What to expect when higher rates finally put the brakes on soaring home prices? Anything from a gentle cooling to a burst bubble
In Providence, R.I., where home prices are rising at one of the fastest rates in the country, a tidy 2,500-square-foot, three-bedroom house on the city's east side is on the market for $585,000 -- a price realtor Ron Phipps expects it to fetch soon. The house sold for $500,000 a year ago, so the current owners' potential gain is $85,000, minus the expense of some improvements and costs incurred during the sale.
That's a huge leap from the annual rate of return earned by the prior owners, who paid $410,000 in 1991. "Essentially it took the former owners 11 years to realize about the same gain," says Phipps. "That indicates how robust the market is."
RED-HOT JULY. Repeat that same trend in select neighborhoods across the country and you have a picture of a housing market moving at warp speed. Last summer no less than Federal Reserve Chairman Alan Greenspan pooh-poohed the idea that a housing bubble was building. He may have a different view now (although he hasn't said anything recently on the subject.) National figures for sales growth and home-price appreciation continue to hit record levels this summer, even as factors that fueled the boom started heading in the wrong direction.
Home buyers, beware. As the U.S. economy recovers strength, you're jumping into a real-estate market that's peaking. And anyone worried whether the U.S. economic recovery has staying power will keep a close watch on the housing market. It has been one of the supporting pillars of the comeback, yet it could soon buckle under its own weight.
Propelled by a spike in mortgage rates that convinced many home buyers they had better act now or pay more later, the pace of existing-home sales in July smashed its prior record. According to data released by the National Association of Realtors (NAR) on Aug. 25, July's existing-home sales reached an annual rate of 6.12 million (seasonally adjusted), up 5% from June and 14% from July, 2002.
New homes are being built at a frenzied pace, too. In July, housing starts hit a 17-year high, according to the Commerce Dept. Even though sales of new homes dipped a bit in July from June's record pace, according to Commerce figures released Aug. 26, they were still at a robust 1.165 million annual rate -- way beyond expectations. That rate equals a 21% jump over the 961,000 new homes sold in July, 2002.
COMING TO A CLOSE. Meantime, the inventory of available homes is falling. Commerce reported a record low supply of new homes in June and July of 3.5 months, down from 4.2 months in July, 2002. The NAR puts housing inventory in July at 2.39 million, a 4.4% drop from June.
Combine motivated buyers with low supply and you get home prices on a tear. The national median price for existing homes jumped 12.1% in the past year, to $182,000 from $162,000, according to NAR. That's the biggest increase since November, 1980, says David Lereah, NAR's chief economist. Prices are the highest in the Northeast, where the median home price was $194,000, up 16.3% from a year ago. In the South, the median price jumped even faster -- at a 17.6% rate -- to $178,000.
The second quarter was the first time on record that home prices increased in every metropolitan area, vs. the year before, with a record number of cities reporting double-digit gains, says NAR. The strongest increases were in the Riverside-San Bernardino( Calif.) area, with a 24% jump to a median price of $212,600. Providence prices experienced a 23% spike, to a $228,900 median. The most expensive metro area now is the San Francisco Bay area. There, the median price is $560,200, up 3.6% from the second quarter of 2002.
LOCKED OUT? None of this is expected to last much longer, however. "There's no doubt that the record numbers...reflect people jumping off fences and trying to get in before mortgage rates rise," says Lereah. The average rate paid for a 30-year fixed-rate mortgage in July was 5.63%, up from a record low of 5.23% in June. Bankrate.com's Aug. 20 survey of lenders -- its most recent -- pegs the current rate at 6.35%, which is still low by historical standards.
The problem: The combination of rising rates and higher prices have made homes a lot less affordable than they were a year or two ago. According to NAR, affordability reached a 30-year high in the first quarter of the year and slipped in the second quarter. Lereah expects affordability to decline this quarter, but says it's still favorable for home buyers.
Most troubling for the long-term health of the housing market would be if homes become too expensive for first-time buyers. A typical entry-level buyer in the second quarter could afford a home of $118,800, yet the median starter-home price was $143,600, according to NAR. That means fewer home owners will have the equity to trade up to all those McMansions being built.
Lereah's hope is that, later in the year, home-price increases will slow to a more normal level -- about 4% -- while more new homes will be added in the most overheated areas. "I'm not thrilled with 12% appreciation," he admits. And while he believes a national decline in home prices will never happen, he admits there could be local markets where prices decline temporarily. If it's taking longer for homes to sell and there is more inventory available, that could be a sign that prices may dip locally, he says.
