Real Estate Curve

Everything To Know About Real Estate

Feb-19-2008

Everything To Know About Real Estate

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Important Topics (A Must Read For First Time Buyers)
Why Should I Buy, Instead Of Rent?
A home is an investment. When you rent, you write your monthly check and that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from your federal income taxes(US), and usually from your state taxes. This will save you a lot each year, because the interest you pay will make up most of your monthly payment for most of the years of your mortgage. You can also deduct the property taxes you pay as a homeowner. In addition, the value of your home may go up over the years. Finally, you’ll enjoy having something that’s all yours – a home where your own personal style will tell the world who you are.

How much Mortgage can I afford?
The answer to this has a lot to do with your income and the amount of your debt load. As a rough rule of thumb, most homebuyers purchase houses that cost between 1 .5 and 2.5 times their annual income. Of course, this figure can vary due to market prices in your area. If houses aren’t available within that range, you may need to spend a bit more. In general, however, your monthly mortgage payment cannot exceed approximately 28-29% of your gross monthly income. Your total debt payments (car payments, credit card payments, etc., plus the monthly mortgage amount) can’t exceed approximately 36-40% of your gross monthly income. These ratios will depend on the type of mortgage you apply for.  

Should I use a real estate broker? How do I find one?

Using a real estate broker is a very good idea. All the details involved in home buying, particularly the financial ones, can be mind-boggling. A good real estate professional can guide you through the entire process and make the experience much easier. A real estate broker will be well-acquainted with all the important things you’ll want to know about a neighborhood you may be considering…the quality of schools, the number of children in the area, the safety of the neighborhood, traffic volume, and more. He or she will help you figure the price range you can afford and search the classified ads and multiple listing services for homes you’ll want to see. With immediate access to homes as soon as they’re put on the market, the broker can save you hours of wasted driving-around time. When it’s time to make an offer on a home, the broker can point out ways to structure your deal to save you money. He or she will explain the advantages and disadvantages of different types of mortgages, guide you through the paperwork, and be there to hold your hand and answer last-minute questions when you sign the final papers at closing. And you don’t have to pay the broker anything! The payment comes from the home seller – not from the buyer. 

How much money will I have to come up with to buy a home?
Well, that depends on a number of factors, including the cost of the house and the type of mortgage you get. In general, you need to come up with enough money to cover three costs: earnest money – the deposit you make on the home when you submit your offer, to prove to the seller that you are serious about wanting to buy the house; the down payment, a percentage of the cost of the home that you must pay when you go to settlement; and closing costs, the costs associated with processing the paperwork to buy a house.

How do I find a lender?
You can finance a home with a loan from a bank, a savings and loan, a credit union, a private mortgage company, or various state government lenders. Shopping for a loan is like shopping for any other large purchase: you can save money if you take some time to look around for the best prices. Different lenders can offer quite different interest rates and loan fees; and as you know, a lower interest rate can make a big difference in how much home you can afford. Talk with several lenders before you decide. Most lenders need 3-6 weeks for the whole loan approval process. Your real estate broker will be familiar with lenders in the area and what they’re offering. Or you can look in your local newspaper’s real estate section – most papers list interest rates being offered by local lenders. You can find FHA-approved lenders in the Yellow Pages of your phone book.  

In addition to the mortgage payment, what other costs do I need to consider?
Well, of course you’ll have your monthly utilities. If your utilities have been covered in your rent, this may be new for you. Your real estate broker will be able to help you get information from the seller on how much utilities normally cost. In addition, you might have homeowner association or condo association dues. You’ll definitely have property taxes, and you also may have city or county taxes. Taxes normally are rolled into your mortgage payment. Again, your broker will be able to help you anticipate these costs. 

So what will my mortgage cover?
Most loans have 4 parts:

Principal: the repayment of the amount you actually borrowed;
Interest: payment to the lender for the money you’ve borrowed;
Homeowners Insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders and;
Property Taxes:
the annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year.

Most loans are for 30 years, although 15 year loans are available, too. During the life of the loan, you’ll pay far more in interest than you will in principal – sometimes two or three times more! Because of the way loans are structured, in the first years you’ll be paying mostly interest in your monthly payments. In the final years, you’ll be paying mostly principal. 

The Great Recession of 2008?
It probably won’t happen, says DIANA FURCHTGOTT-ROTH, and even if it does, we may not know until 2009. The prospect of a 2008 recession is the talk of Washington. Alan Greenspan recently estimated the likelihood at 50 percent. Hundreds of financial experts and economists have weighed in with opinions ranging from “certain recession” to “definitely no recession.” Whose prediction is right? The old saying goes that economic forecasters were invented to make meteorologists look accurate. When the weather reporter predicts rain, one can look outside to see if the forecast is correct. But when an economist predicts a recession, the only verification is the opinion of other economists. The federal government is our official source of information about unemployment, inflation, and thousands of other economic indicators. The informal definition of a recession is two consecutive quarters of negative economic growth. However, it is common practice to leave the determination of a recession to a committee of economists at the National Bureau of Economic Research (NBER), a private organization of academic economists.

