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By
Charles Essmeier
Lots of articles have appeared recently about the booming real estate market
in the United States. Home prices, especially on the East and West coasts,
are not only at record levels, but are increasing at record rates. In some
areas around Washington, D.C. and San Francisco, home prices have tripled in
the last five years. While many homeowners have been enjoying huge increases
in their equity, realized when they either sell their home or borrow against
it, the market has become increasingly difficult for those trying to buy
homes. It may get worse, as there are now some strong signs that the market
may be near its peak:
The prices of homes in many markets are so high that few buyers can purchase
them using traditional mortgages. In Washington, D.C., for instance, 48% of
new mortgages are of the interest-only variety, where the buyer pays only the
interest on the loan for the first few years. This keeps the payments low
enough that the buyer can qualify for the loan. The problem is that the buyer
is only paying interest and not actually contributing to the purchase price
of the home. The fact that so many buyers are obtaining interest-only loans
suggests that prices in those markets may be too high to be sustained.
Many home appraisers have complained that lenders are constantly pressuring
them to “make the numbers” when appraising homes. Appraisers in some modestly-
appreciating markets, such as Buffalo, NY, say that they are often given a
value when assigned an appraisal, with the unspoken understanding that their
appraisal is expected to come in at or above that figure. The lending
industry is competitive, and lenders want to issue as many loans as possible.
It would appear that quite a few of them are even willing to lend money when
the home doesn’t appraise for the asking price. Appraisers point out that if
they don’t provide the “requested” figures, then the lenders will simply hire
other appraisers.
The foreclosure rate is increasing. The rate increased in March and April over
the same months last year, suggesting that more buyers may have discovered
that they have mortgages on which they cannot make the payments. The
foreclosure rates are the highest in Florida and Texas, which have
foreclosure rates that are nearly triple the national average. With interest
rates near historic lows, mortgages are more likely to become even less
affordable as interest rates increase.
What this means for prospective buyers is that they must do even more research
before buying a home. Buyers should genuinely consider whether or not they
could actually afford to make home payments that include a reduction in
principal. If a buyer can’t afford a home without taking out an interest-only
loan, the buyer probably can’t afford the home. Buyers should be suspicious
of home appraisals and should, if possible, ask the appraiser if they are
being pressured to provide a predetermined figure. Every buyer wants his or
her home to appraise for at least the amount of the loan. But the current
market is one where buyers are straining to make payments on prices that are
at record levels. The last thing any buyer wants is to strain to make
payments on a mortgage that exceeds the value of the home. The real estate
market is in a precarious state at the moment, and prospective buyers should
do as much research as possible to make sure that they can both pay for, and
keep, their new home.
©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro
Marketing, a firm devoted to informational Websites, including End-Your-Debt.
com, a Website devoted to debt consolidation (http://www.end-your-debt.com/
>debt) information and HomeEquityHelp.net, a site devoted to information on
home equity loans. (http://www.homeequityhelp.net/>)
©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro
Marketing, a firm devoted to informational Websites, including End-Your-Debt.
com, a Website devoted to debt consolidation (http://www.end-your-debt.com/
>debt) information and HomeEquityHelp.net, a site devoted to information on
home equity loans. (http://www.homeequityhelp.net/>)
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