There are important lessons to learn from the housing bust, lest we repeat our mistakes. Chief among them is that some old-school traditions need to become new-school traditions.
Another spring, another dormant season in real estate?
Maybe yes, maybe no.
In 2008 alone, the housing bust wiped out an estimated $2 trillion in home values. But for the first time in a long time, we are finally seeing an upside.
The same falling home prices that wreaked so much havoc in the economy are queuing up as the solution to the bust.
With prices down about 25% from their 2006 peaks, homes and buying incentives are tempting bargain hunters once again. Many economists agree that we’ve seen the bottom of the market and can see a faint but discernible light at the end of the long, dark tunnel. Sale volumes are up in many parts of the country, but prices aren’t.
In early April, the average 30-year, fixed-rate mortgage loan dropped under 4.8% to historic lows, according to Freddie Mac, prompting some qualified buyers to buy and others to refinance.
At a spring speech, Harvey Rosenblum, executive vice president and director of research for the Federal Reserve Bank of Dallas, said the economy will improve markedly in 2010 and should be back on track by 2011. Housing, which led the country into this economic mess, could well lead it out, he said, partially because of the Obama administration’s $75 billion mortgage relief plan.
The stimulus plan, in part, is offering first-time homebuyers a tax credit up to $8,000, plus a refinancing program that gives much-needed help to owners who are struggling with mortgages and incentive to their lenders.
Credit is finally starting to flow again, and prudent families with a reasonable down payment are for the most part getting the go-ahead to buy. Ian Shepherdson, chief U.S. economist at High Frequency Economics, noted this spring that falling housing prices are likely to slow heading into the summer months and possibly show improvement, cautioning that “foreclosures are weighing heavily on prices.”
The repricing of home values almost everywhere in the country brings with it a whole new real-estate reality, one that marks a return to some of the real-estate “rules” of the past. It’s a reversion to many tried-and-true fundamentals you should recognize and comprehend:
1. Save smart for a down payment. It’s true that tying up all your equity in a mortgage can take away your emergency cash buffer in a downturn. But with the market starting to stabilize, the benefits of a large down payment — from 15% to 20% — will pay off in the form of higher equity, lower payments, better interest rates and more readily available refinancing.
2. Borrow within your means. Just because you’re approved by a lender for a specific mortgage amount doesn’t mean you can really afford the home. The wholesale defaults that occurred on tens of thousands of too-lenient loans carry a strong message: Live within your budget. Lenders grew more complacent with underwriting and appraisal standards because double-digit annual price appreciation lulled them into believing their collateral was safe. In their gamble, they abandoned the three C’s of mortgage lending — credit, capacity and collateral — and everyone lost. Until the run-up in values, a safe mortgage on a home was considered no more than three times a buyer’s annual family income. Some old-school traditions need to become new-school traditions.
3. Buy for the long term. This isn’t the time to try to make a fast buck in real estate. There’s still some market pain left, and it’s unclear when prices will rebound. If you’re buying this year, plan on staying put for the long haul.
4. Your market is unique. National housing trends don’t mean anything. Understand your market’s dynamics, which include the health of the local job market, local foreclosure statistics, price movements, a home’s average time on the sales block, the lack — or abundance — of newly built homes coming upstream and the prices of comparable sales in your specific neighborhood of interest.
5. Watch for the pricing warning signs in the next cycle. Continued home-price run-ups year after year should raise a big, bright, red flag in your castle. From 2000 to 2005, U.S. housing prices increased by an average of 53%, with many markets far exceeding that, including California at 109%, Nevada at 94% and Florida at 90%. That party ended abruptly, and nearly everyone suffered a hangover.
This article was written by Steve McLinden.
For the complete article visit Bankrate.com.
Tags: American Marketing Systems Inc., AMSI, Buyers, home buying rules, Housing Market, Interest rates, Market Conditions, Real Estate
