What Home Buyers are Asking For

This has been one of the longest real estate buyers’ markets in recent U.S. history. With the availability of an abundant supply of homes at rock-bottom prices, buyers have become very picky about their wants and needs. It has therefore become imperative for sellers to not only maintain their homes in impeccable condition, but to also entice buyers with various incentives. It is as if homebuyers are able to catch fish with their bare hands and choose the biggest and the best fish from the lot!

Buyers are driving a hard bargain and demanding the best bang for their buck by seeking properties that are well-maintained, mechanically sound, and have an intrinsic value. As a seller, setting an appropriate asking price has become difficult because regardless of the already low listed price, buyers are bargaining hard and negotiating for various freebies.

Money is tight everywhere. Although buyers have cash to buy a home, generally they don’t have enough to buy a fixer-upper or the desire to renovate it. Another reason for this is the difficulty in obtaining a loan for home improvement. Most Realtors agree that their clients are demanding to see homes that don’t require any repairs. Banks are also seeing similar attitudes from buyers for REO properties. They expect bank-owned properties to be in ready to move-in condition.

To make their homes standout from the crowd, sellers are urged to update, repair, clean and stage their homes very well. Sellers must put themselves in the shoes of fastidious buyers and take care of every subtle nuance in their homes that may prevent buyers from giving a second look.

Given the market conditions, it’s not enough these days to have a solid, well-kept house with a great curb appeal. Buyers look for homes that have upgrades such as screened porches, home theater rooms, home offices and other goodies. Sellers are also upping the ante by offering incentives such as free flat screen TVs, gift cards and the most common contribution to the closing costs. As if this isn’t enough, some buyers are demanding tank-less water heaters, new windows, high efficiency appliances and upgraded landscaping.

Interestingly, buyers prefer homes with an open kitchen that extends into the family room without a separating wall. This is not surprising considering that the kitchen has become the most important room in the house for Baby Boomers. Many buyers are practical and environmentally conscious too. While they prefer granite kitchen countertops, they will settle for any natural composite material with a stone-like appearance.

The weak economy seems to be fueling entrepreneurship in a big way. A lot of buyers prefer to convert rarely used rooms such as the formal dining room or the living room into home offices, reading room or a space for pursuing a hobby. This makes sense because studies have shown that on an average, families use the formal living room no more than 3-4 times per year.  To make the living space feel larger, try staging a rarely used formal area, as additional useable space. 

The thrill of scoring a bargain is driving homebuyers’ demands into unchartered territories. As a seller, think outside of the box and wow the buyer. 

METRO MARKETS

Since the bust of the real estate bubble, people have become cynical about the state of affairs of the residential real estate markets in America’s major metros. While it is true that the residential housing market is depressed, it’s not all bad news.

According to the Fiserv Case-Shiller Index, which monitors and forecasts single-family home price changes in over 375 U.S. metropolitan cities, it is predicted that 75 percent of these metro cities will see stabilization in home prices by the end of 2011. According to this Index, despite price declines of up to 1.5 percent in the third quarter of 2010, home prices have leveled out in one out of four metro U.S. cities.

The Index points that after five years of record declines in home prices a few metro area housing markets are beginning to hit their bottoms. According to Fiserv, prices have already stabilized in the metro areas of Washington, D.C., San Francisco and San Diego. Furthermore, the Index states that as 2011 goes by, about 75 percent of the metro markets would bottom out and subsequently stabilize. Portland (Oregon), Minneapolis, and New York City are amongst those that will join the ranks of stability by the end of 2011.

Metros that are not expected to recover till the end of 2012 include Las Vegas, Phoenix and Miami, according to the Index. These three cities had the steepest declines in home prices. For the mid and smaller cities, the recovery in prices will be slow and an uphill battle because of the ongoing financial crisis and the large supply of foreclosed properties that continue to drag most of the nation’s housing markets.

The housing market situation in Central Florida is worth looking into from an opportunity perspective. According to the Florida Association of Realtors, home prices across the state of Florida have fallen about 20 percent since the past year. However, they are still about 13.3 percent higher than the past five-year period. But the good news is the volume of home sales is rising again, which is a signal that the market may be recovering. Thanks to the high inventory, conditions are ideal for buyers. Mortgage rates are at their lowest levels since the 60’s. Families that are looking to upsize can expect to get more home for their money.

According to several studies, Florida will continue to be the favorite retirement destination for the 80 million strong Baby Boomers. Central Florida in particular, where the healthcare and technology sectors continue to show healthy growth, is seen as one of the best bets in the nation as far as recovery and growth in single-family home sales.

