business Research, who led the research. “Florida has a strong economy and adds jobs every year. That is a major factor in last year still being a big year for population growth, even though it was less than in the previous three years.”
The estimates released this week show the Sunshine State’s population grew by 331,000 between 2006 and 2007, compared with 431,000 between 2005 and 2006; 402,000 between 2004 and 2005; and 448,000 between 2003 and 2004, Smith said. Florida’s total population was estimated at 18,680,367 as of April 1, 2007.
Based on recent trends, Smith said he expects Florida to add about 300,000 residents a year during the next two to three years unless there is a recession.
“The housing boom certainly contributed to Florida’s growth in those earlier years, and the housing bust contributed to the slowdown this last year,” he says. “When economic conditions are tough, it’s much harder for people to sell their homes in New York, Ohio, Michigan or some other state and move to Florida.”
Today’s increasing number of foreclosures, large inventories of unsold houses and the decline in housing prices in some cities contrast starkly with the flourishing construction industry, huge numbers of home sales and flurry of people buying homes simply to make a quick profit that characterized the last few years, he said.
But Florida’s healthy job market and the continued movement of retirees and foreign immigrants to the state helped bolster population growth last year.
“Job growth has been higher in Florida than the national average,” Smith says, adding that the largest increases in jobs during the past year have been in leisure and hospitality services, education and health service. “You also have to factor in Florida’s climate, with its relatively warm winters, which continues to attract people from the Northeast and Midwest from one year to the next.”
Although less significant than employment, retiree migration stands to become increasingly important in the future.
“Over the next 20 years as the baby boomers reach retirement age, the probability is high that many of them will want to move to Florida,” Smith says.
Florida, with its large foreign-born population, also has grown because of the increase in U.S. immigration during the past decade because many newcomers move to places where they already have a network of family and friends, Smith says. Typically, Florida attracts about 8 percent or 9 percent of the nation’s immigrants in a year.
“What is considered a slow year for population growth in Florida would be considered a fast year for most states,” he says. “Between 1990 and 2000, no county in Florida lost population, which is unusual considering that typically 30 (percent) to 40 percent of the nation’s counties lose population during any particular decade.”
Flagler, the state’s most rapidly growing county, has ballooned by 88 percent since 2000, from 49,832 to 93,568; followed by Sumter, which increased 68 percent from 53,345 to 89,771, and Osceola, up 54 percent from 172,493 to 266,123.
Contributing to Flagler’s growth is its location between Jacksonville and Daytona Beach, which is attractive to retirees as well as to commuters. Boosting Sumter County’s population gains are spillover from Orlando to the southeast, as well as the booming Villages retirement community, which covers parts of three counties. Third-ranked Osceola County has drawn a sizeable population of Puerto Rican immigrants in recent years.
Counties with the biggest increases in absolute numbers were Orange County, which grew by 209,259 between 2000 and 2007, followed by Miami-Dade with an increase of 208,513 and Hillsborough with an increase of 193,913. Monroe was the only county in Florida to lose population between 2000 and 2007, declining by 602.
© 2007 FLORIDA ASSOCIATION OF REALTORS®
“There have been a number of news articles lately focusing on the idea that population growth has fallen off the table top in Florida and practically come to a standstill, and that simply isn’t true,” says Stan Smith, director of the UF’s Bureau of Economic and Business Research, who led the research. “Florida has a strong economy and adds jobs every year. That is a major factor in last year still being a big year for population growth, even though it was less than in the previous three years.”
The estimates released this week show the Sunshine State’s population grew by 331,000 between 2006 and 2007, compared with 431,000 between 2005 and 2006; 402,000 between 2004 and 2005; and 448,000 between 2003 and 2004, Smith said. Florida’s total population was estimated at 18,680,367 as of April 1, 2007.
Based on recent trends, Smith said he expects Florida to add about 300,000 residents a year during the next two to three years unless there is a recession.
“The housing boom certainly contributed to Florida’s growth in those earlier years, and the housing bust contributed to the slowdown this last year,” he says. “When economic conditions are tough, it’s much harder for people to sell their homes in New York, Ohio, Michigan or some other state and move to Florida.”
Today’s increasing number of foreclosures, large inventories of unsold houses and the decline in housing prices in some cities contrast starkly with the flourishing construction industry, huge numbers of home sales and flurry of people buying homes simply to make a quick profit that characterized the last few years, he said.
But Florida’s healthy job market and the continued movement of retirees and foreign immigrants to the state helped bolster population growth last year.
“Job growth has been higher in Florida than the national average,” Smith says, adding that the largest increases in jobs during the past year have been in leisure and hospitality services, education and health service. “You also have to factor in Florida’s climate, with its relatively warm winters, which continues to attract people from the Northeast and Midwest from one year to the next.”
Although less significant than employment, retiree migration stands to become increasingly important in the future.
“Over the next 20 years as the baby boomers reach retirement age, the probability is high that many of them will want to move to Florida,” Smith says.
Florida, with its large foreign-born population, also has grown because of the increase in U.S. immigration during the past decade because many newcomers move to places where they already have a network of family and friends, Smith says. Typically, Florida attracts about 8 percent or 9 percent of the nation’s immigrants in a year.
“What is considered a slow year for population growth in Florida would be considered a fast year for most states,” he says. “Between 1990 and 2000, no county in Florida lost population, which is unusual considering that typically 30 (percent) to 40 percent of the nation’s counties lose population during any particular decade.”
Flagler, the state’s most rapidly growing county, has ballooned by 88 percent since 2000, from 49,832 to 93,568; followed by Sumter, which increased 68 percent from 53,345 to 89,771, and Osceola, up 54 percent from 172,493 to 266,123.
Contributing to Flagler’s growth is its location between Jacksonville and Daytona Beach, which is attractive to retirees as well as to commuters. Boosting Sumter County’s population gains are spillover from Orlando to the southeast, as well as the booming Villages retirement community, which covers parts of three counties. Third-ranked Osceola County has drawn a sizeable population of Puerto Rican immigrants in recent years.
