Home prices skyrocketed in the early 2000's, with things really heating up between 2005 and 2007. According to the New York Times, HUD conducted a survey in 2007, finding that home values had risen 16 percent in just those two years. The housing bubble burst in the Spring of 2007 and markets tanked.
Now house values are resetting, with some areas still experiencing declines. In high boom areas, such as Florida, Arizona, and California, homes are having to correct from staggering rises of 20, 30 and even 40 percent in home values. This means values rose, and millions of homeowners bought at the top of the market, now finding themselves upside down in their loans.
Despite the crisis, there are still buyers on the market. But many are wary to make a mistake of buying a home they can't pay for. How much home can you really afford? Home affordability, in general, is dependant on a range of factors. These include:
Employment status: Do you have a stable job and income? Lenders will want to know if they can rely on you to make monthly payments for many years to come. With an unemployment rate near 10 percent, it's no wonder a record number of homes are currently in foreclosure. Another way lenders assess your risk is by examining your credit score.
Credit Score: Over your adult life you have been building up a credit score. Every card and loan you have opened has figured into a 3 digit number from 300 - 850. The higher your number, the less "risk" you are perceived to be, and thus, the more likely you'll be extended higher sums of credit for a lower rate. Car loans, student loans, home loans, credit cards, and personal loans. How faithfully you've repaid them, and how many of them you have open, dictates your score.
Number of Dependants: Do you have children or aging parents for whom you are financially responsible? If so, consider medical bills, schools tuition, and daycare when calculating a reasonable budget.
Desired Location: A 2,000 square foot home in rural Nebraska costs dramatically less than the same 2,000 square foot home in the heart of New York City. Prices even range widely by suburb and neighborhood.
Savings: You will need money for a downpayment. Financial Expert Suze Orman recommends you put at least 20 percent down. That means on a $200,000 house, for example, you should have $40,000 in cash to put down. You will also need additional cash for closing costs, as well as repairs and maintenance that are inevitable with homeownership.
Emergency Fund: Do you have a separate savings account worth 8 months of bills? You must have an emergency fund. Just ask the 15 million unemployed. Things do and will happen. If you don't have this fund, you can't afford a house. You may be able to "borrow" money for a house ... but in reality you really can't afford one.
Interest Rates: Interest rates are at historical lows. At this writing, the 30-year fixed rate mortgage is 4.74 percent. To put this in perspective, rates in the 1980's were anywhere from 13 to 18 percent. This means big savings if you are in the position to buy.
Monthly Payments: If you have ever bought a car, one of the first things a salesman will ask you is, "Where do you want your monthly payment to be?" It's all about rates and downpayments with lenders. Yes, it is important that your monthly mortgage payment is no more than 1/3 of your monthly income, but don't be coaxed into buying a home you can't really afford just because the monthly payments are appealing (hello, subprime mortgage crisis).
Now, all that said, this next idea may seem a bit radical for some of you. There is a movement among some Americans to not only reduce their debt, but to get completely out from under it. This translates implicitly into the home buying process.
We have become a nation increasingly driven by the bigger and better. Need we say more than "McMansions." It is a culture of debt, where even the national government owes $14 trillion. And no, not every country has national debt. The United States, though, leads the way.
So, what if you could buy a much smaller house, or a house in a much less prominent neighborhood, and avoid a mortgage payment altogether?
The idea is nearly unheard of in this country. But it could be one that will begin to gain ground as many families struggle to makes ends meet, and even more families learn the hard lesson about home affordability. The truth of the matter is this. If you are paying a mortgage, you do not own your home. It doesn't matter if you've paid on a loan for 1 year or 29, if you default, the home is property of the bank.
"But what about Joe Smith, who works in the same office and makes $150,000 a year. He just bought that $500,000 house. I should have that same standard of living." This is what is partially responsible for the bubble we saw in the last decade. Keeping up with the Jones.
