Sushi Money

    Among our many personal finance challenges, selling a home can be a daunting task even in the best of times.  And now isn’t the best of times for most of the nation.  Okay, an understatement to be sure- the housing “slump” has gone on for more than a year and most experts are not predicting a turn-around any time soon.  But depending on where you live, real estate may not be too bad, with some economists even seeing a turnaround in progress in places such as Denver, Colorado for example.  Many metropolitan niche markets across the nation are also doing fine… but most of us don’t live in those places.  So lets not get ahead of ourselves- in 2007 housing construction fell by the largest amount in almost three decades in an unprecedented national downturn.  And foreclosures may continue to rise over the first half of 2008 before finally stablizing later this year.

 ”Mark Zandi, chief economist at Moody’s Economy.com, is forecasting that median sales prices for existing homes will fall by 2.5 percent for all of 2007, which would be the first annual price decline on records that go back four decades.”

Yet even with the pessimism, there is reason to hope.  The National Association of Realtors (NAR) forecasts existing home sales for 2008 to stablize and gradually increase.  And for many people, it’s time to buy or sell a home regardless of what the market is doing.   For others the rental market looks pretty good right now as well.

Our lives are so often a tangle of priorities.  If you are selling a home because of a job change or family situation change, then your proverbial plate is pretty darn full.   And if you’re selling because home ownership (and mortgage debt) is not something you can or want to handle anymore, then you may feel a lot of stress based on finances and a need for change.  Heck- selling a home is never easy no matter what your situation.  But if you’ve got some time on your side it can make the process a lot easier.

On that note there is a wealth of information available, and it bears repeating a few key themes.  Bankrate.com has written about 8 Tips for Pricing Your Home.   Solid information that boils down to knowing your market, seeking professional help and working hard to understand valuation and price strategies.  But I think we can do a lot more.  We looked at some of those strategies in Get Ready to Sell That House.    Selling by owner is also a challenge, so think hard about the FSBO approach.  And if you’re facing financial challenge and struggling with mortgage payments, we examined what you can do to avoid foreclosure.

Among all the negative news and gloom out there I try not to give into the hype.  The day is a lot brighter when I simply focus on our personal goals and priorities while turning down the volume of pessimistic commentary from the media.  I won’t tune it out completely because it’s important to stay informed.  But as with so many things, finding a balance in life is important.  A few years from now our memories will fade as we face the challenges of a new day.  I prefer to envision a positive future… setting  intentions for what we plan to achieve over time.  We can create a new future…  I wish you well!

      No matter what we read about the real estate market, there are still people who want to buy homes to live in.   There are always buyers and sellers, even in down markets.  Naturally this is a challenging time to be selling a home, but it’s a wonderful opportunity for a potential buyer.  I think it’s worth remembering that… there are buyers out there! The Street.com talks about opportunity for buyers in How to Get an Even Better Deal on a Home.   Their main idea?  Buying a FSBO, or For Sale By Owner house.  It’s an idea that works, both for the seller and buyer.  But it’s not always easy… especially for the seller!  I’ve bought and sold by owner, and would consider it again.  But as a buyer, I would definitely use a real estate agent as a “buyer’s agent” during the process.  And you really need to make sure “why” you’re buying the house.  Hopefully by now, most potential homebuyers are under no illusions about their home as a potential investment.  It may very well be a good investment many years from now…  but don’t be surprised if it’s value doesn’t go anywhere for a long, long time.  I’ve written about my experience with that process before!  But what a great opportunity buyers have if they do know what they’re looking for right now.

      If you’re selling your home, know that going the FSBO route takes enormous patience and dedication, but can also be very satisfying if you’re a “do-it-yourself” type… and you succeed.  While your waiting, showing and being patient, it isn’t very satisfying at all!  Unless of course you have plenty of time and don’t mind keeping your home “show-ready” for months on end. But it can save a lot of money if all goes as planned. In the current market climate however, I’m not sure I would go the FSBO route unless very confident about the process and the home I was trying to sell, especially as compared to the “competition” around the local area.   

      If you do decide on the FSBO approach, the article above alludes to several strategies and helpful interent companies such as ForSaleByOwner.com.  I’ve used them successfully, but I think the single most important factor was being able to get the house listed in the MLS (Multiple Listing Service).  So even though I managed and sold the home as a FSBO, it was listed on the MLS for agents to see. 