Counties with the biggest increases in absolute numbers were Orange County, which grew by 209,259 between 2000 and 2007, followed by Miami-Dade with an increase of 208,513 and Hillsborough with an increase of 193,913. Monroe was the only county in Florida to lose population between 2000 and 2007, declining by 602.
© 2007 FLORIDA ASSOCIATION OF REALTORS®
Run the Numbers Before Buying an Investment Property
People talk about running the numbers before buying an investment property, but what are the numbers and how do you get accurate numbers? Running the wrong numbers can make the difference of making $500 or losing $1000 per month. In this article, we will go through the costs and factors to consider making your investments successful.
RENTAL INCOME
Rental income is not as straightforward as it seems. Sometimes properties are under-rented and sometimes properties are over-rented, so be sure to find out the market rents when you consider a property. When we bought our first fourplex, we looked at comparable leases and realized our rents were too high, so instead of assuming we would continue to receive $3600 of rental income, we had to be realistic and assume it was more like $3200.
MORTGAGE INTEREST
A huge cost is mortgage interest. You should definitely sort out the details of your loan options and get an idea of current rates before running the numbers. It could make or break a deal. If you are getting a duplex or a house, the loans are generally similar to other home loan programs. Triplexes and fourplexes tend to have higher rates, and commercial is a whole other ballgame. One thing to consider is to put more down because the more you put down, the less your loan will be, which means less monthly interest to pay. Another consideration is the type of loan. We usually recommend people to get a fixed rate mortgage these days because the current ARM (adjustable rate mortgage) rates are not all that much lower than fixed rates.
Just get educated about the loan options and run the numbers with them. Oh, and do not just take advice from one mortgage person. The best way to get educated is to talk to a variety of mortgage brokers and banks to find your best solution; not all loan places have the same programs.
TAXES
People frequently use the taxes from the year when they purchased the property, assuming the taxes will stay the same. Taxes change every year. Taxes can go up drastically after a purchase. For example, an owner occupied property usually has tax breaks, so unless you intend to owner occupy too, your taxes will go up.
In addition, the county appraisal that your taxes are based on could go up after your purchase. For example, if you buy a property for 100,000 but the tax appraisal last year was for 50,000, don't count on it remaining at 50,000. In fact, I have seen cases where a year after a property was purchased the tax assessor increased the appraisal value to the purchase price. The safest approach is to look at the tax rate and the purchase price to determine your future taxes.
VACANCY COST
For some reason people tend to forget to take into account vacancy rate. Even when looking to invest in a desirable rental area, it's best to always take into account at least an 8-10% vacancy rate. Do some investigation, look at your market and find statistics on the average vacancy rate.
TENANT TURNOVER COST
We have personally found the biggest surprise to be the expense of tenant turnover. This includes advertising for a new tenant, cleaning, repainting, replacing carpet, etc. If you expect to have high tenant turnover, like next to a college campus, anticipate this to be a significant cost.
INSURANCE COST
Insurance on investment properties are typically higher than owner occupied, single family properties. So get an insurance quote on the property instead of basing your expected insurance off of the insurance bill for your house. You also should purchase liability insurance, which can be expensive.
MAINTENANCE COSTS
This is by far the most difficult number to estimate. It depends on the property, whether you fix some of the problems yourself or hire outside help, and random luck. So we can't give you a hard and fast number but we can look into different factors to take into account.
**Property Type - When you evaluate different properties remember to take into account the type of property. If it's brick you won't have to paint or worry about wood root. Decks need constant maintenance. A property with wood or concrete floors will be easier to clean and will not have to be replaced when a tenant moves out. Just think about the aspects of the property and their maintenance costs.
**Property Size - A smaller property is easier to maintain than a larger property. For instance, say there are two properties for sale for 200,000 and each have a combined rent of 2000. A property with 2 units and a total of 1000 square feet will be cheaper to maintain than a property with 6 units and 3000 square feet. The larger property will be more expensive to maintain when you are replacing the larger roof, painting the interior walls etc. More units mean more money spent on advertising, make-readies, and more appliances to repair.
**Property Location - Consider your proximity to the property. If you buy a property 30 miles away, over the course of a year you can spend a decent amount of gas money driving back and forth.
**Your personal management style - How often will you do maintenance work yourself vs. hiring help? For instance, when a unit needs painting will you paint the rooms or hire a painter? Hiring professionals is definitely more expensive, but you have to be realistic about how much you will personally do, especially if you are looking at many units.
UTILITY COSTS
Be sure to check what the tenants pay for and what the owner pays for. This includes all the utilities and lawn maintenance. In addition, there may be owner expenses like parking lot lights and trash bin service.
PROPERTY MANAGEMENT COSTS
If you are going to hire a property management company, definitely get their rates. We personally choose properties that we can manage ourselves.
SUMMING THE NUMBERS
We wrote a investment property calculator which is located here Investment real estate calculator. Once you add all the numbers up, you often find the property has 0 cash flow or even negative cash flow. This doesn't necessarily mean you should not purchase the property. There are positive tax benefits to rental properties and depending on your situation, a property with technically 0 cash flow could still put more money in your pocket due to tax benefits. If you think the property is going to appreciate in the future, a zero or negative cash flow property could still be appealing.
The point here is that if you are buying a property with zero or negative cash flow, it's best to know beforehand instead of after the property has been purchased.
RENTAL INCOME
Rental income is not as straightforward as it seems. Sometimes properties are under-rented and sometimes properties are over-rented, so be sure to find out the market rents when you consider a property. When we bought our first fourplex, we looked at comparable leases and realized our rents were too high, so instead of assuming we would continue to receive $3600 of rental income, we had to be realistic and assume it was more like $3200.
