The American Dream

Can you speak about the difference between urban and suburban real estate? It seems that the McMansion / suburban markets are being hit hard while urban markets continue to thrive

Sent by Derek Roberts | 2:19 PM ET | 06-25-2007

Greetings from the one of the worst markets in the country: Lansing, Michigan. I have an illustration and a question.

An illustration: according to our realtor (we're selling due to a new job out of state), when we bought our house several years ago there were 1500 houses on the market in the Lansing area, which made for a typical summer. Now, there are almost 1500 foreclosed houses on the market, plus 3000 other homes.

A question: when we bought several years ago "seller concessions" were not at all the norm in this market. Now, apparently almost all houses around here sell with a 3%+ "seller concession" (that is, cash from the proceeds of the sale given to the buyer by the seller). I've heard recently that those seller concessions don't affect government and realtor association housing statistics. Is that true? In our case, if seller concessions are not taken into account, it appears that we gained roughly $7000 on the sale of the house. But that doesn't take into account the roughly $10000 of seller concessions (some cash, but also a roof before closing).

Sent by Dave | 2:33 PM ET | 06-25-2007

I live in an area that hasn't yet been hit hard by the housing slump that is the average nation-wide. I am afraid, though, that this might be the wrong time to buy. And, call me cynical, but I just don't believe the stats that come from the real-estate professionals in the area. How does one make a decision like this, and if it ends up being the wrong decision, how does one soften the repercussions of the bad decision?

Sent by Jen | 2:58 PM ET | 06-25-2007

I believe that housing prices still have a long way to fall... but how long will it take? Is there a way for you economists out there to make an educated guess about how sticky it will be on the way down?

I recently moved to Virginia Beach, where prices in some neighborhoods tripled in just a few years. I would like to buy, and we have an above-average income, but I refuse to pay asking price on principle. Now, prices are falling, but only by about two percent. Give me a break! I'm not going to pay $300 k for a shack (that was worth $90 k five years ago and $305 K last year), even if it is in the right school district. I'm anxious for the housing market to return to sanity. The question is when will that be? And since the housing boom hit here a little late (in 2004), will the correction be late as well?

Sent by Jenny | 3:01 PM ET | 06-25-2007

I agree with Jenny, housing prices still have some corrections to make. My concern is the growing numbers of foreclosed homes on the market. What will that effect eventually have on the economy?

Sent by Kathy | 3:47 PM ET | 06-25-2007

If you need a roof over your head, it is always better to own than rent. And even better to use other people's money to own! You get the appreciation of the home, thereby increasing your wealth. Renting does not provide that benefit.
Using a mortgage that is simple interest and especially interest only gives you a lower payment, tax deduction and allows you to conserve that principal you would have sent to the lender who pays you no interest on what you send in and if you want to get it back, makes you apply and show why you should get it and charges fees to do so. By conserving what would have gone to principal in a compounding account, you can use your mortgage as the financial tool it should be and create weatlh in the short and long term. The key point is conserving, not consuming.
There are Certified Mortgage Planning Specialists across the country that can help determine if renting or buying is better for your particular situation.
I am sick about the people who got into sub prime loans and didnt take the 2 years to clean up their credit or correct whatever the issue was that caused them to take a sub prime in the first place. I educate my clients and check in with them on a regular basis to make sure they are following the path to successful equity management. If you arent getting this kind of advice, analysis and support from your lender, you should switch to a Certified Mortgage Planning Specialist who will help you manage your home equity to increase liquidity, safety, rate of return and tax deductions. Unlike a traditional loan officer, our role is to help minimize taxes, improve cash flow and minimize interest expense. (Make sure they have the certification and are not just putting the title of mortgage planner on their card. In 2005 there were 465,000 loan officers across the country and less than 2% have earned the designation CMPS. In 2006 the estimate is 330,000 loan officers were working and the estimate for 2007 is that by the end of this year there will be about 200,000. If you have a lender that has been in the market less than 7 years, be suspect of their ability. They are generally order takers and don't know how to properly advise about mortgages.)
Ruby Mason, CMPS Scottsdale AZ

Sent by Ruby Mason | 5:02 PM ET | 06-25-2007

May I suggest you broaden your reading to Ric Edelman, The millionaire Next Door and Douglas Andrew, Missed Fortune 101 and the Last Chance Millionaire. If you are employed, you probably have very few tax deductions and that is one of the main reasons to carry a big long mortgage. Having a house on your balance sheet increases your wealth and even if there is a mortgage, it is simple interest and you can create a side account that earns at compounding interest to create your own wealth.

Sent by Ruby Mason | 5:09 PM ET | 06-25-2007

Rent.

A lot of the houses on the market are unoccupied because people thought they were going to make a killing by flipping them. Many, if not most, of these houses will be foreclosed on because what these people were banking on - continuing price increases - is no longer happening.

It's plain old supply and demand. We have lots of supply and very little demand. Prices will come down.

Sent by LarryK | 9:51 PM ET | 06-25-2007

It's true that renting is a certain loss of money, but it's not certain that buying will be a gain. In my case, I just sold a house for about a $4000 loss after concessions, more like a $20000 loss after realtor fees and improvements, repairs, and maintenance (including lawn care, etc.). I owned the house for three years, and it probably would've cost me about $1000 a month to rent an equivalent property (and I would've saved most of the money on improvements and maintenance), so I came out about $16000 ahead of where I would've been had I been renting. So I was better off owning, even though I've taken a large loss on the property.

However, in a rapidly falling market, the loss on the house could've been greater than what I would've spent on rent.

Also, the capital loss on a primary residence can't be offset against ordinary income, so it's not deductible. You can only offset capital gains. If you have no investments making gains, you won't be writing off that loss.

Also, at my income and with what I was paying for the mortgage interest, it was not enough to beat the standard deduction, not even close. People with lower incomes or with smaller interest payments, and without substantial deductible items, will often be better off taking the standard deduction than itemizing. If you have to buy more house than you can afford or take a higher interest rate than you can afford just to get a tax deduction that barely exceeds the standard deduction, it's probably an unwise move. Only do it if you're sure that the cost of owning a home (including losses if you're in a falling market but also maintenance, broker fees to sell it, etc., and gains from an increase in your standard tax deduction if relevant) exceeds the cost of renting.

Sent by Dave | 10:22 PM ET | 06-25-2007