Home Buyer Beware - Know the Signs of Real Estate Market
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 information
and HomeEquityHelp.net, a site devoted to information on
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