MORTGAGE INTEREST
A huge cost is mortgage interest. You should definitely sort out the details of your loan options and get an idea of current rates before running the numbers. It could make or break a deal. If you are getting a duplex or a house, the loans are generally similar to other home loan programs. Triplexes and fourplexes tend to have higher rates, and commercial is a whole other ballgame. One thing to consider is to put more down because the more you put down, the less your loan will be, which means less monthly interest to pay. Another consideration is the type of loan. We usually recommend people to get a fixed rate mortgage these days because the current ARM (adjustable rate mortgage) rates are not all that much lower than fixed rates.
Just get educated about the loan options and run the numbers with them. Oh, and do not just take advice from one mortgage person. The best way to get educated is to talk to a variety of mortgage brokers and banks to find your best solution; not all loan places have the same programs.
TAXES
People frequently use the taxes from the year when they purchased the property, assuming the taxes will stay the same. Taxes change every year. Taxes can go up drastically after a purchase. For example, an owner occupied property usually has tax breaks, so unless you intend to owner occupy too, your taxes will go up.
In addition, the county appraisal that your taxes are based on could go up after your purchase. For example, if you buy a property for 100,000 but the tax appraisal last year was for 50,000, don't count on it remaining at 50,000. In fact, I have seen cases where a year after a property was purchased the tax assessor increased the appraisal value to the purchase price. The safest approach is to look at the tax rate and the purchase price to determine your future taxes.
VACANCY COST
For some reason people tend to forget to take into account vacancy rate. Even when looking to invest in a desirable rental area, it's best to always take into account at least an 8-10% vacancy rate. Do some investigation, look at your market and find statistics on the average vacancy rate.
TENANT TURNOVER COST
We have personally found the biggest surprise to be the expense of tenant turnover. This includes advertising for a new tenant, cleaning, repainting, replacing carpet, etc. If you expect to have high tenant turnover, like next to a college campus, anticipate this to be a significant cost.
INSURANCE COST
Insurance on investment properties are typically higher than owner occupied, single family properties. So get an insurance quote on the property instead of basing your expected insurance off of the insurance bill for your house. You also should purchase liability insurance, which can be expensive.
MAINTENANCE COSTS
This is by far the most difficult number to estimate. It depends on the property, whether you fix some of the problems yourself or hire outside help, and random luck. So we can't give you a hard and fast number but we can look into different factors to take into account.
**Property Type - When you evaluate different properties remember to take into account the type of property. If it's brick you won't have to paint or worry about wood root. Decks need constant maintenance. A property with wood or concrete floors will be easier to clean and will not have to be replaced when a tenant moves out. Just think about the aspects of the property and their maintenance costs.
**Property Size - A smaller property is easier to maintain than a larger property. For instance, say there are two properties for sale for 200,000 and each have a combined rent of 2000. A property with 2 units and a total of 1000 square feet will be cheaper to maintain than a property with 6 units and 3000 square feet. The larger property will be more expensive to maintain when you are replacing the larger roof, painting the interior walls etc. More units mean more money spent on advertising, make-readies, and more appliances to repair.
**Property Location - Consider your proximity to the property. If you buy a property 30 miles away, over the course of a year you can spend a decent amount of gas money driving back and forth.
**Your personal management style - How often will you do maintenance work yourself vs. hiring help? For instance, when a unit needs painting will you paint the rooms or hire a painter? Hiring professionals is definitely more expensive, but you have to be realistic about how much you will personally do, especially if you are looking at many units.
UTILITY COSTS
Be sure to check what the tenants pay for and what the owner pays for. This includes all the utilities and lawn maintenance. In addition, there may be owner expenses like parking lot lights and trash bin service.
PROPERTY MANAGEMENT COSTS
If you are going to hire a property management company, definitely get their rates. We personally choose properties that we can manage ourselves.
SUMMING THE NUMBERS
We wrote a investment property calculator which is located here Investment real estate calculator. Once you add all the numbers up, you often find the property has 0 cash flow or even negative cash flow. This doesn't necessarily mean you should not purchase the property. There are positive tax benefits to rental properties and depending on your situation, a property with technically 0 cash flow could still put more money in your pocket due to tax benefits. If you think the property is going to appreciate in the future, a zero or negative cash flow property could still be appealing.
The point here is that if you are buying a property with zero or negative cash flow, it's best to know beforehand instead of after the property has been purchased.
Five solutions for a troubled housing market
NEW YORK – Nov. 9, 2007 – How do you fix a troubled housing market? Forbes.com asked that question of a broad range of housing experts, including CEOs of real estate firms, real estate practitioners, economists from lending institutions, and research directors at analytics firms. Here are five of their best suggestions.
1. Restore investor faith. “Mortgage fraud, by both borrowers and insiders, must be identified and prosecuted in order for faith to be restored in the market,” says Anthony Sanders, professor of real estate finance at Arizona State University.
2. Expand Fannie Mae, Freddie Mac and the Federal Housing Administration loans. “Our local banks and community banks have done a great job providing funding. (FHA) should be there as a supplemental for people who have good credit,” says Congressman Lincoln Davis (D-Tenn.)
3. Cut construction and prices. “The market will only hit bottom after builders cut construction and sellers slash prices,” says Mark Zandi, chief economist at Moody’s Economy.com. “The longer builders and sellers hold on, the longer the market will struggle.”
4. Bring back non-agency loans. “The dramatic seizing of the mortgage-credit markets caused the elimination of almost any loan that wasn’t backed by Fannie Mae or Freddie Mac,” says Bob Walters, chief economist at Quicken Loans. The revival of non-agency loans “will add much-needed mortgage funding to potential home buyers and folks looking to refinance.”
5. Buyers and sellers get real. Nelson Gonzalez, senior vice president of Esslinger, Wooten Maxwell, believes that once buyers realize that they’re not going to convince a seller to accept a rock-bottom price, fluidity and activity can return to the market. “There is much pent-up demand,” he says, “and buyers have been sitting on their hands for some time now.”
Source: Forbes, Matt Woolsey (11/07/07)
1. Restore investor faith. “Mortgage fraud, by both borrowers and insiders, must be identified and prosecuted in order for faith to be restored in the market,” says Anthony Sanders, professor of real estate finance at Arizona State University.
