Entries Tagged 'Mortgage' ↓

Many Americans look forward to owning their own home one day.  It’s the mark of success to quite a large portion of the population here - it means that you’ve graduated past the renting phase in your life.  There’s nothing wrong with thinking this way at all - it’s just important not to let it blind you.

All over the place, borrowers are defaulting on their mortgages, banks are foreclosing, and property values are plummeting.  We’re just past the breaking point of the real estate “bubble”, and values are on their way down in many parts of the country.

Several of the areas where I’d like to buy a house are so overpriced that it’s only a matter of time before things cool off, and prices correct themselves.  For example, for Maryland, the state median income for households is about $56,000.  Decent sized homes in nice ( relatively safe, low crime, non BFE ) areas *start* at $300,000.  One can realistically expect to spend $400,000 to buy a nice home in such an area.

Now, bear with me, if you will.  Let’s say a particular family earns the median income of $56,000 per year.  After federal, state, and local income taxes, they’ll be looking at clearing about $39,200 ( at a 30% combined tax rate ).  That’s about $3,266 per month in after-tax income. 

Now, back to the home.  If this particular family was exceptionally good at saving, and was able to put down 10% ( $40,000 ) on their home, they’ll be financing a cool $360,000.  Assuming no property taxes, fees, or closing costs of any kind ( obscene to assume, yes ), and an interest rate of 6.5%, these folks will be looking at a monthly mortgage payment of $2275.44 per month.  That leaves them with $990.56 every month to pay for health care, food, cars, insurance, clothing, electricity, gasoline, and all the other expenses that life throws at us.  Not exactly realistic, is it?

There are worse examples, but Maryland is a close-to-home example for me.  There are many such parts of the country where home prices simply aren’t in line with incomes.  The exotic loans of the past few years helped put people into homes they cannot realistically afford under normal circumstances.  The coming months and years will see many more foreclosures, and subsequent price drops.  If you can hold out for a few more years, you may see a much brighter picture on the housing front.

Compared to May 2006, foreclosures on mortgages were up an astonishing 90% this past month.  Some parts of the country were worse off than others ( noticeably, California ), but as a whole the picture was very ugly.  Why the massive jump in foreclosures?  Well, a couple reasons.  For one, many ARM’s have been resetting.  With the rise in mortgage rates, some people’s mortgage payments are jumping several hundred dollars per month.  For those who purchased on the hairy edge of what they could afford, that spells disaster. 

For another, I feel the entire housing market is vastly overpriced.  Some people stretched themselves too thin buying a house, and even without an ARM reset, they find they are simply unable to keep their heads afloat.

Buying a home isn’t for everyone, and the foreclosure jump is proving that.  I expect many more months of the same, followed by a massive price correction in the housing market.

Buying vs renting is one of the oldest dilemmas around. Financial gurus are very fond of saying something along the lines of “Homeowners get rich while renters stay poor.” Granted, there is much truth in this saying. Part of your house payment every month goes to paying down your mortgage. Add in home appreciation and you’re growing your net worth every month. Why wouldn’t everyone want to own a home then, you ask? Well, here’s a list of reasons off the top of my head:

• Buying costs much more every month ( mortgage + insurance + property taxes )
• Fluctuations in the housing market means your home may lose value short-term
• Repair costs can be significant in the event of a major problem
• Lawn & yardcare costs / extra work
• Energy costs will be significantly more than an apartment

In my current market, renting a nice 2 bedroom apartment runs a bit over a grand every month. To get a home that has similar features ( still have to give up some goodies, such as the gym & pool ) would cost more. Figuring in property taxes and insurance, we’d be looking at right around $1500 per month on a 30 year note - that’s a $500 per month difference. For the time being, we’ve decided to rent rather than buy - and here’s why.

I’m saving $500 every single month - and that’s just for starters. I estimate another $100 at least, in energy savings. That’s $600 per month in my pocket. Add it up, and I’m looking at $7200 per year, free and clear. And of course, if my water heater explodes, I simply call the apartment maintenance staff. They come in and take care of things while I’m off at work, and it doesn’t cost me a penny. I needn’t worry about spending my weekends mowing the lawn, trimming, edging, or shoveling snow in the winter. Granted, I’m not building any equity, and I’m not getting a big tax break due to mortgage interest, but that’s ok. I enjoy having less stress than I would as a homeowner, at least for right now in my life. I’m sure I’ll join the ranks of happy homeowners one day, but it will not be today.

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