Single family home sales in Central Florida reached 1,708 in March, which is a 36 percent increase over February. Over 10,000 properties were under contract waiting for closing. About 5,400 new listings were reported in March, which is a substantial increase. Consumer confidence is on the rise in Central Florida and interest from Canadian and European buyers continues to grow.

Fair Housing Laws: Fair, But Confusing

All “home-owner wannabes” have several common objectives. They want to find the best house money can buy, in the most perfect, decent and safest neighborhood, with ideal neighbors on either side! These objectives are purely subjective.

While it is easy for a real estate agent to provide a plethora of specific but publicly available data to potential home owners such as the best schools, parks, past resale values, etc., it is impossible for agents to answer questions such as “is this a good neighborhood, is it safe, does it have decent people or what’s the ethnic makeup?” and so on. It is impossible on two counts. First of all, any answer provided by the agent to any of these questions is not only 100 percent subjective, but it is also illegal under the federal fair housing laws.

In 1968, Congress passed the federal Fair Housing Act. The primary purpose of the Fair Housing Law is to protect the buyer/renter of a dwelling from seller/landlord discrimination. Its primary prohibition makes it unlawful to refuse to sell, rent to, or negotiate with any person because of that person's background, as opposed to their financial history and resources.  When the Fair Housing Act was first enacted, it prohibited discrimination only on the basis of race, color, religion, sex and national origin. In 1988, disability and familial status (the presence or anticipated presence of children under 18 in a household) were added. The law is enforced by the U.S. Department of Housing (HUD).

Real estate agents support the fair housing laws. They are expected to fully understand it and required to strictly abide by it. This is where the can of worms opens. While everyone agrees with and appreciates the intent of these laws, folks in the real estate industry unanimously find it confusing, convoluting and frustrating because of its numerous land mines.

For example, a house cannot be advertised as a family home or a great place to raise a family. Instead, it can only be labeled as a single-family home, multiple-family home, condominium or townhouse. Because of the broad language of the fair housing laws, a simple expression of a preference can get an agent into a boatload of trouble with the HUD.

The National Association of Realtors' (NAR) Office of Legal Affairs suggests the following tips:

·              Use words that describe features of the property rather than describing the type of buyer that might want those features. For example, describe the property as ‘located near a scenic park with jogging track in the woods' as opposed to ‘great location for joggers, athletic people or nature lovers'.

·              Avoid words that relate to race, color, religion, age, familial status, or national origin ("Heart of China Town", "Hispanic neighborhood" , "adult building", "walking distance to Baptist church", etc.)

·              Avoid using descriptive words such as "exclusive," "private," or "integrated" that convey preferences for one group over another or may tend to characterize a community's makeup.

·              Do not make references to nearby landmarks that may be racial, ethnic, or religious in nature.

Here are a few resources which provide various details about the fair housing laws:

http://www.realtor.org/library/library/fg705

http://portal.hud.gov/hudportal/HUD?src=/program_offices/fair_housing_equal_opp

http://www.nationalfairhousing.org/

http://www.fairhousing.com/

http://www.civilrights.org/fairhousing/laws/

FICOs and FHA: 2 Big Lenders Loosen Up

There is some good news for home buyers, especially first-timers according to Ken Harney of Inman News.  With no fanfare or public announcements, two of the largest FHA-approved lenders – Wells Fargo and Quicken Loans – have backed off their controversial "overlay" requirements on FICO scores (lender overlays are qualification requirements that can be more stringent than FHA's own requirements).

Both these large lenders confirmed last week that they will now lend to applicants with 580 FICOs and 3.5 percent down payments. These revised standards conform in most respects to FHA's own minimums, and open the agency's financing to large numbers of buyers whose credit scores have sagged during the recession.

Along with most other major lenders, both companies previously had insisted on minimum FICOs of 620 for otherwise qualified borrowers seeking 3.5 percent down payment loans. If your score came in even slightly lower, they wouldn't even look at your application. An estimated one third of Americans now have FICO scores below 620, according to one consumer group's estimate.

The lending industry's rationale for imposing a higher bar than FHA's own: They need an extra cushion of protection against potential defaults by borrowers with subpar credit scores. Many of those defaults, they said, could prompt indemnification demands by the Federal Housing Administration -- essentially punitive repayments for insured loans that go belly up. Similarly, FHA lenders want to avoid the costs of servicing nonperforming defaulted mortgages.