2. Expand Fannie Mae, Freddie Mac and the Federal Housing Administration loans. “Our local banks and community banks have done a great job providing funding. (FHA) should be there as a supplemental for people who have good credit,” says Congressman Lincoln Davis (D-Tenn.)
3. Cut construction and prices. “The market will only hit bottom after builders cut construction and sellers slash prices,” says Mark Zandi, chief economist at Moody’s Economy.com. “The longer builders and sellers hold on, the longer the market will struggle.”
4. Bring back non-agency loans. “The dramatic seizing of the mortgage-credit markets caused the elimination of almost any loan that wasn’t backed by Fannie Mae or Freddie Mac,” says Bob Walters, chief economist at Quicken Loans. The revival of non-agency loans “will add much-needed mortgage funding to potential home buyers and folks looking to refinance.”
5. Buyers and sellers get real. Nelson Gonzalez, senior vice president of Esslinger, Wooten Maxwell, believes that once buyers realize that they’re not going to convince a seller to accept a rock-bottom price, fluidity and activity can return to the market. “There is much pent-up demand,” he says, “and buyers have been sitting on their hands for some time now.”
Source: Forbes, Matt Woolsey (11/07/07)
First-time buyers can be in the money
MILWAUKEE – Nov. 8, 2007 – Caught in the shifting rapids of mortgage lending, Billy Alt and Kim Le are just now moving into the condo they thought they were buying in August.
The condo they were buying was in the process of being converted from a rental unit to a condo, and that involved some fancy financial footwork – the kind of transactional footnote that caused barely a blip until this summer’s upheaval in the mortgage market.
They quickly reorganized the finances of the deal to keep it on track.
“If we had been looking just a few weeks earlier, it would have been perfectly timed,” said Le.
While credit standards have clenched up, driving many too-lax lenders from the field, plenty of financiers are looking for customers, say home lenders.
“It’s a very good time for first-time buyers,” said Susan Wommack, national account manager with LoanSifter.com, an industry database business in Little Chute, Wis. “The lenders who are still standing are very competitive, and service levels have gone up, too.”
“For people with good credit, who’ve shown some responsibility, and have some income to work with, there’s plenty of money,” said Kevin Kubacki, senior loan officer with Pyramax bank in Greenfield, Wis.
Because a reliable history of meeting mortgage payments weighs heavily in calculating credit scores, first-time buyers are at a bit of a disadvantage, he added, typically landing between 620 and 680.
That limits the types of mortgages that borrowers can get more than the interest rates they’ll pay. For instance, a first-time buyer hoping to snag a relatively rare no-down-payment loan these days hasn’t a prayer with a credit score of less than 680.
Kubacki and other lenders say that first-timers are finding good luck with government programs specifically geared for them, such as those offered by the Federal Housing Administration.
Restrictions are geared to include as many first-time buyers as possible, because that’s the whole point of such programs, lenders say.
Coming up with the downpayment can be hard.
“The 100 percent financing programs have been popular, but people are rightfully wary of those, so we are returning to a 3 percent or 5 percent downpayment,” said Joni VonAsten, underwriting processor and closing supervisor for Wisconsin Mortgage Corp. in Brookfield, Wis. “We’re going back to the standards that have always been in place.”
Key lending ratios for first-time borrowers
• Total debt - including student loans shouldn’t exceed 50 percent of gross monthly income. That includes property taxes and insurance.
• Total housing payments including property taxes and insurance - shouldn’t exceed 34 percent of gross monthly income.
The condo they were buying was in the process of being converted from a rental unit to a condo, and that involved some fancy financial footwork – the kind of transactional footnote that caused barely a blip until this summer’s upheaval in the mortgage market.
They quickly reorganized the finances of the deal to keep it on track.
“If we had been looking just a few weeks earlier, it would have been perfectly timed,” said Le.
While credit standards have clenched up, driving many too-lax lenders from the field, plenty of financiers are looking for customers, say home lenders.
“It’s a very good time for first-time buyers,” said Susan Wommack, national account manager with LoanSifter.com, an industry database business in Little Chute, Wis. “The lenders who are still standing are very competitive, and service levels have gone up, too.”
“For people with good credit, who’ve shown some responsibility, and have some income to work with, there’s plenty of money,” said Kevin Kubacki, senior loan officer with Pyramax bank in Greenfield, Wis.
Because a reliable history of meeting mortgage payments weighs heavily in calculating credit scores, first-time buyers are at a bit of a disadvantage, he added, typically landing between 620 and 680.
That limits the types of mortgages that borrowers can get more than the interest rates they’ll pay. For instance, a first-time buyer hoping to snag a relatively rare no-down-payment loan these days hasn’t a prayer with a credit score of less than 680.
Kubacki and other lenders say that first-timers are finding good luck with government programs specifically geared for them, such as those offered by the Federal Housing Administration.
Restrictions are geared to include as many first-time buyers as possible, because that’s the whole point of such programs, lenders say.
Coming up with the downpayment can be hard.
“The 100 percent financing programs have been popular, but people are rightfully wary of those, so we are returning to a 3 percent or 5 percent downpayment,” said Joni VonAsten, underwriting processor and closing supervisor for Wisconsin Mortgage Corp. in Brookfield, Wis. “We’re going back to the standards that have always been in place.”
Key lending ratios for first-time borrowers
• Total debt - including student loans shouldn’t exceed 50 percent of gross monthly income. That includes property taxes and insurance.
• Total housing payments including property taxes and insurance - shouldn’t exceed 34 percent of gross monthly income.
Seven smart strategies for real estate
NEW YORK – Nov. 5, 2007 – For millions of Americans approaching retirement, a big part of their fortune is tied up in something they might never want to sell: their homes.
Even with the recent drop in home prices, the real value of a single-family house in the U.S. has more than doubled in 10 years, according to the Standard & Poor’s Case-Shiller index, and home values in some markets have tripled.