Consider for a moment what it is in your life that is really important. No doubt you will quickly pull to mind your family and closest friends. You may think about a full refrigerator, a safe city, and a clean bill of health. These are things found in small homes, the same as large.
Success is not measured by the size of house you own. So, if you are in the market to become a homeowner, be sure to consider what it could mean to buy truly within your means. Does it mean saving for a few more years and then buying a fixer upper? Does it mean the smaller house in the less prestigious neighborhood is in your budget?
In recent years, "What can I afford?" has turned into "How much monthly payment can I afford?" or "How much credit am I approved for?" These do not equate with affordability. Perhaps it is time to think long and hard about what kind of home is appropriate for you and your family. You may find that travertine and granite can be forgone for a nice kitchen table and family meals.
If a basement is musty, if there are black, green or purple blotches on or behind the walls and ceiling tile, or if there is any kind of growth thriving under the carpets or rugs, then the home is probably living side-by-side with a colony of mold.
This is a potential health danger for any family and also a legal liability for you and your clients.
Because of the fear over mold contamination there are so many lawsuits flying around today that sales of resale homes are in jeopardy -- and insurance companies are scrambling to avoid liability, with some U.S. insurers refusing to write any new homeowner policies.
So what do you need know about mold to best serve your clients and keep yourself out of trouble?
Molds are everywhere and have been around forever.
Many people have the impression that this is a new problem -- think, "Attack of the killer molds!" -- and that we now must arm ourselves against the impending invasion. Nothing has changed, however, but the awareness of the presence of mold. Instead of fear -- we need to focus on total elimination, prevention and control. This is easy: Sunlight and ventilation are key.
Use common sense in your approach to mold.
Examples of common sense? Reduce indoor humidity 30 to 60 percent by venting bathrooms, dryers and other moisture-generating sources to the outside; use air conditioners and de-humidifiers; increase ventilation; use exhaust fans for cooking, dishwashing, cleaning. Also, reduce condensation on cold surfaces by adding insulation (windows, piping, exterior walls, roof, floors, etc.).
Excessive exposure can cause symptoms in anyone. Asthmatics and other people with sensitivities (such as infants and the elderly) will be particularly prone to increased asthma attacks, even with moderate exposure to molds. In particular, people with chronic obstructive pulmonary disorders should be particularly wary of molds. Be aware of their conditions and take the necessary precautions.
You cannot spot the feared "Toxic" or "Black" mold simply by looking at it.
Most molds are black or dark green in color and the only way to determine its type is through laboratory testing. This type of mold is also known by its technical names of Stachybotrys Chartarum, or Stachybotrys atra.
Most of the media attention surrounding Stachybotrys is overblown.
In statements surrounding mold in residential construction, the Center for Disease Control (CDC) does not believe that there is not any difference between Stachybotrys and any other mold. It just so happens that since this mold may grow more commonly on building materials, it is the one that happens to be most present in most homes. It's not any more toxic than other molds and the steps taken to remediate Stachybotrys should be the same as that for any other mold presence.
Mold can be cleaned and corrected.
If you find mold on a hard, non-porous surface, it can be cleaned with a 1:16 bleach to water solution (only after first opening a window and wearing non-porous gloves and protective eyewear) as long as the area is less than 10 ft 2 in.
If more than 10 ft 2 in needs to be cleaned, consult the EPA's guide titled, "Mold Remediation in Schools and Commercial Buildings" (You can also get it free by calling the EPA Indoor Air Quality Information Clearinghouse at (800) 438-4318). If the affected material is porous, it should be removed and thrown away. If the porous material mold is extensive, you should contact professionals to gather and remove.
Lastly, NEVER and I mean NEVER mix household cleaners. Mixed chemicals can make toxic combinations.
Always get the home professionally inspected.
