Will Congress pay off Credit Card debt next?

In a shocking surprise, all of those people who could not pay-off their mortgages are also having problems with their credit card bills. Late payments on consumer loans have reached 16 year highs. This does not bode well for the financial sector.

There are now a slew of plans being put forward by Washington to bail out homeowners struggling with their mortgage payments. Most of these plans reward brainless homeowners for taking risky loans, buying at the peak of the market, purchasing more home than they could afford, and not having any financial discipline. Of course, the smart homeowners who only purchased what they could afford within traditional lending ratios and used common-sense are the suckers in the proposed Washington plans. The majority of these hard-working homeowners will be paying for this bail-out via higher taxes and bank fees for a long period of time.

The concept that the loan values for under-water home owners will be set to 90% of the current house value, and the loss to the existing loans be taken by the banks and tax-payers is obscene. Especially when the government (meaning the taxpayer) will be on the hook for any of the new loans that still default. While Congress is at it -- why don't they just pay off all the late credit card debt, surely this will be a popular earmark attached to some bill.

Socialize Loss, Privatize Gain – Welcome the new Wall Street motto

On the other hand, now that the Fed has seen it fit to socialize investment banking losses by allowing trading firms to borrow at the discount window, and bailing-out Wall Street institutions; most of main-street America sees nothing wrong with bailing out homeowners directly for their poor decision making to the tune of 400 billion dollars in government loan guarantees. The axioms that currently apply to Wall Street should equally pertain to the individual consumer according to most sentiment surveys.

The discount borrowing by investment companies from the Federal Reserve ‘Discount Window’ reached $38.1 billion in daily borrowing this week; much greater than $7 billion averaged by standard banks. Rather than using these funds to improve liquidity in the credit sector, most of these firms appear to be using the borrowed funds to implement more risky carry strategies to make money. Someone at the Fed needs to close the barn door. The intent of the Fed program was to ease a potential liquidity crisis; in reality the action is expanding the bubble. The Fed should have placed more conditions on these loans when it agreed, for the first time, to let big investment houses temporarily get emergency loans directly from the central bank.

Thanks to Washington, it appears that there is no longer any punishment for poor business practices. No harsh (and proper) lesson will be learned by either the financial markets or individual homeowners about risk control or avoiding excess greed. A significant educational opportunity is being missed, and unfortunately it badly needs to be taught. The recent actions by the government will only increase risky behavior by institutions and consumers in the future.

Warning: Reverse Mortgages

The financial industry made a killing in fees by marketing annuities to senior citizens. These products were not usually appropriate for the people who were urged to buy them, and now many are stuck with them while the financial firm agents padded their bank accounts. Many firms such as MetLife and Prudential were slapped by regulators for their sleazy practices in selling annuities.

What is the new sleaze that is replacing the annuities? – Reverse Mortgages. Even in the down real estate market, the financial industry has found they can make a killing by selling reverse mortgages to senior citizens. Reverse mortgages have high fees, many times well over 7% of the home’s value – making this a very lucrative business for agents on commission.

FINRA (the Financial Industry Regulatory Authority) issued a warning this week about reserve mortgage products, urging senior citizens to carefully weigh their options before using reverse mortgages to tap their home equity for additional retirement income.

So how many homeowners will be underwater?

Sometimes you have to wonder if press headlines indicate the bottom of the economic downside in some sort of contrary manner. The most recent incarnation, It's So Much Worse Than You Think, actually focuses on the number of homeowners that will have negative equity as housing prices continue to fall.

As outlined in the article, currently housing prices are down 8.4% placing 13.5% of homeowners in a situation where they have negative equity in their homes. The downside of housing prices is likely to reach 15% without a recession and 30% with a recession. A 30% decrease in housing prices would leave 39% of U.S. homeowners with negative equity in their homes.

Owning more money than the home is worth; many of these homeowners may simply walk away from their homes. We have seen this occur with local housing crashes in the past, such as Texas during the oil bust. Now the table is set for a nationwide incarnation of this scenario.