Many who bought mid-priced houses in the mid-1990s now find themselves living in homes worth a small fortune. They could retire comfortably if they could somehow tap into that. But it’s easier said than done.
Ya gotta live somewhere
Unlike stocks and bonds, a home can’t be sold quickly for a profit. The costs to sell a home and move are high, and the declining real estate market makes it doubly difficult these days. And even if you can find a buyer, many longtime homeowners simply don’t want to sell. Too many memories and hard work are tied up in their houses. And after a sale, they know they’ll still need a place to live.
We asked financial advisers for some tips on how to handle real estate as you approach retirement. Their advice is aimed at those ages 55 to 65, but it can be used by anyone investing in real estate.
1. Figure out how much your home is worth – to you.
For most people, a home “becomes an integral part of their identity, of who they are,” says Avani Ramnani, of New Jersey-based Athena Wealth Advisors. Their status in the community is linked to their home, which also holds memories of raising children and the “sweat and hard work” that went into improving it.
All this can make it difficult to sell, even if it’s financially smart. Some people will pay almost any price to stay in their homes for as long as possible.
If you know you need to sell, Ramnani advises first going out and finding a new place where you’d love to live. That may make it easier to load up the moving trucks. While lamenting the home you’re losing, you can also get excited about the one you’ll be gaining.
2. Run the numbers first.
If you’re planning to retire soon, you’ve probably already crunched the numbers: How much will you have to live on? How much will you need? The value of the real estate you own is apt to come into the equation eventually.
But many planners advise running those numbers first without including real estate sales. If you can afford to do so, “don’t look at [your home] as an investment,” says Marshall Groom, a planner in Richmond, Va. “You have to live somewhere.”
3. Downsizing early can pay off.
If your home is worth a lot, and you don’t mind moving to cheaper digs, you can unlock a lot of extra retirement money by downsizing. If that’s your intention, Kristopher Johnson, a planner at Timothy Financial Counsel in Wheaton, Ill., advises doing it sooner rather than later.
The cash raised can provide money to live on early in retirement, while you leave other accounts – like individual retirement accounts – untouched. That gives your nest egg more time to grow untouched, Johnson says. It also gives you more flexibility in dodging tax bills.
Keep in mind, however, that you might need to pay taxes on any real estate windfall. Consult an accountant or planner to make sure your calculation of the benefits of downsizing reflects this possible penalty.
4. Avoid too much real estate exposure.
A key principle for investors is diversification: Putting your money in many different types of assets protects you from bad luck in any one investment.
By the same logic, you should avoid putting more than one-third of your retirement assets in real estate, says Rebecca Preston, a Providence-based planner and member of the Alliance of Cambridge Advisors.
There are a couple reasons for this, beyond diversification. First, real estate is illiquid, i.e., it’s expensive and difficult to buy and sell. An unsold, vacant house can be a big drag on your budget, to stay nothing of your psyche.
Second, real estate isn’t that great an investment over the long term. This decade saw a huge run-up in prices in many markets, but prices can also stay stagnant for long periods of time, as they did in the 1990s. From 1990 to 2000, home values on the Case-Shiller index grew less than 3 percent per year, while stocks on the S&P 500 grew more than 15 percent annually.
5. Think carefully before buying a second home.
As they approach retirement, many Americans think about relocating – to the beach, to the mountains, to a warmer climate, to a place closer to downtown. To try this out, many buy a second home while holding on to their primary dwelling.
Planners say this is a very expensive move. If you’re not careful, doubling your housing expenses can put a big strain on your budget.
Plus, what if your second home doesn’t work out? Many retirees move to a new community only to find they don’t fit in there or miss home. A better idea may be to first take long vacations in a new spot and then rent for a while. “Usually we encourage our clients into a slow transition, rather than a sudden move,” Ramnani says.
If you’re going to be spending only a small part of the year in a secondary location, Preston says it makes sense to rent rather than buy. Unless you’ll be spending more than three or four months at the vacation place, “it’s not worth it,” she says. “You can usually get a nice rental place these days.”
6. Beware of alternative strategies.
There are ways to profit from the value of your house while you’re still living in it. But they get mixed reviews.
One way to tap into your home equity is with a home equity loan. By borrowing money against your home’s value, you can then invest it in the stock market or other investments. “It’s a very risky strategy,” says Mark Rylance, a planner at RS Crum in Newport Beach, Calif. If you invest in a flat or down market – which the stock market could well be for the near future – “it can be pretty brutal.”
Getting better reviews are reverse mortgages, where a lender pays a homeowner as it takes ownership of more of the home equity over time. However, there are limits to this product: It’s relatively new, and fees can still be too high, planners say. The reverse mortgage market is “not mature yet,” Rylance says. Also, it’s better for older retirees; those 55 to 65 may be expecting another 25 or more years in their homes. Finally, a reverse mortgage can make it tough if you want to leave your house to heirs.
7. Deal with falling prices.
As a planner in the formerly hot real estate market in Orange County, Calif., Rylance sees a lot of stress among homeowners worried about their plummeting home values. In the past, a popular strategy was to sell an expensive home for a nice house at half the price in places like Oregon, Nevada, or Idaho.
Now, many have put off plans to move. “People are waiting,” he says.
If you are forced to move or really want to sell, Ramnani advises cutting your price early to win a buyer rather than letting a property sit on the market. The carrying costs of a vacant home can be hefty, and you’re also losing out by not being able to invest that money elsewhere. It’s “the cost of missed opportunity,” she says. “You have all this money stuck.”
Amid falling home values, there is some consolation. “They are going to sell for lower now, but they’re also going to buy for lower,” Preston says.
It can be painful to sell for less than you think your home is worth, but sometimes it’s better to cut your losses and move on. And with home prices expected to continue to fall, you may soon be able to snap up a good deal in a popular location.
