There is more involved in pricing your home properly for sales these days than just looking at what other people in the vicinity sold their homes for. Just a year ago, you could look at comparable sales in you neighborhood and price your home accordingly. Today it has more to do with what you have that can attract people to you neighborhood and then knowing the tricks of pricing correctly to get attention drawn to your home. Last week in the Chicago Tribune, Ruth Simon wrote an article about the complications of pricing a home these days. The article has stories of tactics that different brokers across the country have utilized to attract buyers to specific homes. The article is printed below.

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Calculating a selling price grows more complicated
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By Ruth Simon
The Wall Street Journal

October 8, 2006

As the housing market cools, one of the hardest decisions facing home sellers is how to price their properties.

Traditionally, brokers have set listing prices by reviewing how much comparable homes sold for in a neighborhood. Now, with prices edging lower in many places and the number of homes on the market climbing, checking comparable sales is becoming less useful. At the same time, many would-be buyers are sitting on the sidelines, waiting to see how far prices will fall. Bigger inventories of unsold homes also are making it harder for sellers to figure out how to make their house stand out.

What it takes to sell a house varies from market to market. Some brokers are telling customers they need to underprice the competition, even if they think their home is more attractive. Sharon Baum, a senior vice president with the Corcoran Group in New York, recently listed a two-bedroom, two-bathroom apartment for $3.7 million. That was $100,000 less than the asking price for a similar unit five floors below, even though apartments on higher floors typically carry bigger price tags.

Sellers are also being told to cut prices aggressively if their house isn’t moving–or risk chasing the market downward. If a home doesn’t get any showings in 21 days or gets 10 showings but no offers, Ned Redpath, president and owner of Coldwell Banker Redpath & Co. in Hanover, N.H., often advises the seller to slice the asking price by 10 percent. “We want to see a real whack” that attracts attention, he says.

Builders of new homes also are tinkering with their pricing formulas to generate sales. Mid-Atlantic Builders in Rockville, Md. is offering to adjust the sales price downward up to 45 days before closing if the price on one of its similar homes declines. Waterford Development Corp. will have homes in its Woodland Pond at Manchester development in New Hampshire reappraised two years after closing. If the price drops, the company says it will write the buyer a check for up to 15 percent of the original sales price, not including the value of any optional upgrades.

Even in relatively strong markets, brokers are paying closer attention to price trends. Wallace Perry, president of Coldwell Banker United, Realtors, Carolinas region, says he has begun checking multiple-listing service data every week or two instead of once a quarter.

The renewed emphasis on pricing represents a dramatic turnabout from the heady days of the housing boom, which peaked in the middle of last year. Bidding wars were common and, in many markets, homeowners simply looked at the last sale and asked for more.

That’s all changed. The National Association of Realtors said recently that the median sales price of existing, or previously owned, homes fell 1.7 percent to $225,000 in August from a year earlier, the first such drop in 11 years. There’s now a 7.5-month supply of existing homes on the market, the most since April 1993.

With so many properties vying for attention, sellers are also looking for creative ways to catch the eye of would-be buyers and their brokers. Some sellers are offering to pay closing costs or provide other incentives. When their 3,500-square-foot carriage house in Exton, Pa., failed to sell this spring, the owners dropped the asking price twice, to $449,000 from $479,000, says Beth Koser, an agent with Prudential Fox & Roach, Realtors. When that didn’t do the trick, the couple agreed to offer $10,000 toward closing costs to any buyer or agent who attended an open house within a two-day period. The home sold a few weeks later for $430,000. “The incentive created a sense of urgency,” says Koser.

Other brokers are using incentives to counter competition from new home builders. In Tampa Bay, Fla., Craig Beggins, president of Century 21 Beggins Enterprises, recently put together a list of 16 incentives homeowners can offer, from paying the mortgage for several months, to outfitting a media room with a big-screen TV, to picking up the cost of day care for some period.

