OutOfYourRut.com » real estate

Florida Real Estate: Tropical Paradise is Now on Sale

Kevin M — Thu, 12 Jan 2012 23:19:45 +0000

Guest Post by Josie Fixler

Six years ago, my husband and I decided to take a leap, leave the rat race of New York City, invest in Florida Real Estate, and raise our daughter in tropical South Florida. Our friends and family thought we were insane, leaving behind everything we knew to search for a new life in the Florida Sunshine. But, we were determined.

Florida isn’t just one market—find the one that fits your lifestyle

Our search for our new home began in Fort Lauderdale. It became immediately clear to us that Fort Lauderdale Real Estate is notorious for its pristine sandy beaches, high end boutiques, and upscale restaurants. Fort Lauderdale is recognized as the Venice of America. It has a population of nearly 180,000 people and is the seventh largest city in Florida. Fort Lauderdale is filled with stunning ocean front condominiums and oversized custom built waterfront estates but we just weren’t sure it was the right fit for our family.

Next we turned to the City of Wellington. Wellington was voted as one of the “Top 100” Best Places To Live in 2010 by Money Magazine. Wellington Real Estate is synonymous with high end equestrian living as many homes feature their own private stables and bridal paths and many well-known show horses are trained and housed in Wellington.

Wellington is host to a multitude of housing options including single family homes in gated and non-gated communities, grand custom built equestrian estates, active adult communities, and elegant high rise condominiums and villas. While Wellington is a beautiful city, we did not think it was the right place for us so we continued our search.

We finally turned our search to the city of Boca Raton. Boca Raton is a beautiful city known for its A-rated school system, beautiful parks, high end shops, five star restaurants, and beautiful sandy beaches. Home to Gumbo Limbo Nature Center, Mizner Park, and Boca Raton Museum of Art, there is always plenty of things to do in Boca Raton.

Boca Raton is home to custom built grand estates, oceanfront condominiums, single family homes in both gated and non-gated communities, high-end country clubs, active adult communities, and upscale villas. After looking at several homes in and around Boca, we both felt that this city was the perfect place for us to call home.

Taking the tropical plunge—and never looking back

Six years ago, we invested in Boca Raton Real Estate, and a day has not gone by that we have regretted this decision. Every day we wake up to beautiful pink sunrises, shimmering lakes, tall green palm trees, and warm South Florida weather.

While this morning friends and relatives who live up north are bundling up in their winter clothes and praying that the remote control start on their car is working, we went for a morning jog, watched the sun rise over the ocean, and sat on the beach enjoying our morning coffee. We feel lucky to be here and hope that one day our friends, family, and blog community at large will join us in this life on vacation.

This article is sponsored by Boca Executive Realty–your best source for Florida real estate.

( Photo courtesy of Boca Executive Realty, all rights reserved )

Is America Becoming a Nation of Renters?

Kevin M — Mon, 26 Dec 2011 11:12:02 +0000

By Kevin M

Ominous question, isn’t it? There are all kinds of implications that go with that possibility, and none of them fit neatly within the economic progression of the past 30-40 years when it seemed the entire economy was running largely on the back of the real estate industry. But whether we like it or not, new trends in housing are beginning to emerge, pointing to a future that will likely see more renters—maybe far more—than in the recent past.

Though new construction of residential real estate has been showing definite signs of an upswing in the past few months, the encouraging statistics are far more important for what they hide.

An article last week, Rent Party! Apartments Drive Strong Housing Starts Data (Yahoo!Finance) reports a good news/bad news scenario on new residential construction. The good news: November housing starts are up 9.3% from October, and 24.3% over October, 2010. That’s an impressive turn-around.

But now the not-so-good news: though overall housing starts are up impressively, the stats for 1-4 family homes is actually down, dropping 1.5% from October, 2011.

So if home building is down from last year, what accounts for the increase in new construction? Apartments! Apartment construction (buildings with five or more housing units) are booming while construction of primarily owner occupied single- and small mutli-family homes are stuck at a recession level pace.

The economic implications of this shift are not lost on builders who are moving from the once reliable single family market to apartment construction. They’re on the front lines of the housing market, they see future, and they’re building to prepare for it. Obviously, they see the shift as part of a longer term trend.

The forces driving the rental market

The shift is being driven by a number of factors that insure it will continue for many years, among them:

The foreclosure wave of the past 4-5 years is turning one-time owners into renters
A stubbornly soft employment picture that shows few signs of significant improvement
Lack of savings for down payments
Excessive debt levels
Tighter mortgage lending standards in the face of weak employment, low savings and high debt
Flat or declining house prices have removed the imperative to own
A reduction in new household formations, being driven by all of the above

The combination of these economic forces means that renting may become the New Normal for many middle class households.

How could this affect your own housing situation?

OK, we’ve listed macro-economic factors why renting is becoming more popular, but how does that work out on a personal level? If you’re tossing around the own-vs-rent question, why might you be better off renting? Let’s consider the above factors in light of personal circumstances.

Employment. This is a double-edge issue for most people. Not only can weak employment increase the possibility of losing your job, but finding a new one might require moving to a different city or state. How easy will that be to accomplish if you have a house that will need to be sold? Bigger picture though, how much sense does it make to sign onto a 30 year mortgage given that the typical job lasts only from 1-5 years? As a renter, you’ll have greater employment mobility, should that become necessary, and you can more easily move to a less expensive place in the event of an income drop.