Even with the recent drop in home prices, the real value of a single-family house in the U.S. has more than doubled in 10 years, according to the Standard & Poor’s Case-Shiller index, and home values in some markets have tripled.
Many who bought mid-priced houses in the mid-1990s now find themselves living in homes worth a small fortune. They could retire comfortably if they could somehow tap into that. But it’s easier said than done.
Ya gotta live somewhere
Unlike stocks and bonds, a home can’t be sold quickly for a profit. The costs to sell a home and move are high, and the declining real estate market makes it doubly difficult these days. And even if you can find a buyer, many longtime homeowners simply don’t want to sell. Too many memories and hard work are tied up in their houses. And after a sale, they know they’ll still need a place to live.
We asked financial advisers for some tips on how to handle real estate as you approach retirement. Their advice is aimed at those ages 55 to 65, but it can be used by anyone investing in real estate.
1. Figure out how much your home is worth – to you.
For most people, a home “becomes an integral part of their identity, of who they are,” says Avani Ramnani, of New Jersey-based Athena Wealth Advisors. Their status in the community is linked to their home, which also holds memories of raising children and the “sweat and hard work” that went into improving it.
All this can make it difficult to sell, even if it’s financially smart. Some people will pay almost any price to stay in their homes for as long as possible.
If you know you need to sell, Ramnani advises first going out and finding a new place where you’d love to live. That may make it easier to load up the moving trucks. While lamenting the home you’re losing, you can also get excited about the one you’ll be gaining.
2. Run the numbers first.
If you’re planning to retire soon, you’ve probably already crunched the numbers: How much will you have to live on? How much will you need? The value of the real estate you own is apt to come into the equation eventually.
But many planners advise running those numbers first without including real estate sales. If you can afford to do so, “don’t look at [your home] as an investment,” says Marshall Groom, a planner in Richmond, Va. “You have to live somewhere.”
3. Downsizing early can pay off.
If your home is worth a lot, and you don’t mind moving to cheaper digs, you can unlock a lot of extra retirement money by downsizing. If that’s your intention, Kristopher Johnson, a planner at Timothy Financial Counsel in Wheaton, Ill., advises doing it sooner rather than later.
The cash raised can provide money to live on early in retirement, while you leave other accounts – like individual retirement accounts – untouched. That gives your nest egg more time to grow untouched, Johnson says. It also gives you more flexibility in dodging tax bills.
Keep in mind, however, that you might need to pay taxes on any real estate windfall. Consult an accountant or planner to make sure your calculation of the benefits of downsizing reflects this possible penalty.
4. Avoid too much real estate exposure.
A key principle for investors is diversification: Putting your money in many different types of assets protects you from bad luck in any one investment.
By the same logic, you should avoid putting more than one-third of your retirement assets in real estate, says Rebecca Preston, a Providence-based planner and member of the Alliance of Cambridge Advisors.
There are a couple reasons for this, beyond diversification. First, real estate is illiquid, i.e., it’s expensive and difficult to buy and sell. An unsold, vacant house can be a big drag on your budget, to stay nothing of your psyche.
Second, real estate isn’t that great an investment over the long term. This decade saw a huge run-up in prices in many markets, but prices can also stay stagnant for long periods of time, as they did in the 1990s. From 1990 to 2000, home values on the Case-Shiller index grew less than 3 percent per year, while stocks on the S&P 500 grew more than 15 percent annually.
5. Think carefully before buying a second home.
As they approach retirement, many Americans think about relocating – to the beach, to the mountains, to a warmer climate, to a place closer to downtown. To try this out, many buy a second home while holding on to their primary dwelling.
Planners say this is a very expensive move. If you’re not careful, doubling your housing expenses can put a big strain on your budget.
Plus, what if your second home doesn’t work out? Many retirees move to a new community only to find they don’t fit in there or miss home. A better idea may be to first take long vacations in a new spot and then rent for a while. “Usually we encourage our clients into a slow transition, rather than a sudden move,” Ramnani says.
If you’re going to be spending only a small part of the year in a secondary location, Preston says it makes sense to rent rather than buy. Unless you’ll be spending more than three or four months at the vacation place, “it’s not worth it,” she says. “You can usually get a nice rental place these days.”
6. Beware of alternative strategies.
There are ways to profit from the value of your house while you’re still living in it. But they get mixed reviews.
One way to tap into your home equity is with a home equity loan. By borrowing money against your home’s value, you can then invest it in the stock market or other investments. “It’s a very risky strategy,” says Mark Rylance, a planner at RS Crum in Newport Beach, Calif. If you invest in a flat or down market – which the stock market could well be for the near future – “it can be pretty brutal.”
Getting better reviews are reverse mortgages, where a lender pays a homeowner as it takes ownership of more of the home equity over time. However, there are limits to this product: It’s relatively new, and fees can still be too high, planners say. The reverse mortgage market is “not mature yet,” Rylance says. Also, it’s better for older retirees; those 55 to 65 may be expecting another 25 or more years in their homes. Finally, a reverse mortgage can make it tough if you want to leave your house to heirs.
7. Deal with falling prices.
As a planner in the formerly hot real estate market in Orange County, Calif., Rylance sees a lot of stress among homeowners worried about their plummeting home values. In the past, a popular strategy was to sell an expensive home for a nice house at half the price in places like Oregon, Nevada, or Idaho.
Now, many have put off plans to move. “People are waiting,” he says.
If you are forced to move or really want to sell, Ramnani advises cutting your price early to win a buyer rather than letting a property sit on the market. The carrying costs of a vacant home can be hefty, and you’re also losing out by not being able to invest that money elsewhere. It’s “the cost of missed opportunity,” she says. “You have all this money stuck.”
Amid falling home values, there is some consolation. “They are going to sell for lower now, but they’re also going to buy for lower,” Preston says.
It can be painful to sell for less than you think your home is worth, but sometimes it’s better to cut your losses and move on. And with home prices expected to continue to fall, you may soon be able to snap up a good deal in a popular location.
