Obama’s 2012 Mortgage Relief Plan

It’s clear that the depressed housing marketing is going to continue to place a drag on the economic recovery. Recognizing this, President Obama recently proposed a new mortgage refinancing program that would provide relief to millions of homeowners who would benefit from refinancing their mortgages with high interest rates to something that’s closer to today’s low rates. Americans have been having a difficult time taking advantage of historically low rates because their credit has been damaged or their home is now worth less than what they owe.

Last year, programs were enacted to assist homeowners whose mortgages were held by Fannie Mae or Freddie Mac. However, those whose mortgages were not held by Freddie Mae or Freddie Mac were out of luck. With this new proposal, that stands to change. Under Obama’s proposal, the Federal Housing Administration would be given the authority to refinance the mortgages of homeowners who are current on their loan payments, have a credit score above 580, and are currently paying a high interest rate. The estimated cost of the program is $5-10 billion, which would be funded by fees imposed on banks.

I think that overall, we aren’t going to see a complete recovery until the housing market settles down. There are still too many Americans underwater on their mortgage. Others are treading water, barely staying afloat. Once the housing market makes a significant turn for the better these people will be able to return to their normal spending and saving habits. The current proposal seems to have a low likelihood of passing, but I’m still going to root for it.

Renting vs. Buying a Home

When you’re young, you should start by renting. Quickly save up a down payment and buy a house once you have enough for a down payment. This keeps you from throwing away your hard earned money. This is the traditional advice given to someone my age. However, this isn’t the best advice for everyone.

As usual, I like to use real-life numbers when exploring my options. In this case, I’m going to look at a real rental in my area as compared to buying in the area.

The rental prospect is a 1,640 sq. ft. home with 3 bedrooms, 1.5 baths. This house was built in 1936 and situated in a nice, quiet neighborhood. It’s currently listed for $2,590/mo. The home was purchased in 1999 for $565,000.

A few blocks away we have a 1,550 sq. ft. home with 3 bedrooms and 2 bathrooms. This home was built in 1936 and is listed on the market for $825,000. This house has only been on the market for 20 days, so there’s no reason to think the price is too far off the market at this point. (Update: The house sold for $830,000 within a month of being listed for sale)

From what I can tell from the pictures online, both homes appear similar in condition.

Now, there are many factors that will determine whether it makes sense to buy or rent a home. Some of these factors can be quantified, and others can’t. The pride associated with owning your home can’t be quantified. This is going to be different for each person. Some of you may want to own your own home, while others may want the freedom that renting provides. Renting vs. buying a home will also be largely affected by your career and lifestyle. If you’re not sure where you are going to want to live in five years then it’s not going to make sense for you to buy a home.

There are some nifty tools online that will help you with the math of whether renting or buying makes sense for you. One of the tools I find neat is a graphical rent vs. buy calculator provided by the New York Times. As you can see below, the NYT calculator says that buying will pay off after 19 years. This, of course, is based on a number of assumptions that are simply too hard to predict. The greatest variance is going to come from the annual price change assumption. The safe assumption is the long-run inflation rate, so I used 3%. (To get a better understanding of a long-run appreciation of homes, I highly recommend this post) If I were to change this assumption up to 5%, NYT believes it makes sense for me to buy as long as I plan on staying in the place for 5 years.

Rent vs. Buy House

You have to be careful when looking at these calculators because, if you intend to sell the home after the holding period, you must factor in your selling costs, which are typically about 6-7% of the home’s value. So if I intended on staying in the home for 19 years and selling, I wouldn’t really be coming out ahead. I’d have to factor in the 6% selling costs.

There’s no doubt that most of us either want to, or already do, own a home. It’s the American dream. And the only guarantee when it comes to home prices is the price today. Who knows what tomorrow will bring. If you want a home, and you can afford it, then I think it’s going to make sense for you to buy a home you want. I think the decision is much more personal than any financial calculator can convey. So, some quick rules of thumb: If you want a home, can afford it, and plan to stay there at least 10 years, go for it. If you want a home, can afford it, and only plan to stay there 5 years, then I’d say hold off. Particularly with the current volatility, I’d only buy a home at this point if I intended on being there a while. Whatever you choose to do, as long as you’re aware of the costs and associate risks, any decision you make is going to end up just fine.

 

Housing Not Bottoming Until 2012?

Earlier this year I posted my opinion that we’d see a double-dip in real estate in 2011. Unfortunately, for those who currently own a home and are looking to move, this appears to be the case. On May 8th, 2011, Zillow reported that home values fell 3% in the first quarter of 2011, which is a pace that hasn’t been seen since 2008, when the housing decline was at its worst. Cumulatively, Zillow says that the decline in home values, based on its Home Value Index, is 29.5%, as shown in the figure below.

Zillow Home Value Index

This decline is fairly similar to that established by the Case-Shiller index.

The chart below shows the single-family, 3 bedroom home values for the U.S. as a whole, as well as specifically Florida, California and Hawaii.

US Zillow Home Value Index

I think that Florida’s peak itself is interesting because pre-boom it was below the U.S. average, and now it is back below the U.S. average. However, during the boom, it experience a lot of appreciation in value, while obviously other areas of the U.S. did not. The California values really show the effect of the double-dip here. It seemed at one point that prices had bottomed, but now they are clearly falling again. I think Hawaii is also of particular interest, because it contains Honolulu, which is the only major metro to increase in value during Q1 2011. Hawaii will always have demand as a tourist spot, and I’d imagine this demand to increase as the economy recovers and people are more interested in purchasing vacation homes. Hawaii’s constraints on land keep the supply of homes from keeping up with the demand, which is why we see the values increasing there.

In Zillow’s recent report, it admits that it had previously expected the housing market to bottom by the end of 2011, but it now expects prices to continue to fall into 2012. This is, of course, good news for those of us who would like to purchase a home soon, but aren’t quite ready yet. However, this is bad news for those who own a home and would like to sell. Whether people want to move to a new home, or they simply don’t want to keep pouring money into their original bad investment, there are many people out there looking to get our of their homes. I’d imagine that is only going to increase as prices fall, which will push them even further down. By the end of the first quarter, Zillow reported that 28.4% of single-family homeowners with mortgages were underwater. This means that they owed more on their mortgage than their house was worth.

Overall, Zillow expects value declines of 7-9% for the year. After bottoming in 2012 at the earliest, Zillow then expects a long period of below-average real estate appreciation. Basically, this means that once bottoming, Zillow expects home prices to stay there a while. I would agree with this assessment. I think that we will see this market drop about 20% from where it is now before bottoming out. Once it reaches that point, I don’t think we’ll see any meaningful rebound for a while. I expect prices to hang out on the bottom while a generation that has been scarred by housing mishaps tries to heal.