Tuesday, July 28, 2015

The "GoldiLocks" Housing Market

Today the U.S. housing market stands on much firmer ground than it did just a couple years ago.
From 2008 to 2012, news reports bombarded us with nothing but more bad news in regard to housing.
Millions of homeowners faced foreclosure. Home prices continued to drop. No matter how far things fell, we never seemed to hit bottom.
However the market made a dramatic u-turn in the last three ye ars. After bottoming out in 2012, prices rebounded, restoring much of the equity homeowners lost during worst of the housing market crisis. Today, homeowners have more options when it comes to buying and selling a home than at any other point in recent history.
No matter what your situation has been, today’s housing market is full of possibilities. If you’re thinking of buying or selling a home, now may be a perfect time. Let’s take a look at the reasons why.
What makes now a good time to sell?
The housing market has rebounded significantly in recent years. Home prices are up, giving equity back to homeowners who found themselves underwater on their mortgages during the housing market crisis.
What’s more, as the market has recovers, the conditions driving up home prices provide home sellers with more options!
Home Prices and Equity are Up
When the housing bubble burst, home prices went into free fall. Seemingly overnight, homeowners nationwide watched all of the equity in their homes vanish overnight. Millions found themselves underwater on their mortgages, owing more on their mortgages than their homes were worth.
After bottoming out in 2012, home prices increased dramatically in 2013 and have been on an upward trend ever since. From the rock-bottom home price in 2012 to the end of 2014, home prices rose by 35% at the end of 20141!
The rising prices helped lift nearly 6 million homeowners from negative equity. Many, however, aren’t aware of just how much things have improved. If you’ve been underwater, it’s entirely possible you aren’t any longer. And if you’ve been waiting to sell until prices recovered, that time is now!

Supply Remains Low, Demand Continues to Increase
Household formation, or the rate at which Americans are setting up homes, increased dramatically at the beginning of last year. In fact, at the end of 2014, household formation quadrupled over 2013. With consumer optimism up and wage and job growth ticking up, experts expect these new households to increasingly make the jump to homeownership..
Additionally, more first-time home buyers have returned to the market this year. Previously sidelined for economic reasons, improved consumer confidence, a growing job market, low interest rates, and new down payment assistance programs are helping more first-time homebuyers, unlocking demand that built throughout the recession.
While demand has been increasing, supply hasn’t kept pace. New home constructions has lagged behind demand, and many homeowners haven’t listed their homes because they haven’t realized how much things have improved. Generally, a 6-month supply represents a healthy balance between supply and demand. So far this year, housing inventory has remained below that mark, giving sellers more power in the process. That means homes are selling faster and for more!

What makes now a good time to buy?
So, with many homeowners escaping underwater mortgages and regaining enough equity in their homes to consider selling, should you think about selling and buying a new home? Or if you’re renting, does it make sense to buy a home now? YES! Let’s take a look at the reasons why…

When considering buying a home, the first question many of us will ask is “How much home can I afford?” Several factors affect how much home you can afford, including home prices, mortgage rates, income, wage growth, and more. Today, home prices remain below their peak prices and mortgage rates have hovered well below historic norms, allowing buyers to get a lot more home for their money.
The National Association of Realtors tracks home affordability across the United States as a relationship between the national family median income and the national median home price. At the end of 2014, affordability for the year finished strong thanks to a slight uptick in the national median income. In Q4 of 2014, in order to purchase a single-family home at the national median price, a buyer making a 5 percent down payment would need to make $45,782, which is well below that national family median income !

Home Prices Will Continue to Increase
While home prices and interest rates are currently low compared to historic trends, they won’t remain this low for long.
Looking forward, the Home Price Expectations Survey polls real estate leaders on their predictions for future price growth. On the most optimistic side, experts projected home prices to rise 27.5% by the end of 2019. On the more pessimistic side, they projects prices to rise 11.7% 2.
At the beginning of this year, wage growth in the United States was estimate to be about 2% this year. With wage growth hardly outpacing inflation let alone the rising home prices, You’ll be able to afford less home the longer you wait!
And so will Interest Rates
Mortgage rates have remained at near historic lows for much of the year. In the early part of 2015, mortgage rates fell below 4% and have remained around that 4% mark for much of the year.
However, Freddie Mac predicts 30-year Fixed Rate Mortgages to rise as high as 4.8% in 2016. Even small changes in interest rates can have a large impact on your monthly mortgage payment.

Renting Just Isn’t Affordable
For those making the first plunge into homeownership, there couldn’t be a better time. Rent rates soared in recent years. High debt rates and a sluggish economy prevented many would-be homeowners from saving enough for a down payment, while lack of overall housing inventory and a general skepticism of the housing market sent demand for rentals through the roof.
The end result is rental payments that are potentially much higher than a mortgage payment would be. In the same report mentioned previously, more than 60% of the polled experts expect rental affordability to worsen for the next 1-3 years before it gets better. Owning a home has never made more financial sense!

