Rent vs Own, What to do in California?

Home sales continue to plummet across the state of California as buyers begin to contemplate renting over buying a home as a result of falling home prices. Unlike in Utah, prices in the golden state have taken a beating. Purchasing a property now could result in a loss of tens if not hundreds of thousands for a buyer. While buyers in Utah can easily acquire a Utah Home Equity loan as a means of dealing with unexpected dips in home value, such loans are increasingly difficult to obtain in California.

Frankly, banks do not like losing massive amounts of money by having to foreclose on homes. This leads to higher interest rates and higher down payment requirements which prohibit, or at the very least prevent many potential buyers from purchasing a home in California. Often home buyers decide that it is simply more affordable to rent rather than to purchase a home. Others choose to rent simply because they are frightened off by high interest rates. Second mortgage loans can occasionally be used to pay down a loan early as a means to avoid 30 years of high interest.

Here’s one blogger’s take on the debate:

But what about the tax benefits of owning? Aren’t all renters simply flushing their money down the porcelain toilet of perpetual loserville? First, there is a mistake in believing renting provides no economic benefit. Everyone needs shelter unless you are going the way of the nomad and living under the San Gabriel river. Renting provides the same economic substitute as owning a home aside from tax benefits, equity buildup, and the ability to take a sledge hammer into your kitchen wall should your heart desire. The only problem in hyper bubble markets like Southern California, renting an equivalent place will cost you 2 times less than owning. So for example, you may be able to rent a home for $2,200 that would cost you $4,000 if you were to buy it. And that $1,800 is being invested ideally at a rate outpacing inflation. The way housing is currently going, you’d be better off playing Keno at your local Indian casinos.

This is certainly a valid point. Well, the analysis regarding the cost of renting vs buying is (I wouldn’t advocate the Keno). If one looks at a home as a thirty year purchase with a high interest rate, it could seem like a lifetime liability in which a homeowner can never possibly get out of debt.

Few realize that the proper use of a 2nd mortgage loan could easily reduce a thirty year loan to a 15 year loan. Obtaining such a home equity line of credit can be extremely rewarding for a homeowner who dislikes debt.

Investors Still Investing, but Weary

There may be light at the end of the tunnel for those concerned about increasing rates on mortgage and second mortgage loans.  Investors are still purchasing treasury bonds and other debt and credit backed investments, though perhaps with more caution than before.  CNN writes:

Pockets of the debt markets are showing signs of life, raising hopes that the worst of the credit crisis is over.

“We’ve got a market that is more functional,” said Tony Crescenzi, chief bond market strategist.

In the corporate debt market, healthy companies issued bonds at a slower pace in the third quarter, but the slowdown was much less dramatic than in other areas rocked by panic this summer.

And the Federal Reserve’s latest figures show that the commercial paper market, which companies and banks rely on for short-term financing, has started to loosen after locking up in August.

The improving conditions in both markets show that despite tighter lending among banks, companies are finding ways to raise money to run their businesses.

Whether this will ultimately lead to stable interest rates remains to be seen.  Those looking to buy or sell homes certainly hope so.

Credit Crunch Smashes US Dollar

The American dollar recently fell hard enough to achieve parity with the Canadian.  A further decline is expected as banks continue to take a beating over subprime lending on first and second mortgage loans.

The price of gold is a wonderful indicator of the beating the dollar has taken.  As trust in the currency declines,  gold climbs.   The Telegraph has some interesting expert opinions on why this has happened.

“Central banks have been forced to choose between global recession or sacrificing control of gold, and have chosen the perceived lesser of two evils,” said Citigroup in a fresh report.

“We believe that the policy resolution to the credit crunch will take the form of a massive, extended ‘Reflationary Rescue’, in a new cycle of global credit creation and competititive currency devaluations. This could take gold to $1,000 an ounce, or higher.”

The report’s authors, John Hill and Graham Wark, say the avalanche of central bank bullion sales earlier this year was “clearly timed to cap the gold price”.