John Lonski, chief economist at Moody's Investors Service, doesn't rule out the possibility of national home-price deflation, but he thinks that as long as 30-year mortgage rates don't increase to 8% by the end of the year, the housing market should stay afloat. A rise to even 7.75% by the fourth quarter -- which he considers unlikely -- would mean a 25% jump in monthly mortgage payments.
OF DECADES AND DIPS. "Home-price deflation would be very damaging to the U.S. economy," warns Lonski. "It would reverberate throughout the entire economy, damaging consumer confidence and bringing consumer spending to a stall."
Phipps -- who says Providence's price gains are partly because it remains so much more affordable than nearby Boston -- believes the fundamentals of his corner of the market are healthy for now. He doesn't see the kind of speculation that fueled the '80s real-estate boom-and-bust in the Northeast, and he doesn't expect a commensurate price decline in the near future.
That doesn't mean there won't be a dip, however. "It may not be the best strategy right now to anticipate trying to sell in a short period of time," he concedes. For people thinking of plunking down $585,000 for a three-bedroom house, that's something to ponder.
Wednesday, May 2, 2007
Housing market sturdy but vulnerable
By Thomas A. Fogarty, USA TODAY
Home sales surged in July to a record, but economists increasingly are concerned that housing's decade-long bull market may be cresting.
Existing homes sold at an annualized rate of 6.12 million last month, eclipsing the previous record of 5.94 million in December and January, the National Association of Realtors reported Monday. Median price — the sales midpoint — skyrocketed to $182,100, up 12.1% from a year earlier and the largest jump since 1980.
But higher interest rates, an uncertain labor market, easy mortgage credit and the long period of hyperactivity have many alarmed about where the market may head.
Part of the glitzy July numbers may be explained by "fence jumpers" — procrastinating shoppers pushed to action by a sharp increase in interest rates since June, says NAR chief economist David Lereah. The better explanation, he says, is a fundamentally sound market fueled by a lean inventory of homes for sale and strong demand from a growing number of households.
Others are less certain. "Numbers for July represent kind of a last hurrah," says Ken Goldstein, economist at the New York-based Conference Board. He foresees a cooling market but says, "Unless someone can demonstrate investing in one's home is suddenly unattractive, housing is not going down for the count." (Related: New-home sales rate slips in July).
The analysis is bleaker at money manager Bridgewater Associates. The firm last week told clients to expect a 10% decline in home sales and prices. Higher interest rates and surging prices are putting homes out of the reach of some buyers, the company says. According to Bridgewater, rising interest rates are already undermining housing. But damage won't be apparent in backward-looking monthly housing statistics for a few months.
Caution ahead
The new NAR report is the latest in a series of indicators suggesting remarkable strength in the housing market.
Last week, the government said the annualized rate of housing starts in July rose to 1.87 million units, the strongest number in 17 years.
Earlier this month, NAR reported that all 126 local markets it tracks showed year-over-year increases during the April-June quarter. It's the first time that's happened since surveying began in 1982. In addition, nearly one-third of the metro areas experienced double-digit price growth, NAR said.
But those readings measure the market as it existed when mortgage rates were at or near 40-year lows.
Forward-looking indicators show cause for concern. Applications for mortgages to purchase homes have fallen 15% over the last two weeks, says the Mortgage Bankers Association of America. And building permits for new homes dipped slightly last month, the Census Bureau reported.
In addition, some of the markets where housing sizzled most are cooling.
Steve Kropper, housing analyst and founder of realty Web site Domania, found that in shopping for his own house in suburban Boston, actual prices have dropped to about 98% of the seller's asking price. At the market's most frenzied, actual prices in the red-hot Boston area typically exceeded what the owner was asking by 3% or more. " 'Crazy' ended here nine months ago," he says.
Elsewhere in Massachusetts, Worcester realty broker William Kelleher says average time on the market for a house has increased to 63 days from 57 days a year ago. Prices continue to rise on declining sales volume, he says.
"The seller's reign has weakened slightly, but there's not been a dramatic shift in market conditions," says Kelleher.
Here's what's worrying analysts:
•Interest rates. Since June, the average interest rate on a 30-year fixed-rate mortgage has jumped 1.07 percentage points to 6.28%, says mortgage investor Freddie Mac. Still low by historical standards, the latest interest rate spike is the sharpest over a nine-week period since spring 1994.
The interest rate increase knocks some potential buyers out of the market and reins in the bidding of others. As a result, housing industry economists are lowering their expectations for the rate of price growth later this year.