  Three Northwestern University professors who wrote an August study about the FSBO market say that MLS-listed homes do not necessarily deliver a higher price, but do offer a higher probability of a quick sale, within 60 or 90 days. In addition, roughly 20% of FSBO listings end up relisting in the MLS, which translates into a longer time on the market. Thus, one of the advantages of MLS is a shorter time to sale, which translates into savings (on mortgage, taxes and insurance).

      Of course some people would do almost anything to sell their home right now.   That’s where buyers have the real advantage today, and the single greatest factor, as always, is price.  I’ve talked before about the things you can do as a seller to present your home.  It’s absolutely essential right now.

When I read columns by people weighing the pros and cons of actions such as buying real estate, I see opportunity and confusion. Anya Kamenetz writes To Buy or Not To Buy in her Generation Debt column, and talks about the real estate market today. It’s an honest appraisal of the fear of buying into a market that is struggling. She reviews the ups and downs, and comes away with some good advice for estimating a down payment and the reality of home ownership costs. But I think many people are confused by the difference between home ownership and owning a real estate investment property. The real estate boom that peaked in 2005 basically taught people that there wasn’t any difference. But there is.

If you’re a potential home buyer today, what is your real fear? That you will lose your shirt over a few years for how much you spent on a home? Okay, fair enough. If that’s true, then I agree- you’ve probably got no business being a homeowner. Buying, and living in, your own home is primarily a lifestyle, family and geographic choice more than an investment choice. Actually I don’t believe it is an investment choice. Its really meant for long-term ownership, and any investment benefits come way down the road as a reward for disciplined mortgage payments and long-term market appreciation. But it’s expensive, and there are no guarantees. From what I’ve read, the long-term return on real esate (30 + years) has typically averaged around 6 %. You can do a lot better in the stock market for that length of time.

So if someone anticpates moving in a few years, then why buy a home in the first place? The risk is that you tie up your money in a piece of property that isn’t going to sell, and may be worth less when you do sell it. Admittedly, many people buy that home and don’t anticipate that they’ll need to move in a few years. People get transferred, divorced, decide to move, etc. But that used to be the exception before we became such a mobile society.

I’ve been there… I bought a home and was suprised to be transferred less than two years later. Did I sell it? Nope. The market was stagnant and I had to sit with that home for a long time. I didn’t want to lose money, so I rented it. For a long time… like 13 years. Some of those years were pretty tough, especially with mortgage rates, maintenance costs, management costs (I was an out-of-town landlord), insurance and taxes. When I finally did sell, it worked out okay- and we used the money from that home to help purchase a primary home where we settled down for good. But I will tell you that there were many long years of renting that house with negative cash flow that were a challenge for me. And we didn’t have the income to purchase another home until much later. When we moved around during that timeframe, we usually rented. That was okay- we had no intention of staying in most of those places. I still carried that other home “on the books” for many years.

But you know what? That home that I was stuck with, that I couldn’t sell, that was such a hassle dealing with for many years also turned out to be a decent investment and tax shelter. The rental income losses offset my income, and all the time I continued to pay down the mortgage year after year. Well three mortgages/refinanced loans later anyway. By the time it sold I figure my annualized gain was about 9-10 %, not including the tax advantages and the equity in the home from paying the mortgage. That’s why I see such a stark difference in home ownership and owning real estate as an investment. It may not have started out that way, but that home was a rental real estate investment, plain and simple. Can the home you live in be a good investment? Absolutely… in some markets people have become wealthy by owning real estate the lived in. But it may take a very long time with few guarantees beyond a nice place to live. It helps if you’ve got a mortgage you can live with as well.

My reasons for owning, and living in, a home come down to making a place for our family to grow. In some ways it’s still a new experience. I really haven’t lived in any one home or location for more than three years for my entire life. Yet now we hope to stay in the same home for 15-20 years or more! Personally that’s a pretty good feeling… I don’t need to pay attention to the real estate market per se. In other words, I don’t spend time thinking or worrying about it becuase it’s not relevant right now. Ask me again in 10-15 years and I’ll probably have a different answer. The same for the stock market, retirement funds and investing… if I’m saving and investing for the long-term, then why worry so much right now? As I approach retirement one day, I’ll be a lot more interested in what the market is doing to my retirement assets.