Another approach is a personal plea. Traci Smith, president of Century 21 Smith & Associates in San Antonio, encourages clients to court prospective buyers with a letter explaining the intangibles that make their home and neighborhood so appealing, such as the fact that the kids on the block trick-or-treat at Halloween together.

Some brokers are trying to trigger bidding wars by setting an asking price sure to attract attention. Romeo Aurelio Jr., sales manager for Century 21 Hartford Properties, recently listed a small one-bedroom, one-bath fixer-upper in San Francisco’s fashionable Noe Valley neighborhood for $650,000, even though he figured the home would sell for $100,000 above that. “If we priced it at $750,000, it was going to sit,” Aurelio says. “We marketed it aggressively at $650,000 and it generated 20 offers.” The house sold this week for $845,000.

And with more buyers hunting houses online, selling strategies are adapting to the new technology. Michael Gallagher, a financial-services executive, initially listed his four-bedroom house in Shawnee, Kan., at $274,500. When the listing expired, Gallagher’s new broker suggested that he boost the price to $275,000. Within weeks, the home sold for $271,000, $36,000 more than the best previous offer.

The explanation? Buyers who use the Internet typically search in increments of $5,000 or $25,000, says Kerwin Holloway, a managing broker with Reece & Nichols, a unit of Berkshire Hathaway Inc., which handled the sale. At the higher price, Gallagher’s home was likely to turn up in more searches. It also looked like a bargain to someone whose search started at $275,000. At the lower price, it was one of the most expensive homes priced between $250,000 and $275,000.

A property that’s not priced properly can languish on the market and get shopworn, says Dan Elsea, president of brokerage services at Real Estate One in the Detroit area. A four-bedroom house in Troy, Mich., has been sitting on the market for 10 months, even though the price has been cut to $349,900 from $394,900, Elsea says. A similar home in the same market sold this month for $360,000, just 23 days after it came to market.
Copyright (c) 2006, Chicago Tribune

Are energy costs giving buyers more pause for thought these days than rising interest rates? A recent article in the Chicago Tribune (below) listed that 28% of consumers are more concerned with rising energy cost than they are with rising interest rates. In Illinois this presents a very real problem, as the long restricted electric rates are due to become unregulated next year. ComEd anticipates increasing rates by more than 20%. This will have a huge impact on the more than 70% of Illinois residents who have ComEd as their electric company. Below is a link to the ComEd 2007 Residential Rate Change brochure as well as the October 1, 2006 article from the Chicago Tribune by Marilyn Kennedy Melia about the rising costs of energy and the potential tax credits home owners can benefit from.

http://www.exeloncorp.com/NR/rdonlyres/D76EF165-AC87-4AB7-AE7F-5534A4027F23/2187/ResidentialBrochure972006pdfsenttoprinter.pdf

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FINANCING
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By Marilyn Kennedy Melia
Special to the Tribune

October 1, 2006

Energy is sapping consumers’ enthusiasm for home buying.

While rising interest rates are usually blamed for slowing the housing market, a National Association of Realtors survey shows that 28 percent of consumers say energy costs were an obstacle to homeownership; only 14 percent cite interest rates as the primary impediment.

- When a buyer hires a home inspector, the report usually assesses the energy efficiency of a furnace, hot water heater and air conditioner, as well as the insulation quality of a home, says Will Decker, president of the Chicago-area chapter of the National Association of Certified Home Inspectors. Decker says that a handful of Chicago-area inspectors have thermal imaging cameras, allowing them to provide more energy-related findings, such as missing insulation.

But inspectors don’t estimate utility bills. Real estate agents report that many buyers will ask home sellers for past electric, water and gas bills .

Past bills are only a rough guide, however.

For one thing, the buyer’s utility usage might differ from those of the owner’s.

The cost of natural gas, which represents the largest portion of your gas bill, varies with market conditions, says Pat Clark, a spokeswoman for the Citizens Utility Board, a consumer advocacy group on utility issues.