Thinking of selling your home?
No matter what your situation has been in recent years, chances are your position has changed! So if you’ve been thinking of selling your home or buying one, now is a perfect time reevaluate where you stand.

Tuesday, June 30, 2015

Why I Bought My Second Home Before My First Home: Money, Freedom, Fireflies

Like a lot of New York City residents who don’t work in finance or have access to family money, I’ve always regarded the real estate market here as “not for me.” Over the past 20 years, I’ve watched neighborhood after neighborhood pass me by in terms of affordability. Where once a half-million bucks bought a Brooklyn brownstone in need of TLC in, say, Fort Greene circa 2000, that same house will now set you back $3 million. A bargain-priced “handyman’s special” former tenement two-bedroom on the Lower East Side? A “full of character” Long Island City, Queens, townhouse with bragging rights–worthy monthly payments and awesome views of Manhattan? All History Channel stuff.

So someone with my income—which would make me quite comfortable in any part of the country not named New York, San Francisco, or Silicon Valley—is left with three choices:
  1. Spend everything to buy in a neighborhood with mediocre schools, a far stretch from my usual social scene, and aesthetics that could best be termed “challenging.”
  2. Rent a nice, livable apartment, hoping for the (peaceful, timely) death of a moneyed aunt to aid the purchase of a future place that, while not ideal, at least won’t depress me each month when I’m making that $3,500 mortgage payment.
  3. Buy a “second home”—even though I didn’t actually own a first one. Which is what I did.
In 2007, my wife and I closed on a farmhouse on a stunning piece of land in the Catskills for $260,000, which wouldn’t even get us a studio apartment in our Brooklyn neighborhood of Boerum Hill. Sure, the place was in need of work—a modified two-story farmhouse with a case of 1960s renovation blues—but the views were incredible, and the town had a wonderful mix of farmers, ex-farmers, NYC transplants, and second-homeowners (many in the same boat as us). It offered us the chance to invest in a property without mortgaging our future on a million-dollar box of depression.

We needed two things to make it work: enough money for the down payment (in our case, about $50,000) and—this part is keya city apartment with below-market rent to make it economically feasible. The combination of our mortgage plus our rent is what most of our friends pay just to rent their (admittedly, much nicer) apartments. But if you buy wisely, you can still pull it off while renting an apartment closer to market rate. You’d be surprised by what $120,000 will buy you in upstate New York.
Once we came up with a game plan, a major question remained: How would we pull it off? Here’s our insider’s cheat sheet.

Figure out the ‘first second home’ financing

My wife and I have good credit, so we were quickly approved for a $200,000 loan at 6% (refinanced two years ago to 4%). Because we didn’t already have a mortgage or own another house, the bank didn’t look at this as a “second home” purchase, which tends to be harder to finance and often carries a higher interest rate. In fact, we were (tacitly) encouraged by pretty much everyone involved to proceed as if this would be our primary residence. This made sense to us as, well, we didn’t own anything else. Though some years we might not be there the requisite 183 days a year to establish residency, it would be our primary residence, because it was the only residence we owned. On paper, we were buying that house and moving in.
If you’re lucky enough to be able to work at home, you can claim primary residence and not have to pay those notoriously high NYC income taxes. I couldn’t manage that myself, and faking it is risky (not to mention illegal): Your ATM and E-ZPass will sink you quickly if you ever got audited.

Decide whether to make money on it—or not

We couldn’t live there full time, or work from there, but we also didn’t want to be landlords. Plus, we don’t have to pay tax on that would-be income or declare the place as a business, which would make things complicated if we tried to sell; capital gains snatches up a sizable amount if it’s not your primary residence. Plus, we could afford our mortgage. Much of the time it’s empty, but we love letting friends use it whenever we can; we’d rather have someone there than not.
But others may want to go the Airbnb/VRBO/Craigslist route, which can cover a significant chunk of the mortgage. Don’t forget to file those tax forms, though.

Understand the stuff you never realized you’d pay for

As much as we love the nature, the quiet, and the views, this kind of homeownership has its drawbacks, especially when we’re not making a profit.
Think of all the responsibilities that come with owning a house. Now think about having that house 150 miles away. Is there too much snow on the roof? Is the basement flooding? Did the contractor show up and fix the sagging hearth? These are things that keep me up at night.
When you own a weekend home, you end up paying for services you might never use if it were your primary residence. After realizing that I spent three hours each weekend mowing the lawn, I decided to pay someone to do it ($75, but I have a big lawn!). The same with plowing the snow ($20). You have to pay someone to get the mail, check the pipes (and call a repairperson if they’re frozen), and keep an eye on the place, though we are blessed with a great neighbor who does it for less than the cost of a fancy New York City meal (she feeds our cat, too, who lives there full time).
As with any fixer-upper, you have to get used to the fact that most of your extra cash will go into the house. What makes it more complicated is renovating from 150 miles away—it’s as hard as it sounds. We renovated the kitchen so it opens to the back and the view, and we put in dormers to make a “real” upstairs out of a glorified attic—all with the help of FaceTime.