While the information in this article is good and it's always smart to arm yourself with enough information to properly handle any situation, you are not to be mistaken as the mold expert. A professional home inspector will bear the responsibility of the mechanical, structural, and in most cases the environmental conditions of the home once they are hired by the client, releasing you from that burden. The inspector will assess the situation and put it into the proper prospective (believe it or not, I have seen a big deal made from some mold on a wall because some water was spilled from a fish tank when the home was vacated) for both you and your clients and make the call to refer it to the professionals if a "Red Flag" is discovered.
So there you have it 3; the nuts & bolts to mold within our homes. Further information on mold can be found on the EPA website by clicking here or at the CDC website, by clicking here.
Steve Rodriguez is the owner of Bulldog® Professional Inspection Services, a professional home inspection company in the Kansas City area.
Where Do Home Owners Pay the Highest Real Estate Taxes? by Kenneth R. Harney
Where are American home owners hit with the heaviest property tax levies? You might be surprised. Tapping into special Census Bureau survey data, the National Association of Home Builders has come up with two different sets of answers -- one list based on the highest annual tax dollars actually paid out, and a second list based on the highest tax rates levied.
When it comes to sheer dollars paid out, New Jersey is tops by far. If you own property there, you pay the highest median taxes in the U.S. -- a whopping $5,352 a year. That's not primarily because your home's market value is so high. After all, California ($477,700 median value), Hawaii ($453,000), the District of Columbia ($384,000) and Massachusetts ($361,500) have more expensive houses than New Jersey's $334,000, yet homeowners in all of them pay less per year than their compatriots in New Jersey.
It's mainly because New Jersey funds 35.3 percent of all local and state government activities from the property tax revenues it collects from homeowners-far higher than the 22 percent U.S. median. Only New Hampshire, which has no state income tax, derives a higher percentage of government revenues from its property owners (43 percent). However, because of lower home values ($249,000 median), the typical owner in New Hampshire pays a median $3,900 in property levies -- $1,432 less than the typical New Jerseyan.
The rest of the heavy-handed dozen tax states in terms of median dollars per home: Connecticut ($3,865 median), New York ($3,076), Rhode Island ($3,071), Massachusetts ($2,974), Illinois ($2,504), Vermont ($2,835), Wisconsin ($2,777), California ($2,275), Washington ($2,250) and Alaska ($2,241).
The U.S. median property tax bill per year is $1,614, according to the NAHB study.
Now for the states with the lightest tax bills: Louisiana, where the median property tax paid per year is a minuscule $175. Then come Alabama ($302), West Virginia ($389), Mississippi ($416), Arkansas ($459), Oklahoma ($635), South Carolina ($642), Kentucky ($693), New Mexico ($707), Wyoming ($737) and Tennessee ($794).
But wait a minute. Don't these low-and high-annual median tax payouts reflect home values to some degree? Absolutely, says the author of the study, economist Natalia Siniavskaia. Ranking the states by their median tax rates produces a rather different list of heavy and light taxers, and may indeed be the more accurate measure.
For example, Texas, which collects a median $1,926 from its home owners in property taxes per year, turns out to be nearly the heaviest taxer among the states in terms of rate-a median $18.17 per $1,000 of value. Only Wisconsin imposes a heavier rate -- $18.20 per $1,000.
Other states that rank among the highest by rate include Nebraska ($16.69 per $1,000), Vermont ($16.35), New Hampshire ($16.33), New Jersey ($16.03), Illinois ($15.79) and North Dakota ($14.97).
States that appeared to be heavy taxers, but that actually have moderate rates applied to high median home values, include California, whose $4.77 per $1,000 in value ranks it 45th in the country, and Massachusetts, ranked 29th with a median rate of $8.23 per $1,000.
Torn Between Two Houses? What to Consider When Making a Decision
As you find yourself heavily immersed in the house-hunting mode, you may encounter a situation in which you're torn between two houses. Perhaps you and your spouse each have a favorite, or perhaps you both like two houses equally - or think you do.
Making a final decision and determining which house to make an offer on shouldn't be taken lightly. The decision should be made rationally and not guided by emotion.