Electricity rates for Illinois homeowners have been steady for about a decade, “frozen” by state regulators. The thaw starts next year with ComEd, which serves about 70 percent of Illinois residents. The company says its rates will rise by more than 20 percent.

The only way to alleviate the fear of unpredictable utility bills is to sign up for a budget plan, which all utilities offer, Clark says.

Don’t confuse “budget” plans with others such as “fixed bills” says Clark. These are offered by unregulated affiliates of the utilities and aren’t appropriate for homeowners on a budget, Clark says.

- Tax credits for energy efficiency are a well-kept secret.

Because contractors aren’t in the habit of dispensing tax advice, businesses that sell heating, cooling and other energy-related home products may not know that some energy-efficient models allow homeowners to take an income tax credit, says Steve Nadel of the American Council for an Energy-Efficient Economy. With such a credit, homeowners can subtract up to $500 from their federal income tax.

While some companies are using the tax credits, in effect only this year and next, as a marketing tool , others may not know about them, Nadel says.

Just the words “energy efficient” aren’t enough, says Charlie McCrudden of the Air Conditioning Contractors of America. The federal government recently increased efficiency standards for air conditioners, but only models that exceed those minimums qualify for a tax credit, McCrudden says.

A chart listing eligibility specifications for windows, insulation and other energy-related items that could garner a credit is at www.energystar.gov.

To claim a credit, homeowners don’t need to submit qualifying receipts with their income tax return, but they should keep this material with their tax records, Nadel says.

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Address questions to Financing, Chicago Tribune Real Estate, 435 N. Michigan Ave., 4th Floor, Chicago, IL 60611. You may also e-mail realestate@tribune.com. Answers will be supplied only through the newspaper.
Copyright (c) 2006, Chicago Tribune

Additional reference article added 10/08/2006

We have all heard about it on the radio, seen it on t.v., or read about it in the paper. The news is bleak – the Real Estate bubble is bursting. Terms like Hard Landing or Soft Landing are being bandied about. But it is important to note that the statistics are based on information that is being “rolled-up” nationwide. What does all of this mean for the Chicago area resident? According to the National Association of Realtors, or NAR, in the second quarter of 2006, Chicago home prices grew by 4.9% over the same period in 2005. This is certainly not as bleak as some areas of the country, where prices actually fell below last years. However, it is not the double digit growth that was experienced by some areas of the country over the last few years.

To get a better understanding of the current state of the Real Estate market, check out the links below.

http://money.cnn.com/2006/08/15/real_estate/Metro_home_prices_fall/index.htm

http://www.bankrate.com/brm/news/mortgages/home-values1.asp

Another interesting article on this subject:

http://money.cnn.com/magazines/fortune/fortune_archive/2006/10/02/8387409/index.htm

With the fast pace growth of the real estate market over the past few years it was only natural that there would be a significant increase in the number of real estate agents. Now that the market is slowing down, there is an over abundance of agents looking for your business. What do you need to know in order to choose the right agent for you and your needs? I came across a great article on MarketWatch.com (link below), written by Amy Hoak, that discusses, in depth, what both a buyer and a seller should be looking at when interviewing real estate agents.

http://www.marketwatch.com/News/Story/Story.aspx?siteid=google&dist=nwhfriend&rid=em_story_e_main&guid=%7b8594999D-D841-4454-9A40-B928AE7A90D6%7d

On the surface, option adjustable rate mortgages are very enticing. The mortgagee has 4 options, every month, of how much to pay on their mortgage. You can choose from paying an amount that is equal to a traditional 30 or 15 year mortgage, or you can make an interest only payment. The final option is a much lower payment, usually equal to less than 3% of the annual loan amount. This can be a very seductive opportunity for home owners/buyers who have income that may be susceptible to change on a monthly basis. However getting caught in the trap of exercising the 4th payment option too often, can ultimately cause the mortgagee many problems.