This of course will place the banks under additional stress that normally plan for a mere 1 or 2% default rate; rather than the 5 or 6% default rate from prime loans which would be seen with this type of recession.

On one hand the article may be on target that vicious cycle of additional housing driven downside remains; on the other hand it could serve as a signal that it is time to start buying rental housing on the cheap.

So You Want To Be a Millionaire

Many times I am approached by people who have recently graduated from college who want to know how they can become a millionaire. Many chatter about some far-fetched scheme to strike it rich by the time they are thirty and retire to some lush tropical paradise.

The stark reality for many of these recent graduates is glummer; there is no ‘easy money’. Very few of these individuals will become executive VPs by age 25 or agents for Hollywood movie stars. Most college graduates will labor in companies in professional positions starting in the $40K to $60K range, and can only look forward to 40 more years of being a cube rat in their selected career path.

The good news; you can still easily become a millionaire while laboring in a standard job in corporate America. It simply requires some financial common sense. Most of the millionaires in America are not famous superstars but the older person laboring away in the cube just down the hallway.

The majority of millionaires in America achieved this goal by simply sticking to a few basic financial rules after they graduated.

Scratch the fancy car when you graduate

One of the most critical mistakes that many graduates make is rushing out to purchase a fancy $30K plus car immediately after they graduate. This normally sticks the new graduate with a $600 per month or greater car payment. Sure the car may look hot outside the bar on a Friday night, however you probably have wreaked havoc on your financial future the day you signed the lien papers. Purchasing an expensive car with a sizable loan or lease payment greatly reduces the income available that can be saved; while sticking the owner in an asset that drops in value each month.

When you graduate from college you should focus on purchasing a good used car or low-cost new car. The key is to keep the size of your loan and monthly payment to a minimum. The loan is useful from the perspective of building a credit history, but you don’t want the payments to gobble up the majority of your monthly take home.

If you are able to keep using a car that faithfully took you through your college years while enduring all the tailgating, then you should strongly consider of sticking with this fine automobile. Not only for the enduring memories it carries, but because it makes financial sense. As long as you are not spending a huge amount on repairs each month to keep the old jalopy running, then sticking with the old car after college many times is an excellent decision for you financial future.

Fully fund your 401K

At minimum always fund your 401K plan to get the full company match. The company match is free money. It is better to fund it up to the 401K limit ($15,500 in 2007), but understandably this is not possible for many graduates. However they should always attempt to save at least 10% of their salary in their corporate 401K plan. Going beyond 10% is a great bonus.

It is important that you probably diversify your 401K investments within the funds offered by the corporate plan to align with your age and risk tolerance. An earlier article discusses proper 401K diversification in detail.

Portfolio Diversification – 401K
http://hingefire.blogspot.com/2007/02/portfolio-diversification-401k.html

Save 10% more

Outside of your 401K; you should put away an additional 10% of your monthly salary. It is best to place this money in an IRA if appropriate for long term tax-free savings, or put it in a taxable fund destined for the down payment on your first house. Have an investment plan based on the long-term and short-term objectives. Do not put the money into risky investments, but focus on a diversified portfolio that aligns with your time frame. For example, if you are considering the purchase of a house shortly then if makes sense to leave the down payment in an interest-bearing cash account.

It is important that you also drive to create a rainy day emergency fund. Over time you should drive to put six months of pay in this “rainy day” account. It can be used in crisis situations such as medical bills, auto collision repairs, and to cover expenses in case of job loss. Remember that you live in the age of corporate re-structuring; it is very likely that you will experience being dumped on the street with less then one month’s severance pay before you are thirty years old. Since 1999, over 70% of professional Americans under the age of 30 have been “re-structured” according to one survey.

Buy a home

If you plan to stay in a particular geographic area and want to settle down there, then you should work towards purchasing a house, townhouse, or condo. You should only purchase a home if you qualify for the loan under traditional lending standards with a 30 year fixed rate loan. Do not over-stretch yourself with interest-only and other exotic home loans. We are currently watching the foreclosure drama in America of what happens to a million plus households who over-extended themselves with adjustable rate loans. If you can not afford a home with a traditional loan then you must continue saving or find a place that is more affordable.

