Read an Excerpt
House Poor
How to Buy and Sell Your Home Come Bubble or Bust
By June Fletcher
HarperCollins Publishers, Inc.
Copyright © 2006
June FletcherAll right reserved.
ISBN: 006087323X
Chapter One
To Buy or Not to Buy, That Is the Question
April and Adam Nichols are suffering from sticker shock. The newlywed New Yorkers would love to get out of their cramped one-bedroom rental in Manhattan, which costs them $2,325 a month, and buy a starter condo. But everything they've seen in their under-$500,000 price range is horrible. One place they looked at in Hoboken, New Jersey, was a fifth-floor walk-up with a view of an ugly brick wall. Another in the Bronx was in a run-down building populated by folks fifty years their senior. And as for buying in pricey Manhattan itself--well, unless you're Donald Trump himself, fuggedaboudit.
So what are the Nicholses planning to do? For now, nothing. "It's hard to throw money away on rent, but we're going to be patient," says Ms. Nichols. "Prices are bound to come down."
It's hard to sit on the sidelines when every day, the news profiles hairdressers, truck drivers, and schoolteachers making thousands flipping properties. And it's harder still when the airwaves are crammed with home-fix-up shows, and when bookstores are filled with books on how to make millions as a real estate investor.
But to every thing there is a time and a season, and that's as true for home buying as it is for everything else. The people who win big inthe real estate game are the ones with the courage to sit out the manias as markets reach their peaks and buy during the busts. As Shakespeare wrote: "Ripeness is all."
The trick is to be contrarian and recognize where you are in the real estate cycle. When Doug Duncan, chief economist for the Mortgage Bankers Association, moved to Washington, D.C., in 1988, the local real estate market was sizzling and buyers got caught up in bidding wars at open houses. He decided to rent. Soon, the market took a nosedive. Five years later, he decided it would be a good time to buy. He paid about a third less than the previous owner, who'd lost his home in a foreclosure. "You have to use caution," he says. (We'll show you how in Chapter 6.)
Understandably, not many real estate brokers share this opinion. An ad sent to clients by agents of the New York brokerage Prudential Douglas Elliman pushes ownership hard, even in today's hair-raising market. It points out that real estate prices, unlike stocks, adjust slowly, and that predictions that the New York market would crash after 9/11 didn't come to pass. It also tells first-time home buyers that they have to "get in the elevator to ride to the penthouse," and asks: "Why do you work so hard? To live in a crummy rental for the rest of your life waiting for a bargain to emerge?"
But the real worry today isn't that you'll be stuck in a rental for the rest of your life, but that you'll buy at the peak and be stuck in the property for an entire real estate cycle, which can last for years, waiting for prices to recover. To come out ahead as investors, we need to buy low and sell high, but this gets forgotten in the emotions of buying a home.
So how often do busts occur? The Federal Deposit Insurance Corporation (FDIC) has identified 21 cities that experienced a housing bust over the last quarter-century. In the mid-1980s, the victims were cities in Texas, Louisiana, Oklahoma, and other places that depended on oil prices. In the early '90s, cities in the Northeast and California, which had ex-perienced big, unsustainable home price run-ups, were hit. Scattered throughout the country were other places that experienced price declines when they lost major employers or became overbuilt. After too many developers invaded Honolulu, for instance, the city had six straight years of price declines, ending in 2001.
Although the FDIC notes that booms don't always end in busts--often, there is simply a period of price stagnation--the agency adds that the number of boom cities increased by 72%, to 55, in 2004, mostly near the coasts. More than half of these places had never experienced a boom before.
How genuine is the danger of price declines today? Some economists like David Lereah, chief economist for the National Association of Realtors, argue that we're not in danger at all, because current long-term fundamentals are sound. In his recent book Are You Missing the Real Estate Boom?, Mr. Lereah points to a number of factors that he thinks will keep the boom propped up indefinitely, including healthy job growth, tight supply, and continued demand by retirees, foreigners, Baby Boomers, and their children. He predicts prices will rise 9% this year nationwide, with even greater gains in markets on the coasts. "This real estate boom has wings," he writes.
But though nominal prices haven't fallen since the 1930s, real home prices have tumbled from time to time, typically after a big run-up like we're seeing today. In the early '80s, real home prices fell 10%. It would take a sharp and unlikely contraction of the economy to repeat that scenario--a doubling of current mortgage rates and a halving of home sales--but if oil prices remain high, such a contraction is possible, according to Lawrence Yun, a forecast economist also with the National Association of Realtors.
After all, oil prices affect everything from how many workers a company hires to how much consumers pay at the pump. Given that the United States currently holds less than 2% of the world's oil reserves, and is faced with diminishing supply in places like Prudhoe Bay, it's likely that we'll have to ramp up imports. Analysts expect prices, which recently touched $60 a barrel, to remain high by historical standards over the next year or two.
Other factors are troubling, too. Americans are deeper in debt than ever before, many from risky interest-only and negative amortization loans they took out to take part in an all-night real estate party, which we'll discuss more in Chapter 2.
And the same herd mentality that has influenced manicurists to try to become real estate moguls could also swing the other way. One big bump-up in interest rates, coupled with a few local downturns, is all it would take to create a stampede for the exits. The effect could be devastating and widespread. In 2000, when the stock market fell, a third of the accumulated stock wealth was in the hands of 1% of investors. Today, the top 1% of home-equity holders control only 13% of the nation's housing wealth. When the housing market turns--and it always does, eventually--the manicurists and the moguls are going down together.
A Time to Buy, A Time to Rent
What should you do in these uncertain times, buy or rent? There's no one-size-fits-all answer, since it all depends on where you live, your income, your stage of life, and how often you plan to move. Generally speaking, people tend to rent when their income is the lowest, when they're young and old, and to own in-between. However, that's not always the case, especially today, when some young people are forgoing pricey cars and weddings to make down payments, some older people are opting to suck the equity out of their paid-off homes through reverse-equity mortgages, and some mid-career couples are renting in luxury condos in the city rather than buying a McMansion in the 'burbs.
A number of Web-based calculators can help you decide whether it's best to rent or own using data such as your salary, the cost of the home, the interest rate and term of the loan, and other factors. But bear in mind that many of these calculators are being offered by lenders who have a vested interest in your buying a home. One of the best calculators on housing affordability from a neutral source is on the Web site of Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania. He also has other excellent calculators to help you determine the best ways to handle other mortgage scenarios, like comparing loans and fees, refinancing, consolidating debt, making extra payments to principal, terminating mortgage insurance, and figuring out the best loan terms.
Let's look at the cases for owning and buying, so you can decide what best fits your current circumstances.
Continues...
Excerpted from House Poor
by June Fletcher
Copyright © 2006 by June Fletcher.
Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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