Economists say damage to the housing market, if any, will depend on whether rates stall or continue higher. Economic consultant John Tuccillo of Arlington, Va., looks for another full-point rise. As a result, he says, "Housing will slow dramatically and stop dead in some markets."
Christopher Cagan, research director at First American Real Estate in Anaheim, Calif., sees only a slight impact from rising interest rates.
"Interest rates are still at historic lows — just 25-year lows instead of 45-year lows," says Cagan.
And innovations by mortgage lenders give borrowers greater ability to minimize the impact of an interest rate spike through adjustable-rate mortgages and other new products.
Karen Davis, a sales manager from Novi, Mich., is buying a place near her current home. The availability of the right house on a quieter street prompted the decision to act despite rising interest rates.
Davis says she was able to blunt the effect of rising rates by taking a mortgage that permits interest-only payments for the first five years. Her savings over a standard 30-year fixed-rate mortgage: $675 a month. Some of that savings will go to monthly payments against the loan principal, even though the lender doesn't require it, Davis says.
•Forward buying. Thirty million homes have sold in the past five years, vs. 20 million in the five years ended in 1994. Total home sales have set records in nine of the past 11 years.
Conditions have been so conducive to home buying, says University of North Texas finance professor Randy Guttery, that buyers who prefer to wait buy now instead to head off higher costs in the future.
By "borrowing" against future sales, some analysts say that the housing market may be setting up for a sharper correction. Instead of pent-up demand, says Economy.com chief economist Mark Zandi, "We'll be having spent-up demand."
•Jobs. The economy appears to be improving. In fact, that perception is forcing the rise in mortgage interest rates as bond investors, who supply the capital for home finance, adjust expectations. But against the backdrop of general growth, the economy continues to shed jobs. The 44,000 jobs lost in July marked the sixth consecutive month of declining employment.
Michael Sklarz, chief valuation officer at Santa Barbara, Calif.-based FNIS, says continued softness in the labor market could undercut housing by diminishing consumer confidence. Says Sklarz: "Potential home buyers need to feel secure. The job market, rather than mortgage rates, may be the most important factor to watch."
•Credit standards. Credit standards have eased over the past decade, as lenders permit smaller down payments and easier terms, such as interest-only monthly payments. And millions of homeowners have tapped into their growing home equity through second mortgages or by taking extra cash when refinancing.
Tuccillo, the Virginia consultant, says years of homeowners supporting themselves "by looting the equity in their homes" puts many in financial peril. That, he and others say, could unleash a flood of market-depressing foreclosures.
John Burns, an Anaheim consultant to home builders, says aggressive lending practices "are creating homeowners who can't afford to pay the mortgage." Damage, he says, is likely to be the worst in neighborhoods where highly leveraged buyers begin losing their homes to foreclosure. Even a slight decline in home values could prompt such a wave, he says.
Zandi of Economy.com also sees a threat from changing credit standards but not the same one. Zandi says he is more concerned about the possibility of a severe constriction of lending requirements if home prices stall or decline. Severely restricted credit could lead to a downward spiral in home values, he says.
Even now, Zandi says, lenders' concerns about inflated home prices have prompted a slight throttling back on mortgage credit.
Market watchers don't have long to wait for new grist for analysis. The Census Bureau is scheduled this morning to release its report on the sale of new homes in July. July sales are expected to roughly match the record-high annualized 1.16 million pace of June, according to Thomson Financial.
Interest rate spike endangers economy
One-point jump in mortgage rates slows refinancing boom, affecting housing market and personal spending.
| Staff writer of The Christian Science Monitor
NEW YORK AND BOSTON – Those days when neighbors could lean across the hedge and brag about their new ultra-low mortgage rates are just about over. Within the past few weeks, long-term interest rates have spiked by almost a full percentage point, probably ending one of the nation's greatest mortgage-refinancing booms in history. The higher rates - almost back to where they were a year ago - mean that many people will no longer be able to afford to borrow as much money. This may eventually affect housing prices, which have been just about the best performing investments in the American portfolio.
If the housing market fades, analysts expect it could ripple widely through the fragile US economy. Americans have been using refinancing to pay for their kids' college tuition, lower the debt on their credit cards, and take the family to Disneyland. In essence, savings on the mortgage had become one way millions of Americans could afford their lifestyle.
"With [the refinancing boom] ending, for the economy as a whole this is bad news," says Lyle Gramley, a former governor of the Federal Reserve Board.