Below is an article that appeared in the Chicago Tribune on August 6, 20006, written by Vickie Lee Parker of the Raleigh News and Observer. It covers in more detail the potential pitfalls of the option ARM.

Use caution with mortgages that are adjustable
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By Vicki Lee Parker
Raleigh News & Observer

August 6, 2006

RALEIGH, N.C. — As consumers, we love choices. But as we know, too much of a good thing can be dangerous.

Such is the case with a mortgage product called an option ARM.

Home buyers, pay close attention, because this gets confusing–which is exactly what some mortgage brokers are counting on.

Basically, an option adjustable rate mortgage (ARM) program works like this: You get a mortgage statement each month that lets you pick from four monthly payment amounts. Two options are typical 30- or 15-year payments of principal and interest. A third is an interest-only payment.

The fourth is a significantly lower minimum payment, typically less than 3 percent of the loan over a year’s time. In other words, it’s like buying your house on a credit card, and it’s no secret what trouble that can cause. As with a credit card, if you make only the minimum payment, you will be paying only a small portion of your monthly interest expense. The rest is tacked on to your principal, which means the cost of your home increases every month.

Your principal could climb as high as 115 percent of your original loan before your mortgage company starts demanding full-interest payments. That means that your $200,000 home could eventually cost $230,000.

And it gets worse. Say someone bops you upside the head, and you realize that you made a big mistake. You try to refinance, but what happens? That’s when you find out that buried in the mounds of papers you signed at closing was an agreement to pay a hefty pre-payment penalty. You’restuck in this money-draining loan for however long the contract says.

Option ARM loans are not new. They have been around for years. However, they were not created for the average home buyer. They were designed for people with unpredictable income, such as entrepreneurs or people who work on commission. The loans allow them to make minimum payments when their cash flow is low and catch up when their income increases. Option ARMs are also ideal for savvy real estate investors, who understand the risks and plan to sell the property within a year or so.

But as interest rates rise, some mortgage bankers are peddling these high-risk loans to everyday home buyers who might not be able to afford their dream home with a 30-year fixed mortgage.

In the past two years, the number of option ARM loans has climbed. They account for about 16 percent of all loans, compared with 5 percent in 2004, according to Fitch Ratings, which provides research for the credit industry.

Mortgage bankers “will go back to gimmicks to find a way to get through the lull,” said Gordon Miller, founder of DNJ Mortgage in Cary.

In their defense, mortgage companies say that they only offer these loans to people who qualify for the higher monthly payments. Even so, as many as 80 percent of people with option loans consistently pay only the minimum payment, said Suzanne Mistretta, a senior director at Fitch Ratings.

Of that group, many will eventually end up losing their homes in foreclosure proceedings. Nationally, the number of foreclosures has been rising, according to Foreclosure.com.

“When I hear that people are taking these loans in order to keep the cash to pay off debts, the odds are high they are heading to foreclosure, because they are robbing Peter to pay Paul,” Miller said.
Copyright (c) 2006, Chicago Tribune

As the housing market flattens and sellers are no longer in the drivers seat, is the world of the housing auction, on-line and live, a good direction for sellers and buyers alike. Instead of a home lingering on the market for months and possibly loosing value with each passing day, an auction can provide a seller with a much quicker and definitive turnaround period. For buyers, it still offers the opportunity for a bargain.

Below is an article by Diane Wedner published in the Chicago Tribune on July 30, 2006, discussing some of the basics for buying/selling at auction.

Auctions a draw online, in person
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By Diane Wedner
Tribune Newspapers: Los Angeles Times

July 30, 2006

LOS ANGELES — Fanned by eBay flames, it was bound to happen. As buyers have regained an upper hand and sellers have started to sweat, real estate auctions–live and online–have caught on.

The changing market has nervous owners trying to sell quickly rather than letting their homes languish while their fears of declining values mount. Buyers, sensing the realty winds shifting their way, see bargains, something they’ve only dreamed of in the last few years. And then, of course, there is human nature and the thrill of bidding.