Savings and debt. Since it’s no longer possible to flip houses every few years, you’ll have to live in your home much longer, and that will mean repairs—big ones as the home ages. Home repairs now cost well in the thousands, and often tens of thousands of dollars. If soft house prices mean you can no longer take a home equity line to make major repairs, then your house might eat up your savings and force you to tap credit cards.

Flat/declining house prices. Rising house prices have been the ultimate (but generally unspoken) lifeblood of the housing market. Not only has it dangled the possibility of easy riches for ordinary people, but it also morphed into the classic buy-now-and-beat-the-price-increase marketing strategy. It’s disappearance from the housing scene has a greater impact than is generally assumed.

Even if rising property values aren’t your primary motivation for buying a home, their absence will affect your investment for years to come, and maybe even forever. Let’s face it, from the 1970s through about 2006, millions of people did buy primarily for rising values. They were a significant force in the market, and their sudden disappearance means housing is no longer either a guaranteed investment nor even necessarily very liquid.

Foreclosures, tighter lending standards and slower new household formations. Even if you have no trouble qualifying for a mortgage for the home you want to buy, the fact that fewer prospective homebuyers can get a mortgage will impact your housing investment. Fewer qualified buyers means a smaller market for homes in general, and that will translate to slower/flat/declining price trends. Not only will your home be worth less in the future, but there will be fewer prospects to sell it to should selling become necessary.

Why should we think the shift to rental housing is in any way permanent?

Of course, none of us have a crystal ball, but I think it’s pretty safe to assume that the shift to rentals will continue for the foreseeable future. It’s not a fad, but a reaction to all of the economic forces we’ve covered so far, none of which are likely to reverse any time soon.

The weak employment front is being caused by long-term fundamental shifts, such as the off-shoring of jobs to lower wage countries, and the relentless advance of technologies that are reducing some fields and eliminating others completely. Meanwhile, it seems clear that low mortgage rates—the usual solution to a bad housing market—are having no affect at all.

In addition, we have to consider the very real possibility that future recoveries may look very different than they have in the past. Not only is it likely that recoveries won’t be real estate driven, but they may not benefit housing in any meaningful way either. The Baby Boom generation—the largest single generation in history—has moved past the prime home buying years, and many are now looking to downsize. Combining this with economic factors has the weak housing market looking, smelling and acting permanent.

Why we might not become a nation of renters

Part of the difficulty with home ownership right now is that real estate was at the center of the financial meltdown, and that situation is still actively playing out. While it does, renting is looking better all the time, if for no other reason than that flexibility is a huge advantage during a time of major change, and that’s exactly what we’re in.

None of this means that owning a home will have no value in the future, but how and when a home is bought will be the determining factor. If house prices continue to decline, eventually the cost of owning a home will drop down to a level where it will be competitive with renting, and maybe even cheaper. That will be the point where we’ll start to see a real recovery in housing.

Here in Atlanta where I live, new subdivisions that were priced in the $600,000-plus range five years ago are now advertising base prices of $350,000. The homes are selling at the lower prices! As price drops (to more realistic levels) move through the market, housing will finally stabilize. That won’t happen quickly or easily though, because many millions of owners of existing homes are still carrying the large mortgages that were based on much higher values. The ride down will be slow and painful, just as it’s been so far.

While that’s taking place, renting a home is increasingly looking to be the housing arrangement of choice. The building industry is betting their bankrolls it will continue.

What do you think about renting? Is it a viable alternative in the current economy?

8 Ways to Buy Your House for Less
How to Get a Real Deal on Your Next Home
A View From the Economic Cliff
5 Reasons to Buy LESS House Than You Can Afford
What Would You Advise a Friend Facing Foreclosure?
Why Time is Your Friend When Buying a House

( Photo from Flickr by stepnout )

Refinancing With Declining Home Values

Kevin M — Thu, 15 Dec 2011 15:58:00 +0000

Guest Post

The criteria for refinancing a mortgage through a traditional lender typically require some degree of equity in the property. At the very least, homeowners should not owe more than the home’s value in order to qualify for the best refinance rates.

After the housing market crashed in 2008-09, many homeowners found themselves struggling to refinance their mortgages in light of sinking home values and disappearing equity. However, there is hope for refinancing even for borrowers underwater with their current mortgage.

Home Affordable Refinance Program

The Home Affordable Refinance Program, better known as HARP, was designed to help homeowners refinance their homes with stable, affordable mortgage terms. A joint effort by the Department of the Treasury and HUD, the HARP concept was designed to address the problem of lost home value compared to mortgage balance owed.

Certain criteria are required in order for a borrower to qualify for a HARP loan. Primarily, borrowers must be current on all mortgage payments, with no more than one late payment in the previous 12 months. Additionally, the loan must be owned by Freddie Mac or Fannie Mae. Initially, the ratio of loan to home value had to meet qualifying criteria, but those standards were changed in 2011.

Individual lenders are responsible for processing and approving applications. Not all mortgage servicing companies make HARP available, as involvement with Freddie Mac or Fannie Mae is required. If available through a lender, refinancing under HARP does require the origination of a new loan, with all the subsequent fees and underwriting requirements typical of a refinance. The program does not guarantee the best refinance rates, but instead strives to help homeowners refinance into a more affordable payment and interest rate.

FHA Streamline Refinance Program

Whether a borrower qualifies for HARP or not, there are options available for refinancing, even when the value of the home has dropped. For example, borrowers with The Federal Housing Administration (FHA) mortgages may be eligible for streamline refinancing. Like HARP, the FHA Streamline Refinance program may not offer the best refinance rates, depending on the borrower’s credit history and income, but the program does help homeowners who are under water with their mortgages.