It may be bad news - especially for consumer spending - but it is not unexpected. Economists had been expecting long-term interest rates to start trending upward once the economy came to life. "We just didn't expect it to come this far and this fast," says Doug Duncan, chief economist for the Mortgage Bankers Association in Washington.
Behind the quick rise in rates is the bond market's anticipation that the economy is on the road to higher growth. The market has also reacted to the news that the US budget deficit would be higher than expected. Then, Mr. Duncan says, the bond market became confused by conflicting signals from the Federal Reserve, which sometimes has hinted at a need for more cuts, and other times has said the economic recovery has begun.
The changes have been so swift that many mortgage shoppers have been caught by surprise. "People who are looking for houses are counting on the 5-1/2, which has been the rule for the last couple of months," says Sofia Stafford, a real estate agent with Re/Max Northwest in Des Plaines, Ill., a suburb north of Chicago. "Now they are finding a house, and the rates are already at 6-1/2 or so."
One of those caught by surprise is Scott Gladstone, a father of three who refinanced his Brookline, Mass., home twice in 2002 and again in 2003. He was preparing to get an even lower rate a few weeks ago when, he says, "the rates just shot straight up."
Now, Mr. Gladstone is hoping that the economic rebound does not occur since he is "poised" to take advantage of another drop in rates. "That's not very patriotic to hope for that. So I'm a little bit torn," says Gladstone, a lawyer who just opened his own business in Newton.
Mortgage refinancing is a relatively recent phenomenon. Twenty years ago, most Americans would take a 30-year fixed-rate mortgage and just start making payments. But, as interest rates became volatile, mortgages rates started to rise and fall more sharply. Americans started watching the financial pages more closely.
Typical is Kathy Stout of Lompoc, Calif., who refinanced her home in December, only to see rates drop another whole percentage point by summer.
So she listened to her financial adviser and refinanced again in June. She and her husband are now paying 4.625 percent, down from 5.536 percent. She figures the lower rate on the 15-year loan will save them about $20,000 over the life of the loan.
"Now they are going back up, so we were really lucky," she says.
The higher rate means that some buyers won't be able to afford the same level of mortgage. For example, someone borrowing $200,000 at the low point for rates, 5.2 percent, would have a $1,100 monthly payment. Now, to have the same monthly payment, that person could afford only a $180,000 loan.
"Maybe instead of a four-bedroom, they will have to settle for a three-bedroom," says Lawrence Yu, an economist for the National Association of Realtors.
For the past several years, housing prices have been rising at about 8 percent per year. However, in some markets, they have been going up at more than 20 percent.
Over the past two years alone, the average house has increased in value by about $20,000.
But Duncan of the Mortgage Bankers Association says that for the past year, the rate of increase has been slowing. At the end of March, it was down to about a 3.7 percent annual increase.
Still, it's the refinance market that is reeling from the rise in rates. Scott Messina, publisher of Originator Times, an online publication for the mortgage industry, says the "refi" market has experienced "one of the sharpest drops in its history" as activity dropped about 50 percent over the past month.
Now, he says much of the refinance activity is centering around adjustable-rate mortgages (ARMs), which track short-term interest rates. "Some people are still seeing their rates come down," he says.
In fact, some loan consultants are counseling their clients to just sit tight. Barbara McMullin, owner of Capital Financial Services in Santa Barbara, Calif., says she hasn't canceled any loan applications yet. But she figures the days of the "bottom fishers" are gone.
"The people who were just doing it to save $50 or $100 are not going to do it, because they can't," she says.
Please fence me in
The allure of gated communities is built on a simple premise: Gates keep criminals out and desirables inside. It's an idea that has appealed to many. But is it valid?
| Staff writer of The Christian Science Monitor
PONTE VEDRA BEACH, FLA. – For visitors to Marsh Landing development, stopping by to see a friend involves more than driving up to one of the large, expensive homes. The first stop comes at a gatehouse, where a guard checks the day's list of expected guests. Unanticipated visitors must wait until the guard calls the homeowner and gets clearance. Only then are approved guests issued orange passes that allow them to enter this private 1,100-house neighborhood.
The limited-access, or gated, lifestyle of Marsh Landing is one chosen by roughly half the residents in this region southeast of Jacksonville, Fla. The allure of such developments is built on a simple premise: Gates keep criminals out and desirables inside.
It's a concept that has appealed to many over the years. Nationally, the number of people building or buying behind gates grew rapidly in the past few decades to about 4 million today, according to some estimates, with maybe twice as many behind walls or fences that give the appearance of being gated.