Wells' newly revised policy actually dips the FICO score cutoff line well below 580 -- all the way down to deep subprime 500 -- but also sets strict underwriting hoops and snares to weed out unqualified applicants. For example, borrowers with scores in the range of 500-579 will need a 10 percent down payment from their personal resources. They will not be able to use gift money from relatives, friends or a charitable down payment assistance program to meet the 10 percent upfront equity test.

Home buyers with scores of 580-599 will need 5 percent down payments, and will be prohibited from supplementing their own cash with gifts. Borrowers with FICOs above 600 will qualify for 3.5 percent down payment FHA deals, but will be allowed to use gift money.

Contributions from home sellers to defray buyers' closing or loan origination costs will be limited to 3 percent. Debt-to-income ratios will be tight: 31 percent for monthly housing-related expenses, and 43 percent for total household debt service.

If the mortgage industry adopts the Wells and Quicken guidelines in some form, tens of thousands of consumers -- along with the real estate professionals assisting them -- could be beneficiaries in the weeks immediately ahead.

How to sell a house: basics and myths

“Should I hire a real estate agent or sell on my own through the For Sale By Owner (FSBO) process?” This question comes to the minds of many home sellers who hope to save the commission they would have to pay a real estate agent. The brave few who choose the FSBO route quickly realize and appreciate the value of hiring an agent once they encounter the massive amounts of paperwork involved and the state laws that govern real estate transactions. Statistically, sellers who sell their home without a real estate agent often get less from the sale than sellers who use one.

The basics of how to sell a house are very simple. A clean home that’s correctly priced, properly staged, well maintained and is accessible to potential buyers via MLS and websites will sell quickly. Having great photographs or a virtual tour video would also help. The one other thing that a seller could do to get a better price and sell faster is to hire a savvy real estate agent.

While the low-tech, inexpensive for-sale sign and flier box are still powerful ways to market a house, this alone is not good enough in today’s depressed real estate market. It is important to hire an agent who has mastered the use of modern technologies including social networking, smart phone apps, text messages, Quick Response (QR) codes, GPS map data, syndicating property information to hundreds of marketing websites, etc.

Facebook and Twitter are no longer buzz words. There is proof that Realtors that employ these new media not only have higher sales records, but they also sell much faster than their contemporaries that still depend only on the traditional newspaper or print ad marketing staples of the past. Baby boomers and younger generations prefer to receive property information via text messages on their phones by dialing a number or by using the cameras on their smart phones to scan a QR code displayed on the for-sale sign.

Selling a house also requires objective, fact-based decisions which can often become obscured by some of these age old myths.

Myth: Set the price high and lower it gradually if it doesn’t sell.

Truth: Pricing too high or low is equally bad. A comparable market analysis created by a real estate agent is the best way to set the right price. 

Myth: Upon receiving an offer, make the buyer wait to get an upper hand in price negotiations.

Truth: Promptly responding to an offer is not only professional, but it actually increases the possibility of a quick sale.

Myth: It’s OK to list a home that needs repairs, as long as the defects are clearly disclosed upfront.

Truth: Today’s buyers prefer homes that are in ready to move-in condition. While major defects can be disclosed in exchange for a lower price, taking care of minor repairs makes a house more marketable.

Myth: A home warranty is unnecessary.

Truth: A home in good condition which comes with a warranty is preferred by most buyers because it provides peace of mind and consequently, it speeds up their decision making process.

Myth: It’s better to sell on your own to save the real estate agent’s commission.

Truth: Not only do sellers net less when they sell on their own, but many end up hiring a real estate agent half way through the sales process because they get overwhelmed by the amount of work and time involved.

Reminder…Homebuyer Tax Credit Extended for Military Personnel

Good news for service members! Military and certain other federal employees serving outside the U.S. may qualify for a one-year extension on the homebuyer tax credit, up to $8,000.* The tax credit applies to homes purchased after November 6, 2009 for $800,000 or less. A binding sales contract for a principal residence in the U.S. must be signed on or before April 30, 2011 and close by June 30, 2011.

For complete eligibility details, visit the IRS's section on Homebuyer Credit for Members of the Military.

International Buyers of US Real Estate On The Rise

Prior to the ongoing real estate crisis, the U.S. stock market was the primary investment vehicle for foreign investors. But thanks to record foreclosures, international buyers are increasingly attracted to American real estate. Several factors such as the economic recession, weakness of the dollar and the bountiful availability of real estate in choice markets are contributing to this phenomenon. Most foreign buyers believe purchasing a home in the U.S. is more affordable than in their home countries.