Of course, you may not have the luxury of taking your time on deciding which house you'd like to pursue. You may be in a market in which homes in your price range get snatched up as quickly as they go on the market, perhaps even attracting multiple offers.
But in some situations, you may find yourself torn between two houses. Sometimes the easiest thing to do is take pen to paper and outline your family's needs, your budget, and the pros and cons of each house.
Some things you'll want to compare include:
The neighborhoods. If the two final contenders are in different neighborhoods, evaluate the pros and cons. If you have kids and being close to a park is important, you'll want to consider that. How close are shopping, restaurants, church, and other services? Are the streets maintained? Do homeowners landscape and maintain their homes nicely? How long will your commute to work be?
The schools. If you have school-aged children, you definitely want to consider the reputation of the neighborhood schools. You can usually find general district information and state standardized test results online. But once you're this deep in the process, you'll want to visit the schools and receive the information first-hand from school officials. You should also talk to teachers and parents.
Crime. Go to the local police or sheriff department and ask about crime in your specific neighborhood. You might find theft or vandalism to be more prevalent in one area than another.
The houses compared to others in the neighborhood. While it may boost your self-esteem to have the biggest house on the block, it's typically a better idea to stay away from purchasing the neighborhood monster. When it comes time to sell you'll find that the lower value of your neighbors' homes will shrink your home's value.
Appreciation. If the two homes you're eyeing are in different parts of town or different neighborhoods, ask your real estate agent to retrieve sales of homes in those neighborhoods over the past few years. If one neighborhood shows an annual average 8 percent increase and another is skyrocketing at 15 percent, you may have your decision made.
The sellers' situations. If you don't know already, ask your real estate agent how long each home has been on the market. Usually the longer a house has been listed, the better chance the seller will accept an offer lower than asking price. Conversely, if the house has been on the market for just a couple days, the sellers will probably wait for a better offer if you offer less than the listed price. Your real estate agent might also be able to dig up additional information about the sellers, like why they're selling. If it's a job-related move or a divorce, the sellers likely want to move as quickly as possible, meaning you have a better shot at them accepting a lower price.
The houses themselves. If you haven't already, you should make a list of the amenities and attributes you want your house to have. If you want that first-floor home office, a large, open back yard for the kids, or a gourmet kitchen, be sure to include that on your list. Then, rate how each house measures up to each need on your list.
Drawbacks. Likewise, make a list of the cons associated with each house and determine how much of a negative impact each will have.
As you carefully weigh all the factors, it might become clear that one house is more enticing than the other. Or, you may find the houses are still equally appealing. If that is the case, be sure you look at the homes more than once. You may notice something you didn't the first time around - something that could sway you one way or the other. Written by Michele Dawson
May 26, 2006
Practical Things to Remember When Home Shopping by M. Anthony Carr
Most folks are always looking for the ever-elusive "dream home." Not too long after settling into a new dwelling, many residents begin to pick apart the house they just rented or bought.
Someone who really likes the idea of a laundry chute (great, no more walking the dirty clothes to the laundry room), rethink that idea when they now have to climb up two flights of steps to put away the clothes.
Here are some practical things to think about when you're looking through your pool of homes that you're hoping to buy.
Measure your furniture I mentioned this recently about a couch that wouldn't fit into my basement once I finished the space. You might say the excitement about the two sleeper sofas dimmed to the degree that I was realizing I couldn't use them the way I had planned. Fortunate for me, I had hired the perfect decorator who pointed me back to the furniture manufacturer who directed me to a couple of fellas that dismantle, move and reassemble furniture. Thus -- when shopping for a home, don't forget the measurements of your large furniture: couches, big screen TVs, mattresses, pianos, etc. More than likely, they will convey with the house.