Various criteria and terms are available through FHA lenders provided the mortgage is current, the loan is insured through FHA, the refinance lowers monthly payments and no equity is cashed out. As with HARP loans, loans eligible for FHA streamline refinancing vary, depending on specific lender terms. Some borrowers may qualify for no-cost refinancing with a higher interest rate. Others may have their closing costs rolled into the new loan, to take advantage of lower rates.

Individual Lender Refinance Programs

For homeowners whose loans are not owned by Freddie Mac, Fannie Mae or FHA, many individual lenders offer programs to help refinance underwater mortgages. No matter what lender owns the mortgage note, borrowers should start the refinance process by first asking their current lender what programs the lender offers and for which programs the borrower qualifies. From there, the borrower can pursue other options to ensure the best refinance rates and terms for their situation.

This post is brought to you by Refinance Mortgage Rates, a consumer organization with the mission of educating and informing in a time of economic uncertainty. We publish and spread accurate content to help consumers avoid the pitfalls of the mortgage and real estate market.

Save for Retirement Now or Payoff Your Mortgage First?
Five Reasons the 30 Year Mortgage Beats the 15
Why Paying Down Your Mortgage is More Important Than Ever
Is Now a Good Time to Refinance?
Adjustable Rate Mortgages – You’re Kidding, Right?
5 Reasons to Buy LESS House Than You Can Afford

( Photo from Flickr by LancerE )

Has the Time Come for Commercial Investment Property?

Kevin M — Fri, 14 Oct 2011 20:45:07 +0000

By Kevin M

I’ve written a good deal about real estate as an investment on this site, but the emphasis has been on residential property, generally in the 1-4 family category. But there’s an entirely different sector in the real estate world involving commercial and larger multi-family property that has the potential to offer both greater rewards and higher risks. Sometimes referred to simply as investment properties, this type of investment is for sophisticated investors who are knowledgeable about the particular risks that investing in such property carries.

To the seasoned real estate investment professional however, there are ways to play this market that both lower those risks and increase returns. At a time of microscopic returns on interest bearing investments and high volatility in the equity markets, an investigation into alternatives begins to become more attractive.

Buying below market value properties

One of the critical aspects of successful real estate investing—or any investing—is buying below market value. I’ve written about this very issue in connection with residential property investments, and while the considerations are similar, the necessity to do so is even greater where investment property is concerned.

In the investment property arena, the focus should be on buying distressed properties. These are properties that can be bought for below replacement value. However since investment properties tend to be unique (as compared to single family sub-division homes on the residential side), determining which are distressed is not quite so easy. Intimate knowledge of both the property and its respective market are absolutely necessary.

Distressed properties are often in disrepair, in some state of default or foreclosure with the lender, or being auctioned off to the highest bidder. In and of themselves, none of these factors mean categorically that a property can be had for below market value—that’s where market knowledge comes into play. In addition, the fact that a property can be purchased for less than its market value doesn’t mean it will be a solid investment. The specific reasons why the property is distressed are significant. A poor location or a state of extreme disrepair or decay can negate even the deepest price discounts.

It’s important to understand that commercial and investment type property is generally less liquid than small residential property. Not only is each property unique, but the number of potential buyers for any given property is far more limited. That adds layers of risk to an investment in that it will generally be harder to dispose of property particularly in a soft or declining market.

Never put all your eggs in one basket

Diversification is the order of the day in most investment classes, but it is even more important in regard to investment property. While you can spread a few thousand dollars out over several stocks or mutual funds, a single investment in a commercial property may require millions of dollars. Worse, if the properties are distressed (as they should be) financing will be unavailable requiring an all cash investment. Diversification in this type of investment medium is very difficult under such circumstances.

For this reason, it’s best to navigate this investment class as part of a larger group. Pooling of resources can enable diversification even in markets where single investments run into the millions of dollars.

International diversification

Property markets vary by location, consequently there’s no assurance that a recovery in one market area will translate into improvement in another. As with all investment types, diversification is more important than ever. One way to accomplish this is through investment in properties overseas. Due to economic conditions in various countries—and the unpredictability of future conditions in any one of them—investment risk can be lowered substantially through property investments in several countries.

This type of diversification is not unlike what is advocated in the stock market with the use of international funds or funds invested in individual countries. The purpose is to achieve geographic diversification in addition to specific investment diversification.

This is a high risk investment class—don’t go it alone

Investment property is a high stakes game, and that means deep research (you must know the game you’re playing!) and diversification. If you don’t have knowledge of the market or the resources to properly diversify your holdings, you shouldn’t try this business alone. Find a reliable partner who can reduce the risks and help you to find the best deals.

Yes, investment property is a high risk play, but alternatives in other investment areas have become more constrained making the search for potential returns in unconventional areas more necessary than ever. That said, this is not an investment class for the average investor, but one that could be well suited to the person who has some familiarity with it, and a broad enough diversification into other assets to cushion the impact of a bad investment or two.

Have you ever tried or considered investment property? What would you recommend to someone who might be considering it?

( Photo from Flickr by thomasbrightbill )

5 Reasons to Buy LESS House Than You Can Afford

Kevin M — Tue, 27 Sep 2011 21:56:16 +0000

By Kevin M

For generations the conventional wisdom on housing was always to buy the most (or more) house that you can afford. The rationale—which worked for decades—was that a house was the closest thing to a guaranteed investment, and by buying the most expensive property you could afford you were insuring the greatest possible payoff over the long run.

