Trulia reveals trend towards homeownership where affordability to buy versus rent extends to almost four in five major U.S. cities

Rent vs. Buy Decision in Coastal Cities – Los Angeles, Seattle, Boston, San Francisco, Portland and Oakland – Depends Less on Home Affordability, More on Personal Finances

 SAN FRANCISCO, April 28, 2011 – Trulia today released its Q2 2011 Rent vs. Buy Index, which compares the cost of buying and renting a two-bedroom apartment, condominium or townhouse in the 50 largest[1] U.S. cities. Since last quarter, buying a home has become more affordable than renting in nearly four out of five (80 percent) major cities; only in New York, Fort Worth and Kansas City was renting a less costly option than buying.

KEY FINDINGS

• Falling Prices and Rising Rents Make Homes More Affordable in Q2 Versus Q1: Current market conditions consisting of steadily rising rents, falling home prices and low mortgage rates have tipped the rent versus buy scale in favor of homeownership.

• Consumers Face Difficult Decision in Coastal Cities: Aspiring homeowners in Los Angeles, Seattle, Boston, San Francisco, Portland and Oakland face a bigger challenge when it comes to deciding between renting and buying a home. The cost of homeownership in these coastal cities continues to be more expensive than renting; however, it may make more financial sense to buy depending on the situation.

PRE-APPROVED QUOTES 

“With home prices nearing a double dip and more foreclosures expected to flood the housing market over the next two years, the decision between renting and buying a home across most of the country has clearly moved in favor of buying,” says Ken Shuman, Head of Communications at Trulia. “As we head into the summer buying season, those looking to buy a homeshould be encouraged by improvements in the market and feel optimistic about their chances of finding an affordable home, much more so than in previous years.”

Aspiring homeowners should focus their energies on locking down a low mortgage rate sooner than later. While home prices are unlikely to return to pre-crash levels, today’s low interest rates will likely rise thanks to inflation and spikes in the Fed rates,” notes Shuman. “As the government wind downs its role in the mortgage markets higher mortgage interest rates will be inevitable.”

METHODOLOGY
Trulia calculated the Q2 2011 price-to-rent ratios for the 50 largest U.S. cities using the median list price compared with the median rent on two-bedroom apartments, condominiums and townhomes listed on Trulia.com as of April 1, 2011.  

Sample Price-to-Rent Ratio Calculation:

• Median List Price: $140,201.37
• Median Rent: $1,871.65
• Price-to-rent ratio: $140,201.37 ÷ ($1,871.65 x 12) = 6
  

Interpretation Key:

• Price-to-Rent Ratio of 1-15: Owning a home is much less expensive than renting in this city.
• Price-to-Rent Ratio of 16-20: The total costs of homeownership in this city are greater than the costs of renting, but it might still make financial sense to buy depending on the situation.
• Price-to-Rent Ratio of 21+: Renting in this city is much less expensive than owning a home. 

Definitions:

• Total costs of homeownership include mortgage principal and interest, property taxes, hazard insurance, closing costs at time of purchase and ongoing HOA dues and private mortgage insurance, where applicable. It also includes an offset for the tax advantages of homeownership, including mortgage interest, property tax and closing cost deductions.
• Total costs of renting include rent and renter’s insurance. 

– compliments of Chip Scarinzi for Trulia

experian adds rent payments to credit reports

Renters who need to build their credit histories are getting a leg up from a major consumer credit reporting agency.

Experian is now incorporating rental-payment history data from its recently acquired RentBureau unit into its traditional credit file, which it says will make it easier for college students, recent graduates and immigrants to boost their credit scores — if they pay their rent on time. Typically, credit reports include payment history on credit cards, mortgages, retail accounts, installment loans and finance company accounts.

Experian’s move comes at a good time, with the U.S. homeowner rate falling to its lowest level since 1998. It was 66.5 percent in the fourth quarter, according to the U.S. Census Bureau. That’s 0.7 percentage points lower than the fourth quarter of 2009 and 0.4 percentage points lower than the rate in the third quarter of 2010. The last time it was below the current level was in the fourth quarter of 1998, census data shows.

Still, there are limitations. RentBureau’s database receives rental payment histories every 24 hours from property managers, but currently includes only 8 million residents nationwide.