Homeownership provides some good tax breaks and allows you to build equity over time, even with all the cycles the housing market experiences. Money spent on rent is basically lost and does not build your financial future – a home you own acts as a leveraged asset that allows you to build equity over time.

The following calculator demonstrates the long-term financial advantages of owning over renting.

Should I Rent or Buy A Home?
http://finance.yahoo.com/calculator/family-home/hom-06

Don’t purchase all that junk brand new

So now that you have a nice house or apartment, there is no need to run out and purchase every single item imaginable at the local stores to fill every corner. Why buy that dining room set for $5000 brand new on store credit when the people with the garage sale next door are selling a better quality used set for a mere $300? You should be willing to purchase items used or online in order to get great discounts off of the retail prices in local stores, or wait until desired items go on sale.

In our consumer driven nation, the money that you will save over time by buying products at a discount adds up quickly towards your bottom line. Always take the smart path in regards to purchasing stuff. First ask yourself if your really need it. If yes, then use common sense in obtaining major items and don’t buy on impulse in the store. Usually you will land up with just as nice stuff in your home as the guy next door who purchased everything at a premium, but unlike the neighbor you won’t be burdened with $50K in credit card debt.

No credit card debt - EVER!

Don’t ever run up debt on credit cards that you can not pay off at the end of the month. Repeat over and over again until this becomes mantra. There is not reason to ever run up a credit card bill with frivolous purchases that you can not pay off at the end of the month. If you can not afford it then don’t buy it. This applies to luxury items, electronics, exotic vacations, and all other purchases. Once again, if you can not afford it then don’t buy it.

This general rule of debt not only applies to credit card debt but all other similar debt such as personal loans, unsecured loans, boat loans, car loans, and unaffordable store credit situations. From a general fiscal perspective, the only things that you should take out loans for are home mortgages and money for starting a business. These are items that hopefully appreciate over time.

The sole possible exception to this hard rule should be medical emergency bills. However you should always try to work out a payment plan with a hospital or medical office rather then putting these charges on your credit card.

Pay off student loans

After you graduate if is probably too late to provide advice about obtaining the most affordable student loans, and as many grants and scholarships as possible. It is preferable to walk out of college with little to no debt; however this is not realistic for many students.

What can a graduate do about that mound of college debt that they have to start making payments on? One is to consider consolidating multiple student loans within six months of graduating in order to minimize your monthly payment. There are multiple resources on the web that discuss this. One good resource is the U.S. Department of Education which provides some good information about paying student loans.
http://www.ed.gov/students/college/repay/edpicks.jhtml?src=ln

Many students walk out of college with sizable debt. Students should take steps if possible to reduce interest rates on the debt and minimize their monthly payment. I would also urge graduates to consider accelerating the repayment of their student loan debt, especially high interest rate loans, if this is possible within their monthly budget.

Avoid car loans

It is usually difficult to get your first car out of college without a loan. However after your first car you should never take out a loan for an automobile. Cars are depreciating assets, they lose value the minute your drive off the dealership parking lot. It usually makes more sense to purchase good used cars with cash then buying brand new cars with lofty premiums.

My family drives Mercedes. Why did I select these high end expensive cars – it does not sound very frugal? The immediate answer is because they are safe, as a recent accident which totaled one of the cars demonstrated. The good news - everyone walked out of the car without any serious injuries. Many of my neighbors think these cars in our driveway are new because they are kept in great shape. None were purchased new and I drove my last diesel till it had over 220K miles then sold it to our neighbor for his son to use. The key point here is that you can enjoy all the benefits of luxury cars without going into debt paying for them, if you simply apply some basic financial common sense.

Use common sense in your lifestyle – the 80% rule

Use only 80% of your take home pay and save the rest! Most people can cover their housing and food expenses while still enjoying a lifestyle that includes dining, clubbing, and vacations while saving 20% of their pay. Live within your means. Don’t make huge frivolous purchases; that new 62 inch plasma TV may look neat but it sure is going to cause a hit to the budget before the Super Bowl party.