A survey conducted by NAR estimates that between April 1 2009 and March 31, 2010, $66 billion worth of residential properties, which is about seven percent of the residential market, were bought by foreign buyers, including those with residency outside the U.S. and workers with temporary visas.

Buyers from Canada, Mexico, the U.K. and China were the top 4 of the 55 countries. In 2010, foreign buyers purchased properties in 39 states. However, slightly over fifty three percent of the buyers are concentrated in Florida, California, Arizona and Texas. Florida and California have been the top two destinations since the past three years.

International buyers seem to have specific geographic preferences.  Florida typically attracts Canadian, European and South American buyers while the Europeans prefer the East Coast. The West Coast has been the favorite location for Asian buyers for many years and the Mexicans are drawn to the Southwest.

$247,100 was the median price paid by foreign buyers. For most buyers, the U.S. purchase was either an investment property or a second home. Sixty six percent purchased single family detached homes. International buyers purchased more condos than Americans and Florida was their top preference. Sixteen percent of the total international buyers purchased homes valued over S500,000. Interestingly, fifty five percent of international buyers bought properties by paying cash.

With the U.S. housing market continuing to be in a depressed state, 2011 will likely see more foreign buyers than 2010, especially from countries where the currency is stronger than the dollar. This could be the silver lining for America’s real estate industry in an otherwise gloomy outlook.

Florida’s existing home, condo sales up in January

ORLANDO, Fla. – Feb. 23, 2011 – Florida’s existing home and existing condo sales rose in January, according to the latest housing data released by Florida Realtors®. Existing home sales increased 14 percent last month with a total of 12,151 homes sold statewide compared to 10,702 homes sold in January 2010, according to Florida Realtors. January’s statewide sales of existing condos rose 36 percent compared to the previous year’s sales figure.

Seventeen of Florida’s metropolitan statistical areas (MSAs) reported increased existing home sales in January; 16 MSAs had higher condo sales.

“Now is a great time for anyone thinking of buying a home in Florida to make that decision,” said 2011 Florida Realtors® President Patricia Fitzgerald, manager/broker-associate with Illustrated Properties in Hobe Sound and Mariner Sands Country Club in Stuart. “Mortgage rates are historically low, although they are beginning to tick up slightly as the economy shows signs of strengthening. Conditions remain very favorable for buyers, with a range of housing inventory and attractive prices.

“Homebuyers soon will have the opportunity to visit a number of open houses in their preferred locales all in a single weekend, as part of the second annual Florida Open House Weekend, March 26-27, 2011! From the Keys to the Panhandle, Realtors across Florida are participating in this statewide open house event sponsored by Florida Realtors. Consult a local Realtor® about Florida Open House Weekend, and find out more about qualification criteria and opportunities in your local housing market.”

Florida’s median sales price for existing homes last month was $122,200; a year ago, it was $131,000 for a 7 percent decrease. Analysts with the National Association of Realtors (NAR) note that sales of foreclosures and other distressed properties continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes. The median is the midpoint; half the homes sold for more, half for less.

The national median sales price for existing single-family homes in December 2010 was $169,300, down 0.2 percent from a year ago, according to NAR. In California, the statewide median resales price was $301,850 in December 2010; in Massachusetts, it was $285,950; in Maryland, it was $240,000; and in New York, it was $225,000.

According to NAR’s latest outlook, improving economic conditions and strong affordability are positive factors for the coming months. “Modest gains in the labor market and the improving economy are creating a more favorable backdrop for buyers, allowing them to take advantage of excellent housing affordability conditions,” said NAR Chief Economist Lawrence Yun. “Mortgage rates should rise only modestly in the months ahead, so we’ll continue to see a favorable environment for buyers with good credit.”

In Florida’s year-to-year comparison for condos, 6,681 units sold statewide last month compared to 4,916 units in January 2010 for an increase of 36 percent. The statewide existing condo median sales price last month was $79,400; in January 2010 it was $97,000 for an 18 percent decrease. The national median existing condo price was $165,000 in December 2010, according to NAR.

The interest rate for a 30-year fixed-rate mortgage averaged 4.76 percent in January, down from the 5.03 percent average during the same month a year earlier, according to Freddie Mac. Florida Realtors’ sales figures reflect closings, which typically occur 30 to 90 days after sales contracts are written.

