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Re- Re- Refinancing Home Loans to Keep Payments The Same July 24, 2006

I think I’m partially crazy for taking on a 30% debt-to-income ratio by buying a home in New York City. But if you read the NY Times article yesterday about people refinancing their mortgages before their adjustable-rate mortgages reset just to to keep their payments the same, I think it’s time to say that a lot of people are just delaying their debt drowning.

Millions of Americans have turned to adjustable-rate mortgages to afford a home as prices soared. But when you don’t plan for the ARM interest rates reset when interest is rising, it’s time to start living below your means. The artificially low teaser rates are attractive when you think you might not stay in your home for more than 5 years, but you never know what your financial circumstances or housing market will be like when your interest rate resets. People who are refinancing and re- refinancing are just building up their mortgage with closing costs and delaying a possible financial meltdown. We all would like to assume that we’ll be making more money in a few years or that we can build up enough of an emergency fund, but anyone who doesn’t have a trust fund can loose their income. I try to make myself useful at work, but we all know that employment is an at-will term, which means the company can fire me or I can quit at anytime. Even if you have your own company, business can slow down. I know I’m not indispensible, so I’m trying to build up my cushion. Don’t you get nervous when you read articles like this one and the person they interview says:

Still, borrowers like Mr. Perry say the loans make sense because in a few years they plan to move to another home, earn more or refinance again, often using the same assumptions they made when they took out their earlier loans.
…“I am not going to be here for 30 years. Why is it important to have a fixed mortgage?”

If home prices keep rising, maybe this won’t matter in 5 years, but what are the chances they keep going up like they have been in the past 5 years? (Looks like there’s about 50% of all loans in major California cities in 2006 are negative amortization mortgages. What will happen in 2010? Scary thought. Check it out in the article).

Source:
Re-Refinancing, and Putting Off Mortgage Pain, NY Times
Published: July 23, 2006

Based on Average Price and Percent of Income Spent on Housing, Manhattanites Make $268,000 June 26, 2006

According to The Real Deal, New Yorkers are spending more than 30% of their income on housing, and in many cases, more than 50%. That doesn’t even include other debt as I mentioned in a previous article.

By 2006, New Yorkers were spending more than 30 percent of their gross incomes on rent, surpassing what’s commonly cited as the maximum threshold households should spend on renting. The median share of income spent on rent by renters in the city rose from 28.6 percent in 2002 to 31.2 percent in 2005, according to a new report from New York University. Decreasing real income and increasing real rents were the main culprits for inching over the 30 percent threshold.
…
For unsubsidized, low-income renters in the city, the situation was even worse over the three-year period from 2002 through 2005. The median share of income spent on rent increased to more than 50 percent last year, up from the already dire 43.9 percent in 2002.

By borough, median rent in 2005, according to the NYU report,

If the average rental for a studio in Manhattan is over $2000, it’s very difficult to keep up with expenses and save up if you have to spend 30% of income on rent.

Put another way, if the average price of a Manhattan apartment is $1,260,000, the mortgage of $1,008,000 is about $6,700 per month (assuming 20% down and 7% interest rate). That would mean that if that mortgage is 30% of income, one would be making $22,333 per month (or $268,000 per year) for the debt-to-income ratio to be at 30%.

Of course these numbers are in theory. A lot iof people may put a bigger down payment or have lower interest rates. Either way, I don’t know about you, but I don’t know many friends who make that much at this point. I have several friends who are forced to change their spending habits or have to get a roommate, just like me, but how many more people can afford Manhattan anymore?

Source:
City rents claiming greater income slices; New Yorkers now spend more than 30 percent of incomes on rent, The Real Deal

Gut-check: Economy vs Personal Finance in America June 13, 2006

Here’s a non-technical analysis on what’s going on now. According to this CNN/Money article, net household wealth hits record high, but debt rose at the fastest rate since 1986, the Federal Reserve said on Thursday. At the same time, America has a negative savings rate. So let’s summarize the household financial status this year,

Here’s the economic environment we’re in today:

From what I’ve seen out there, there are a lot of nervous economists out there…not to mention us people who are doing our best to support our families. Do the figures above say anything about Americans?