Effectively “living below your means” will allow you to put aside money for investing that will fuel your long term financial success. The good news is that it is not necessary to live like a miser and worry about every penny in order to do this. When I first got out of school and was socking away twenty percent of my cash, I was not overly concerned what my tab at the bar was over the weekend, it came out of the ‘80%’ dedicated to monthly living expenses.

This concept of saving 20% of your take home pay aligns with the idea of saving 10% of gross pay beyond your corporate 401K contribution when taxes are taken into consideration. However, the key concept to take-away is that for long term financial success you should live at 80% or below of your monthly take-home pay, and avoid large frivolous purchases.

Don’t ever use HELOC or other home loans as an ATM machine

We have recently watched a good number of homeowners in America using their homes as ATM machines while housing prices have risen quickly over the past few years. They used the increasing equity in their homes to purchases cars, boats, planes, and other costly luxury items. Now that home prices are dropping and the lending spigot has been cut off, the birds are coming home to roost. Many of these homeowners are stuck with loans that are worth more then the values of their houses, and are under stress to make the payments.

Homeowners should only use cash from HELOCs and other home loans to improve your house. This was the original intent of these types of loans. The concept was to build additions or re-modeling to your home that would add value, thereby maintaining your overall equity in your home.

For first time home buyers, HELOC and similar loans make common sense when they are used for the correct purposes.

Choose a partner with your values

Thinking of getting married? Some quick advice --- Be sure that your significant other is aligned with your values regarding money. I would urge couples to fully talk about finances before they tie the knot and define a plan of how to handle everything.

A good portion of the divorces in America are due to arguments over money. The average middle-class divorce now costs $187,000 when all factors are taken into consideration. This type of financial hit is nearly impossible to recover from when you are saving towards a long term objective.

Do these Principles work?

On a personal note, I can attest that following the principles listed above will enable people reach their goal of having a large net worth. Many of the concepts are not only applicable to those who just recently graduated from school but for people of any age. I am 43 and our family has a high net worth. Most of the money is in 401K plans, housing equity, and college money reserved for the kids. All saved while being a single-income family for the past 17 years. My wife had the really difficult job of focusing full time on our children and I would like to thank her for that very publicly; she has done a tremendous job! I got to escape to a cube each day doing software development.

I don’t feel ‘rich’ in the traditional monetary sense. I have three kids to put through college soon and am currently involved in founding a start-up with no revenue yet. Our family drives used cars, only has mortgage debt, and uses common sense in our spending. It is not as if we are misers, our family still enjoys nice cruises as vacations and goes on road trips around our region. Most people would not look at our family and think ‘they are rich’; I don’t have a leased $80,000 sports car in my driveway, nor can I brag about all the things I purchased with $120,000 worth of credit card debt. I expect most of the millionaires in America are like us; not ostentatious, but somewhat frugal and hard-working while living in middle-class neighborhoods.

I am probably more worried about money now then earlier in my life. I don’t really feel “wealthy” or financially comfortable despite being considered high net worth. My financial situation seems like a ‘bigger problem’ now then when I was only 22. This is because I currently have the responsibility of providing for an entire family and in those early post-college days I was more concerned about which night club to go to on Saturday.

While the concept of becoming a millionaire slowly over time may not sound immediately exciting; it is the sure path to achieving this goal. The further good news is that is does not require tremendous personal sacrifice or the scaling back of your entire life to reach this objective – just follow the guidelines listed above and in time you will join the many households with over a million dollars in net worth.

What is “Rich”

It is important not to have stress over monetary issues spill over into relationships and your perspectives on life. In many ways, being ‘rich’ is not about how much money you have in the bank, but being involved with your community, family, and friends.

One of the things I have always promoted is "Giving back to the Community". In many ways this is one of the cornerstones of our family philosophy. Our family is active in local schools, non-profit boards, and other volunteer activities. Whether you are helping in a school, coaching a youth team, building a home with Habitat, running to raise money for the Food Bank, or any other activity; I would urge everyone to get out and get involved. It does not matter what age you are. Many of the best volunteers in our local youth sports, education initiatives, and athletic events for charity are recent college graduates!