Last June, Experian acquired RentBureau, and, last month, started incorporating its data into its traditional consumer credit reports.

It’s “one more thing that lenders, landlords, insurance agents and even employers can learn about you,” said Bill Hardekopf, chief executive of LowCards.com, a credit-card comparison Web site. “This could be great news for renters who dream of owning their own home.”

Experian claims to be the first and only major credit reporting agency to include residential rental payment data in credit reports.

Chicago-based TransUnion, through one of its subsidiaries, collects rental payment data and supplies it to landlords with credit information to help them screen potential tenants. But, at this time, rental payment history on the basic credit file for routine credit inquiries is not available from TransUnion, spokesman David Blumberg said.

“TransUnion has always been a leader in using alternative data sources, like utilities data, to help provide a clearer picture of an individual’s credit history and help unbanked individuals to gain access to the credit they deserve,” Blumberg added. “TransUnion currently uses this information in all of its proprietary scoring models.”

- compliments of becky yerak

ARMs helped sink the economy – now they’re back!

Adjustable rate mortgages are back!

After accounting for nearly 70% of all mortgages issued during the boom, ARMs vanished during the bust, totaling just 3% of the market in 2009. Now they make up 5% of all mortgages issued, and Freddie Mac predicts 10% by December.

Behind the comeback is a simple fact: ARMs are a great bargain right now. The most common ARM loan currently has a rate of 3.5% compared to 5% for a 30-year fixed-rate mortgage.

“For anyone with a high likelihood of moving soon, the 5/1 is a great product,” said Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association. “It’s a well understood product too; there’s not a lot of danger with it.”

So why isn’t everyone grabbing an ARM?

Well, because fixed-rate mortgages are seen as safer because they carry the same rate over life of the loan. Borrowers always know what their payment will be.

12 cities: Where to rent vs. buy

But with ARMs, interest rates change over time. For example, the 5/1 ARM — the most common loan — has the 3.5% introductory rate for the first five years. After that, the rate adjusts annually.

That sounds kind of dangerous, but look deeper. On a $200,000 mortgage, the monthly ARM payment at 3.5% would be $898 compared with $1,074 for a 30-year, fixed-rate loan at 5%.

That’s a $10,560 difference after five years, when the ARM would adjust. At that point the ARM rate could jump to a worst-case scenario 8.5% and the monthly payment to $1,538.

It would still take more than 22 months of the higher ARM payments to offset the first five years of savings.

“Even under a worst case scenario, you’re better off with an ARM if you’re planning to live in the house for less than seven or eight years,” said Steve Habetz, a loan officer with Darien Rowayton Bank in Connecticut.

How long after foreclosure until I can buy?

And, the reset will, most likely, be lower than to 8.5%. The amount the rate can increase is typically calculated by adding a margin of 2.75 points to an index, usually the rate of a one-year T-bill, explained mortgage broker Alan Rosenbaum, founder of GuardHill Financial. And most loans have a maximum amount they can rise per year and a cap on how high the rate can go.

Still, many homebuyers want no part of ARMs.

“I had a client recently who told me that they were going to move in four or five years,” said Habetz. “I suggested an ARM. They insisted on a fixed rate. It made no sense but that’s what they wanted.”

Many buyers remember the so-called toxic or exploding ARMs and how their defaults triggered the mortgage meltdown, helped sink the housing market and usher in the Great Recession.

These loans failed for a couple of reasons. Many were issued to people who lacked the income to pay once the initial years of low fixed rates ended and the interest rate reset higher. Too, the caliber of borrowers was very low.

The 5/1 is an entirely different animal, experts says. Unlike the toxic ARMs, these products are issued to borrowers with high credit scores, making substantial down payments and with assets, debt and income carefully underwritten before approval.

Rosenbaum said he’s always featured the 5/1 ARM as the product of choice unless the clients tell him they’re planning to live in the home for 15 or 20 years.

For people planning to stay for less time, “It’s paying for insurance they don’t need,” he said. 

compliments of les christie of money.cnn.com

just sold in berkeley…

charming berkeley bungalow

3200 tremont street, berkeley…listed for $325,000 and sold for $350,000 with 2 offers…but whew, 5 appraisals – it’s the world we currently live in!!

should you pay off your mortgage?

here’s a really great article from money.cnn.com about if it’s the right thing for you to do…

When there was easy money to be made in real estate and stocks, mortgage debt seemed like nothing to fear. Now an increasing number of homeowners are wondering if it makes sense to hasten the day they can say goodbye to a big monthly expense while earning the equivalent of a decent, guaranteed return.