© 2011 Florida Realtors®

NAR: Existing-home sales rise again in January

WASHINGTON – Feb. 23, 2011 – The uptrend in existing-home sales continues, with January sales rising for the third consecutive month. Sales numbers are now at a pace that is above year-ago levels, according to the National Association of Realtors®.

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 2.7 percent to a seasonally adjusted annual rate of 5.36 million in January from a downwardly revised 5.22 million in December, and are 5.3 percent above the 5.09 million level in January 2010. This is the first time in seven months that sales activity was higher than a year earlier.

Lawrence Yun, NAR chief economist, said the improvement is good but could be better.

“The uptrend in home sales is consistent with improvements in the economy and jobs, which are helping boost consumer confidence,” Yun said. “The extremely favorable housing affordability conditions are a big factor, but buyers have been constrained by unnecessarily tight credit. As a result, there are abnormally high levels of all-cash purchases, along with rising investor activity.”

A parallel NAR practitioner survey shows first-time buyers purchased 29 percent of homes in January, down from 33 percent in December and 40 percent in January 2010 when an extended tax credit was in place. Investors accounted for 23 percent of purchases in January, up from 20 percent in December and 17 percent in January 2010; repeat buyers made the remaining purchases.

All-cash sales rose to 32 percent in January from 29 percent in December and 26 percent in January 2010.

“Increases in all-cash transactions, the investor market share and distressed home sales all go hand-in-hand. With tight credit standards, it’s not surprising to see so much activity where cash is king and investors are taking advantage of conditions to purchase undervalued homes,” Yun said.

All-cash purchases are at the highest level since NAR started measuring these purchases monthly in October 2008, when they accounted for 15 percent of the market. The average of all-cash deals was 20 percent in 2009, rising to 28 percent last year.

The national median existing-home price for all housing types was $158,800 in January, down 3.7 percent from January 2010. Distressed homes edged up to a 37 percent market share in January from 36 percent in December.

NAR President Ron Phipps said the median price is being dampened by unusual market factors. “Unprecedented levels of all-cash purchases, primarily of distressed homes sold at deep discounts, undoubtedly pulls the median price downward,” Phipps said. “Given the levels of inventory we see today, we believe that traditional homes in good condition have held their value.”

Total housing inventory at the end of January fell 5.1 percent to 3.38 million existing homes available for sale, which represents a 7.6-month supply at the current sales pace – down from an 8.2-month supply in December. The inventory supply is at the lowest level since December 2009.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 4.76 percent in January from 4.71 percent in December; the rate was 5.03 percent in January 2010.

Single-family home sales rose 2.4 percent to a seasonally adjusted annual rate of 4.69 million in January from 4.58 million in December, and are 4.9 percent higher than the 4.47 million level in January 2010. The median existing single-family home price was $159,400 in January, down 2.7 percent from a year ago.

Existing condominium and co-op sales increased 4.7 percent to a seasonally adjusted annual rate of 670,000 in January from 640,000 in December, and are 7.9 percent above the 621,000-unit pace one year ago. The median existing condo price was $154,900 in January, which is 10.2 percent below January 2010.

Regionally, existing-home sales in the Northeast fell 4.6 percent to an annual pace of 830,000 in January from a spike in December and are 1.2 percent below January 2010. The median price in the Northeast was $236,500, which is 4.0 percent below a year ago.

Existing-home sales in the Midwest rose 1.8 percent in January to a level of 1.14 million and are 3.6 percent above a year ago. The median price in the Midwest was $126,300, which is 3.2 percent below January 2010.

In the South, existing-home sales increased 3.6 percent to an annual pace of 2.02 million in January and are 8.0 percent higher than January 2010. The median price in the South was $136,600, down 2.1 percent from a year ago.

Existing-home sales in the West rose 7.9 percent to an annual level of 1.37 million in January and are 7.0 percent above January 2010. The median price in the West was $193,200, down 5.7 percent from a year ago.

© 2011 Florida Realtors®

Foreclosures to Eclipse 2 Million This Year

            In case you missed the news the other day, Nobel Prize-winning economist Joseph Stiglitz dropped another bombshell on the nation’s real estate industry. He expects an additional 2 million foreclosures to hit the U.S. this year – adding to the whopping 7 million that have occurred since the economic crisis of 2008.

            “U.S Foreclosures are continuing apace,” Stiglitz told a packed news conference near Port Louis, the capital of Mauritius. “A quarter of U.S. homes are underwater.”