Some of my most personally rewarding experiences occurred when I was involved in volunteer efforts. These are the days I look back at and say "Wow, that was great. I made a difference."

Invest in your community - many times it will bring more meaningful returns then your portfolio. Common sense in spending starting right out of college can make you a millionaire, being ‘rich’ however involves much more then money.


References

More U.S. millionaires are middle-class
http://uk.reuters.com/article/outsourcingNews/idUKN2636659120071101?pageNumber=1&virtualBrandChannel=0

Time to Ask for a Reassessment?

For homeowners who purchased at recent peaks, it may be time to ask your local property tax authority for a reassessment. This is especially true for homes in very pricey areas such as Santa Clara County in California, as well as locations where home prices have tumbled greatly such as Florida. Most communities have a different appeals process, the best way to find out how the reassessment procedure works in your area is to call the local government office. A number of homeowners land up saving hundreds if not thousands in property taxes simply by filing some appeals paperwork.

Taxes Are Reassessed in Housing Slump
http://www.nytimes.com/2007/12/23/us/23tax.html?_r=1&th&emc=th&oref=slogin

Avoid Foreclosure Scams

In the current dismal real estate market, there are many foreclosure scams making an appearance. Most of these scams promise homeowners that they can prevent foreclosure if they are late on their payments. The reality is that most of these “plans” are simply scams whose primary purpose is to take advantage of the homeowner and rip them off.

A recent articles came out that provides good information on how to avoid these scams. I would urge anyone facing late payments on their mortgage (or is trying to help someone in this position) to read this article. Even those up to date on their mortgages will benefit from it, especially the advice to watch out for unsolicited letters appearing to be from a division of your mortgage company demanding additional money.

How to Spot a Foreclosure Rescue Scam
http://finance.yahoo.com/expert/article/millionaire/58089

Where is the Real Estate Bottom?

Most falling real estate markets follow a standard historical pattern. The first year is the year of the slide, while the bottom is established during the second year. Clearly 2007 established itself as the year of the slide which means the bottom for most local markets should occur in 2008.

This is good news for many homeowners; if they can just make it through 2008 then they are likely to start seeing their home prices increase in 2009. However for owners that must sell during the upcoming year, the real estate market experience is likely to be even more painful than those who are marketing their homes today.

A good number of seasoned real estate investors are hunting for the market bottom; many expect to find it during 2008 and start purchasing select properties at low prices. However these types of experts represent a minority of the overall set of speculators, but they normally serve as a great benchmark for establishing the market trough. When homeowners start seeing articles in the press highlighting these type of investors than they can start to fell more comfortable about their real estate prospects. Nonetheless owners should understand that the recovery from the bottom is normally slow and requires many years. Usually it takes eight years for a real estate market to recover to its pre-collapse prices; which is still bad news for those who purchased at the peak.

Will Home Prices Hit Bottom in 2008? Yes, But . . .
http://finance.yahoo.com/real-estate/article/104024/Will-Home-Prices-Hit-Bottom-in-2008-Yes-But

Time to Renovate

There is a silver lining to the housing crisis. Contractors are being more realistic about your home improvement projects.

For a while now, I have been looking to get a room in our attic finished. The room is about 20 by 16 in size, and does not require anything fancy; no bath, upgraded features, or anything very expensive. About a year ago, I put the project out for bid and most of the contractors did not even call back. The contractors that did respond provided outrageous quotes and did not even seem to be reliable.

Fast forward the clock to today, I recently started to explore this project again. The return calls are much quicker and the price estimates down more than 30% from the outrageous expectations from a year ago.

This phenomenon appears to be common and nationwide. It appears the time is now to get moving on that home renovation project which your spouse yearns for.