Foreign cash could boost housing market
For an individual or developer trying to sell a home, interested buyers are just as likely to already have a place in London or Paris as they are to be first-timers new to the market.
“European investment is likely to pick up,” said Mark Vitner, chief economist for Charlotte, N.C.-based Wachovia Corp. “Now is the time to come over and take advantage.”
The theory goes that foreign investors step in and replace first-time home buyers who have been squeezed out of the housing market during the recent downturn. These new investors in turn allow current homeowners to sell and trade up to larger homes.
That will help restart owners moving up the housing ladder, a process that had been key to economic growth in recent years.
Some mortgage brokers are already seeing a boost in inquiries about buying property from overseas. Dan Green, a certified mortgage planning specialist and author of TheMortgageReports.com, said the number of inquiries he’s received from outside the U.S. is probably five to 10 times larger than it was a year ago.
A boost in the number of homebuyers would provide needed relief for the beleaguered housing market.
Home sale prices fell every month in 2007 through August, according to the S&P/Case-Shiller index. Existing home sales have declined for eight straight months through September, according to the National Association of Realtors.
As the housing market has plummeted, the dollar has also sunk to record lows compared to other currencies, such as the euro, meaning more spendable cash in the U.S.
“The dollar is on sale,” said Susan Wachter, a professor of real estate at the Wharton School at the University of Pennsylvania.
Today, a foreign buyer would need only 34,100 euros to make a $50,000 down payment on a house. At the beginning of the year, the same buyer would have needed 37,920 euros to make the same down payment.
The influx of foreign investors can help set a floor for the real estate market, Green said.
Because lending guidelines have been so restricted in recent months due to rising delinquencies and defaults, it is more difficult for U.S. customers to get a home loan. First-time homebuyers are especially being squeezed right now, Green said, and that is where the foreigners can provide support.
For investors from countries like Ireland, the exchange rate is providing a boost in spending power, said Phillip Hegarty, the sales director for Castleroc Estates, a Dublin, Ireland-based firm that works with Irish investors to buy residential and commercial real estate in the United States.
“It’s an enticing investment,” Hegarty said.
Hegarty said there is plenty of demand for investment in locations like Chicago and New York, and often that demand exceeds supply.
But New York and Chicago are not the only locations likely to provide popular options for foreign investors. Places like Florida and California are likely to see a surge in foreign investment.
“In a market with great turmoil, (the weak dollar) is one factor supporting some key markets,” Wachter said of the weakening dollar.
Wachter said markets like Miami and San Francisco, which are under pressure from the U.S. slowdown, are increasingly being supported by foreign investors.
“European investment is likely to pick up,” said Mark Vitner, chief economist for Charlotte, N.C.-based Wachovia Corp. “Now is the time to come over and take advantage.”
The theory goes that foreign investors step in and replace first-time home buyers who have been squeezed out of the housing market during the recent downturn. These new investors in turn allow current homeowners to sell and trade up to larger homes.
That will help restart owners moving up the housing ladder, a process that had been key to economic growth in recent years.
Some mortgage brokers are already seeing a boost in inquiries about buying property from overseas. Dan Green, a certified mortgage planning specialist and author of TheMortgageReports.com, said the number of inquiries he’s received from outside the U.S. is probably five to 10 times larger than it was a year ago.
A boost in the number of homebuyers would provide needed relief for the beleaguered housing market.
Home sale prices fell every month in 2007 through August, according to the S&P/Case-Shiller index. Existing home sales have declined for eight straight months through September, according to the National Association of Realtors.
As the housing market has plummeted, the dollar has also sunk to record lows compared to other currencies, such as the euro, meaning more spendable cash in the U.S.
“The dollar is on sale,” said Susan Wachter, a professor of real estate at the Wharton School at the University of Pennsylvania.
Today, a foreign buyer would need only 34,100 euros to make a $50,000 down payment on a house. At the beginning of the year, the same buyer would have needed 37,920 euros to make the same down payment.
The influx of foreign investors can help set a floor for the real estate market, Green said.
Because lending guidelines have been so restricted in recent months due to rising delinquencies and defaults, it is more difficult for U.S. customers to get a home loan. First-time homebuyers are especially being squeezed right now, Green said, and that is where the foreigners can provide support.
For investors from countries like Ireland, the exchange rate is providing a boost in spending power, said Phillip Hegarty, the sales director for Castleroc Estates, a Dublin, Ireland-based firm that works with Irish investors to buy residential and commercial real estate in the United States.
“It’s an enticing investment,” Hegarty said.
Hegarty said there is plenty of demand for investment in locations like Chicago and New York, and often that demand exceeds supply.
But New York and Chicago are not the only locations likely to provide popular options for foreign investors. Places like Florida and California are likely to see a surge in foreign investment.
“In a market with great turmoil, (the weak dollar) is one factor supporting some key markets,” Wachter said of the weakening dollar.
Wachter said markets like Miami and San Francisco, which are under pressure from the U.S. slowdown, are increasingly being supported by foreign investors.
Proposed tax changes may have only a marginal impact
TALLAHASSEE, Fla. – Nov. 5, 2007 – Will the slumping Florida housing market get a major boost if voters approve a measure that allows homeowners to take their tax break with them when they move?
That’s what lawmakers are touting, but some economists question whether the legislation will do much to reverse the current slowdown in homes sales.
The so-called tax portability will have a “marginal, positive effect on the real estate market, certainly, not of the size and magnitude to cause a major recovery,” said Hank Fishkind, an Orlando-based private-sector economist who has served as an adviser to a number of Florida governors.
Sean Snaith, an economics professor at the University of Central Florida, said the measure isn’t likely to spur home sales to a significant degree or make much difference to the overall health of the state.
“Our economy is so big,” Snaith said, totaling about $770 billion a year in gross state product. But now growth is slowing nationwide and in Florida, with more powerful forces at work, he said, that could swamp any tax-related strategy to boost home sales.
“What we really need to do is take a hard look at how we pay for things” through assorted taxes and fees, Snaith said.