And builders continue to construct gated communities. After all, by putting a gate on a new project, a developer can quickly and inexpensively make a statement with a memorable entrance.
But gating has now lost some of its original cachet. Since gated communities are no longer new, they are not so special anymore. And they don't necessarily deliver the increased safety that attracted buyers in the first place.
Urban planners and academics are also raising questions about the long-term social impact of gated neighborhoods: Will privatizing traditionally public spaces lead to an erosion of civic engagement? Will gates that clearly delineate neighborhood boundaries heighten the sense of social, economic, and racial divisions that already exist in society? And will children who grow up in gated communities come to depend on walls and gates for a sense of security?
Questions like these hang in the air, waiting to be studied, as first-generation gated communities mature and new ones are created.
Do gates provide safety?
What has been answered, so far, is the question of whether gated communities provide the level of safety that has long been implied. The answer: not really.
There is no definitive study, for example, that proves gating significantly lessens crime. The fact is, upscale communities like Marsh Landing generally are in areas that already enjoy low crime rates. What crime does occur here is limited to things such as vandalized mailboxes or garage thefts that insiders, including teens and contractors, are as likely to commit as anyone else.
Living behind a gate does provide residents with a perception of greater safety, however, and it does discourage some criminals.
"Just having the gates, psychologically, is going to deter some burglars," says Chris McGoey, a California-based security consultant. He acknowledges that the real focus in these places is on discouraging drive-through robberies, speeding, and unwanted traffic and solicitors.
Regardless, many residents still say that they feel more secure, because the gates protect them in ways that are not immediately apparent.
Seniors such as Cali McClure, a resident of Lake Barrington Shores in Lake Barrington, Ill., appreciate the presence of friendly guards at the entrance. "As a single woman, it's nice when you drive in late at night," she says. "It's just like somebody greeting you when you come home."
And as Marcia Hodgson of Marsh Landing points out, the gates do provide more privacy. "You don't have people selling you vacuum cleaners or magazines or trying to talk you into their religion," she says. "And if somebody like the Girl Scouts come to your door, you know it's a kid from the neighborhood."
For Dan MacDonald, a retired salesman from New York, Marsh Landing appealed because of "the landscaping standards and the look of it." Unlike unzoned areas where stately homes may sit alongside double-wide trailers with abandoned cars in the front yard, the subdivision, with its lagoons and carefully laid out green spaces, has the feel of a manicured private park.
Even as gated subdivisions have lost their sense of newness in most parts of the country, they appear here to stay. This is partly because of their inherent appeal in a security-conscious culture, and partly because they project an air of exclusivity, which sells well in a society that imitates the wealthy.
But while gated communities have not lived up to the hype, they may not deserve some of the criticism they have gotten, either.
For instance, some experts have wondered if these communities might rally their residents to vote against tax hikes to fund needed community services and to pay for schools.
Observes Bruce Maguire, a county commissioner representing Ponte Vedra Beach, "If you live inside a gated community, you have to ask yourself, 'Why would I want to pay another $500 a year in taxes, because [the local government] won't be paying for my streets, my park, my landscaping, so what benefit am I getting?' "
Even so, Mr. Maguire says he has not seen the gated communities he serves acting as a monolithic voting bloc.
Municipalities aren't in a hurry to create hurdles to gated development, since it means more tax revenue without the need to pay for streets and other infrastructure. This is why Tracy Gordon, an analyst with the Public Policy Institute of California, says gated communities should retain their appeal in her cash-strapped state.
Some governmental resistance to gates exists, but whether it constitutes a real countermovement is hard to tell. The main thing for some jurisdictions is to ensure that gated communities have sufficient reserves, lest they become overwhelmed by infrastructure repair costs and turn in desperation to public funding to bail them out.
"Local governments are looking at these things and saying, 'If we allow these communities to have their own streets we may be inheriting a burden in the future, as the community ages,' " says Edward Blakely, coauthor of "Fortress America: Gated Communities in the United States."
Another concern about gated communities has been that people who lived in them might disengage from the rest of the world. As Steven Bodzin of the Congress for the New Urbanism puts it, "Gated communities are seen as the ultimate manifestation of a lot of bad trends in American real estate, including increased segregation by income, the loss of true public space, the loss of the commons, where democracy is supposed to flourish."
Part of the American dream?
But Sharon Aardal, who lives in the Blackhawk development in Danville, Calif., disagrees with that assessment. She enjoys "access to all kinds of things right outside the gates. I don't feel isolated in that sense at all."
