"The difference between a successful person and others is not a lack of strength, not a lack of knowledge, but rather in a lack of will." - Vince Lombardi
Pragmatic Approach
How to Save for Your First Home - Read The Wall Street Journal article (below) dated 26 February 2006. Do your own research first, organize your finances, then speak to an experienced real estate professional.
History was my college major. Statistics, maps, first-hand accounts, and black-and-white photographs have fascinated me from a very early age when I built models of WWII airplanes with my father's help. If there is one piece of advice that I feel is best given to anyone considering taking the plunge into home ownership, it is to let history guide you and to speak to your parents. As funny or odd as that may sound, think about it: Who knows more about actually living through decades of inflation and has an aggregate wealth of knowledge than parents or (especially) grandparents?
(See U.S. Housing Prices for extraordinary evidence to the value of home ownership.)
Historical Perspective
In the first few decades of the 20th century, it took a down payment of between 33% and 50% to acquire financing for a home purchase. It should also be noted that the terms of these mortgages were not what is typical today, as 6 to 11-year notes were the norm compared to 30-year contemporarty financing. Franklin Roosevelt's New Deal was an extraordinary improvement to these conditions. Contemporary lenders are basically throwing money at people with good to outstanding credit. Extremely affordable mortgages are found within hours, and in some cases lenders are offering 103% financing! If you plan to retire without having to look over your shoulder (figuratively - literally looking at your savings every month), then buy a place to call home, as well as a sound investment. This could quite probably be the best investment of your life.
Parental Perspective
If you are either a parent or have plans to start a family one day, the page entitled Homes & Children has the abstract for The Impact of Home Ownership on Child Outcomes by the Harvard University authors, with a link to the full paper. This is a must-read for renters.
Personal Perspective
Chris and his family have two properties in Santa Monica. One is their home, and the other is an income property / part of their retirement plan. (It should be said that more traditional retirement funds are also necessary.) As a realtor, of course he believes in home ownership, and that is one of the reasons he entered this field. It would be nice to help make everyone's dreams come true, but some people are simply afraid.
The worst financial decision Chris ever made (or failed to make) was passing on the opportunity to buy an apartment on the Upper East Side of New York in his early 20s. It could be another income property at this point earning at least an extra $1,200 per month for him... (net), not to mention the hundreds of thousands of dollars in equity it would have by now. The best financial decision he and his wife every made was keeping the old house when they moved into something bigger.
Here's an article (at the bottom) for all buyers on the fence. You should be warned that it may poke some fun at you, especially if you've been thinking about purchasing real estate for some time but have, as yet, waited to do so. Read the articles in State of the Market as well as the page entitled 7 Steps to Buying, arm yourself with the perspectives of all sides of this argument, (hopefully) take the plunge, and five years from now (if not 5 months) you will fully realize that it was the best financial decision of your life.
Candor, Family, Home - If you'd like to compare Chris to other realtors, read the page entitled Online Interview
The following articles are great motivation:
How to Save for Your First Home
Why Homeowners Get Rich and Renters Stay Poor
Fear of Committing?
The Wall Street Journal - 26 February 2006
How to Save for Your First Home
By KELLY K. SPORS
It's a dream of many young adults to buy a first home. But there's an unfortunate reality: Even buying a "starter home" with today's lofty prices can mean saving tens of thousands of dollars for a down payment.
How do you pull it off? The key, obviously, is to save like crazy. Beyond that, here are several suggestions that may make the path to home ownership a bit easier.
1 Aim for 20% down.
Timothy Wyman of the Center for Financial Planning in Southfield, Mich., says you may be able to get by with putting only 10% of the purchase price down, as long as you are confident your income will remain steady or grow and you plan on keeping the home at least five years.
But Mr. Wyman says buyers should ideally aim to save up 20% or more of the price. The risk of putting down too little: If the home falls in value and you sell at a loss, you'll owe more to the lender than you receive from the buyer.
In addition, many mortgages require buyers who put down less than 20% to get private mortgage insurance, which can add $80 to $100 to your monthly bill. And the less you put down, the higher your loan balance and therefore your monthly payment will be.
Mortgage lender Washington Mutual estimates that a buyer who puts down 5% on a $300,000 home with a 5.88% 30-year fixed-rate mortgage might pay $2,133 a month, including fees and property tax, while a buyer who puts 20% down would likely pay $1,682 a month. (The estimate assumes the 5%-down buyer must pay for mortgage insurance.)
