Buying a Home: American Dream or Financial Nightmare?

Posted on December 14, 2007
Filed Under debt, mortgage, savings |

Is the fall of home values and the credit crunch crushing the American dream of owning a home? Many have found that their dream home has turned into a financial nightmare. I can relate as my current financial woes are directly related to selling and buying a house in today’s market.

Easy Money

For years, mortgage companies were offering a plethora of tempting and highly advertised loans; 1% interest rates, interest only loans, pick a payment, 125% of value refinances, and the list goes on and on. Bad credit? No problem, they would find you a mortgage. People of every income bracket fell prey to the temptation of easy money and low interest rates.

Credit Crunch

With several major mortgage companies showing multi billion dollar losses, it seems that subprime loans are a thing of the past. Imagine… you have to have good credit to buy a house these days and reasonable debt to income ratios. As lenders deal with short sales, rising foreclosures and a housing glut on the market, they are tightening requirements across the board, and lo and behold, my mailbox is no longer full of refinance offers.

Falling Values

With the glut of homes currently on the market, home values have decreased in many areas. This has affected people both looking to refinance and looking to sell their homes. Many are finding that instead of being upside down in their car loan, they are upside down in their mortgage and owe more than their home is worth in today’s market.

Rich and Poor

In my area, this has hit upscale homes much harder than the “starter home” market. Those who have homes valued over $400,000 are finding that their homes will appraise for 20 or 30 percent less than they did 3 years ago. This is following a period where home prices skyrocketed, in some instances, doubling the value of a home in 2 to 3 years. In the Northern VA area, realtors and lenders are calling this a market “correction” which in the long term is probably a good thing. Just don’t tell that to people who bought a home in the latter part of 2006 when prices peaked.

Help on the Horizon

Congress is currently considering several bills that hope to reduce the foreclosures that are predicted over the next several years. According to The Hill, HR3609 would allow a bankruptcy judge to alter the repayment terms of mortgage loans for those facing Chapter 13 bankruptcy. The problem with this bill is that it will force people to bankruptcy in order to get relief.

The Bush Administration has negotiated an initiative with the mortgage industry to freeze interest rates for 5 years according to Fox News. This initiative will help some homeowners who are current on their payments but will be in financial trouble when their interest rates reset. Along with this, The Washington Post reports that there is a bill to expand the FHA loan program to help subprime borrowers.

None of this directly helps homeowners watching their equity drop but in the long run stopping the flood of foreclosures will help to stabilize the market and hopefully, stabilize home values.

Bright Side?

Yes, there is a bright side to all of this. If you have good credit, are not head over heels in debt, and are looking to purchase your first home, the news is good indeed. Today’s market is definitely a buyers market. Home prices are reasonable and interest rates are still low. Competition from investors is low and there are fewer buyers.

Before you go shopping for a house, go shopping for a lender. Find one who is willing to work with you, check your credit and income and give you the amount of home you can reasonably afford to purchase. Make sure that you are getting a fixed rate interest loan. With rates so low, it would not take much to see them double in a year or so. A fixed rate mortgage will mean that while the ARMs are rising yearly, yours will stay at the same rate until you pay it off.

Once you know your price range, you are in a better position to look at and purchase a home. Your loan should be pre approved up to a certain amount and that gives you a bargaining chip when you make an offer. Motivated sellers may be willing to take a lot less than the listed price for their home for a solid offer.

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Comments

2 Responses to “Buying a Home: American Dream or Financial Nightmare?”

JM on December 17th, 2007 7:37 pm

If homes have seen double digit gains in the past 3-5 years but have since seen a 30% drop in appraisal value, it only matters in 2 scenarios:

1.) For some reason you need to sell your home *right now*

or 2.) You stupidly cashed out your fake equity and spent it all on stuff like a Hummer or a new boat or even college tuition.

I can sympathize with the people in #1. I have no sympathy for those under #2.

For anyone else, the advice is simple: just don’t sell your home right now. Markets are cyclical, and you will see your home value rise again.
Financial Fool on December 17th, 2007 8:21 pm

JM, You are correct but for whatever reason, quite a few people refinanced and are either now facing foreclosure or will be when their interest rate rises. They felt pretty safe doing it as it’s not normal for home values to fall.
I would be interested to learn when the last time it happened.

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