They do not explain this explosive allegation, long promoted by the gold group GATA. But it would not surprise me if the European Central Bank’s motive for selling 37 tonnes in April and May was to hold the euro price of gold below €500.

If the American dollar fails to stabilize, Asian and European economies may get hit as well.  Avoiding such disaster is a difficult thing to arrange however, evidenced by central banks failure.

Lease to Own - A Worthwhile Method for Purchasing a Home?

Leasing to Own is a creative method of essentially writing a long term purchase contract on a home with two big differences. You can move into the home immediately, and you lease the home until the contract closes.

Such ‘Lease to Own’ options tend to appeal to a few select groups:

1. First time homebuyers with low-credit, no down payment, or are in some way unable to afford/obtain a mortgage or even a second mortgage loan.
2. Illegal aliens, persons seeking citizenship, or persons who need time to find a family member to cosign with them.
3. Investors who wish to gamble that a home will go up in value, but don’t want to risk too much if it does not. They will occasionally make use of a home equity line of credit or a 2nd mortgage loan in order to float the rental costs.
4. The constantly evicted who otherwise cannot find places to rent. (Sellers sometimes get desperate to fill the property and as a result are not as thorough in background checking)

For most first time home buyers leasing-to-own is a BAD IDEA. Chances are that almost every lease to own property you find will be constructed to result in one of the following outcomes:

1. Buyer agrees to rent the house for more than it would normally rent for, with the understanding that a small amount per month will be applied to the purchase price should you purchase in a year or more.

2. Buyer spends all kinds of money fixing up the house, making repairs, and so on. Buyer generally believes he or she will own the house so they take better care of it than if they were just renting.

3. X year(s) pass, and it’s time for the buyer to buy the house. One of three things happens:

a) The property has decreased in value —–> so the buyer walks away, losing a few thousand dollars in what was paid to extra rent, plus all the repair costs, new carpet, custom blinds, paint, landscaping etc.

b) The property is worth less —–> buyer stupidly buys at originally negotiated price because of money already sunk into the home.

c) The property has increased in value —–> seller then tells buyer about the new, higher price. Buyer threatens to sue, seller laughs. Seller sells for higher price, either to buyer…or a new sucker.

Keep in mind that smart real estate investors use the lease-option scam to extract extra money out of their investment properties. If you own investment property, a carefully constructed rent-to-own option can make you several thousand dollars AND get you a good renter.

Leasing to own is usually a BAD idea for illegal aliens, and others who are currently unable to get a loan, but think they might be able to find someone to cosign or get the loan for them in a year or two.

Having someone else own your home is just asking for trouble. Also, since home loans can be such a complicated process, it is very difficult to predict accurately that you will be able to get a loan or even a Utah home equity loan in time to purchase the home.

That said, if you find a deal (which investors often do) locking it in a long term lease to own contract could be a wise way of gambling. Should home fall in value, you can walk away relatively unscathed (vs actually owning it).

Doing so REQUIRES a good attorney to help you construct a bullet-proof contract so that you can actually purchase the property should it increase in value. You should also try to contract the option of subleasing, as you may not actually want to live in the home, and subleasing is an easy way to minimize loss, and possibly even break even. Sellers may resist this (for obvious reasons, as you could potentially sublease to a very destructive renter)

Always be creative when approaching a seller, as proposing a rent-to-own could be an excellent method of buying a property with minimal risk. For the reasons already listed above, a buyer should generally avoid properties already being marketed as lease-to-buys.

Netbank Shuts Down Amidst Massive Defaults

Netbank, a major lender of primary and second mortgage loans.  Netbank gained an immense market share during the housing boom, has made a complete about face resulting from a government shutdown.  The Deseretnews has more:

 NetBank Inc., an online bank with $2.5 billion in assets, was shut down by the government on Friday because of an excessive level of mortgage defaults.