You'll also need extra money set aside on top of the down payment for closing costs such as title insurance and mortgage fees, which can reach up to $5,000. If you want to pay "points" to lower your mortgage rate -- a smart idea for borrowers who expect to stay in a home several years -- you'll want a few thousand dollars more.
To find out the price of local starter homes, so you can estimate what you'll need to save up, you can check out home listings on Realtor.com or compare sales data at Zillow.com.
2 Keep it separate.
Set up a separate account for your down-payment funds, so the money doesn't get intermingled with other savings and so you can keep track of how much you save. This would probably be a taxable account at a bank or brokerage firm.
Mr. Wyman suggests setting up regular automatic deposits from a checking account into the down-payment account to force regular savings. "You want to be moving money to this account before you spend it," he says.
3 Consider your time horizon.
How best to invest down-payment money depends on your time horizon for purchasing a home. Those planning to buy in three years or less should put the money in conservative investments such as short-term certificates of deposit or short-term bond mutual funds to shield themselves from potential market downturns.
If you're waiting at least five years to buy, you can invest more aggressively. A balanced mutual fund that invests in, say, 60% stocks and 40% bonds, such as Vanguard Balanced Index Fund, is a good choice and should perform better over the longer period.
4 Get extra help.
Few first-time buyers pony up the entire down payment on their own. Nearly 23% of first down payments come as gifts from relatives and friends, according to a recent survey by the National Association of Realtors.
While such assistance is great, there are also other places you can look. There are many down-payment assistance programs for first-time buyers that are offered by banks, local governments and charities. Many are open only to low- or moderate-income buyers and some are targeted to specific communities.
Some programs lend buyers a substantial portion of the down payment. For example, the California Housing Finance Agency can provide eligible first-time home buyers in Los Angeles 3% of a home's purchase price as down-payment or closing-cost assistance. The money must be repaid when the buyer sells the home, refinances or pays off the loan.
Many lenders have information about assistance programs that borrowers can seek help from.
5 Clean up your finances.
Your credit history will determine the loan terms and mortgage rates you qualify for. You could be offered a smaller loan or charged a higher rate if a lender is concerned you might not be able to repay.
So before approaching lenders, first-time buyers should give themselves the financial equivalent of a physical exam, says Ellie Deskin, a financial planner in Troy, Mich. This means checking your credit score and credit reports with the three major credit bureaus and fixing any errors. (Consumers can now get one free copy of each report annually by going to Web site annualcreditreport.com.)
Also consider paying down some debt, especially high-interest debt such as credit cards, that might flag you as a riskier borrower.
While some debt is okay, being overloaded will likely tarnish your loan terms.
6 Weigh mortgage tradeoffs.
Lenders increasingly offer creative loans, such as interest-only loans and certain types of adjustable-rate loans, that can reduce your monthly payments -- at least for a while. But these alternative loans can be much riskier than fixed-rate loans, because monthly payments can jump after a few years.
A general rule of thumb is that your monthly mortgage payment shouldn't exceed 28% of your household's gross monthly income. Check out some mortgage calculators at Dinkytown.net to calculate what your monthly payment would be with different types of loans.
7 Hands off retirement savings.
If you're just shy of saving up enough for a home, you might consider taking a small loan from your 401(k) plan or withdrawing some principal from a Roth IRA. But many financial advisers caution against tapping retirement accounts too heavily for a home purchase.
For one thing, you're going to need your retirement stash, so you don't want to gouge it. Taking a loan from your 401(k) can also be risky, since you may have to pay it back if you leave the company. And if you take money out of your Roth, you can't replace it, so you lose some of the Roth's long-term benefit of tax-free earnings.
Yahoo Finance - 14 February 2006
The Automatic Millionaire by David Bach
Why Homeowners Get Rich and Renters Stay Poor
With my new book, "The Automatic Millionaire Homeowner," I aim to demystify the process of home buying and provide you with a common-sense way of looking at a real estate market that often seems crazy. If you're a renter, the book is meant to give you the motivation as well as the tools to make the dream of homeownership a reality. If you already own a home, it will teach you how to make it the foundation on which a lifetime of financial security can be built. What follows is a sneak preview of the book, which launches in March.