Enjoy! Home is where the country is

Still, it’s worth it. For now. Brooklyn may be where we live and work, but the Catskills is where we feel most at home. It’s where we celebrate Thanksgiving and Christmas. It’s where my wife and son have spent the past two summers almost exclusively, hanging out with a group of other families, many of whom are doing what we do. Despite the three-hour drive (!) we look forward to hitting the road every Friday and find ways to eke out extra time on either side of the weekend. My bedroom upstate contains the various objects and life souvenirs that I care about. My bedroom in Brooklyn contains my work clothes and a large canvas L.L.Bean tote packed with things to take upstate. I am grateful for the cheap-ish rent, but I feel no love for my tiny two-bedroom apartment.
There is something else we didn’t consider when we embarked on this adventure: You have to really want to be in your “second” home as much as possible, otherwise you endure a certain level of guilt when you vacation anywhere else. Shouldn’t we be upstate, working on the house? The sad reality is always lurking there in the bushes—the second house won’t always make sense for your life. When you’re single or married without kids, escaping to the country is a blissful way to spend your free time. And then, suddenly, you have two school-aged children and that free time disappears.
But I wouldn’t trade anything for the time I spend with my older son (my other son is an infant, so he’s just getting to know the place), running barefoot outside, throwing rocks in the pond, digging up carrots we planted on Memorial Day weekend. This despite the fact that we go to the house less often now than we did before they came along. Classmates’ birthday parties (those damn birthday parties!), sports, the hassle of strapping a 4-year-old and a 1-year-old into the car for a three-hour drive mean that “every weekend” has turned into “two or three times a month” in warmer months, and “once a month” in winter.
For now, we will continue the bifurcated existence. My kids will learn to navigate life in a 700-square-foot apartment in the city, and on a 10-acre former dairy farm where coyotes wake you at night with their howls. My wife’s freelance work means that the kids will be spending another summer almost exclusively up there this year, running after lightning bugs and learning to swim at the town pool while I toil in the hot city. Luckily, I have my L.L.Bean tote packed and ready to go.

Monday, June 1, 2015

Think You Don’t Need Flood Insurance? Think Again

Flash flooding from intense storms over central Texas and Oklahoma over the past week has brought images of rivers and bayous overflowing their banks, streets inundated with water, homes floating off their foundations, and cars set adrift.
In Houston, more than 4,000 homes have been damaged by the muddy waters so far, officials say. Rebuilding those homes will take months, if not a year or more. But some homeowners may not get all the help they’ll need, because they don’t have flood insurance.
While homeowners in high-risk flood plain zones are required to buy flood insurance, others should consider buying it, too. More than 5.5 million homeowners in more than 21,000 communities across the U.S. already do, according to the Federal Emergency Management Agency.
Anywhere it can rain, it can flood. When you consider that, and what’s going on in Texas, which was in the midst of a drought until last week—homeowner’s insurance policies do not include flood damage,” says David Schein, a regional flood insurance specialist for  FEMA.
“You don’t have to be in a high-hazard area to flood. We pay claims for the obvious: a stream, creek, river coming over its banks. However, in an urban environment that’s paved, the water can be just ponding, or pooling on its way into the stream. That can be a covered claim, water flowing over the land.”

Why buy flood insurance?

Floods are the most common weather emergency in the U.S., according to FEMA, and they usually strike without warning. Flooding can result from hurricanes, tropical storms, cyclones, plain old heavy rains, winter storms, spring thaws, overburdened or clogged drainage systems, or occasionally from nearby construction. The increased development of buildings, parking lots, and roads has made flooding more severe throughout the country, FEMA says.
You can live miles away from water and still be a victim of flooding. It  takes only a few inches of floodwater to cause tens of thousands of dollars in damage, according to FEMA.
And don’t assume that federal disaster assistance will bail you out when there’s a flood. It’s helpful to homeowners only when the U.S. president declares a state of emergency—and is usually a loan that must be repaid with interest, FEMA notes. Flood insurance policies pay out on qualifying claims whether or not a federal disaster is declared.

What kind of risks am I running?