The measure passed by the Legislature earlier this week, if approved by voters Jan. 29, would give existing homeowners a tax break if they sell and move to another dwelling in the state. That could remove at least one potential barrier for homeowners who have been reluctant to move.
“It’s very exciting. We’re glad it passed, and we’re looking forward to having it jump-start the market,” said Trey Price, a public-policy analyst with the Florida Association of Realtors.
Florida lawmakers are looking for a way to undo some of the “unintended consequences” of the state’s Save Our Homes property-tax provision, originally approved by voters in 1992 to help families stay in their homes and not be forced to sell just to escape escalating property taxes.
It caps increases in appraisals of owner-occupied homes at 3 percent a year or the rate of inflation, whichever is lower, and homes are assessed at the full market value only when sold.
Many fear it has “trapped” homeowners, because selling and then buying another home in the state can immediately triple or quadruple a homeowner’s property taxes.
Snaith and a number of other economists say they don’t expect Florida’s housing market, which is falling from record highs set two years ago, to recover until 2009 because of record-high inventory, record-high prices in inflation-adjusted terms, and weaker demand for a host of reasons that include higher property-insurance costs.
Tax issues, they contend, affect sales on the “margins” of the market but do nothing for the fundamentals. Larger forces, such as an oversupply of homes and weak demand, are the real keys to the state’s and the nation’s lethargic home sales.
But it all could be moot if courts rule the tax structure unconstitutional. Price, with the Orlando-based state Realtors trade association, said the organization fears the final version of the bill “increases the likelihood of its being overturned.”
He would not say what might happen if the tax savings, retroactive for buyers during 2007, were overruled by the courts.
Gov. Charlie Crist, in touting the tax-cutting proposal during appearances this week, repeated his claim that the measure will thaw Florida’s frozen real-estate market.
“This is going to fire-up Florida’s economy – this economic engine that’s been held back,” Crist said at the Capitol before traveling to Jacksonville, Orlando and Port St. Lucie to promote the proposed constitutional amendment.
Some residents still are not sold on the idea of preserving the tax break for existing homeowners.
“I oppose portability. That’s wrong,” said Jonathan Nunes, 37, who bought a home in east Orlando two years ago for $330,000 and pays about $5,000 a year in property taxes to Orlando and Orange County, along with other government entities that get smaller slices of the tax pie that comes out of his pocket. He said he figures he will vote against the tax measure, for a number of reasons.
High taxes in general are the main problem, Nunes said, along with the high cost of housing in general.
“The dollar cost of the home is the bigger issue,” he said, and “taxes are just ridiculously high.”
That’s what lawmakers are touting, but some economists question whether the legislation will do much to reverse the current slowdown in homes sales.
The so-called tax portability will have a “marginal, positive effect on the real estate market, certainly, not of the size and magnitude to cause a major recovery,” said Hank Fishkind, an Orlando-based private-sector economist who has served as an adviser to a number of Florida governors.
Sean Snaith, an economics professor at the University of Central Florida, said the measure isn’t likely to spur home sales to a significant degree or make much difference to the overall health of the state.
“Our economy is so big,” Snaith said, totaling about $770 billion a year in gross state product. But now growth is slowing nationwide and in Florida, with more powerful forces at work, he said, that could swamp any tax-related strategy to boost home sales.
“What we really need to do is take a hard look at how we pay for things” through assorted taxes and fees, Snaith said.
The measure passed by the Legislature earlier this week, if approved by voters Jan. 29, would give existing homeowners a tax break if they sell and move to another dwelling in the state. That could remove at least one potential barrier for homeowners who have been reluctant to move.
“It’s very exciting. We’re glad it passed, and we’re looking forward to having it jump-start the market,” said Trey Price, a public-policy analyst with the Florida Association of Realtors.
Florida lawmakers are looking for a way to undo some of the “unintended consequences” of the state’s Save Our Homes property-tax provision, originally approved by voters in 1992 to help families stay in their homes and not be forced to sell just to escape escalating property taxes.
It caps increases in appraisals of owner-occupied homes at 3 percent a year or the rate of inflation, whichever is lower, and homes are assessed at the full market value only when sold.
Many fear it has “trapped” homeowners, because selling and then buying another home in the state can immediately triple or quadruple a homeowner’s property taxes.
Snaith and a number of other economists say they don’t expect Florida’s housing market, which is falling from record highs set two years ago, to recover until 2009 because of record-high inventory, record-high prices in inflation-adjusted terms, and weaker demand for a host of reasons that include higher property-insurance costs.
Tax issues, they contend, affect sales on the “margins” of the market but do nothing for the fundamentals. Larger forces, such as an oversupply of homes and weak demand, are the real keys to the state’s and the nation’s lethargic home sales.
But it all could be moot if courts rule the tax structure unconstitutional. Price, with the Orlando-based state Realtors trade association, said the organization fears the final version of the bill “increases the likelihood of its being overturned.”
He would not say what might happen if the tax savings, retroactive for buyers during 2007, were overruled by the courts.
Gov. Charlie Crist, in touting the tax-cutting proposal during appearances this week, repeated his claim that the measure will thaw Florida’s frozen real-estate market.
“This is going to fire-up Florida’s economy – this economic engine that’s been held back,” Crist said at the Capitol before traveling to Jacksonville, Orlando and Port St. Lucie to promote the proposed constitutional amendment.
Some residents still are not sold on the idea of preserving the tax break for existing homeowners.
“I oppose portability. That’s wrong,” said Jonathan Nunes, 37, who bought a home in east Orlando two years ago for $330,000 and pays about $5,000 a year in property taxes to Orlando and Orange County, along with other government entities that get smaller slices of the tax pie that comes out of his pocket. He said he figures he will vote against the tax measure, for a number of reasons.
High taxes in general are the main problem, Nunes said, along with the high cost of housing in general.
“The dollar cost of the home is the bigger issue,” he said, and “taxes are just ridiculously high.”
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