The main drawback she sees in living in a gated community is the perception others have, and she once did, that residents are snooty. "That was my reluctance," she acknowledges, "but I found it's not that way at all. This is a delightful community."
The American dream, says author Blakely, is to find a great neighborhood "because we really are a communal people. There's this urge to find the dream place, the dream house, the dream neighborhood. Gates give the illusion that somehow you can control this."
Historically, walled cities were built to protect those in power and their communities. They can be traced, according to "Fortress America," to the Romans, who erected walled communities in England in 300 BC to maintain order.
In the United States, gating dates to two periods of high immigration, says Blakely, who suggests that the influx of new peoples leads to efforts to insulate established residents. The first occurred in the late 1800s, when cities were industrializing, and the second was after the Vietnam War. Planned retirement communities in the 1970s helped drive gated-community development focused on lifestyle, prestige, and/or safety.
Today gated communities are most prevalent in the Sunbelt states - Arizona, Texas, Florida, California.
To counter the popularity of gated subdivisions, some urban designers are working on new models of community that emphasize compact, mixed-use development, walkable spaces, public commons, and interconnectivity between residential and commercial spaces.
In Marsh Landing, people get together at individual homes or the golf club, where putting greens, not town greens, facilitate much of the social interaction.
One resident without golfing privileges concedes, "We're living in a very nice place, but sometimes I feel like I'm living on an island."
Tuesday, May 1, 2007
Reverse mortgage can be 'a blessing'
By Sandra Block, USA TODAY
Dorothy Rogers, 84, can't imagine ever moving out of her home in Hampton, N.H. She helped her husband, John, build the single-story house in 1955, supporting the boards while he nailed them in place. "I held every piece of this house," she says.
Now the house is supporting Dorothy. The $631 monthly payment from her reverse mortgage has allowed her to remain in her home, pay for her prescription drugs and see an occasional movie. Before she received the loan two years ago, she was struggling to get by on her monthly Social Security check, her only source of income since her husband's death in 1976. "It was a blessing," she says.
A reverse mortgage allows homeowners like Rogers to earn tax-free income by tapping the equity in their homes. Unlike other kinds of home loans, the loan doesn't have to be repaid until the homeowner moves, sells the house or dies.
As the name implies, a reverse mortgage is the opposite of a traditional home mortgage. With a traditional mortgage, you borrow a specific amount and pay it back every month, gradually increasing your equity and reducing the size of your loan. With a reverse mortgage, a lender makes payments to you, based on the equity you've accumulated in your home. Over time, your equity decreases and the loan increases, although it can never exceed the value of your home.
While still only a narrow slice of the home loan market, the reverse mortgage business has skyrocketed. Financial Freedom, the USA's largest lender of reverse mortgages, says it funded about 6,000 reverse mortgages in the first six months of 2003, up 80% from the same period last year.
Analysts say the market has been helped by record low interest rates and rising home values. Lenders use three factors when calculating the size of a reverse mortgage:
•The age of the homeowner. You must be 62 or older to qualify for a reverse mortgage. If your home is jointly owned, both owners must be at least 62. The older you are, the larger the loan amount.
•The value of the home. Lenders typically require an appraisal before approving a reverse mortgage.
•Current interest rates. When lenders calculate the amount of a reverse mortgage, a portion is put aside to pay interest on the loan, and the remainder is principal. The smaller the interest portion, the larger the principal, which means more cash for the homeowner, says Bronwyn Belling, reverse mortgage specialist for the AARP Foundation.
Low interest rates and rising home values have made reverse mortgages more lucrative for homeowners, says Peter Bell, president of the National Reverse Mortgage Lenders Association. But fence sitters who are considering a reverse mortgage may not want to wait much longer. If long-term rates continue to rise, the amount of cash available to borrowers will decline. A 65-year-old borrower with a $200,000 home would receive about 15% less today than he would have gotten six weeks ago, Bell says. "If somebody is considering a reverse mortgage, now is an opportune time," he says.
Types of reverse mortgages
The most popular reverse mortgage is the Home Equity Conversion Mortgage, which is insured by the federal government. With an HECM, you'll never have to repay the loan as long as you live in your home, even if your neighborhood goes downhill, you live to be 110 or your lender encounters financial problems. The guarantee is financed by an insurance premium included in the cost of the loan.
Fees on HECMs are generally lower than on other types of reverse mortgages, Belling says. The biggest drawback is the mortgage limit, which varies depending on where you live. HECM limits range from $154,896 in rural areas to $280,749 in large cities.