            Why the gloomy forecast? Because the number of U.S. homes worth less than their outstanding mortgage jumped in the fourth quarter as prices dipped and lenders seized fewer properties from delinquent borrowers.

            Currently 15.7 million homeowners had negative equity, also known as being underwater, at the end of 2010, according to Seattle-based Zillow Inc. That’s a 13 percent increase over the 13.9 million in the previous three months.

            That total represented 27 percent of the mortgaged single-family homes, the highest in Zillow data dating back to the first quarter of 2009.

            The news on the local front appears just as bleak.  The Orlando Sentinel reported in its February 12th edition that the number of foreclosed homes on, or about to hit Metro Orlando’s resale market has more than doubled in the past year – forcing down the prices of other houses that have already lost more than half of their value since before the recession.

            The four-county metro area of Orange, Seminole, Osceola and Lake counties had 13,712 bank-owned properties in January – up from 5,874 a year earlier, according to figures from California-based RealtyTrac. This has contributed to a record statewide glut of foreclosed properties that now stands at 104,759 and counting.

            “Americans today are worse off than they were 10 to 12 years ago,” Stiglitz said, adding that the U.S. faces “increasing inequality,” with the “upper 1 percent controlling 40 percent of wealth. Instead of trickling down, it has trickled up.”

            There are, however, some significant positives that have come to light.

First, foreclosures did slow down in the fourth quarter. Lenders, including Bank of America Corp. and Ally Financial Inc., halted many home seizures after accusations they used improper documentation and processes. Attorney generals in all 50 states are investigating.

But, more importantly, the wave of foreclosures, especially here in Central Florida, has created a tidal wave of opportunities for both homebuyers and investors alike.

Prospective buyers who previously were priced out of the housing market are using this opportunity and taking advantage of lower property values to purchase their first home and begin a new chapter toward their futures. Lower property values also have been a boon to investors who are adding to their real estate portfolios.

Take Larry and Janelda Minor, for example. They purchased a vacant eight-unit apartment complex in Kissimmee valued at $350K for just $200K. Within a few months all eight units were fully rented – a property lemon was turned into lemonade.

“Our experience with Rajia Ackley with Coldwell Banker Ackley Realty while purchasing the property was very positive,” the Minors said. “Our questions and concerns were answered quickly and completely throughout the entire process. We appreciate her guidance in helping us secure this commercial property during these trying times.”

Despite the gloomy real estate predictions of Joseph Stiglitz, et al, there’s still some happiness to be found. Just ask the Minors.

            We’ll keep you updated.

           

Why Home Ownership Matters

Homeownership has always been a bedrock of the American dream. But the ongoing economic storm and its unmitigated effects have radically changed how many people are perceiving it. In 2010, even the media jumped on the bandwagon and questioned if home ownership was good for America. Since the real estate crash, housing gurus have been saying that the new norm of the future is less home ownership and more people renting. Other analysts are claiming there is no financial benefit in the long run to home ownership based on recent market drops and skyrocketing foreclosures.

Buying a home is one of the largest financial decisions most potential homeowners will ever make, and in addition to individual financial situation, emotion plays a big role in the buying decision. So let’s attempt to answer the question “if home ownership still matters?”

The largest tangible benefit to homeownership is building equity in the home. This can happen over time with price appreciation. In the economics of homeownership price appreciation is the dominant determinant. For most homebuyers, purchasing a home is not a short-term investment. The second biggest financial advantage of homeownership is tax benefits, which includes the ability to deduct the annual interest paid on a mortgage from income. There are other secondary tax advantages such as property tax deduction, deductible home buying expenses, tax free capital gains, etc.

Homeownership also has other distinct advantages, many of which may be emotional and not necessarily tangible. For some, home ownership provides a sense of stability and financial security for their children, and for others, it gives them the opportunity to establish family traditions. Many studies have documented the positive impact of home ownership on children, which include better health, fewer behavioral problems, higher achievement in math and reading, lower school dropout rates and higher high school graduation rates. Although the association of these outcomes with home ownership is debatable, some research has shown that home ownership has a measurable effect on children’s success.

Housing is a key driver of the American economy. It accounts for more than 15% of the national Gross Domestic Product. The housing market needs to be strong and sturdy in order for the U.S. economy to recover and remain healthy over the long term. Home ownership is an integral component of the American way of life and it also helps shape the financial fabric of the nation. While the merits of home ownership continue to be actively debated on blogs and by industry experts, most Americans believe that home ownership is still relevant and shall continue to be the biggest component of the American dream.