That thinking caused many households to go deep into debt in order to make it happen, which created a vicious circle of greater debt feeding higher property prices.

What a difference a few years can make?

The entire conundrum went full circle, with property prices rising consistent with higher mortgage levels, until the borrowing party stopped. Suddenly John and Jane Q. Homeowner could afford to borrow no more, and the whole property construct has gone into the ditch.

Will we get out of that ditch anytime soon? Maybe…but maybe not, at least not for a long time.

Rather than speculating as to when the long awaited turnaround will occur, it might be better to plant our feet firmly in the ground that is now, accept our new reality and make adjustments in our housing expectations that are consistent with that reality.

Now is the time to reverse the psychology that drove both property prices and debt to dizzying levels and adopt a new strategy: buy LESS house than you can afford! Why?

There is no job or career stability

Despite the plethora of no doc and no income verification loans, the fortunes of the housing market have always rested squarely on employment. Since most properties are acquired primarily through debt, employment and career stability have always been the unseen foundation beneath property prices.

Whether through technology or off-shoring of jobs to countries with lower wages, the trend in business is now the reduction in both staffing and payroll levels. This trend has been at work for many years and shows no sign of reversing.

Meanwhile jobs and careers that were once thought to be safe are no longer, and those considered secure today have little in the way of long term certainty. It’s critical then for homebuyers to buy with the assumption that their incomes could be lower in the future than they are at the time of purchase.

We can no longer assume property values will rise

If house prices have always been based on employment, then mortgage lending has always been based on house prices. Rising prices not only meant higher mortgage loan amounts, but they also functioned as a borrower fail safe: if you could no longer afford to make the mortgage payments you could usually sell the property for more than you paid for it.

The mortgage would be paid and you’d walk away with a cash windfall, free to go on and make your next move in life. It was a cozy arrangement while it lasted.

But property values in much of the US, the UK and Europe have fallen, often substantially, and continue to do so to varying degrees. This means no more borrower fail safe—rising property values can no longer be counted on to solve mortgage problems. It may be critical that you buy a property for even less than current market value.

Selling a property is neither certain nor inexpensive

The same factors that are lowering house prices are also making them difficult to sell. Mortgage lenders, stung by the wave of foreclosures that seems to have no end, have tightened lending standards. Fewer people now qualify for mortgages, and that reduces the pool of potential buyers.

There’s also the issue of cost. Trying to sell a house in a buyers market is not only more difficult, it’s also more expensive. In a strong market you might be able to sell your property without a real estate agent; in this market you almost have to have one, and that mean’s you’ll pay a commission. It may also mean you’ll need to pay part or all of the buyer’s settlement costs, another sales expense that may not have existed in better times.

The time and expense needed to sell a property might make doing so impractical. Be sure to consider this fact when buying a new home.

Non-mortgage housing costs are rising

One of the best features of a mortgage—if it’s a fixed rate—is that your payment is locked in at purchase and can never rise. But that can’t be said of other housing expenses. With local governments facing budget shortfalls, property taxes are rising. Homeowner’s insurance premiums are also rising, and utility costs are bouncing all around with the rise and fall of oil prices. Repair and maintenance costs are also increasing now that people are forced to stay in their homes longer than in the past.

The only control a homeowner or buyer has over their housing expenses is with the mortgage itself. For this reason, it’s vitally important to make the best deal on a mortgage that you can. Loan rates and fees vary from lender to lender, and having a reliable e-mortgage calculator is the first step toward getting the best deal on a mortgage.

You may actually have to pay off your mortgage!

Leverage has been a central component in the real estate market for a very long time, so much that few people questioned its use until the current housing collapse. The idea was to put as little money down as possible, maximize the mortgage financing, and keep rolling the loan over every few years, either to get cash out or consolidate debt. If we’re honest, paying off a mortgage was never the goal—that has a lot to do with the mess we’re in now.

But today is a new day, and the game has changed. In the housing and mortgage environment we’re in now, and will be for the foreseeable future, you need to have a concrete intention and plan for paying off your mortgage! Again, this will mean getting the most favorable mortgage terms possible. Use an emortgage calculator, investigate as many lenders as possible, and be sure to get the best deal available.

Do you think the real estate market will improve soon? If not, what advice can you offer that will help both homeowners and buyers cope with a weakened market?

Five Reasons the 30 Year Mortgage Beats the 15
Save for Retirement Now OR Payoff Your Mortgage First?
Why Paying Down Your Mortgage is More Important than Ever
Is Now a Good Time to Refinance?
What Would You Advise a Friend Facing Foreclosure?
Want to Save Thousands on Your Mortgage? Fix Your Credit

( Photo from Flickr by bob194156 )

Why Near Zero Interest Rates Are Hurting Economic Recovery

Kevin M — Sun, 21 Aug 2011 21:29:17 +0000

By Jessica Wagner

Earlier this month, the announcement came that American’s triple A credit rating was being downgraded to double A plus status. The Federal Reserve announced that it was making no plans to raise the near zero interest rates that have been set in place for some time now. This announcement came on the heels of the worst drop in market shares since the market collapse that happened back in 2008.

It seems that the FED isn’t planning to raise the interest rates for the foreseeable future and the near zero figure is likely to stay in place for another two years. This has many in the private and public sector seriously concerned as it’s widely seen to be a major factor in sustaining such poor economic results. Keeping the rate low was seen as a way to inspire investment growth, but it appears to have had the opposite effect and seems to be hurting the economy’s ability to recover.