Unlike rain, no one can be sure when a recession has begun, or when it has ended. The NBER designates the beginning of a recession months after it has started and designates its ending months (or sometimes years) after it has ended. It measures business cycles on a monthly basis and classifies the period between the peak and trough of a cycle as a “recession.” The NBER has reviewed historical and current economic data to designate 33 American economic recessions since 1854; the most recent one lasted from March 2001 through November 2001. But it wasn’t until November 2001 that the NBER pinpointed March 2001 as the beginning of the recession; and it wasn’t until July 2003 that it determined precisely when the recession had ended. 

One might infer that the U.S. economy was expanding consistently before March 2001 and then contracting consistently until November 2001. But economic data from the federal government’s Bureau of Economic Analysis reveal a much different picture. The economy contracted in the third quarter of 2000, the first quarter of 2001, and again in the third quarter of 2001. But it expanded in the fourth quarter of 2000 and the second quarter of 2001. In other words, there was choppy economic performance throughout both years. If one defines a recession as two consecutive quarters of negative growth, then no recession occurred. 

So will there be a recession in 2008? The NBER usually waits several months before designating a recession. So if a recession were to begin in January 2008, the NBER might not announce it until the summer or fall. If a recession began next summer, it might not be identified as such until early 2009. 

Some experts believe that a credit shortage will tip the economy into negative growth. The credit crunch has indeed caused havoc in the financial and real estate sectors, and the Federal Reserve reacted last week by lowering interest rates by a quarter of a percentage point. Columbia Business School economist Charles Calomiris, a visiting scholar at the American Enterprise Institute, believes that the Fed’s actions thus far have been appropriate, but that further loosening of the money supply may not be necessary. Calomiris sees the housing finance shock as small relative to the total economy. Although subprime mortgage losses will probably range from $300 billion to $400 billion, housing prices are not collapsing. 

The most precise measure of change—the Office of Federal Housing Enterprise Oversight (OFHEO) index comparing sales prices of the same houses over time—declined by 0.4 percent in the third quarter of 2007, the first quarterly decline in 13 years. Yet prices were still 1.8 percent higher than they were a year ago. Although Calomiris recognizes that further declines are likely, he thinks they will be concentrated in certain regions, and likely will not exceed an average decline of 5 percent nationally, as measured by the OFHEO index. 

Others, such as American Enterprise Institute resident fellow Desmond Lachman, a former strategist at Smith Barney, believe that the Fed did not go far enough. Lachman sees a much larger financial crisis in the making and reckons that the ongoing housing bust runs a risk of aggravating that turmoil. Like Harvard professor Martin Feldstein, he says the Fed needs to be more aggressive in responding to the credit crunch if a serious economic slump is to be averted. 

“We clearly have had a major house price and credit market bubble between 2000 and 2006 that is now in the process of deflating at a time that oil prices are at $90 a barrel,” Lachman explains. “House prices have already started to decline and could very well decline by 5-10 percent a year over the next few years, which will erode the underlying collateral of bank mortgage lending.” 

The Fed may have been prudent in lowering rates on December 11th, but it was clearly unprepared for the inflation figures that were released by the Bureau of Labor Statistics on December 13th and 14th. Both the producer price index (PPI) and the consumer price index (CPI) increased by far more than expected. The PPI jumped by 3.2 percent in November and by 7.2 percent over the past year. The CPI rose by 0.8 percent last month and by 4.3 percent over the past year. These numbers may stoke inflation fears and dissuade the Fed from pursuing more rate cuts. 

Other economic remedies, such as tax relief, are available to stimulate the economy and prevent a recession. Lawmakers could make the Bush tax cuts permanent, or they could even pass new tax cuts, as several Republican presidential candidates have proposed. The prospect of higher taxes after 2010, when the Bush tax cuts expire, has had a dampening effect on current investment.

On balance, it is not likely that the United States will experience a recession in 2008. Most economic forecasters expect growth to continue in the 2.5 percent range. Employment and personal income have remained strong through October and November of 2007, so consumption spending should continue, buoying the economy. The weak U.S. dollar makes American exports more competitive, thereby fueling economic growth and employment. Even if the economy dips in 2008, its slowdown may not last the requisite “several months” to be designated a recession by the NBER. 

In other words, whether or not there is a “recession” in 2008 will depend both on actual economic activity and on the subjective judgments of the NBER. Neither is easy to predict, and an inaccurate forecast today will not be proved false for 12 months or more, by which point it will have been long forgotten. 

Diana Furchtgott-Roth is a senior fellow at the Hudson Institute and a former chief economist at the U.S. Department of Labor.


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