How Buying a Home Is Likely to Change

By Rick Newman

Posted: February 9, 2011

Last year's sweeping financial-reform law revamped much of the banking system. But there's one industry it didn't touch: housing finance. For good reason. Unlike the convalescing banking sector, the housing market is still a wreck, with any false move likely to destabilize things even further and cause fresh damage.

But the system can't continue the way it is either, so policymakers in Washington are gingerly starting to propose ways to fix the way we finance the purchase of homes and assure that there's never another housing bust like the one that began in 2006—and still isn't over.

The biggest and thorniest question is what role the government should play in the housing market. The government has had a hand in housing since the 1930s, when it began to subsidize home purchases for some buyers. But today the government dominates housing finance, with our system effectively nationalized. The government backs nearly every new mortgage, bearing much of the risk that lenders would ordinarily take on. That has kept mortgage money flowing during a severe credit crunch, preventing a much bigger disaster in housing, and a deeper recession. But it has also cost taxpayers billions of dollars, created a perverse system ripe for political abuse, and crowded out private financing that might be deployed more efficiently.

So with the economic recovery gaining strength, it's finally time to address the problem-to-be-named later. The Obama administration has come up with a set of options for winding down Fannie Mae and Freddie Mac, the insolvent housing agencies that back many middle-class mortgages but suffered catastrophic losses in 2008 and were taken over by the government. Some Republicans would like to see Washington end its role in housing altogether, while many economists favor some kind of hybrid system that transfers much but not all of the government's role to the private sector. A few small changes could happen this year, with the biggest reforms probably not likely until at least 2013, after the next presidential election. Even then, changes will probably be phased in slowly, to minimize disruption—and panic.

Still, we may be on the verge of a transformation in the way Americans pay for the biggest purchase they'll ever make, which determines how millions of families prioritize their household finances. Since many families spend years saving for a down payment and preparing for the plunge into homeownership, long-term planning is prudent. Here are some of the possible changes both buyers and sellers should anticipate:

Rising mortgage rates. During the housing boom that ended in 2006, mortgage rates were artificially low because lenders failed to price in enough of a cushion to account for the kind of steep price declines that have occurred. Even the most responsible lenders figured the worst-case scenario might be a 10 percent decline in prices, and they priced their loans accordingly. So far, home values have declined by about 30 percent from the 2006 peak, and they could still fall another 5 to 10 percent. That's one reason losses at Fannie, Freddie, and other mortgage lenders were so severe. Rates are still extremely low, but that's largely because the government is effectively subsidizing them through taxpayer bailouts, Federal Reserve policies, and guarantees against losses on most new mortgages.

If the government continues to back mortgages at current levels, rates might stay low—but taxpayers will be on the hook for the cost of the next meltdown. A more likely outcome is a hybrid system in which private lenders bear more of the risk, while the government insures them against catastrophic losses and charges a fee to cover the cost—similar to the way the FDIC insures banks. A recent study by Moody's Analytics calculates that such a system would raise mortgage rates by about 30 basis points, or 0.3 percentage points. If the whole system were privatized, Moody's estimates that could push rates up by about 120 basis points, or 1.2 percentage points, compared with a government-run system. On a $200,000 mortgage, a 30-basis-point bump would add about $39 to the monthly payment; a 120-point bump would add about $159. The spread would likely be greater for borrowers with weaker credit. And remember, those hikes would come in addition to other factors likely to drive long-term rates up over the next few years.

Higher down payments. Last year's Dodd-Frank financial-reform law did contain a few provisions that affect mortgages, including one that's likely to lead to formal down-payment requirements for many traditional loans. The government hasn't yet spelled out the details, but it probably will sometime this year. It seems likely that the required down payment on the majority of mortgages could be 20 percent, and perhaps as high as 30 percent. It will still be possible to get a loan with less money down, but because of new ways that lenders will have to handle such loans, interest rates will probably end up higher than they would have under the old rules.

Of course, many borrowers can't even get a loan these days unless they come up with a meaty down payment, so formal rules may not make that much of a difference, in reality. The biggest impact might be felt by hopeful buyers without a lot of cash who have been waiting for standards to ease, so they can get into a home with just 5 or 10 percent down. It might be a long time before standards ease that much, or banks make loans affordable for buyers financing most of the value of a house.