It has led to scenes such as this one in Pasadena last month, with Kennedy Wilson auctioneer Dean Cullum bellowing, “Who’d like to open up the bid at $100,000? Do I see $100,000? Over there! Who wants to bid $125,000?” Minutes later, after a rat-a-tat-tat of climbing offers for a condo, investment partners and auction veterans Robin Morgan and Miriam Wimberly came up with the winning bid of $436,000.

“I think we got a bargain,” Wimberly said. Agents say that comps for the two-bedroom, 2 1/2-bathroom condo in 1,023 square feet suggest the price was on target for the neighborhood.

More accepted as a way to sell real estate on the East Coast, the trend has taken longer to catch on in the West, where buyers had considered auctions as the last resort. “So many people here think auctions are only for distressed or really bad houses,” said Marti Barajas, an executive for Pacific Auction Exchange, a real estate auction franchise company. However, most homes sold at auction, she said, get there because sellers chose to sell them that way.

Home-buying auctions have grown so much that gross sales of residential properties rose nationally to $14.2 billion in 2005, up 24 percent from $11.5 billion in 2003, according to estimates from the National Auctioneers Association, an auctioneering trade group.

The two most well-known types of auctions are “open outcry,” in which an auctioneer calls out the bids to the public, and sealed-bid auctions, in which all bidders submit their offers to the auctioneer on the same day, without knowing the other bids. Online auctions also are gaining steam.

In the first two cases, the properties are offered as absolute, in which the highest bidder wins the property; “published reserve,” or minimum, bidding, in which the seller takes the published minimum bid or higher; and “unpublished reserve,” in which the high bid is subject to the seller’s acceptance.

Here are some tips for those planning to go the auction route:

Inspect, then bid

Auctions for condos, condo-hotel units and fractional ownerships, in particular, are gaining traction, said Steven Good, chairman of Chicago-based Sheldon Good & Co., the nation’s largest auctioneer of real property.

Some buyers love the transparency of auctions. Auctions let them do their homework before the sale. Auction companies typically allow 45 to 60 days for buyers to attend open houses and in some cases bring inspectors, said Todd Wohl, vice president of Premiere Estates Auction Co. in Manhattan Beach.

Owners, for their part, like that they can sell their properties without financial, cosmetic or termite contingencies. On the downside, properties that are not aggressively marketed may result in just a few low-ball offers.

Bidding on foreclosures

Buyers seeking bargains sometimes look for foreclosure auctions, which take place at the property site or the courthouse. The lender’s representative typically makes the first bid, up to the amount owed. If no one else bids, the lender gets the property, then sells it. Outside buyers who win a foreclosure property must pay in full with cash or a cashier’s check at the close of the auction. These sales are complicated, experts say, making bargains iffy. Properties often require extensive work and may have liens against them.

Buying online

Online auctions have grown in popularity since 2001, said RealtyBid.com chairman Tony Isbell. His company has sold 2,700 properties in the last three years and lists about 300 to 400 properties each month. Vacation homes are particularly popular, he said.

Under RealtyBid’s rules, properties are listed for 14 days, during which time buyers–after registering with the online company (for free)–are encouraged to visit the sites in person. Bidders may place their offers any time during the two-week period; all bids are displayed online. The winners receive a contract by e-mail, which they sign and return with a deposit check.

“The online market exposure is so much bigger than live auction,” Isbell said. “The Internet allows someone to bid from anywhere in the world, any time, day or night, over two weeks.”

Another way

Then there’s the five-day round-robin bidding process, an auction-type approach in Bill Effros’ book, “How to Sell Your Home in 5 Days.” After three days of seller advertising, potential buyers attend a two-day open house, at which they place their bids on a sign-in sheet there. After the bidding closes, the auctioneer calls each person who made a bid, asking whether he or she wants to make higher offers. The process is repeated until there is only one bidder left. The minimum-bid process is nonbinding to both parties.
Copyright (c) 2006, Chicago Tribune

The following article, printed on July 30, 2006 in the Chicago Tribune, talks about the cooling Chicago real estate market - and the diference between a house and a home.