The Homeownership Dream -- and the Results
From 2001 to 2005, the average homeowner saw the value of his or her house jump by more than 50 percent. Many homeowners doubled, tripled, and in some cases even quadrupled their wealth in just five years because of exploding real estate values.
Imagine that. Buy a home, live in it, build your wealth, get great tax deductions -- and then retire rich. It may sound too good to be true.
Indeed, plenty of experts will tell you that the housing boom never happened. According to them, what we've experienced over the last few years was just a "bubble" that's going to pop any minute now. Others insist that whether it was a boom or a bubble, it's over. According to them, it's now too late to get in on the party.
The American Dream Is No Fantasy
I think both these positions are wrong. My view is that the American dream of building a nest egg by owning a home is no fantasy. Homeowners have been getting rich off their real estate for years, and they will continue to do so in the future.
How can I be so confident about the real estate road to riches? Well, U.S. real estate values have been going up steadily for nearly four decades -- an average of 6.3 percent a year since 1968, which is when the National Association of Realtors first started keeping track. According to Freddie Mac (a.k.a., the Federal Home Loan Mortgage Corporation), since 1950 U.S. house prices have never experienced a year-to-year decline nationally. Compare that to the S&P 500, a major stock-market indicator that has had no less than a dozen down years in the same period -- or the market for U.S. Treasury bonds, which has fallen in 17 of the last 55 years.
Of course, just because home prices have been rising for the last half-century doesn't mean they're going to continue doing so. But real estate's phenomenal track record is not the only reason you should want to become a homeowner. Here are five more.
1. Owning Is Cheaper Than Renting
People who say it's cheaper to rent than to own are simply wrong. Under certain circumstances in certain markets (where real estate values are overheated and rents are low), there may be some short-term advantages to renting. But over the long haul, renting simply isn't a good deal. If you don't own your own home, you can easily wind up spending more than half a million dollars on rent during the course of a lifetime -- and probably a lot more.
Assume you're renting a house for $1,500 a month. Now let's say you stay put for 30 years, during which the landlord increases the rent by 5 percent a year. Over those 30 years, you will hand over a total of nearly $1.2 million in rent payments -- and at the end, you'll have nothing to show for it except a bunch of cancelled checks. To add insult to injury, you'll now be paying $6,174 a month in rent!
Now let's imagine that instead of continuing to rent, you buy the same home for $200,000 (this is just an example, and prices will vary greatly from market to market, especially in big cities where homes are typically much more expensive). Initially, your costs as a homeowner are likely to total around the same $1,500 a month you would've paid in rent. But these costs won't balloon over the years the way rent would. That's because your regular mortgage payment, which represents the lion's share of your monthly outlay, is fixed (or, if you have an adjustable-rate mortgage, at least capped).
What will balloon over the years is the value of your house. Say it goes up by 6 percent a year, which is actually slightly lower than the national average. After 30 years, you will own a home that's worth just under $1.1 million.
2. Homeowners Get Leverage
Leverage is what you get when you use what is called "OPM," which stands for "other people's money" -- the other person in this case being your bank or mortgage lender.
Here's how it works. Let's say you buy a home for $200,000. With standard 80 percent financing, you make a cash down payment of $40,000 and cover the rest of the cost with a $160,000 mortgage from the bank.
Now let's say over the next year or two the value of your house rises by 10 percent. So now it's worth $20,000 more than you paid for it. If you were to sell the house at this point for $220,000, what kind of return would you have made?
If your answer is 10 percent, you're mistaken. You take the $220,000 you got for the house and repay the bank its $160,000. That leaves you with $60,000 -- or $20,000 more than the $40,000 original down payment. In other words, you made a $20,000 profit on a $40,000 investment -- which amounts to a 50 percent return.
As much as I like stocks, bonds, and mutual funds, there's little chance any of them will produce anything close to that return in such a short amount of time.
3. Homeowners Get Tax Breaks, Renters Don't
The best way to stay poor is to pay more than you have to in taxes. When you rent, you get absolutely zero tax breaks on your housing costs. But as a homeowner, you get the mortgage-interest deduction, which can effectively reduce your monthly mortgage payment by 30 percent or more.
