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Most new home buyers want a yard for their dog and a dog house. Somewhere to plant flowers, a garden -- all the things they can't in the apartment complex shared with many other people.
Today, any housing transaction -- especially a first time home buyer purchase, has to make financial sense because home prices have fallen so much.
Weakening housing prices aren't just a problem for home owners in the North -- New York, Boston and Pennsylvania, property values are low around the country -- Texas Arizona, California and Florida. Recent housing surveys show prices falling or stagnating in markets around the world. Existing mortgage holders, potential home equity borrowers and first time home buyers should take note of the trend. They may have to adjust their borrowing and shopping strategies now to avoid trouble down the road.
The last thing a new home buyer would like to do is commit to buy a new house for a large sum of money and then three years down the road, decide to relocate and have their sales agent say, 'Your old house is not worth what you paid for it.' You've got a problem there and I want to make sure it's stable.
While the housing markets have held up fairly well in the face of the economic slowdown before, low unemployment and failing mortgages in many states are mounting. More layoffs have been announced in the U.S. and the auto and retail sectors, along with the long slump in the stock market, the layoffs have put pressure on real estate foreclosures in most areas.
Over the last 50 years, home prices have really year after year increased or appreciated. But in the last few years we have seen that slow from a trickle to a stop, and in some particular markets foreclosures and Bank REO's saturate the builder subdivisions.
Declining mortgage markets
The current real estate markets price decline is the largest in many years and homes are selling for what someone is willing to pay, -- or not sell at all. When this sort of thing gets publicized day after day after day, it has a looming effect where people are scared to go out and buy homes.
To cope with these conditions, borrowers and buyers should adjust their financial behavior. Consumers who are shopping for homes in weak markets, for example, have to be sure they're going to stay put for a while. Potential buyers with shaky jobs or first time home buyers who plan on starting families and moving to bigger homes a year or two down the road may want to just rent.
Why? It doesn't take long to recoup a couple thousand dollars in mortgage closing costs when home values are rising. But when they're falling or remaining stable, home owners who can't stick around and wait out the sluggish period can end up in foreclosure. The difference between the purchase price they pay and the price at which they sell isn't enough to cover the upfront closing costs, the back-end real estate agent commissions and any upgrades and renovations.
Sellers are struggling to get the prices they want and buyer concerns are warranted. After investing a down payment and money upgrading a house inside and out, buyer's are afraid their investment won't pay off at closing time.
Because of potential problems with home prices, this isn't a good time for borrowers to stretch their budgets at purchase time, either. Doing so may cost more now than in the past because of the way private mortgage insurance (PMI) works.
Over the past decade, buyers were able to put little money down and buy expensive homes. That results in loans that have a high loan-to-value (LTV) ratio -- and the expensive monthly PMI payments that come with those loans. When new homes appreciate quickly, buyers can get away with this tactic because PMI payments would quickly vanish. That's because when homes appreciate quickly; 95 percent LTV loans turn rapidly into 80 percent LTV loans, and that's the threshold at which most mortgage lenders allow borrowers to waive PMI. But with falling or stable prices and the long amortization schedules of 30 year loans working against them, home buyers could get stuck paying an extra $150 or $200 a month in PMI payments for many more years.
Refinances and consolidators beware
Current home owners who are thinking about refinancing or taking out home equity loans to consolidate debt while rates are low should be careful, too. For one thing, some customers who have done so in the past have gone out again and racked up new credit card debt. When prices are rising, enough equity becomes available that those home owners can refinance again and try to do things right the second time around. But when prices are falling, the equity isn't there and the debts can overwhelm them.
Home buyers who borrow at high loan-to-value ratios to consolidate debt or make home improvements could end up owing more than their properties are worth. That's because they don't have equity cushions large enough to absorb price declines. A borrower in that position faces an array of bad options if a job loss or something else forces a home foreclosure sale: |
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Home owners who insist on borrowing may want to consider making extra mortgage payments for principal reduction so they don't get caught owing more than the house is worth. The same holds true for people who already have a lot of mortgage debt from past loans, but don't think they'll have to move anytime soon.
If the housing economy gets worse and prices collapse, many home owners will walk away from their loans, even though doing so can wreck their credit. In theory, a lender can come after the personal assets of a borrower who it forecloses on if the post foreclosure sale doesn't net enough to pay off the customer's loan. But the judicial burdens of doing so and the relatively slim chances of recovery deter many lenders from bothering.
When the market was hot in the late 1980s, builders were selling new homes faster than they could build them and home owners were building equity at a healthy clip. But when home sales cooled in the early 1990s, prices collapsed. Home owners were so deep in the hole that some handed their keys to their banks and rented homes with monthly rents that were substantially lower than their mortgage payments had been.
No one knows if the United States will rebound from the recession this year. But lenders recommend home owners and potential buyers of homes in today's market should plan and save money for the down payment, loan costs and upgrades. |
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