Why is that conveying? Okay, so it sounds great that the pool table (or 2 sleeper sofas) conveys. Be sure to ask yourself -- Why? Why would the owner part with this piece of furniture, extra refrigerator, etc.? Play a quick game of pool, see if the refrigerator really freezes and cools, and why would they let go of these two perfectly good sleepers? Sometimes, it may be they just won't have room in the next house for them or no longer need them. Meanwhile, they may be handing over a white elephant to the next owners.
Sounds great. What if it breaks? So the hot tub stays? Great. What if it breaks down? Again, is this really a benefit to the house or is it something that has cost the owners hundreds or thousands of dollars a year to maintain? Find out if a large piece of equipment, appliance, etc., has had any repair problems.
What about conveniences? Sure, the house is located deep into the community on a cul-de-sac, but what does that mean when you need a bag of sugar or flower? Is the shopping just a few minutes down the road or does it mean a 15-minute jaunt down Hwy. 1? If it's a newer development, how long before they will be constructing the business section of the development?
What kind of wiring? This analysis has become more important as homeowners look more toward broadband, high-speed Internet access for work and pleasure. When walking through an older home, be sure to really understand what all the coaxial connections really attach to: antenna, cable, digital cable, satellite. In addition, if you're accustom to other type connections, such as DSL or Fiber Optics, at least find out if these services are available if the house doesn't have them connected already.
Planes, trains and automobiles If you're looking for a quiet neighborhood, don't forget to come by and check out the community during rush hour. It may be convenient to the main thoroughfares, but are those roadways so close that you can hear the traffic (or see it) before tuning to Traffic on the Nines? How about the sounds from above? I've talked with many owners who, aware that the community was near the airport, had no idea they would have to straighten up their pictures on the walls after each airplane flew over.
HOA Documents Don't just thumb through the homeowners association documents. Be sure to really understand your limits under these binding documents. In a community near Washington, D.C., for instance, no residents can park a pickup truck on their property. Imagine the surprise to a new homeowner who just didn't happen to read about that limitation in the docs. When I've bought properties, this is one of the sections of the HOA docs I turn to immediately.
More detail is better than the big picture when it comes to selecting your next property. Research, drive by and really get to know your target property before making a final decision. Happy home shopping.
New home buyers -- especially younger, first-time purchasers -- are the unwitting victims of a little-known practice by some credit card companies: Withholding of their credit limits in reports to the three national credit bureaus.
That's the conclusion of new research into the practice by independent credit agencies and credit software firms.
"There is no question that home buyers with 'thin' credit files (containing only small number of accounts) get badly hurt when their major card issuer does not report their account limits," says Terry Clemans, executive director of the National Credit Reporting Association. "I mean big potential increases in their mortgage costs" because of depressed credit scores.
David Chung, president of CreditExpert, Inc., a scoring software technology firm based in Towson, MD, said declines of 40 or 50 FICO score points are not uncommon for younger consumers with just one or two affected card accounts. Even middle-aged homebuyers with substantial credit histories can lose 25 or 30 points or more when their major card issuer withholds their account limits in its reports to Equifax, Experian and TransUnion, the national bureaus.
In one recent case documented by researchers at Chung's firm, a young Baltimore area woman lost 66 points off her FICO score, pushing up her mortgage borrowing costs by nearly $9,000 during the first five years of a $225,000 fixed-rate 30-year home loan. The reason: Even though the woman had a $4,000 limit and a perfect payment record on her sole credit card, the card company withheld her account limit information from the bureaus. As a result, the FICO scoring system used by most mortgage lenders to price home loans could not give her the points she deserved for her solid credit card record. That, in turn, raised her mortgage interest costs substantially.
In another recent case documented by CreditExpert researchers, a 40-year-old Columbus, OH man lost 43 points when two of his card issuers failed to report his limits.
Which card companies fail to report account limits, and why? Beginning with the latter question first, credit industry executives say card issuers sometimes hide their best customers' identities from potential poaching competitors by lowering their FICO scores or cloaking their account maximums. Card companies routinely troll through the vast databases of the national credit bureaus looking for names and credit profiles as targets for new card offers.