What if it’s just a house?
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July 30, 2006

Word arrives now from the real estate industry that the Chicago housing market is cooling. Sales of single-family homes declined 15 percent between June of 2005 and June of 2006. The same story is playing over much of the nation as a collective decision to wait, for some reason, settles into the psyches of those who were eager to dive into the real estate game only a few months ago.

We could actually be approaching an era in which owning a home would just be that, having a home, not necessarily an investment that can be turned around in a few years for fat profit. Undoubtedly, this will be viewed as a bad thing in some quarters, a sign of a misfire in the great, humming engine of the American economy.

Still, anyone who has ever owned one knows there’s more to a house than equity.

To be sure, it can help pay for college, finance improvements, buy a car, do all kinds of things as it appreciates in value. But in the end, for practical lovers of things that last, it remains a house, and a very good thing at that.

Having a roof over your head, even a roof that is not worth a bundle more today than it was worth a year ago, is not an unpleasant thing.

Stripped of economic measure, it becomes a home where magical kitchen smells waft, the ripe and bawdy rhetoric of the HBO series “Deadwood” fills an hour in the evening and leaves us asking the question, “Wait, did they actually talk like that?” and, when you are all alone and staring at the ceiling at 3 a.m., sleepless, you can be comforted by hearing the sink drip.

At the end of the day, when you walk up to the front door and have that sense that the place is actually going to enfold you, embrace you, comfort you, does it really matter that it’s not like a cold block of gold clicking up in value with each passing month?

Of course it doesn’t.

Houses go up in financial value.

Homes go up in value of another measure, so much more dependable than the whims of the marketplace.

Copyright (c) 2006, Chicago Tribune

The recent addition of 50 Year Mortgages has caused a stir in the mortgage marketplace. Are they in fact the saving grace for home buyers trying to purchase in pricey markets, or purchasers with spotty credit? Or are they a marketing gimmick designed by mortgage companies?

The following article was written by Mary Umberger and was published in the Chicago Tribune on July 30, 2006.

Long way to go for 50-year mortgages
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Longest-term loans can help those with credit problems, some say

By Mary Umberger
Tribune staff reporter

July 30, 2006

This story contains corrected material, published Aug. 1, 2006.

Just 600 monthly payments, and the house is all yours.

Recoil, if you will, at the thought of a 50-year mortgage, but it’s here.

A California mortgage company began to offer the loans in March to considerable media hoopla and touted them as a lifeline to consumers trying to squeeze into that state’s ultra-pricey housing market.

The loans haven’t caught on in a huge way, though a handful of lenders now offer them, and they are available nationwide.

Critics dismiss them as a poor choice or a marketing gimmick. But some in the industry say 50-year mortgages are finding their niche, and it may be just a matter of time before they are common. “We felt the loan would fill a need for some people to keep their payments lower,” said Alex Diaz Jr., vice president of Statewide Bancorp, a mortgage company in Rancho Cucamonga, Calif.

In the second quarter Statewide originated about $92.1 million in 50-year loans in five states, Diaz said. That’s a minuscule portion of the industry’s $700 billion in all mortgage originations in the period.

Darren Weisberg, president of the Illinois Association of Mortgage Brokers, said he is not seeing “any activity on the loans” in Chicago. “It’s too soon.”

Dan Green, a mortgage planner with Mobium Mortgage Group in Chicago, said the loans recently have become available to Chicago-area borrowers through mortgage brokers who have business relationships with several national lenders that are offering them. Most of these lenders specialize in so-called “subprime” or “non-prime” loans.

Green said some of those credit-impaired borrowers might be good candidates for the 50s. The borrowers would use the ARM to leverage the equity from their homes to pay off debt and improve their credit scores–then refinance out of the 50-year loan to something with better terms. “It’s ironic that the longest available amortized loan is really a short-term solution for some people,” Green said.