So instead of fear and confusion, I see a lot of opportunity today for potential home buyers, especially those who know where they want to live, how long they want to be there, and how much they are willing to spend. The real estate market will probably struggle for a couple more years at least, and there will be many buying opportunities along the way. But if you’re set on becoming a homeowner, then find a place you really like at a fair market price, and plan to stay there a long time (5-10 years +). If you’re not planning to live in that home very long, then you proabably are better off renting.

And by the way, that home that became rental property for so many years? It didn’t start increasing in value until after the 8 year mark! If I had sold any time during the first 8 years, at best I would have broken even. For many people, breaking even on a home they live in is just fine… they’ve had the pleasure of living there all that time. But if it’s a rental property? That’s a tough place to be. Make sure it’s what you want to do with your time and money!

    In a challenging housing and mortgage lending climate, it is obvious that both buyers and sellers are looking to improve their chances for completing the deal.  CNN/Money has written a great piece on how to Make the Rocky Real Estate Market work for you.   There is more worth considering…especially if you’re a seller. I’ve been there several times myself over the past fifteen years, and strongly believe there are specific things you must do to get your home sold.  So if you’re planning or trying to sell your home, take a look at Get Ready to Sell That House  posted in March.  When I look back, it was the little things that mattered most in selling several homes, and I would do those same things today.  Perhaps I might be even more accomodating to prospective buyers and really examine the bottom line selling price I would accept.

     For buyers, the real estate market offers incredible opportunities right now… and maybe for the next 12-18 months.  We never really know, but it’s a good bet that a housing recovery is a year or two away, so it’s a buyer’s market for now. Yet there’s always something to deal with… and getting a mortgage loan isn’t quite so simple anymore.  That doesn’t mean you can’t get a loan, because you can.  But lenders are obviously very concerned about mortgage risk right now, and will grill you from top to bottom to ensure income verification and credit score analysis meets their criteria.  Here’s a few things to consider as a buyer BEFORE you begin the mortgage application process:

• Get a copy of your credit history and look carefully at every item.  I recommend getting a copy of your credit history from all three major credit agencies.  You can do this through MyFico.com or a similar company.
• If there’s something you think shouldn’t be on your credit report, then send a dispute letter to the credit bureau.  They are required by law to investigate and return their findings to you.  If they can’t, they must drop that item after 30 days.
• Unless your credit situation is severely challenged, I would not recommend going through a “credit repair” agency or business.  You can do the same thing yourself intead of paying them monthly fees and retainers.
• Take a close look at your individual or family debt situation.  If you’re married, and will be applying jointly for the mortgage loan, then both spouse’s debt and credit history will be closely examined.  Avoid applying for any loans, of any kind, within 6 months of applying for a mortgage. 
• Work hard to pay down your debt to improve your debt-to-income ratio.  Mortgage lenders have slightly different criteria, but the bottom line is that you must be able to make the monthly mortgage payment.  Check out this article from Bankrate.com describing the basics of mortgage lending criteria.  There’s a calculator at the end of the article to conduct your own analysis.
• Be realistic about the size of the mortgage you can afford.  When your credit history, debt and income situation are in control, then it’s time to think about that down payment. 
• Mortgage lenders are probably going to require a 10% to 20% down payment for the home you choose to purchase.  If you put less than 20% down, you’ll also be paying for Private Mortgage Insurance which can be 5% to 10% of your monthly payment.  Maybe even more with the mortgage fallout this year.
• Consider the costs of insurance on your prospective home, which may add up to 10% to 15% of your monthly payment.
• Taxes… a biggie.  Take a look at your county collector or assessors property tax requirements.  You can probably see what homeowners are paying for taxes in the area you might choose to live. Property taxes vary widely throughout the nation, but in some areas monthly property taxes can make up 20% to 40% of your monthly mortgage payment! 
• Most lenders will require an “escrow account” to hold funds for property taxes, insurance and private mortgage insurance.  That escrow account accumulates funds throughout the year, and is why it’s added to your monthly mortage payment.  The lender wants to make sure those fees are paid, so most insist on escrow accounts.
• Is it time to look for a home?  This should be something you spend several months on… take your time and have a good idea of the size and cost of the house you can afford.  When you are serious about looking at homes, with the potential to make an offer to buy… you’ll want to have a mortgage loan “pre-approval” letter in hand.  This is more than a “pre-qualification” that simply says you are qualified to apply for a loan.  The “pre-approval” is an initial commitment from a lender for a given mortgage product, and given mortgage amount.  You should not have to “apply” for a mortgage loan to gain a pre-approval letter.  Talk to your preferred lender(s) and ask what is required to get a pre-approval letter. 
• Ready to apply for a mortgage?  Do so very carefully… Bankrate.com also offers a great look at national and local mortgage rates from many different lenders.  Just do your homework and shop around.   When you are ready, it might be in your interest to apply with two or three lenders.  It may mean paying several hundred dollars extra for more than one home appraisal, etc. but that’s an option you can choose.  During a home purchase in 2006, I applied with two lenders, one of which refunded the home appraisal if we did not close on a loan with them.  Just make sure you are not committed to the loan for any excessive costs when applying with more than one lender.  The lender does want your business, but if they cannot offer as good or better rates than another lender, they will usually tell you.
• When applying for a mortgage, do not space out loan applications over several weeks or more.  Your credit history will normally show multiple “hits” for loan application if spaced out over time and it may lower your credit score.  But two weeks is usually the magic timeframe.  If you apply for a loan with several lenders within a two-week period, the credit bureas normally don’t consider that negatively for your credit score, understanding that consumers may be shopping or applying for a loan.
• Type of loan?  I’m a firm believer in a 30-year fixed rate mortgage.  You can pay points at closing to lower the rate, or take a higher rate for little to no points.  All points are is a prepaid form of interest tacked on to your costs at closing.  In exchange for a lower rate, you are prepaying the lender up front.  Sometimes you can wrap those points up in the mortgage itself.  Rates are still very good right now by historical standards.  I paid for several years on a loan at 8.9% and 7.9 percent.  I even paid off a truck loan at over 12% in the mid-1980’s!  Sounds absurd right now, but that was life back then.   You can talk to many people who had mortgage loans ranging from 10% to 14% in the early 1980’s after rampant inflation during the Carter years.  Why do you think Ronald Reagan was elected?  So if we can get a mortgage loan today from 6.5% to 7.5% we’re doing pretty darn good!
• Finally, be patient yet firm with your lender, and ensure you understand the process and forms you’ll be dealing with!  There will be appraisals, inspections, etc, etc.  Your buyers agent (you have one, right?) should be knowledgeable about the process and help shepard the closing.  The lender can (and should) give you a package of estimated closing costs, including most of the forms you will see at closing.  Read and understand the terms of your loan… and go over the expected closing costs in advance so there are no surprises on closing day.  If you do get a surprise at closing, perhaps a change in interest rates or some excessive costs that were not previously disclosed… be prepared to walk away.  Most people never do, they just want the process finished and are happy to get into the home of their dreams.  But it’s your money, and your mortgage.  It should be something you understand and are prepared for.  After all, it’s probably the biggest expense of your life!

There are many library books and other sources of information on buying and selling homes… do yourself a favor and continue to learn as much as possible before hand.  I’m sure I missed something… let me know!

I spent some time this week working on describing my view of setting financial goals. It was a busy week however, and presented much opportunity for thought with all the market turmoil. Obviously we live in uncertain times. Instead of a discussion of financial goals this week, it seemed a better time to look at the mortgage issues and consider market risk tolerance.

Normally we think of risk tolerance only in terms of investing in the stock market or with mutual funds. Some people say real estate is the ultimate hedge against risk and inflation over time. Maybe, but not unless you have a long time to own it. On a nationwide basis, I would argue that the market for speculation and flipping of real estate is pretty much over. There are a lot of people who invested in real estate and are now making payments on an investment property because they didn’t consider the risk of owning that asset. Many are giving those properties “back to the bank” because they can’t make the payments on them. In the fast moving real estate market from 2000-2005, risk was not something people considered in terms of real estate. The market was “too good” and it was “too easy” to sell a home.

Now we have lenders concerned about risk to their own portfolios of mortgage-backed securities, and an illiquid bond market. Because of the subprime lending blowup, banks and other lenders are wary of taking on new loans. They are demanding a premium both in terms of borrowers with excellent credit scores and higher interest rates on their loans. Many people are trying to secure a new mortgage to purchase a home, while others are trying to refinance their mortgage on their present home.