Capital One Financial, which confirms that it withholds all customer account limits in all reports to the bureaus, says it does so for another reason: Privacy. Capital One spokeswoman Diana Don said the firm sees credit limits as "proprietary" information -- one of the "terms and conditions" of an account that should be kept sealed.
Asked whether Capital One was aware that by withholding limits, it potentially depressed some customers' FICO (Fair Isaac) scores, Don said: "We do not think it would be appropriate to impact (an) individual's Fair Isaac score -- positively or negatively -- by reporting (limits.)"
Ms. Don added: "Because we are not privy to Fair Isaac's proprietary scoring algorithms, we do not know how an individual's scores would be impacted" by withholding reporting of limits.
Another large card issuer who does not report certain customers' limits is American Express. Although the company reports limits on its revolving-balance cards, such as Optima and Blue, it reports no limits on its familiar green, gold and platinum non-revolving cards. A spokeswoman for American Express said the non-revolving cards, which generally must be paid off in full each month, have "no pre-set limit," so no limit can be reported, whatever the impact on FICO scores might be.
Most other large card issuers, including Discover and HSBC, have corporate policies mandating full reporting of account details on credit card customers. But independent credit researchers, such as CreditExpert, say they routinely see credit files with account limits missing from a wide spectrum of card issuers. A recent study by the Federal Reserve Board confirms that impression. It found that 46 percent of all consumers in a random sample of 301,000 credit files had at least one credit limit missing or withheld.
Since any missing limits have the potential to hurt home buyers' abilities to obtain good interest rates on their mortgages, Realtors and other trusted advisors should urge clients to check their credit files well in advance of applying for a loan. Otherwise, they just might find themselves quoted a less-affordable "subprime" interest rate on their mortgage even though they deserve much better.
Written by Kenneth R. Harney
Efficient Homes Offset Energy Costs
Freddie Mac analyzed data from the American Housing Survey (AHS) and found that fuel cost as a percentage of home value was about 0.8 percent between 2000 and 2003, versus about 1.8 percent before 1960 and an average of 1.3 percent in the oil crisis decade of the 1970s.
While some of the cost difference can be attributed to home value appreciation, Freddie Mac says much of it is due to recently built homes that are about twice as energy efficient as homes built in the 1960s.
Crude oil pulled back from a peak of $55.23 per barrel in October, but remains far off the $30 a barrel mark of a year ago.
Laundry Rooms a Hot Amenity for Homebuyers
Laundry rooms top buyers' list of most desired extra rooms, regardless of the property size or the buyer's income, according to a survey by the National Association of Home Builders.
Laundry rooms are no longer relegated to the basement, and many buyers are requesting more than one. In addition to washers and dryers, homeowners want cabinets, countertops, drying racks, and pull-down ironing boards, among other amenities. Laundry rooms are now multi-purpose spaces, where homeowners store cleaning and pet supplies, surf the Web, and do crafts.
Builders of single-family homes priced under $200,000 have made deluxe laundry rooms a standard feature, and many are including them in multi-family structures as well. Written by Realty Times Staff
Avoid Home Buying Mob Mentality
Waiting for higher interest rates to depress prices may not be your best home-buying strategy.
That's because interest rates have become part of a vicious housing market cycle that's pushing prices up, not down, and more than ever conditions warrant a more holistic approach to buying a home.
This year, interest rates have been rising during the season when most buyers traditionally hit the market. That has swelled the ranks of seasonal buyers with an influx of buyers chasing interest rates.
The extra demand is contributing to higher prices.
As prices rise, yet another wave of buyers begin to chase rising prices.
If interest rates are your buying indicator, it's a cycle that may not end anytime soon.
During the mid- to late-1990s' technology-driven economic and housing boom, interest rates were, at times, more than two percentage points higher than they are now. In the 1980s' housing boom, mortgage interest rates were higher still, from 10 percent to more than 12 percent at times, according to Freddie Mac.