Source:
News Release: Personal Income and Outlays, Department of Commerce, Bureau of Economic Analysis (BEA), May 2006
Consumer Price Index Summary, April 2006

Manhattan Short on $1000/month Rentals June 5, 2006

This Saturday’s NY Times had an article about $1000 rental apartments in New York. While in most of the US, $1000 per month rent will get you quite a bit, it won’t get you much more than a studio in NYC. For example, a quick search on apartments.com in the city of Chicago returns 155 listings, a search for the same criteria returned 3 listings in Manhattan.

So the article mentions that it is possible to find $1000 apartments:

The good news is that there are plenty of one-bedrooms renting for $1,000 to about $1,150, and they are better than decent. No, they aren’t on every street corner in Manhattan, where the average one-bedroom in a non-doorman building ranges from about $1,850 in Hell’s Kitchen to $2,850 in SoHo or TriBeCa, according to Citi Habitats’ Black & White Report on rentals in the borough.

But once you get out of Manhattan, where the vacancy rate for rentals is a slender 0.89 percent, according to the Citi Habitats’ survey, there are apartments to be had — and they can be found without even looking very hard — as long as you act fast when you find one you like.

It’s not easy living in NYC when you’re not on a Wall Street salary. But there are other affordable locations nearby in NJ or Long Island. This makes it tough to save up for retirement.

Source:
What You Can Rent for $1,000,
NY Times, published June 4, 2006

More Real Estate Agents than Doctors in the US May 24, 2006

Just thought this was an interesting factoid…What does it say about the priorities of the US population when there are more real estate agents per person than there are doctors per person?

There are currently 298,815,342 people in the USA, according to the US Census Bureau. The Real Estate Bloggers writes that there’s a new report from the California Department of Real Estate that says there is a real estate agent for every 52 adults in the state. Let’s take a look at the number of people in the US divided by the number of active physicians (approximately 800,000) and compare that with the population in California divided by the number of real estate agents.

It’s a chicken-or-egg question, but maybe the number of licenses is related to the huge run up in housing prices in the US, especially in CA and the surrounding states?
Sorry this post has nothing to do about personal finance or tax, but I had to point that out. So to relate this to personal finance, I wonder how many financial advisors there are per person in the US? Apparantly Warren Buffett thinks there are too many of them. (see his famous 2005 letter to his shareholders, titled “How to Minimize Investment Returns” (pdf) on page 17.

From The Real Estate Bloggers
Medical miscalculation creates doctor shortage, USA Today

“Smooth Transition to Normal” for Westchester County Real Estate May 18, 2006

Because I live in NYC area, I watch the market in Manhattan, Brooklyn, North NJ, Bronx, Queens, LI, and Westchester County. I received a market report from a broker of mine in Westchester County and thought I’d share with you.

The latest statistics from the Board of Realtors in Westchester County in New York State show that real estate sales reported in the first quarter of 2006 were 9% fewer than the number reported a year ago and announced that “the boom is over, and our area has made a relatively gentle descent to a more sustainable level of sales volume and prices increases.” Single-family house sales in Westchester were down by 14% from a year ago.

Inventory has been steadily increasing as well:

That build-up accelerated in 2006 with 38% more units on the market at the end of the quarter than in 2005. Putnam County’s stock increased by 23%.

The number of available Westchester condominiums increased by a hefty 81% to 860 units. As has been noted in previous reports, the spate of new condominium construction in White Plains and elsewhere in Westchester has added new and resale units to inventory in this market sector.

…
Another indicator of a return to a “normal” market is that first-quarter average prices increased by less than double-digit percentages on an annual basis, confirming the trend to price moderation of the past several quarters. The median sale price of a Westchester single family house increased by 5.7% from $615,000 last year to $650,000 in this first quarter of 2006. In Putnam County the $375,000 median sale price was 8.5% below last year’s median.

The report mentions that although the Westchester county housing market is not immune to potentially serious slowdown of the national economy, the “local eight-year run has been founded on classic principles of supply and demand, not on speculative building or speculative investment by buyers, we are experiencing a relatively smooth transition to a slower, even “normal” real estate market.”

Source:
Westchester MLS Report (pdf)
(home image courtesy of Southeby’s International Realty. Thanks!)

Rich People Love Mortgages May 9, 2006


You’ve seen all the media attention about how mortgage rates are rising and homeowners are either locking in rates before they go up or refinancing mortgages from adjustible to a fixed rate. A quick check of mortgages shows that a standard 30 year fixed rate is only 8 basis points (0.08%) higher than last month’s rate.