Financial Freedom offers a "jumbo" reverse mortgage for qualified homeowners who want larger reverse mortgages than permitted by HECM rules. Many customers are affluent homeowners who want to postpone taking money out of retirement savings plans, says CEO Jim Mahoney.
Once you choose a reverse mortgage, you need to decide how you'll get your money. HECM borrowers have three options:
• A single lump sum.
• A credit line for a specific dollar amount that you can tap whenever you need the money.
• A monthly cash advance for a specific period of time or as long as you live in your home.
You can also choose a combination of the options. Most borrowers take part of their reverse mortgage in a lump sum and leave the rest in a credit line, Mahoney says. That strategy provides money for immediate needs, such as a new roof or credit card debt, while leaving some money available for the future, he says. The HECM credit line earns interest, creating a hedge against inflation.
Reverse caveats
For all their benefits, reverse mortgages aren't appropriate for many homeowners. Think twice about a reverse mortgage if:
• You plan to sell your home or move in the next few years. Borrowers typically pay origination fees, closing costs and, in the case of HECM loans, a mortgage insurance premium. Those fees are typically rolled into the loan amount so you don't have to pay them up front, and they help guarantee you won't have to repay the loan as long as you stay in your home. But if you plan to move in a few years, you'll end up paying for protection you don't need, Belling says.
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If you need money for a one-time expense, such as a new roof, check out local and state housing assistance programs before applying for a reverse mortgage, Belling says. Such programs are often cheaper and quicker than reverse mortgages, she says.
• Your reverse mortgage won't cover the costs of keeping your home. Reverse mortgage lenders can force repayment if you fall behind on property taxes or homeowners insurance. They can also require you to repay the loan balance if you fail to maintain your home.
• You want to leave your house to your children. The balance of your reverse mortgage must be repaid in full when you die or move out of your home. If your children want to keep the house, they'll have to repay the loan, either with their own funds or by taking out a new traditional mortgage on the home.
Consult your family before obtaining a reverse mortgage, says Nancy Flint-Budde, a financial planner in Salem, N.Y. "Make sure everybody is in agreement so there are no surprises later."
Flint-Budde recently advised an older client who was considering a reverse mortgage to sell her home to her children instead. The sale included a "life tenancy" provision that allows the woman to stay in her home until she dies, Flint-Budde says. The arrangement provided more income to the homeowner than she would have obtained through a reverse mortgage and ensured the home would remain in her family, she says.
Local Dynamics Rule In Real-Estate Markets
By Robert Irwin
Question: We live in a small town where most, if not all, of the real-estate agents own properties that they also sell. Since other listed properties must compete with the agent's personal properties, sales are very slow, and most homes remain on the market for a year or two unless the price is reduced far below the appraised value. All too often, an agent will discourage a potential seller from listing a property and buy the property on his or her own -- at a bargain. How can I sell my house under these conditions?
-- Vera, Neosho, Mo.
Vera: Market conditions are generally determined by the health of the surrounding economy and by the supply of homes available, not by whether or not they are owned by agents. It sounds like the real-estate market in your area happens to be particularly slow. If so, prices are probably depressed and agents may be picking up bargains to hold as rentals for the short term, hoping to make big money in the long term.
Selling your house in a down market is particularly challenging. Buyers tend to be highly price sensitive. This means that in order to get a sale, you will have to do a very strict analysis of what comparable homes are selling for (a good agent can help you with this) and then price your home accordingly. Unfortunately, this usually means selling for less than you may feel your home is worth.
An alternative may be to hang onto your property. You can do what the agents are doing and try to rent it out in the short term, hoping for a turnaround in the future when you will be able to sell for a profit. Another alternative is the "lease/option," where you convert a tenant to a buyer over a period of years. Again, check with a good agent who can arrange to handle such a transaction for you.
-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent books are "How to Get Started in Real Estate Investing" and "How to Buy a Home When You Can't Afford It" (McGraw-Hill, 2002).
Real Estate Bubble Theory Shows More Evidence: John Wasik
When it's sweltering, you seek a cool place. When it comes to hot residential real estate, it may be time to cool your ardor.
Federal Reserve Chairman Alan Greenspan and the real estate industry insist that there's no real estate bubble. Greenspan's conventional wisdom argument is that most people don't turn over relatively illiquid real estate the way they sell stocks and bonds.
That's true, yet there's evidence that housing prices may be slackening. A combination of high consumer debt, unemployment and the flow of hot money back into stocks will trigger a decline in the hottest residential markets. It's time to prepare for the inevitable bursting of the bubble.