4. Homeowners Can Earn Tax-Free Profits
Another way to stay poor (or at least middle class) is to keep letting the government take part of the profits you make from your investments. Buy shares of Google at $300 and sell them at $600, and you've made a bunch of money, but not as much as you think. This kind of profit is called a capital gain, and as with virtually all income, the IRS insists on taking its cut.
There's one asset, however, that you can sell at a profit without having to pay capital-gains taxes to the government. You guessed it: It's your home. Under current tax law, if you sell your primary residence, you don't have to pay any capital-gains taxes on the first $250,000 in profits -- the first $500,000 if you're married.
5. Homeowners Become Savers
Each time you make a mortgage payment, you're saving money. That's because with each payment you're reducing your loan balance a little -- and that, in turn, is building your equity. (This assumes you don't have an interest-only loan.) The longer you're in your home, the more equity you build, the more you save -- and the richer you get.
If You Want to Be Rich, Don't Rent
According to statistics compiled by the Federal Reserve, the average homeowner is 34 times richer than the average renter. If you're not a homeowner, this may depress you. But it shouldn't. Why? Because -- and this I can't emphasize this enough -- it's never too late to catch the real estate wave.
Everybody has to live somewhere, and someone owns every place where someone lives. Why shouldn't that someone be you?
Obviously, no investment -- not stocks, bonds, or real estate -- goes up in a straight line forever. But over the long term in America (which is to say, 10 years or more), most experts believe that homeownership is an exceptionally smart way to invest your money.
Remember -- as long as you're alive, you have to live somewhere. So does everyone else you know. And because of that, homeownership will continue to be a great investment.
The New York Times - 31 July 2005
Fear of Committing?
By Teri Karush Rogers
ON the diving board of dashed hopes and denial paces an unhappy figure: the would-be buyer who shops for years but resists taking the plunge.
Like timid bathers, some just need time to acclimate to the chilly reality of what their money can't buy. That process can take some time. Eventually, though, after long and careful looking, they do take the leap.
But others never do. They focus on flaws and high prices as a way of rationalizing an underlying inability to commit to real estate.
"There are so many levels to this situation," said Dr. Ann S. Maloney, an
Such thinking, if prolonged and paired with the inability to make a decision one way or the other, can signal what's known as an obsessional personality. Obsessives, Dr. Maloney explained, adeptly bury their feelings beneath an avalanche of thoughts.
"Most really high-functioning professionals are not overtly anxious because they've sublimated it into very productive lives," she said. But for some, when it comes to real estate, she added: "They overthink it. They're managing their anxiety. An obsessional is caught up with doing the right or wrong thing, meaning they're really caught up in whether it's the perfect time to buy, whether it's the right apartment or wrong apartment."
John C. Prince, a senior vice president at Prudential Douglas Elliman, worked with one couple for three years in their search for a three-bedroom apartment priced from $1 million to $2 million. The pair agonized over ascending prices. "They would send you articles from every sort of newspaper saying the bubble was bursting," Mr. Prince said. "They spent far too long analyzing every market issue." Once, after a half-dozen visits to an apartment, the couple was banned by the seller's broker.
"The head ruled every decision and didn't give way to the heart, so they never fell in love with anything," Mr. Prince said. "It was always too much of a cold decision to make."
A fear of unsound investments, when it gums up the gears of decision-making, can obscure unmet needs.
Sometimes, Dr. Maloney said, "it's really about a need for deprivation," connected to unmet desires in early childhood. "They will perpetuate it in their lives in whatever they do - in relationships, work, purchases, possessions," she said. "It's not about having or getting what you want, it's getting to be angry about not having it. It's about punishing the parent who didn't give it to them."
While brokers aren't usually privy to their clients' psychological skeletons, they do say that people who experience sudden financial success can have a hard time spending, much like a Depression-raised grandparent who continues to hoard tin foil.
Beverly Feingold, a vice president at Halstead Property, recalled the couple she worked with for six years, after the income of the husband, a lawyer in his 50's, skyrocketed unexpectedly. Still, Ms. Feingold said, "They could never quite afford what they thought they wanted." Her wake-up call came when she showed them exactly what they asked for: a pretty, prewar classic five on the
"If this apartment were two floors higher, this would be it," the lawyer assured Ms. Feingold, who, two weeks later, located exactly that in the same building.
"I took him to see it and he found something else wrong with it, and that's when I realized he was never going to buy," she said, attributing it to "the fear of losing the position they never really expected to have."
