Monday, June 21, 2004

By Glenn Roberts Jr.
Inman News

Editor’s introduction: The greatest housing boom in U.S. history has made real estate the hot topic. Some people have become so obsessed with home shopping that they are visiting open houses as a new form of weekend entertainment.

In some markets, prospective buyers are packing Wednesday and Thursday open house tours. And each month, roughly 20 million consumers browse MLS property listings on the Web. They are the modern-day “Lookie Lou’s,” or people who dream of owning a home but cannot or will not take the plunge. We call them: Castle Clickers.

Market dynamics are also out of control. Multiple offers are common, people are camping out to get in on new subdivisions and double-digit home appreciation is not confined to the East and West coasts.

Real estate is everywhere.

Don’t try to run. Don’t try to hide. It is simply inescapable. It will find you at work, at play, as you watch television, listen to the radio or surf the Internet. Your friends and family, co-workers and neighbors are probably talking about it. Or at least thinking about it. So is the couple seated next to you at the local restaurant.

Case in point: Home & Garden Television, the cable channel better known as HGTV. During this nationwide housing boom, the popularity of HGTV has been surging. One of the fastest-growing cable networks, HGTV hit its highest weekly ratings in April, according to Nielsen Media Research, and that tops 16 consecutive months of increases in its primetime ratings. The network, now available in about 85 million households, features such programming as “Curb Appeal,” “Design on a Dime,” “Designed to Sell,” “House Hunters” and “Divine Design.”

Other networks have attempted to capitalize on this frenzy by launching their own home shows. Jack Myers, a media analyst who tracks programming, pricing and technology trends and innovations, said, “The focus on home and garden has gone through the roof. It is the single most popular reality trend today.”

The genre’s success certainly mirrors the success of the housing market, he said, as cheap borrowing rates have enabled more people to become homeowners. People are spending more money on redecorating, renovation and remodeling, he said, and he doesn’t expect the home-show craze to slow down.

“The fact that there has been such a housing boom suggests that there are many, many more years when people will be investing in the homes they’ve now bought,” Myers said. And the successes of print publications focusing on home and garden attest to the staying power of the genre, he said.

Recently a couple was surprised to find out that a listing they were interested in had sold before they even had a chance to see it. This was particularly disconcerting because all the other listings they had considered were marketed for a week or more before offers were accepted. Then, in most cases, there were several other buyers vying to buy the property. But, the one that got away sold with only one offer, leaving the buyers wondering if they had missed out on an excellent opportunity.

It turns out that the listing in question wasn’t the right house for these buyers. But, the quick sale does raise a question. In a hot seller’s market, as are occurring in many areas of the country, especially in California, why would a seller accept an offer quickly without the benefit of full market exposure?

Some sellers feel under pressure to sell quickly. For instance, sellers who buy before they sell may feel more comfortable with a fast sale at a good price than they would waiting for weeks wondering if they’ll receive a better offer. That extra time could cost the sellers a lot if they are paying for two mortgages plus interim financing.

Real estate is a fast business that waits for no one. And sellers can accept offers whenever they want

Adjustable-rate mortgages increased considerably this week on speculation the Federal Reserve will raise interest rates by the end of the month, according to surveys conducted by mortgage buyer Freddie Mac and Bankrate. Long-term mortgage rates remained stable.

In Freddie Mac’s weekly survey, the 30-year fixed-rate mortgage averaged 6.3 percent for the week ended today, up slightly from last week when it averaged 6.28 percent.

The average for the 15-year fixed-rate mortgage this week is 5.67 percent, up a little from last week when it averaged 5.63 percent. Points on both the 30- and 15-year averaged 0.7.

One-year Treasury-indexed adjustable-rate mortgages averaged 4.14 percent this week, with an average 0.7 point, up considerably from last week when it averaged 3.98 percent.

“The 1-year ARM responds more directly to movements by the Federal Reserve Board and market chatter has it that the Fed will not only raise rates at the end of this month, but may do so consecutively throughout the rest of the year,” said Frank Nothaft, Freddie Mac vice president and chief economist. “News like that is good news for keeping long-term fixed-rate mortgage rates low since those are more sensitive to inflationary expectations.

“All eyes will be on the Fed for the next few months at least. How aggressive or how measured the coming rate hikes are will determine the future direction of both short- and long-term mortgage rates.”

Fixed mortgage rates continue to move in small steps, but rates on one-year adjustable rate mortgages jumped significantly this week, according to Bankrate.com’s weekly national survey of large lenders.

The average 30-year fixed-rate mortgage increased from 6.34 percent to 6.36 percent, while the average one-year adjustable-rate mortgage increased from 4.12 percent to 4.32 percent. The average 30-year fixed-rate mortgage has fluctuated between 6.34 percent and 6.37 percent for the past month, while the average one-year ARM is now the highest since January 2003. The 30-year fixed-rate mortgages in this week’s survey had an average of 0.3 discount and origination points.