But with mortgage rates around 6.19%, someone in the top 35% tax bracket would be paying closer to 4% on the borrowed money. The very rich are more comfortable with debt and they seek out loans for things they could pay for outright. Interest Only loans used to be for wealthy clients who will invest the savings on the difference between an interest-only mortgage and an amortizing mortgage, and who is confident that the investments will make money and beat the 4% they pay on the mortgage.

The reasons for taking on more debt range from buying artwork, yachts, airplanes, or investing in funds. A very rich person may easily be able to pay $20million cash for art but the opportunity cost of selling something else and paying tax on it is far higher than borrowing money from their private banker. As for mortgages, with the tax deductions they can take up to the $1million cap, the wealthy can make up the interest rate they pay by investing in taxable securities by leverage their real estate holdings.

Sources:
(mortgage chart courtesy of Bankrate.com, as of 5/9/06)

$1,260,000 Apartment April 4, 2006

That’s the average price of a Manhattan apartment, according to a quarterly report released by the real estate brokerage firm Brown Harris Stevens. The price is up 15% from last quarter and 8% higher than 2005. If that’s the average price (add up all sales and divide by the number of apartments sold), and there are supposedly 62,773 millionaires in Manhattan, how do the rest of the 2 million or so people afford to buy? Or how do the average Manhattan-ite afford to rent?

Real estate is a localized market, so what’s happening in Florida or Arizona doesn’t always apply to NYC. Everyone is talking about the real estate bubble, but based on the average sale price, I don’t see it in NYC…yet.

Source:
Brown Harris Stevens - Market Reports

Previously: Expensive Rental Apartments

Real Estate: Cashing In or Trading Up? March 15, 2006

With real estate prices so high, do you know anyone who has sold and cashed out to downsize? Because we’re relatively young, since last summer, we thought of selling our home and downsizing until the market conditions are better to buy a bigger home for a future-growing family. (Remember capital gains in real estate is tax free in the US up to $250k for an individual or $500k for a married couple). In NYC, even if we wanted to downsize, it is more expensive to sell and rent or buy. As mentioned before, rental costs average $3755 per month in 2005 in Manhattan. We’re seeing a softening in the NJ market, so we have decided to place our home up for sale and move to an area with more potential for gains. Of course we’re not saving more, but we’re moving to an area we love and believe that that area is more desirable place for real estate in the long run.

Speaking of downsizing, this is an the extreme opposite of it. I don’t know why there’s a need for rich people to buy bigger and bigger homes. The article from March 13, 2006 in the NY Times about the 38,929 square foot, 11 bedroom, 16 bathroom house in Greenwich, CT is rediculous. Who needs that much room? Click on the graphic for the image of the house:

He said he wanted a home that would be suitable for entertaining and have room for his children’s friends and his future grandchildren to sleep over. “We have one guest room,” he said of his current 5-bedroom house. “I go down in the morning and there’s people sleeping on sofas.”

Poor guy. He’s got no room in his house, so he’s building a home with 4 kitchens and 11 bedrooms. Maybe he should charge the people who stay overnight on a regular basis? It’s hard to feel sorry for these people, but I suppose if you have the money, you’re entitled to do what you want.

So, are you cashing in or trading up?

Source:
Land of the Big Puts ‘Too Big’ to the Test
By ALISON LEIGH COWAN, NY Times, March 13, 2006

David Bach’s NYC Seminar Review…sign up for your city soon March 10, 2006

I was able to catch David Bach’s seminar in NYC last night. It was his kick off event for his 14 city tour, so if you’re interested you can still sign up to go (read about it in my previous entry here.)

‘Madame X’ of My Open Wallet gives a thorough review (great job, by the way!) of the evening so I won’t repeat anything. There were several thousand people at the event, and I noticed that there were more women than men there. There seemed to be a lot of people in their 20’s and 30’s (like myself), which I think is great. I keep reading that single women are much more likely to buy their own homes than single men. It seems like younger people are getting more and more knowledgeable about finances/savings, which is better than the US savings rate suggests, which I just wrote about yesterday. I found David Bach’s message to be pretty common sense, but I think it’s great that he’s getting the message out to save and learn more about your finances. I find his stories and inspiration to take action is the important message for all of us.

The “homeowner’s fair” was a chance for real estate professionals to get to know you, and as Madame X said, it was too chaotic.

If you can go, I’d recommend going, just for his book, “The Automatic Millionaire : A Powerful One-Step Plan to Live and Finish Rich” he is giving away.

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