High-risk flood zones: Insurance required

People buying homes in certain designated flood hazard areas are required by FEMA to purchase flood insurance before getting a home loan from federally regulated or insured lenders. High-risk areas are those declared to have at least a 25% chance of flooding during the typical 30-year mortgage. FEMA estimates there are about 30 million structures, both residential and commercial, in that position nationwide. There’s less risk of a structural fire in your home, Schein notes (about 10%, over a 30-year mortgage), yet no one questions the need for fire insurance. You can find out if you’re in a flood zone or get a full breakdown of high-risk subcategories.

Low- to moderate-risk flood zones: Still recommended

Homeowners who aren’t close to a body of water may still want to consider buying flood insurance. About 25% to 30% of flood insurance claims come from areas that have less than a 1% annual chance of flooding, according to FEMA. The agency still recommends flood insurance in these low- to medium-risk areas, and in fact homeowners and businesses there might be eligible for a lower-cost preferred risk policy.
You can find out your property’s level of risk at FloodSmart.gov. This can help you assess your potential flood insurance premium.

How to get insurance and what it’ll cost you

Flood insurance is available in more than 22,000 communities that participate in the National Flood Insurance Program, created more than 45 years ago. The program requires certain flood plain management initiatives in high-hazard areas. However, it also offers policies outside of flood plains, whether or not your property has flooded before.
“What we’re hearing from our offices in Texas is that a lot of people who had major damage are quite far outside the mapped flood area,” Schein says, adding that it’s not terribly unusual. “We hear heartbreaking stories all the time. We hear, ‘My insurance agent told me I don’t need it.’ What the agent should have said, or meant to say, is: ‘The bank is probably not going to require it.’ That’s not the same thing.”
Premiums vary depending on the date of construction and relative risk of the area—they average $550 per year—and most policies have a 30-day waiting period before coverage begins (that’s so you don’t take out a policy as you see the waters rising). Homeowners can purchase up to $250,000 in coverage for their home. Separate coverage is available for its contents, of up to $100,000 for homeowners or renters. Residential condominium associations can purchase up to $250,000 of coverage for each eligible unit, or the replacement cost of the building, whichever is less.

Monday, March 30, 2015

How to Find the Right Financing Option for Your Home Renovation

There are several ways to pay for your home improvement project. Which one is right for you? That depends on a range of factors, including project cost, your household budget, how much you’ve saved, and how soon you plan to start work. This checklist of pros and cons can help you choose the financing option that best fits your budget and your project.

Option No. 1: Pay cash

If you’ve saved money to pay for the project, or received a big tax refund or work bonus, paying cash may be a good option. You won’t take on any more debt and you’ll have immediate access to the money, unless it’s tied up in a certificate of deposit or an investment account.
Unless you’re a super saver, it could take years to save enough to pay for a large project like a kitchen overhaul, which can cost $50,000 or more.

Option No. 2: Pay with your credit card

If you have a low-interest credit card or a 0% balance-transfer option, you can also consider paying with a credit card. You won’t have to go through a lengthy approval process, especially if you’ve already been approved for the card.
Many contractors won’t accept credit card payments. While you can get a cash advance through your credit card, the interest rates are often very high. If you’re using a card with a limited-time, low introductory interest rate and don’t pay off the full balance before the offer ends, you’ll face much higher monthly payments and end up paying a lot of interest on the remaining balance. In addition, the length of introductory offers is usually only a year or a year and a half, which gives you a very tight time frame for paying off the debt.

Option No. 3: Get an unsecured personal loan

In contrast to credit cards, an unsecured loan—also known as a personal loan—can have a fixed interest rate and a fixed monthly payment. This type of loan does not require you to put up your house as collateral, so your home is not at risk. And, you can still qualify if you haven’t built enough equity. The application requires minimal documentation, so the process takes just a few minutes. And, you’ll receive your money in a few days. In addition, there are no closing costs and you usually have several years to pay back the loan.
Interest rates for unsecured loans can be higher than those for home equity or other secured loans, which means you pay more interest over the life of the loan. You cannot deduct loan interest from your taxes.

Option No. 4: Take out a home equity loan

If you have equity in your home, a home equity loan or line of credit can help you pay for a more expensive project. These loans usually have lower interest rates, and you may be able to deduct the interest and any points on your income taxes as well. In addition, you may have longer to pay back the loan—anywhere from five to 30 years.
This type of loan is also called a secured loan. That means your house is collateral for the loan and, if you don’t pay it back, the lender can take your home. It can take six to eight weeks to complete the application process and receive your money. Though the interest rate may be lower, the fees can add up. You’ll pay closing costs—including the cost of an appraisal, attorney’s fees, title search charges, and more—which can add up to several thousand dollars. The amount you can borrow will also be limited to a percentage of your home’s value minus any current mortgage.
Before you decide how to pay for your home improvement project, think about which option best suits your budget, the amount you need to borrow, and how soon you’ll need the money. Doing so will help to ensure that you get the loan that’s right for you.
This article is intended to provide generalized information to assist the general public in making financial decisions; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.