John Talbott, author of ``The Coming Crash in the Housing Market,'' (McGraw-Hill, 2003) and a former vice president with Goldman Sachs, says the housing market is already experiencing a decline.
Applications for new home loans fell 5.4 percent in the week ending July 18, the lowest level in three months, according to the Mortgage Bankers Association of America, an industry group. Rates on 30-year mortgages rose 0.39 percentage point to 5.72 percent, the largest weekly increase since November 2001. Housing prices also are shifting into reverse.
``While 199 out of 200 cities saw housing price increases last year, approximately 60 percent of those markets showed a decline in the first quarter of 2003,'' Talbott says.
The Evidence
It's not easy to be a Cassandra when it comes to home prices, which have been rising at double-digit clips in markets from Manhattan to Manhattan Beach, California, for the last three years.
If the economy is doing so poorly, why are people still bidding up home prices? Talbott says that housing-price increases are being skewed to present a brighter picture.
Talbott takes issue with the widely cited U.S. national average of home prices that shows them rising at an annual rate of 7 percent. The survey comes from the National Association of Realtors, or NAR, the industry's main trade association, as of March 31.
If you look at only six months of price data prior to March 31, Talbott says the ``national growth rate for existing home prices is almost zero percent.''
Accepting the theory that real estate has been a monetary refuge from the stock market -- and stocks are entering a bull market -- then investors may be moving their money from Main Street back to Wall Street.
Price Declines Noted
Using the six-month figures, Talbott discovered price declines in several markets from October 1, 2002, through March 31. Here's a sampling from the NAR price survey, which can be found at http://www.realtor.org/research :
-- Monmouth, Ocean, Middlesex, Somerset and Hunterdon Counties, New Jersey, declined 3.3 percent.
-- The San Francisco Bay area lost an average 1.43 percent.
-- In the Southwest and Midwest, declines were noted in Amarillo, Texas, (negative 3.4 percent), Akron, Ohio, (off 5.5 percent), and Chicago, Illinois,(down 1.47 percent).
-- Even previously reported double-digit increases are chastened by the most recent six months' of data. The 15 percent annual increase in the New York metropolitan area becomes a 2.84 percent rise and the 20.5 percent swell in Orange County, California, drops to 3 percent ascent.
Although Talbott's numbers are higher when you annualize -- I have figured the straight percentages -- they could signal a slowdown.
``This is a far more pessimistic story than that presented by industry news releases,'' he says.
The Speculation Factor
``Why are prices high?'' asks Talbott. ``Buyers are not price sensitive because they are leveraged and playing with other people's money and banks don't care about prices paid because they don't hold the mortgages they create.''
Then there's the troubling economy. The jobless rate in June rose to 6.4 percent, the highest in more than nine years. The dour jobs situation exacerbates a housing decline. When homeowners lose jobs, they can't pay their mortgages if they are in heavy debt and have no liquid savings.
Oppressive debt has led to a record number of vehicle repossessions and personal bankruptcy filings. Personal bankruptcy filings alone continue to break new records. There were more than 1.6 million bankruptcies for the period ending March 31, according to the administrative Office of the U.S. Courts. That's up 7.1 percent from the previous year.
Personal debt, joblessness and easy credit account for the home foreclosure rate hitting an all-time record of 1.2 percent of all mortgages outstanding in the first quarter, according to the Mortgage Bankers Association.
The way these cycles work, it will be years before highly leveraged homeowners -- spurred on by mortgage rates hitting 45- year lows -- work through their debt woes. Meanwhile, millions of properties will be sold at distressed prices.
Protective Strategies
Do Talbott's observations mean an easing in prices? Or is it the popping of a bubble?
The National Association of Realtors counters that tight housing stocks and low mortgage rates will push the existing home price 6 percent higher this year.
``Lower than expected mortgage interest rates have brought more buyers into the housing market offsetting sluggish economic growth and weakness in the labor markets,'' said David Lereah, NAR's chief economist in a statement.
Tablott urges caution for most homeowners and investors. ``You have enough risk in real estate through your home,'' Talbott says. ``Get rid of mortgage company stocks and real estate investment trusts in your stock portfolio and sell your second home.''
Whether you believe Talbott is unimportant. Housing prices will settle down eventually. If you have more than 60 percent of your net worth invested in residential real estate, it's a good time to invest elsewhere for the sake of diversification. Sometimes you need financial shelter from the shelter you live in.
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