The Upside to the Downturn
Contractors Return Calls, Materials Cost Less; Mr. Bowes's Half-Price Renovation
http://finance.yahoo.com/real-estate/article/103942/The-Upside-to-the-Downturn

Quick Takes: U.S. Real Estate Crisis Score Card

• $500B in loan related write-downs at banks and rising.
• $2 Trillion in economic credit impairments in lending.
• 446,726 homes currently in foreclosure (1 for every 196 households).
• 1.4 Million or more homes expected to enter foreclose in 2008.
• Foreclosures increasing at over 34% per quarter.
• U.S. GDP projection for 2008 lowered to 1.9% due to mortgage problems – down a full percentage point.
• Likelihood of 6.4% unemployment with an additional 3 million jobs lost.
• Property value drops nationwide estimated at 7% for 2008 – a loss of $1.2 Trillion to homeowners.
• U.S. Home Prices fall 4.5% nationwide in Q3 of 2007 – the largest decrease ever.
• 191 Mortgage Lenders out of business.
• Cities expected lose a minimum $400B of economic activity due to the housing crisis.

Was loosening the traditional lending standards really worth it?

References:

S&P: 3Q Home Prices Fall by 4.5 Percent
S&P Says 3rd-Quarter Housing Prices Dropped by Sharpest Rate in Index's 21-Year History
http://biz.yahoo.com/ap/071127/home_price_index.html?.v=2

Report: Foreclosures Will Sap U.S. Cities
http://www.cbsnews.com/stories/2007/11/27/business/main3542359.shtml

Since late 2006 - 191 major U.S. lending operations have "imploded" (11/27/2007 figure)
http://ml-implode.com/

Have We Seen Worse of Mortgage Crisis?
New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario
http://biz.yahoo.com/ap/071124/doomsday_scenario.html?.v=2

Housing to slow growth in 2008
A report warns of 20 percent hit on Triangle economy; U.S. growth may slow 25 percent
http://www.newsobserver.com/business/story/795068.html

Foreclosures increase crime and drop property values

Suddenly foreclosures rather than “how to flip your home to make millions” is the focus of the majority of homeownership articles. It only took a mere six months to go from one extreme to the other in the financial press.

In a tribute to “Captain Obvious”, recent articles hawk the reality that foreclosed homes are a magnet for crime and cause neighboring property values to drop. One figure to note, each foreclosed house in your neighborhood will cause your home value to drop by 1%.

In the meantime, those turning off the lights at bankrupt mortgage companies wring their hands and exclaim, “Who would’ve thought that lending money to people who never could have repaid it would cause a crisis in neighborhoods across America.”

Empty Houses Home to Crime As Loans Fail
Neighborhoods Suffer As Crime Follows Foreclosures Into Vacant Houses
http://biz.yahoo.com/ap/071113/vacant_homes_crime.html?.v=1&.pf=insurance

Protecting your Home’s Value in the Era of Foreclosures
Foreclosures can affect the value of your property even if you've been paying your mortgage faithfully. Here are some ways you can protect your home's worth if your area is hit hard by foreclosures.
http://biz.yahoo.com/cnnm/071115/111507_toptips.html?.v=2&.pf=loans

International Housing: Home Prices Drop in U.K.

The housing tumble is not a phenomena contained to the U.S.; the housing prices in the United Kingdom dropped in the most recent report. The U.K. market shared many undesired similarities with the U.S. market over the past few years; weak lending standards, out-of-control speculation, rampant price increases, a bank-driven secondary derivative market for mortgages, and other disconcerting parallels.

Resembling the U.S., the situation is now coming home to roost in the U.K. Many British banks are under pressure from mortgage defaults and there is an increasing likelihood that several will have to be bailed out; potentially leading to more bank runs similar to the recent panic where British mortgage lender Northern Rock PLC saw unnerved customers withdraw billions of pounds from their accounts.

U.K. Home Prices Fall; Sellers Told to Ask for Less
U.K. home values dropped this month in every part of the country except London and sellers shouldn't hesitate to reduce prices further because a more protracted slowdown is on the way.
http://www.bloomberg.com/apps/news?pid=20601102&sid=ain.XyjSVu5I&refer=uk

“If you have to sell, then seriously consider dropping your price and taking an offer now rather than holding out,'' Miles Shipside, commercial director at Rightmove, said in a statement. ``You could be offered even less in a few months. Prices are set to flat-line.''

