Obama and the Band

Obama and his band are great salesmen, and if they don't start putting some meat into this current stimulus campaign, they'll soon look like great used car salesmen. Apparently, the $350 billion is still safely in the system; banks are simply too timid to lend it, and over $850 billion of reserves sit in the Fed's vault. Goldman Sachs wants to give their TARP money back in light of the executive pay contingency. So it's there.

Hopefully we'll see some details of this $2.5 trillion deus ex machina soon. I doubt the greed will be controlled by new regulations soon enough; the US government could very well become our new First National Bank -- for good. (A cartoon in last week's New Yorker called it First Nationalized Bank.) That may be the future: we look back at the 1990s and the 2000s as an era when men and women in suits legally stole from men and women in jeans.

Where's the fat lady and why isn't she singing?

In assuming certain measures that the Obama administration will enact, Moody's Economy.com came up with some siginificant key findings in their current house price forecast, the most eye-catching of which is that house prices will stabilize by the end of the year.

But not before sliding another 11%, according to the Case-Shiller indices which Moody's sites in their study. That gives us a peak-to-trough swing of about 36% in home prices, so when they do stabilize, we'll see housing prices similar to the ones we saw at the dawn of the new millennium.

Moody's findings go on to state that by the end of the downturn, almost 62% of the country's metro areas will have experienced double-digit declines in home prices, and in almost 10% of those metro areas, prices will have fallen over 30%.

Do not ask for whom the fat lady sings...

Jimbo's Jumbo

My friend Jimbo has been looking for a new home since November. Poor timing, because Jimbo needs a jumbo. He requires a large home and therefore a large mortgage. (A jumbo mortgage is any loan that exceeds the conforming loan limit of $417,000.)

Before the housing crises, jumbos, the high end of non-conforming loans, were much easier to acquire as lenders used stated income and didn't require backup documentation like pay stubs or tax returns. That all changed around the same time that many of us learned what a credit default swap actually is. As it turned out, not only was the sub-prime market a scary place for investors, so was the luxury market.

But lenders seem to be loosening up a bit. Interest rates for jumbos have inched their way below 6% as of late, so Jimbo may be in luck. He'll have to provide documentation of his income - the days of stated income will at best bookend the period we're in now - but he'll at least have a shot at a reasonable interest rate.

How fun is this housing crisis?

So, it'll be longer than expected before it's safe to go back in the water. Turns out, we're not even halfway through this thing. The sub-prime market, fingered as the cause of our current housing crises, is just the beginning and may pale in comparison when we look at the upcoming adjustments in Alt-A and option ARM loans. It's estimated that the sub-prime debacle has created over $1 trillion in defaults and and losses totaling $7.7 trillion, according to Moody's Economy.com, of the world's market capitalization since the October peak. Alt-A and option ARM loans, which will begin to adjust on a large scale sometime in 2009, could cause an additional $1.6 trillion in defaults over the next three years.

Alt-A loans (Alternative A paper) are loans that are less risky than subprime loans, but certain characteristics - like high debt-to-income ratios or high loan-to-value ratios - keep these loans from conforming as Fannie Mae or Freddie Mac mortgages. Option ARM loans offer low initial interest rates, teaser rates as they've been called, which reset in as few as two years. Most of these types of loans were written in 2005 - 2007, and default rates on them are already untypically high due to current economic conditions.

Can't exactly say it'll be fun to watch, but watch we will.

Fun, Fair, Fast. Does this sound like real estate?

You should meet Rusty Denman. Just about everyone who’s had the honor recently loves him. A short time ago I posted a piece about how to sell your home in five days, a method I found perfectly in tune with what we’re singing at DwellWell.com: Sell it yourself, it’s easier than you think, we’ll show you how, you’ll save thousands.

Rusty’s a true believer. Not only did he save himself thousands with the 5-day method, he’s helped countless others do it as well, attracting millionaires and movie stars in the process. They all love him – all the way to the bank!

His next sale will be a “Rusty” first: he’ll use the 5-day method to help auction a bundle of three incredible rental properties on North Carolina’s Outer Banks. It looks like an investor’s dream to us, so we’re watching this one closely. When was the last time you had a 1031 exchange or multi-property sale that wasn’t bulked up with a real estate commission?

(If you want to see these three properties, go to www.outerbanksmansions.com. And check out the 5 day method: www.5day.com.)

How Much House

Before you start looking for a home, it’s important to know how much you can afford. The best way to do this is to have a lender pre-qualify you. You’ll have to qualify for a mortgage eventually, but it’s best to do it up front for a couple of reasons. First, you’ll know the price range of homes you should be looking in. This keeps you from finding a home you love but can’t afford. Second, when you find the right home, the seller will know you’re a serious buyer and that the sale won’t stall out after the sales agreement is signed because you can’t get the loan you need.

Keep Your Financial Picture Clear
As you’re looking for a new home, keep this in mind. Because buying a home is such a large financial commitment, lenders care about your finances in the weeks and months prior to your obtaining a mortgage. Don’t make any big purchases, keep your financial picture as clear as possible by not transferring funds around from various banking and investment accounts, and don’t change jobs, unless, of course, you’re moving to take a new job.