In addition to higher interest rates-driven demand and related higher home price-driven demand, demographics and mathematics continue to put further price pressures on the housing market.
The growing bulge of second home-buying baby boomers and homeowners who see housing as their only money-making investment, those groups have done the math. Stocks remain well below their peaks, while housing not only survived the recession, but helped shoulder the national economy through the downturn. Older, wiser buyers are moving up and moving on to second and third houses.
What's more, for most buyers, the bottom line isn't home prices or even interest rates, but the affordability of the monthly mortgage. As long as buyers continue to enjoy income growth and can make that mortgage payment, they will continue to buy into a market. A host of mortgage programs make housing more affordable.
And then, of course, there's the housing shortage. From Delaware to California the shortage of housing also exacerbates home prices.
Bottom line?
Interest rates don't rise in a vacuum and that makes an interest rate-driven home buying strategy a myopic approach to the transaction.
Even when all the market conditions appear to trumpet "Buy!," it's not your time until owning is cheaper than renting and a home purchase is a natural fit for your financial needs, goals, obligations and lifestyle.
Instead of making the home-buying decision based on one or more economic conditions alone, don't overlook the more holistic context of your own home economics.
If you are too over-burdened financially to buy a home and take the "Buy now!" advice, it could bankrupt you.
Step back, take a thorough look at your financial picture, pay off debt and otherwise take the time to prepare yourself for the financial responsibilities of home ownership. Don't overlook the value of a financial planner or other professional personal finance specialist for objective advice about home buying.
The most expensive transaction you'll likely ever complete, comes with many more costs than the monthly mortgage payment, property taxes and insurance.
For you, it's the "right time to buy" when buying a home won't put you in the red.
Written by Broderick Perkins
Study Highlights "Value-Added" Contributions of Home Features
In what could be the largest study of its kind, the National Center for Real Estate Research, has calculated the "value-added" contributions of dozens of home features and facilities. The study used sophisticated statistical analysis techniques on nearly 29,000 home sale transactions over an eight-year period. Would you believe:
An extra half-bath adds 15% to the selling price of a home, but an extra full bathroom adds 24%.
Adding a sitting area to the master bedroom increases the sales value of the house by 8%.
Garages more than pay for themselves - adding 12.9% to the selling price of the home.
A house with a single fireplace sells for 12% more than an identical house without one.
A basement-located laundry room actually cuts the selling value of a home, whereas a laundry room located on the first or second floor raises the market value by 15%.
Written by Realty Times Staff
Which Is Better: Real Estate Or Stock?
Around the country real estate results in many communities -- but not all -- have been extremely good in the past year. The National Association of Realtors says that median prices for existing homes reached $183,600 in May -- up 10.3 percent in the past 12 months.
However, from an investment perspective, home values have actually risen at a far greater pace.
Imagine that a home was bought in May 2003 for $166,455. Add 10.3 percent and sure enough the price a year later is $183,600.
But did anyone buy a home for cash in 2003? Some people, sure. But most homes, most of the time are financed. If you bought with 10 percent down ($16,546), your cash investment was up 104 percent.
What about those monthly mortgage payments, taxes and insurance? They're just a form of economic "rent" -- vaguely what you would pay if you didn't own, what you might collect if you rented the property, and an "opportunity cost" you might lose if you bought for cash that could have been used in other ways to produce income.
According to "Charting Real Estate's Biggest Winners" (July 18, 2004), The New York Times asked James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, to compare stocks and real estate from 1980 through March of this year. To get his results, Dr. Hughes used data from the Dow Jones industrial average and the Office of Federal Housing Enterprise Oversight.
"In 1980, the Dow was at 830," Dr. Hughes said. "In 2004, it has been running between 10,000 and 10,500. Rounded off, that's about a 1,100 percent gain." Home prices in New York State over the same period, by comparison, increased 400 percent, according to the federal data.