Less backing for expensive homes. The government changed the rules during the financial crisis to allow federal backing for mortgages as high as $729,750 in some high-cost areas, which means loans up to that amount count as "qualifying" loans suitable for the lowest rates. That ceiling is set to drop back to $625,500 on September 30. Expect it to happen, since Republicans who now control the House of Representatives want to reduce the government's role in housing finance, not perpetuate it. Bigger loans will still be available—but with higher rates. And the ceiling on qualifying loans could shrink further, since that might be one way to shrink Fannie and Freddie.

Fewer fixed-rate mortgages. If the housing-finance system were to end up largely privatized, it would probably mean far fewer 30-year, fixed-rate mortgages—which are the ones most popular with consumers. Banks don't like such mortgages because consumers can refinance if rates go lower, but banks can't hike rates if they go higher. "The 30-year, fixed-rate mortgage exists because of the government backstop," says Mike Konczal, a fellow with the left-leaning Roosevelt Institute. "Getting rid of it would shift more of the risk onto households."

In countries where the government plays a lesser role in financing homes, such as Canada and many European nations, the majority of mortgages are adjustable, with rates that reset every few years. That requires more cushion in the family budget for rising costs—and more responsible homeowners. But it might be worth it, since many of those nations avoided the kind of bust that has left millions of Americans with mortgages that exceed the value of their home. The odds of Congress killing the 30-year mortgage outright are probably low, but the rules under a hybrid system could restrict access to a smaller subset of top-tier borrowers. People who once might have qualified for the best mortgages might have to settle for less. Good credit will remain more important than ever.

Fewer homeowners. Loose lending and aggressive government policies pushed the homeownership rate to a peak of about 69 percent in 2005, a level that was probably unsustainable. It's now back to about 66 percent, and with foreclosures still mounting, the homeownership rate could very well dip below the historical average of 64 percent or so—and stay below long-term norms. One bit of good news for home buyers is that a combination of steep price drops and low interest rates have suddenly made homes very affordable. But credit is obviously tight, and new rules could keep it that way.

There's one other possible change that could discourage homeownership: The reduction or elimination of the mortgage-interest tax deduction, which costs the government about $80 billion per year. That tax break has been in place for decades, as a way to promote homeownership. But with Washington running record annual deficits and facing mounting pressure to start paying down its debt, giveaways like the mortgage deduction might have to go. At least two deficit-reduction panels have recommended a lower homeowner subsidy, which would hit middle- and high-income homeowners the most. If it ever happens, the result could be smaller, less expensive homes for many—plus more renters.

Less volatility. If policymakers do their job well, they'll ultimately produce a system less susceptible to hot money, speculators, bubbles, and shocks. For buyers, that means a return to the days when you bought a home to live in for a decade or two, not to occupy for a few years and then turn a profit on. "If I were a couple looking at a home, I'd be extra skeptical about investing," says Konczal. "I'd be prepared to sit in the home for 10, 20, even 25 years." It sounds restrictive, but many Americans might decide that a home for life is better than no home at all. And that they could live with a little stability.

Where the Housing Bust Is Still Doing Damage

By Rick Newman

Posted: February 2, 2011

How long could it possibly last? At least another year, in some places.

Nationwide, there's a good chance the housing bust will finally end in 2011, after price declines of more than 30 percent from the 2006 peak. In some markets, prices may even start to rise this year. But in many cities the housing bust is still going strong, for reasons everybody knows about by now: rampant speculation, vast overbuilding, lousy lending standards, and persistently high unemployment. Here are the 15 metro areas where research firm Fiserv expects home values to fall by the most in 2011. Some should see a rebound in 2012, with home prices likely to turn around. But some cities face at least two more years of pain:

	Price change in 2011	Price change in 2012
Naples, Fla.	-18.9%	-4.3%
Ocean City, N.J.	-17.4%	-0.9%
Salinas, Calif.	-16.2%	3.8%
Riverside, Calif.	-16%	3.1%
Merced, Calif.	-15.8%	8.3%
Punta Gorda, Fla.	-15.2%	3.8%
Detroit	-15.1%	5.9%
Miami	-14.5%	-10.7%
Orlando	-14%	-4%
Fort Lauderdale, Fla.	-13.6%	-7.6%
West Palm Beach, Fla.	-13.3%	0%
El Centro, Calif.	-13.3%	5%
Las Vegas	-12.9%	-6.5%
Atlantic City, N.J.	-12.8%	-6.5%
Phoenix	-12.8%	-4.8%

Note: Forecasts are for a median-priced, single-family home, from third quarter to third quarter.