What the Fed HOPED low interest rates would accomplish

This decision wasn’t made lightly, and the Federal Reserve stated that this decision was made based on the grim outlook for the U.S. Economy. After the announcement was made, the market fluctuated greatly and many in the industry were unsure as how to react to the news. The decision was made with the intention of helping out an incredibly weak economy that’s seen static investment and job growth.

Though some areas of the job market have seen bright spots like in nursing schools, most sectors are lagging far behind. The FED wants to buy more Treasury bonds to keep the long-term rates low until things improved, but this move is the sign of a market that has no idea how to come back in the face of such overwhelming issues. Many argue that such a move is good in the short-term but makes for an incredibly poor strategy when you take the overall market into account.

The low interest rates do assist in some areas of the market and this was the hope when the FED made their decision to extend these rates. When the low rates are set in place, it makes it easier for people to receive low fixed-rates on mortgage loans and makes it cheaper to get business loans. This is one positive for the economy, but it doesn’t seem to be working.

Zero interest rates are having the opposite affect

Sales of existing homes dipped in the second quarter and have seen very little movement forward this year. This is due to the increased difficulty for individuals to qualify for a home loan, a factor which is more than offsetting the benefit that would ordinarily be provided by such low mortgage rates. Banks are far less liberal with their lending practices and people, as a whole, are taking a wait and see approach. The move to keep rates low was intended to help, but it only seems to be making a bad situation worse. Perhaps it is that rates so low offer little protection for lenders in the event of borrower default, contributing to strickter loan qualifications.

When you keep interest rates low for such a prolonged period of time, you create stagnation in the market. Where, in some areas, low rates help out buyers, it has the opposite effect for investors. People who’ve invested in treasury bonds and other assets are seeing almost no growth with their investments.

People saving for retirement and other purposes are gaining no traction with their money. And perhaps no group has been more negatively affected by low rates than the elderly, who were counting on interest income to help pay for retirement. Retirees are being forced to either participate heavily in the stock market—with all the risk that goes with it—or to draw down on their investment principal. That last step is having a negative affect on the economy as the nation’s savings base dissipates.

While rate easing and near zero standards might have some salutary effect, it’s only useful in the short-term. These policies create a long-term toxic environment for the financial sector and decrease consumption over all. This low interest approach will not lead to improvement, but will likely lend further to an even larger and deepening economic malaise that will continue for the foreseeable future until more bold economic policies are set in place.

What do you think about low/zero interest rates—are they helping the economy or hurting it?

The Second Depression Cometh
A View From the Economic Cliff
Ten Financial Mistakes You Can’t Afford to Make
Where are You Investing Your Money Right Now?
How Are You Faring in the “Jobless Recovery”?
10 Important Things to Get Right With Investing

( Photo from Flickr by tiseb )

Buying a New Home vs an Existing Home

Kevin M — Tue, 17 May 2011 14:36:11 +0000

By Kevin M

As of this week I’ve been officially welcomed into the ranks of the staff writers over at Lending Tree! With Lending Tree’s focus on lending and real estate, and my background in mortgages, the arrangement is a natural fit.

For my first two posts, there’s a two part debate on the advantages of buying either a brand new home, or an existing one. It’s an interesting debate because there are tangible benefits going with either.

Check out these two posts, and weigh in with your thoughts:

6 Reasons to Buy a (Brand New) Home

6 Reasons to Buy a (Not So Brand New) Home

Thanks!

( Photo from Flickr by rossgram )

Are Retirees Better Off Renting than Owning a Home?

Kevin M — Fri, 22 Apr 2011 15:08:08 +0000

By Kevin M

If you’ve spent much time on this site, you know that I’ve taken aim at the assumption that homeownership is good for everyone. It’s not that I think owning a home is bad, but more that I don’t think it’s right for everyone. In addition, I think that the advancement of- and unquestioned belief in- universal homeownership was one of the root causes of the real estate and mortgage meltdown.

Today I’d like to zero in on homeownership as it relates to retirees, and by extension, to retirement planning. I’m going to risk committing a heresy to make the case that many would be better off renting in retirement.

Why might some retirees be better off renting?

Carrying a mortgage into retirement

The conventional wisdom is that you should have a home of your own and no mortgage on it when you retire–so far, so good. But what if your house won’t be paid off before retirement? Or what if you’re already retired and you still have a mortgage?

For many people, that’s the reality. More than half of retirees were carrying mortgage debt in 2009, which was double the percentage just two years earlier. Apparently a generation raised with debt as a traveling companion doesn’t feel compelled to eliminate it in retirement as previous waves of retirees have.

For the vast majority of people, being able to retire at all will require a reduction in living expenses; since a mortgage is typically the single largest expense, carrying it into retirement will be like dragging an anchor from the past.

It begs the question: what’s the difference between paying a mortgage, and paying rent? I’d argue that the answer is “not much”. When you’re a tenant, you pay rent that enables you to live in the property. When you pay a mortgage, you pay “rent”—a.k.a., interest—on the money you owe that enables you to live in the property.

So if it’s a wash whether you rent or own with a mortgage, why not own? Read on.

The tax benefits of home ownership may evaporate

Tax breaks are one of the major reasons driving people to own homes, but for many seniors that benefit diminishes or even disappears completely. Since the income tax is progressive (tax rates rise with higher income) the homeowner benefit declines with the lower income that retirement usually brings.