So far, most of the loans are in California, though a few lenders are marketing them nationally to subprime borrowers, who have spotty credit histories and are likely to pay higher interest rates.

“This is not a product that has been taking the world by storm,” said Doug Duncan, chief economist for the Mortgage Bankers Association, a trade group in Washington, D.C. “From a statistical perspective they are practically non-existent.”

Mega-lenders such as Wells Fargo and Countrywide say they have no plans to make 50-year loans. And they say the loans will not get traction until they become widely sold in the secondary market, as most mainstream mortgages are. Mortgage financiers Fannie Mae and Bear, Stearns & Co. said recently that they have no plans to buy the 50-year mortgages from lenders.

Just give them time, say some in the industry.

“I don’t see any objections to Fannie and Freddie [Mac] buying the product,” said Terry King, who follows loan trends for MRG Document Technologies, a Dallas firm that provides support services to the mortgage industry. “Let it pick up speed. It’s got momentum on the East and West Coasts.

“I predict that [Fannie Mae and Freddie Mac] will adopt the loans by the end of the year,” King said.

Most of the 50-year loans, so far, aren’t really “50-year loans,” fixed-rate products for which the borrower would make a set payment every month for half a century.

Adjustable rates

Instead they are adjustable-rate mortgages, or ARMs, in which the monthly payments remain the same for a certain period, then “reset” and fluctuate with prevailing interest rates, amortized over a 50-year term.

Statewide originally offered them as five-year ARMS, but now also packages the loans as two-, seven- and 10-year ARMs. Recently it began to make 50-year, fixed-rate loans, Diaz said.

“That [50-year-fixed] is for somebody who is looking for the safety of knowing that the payments will never change,” Diaz said. “We haven’t done many of those. We’re sticking with our original thought, that people who take the 50-year loan aren’t looking for a long-term solution” and will sell their homes within a few years.

He said Statewide, which does not do business in Illinois, saw the loans as an alternative to payment-option ARMs, which allow borrowers, within limits, to choose how large a payment they will make, repaying only the interest or a smaller monthly amount.

Those loans have been wildly popular in areas such as California, where home prices have climbed dramatically. However, payment-options carry the risk that, by deferring payments, borrowers will end up with “negative amortization.” When the unpaid interest is added to the principal, the borrower owes more than he did at the beginning of the loan.

Diaz also says the 50-year loans are a better bet than the similarly popular interest-only loans because, with the former, the borrower at least builds some equity.

But critics abound.

“They’re asinine,” said Jack M. Guttentag, professor of finance emeritus at the Wharton School at the University of Pennsylvania, who now runs a mortgage-information Web site.

“I tell people to ignore them,” Guttentag said. “Given the wide availability of interest-only loans, going out beyond 30 years seems senseless. You are paying more for the loan and getting a very small reduction in the payment.”

At the very least, ARMs carry a risk of resetting at an uncomfortably or sometimes unaffordably high rate, which should be a concern for borrowers who are only marginally able to buy, critics say.

They say the loans do not cut the monthly bill by much. And the interest paid over the life of the loan is eye-popping.

For example, with a 30-year loan for $275,000 set up as a five-year ARM at an interest rate of 6.58 percent, the monthly payment would be $1,752.68, said Keith Gumbinger, vice president of HSH Associates, a mortgage-industry publisher in Pompton Plains, N.J.

Gumbinger assumes that such an ARM in a 50-year form would have an interest rate a quarter point higher.

So, at 6.83 percent, the monthly payment would be about $1,618.95, a monthly cash-flow savings of about $133.73, he said.

But the “gulp” comes in the interest paid over the initial 60 months (this sentence as published has been corrected in this text). For the 30-year loan it would be $87,826.66, he said. For the 50-year it would be about $93,306.32.