But in both cases, the mortgage climate has changed, making it difficult… probably for many years. You may have read the recent Yahoo article Mortgage Mess Creates Lending Drought, which sums up the issues facing mortgage loan borrowers pretty well. The article above makes a good point however that the current lending climate is not very different from that of the 1980’s and 1990’s. I remember working through a mortgage application in the early 1990’s where the lender picked through everything with a fine-toothed comb. I almost didn’t get that loan because of tiny blip on my credit record from years earlier. I had to scramble to get a letter from a long-gone creditor that stated my account was paid off. It didn’t matter whether it was correct or not… my credit record showed it was outstanding.

What can we do about a challenging lending climate? Not much in the short term beyond making sure that if you’re buying a house, that the mortgage contingency is quite specific in case you cannot get that loan. Sellers are going to have to work with buyers because the process may take a bit longer. If you are buying a home this year or next, do your best to clean up your credit record and make sure there are no outstanding issues or red flags. Also, work at paying down debt to lower your debt-to-income ratio.

There’s lots of advice on the net for how to improve your credit score, and having an excellent credit record is obviously very important. It’s also time to be realistic… most people are going to need to pay 10% to 20% down on their home, and the lender will look very closely at income to ensure qualification is accurate. These days the credit rating agencies are required by law to investigate and report back about any item on our credit record we question.

But if you haven’t already checked your credit record, the time to find this out is not while applying for a mortgage or trying to close on a home. Sometimes it takes several weeks or more to get things in order, so it pays to do your homework before applying for a mortgage. What does all of this mean to me personally? I think it means the easy money party is over. In other words, too much debt on the family balance sheet could prevent us from buying, or refinancing, a home or other major asset. It also means that the stock market is going to continue being very volatile over the next 6-18 months.

The worst case indicates a recession and severe contraction regarding consumer spending over the next year or two. In that scenario I see the housing market remaining depressed and the global economy slowing down. Many “doomsayers” believe inflation will return with a vengeance. I don’t know about that, and not being an economist, I won’t prognosticate further.

I’m a long-term investor and homeowner, and will try to make decisions appropriate to the long-term. And as well as I know my own limitations, I also know my personal tolerance for risk. That brings me to my real point… in today’s market climate, if you’re going to be investing in the market- any market, you absoultely must decide what your tolerance for risk is. The time to decide you are not comfortable losing money in a particular market investment choice is ideally before you put money there! But most of us learn things a little harder, through experience. Knowing our risk tolerance is not hard, but making decisions appropriate to our risk tolerance often is.

Risk tolerance is a very personal thing, and there are few right answers. What is right for you may not be right for me. What is right for your spouse may not be right for you, so you will need to strike a balance or an agreement for your investing goals and allocation. Risk tolerance is also tied to the time horizon for your investment goals. If you’re saving for a down payment on home, your risk tolerance should necessarily be very low and your assets should be in a savings or money market account. If you’re examining risk tolerance in terms of retirement in 20 years, that presents a whole new perspective. The ancient Greek saying “Know Thyself” is very appropriate. We are trying to work with a level of risk that is appropriate to our goals, time horizon and personal level of comfort. Many studies have been done to investigate consumer risk tolerance, and basically the studies show that people are normally far more conservative than they think. In other words, we often think we are willing to handle degrees of risk, but when it comes to losing money, we are not prepared for risk at all. Here are some tools you can use to analyze your own tolerance for risk:

MSN/Money Online Risk Tolerance Quiz: A quick online assessment of risk tolerance.

The following are printable .pdf files:

Investment Risk Tolerance Quiz: An excellent risk tolerance quiz courtesy of North Dakota State University, by J.E. Grable and R.H. Lytton.

Risk Tolerance Quiz: This is a useful risk tolerance questionnaire from Richard D. Margarian. Use your answer choice as the points for each question, then total them up at the end.

Retirement Risk Tolerance: A short analysis form that looks at risk from a retirement goal perspective.

There’s also few things better than a good second opinion. If you want objective advice and a closer examination of risk and asset allocation, find a professional Certified Financial Planner in your area using the Financial Planning Association’s search tool.