Not only is income usually lower, but some of it also escapes taxation altogether. Social Security income, for example, is only partially taxable for federal taxes while states exempt it completely. And most states offer generous income exclusions for retirees. Here in Georgia, seniors get a $35,000 exemption for “other retirement income”—and that’s per person.

Lower income/less taxable income means less homeownership tax benefit. For many retirees, there will be no more tax benefit to owning than with renting.

A renter doesn’t have to worry about repairs and maintenance

If you rent, you don’t have to make repairs. New roof–$5000, $7000, $10,000—not your problem. New furnace—$5000, $7000, $10,000—again, not your problem. These expenses, often completely ignored in the homeownership equation, can be a budget buster for retirees on a fixed income.

And how about maintenance? Maintaining the lawn, trimming hedges, raking leaves, shoveling snow—the homeowner has all of these responsibilities, the renter has none. For the retiree, or the person planning for retirement, these are more than just minor ongoing responsibilities.

Who will maintain your property if you’re unable to? Many retirees like to travel; and as much as we may not want to think about this, many have or will develop health issues that will make routine maintenance undesirable or even impossible. Now you’re looking at paying someone else to do what you can’t, and another expense is added to the budget. A retiree who rents doesn’t have this issue.

Even if you have no mortgage, you’re never really “rent free”

It’s sometimes said that people who have paid off their homes live “rent free”, but as popular as that notion may be, is it even true?

Not entirely—and maybe not at all.

We’ve already discussed repairs and maintenance as an ongoing cost of owning a home, but you’ll also have real estate taxes, homeowners insurance and possibly home owner’s association dues. In some areas of the country, real estate taxes have gotten so high that the monthly expense comes close to what it would cost to rent an apartment. None of these expenses will disappear because you paid off your mortgage.

The idea that you’ll ever truly be rent free is virtually a myth, and we haven’t even gotten to another significant “expense” involved in homeownership that rarely gets much attention…

Opportunity cost

A house is a capital trap, and one that’s owned free and clear has even more money tied up in it. While not having a mortgage payment is a substantial advantage to a retiree, much of the benefit is lost when we consider what else could be done with the money if it weren’t tied up in the house, also known as the opportunity cost.

Earning income on the money to generate an additional cash flow is one opportunity cost. This a more obvious issue when interest rates are higher than they are now. Since interest rates on savings vehicles are at historic lows, it doesn’t seem to be much of a factor. But low interest rates have caused a real issue for retirees in this regard, creating a very real opportunity cost from another direction.

With interest rates on savings hovering in the low single digits, access to principal has become more important to retirees than the income it generates. It is for this reason that reverse mortgages have become so popular—people need the cash that’s tied up in their homes. And—ironically—how much of that cash is being borrowed out to maintain and make needed repairs to the home itself?

In a higher rate environment, a retiree could rely on the cash flow from the income on his investments—now he may need to draw down the investment itself to survive.

Is renting in retirement right for YOU?

Is renting the better option for all retirees? No, not for all—but then neither is homeownership. Each retiree, or perspective retiree, has to consider his or her housing situation in light of personal circumstances, and not rely on general assumptions or on “conventional wisdom”.

When might you be better off renting than owning in retirement?

If you have few investments apart from the equity in your home
If the necessity of taking a reverse mortgage is more than a remote possibility
If your current house payment—with or without a mortgage—is higher than prevailing rents in your area
If you’ll be carrying a mortgage into retirement that won’t be paid off any time soon
When there’s a distinct possibility that you may need to make a move shortly after retirement; this could be for health reasons, to follow your children, or because now that you’re retired you don’t want to live in any one place
When health problems or a desire to travel necessitate paying others to maintain your home
When selling your home will mean the difference between a comfortable retirement and a life of struggle
When you’re “over-housed”—the 4000 square foot home you raised your family in is three times more space than you need now and you’re tired of paying for what you aren’t using
When there’s so much equity in your home that freeing it up will open up some…exciting life opportunities

Consider which path is best for you in light of the above questions—you may be surprised to find that renting is the better opportunity for you in your retirement years.

Fortunately the tax code offers favorable treatment if you want to sell your house and cash out. The IRS allows a one time exclusion from tax on the gain on the sale of your primary residence of up to $250,000 ($500,000 if married, filing joint) that will enable most people to liquidate their homes with little or no tax consequences.

Have you ever considered renting as part of your retirement strategy? Do you see any downsides? Are there other reasons to rent that I haven’t listed?

Preparing for SEMI-Retirement

Will Social Security Be There When You Retire?

Over 50 – No Pension, No 401K – What Now?

Save for Retirement Now or Payoff Your Mortgage First?

Good Retirement Planning Should Include a Low Cost/Debt Free Lifestyle

Will a Million Dollars Be Enough to Retire On?

( Photo from Flickr by Sands Beach Lanzarote’s )

Why Time is Your Friend When Buying a House

Kevin M — Sun, 10 Apr 2011 18:09:20 +0000

By Kevin M

Housing prices are lower than they have been in years. Mortgage rates are near all time lows. Housing stats are starting to pick up. The bottom on the housing market is in. Joe Smith around the corner sold his house in three days, and he had four offers (or was it four days with three offers?). Time to buy—and buy quickly! Prices will never be this low—rates will never be this low—the real estate agent said so. Buy, buy, buy!

We’re starting to hear this kind of buzz. If you’re looking to buy a home are you starting to feel the pressure to make your move during this rare “window of opportunity”? Well, ignore the hype. The window will likely be open for a good while, so realize that time is your friend and play it for all it’s worth.