The balance after five years would be about $257,666 (with $17,334.20 in equity) for the 30-year loan versus $271,169.23 for the 50 (with $3,830.77 in equity).

“So the $133 cash-flow improvement [$8,023.80 over five years] has cost you an additional $5,479.66 in interest, leaving a `real’ benefit of just $2,544 and change.

“That $2,544 benefit has cost you $13,503.43 in equity you haven’t built,” Gumbinger said.

But Diaz and others in the mortgage industry argue that given the changes in consumer behavior, the term of the loan has, in some ways, become irrelevant. Homeowners have come to expect an ongoing cycle of refinancing or moving and often do not keep loans longer than a few years.

“In California, it is not common to meet somebody who has lived in a house for 30 years,” Diaz said. “Maybe in my parents’ generation that was so, but I don’t think the marketplace today does that.”

Long-term mortgages also may be a bellwether of changing attitudes about credit, say consumer debt experts, who add that holding a mortgage until the house is paid for is a phenomenon that went out at the turn of this century.

John and Carolyn Roberts, for example, planned to renovate the Arlington Heights house they bought in 2004 with an interest-only loan at 100 percent of the home’s value. Renovation costs exceeded their expectations, however, and in March, 2005, they switched from the interest-only loan to a 40-year loan with a rate that was fixed for two years and had smaller monthly payments.

“We went to a 40 to keep cash flow going,” Roberts said. “It was a bridge loan.”

They finished the renovation in January, and swapped the 40-year for a 30-year, fixed-rate mortgage.

“The mortgage market has changed drastically since I was a young man, when savings and loans would make the loan and collect principal and interest,” said Roberts, who is 58. “In this day and age, they are selling the product and reselling it. Most homeowners never pay it off anyway.”

And Roberts doubts that he will hang on to the 30-year loan until it is paid off.

“I’m thinking that in five years there may be a better product and I may refinance to get that,” he said. “I have to think, closer to retirement, about cash flow.” Weisberg, of the Illinois Association of Mortgage Brokers, said more and more consumers recognize that they will not have one, and only one, mortgage over their lifetimes. “There’s clearly been a paradigm shift. Houses and real estate finance are disposable and interchangeable.”

Part of that attitude change is due to the refinancing whirlwind fueled by low interest rates, said Robert Manning, research professor of consumer financial services at the Rochester Institute of Technology.

But it’s also a sign of a generational shift, he said.

Job mobility

“There is so much more mobility in the job market now,” Manning said. “It used to be you would get your reward by hanging in there for five to 10 years, so you were place-specific.

“But a lot of young people today know that the only way to get a bump in their salary is to move on to a new job,” Manning said. “They are constantly in the job market, they have no idea how long they are going to be in one place and that’s why ARMs are so appealing to them.”

And consumers increasingly want to leverage their income into as many places as possible: homes, credit card debt, student loans, Gumbinger said.

There are lots of ways to go about it. In recent years lenders have opened the door to homeownership for many by rolling out a buffet of loan types that start with comparatively low payments.

To make those monthly hits more palatable, lenders lengthened terms. About a year ago 40-year loans became widely available almost immediately after Fannie Mae agreed to buy them from lenders, a seal of approval for mortgages.

“Loans with 40-year terms now comprise about 5 percent of the marketplace,” Gumbinger said. “That gets them up to sizable-niche status.”

And now, we have the 50s, which are so new the industry has not yet developed a way to track their popularity.

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mumberger@tribune.com
Copyright (c) 2006, Chicago Tribune

Janett Kidd Stewart comments on an investment survey which inidcates cooling trend towards investmetn in real estate

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This article hilights some of the trends in the Gen X real estate shopping patterns.

67 percent of Gen Xers consider four bedrooms a minimum, and 77 percent watn celilings at least 9 feet high

ehhh ok. and here is a newsflash

They’re techno-savvy and more likeely to be hosue-shopping on the internet.

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Original story in Chicago Tribune August 7th, 2005

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