Finally: Some Truth in Real Estate Projections

Most of the articles about real estate prices are sunny, projecting a quick pricing rebound in all local markets by late 2008. The majority of these media items almost read like a press release from the real estate industry, regularly quoting NAR and other stakeholders who have an interest in positive spin on the deteriorating situation.

Finally an article has come out that looks at the cold, hard facts and attempts to perform some realistic real estate market evaluation based on math. A recent article in Fortune projects the prices five years from now using the most reliable indicator of all, price-to-rent rates. The results clearly demonstrate that the quick recovery jubilantly projected by the real estate industry is fiction, and homeowners better be prepared for a multi-year cycle of pain.

Price-to-Rent rates are like a P/E for home prices. Similar to P/E’s for stocks, the price-to-rent ratios are mean reverting, and will always eventually come back to the mean once a speculative real estate market bursts. From 2000 to 2007 the nationwide P/R jumped from 15 to 24, an increase of 60%; this steep climb is not sustainable, and housing prices will eventually correct or rents rise to properly remedy the situation. Performing P/R calculations brings some disturbing conclusions; real estate will have to drop in price by an average of 16% across all markets to reflect proper pricing. This includes the expectations of increasing rents. Some local markets will show far worse downside performance.

The results for 54 areas around the country can be found in this table:
http://money.cnn.com/magazines/fortune/price_rent_ratios/

On average, a home that sells for $436K will drop in price to $372K five years from now. A house in San Francisco will be worth $1,568M in five years if the current value is $1,732M. In Raleigh, a house currently valued at $447K will be worth $381K in five years.

The information demonstrates that the real estate price decline is likely to last for a significant period of time, now that the era of lax lending standards has come to an abrupt halt. In the long run, the return to traditional lending standards and non-speculative valuation is a solid positive for the economy. However existing homeowners need to be able to deal with some valuation pain over the next few years as the situation corrects itself.


Real Estate: Buy, Sell, or Hold?
by Shawn Tully
Thursday, November 15, 2007
http://finance.yahoo.com/real-estate/article/103872/Real-Estate:-Buy,-Sell,-or-Hold

Rent vs. Buy: The Debate Continues

With the recent housing market turmoil, the controversy over rent versus buy has returned to the forefront in the financial press. This new focus varies greatly than the majority of the articles printed two years ago, which all emphasized the importance of purchasing a home at all costs.

In short term situations, renting has advantages over buying. For those who want to settle down for the long term, home ownership has some key advantages over renting; it provides some good tax breaks and allows you to build equity over time. Ownership is an excellent form of investing in your future.

However, it is important that you only put yourself in a home ownership position that you can afford. Avoid interest only and other exotic loans. If you can not qualify to purchase a home under traditional lending standards with a 30 year fixed rate loan then you should not pursue the situation. Currently most of the population is watching awestruck at what transpires when property owners over-extend themselves. In many cases these foreclosed owners should have never been given a mortgage. The good news is that banks are quickly returning to traditional lending standards which should avoid a repeat of this fiasco.

One good method of evaluating homeownership versus renting is to take a levelheaded dollar and cents based approach. For people that plan to hold onto a home for the long term, there is usually a significant financial edge for ownership. One valuable calculator that provides a comparison can be found at:
Should I Rent or Buy A Home?
http://finance.yahoo.com/calculator/family-home/hom-06

One recent article about the “New Realities of the Rent vs. Buy Debate” can be found at:

Now That Housing Has Soured, Renters Are Glad They Didn't Buy
With real estate in a slump and foreclosures soaring, renters are cheering now. Is the conventional wisdom that it's better to buy than rent mistaken in today's market?
http://finance.yahoo.com/real-estate/article/103796/Now-That-Housing-Has-Soured,-Renters-Are-Glad-They-Didn't-Buy;_ylt=AsBWkzMQVUcwR6U4hOjGB9i7YWsA