For one thing, housing sales continue to be weak. The statistical improvement we’re seeing in most markets is mostly upward bumps off a very low bottom.

More important, the profile of the typical buyer is deeply impaired. Three factors are combining that will keep a lid on the size of the potential buyer market for home for the next several years.

Credit

Credit guidelines have tightened since the housing crash. Certain programs, like sub-prime loans, no longer exist and credit requirements for nearly all programs have been stiffened. But that’s only half the problem.

The other half—probably the more significant one—is that credit profiles have deteriorated during and since the crash. Millions of people have experienced bankruptcies, foreclosures and prolonged periods of unemployment that have wreaked havoc with their credit profiles.

It’s important to realize that not nearly all of these people are “deadbeats”—many had sterling credit before the crash and had no problem getting loans of any sort.

The problem here is that these same people—who comprised a large chunk of the home buying market a few years ago—have been effectively removed from the pool of potential buyers. A bankruptcy, foreclosure or just a period of poor credit can keep a person from getting a mortgage for several years.

Equity and assets

Real estate equity has always played a big role in the housing market. In order to buy one home, buyers often need to sell their current one in order to come up with the down payment on the new one. If a homeowner has little or no equity there may be no money to make that down payment.

If the homeowner has negative equity—also known as “underwater” mortgages—he may need to come up with cash just to close out the mortgage on his current home in addition to funds for the down payment on the new one. And the number of underwater mortgages is at record levels.

Meanwhile, an industry shift has made this situation significantly worse. No down payment loans, which were extremely popular during the boom years, are now all but gone.

Multiply little equity, no equity and negative equity positions by millions of homeowners and you have millions more potential buyers excluded from the market.

Income and employment

Just as with credit guidelines, we have an unfortunate intersection of tighter mortgage underwriting guidelines with unfortunate economic conditions.

Income and employment guidelines for mortgage buyers—which were largely ignored by lenders prior to the meltdown—are now being enforced. And no income verification loans, which represented a disturbingly high percentage of all mortgages just before the housing crash, no longer exist.

At the same time, small businesses have closed and many millions of people have faced prolonged periods of unemployment and under-employment. Far fewer potential home buyers can meet the industry requirement for income and employment stability.

If you’re looking to buy, you have plenty of time

Combine all three of the above factors, and we have a real estate market where the pool of potential buyers has shrunk by many millions. That virtually guarantees that the real estate market will be soft for the foreseeable future—and if you’re in the market to buy in home, that’s good news for you. But in order to make that work in your favor you need to avoid the growing chorus of buy-now-and-beat-the-price-increase.

Keep your realtor on a short leash. Real estate agents are commissioned sales people—it’s their job to create a sense of urgency. The better they are at it, the bigger their paychecks. Tap their expertise, but don’t give into artificial deadlines.
It’s a buyers market, and you’re a buyer. Simply put, you’re in the drivers seat, not the seller.
Walk away from delusional sellers. It’s hard to believe that there are sellers who have completely missed the news on the state of the housing market, but there are. Either they believe that the home they’re selling is somehow special, or they’re too early in the process to realize that aren’t in control. What ever the cause, if it appears you’re dealing with such a seller, remove yourself from the negotiations.
Focus on properties that have been on the market for a few months. The difference between a delusional seller and desperate ones is often the amount of the time their property has been sitting on the market. For your purposes, the longer a house has up for sale the better the chance of getting a good deal. If a house has been for sale for more than six months, it’s likely that one or more offers on it have fallen through. That’s the best kind of seller to work with.
There’s always another property down the road. This is true even in normal markets, but in buyers markets that have lasted for years it’s even more so. Don’t fall in love with any single property. If the deal isn’t right, move on to the next one.
For all the above reasons, you must buy below market. Many people believe they’re getting a good deal on a home because they’re buying it for substantially less than what they would have paid at the top of the market. This is categorically untrue. You should look to pay less than current market values–that’s a good deal! Given the uncertain state of the real estate market, this will be your best defense against becoming another one of its casualties.

Don’t let anyone—not home sellers, real estate agents, news articles, expert pronouncements or even well meaning family and friends—convince you that you need to move quickly to get a good deal on a house. Quite the opposite. In this market, patience will get you a far better deal than urgency. So take your time and stay in control—you just might save tens of thousands of dollars.

Are you in the home buying market right now? Are you feeling the pressure to move quickly? What are your thoughts about that?

How to Get a Real Deal on Your Next Home

Eight Ways to Buy Your House For Less

Is the American Dream Dead Now That Housing is in the Tank?

Buying vs. Renting a Home – Its Not All About Money

2010 Was the Worst Year in Housing Ever—So Is Now the Time to Buy?

( Photo by Casey Serin )

2010 Was the Worst Year in Housing Ever—So Is Now the Time to Buy?

Kevin M — Fri, 28 Jan 2011 00:19:58 +0000

By Kevin M

By all accounts, 2010 was a terrible year in the housing market. How terrible? An article this week on Yahoo! Finance sums it all up in the headline: New-home sales in 2010 fall to lowest level in 47 years.

That’s almost half a century and longer than most Americans have been alive. But even that doesn’t quite capture the gravity of the situation. Apparently records tracking new home sales only go back to 1963! Or put another way, 2010 new home sales were the lowest on record! In reality, no one really has any idea how far back we’d have to look to find sales figures that low.