A different group of would-be buyers worries less about holding on than about closing off options. "They're stuck in ambivalence," Dr. Maloney said, "a developmental stage that's usually mastered in adolescence. If you make this choice, you cannot make the other one."
Brokers say they typically encounter this shopper in one of two guises: the perennial bachelor and "the single woman who has never married, who is afraid to commit to an apartment, because she's afraid if she somehow commits to a studio or one-bedroom then she's never going to get married," said Julie Friedman, a senior associate broker at Bellmarc Realty.
More heartbreaking for brokers, perhaps, are the 40-something bachelors with more money to spend but who are as reluctant to promise themselves to an apartment as they are to a mate.
"I have people who've come into me at 40 years old, and, oops, they forgot to get married and have kids," said Maryellyn Duane, an
Lauren Cangiano, a senior vice president at Halstead, described the never-married, 40-ish lawyer she worked with for two and a half years. While living in an
After two years, he worked up the courage to bid over the asking price for
Some would-be buyers are more haunted by what other people think. They fear being the dupe who bought at the top or the owner of an unenviable apartment.
"People either have to have the greatest place or they wind up having nothing," said Dr. Duane, the psychologist, who labeled it narcissistic thinking. "You're either a hero or a zero."
Into this paradigm falls the rent-controlled tenant who can afford better. "We have clients in rent-controlled apartments who don't have dishwashers, and the washer and dryer are in the basement with one dangling light bulb," said Ms. Friedman of Bellmarc. "They're living in a slum but no matter what we find, they can't break with that cheap rent."
Dianna L. Lake, another Bellmarc agent, recalled the 30-ish technology salesman, earning $300,000 to $400,000 a year, who sought a two-bedroom prewar for $1 million to $1.2 million, but would consider only distinguished buildings inhabited by his peers.
"He wanted to see a particular building in the worst way, a prewar prestigious building on the
Other perpetual shoppers may be in thrall to a childhood real estate trauma. "A lot of people in therapy say their whole life got screwed up by their parents' moving," Dr. Duane said. "They often go back to, the move was a pivotal part in ruining their lives." As a result, she said, "There's a whole category of the population who just avoid allowing themselves to be comfortable and finding the right niche for themselves."
Some brokers say couples conflict is a deal staller.
Arlyne Blitz, a vice president with the Corcoran Group, pointed to situations where a husband wants a one-bedroom apartment, envisioning a move to the suburbs after the first child arrives, while his wife wants a two-bedroom. "She is a little frightened that she'll have children and be secluded in the suburbs," Ms. Blitz said. "They may end up buying, but they may be at odds for a while before they really come to terms."
Or they may never agree. Ms. Friedman of Bellmarc said her clients have included "couples who are married but afraid to commit to a purchase, because I think in the deep recesses of their mind, they know they're going to split."
"If they commit," she said, "it's just one more issue to deal with in divorce court when they split up the property."
She described one set of clients that she and her brother, Lewis Friedman, a Bellmarc senior vice president, worked with for two years: "He loves prewar and high ceilings and she loves new condos filled with glass and sunlight and terraces. When the husband comes in and says he wants to buy the apartment and is strong and passionate about buying it, I think he knows the wife hates it. Or he walks in and denounces it as the worst architecture they've ever seen in their lifetime, and they have a huge fight, and they each e-mail me separately with their own reasons. I know they are looking for a reason not to commit because they are just going to have to detangle it."
Like other brokers who choose not to cut the apron strings, Ms. Friedman said that her relationship to the couple has tilted from business to social. "There's a difference between spending your time and wasting your time," she said. But most brokers dispatch die-hard commitment-phobes back into the concrete underbrush.
"Browsing is a term for animals in the forest who are just nibbling at buds," said Will Brownell, a broker at Bellmarc and historical writer with a Ph.D. in history, who traced the word browse to brouz, an old French word for buds and shoots. "Such creatures are a bloody nuisance, in someone's woods or someone's real estate, because they really get in the way and they really impede normal growth."
There is hope for those who recognize themselves here. Breaking the cycle "is about understanding the pattern, recognizing the familiarity," Dr. Maloney said.
"Of course, none of this is bad, as long as it doesn't keep you from getting what you want," she added. "We're all nuts. It's just a question of what particular way we're nuts and to what degree."