It was the largest savings and loan failure since the tail end of the industry’s crisis more than 14 years ago. Federal regulators appointed the Federal Deposit Insurance Corp. as a receiver for Alpharetta, Ga.-based NetBank.

Customers with less than $100,000 deposited with NetBank will be protected by FDIC insurance.

While dozens of mortgage companies have closed due to soaring defaults of home loans made to borrowers with weak, or subprime, credit, those problems previously had occurred among non-bank lenders such as New Century Financial Corp. NetBank, in contrast, is federally regulated.

Loose mortgage standards in recent years — especially among lenders catering to subprime borrowers — have resulted in a spike in home loan defaults.

This is a fairly surprising announcement.  Up until last month Net Bank was marketing aggressively to persuade consumers to bank with them.  Anyone who deposited more than $100,000 may now find themselves sharing in the bank’s losses.

Hopefully this serves as a warning to consumers.  Never save more than $100,000 with one bank.

British Version of FDIC Insurance Proposed

The Chancellor in England has modified his proposed insurance protection for British savings. The Telegraph writes:

 The Chancellor has staged an embarrassing climbdown by pledging to guarantee only the first £35,000 of savings held in British banks and building societies rather than the £100,000 he originally suggested.

Alistair Darling will make the promise today as the first step in reforming the financial services compensation system in the wake of the Northern Rock bank affair.

It was the paucity of the current guarantee – which fully protects only the first £2,000 of savings and 90pc of the next £33,000 – that prompted the queues of savers at Northern Rock branches when it emerged the struggling bank had been forced to call on the Bank of England for help.

England has suffered banking problems including runs on the bank due to the lack of banking insurance offered to borrowers.  Unlike the US, where FDIC insurance protects deposits up to $100,000, there is much less protection in England.

Due to such a lack of safety in deposits, many in Britain take to investing in their own homes, paying them off early through the use of second mortgage loans.

Best Time to Rent, Buy, or Pay Mortgage Down Early?

Often those who choose to rent or pay down their mortgage are presumed to do so out of necessity rather than choice. Such an assumption is often incorrect, particularly in today’s housing market. Simply said, many Americans now find that median income household cannot buy median priced homes.

Historically there has been a notable cycle in the market that housing trends closely followed.

Generally speaking, whenever prices rise faster than incomes, income levels eventually rise as well, or home prices decline.

That said; this previous housing bubble has been larger than anything history has ever seen. For some reason incomes do not seem to be rising anywhere near fast enough to keep up with the gains made in housing in previous years.

While median housing prices have declined somewhat in the past year, they are still heavily inflated relative to median income levels.

This leads one to conclude that perhaps now is the best time in US history to be a renter if you do not already own a home. One is much better off paying somewhat high rents for the next few years than buying a home and then watching equity disappear should the market take a freefall.

Those already owning a home have benefited from recent gains made in housing prices. Such gains can sometimes be difficult to realize however as the demand to buy property has fallen. One’s home is worth more than when it was initially purchased, but selling it to realize such a gain is an entirely different matter.

This can be particularly difficult for flippers, or home owners who mistakenly purchased homes with adjustable rate mortgages expecting to easily sell their home in the future. Now that the market has slowed it can be terrifying holding a home with monthly rates about to skyrocket.

Adjustable rate mortgages often skyrocket after a few years, sometimes doubling one’s monthly housing payment. Such an increase in payments can be nearly impossible to afford.

According to many experts, housing prices that one sees today are artificially high and therefore not sustainable. Such a view is backed by events of the past; historically homes have been valued relative to income levels. In the latest housing bubble median home prices shot up by close to 50 percent. The median income, on the other hand, has gone up roughly 10 percent in the previous decade–a very meager increase compared to the drastic change in home prices.

Today’s incomes simply cannot support the bubble-inflated prices, a fact which many homeowners with adjustable rate loans are quickly learning. In places such as California, Americans earning the median income simply have no chance of affording a median priced home with a conventional loan. Often such expensive homes lead to homeowners purchasing a home they cannot afford using an adjustable payment mortgage. This makes such a loan affordable for a few years but unless incomes jump drastically (which they don’t seem to be doing), the home remains too expensive after the payment adjusts.