The 15-year fixed-rate mortgage, popular for refinancing, climbed 5 basis points to 5.75 percent, while the jumbo 30-year fixed-rate mortgage inched 1 basis point higher to 6.54 percent. A basis point is one one-hundredth of one percentage point.

Although fixed mortgage rates have been treading water over the past month, short-term interest rates have been particularly sensitive to the prospect of looming Federal Reserve interest-rate hikes. Another strong employment report released June 4 and Alan Greenspan’s hawkish comments about inflation on June 8 affirmed that the Fed will begin boosting interest rates at the end of June.

Yields for short-term Treasury bills, a common benchmark for adjustable-rate mortgages, increased to reflect the likelihood of upcoming interest-rate hikes. After rising rapidly between March and May, long-term Treasury yields responded in a more modest fashion. Mortgage rates are closely related to the yields on government bonds

Question: I am trying to choose between a 3/1 adjustable-rate mortgage at 4.625 percent and a fixed-rate mortgage at 5.875 percent, both 30 years. I don’t expect to be out of my house within three years. What is the best way to make this decision?”

Answer: Whether the adjustable-rate mortgage (ARM) or fixed-rate mortgage (FRM) turns out better depends on what happens to interest rates in the future, which no one knows. Shoppers faced with this decision should ask themselves, “Is this a risk worth taking,” and “can I afford to take it?”

Scenario analysis
The best way I know to deal with these questions is by determining what will happen to the rate and payment on the ARM if market interest rates change in ways that you specify. This “scenario analysis” provides a measure of the risk if rates increase, and the benefit if they don’t. It also allows you to determine the extent to which you can reduce the risk on the ARM by making the larger payment than you would have made had you selected the FRM.

A side benefit is that you can’t do scenario analysis without knowing all the features of the ARM that affect future rates and payments. The information you are forced to compile for this purpose you should have anyway. Otherwise, you don’t know whether you have found the best deal on your ARM.

For example, you told me that your 3/1 ARM had a rate of 4.625 percent, but that rate holds for only three years, after which the rate adjusts every year. You did not tell me what I needed to know to calculate the rate and payment after the three years. I found out that your ARM rate was tied to the one-year Treasury index, which had a recent value of 1.28 percent, and had a margin of 2.75 percent. After three years, your rate would equal the index at that time plus 2.75 percent, subject to an adjustment cap of 2 percent (no rate change can exceed 2 percent) and a maximum rate of 10.625 percent.

You need all that to do scenario analysis, but you also want it for shopping. If you could find the same 3/1 ARM with a 2.5 percent margin, you should grab it.

The numbers cited below all assume loan amounts of $100,000:

A stable-rate scenario provides the best measure of the potential benefit of the ARM. The payment would be $514.14 for the first 36 months, and $481.76 thereafter, as compared to $591.54 on the FRM. If you made the $591.54 payment on the ARM, you would pay it off in 257 months.
I used four rising-rate scenarios of gradually increasing severity: 1. Small rate increase: after two years, the index increases by .5 percent /year for three years; 2. Moderate rate increase: after one year, the rate index increases by .75 percent/year for four years; 3. Larger rate increase: starting immediately, the index increases by 1 percent/year for five years; and 4. Worst case: the index rises to 100 percent in month 2.
With the small rate-increase scenario, the payment remains lower on the ARM than on the FRM over the entire 30 years. If the borrower makes the FRM payment, he will pay off in 304 months. The borrower thus benefits if rates are stable or decline, or have a delayed rise of 1.5 percent over 3 years.
With the larger rate-increase scenarios, the benefits of the ARM over the first three or four years are followed by losses. Skipping to the worst case, the payment would rise from $514.14 to $630.64 in month 37, to $754.44 in month 49, and to $883.74 in month 61 where it would remain until payoff. It is useful to know whether you could deal with these increases, even though the likelihood of their occurring is very low.
These payment increases could be reduced by making the larger FRM payment in the first three years. If you paid $591.54 rather than $514.14 for 36 months, you would reduce the worst-case payment in months 61-360 from $883.74 to $856.01.

Scenario analysis doesn’t provide definitive answers to the questions posed at the beginning of this article. However, it does allow you to make an informed judgment based on all available information. In the face of an uncertain future, that’s the best anyone can do.

By Liz Pulliam Weston

When Justin Sloggatt started looking for a home in Los Angeles’ Miracle Mile area, the typical place he toured was selling for a steep $500,000. Only a year later, similar homes there were selling for nearly $100,000 more.

With prices spiraling upward at the time, Sloggatt, a 30-year-old film producer, began to despair that he would never find a house he could afford in the neighborhood he liked.

Fortunately for Sloggatt, he nabbed a 2,800-square-foot home for $425,500 in probate court, using one of the techniques determined buyers can employ to get an edge in pricey markets.

Through the back door
Whether you’re a first-time buyer or a homeowner trying to upgrade, purchasing a house in an expensive or fast-rising area can be daunting. But real-estate experts say there are plenty of ways for committed buyers to get into even the hottest markets.

Before we begin, though, a few caveats:
Don’t expect screaming deals. Hot markets mean there’s competition for virtually every available home. You can reduce the rivalry by looking off the beaten path, but don’t pass up a good deal because you’re waiting for an impossibly great one to come along.