"So, on the surface, it looks like you would have done better in the stock market," Dr. Hughes said. "However, that does not take into account the ability to leverage your initial housing investment."
In other words -- keeping the numbers simple -- assume you bought a $100,000 home in 1980. "By 2004, it would have increased to $400,000 in value," Dr. Hughes said. "Thus your gain would have been $300,000."
"However, assuming you only made a 10 percent down payment on the home -- or $10,000 -- that means your initial $10,000 investment grew to $310,000," he said. "That's a gain of about 3,000 percent, which is far better than the stock market. If you had invested the $10,000 in stocks, it would have grown to $110,000 in the same 24-year period."
"So that indicates the effect of leveraging your initial housing investment into a much larger value through borrowing."
There are, of course, other factors to consider in comparing housing leverage and capital gains. "Obviously, you have to pay the mortgage each month over the 24 years," Dr. Hughes said. "However, that is generally not appreciably different from what you would have paid in rent if you hadn't bought the home."
And so, finally, someone agrees with the idea that real estate returns should be valued on the basis of the cash actually invested and not just sale prices, that leverage counts, and that monthly ownership costs are simply a form of economic "rent."
Where I disagree with the good professor concerns the Dow Jones average.
To say that the Dow Jones industrial average rose from 830 in 1980 to 10,000 or so this year would be a far better compassion if we were looking at the same bundle of 30 stocks. However, that's not the case.
DJIndexes.com provides an excellent history of the oft-quoted average -- including company changes since 1980. For instance, during the period from 1980 through 2004 the Dow replaced a number of companies from the index including such well-known names as Johns Manville, General Foods, Owens Illinois, Inco, Westinghouse, Texaco, Bethlehem Steel, Woolworth, Goodyear, Union Carbide, Sears, AT&T, and International Paper Company.
What these changes suggest is that the difference between real estate and stock investments -- even when leverage and economic rent are included -- is still undervalued. Why? Because the bundle of stocks the Dow once represented has changed -- even though many former Dow components continue as functioning, solid businesses.
In other words, to have a fair comparison between the Dow Jones stock index and real estate, lets look at the stocks that were included in the 1980 version of the index. That the 1980 version of the index differs from the 2004 version is to be expected -- different companies are included each year. Alternatively, a house built in 1980 with three bedrooms and two baths on a given lot is substantially the same.
As to what real estate or stock will do in the future, no one knows. As they say on Wall Street, past performance does not guarantee future results. But then, they also say that on Main Street.
Written by Peter G. Miller
Home Buying Articles and Advice...
Buying a home can be one of your most significant investments in life. Not only are you choosing your dwelling place, and the place in which you will bring up your family, you are most likely investing a large portion of your assets into this venture. The more prepared you are at the outset, the less overwhelming and chaotic the buying process will be. The goal of this page is to provide you with detailed information to assist you in making an intelligent and informed decision. Remember, if you have any questions about the process, I'm only a phone call or email away!
As you find yourself heavily immersed in the house-hunting mode, you may encounter a situation in which you're torn between two houses. Perhaps you and your spouse each have a favorite, or perhaps you both like two houses equally - or think you do.
Efficient Homes Offset Energy Costs
Laundry Rooms a Hot Amenity for Homebuyers
Waiting for higher interest rates to depress prices may not be your best home-buying strategy.
Study Highlights "Value-Added" Contributions of Home Features 
Around the country real estate results in many communities -- but not all -- have been extremely good in the past year. The National Association of Realtors says that median prices for existing homes reached $183,600 in May -- up 10.3 percent in the past 12 months.
Buying a home can be one of your most significant investments in life. Not only are you choosing your dwelling place, and the place in which you will bring up your family, you are most likely investing a large portion of your assets into this venture. The more prepared you are at the outset, the less overwhelming and chaotic the buying process will be. The goal of this page is to provide you with detailed information to assist you in making an intelligent and informed decision. Remember, if you have any questions about the process, I'm only a phone call or email away!