Sadly enough, most borrowers didn’t take out conventional financing during the previous housing boom in order to purchase their home. Instead, caught up in the housing craze many borrowers took out risky and illogical subprime loans in order to be able to afford a home. This led housing prices to a never before seen height. For a few brief years anyone who wanted was able to purchase an expensive home, often with little income or few assets to use as collateral. Obviously those with no job and poor credit find it difficult to continue to afford a home when payments jump. This has resulted in record numbers of foreclosures and a full meltdown in the mortgage loan industry.

Those with adjustable loans rarely realize that through the use of a second mortgage loan they can actually pay down a mortgage loan early. This can work miracles for those trying to manage a budget with a difficult loan.

With more than 150 major lenders having closed up shop in recent years, it has become incredibly difficult to qualify for a loan. Many homeowners who have already purchased a property cannot now refinance the same home. The only real option to avoid foreclosure can be using a 2nd mortgage (which is often easier to qualify for) in order to float and manage monthly payments.

Housing Crisis to Persist Past 2008

Many have been wondering whether they should refinance or take out a second mortgage in order to lower their mortgage payments.  Predictions range wildly regarding just how long the housing slump will persist.

The government has an answer according to Bloomberg:

Fannie Mae Chief Executive Officer Daniel Mudd said the housing slump will last beyond next year, dragging down home prices and increasing credit losses.

“We don’t think we hit a bottom until the end of ‘08 and then we have some period of time to work our way back up again,” Mudd said today in an interview in Washington.

The outlook from Fannie Mae, the largest source of money for U.S. home loans, is more bearish than that of the National Association of Realtors, which this month predicted new home sales will stop falling in the first quarter of 2008. Pessimism about the housing market is growing as prices fall and demand declines. Purchases of new homes in the U.S. dropped more than forecast in August and prices plunged by the most in almost four decades, the Commerce Department said today in Washington.

U.S. home prices will fall 2 percent to 4 percent this year, and “more next year,” Mudd said.

Should those predictions prove correct, it would be best to lock in a rate now as rates will continue to climb as lenders close.

CIT to Sell $4.2 Billion in Mortgage Bonds to Freddie Mac

In a second mortgage sell off, CIT Group has announced plans to sell off a huge amount of it’s mortgage debt on the secondary market.

Reuters reports:

The deal is expected to close later this month. CIT Group has borrowed $2 billion from Morgan Stanley against its expected proceeds from the sale.

The move was seen as a positive by investors concerned about CIT Group’s access to short-term credit markets. The company’s shares rose as much as 9 percent before giving back most of their gains. The cost of protecting CIT Group’s debt against default dropped dramatically.

New York-based CIT Group is still borrowing in commercial paper markets, but financing with short-term debt has become more expensive for many companies in recent months, with some issuers finding themselves shut out entirely.

Good news perhaps for CIT, bad news for the American government that will be buying up those loans.

Fed Rate Cut Will do Little to Help Homeowners

Bloomberg has a nice blurb on why the fed is doing little to actually benefit those in need.

“Mortgage rates won’t stimulate demand,” said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis. “The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages.”

The average 30-year fixed mortgage rose 0.10 of a percentage point to 6.08 percent today, according to North Palm Beach, Florida-based Bankrate.com’s survey of banks and lenders in the 50 U.S. states. It peaked this year at 6.42 percent on June 14, Bankrate.com said.

The housing industry, now in the second year of its worst recession since 1991, erased 0.6 percent from gross domestic product in the second quarter. Home prices probably will fall on a year-over-year basis for the first time since the Great Depression of the 1930s, Anderson said.

Sadly, federal rate cuts rarely have a direct affect on mortgage and second mortgage rates.  Often it can take months for a cut to have any affect at all.

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