Buy the worst home in the best neighborhood you can afford. This old real-estate saw still works. Desirable areas appreciate faster in good times and hold their value better in bad times.

Look for homes you can add value to. You’re more likely to get a payoff – in terms of a higher selling price later – when you spend money bringing a home up to the average level of the rest of the neighborhood. If it’s already the biggest or the best, you’re going to pay a premium.

Don’t bankrupt yourself. You need to set limits on how much debt you’re comfortable carrying, since many lenders today will loan you far more money than makes sense. (See “3 Worst Money Moves You Can Make.”) Allowing your housing and debt payments to eat up more than about 36% of your gross income is asking for trouble.

Get pre-approved. Pre-approval is much better than mere pre-qualification. You want to be able to tell a seller that a lender has already committed to loan you money.
Now, on to the strategies:

Look for motivated sellers
Death, divorce, relocation, foreclosure – all can induce a seller to part with a home for less than the going market rate.

You often can discover the seller’s motivation by schmoozing his or her real-estate agent. Real-estate professionals really aren’t supposed to disclose why a home is on the market, but many do – fortunately for you. You often can negotiate a better deal when you know someone needs to sell and isn’t just “testing” the market.

Other motivated sellers include banks and other lenders that own foreclosed homes. But don’t expect the great bargains often touted on late-night infomercials. Some lenders get a premium for homes they fix up before sale, and even neglected homes tend to get many bids from people who’ve purchased those “get rich quick with foreclosed homes” tutorials.

You can find lists of foreclosed homes in a variety of places, from commercial Web sites like Foreclosures.com to government agencies like the U.S. Department of Housing and Urban Development (See links at left under Related Sites.).

Sometimes you don’t have to do any detective work. Real-estate listings, for example, will include the fact that a home is in probate, which is the court process that typically follows a death.

The rules of probate differ by area, but often there’s a court proceeding involved. Offers are made public, and rivals may bid against each other for the home.

In Los Angeles County, for example, someone who makes an offer on a home that’s in probate can easily be outbid by others willing to pay at least 5% more.

That’s how Sloggatt got his house. Another buyer originally bid $400,000 on a house that was listed for $425,000. Sloggatt showed up at the court proceeding and bid $425,500. The original bidder had a chance to counter, but chose not to.

Tackle the unloved
Most people have little imagination. They can’t see, for example, that a bungalow with its warren of tiny rooms could be transformed into an open and airy showplace with the removal of a couple of walls. Or that hiding behind overgrown shrubbery or a bad paint job might be an architectural gem that just needs some elbow grease applied.

If you can see the possibilities in a fixer-upper, you’re ahead of the game. Just don’t get in over your head.

Always get a professional, independent inspection, and steer clear of any house that has foundation or geological problems. Outdated wiring and plumbing can also be expensive to fix.

Stacy and David Grow thought they had found their dream home in Chicago before they had it inspected. The kitchen had been updated after a house fire, and the sellers assured them all was well. The Grows’ inspector, however, found antiquated knob-and-tube wiring – a potential fire hazard, especially with the power demands of modern appliances.

The Grows would have had to pay thousands to update the home. They passed, and eventually they found a more updated house that better suited their needs.

Inspections cost “a pretty penny,” Stacy Grow said, “but it saved us a lot of money.”

Don’t shun the stigmatized house
A home needn’t have been the scene of double homicide to get a bad reputation. Sometimes a greedy seller is all it takes.

Overpriced houses often linger on the market, ignored by buyers and real-estate agents who have moved on to the excitement of newer listings and sellers who seem more reasonable.

“In a market like this, there’s a stigma if it doesn’t sell within a month,” said Anthony Marguleas, a buyers-only agent and owner of A.M. Realty in Los Angeles. “People think there’s something wrong with it.”

That’s a warning for sellers – but an opportunity for buyers, Marguleas said. Realizing they’ve blown it, a seller may begin to get desperate and be willing to deal.

“Sometimes,” he said, “it will go for 10% or more below the market if they overprice it to begin with.”

So-called “FSBO” homes – “For Sale By Owner” – often get neglected, as well. They’re typically not included in multiple-listing services, and real-estate agents may ignore them in favor of sellers who offer full commissions.

Be careful buying homes with more permanent stigmas. You may get a deal on a home near a school, on a busy street or fronting a cemetery. But you may have trouble selling it in the future. The school will still be noisy, the street still dangerous (maybe even more so, since traffic almost inevitably gets worse), and the graveyard will still give people the willies.

State housing agencies
States offer loans with below-market interest rates as well as assistance programs that lend or give you the money for a down payment. And you don’t have to be poor to qualify.

In Boston, for example, a family of three can have a household income of $101,000 and still qualify for help from the state’s MassAdvantage program.

The lower the interest rate, the bigger the mortgage you can get, and the more house you can buy. The downside: If you sell within nine years of getting the loan, a federal tax could take back up to 50% of any profit you make on the home.