Another article on the same subject, released last week from Bloomberg gives some telling statistics: 1.28 million new homes were sold in 2005 (peak) versus 321,000 sold in 2010—that’s a 75% reduction in the number of new homes sold in a space of five years. In addition, we’ve experienced a 30% drop in house prices since the price peak in July of 2006.

The curious way news is reported

Now here’s something interesting about the two articles cited above: both have put a positive spin on those numbers!

The Yahoo piece centers on the fact that December sales were 17.5% higher than November’s, and that economists are predicting a solid rebound for 2011. The Bloomberg article has decided that the truly important story is that the largest builders are poised to grab an even bigger share of the market as sales improve going forward.

Talk about making lemonade out of lemons!

I’m certain that at least part of the reason for the upbeat tone has to do with the January Effect. January is the month that we put last year behind us and start fresh. Resolutions have been made, projections issued and budgets established and we’re never more confident on the success of any of them as we are at the beginning of a new year. As an example, the Dow finally crossed the 12,000 mark this week for the first time since 2008 when it was heading the other way.

Optimism is another factor. I think it’s the natural human state; no matter how bad things get, at least some part of us remains optimistic that it will all get better. And when things get as bad as they have in the housing market, it’s also natural to start to believe that things can only get better.

Why the euphoria on housing may be premature

It’s usually when a market deteriorates the way housing has in the past few years that I’m most optimistic about its future. Inventory is up, prices are down, interest rates are the lowest in history and the economy looks to have bottomed, at least for the near term.
At a minimum I think we’ve reached the point where there are deals to be had.

And yet there are nagging problems with housing that can’t be ignored. Consider the following…

Price/interest rate relationship. House prices have fallen significantly in an environment of record low interest rates—below 5% for a 30 year fixed rate loan for much of the past two years. At any other time in history, significant drops in mortgage rates would resuscitate housing in a matter of months. Something’s different this time.

This begs an obvious question: if low rates failed to lift the market, what affect will rising rates have? If we’re betting that rates remain low for the next couple of years, we’re also betting that the economy will remain weak. How will that support housing? This is an apparent conundrum and we’ll have to wait to see how it plays out.

Home ownership isn’t as tax friendly as it used to be. Income tax deductibility has always been a major driver for the housing market. But the tax benefits of homeownership aren’t what they used to be. Standard deductions have steadily risen over the past five years, while lower house prices and interest rates have shrunk the amount of mortgage interest likely to provide a tax deduction.

The standard deduction for married filing jointly is $11,400 for 2010; at that level, the tax benefit to many homeowners is limited. For some, there will be no deduction at all, since interest, taxes and other deductions will fall beneath the allowance.

Mortgages aren’t as easy to get. Mortgage financing remains much harder to get than it was at the peak of the market when house prices were soaring. No down payment loans are harder to find, while sub-prime mortgages, no doc and stated income loans are all history. All were major drivers of home sales. Unless we’re converting to a largely cash market it’s hard to see activity picking up significantly. Mortgage financing has always been the grease on the wheels of housing, and it remains impaired relative to where it was when the market was booming.

Lost equity.Finally, there’s a pronounced lack of home equity. A 30% decline in house prices has wiped out hundreds of billions of dollars in equity that would be necessary to enable current homeowners to tap by selling their homes to trade up to bigger, more expensive ones. In a nation of non-savers, it’s hard to see where the cash will come from for all those down payments.

How to avoid being a victim of a false start in housing

With all of those factors dragging on housing am I suggesting that you avoid buying a home in the near future? Not at all.

I’ve lived long enough to know that ominous adversities are often overcome by developing trends that have not yet been identified. A new technology could create fresh capital and millions of jobs; an economic or political collapse in a major country or region could send millions of people and billions of dollars flooding into the US; the DOW could race to over 20,000 in less than two years, creating a trickle down wealth effect into the housing market.

But until one of those events (or something similar) become obvious, it’s best to protect yourself and your money so that you don’t become a victim of a false start.

If you do want to buy a home, and think now is the time, consider the following as you do:

Buy less house than you can afford. The time horizons on homeownership are now significantly longer than they were a few years ago. The easier a house payment is to manage, the more staying power you’ll have for what ever the future holds.
Pay less than CURRENT market for what ever you buy. That will provide needed margin just in case prices aren’t done falling. (BTW, the fact that you can buy a house for less than it would have cost five years ago isn’t material—current market is all that matters, and you should buy below it in this environment.)
Have a workable plan to payoff your mortgage early. Refinance options are constrained and there’s no telling how long that situation will continue. If you follow the first recommendation, this will be much easier.
Make the biggest down payment you can afford without leaving yourself completely broke. If you can’t make more than a minimum down payment, it might be better to wait until you can. Take your time—there’s no rush to buy in this market.
Make sure you’ll have a cash cushion after you close on the home, and don’t spend it all on furniture afterwards! You probably won’t be able to rely on a home equity line to cover shortfalls and credit overall isn’t as generous as in the past. This is not a market where you want to be stretched thin!

The above suggestions should keep your financial ship afloat even if the housing market isn’t done falling—and I wouldn’t be 100% certain of that even if 1000 economists say otherwise.

What do you think? Is now a prime time to buy a house? Or do you think there’s still too much to be worked out in the market to take a chance? What suggestions would you make to a person looking to buy now?

How to Get a Real Deal on Your Next Home
Eight Ways to Buy Your House For Less
Is the American Dream Dead Now That Housing is in the Tank?
Buying vs. Renting a Home – Its Not All About Money

( Photo by bluegras )

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