What Lenders Look At
How much you can afford is dependent on more than just your total income. It's also dependent on the type of mortgage financing you choose as well as your monthly debt payments. Lenders look at your total household income, your debt-to-income ratios and your net worth (your total assets minus your total liabilities). From these numbers they determine your maximum loan amount, your maximum monthly mortgage payment and minimum down payment.

The greater your net worth, the more house you can afford and the smaller your interest rate and down payment will be. There are two debt-to-income ratios: one tells a lender how much of your gross monthly income goes toward paying your housing costs, and the other tells them how much goes toward paying both your housing costs and your monthly bills. These ratios tell a lender how much you can afford on a monthly basis.

It may sound terribly complicated, but the process of pre-qualifying yourself is fairly painless. The lender does most of the work. You just provide them with the information they need.

Shop Around
Once the lender has done the math, there are different lending products they can offer you. The guidelines that lenders follow are more flexible than they used to be, especially with regard to the debt-to-income ratios. In recent years, you’ve probably noticed that the lending business has become very competitive. Television ads show lenders lining up at your door to offer you a better deal. In reality, they won’t line up at your door, but they’ll be extremely receptive when you walk through theirs.

Don’t be afraid to shop around for the best loan. Make these lenders sharpen their pencils. Working with a local bank or lending institution has its advantages, but there are also many options on the Internet. You’d be surprised what just a small amount of research can save you. For a list of local lenders, visit our Buyers Resources page.

Down Payment
Depending on your financial picture, the down payment on a home could be as high as 20% or as little as nothing down. If your lender gives you the option of nothing down, they’ll most likely require you to take out private mortgage insurance to protect them in the event you’re unable to make your monthly mortgage payments some time down the road.

Something else to keep in mind. If you have the money to make a larger down payment than the lender requires, it’s not necessarily a good idea to do so. While you’d be borrowing less and your interest payments would be smaller, you’ll have less interest to deduct from your taxes. Which means you’ll have less cash on hand. That extra money can come in handy when you consider moving expenses or new furniture and fixtures for the home.

Pre-qualifying Summary
Once you’re pre-qualified, you know exactly how much house you can afford. Being pre-qualified by a lender makes it easier to negotiate with a seller because the seller will know there’s no risk of you not being able to get a loan once the sales agreement is signed.

"But wait. Don't I need a real estate agent?"

Not necessarily. Many home sellers turn to real estate agents because it is the de facto method for selling a home. While working with a real estate agent is right for some sellers, increasingly sellers are discovering they really can do it on their own and save thousands in commissions. When you choose to sell your own home or property is much easier than you think, even though it may seem intimidating at first.

It comes down to just a few things:

1. You need to price your home correctly and to find a qualified buyer for your house, which is why you've come to DwellWell.com, the fastest growing For Sale By Owner site in North Carolina. Here you'll learn how to work with an appraiser and with online listing services to determine the fair market value of your home, and you'll learn how a lender can help you pre-qualify buyers.
2. You need to work with the buyer as they schedule their inspections, such as the appraisal, the home inspection and the pest inspection. (You'd have to do this even if you had an agent.)
3. You'll learn how to work with your own attorney who can help you with the sales agreement and preparation of all of the required legal documents, including the title and deed. Legal fees for a real estate closing are usually between $300 and $500, and they're worth every penny.

For more on selling your own home go to DwellWell's Home Seller Resources page.

Commissions and Your Bottom Line

The economist Stephen D. Levitt and co-author Stephen J. Dubner wrote recently in their book Freakonomics (HarperCollins Publishers, Inc.) of Levitt’s study showing that when real estate agents sell their own homes, those homes stay on the market an average of 10 days longer than their clients’ homes. The same study shows that the selling price of real estate agents’ homes is on average 3% greater than that of their clients.

Here’s why. A couple who lists their home with a real estate agent for $250,000 may hear from the agent that someone has offered $240,000 for the home. In many cases, the agent will insist that the offer is good and that the sellers should take it. Why would the real estate agent be so eager to accept a price that’s $10,000 below the seller’s asking price?

It could be that the home was priced too high to begin with, and when this happens it's usually because the seller has insisted on the high selling price. But Levitt's study showed something interesting. Typically, agents split their commissions: half goes to the buyer’s agent, half to the seller’s agent. Then it’s usually split again: each agent gives half of their commission to the agency they work for. So the agent representing the seller is only getting 1.5% of the sales price of the home (6% ÷ 4). With a $240,000 offer, the price of the home is reduced by $10,000, but the commission is reduced by only $600. The real estate agent’s cut of this is $150. It will cost the seller’s agent only $150 to accept the low-price offer. What does it cost the seller? An additional $9,400.

This situation happens every day. There is a strong incentive for real estate agents representing the seller to entice their sellers into accepting offers well below their asking price. You've got to price your house correctly from the beginning so that your confidence won't let you come down too far in price.

Sell Your Home in 5 Days?

If you're selling your home or just thinking about selling your home -- or dreading selling your home -- you owe it to yourself to check out George Cappony's real estate classic, "How To Sell Your Home In 5 Days." It's hugely popular, and it'll be that little book that changed an industry. Cappony's ideas are truly iconoclastic. The real estate auction is nothing new, but after cutting it down to its bare and most expedient essentials, Cappony has turned this method into a mantra. Sell your home in five days! Why not?