“I’m hearing this question more now that clients aren’t feeling as comfortable about the market,” says Los Angeles area financial planner Eileen Freiburger.

Maybe you’re part of a young family, and whittling down your loan balance seems like a sound strategy. Or maybe you’re counting down to retirement (perhaps even already kicking back), have only a few years of payments left, and are wondering if you should just knock off the balance.

But if you’re thinking of such a move, you’re also well aware that mortgage interest is tax-deductible — and if history is any guide, putting money into stocks will earn you a higher return over the long haul than putting it into real estate.

The answers to the questions below can help you determine your best course of action.

Do you have more pressing financial needs?

Anyone who has credit card debt or isn’t maxing out her 401(k) should make those the priority. You should also have at least six months’ worth of living expenses in cash.

A few years ago you would have been able to pull money out of your home quickly if, say, you lost your job. Now that lenders have tightened up, that’s not so easy.

Retirees and near-retirees contemplating a lump-sum payoff need to ensure they have enough liquid savings to handle emergencies such as unexpected medical expenses, especially because it’s hard to tap equity on homes without first mortgages.

And you shouldn’t pull money out of your IRA to pay off your home loan, since the IRA funds will be taxed at ordinary income rates.

How long do you plan to stay?

If you plan to trade up to a larger home or downsize to a smaller one within five years, it doesn’t make sense to put extra money into your mortgage. The real estate market may be shaky for a while longer, and “you don’t want to tie up your cash in your home and then not be able to sell,” says La Jolla, Calif., financial planner Christopher Van Slyke.

What do you really gain from the interest tax deduction?

Assuming you itemize your deductions, you can find out what you save by multiplying the mortgage interest you paid last year by your tax rate (federal plus state). A couple in the 28% tax bracket, with a $200,000 loan at 5%, for example, will save $2,781 in taxes the first year of a loan.

‘Substantial risk’ of 25% drop in housing

Your tax savings decline the further you get into the loan, as more money is applied toward principal.

For many retirees and near-retirees close to the end of the mortgage, the interest deduction is not a reason to avoid paying off the loan, especially since retirees often end up in a lower tax bracket, says planner Peter Canniff of Nashua, N.H.

How would you otherwise invest the money?

Put your money into stocks and bonds and you’re likely to get a higher return over the long run than you would paying off your home loan, given today’s low rates.

If you itemize, you can calculate your effective return by multiplying your mortgage rate and your tax rate, then subtracting the answer from your mortgage rate (you can do this with the mortgage tax-deduction calculator at bankrate.com/calculators.aspx).

So for someone in the 28% tax bracket with a 5% mortgage, the effective rate of return on paying off the mortgage is 3.6%. By comparison, a 50/50 stock/bond portfolio has historically earned 8.2% long term, though it’s sensible to expect future returns to be a more modest 6%.

Still, if you’re very skittish about the market or are a retiree keeping a big chunk of money in low-earning CDs, you might do better by losing the loan, given that the average five-year CD is paying just 1.6%.

“For retirees, it’s hard to beat the guaranteed return,” says Anthony Webb, an economist at Boston College’s Center for Retirement Research.

Will being debt-free help you sleep better?

In that case, you might be willing to forgo the extra return you could earn in the market. “Less stress, less worry,” says Orlando-area planner Brian Fricke. “Sometimes that matters more than the math.”

- compliments of lisa gibbs, money magazine

explaining the (stingier) energy tax credit…

Homeowners who make energy-efficient improvements to their houses can still get a break from Uncle Sam next year, but the payback will be smaller and there are several catches that could shut out some taxpayers altogether.

The tax law passed in December extends a federal tax credit through 2011 for people who make their homes more energy efficient. The catch: The government reduced the credit to pre-2009 levels. This means that taxpayers will be able to get a maximum $500 lifetime credit for up to 10% of costs of making their home more efficient. That’s down drastically from the maximum $1,500 credit that covered up to 30% of expenses which taxpayers could claim in tax years 2009 and 2010. (Now and then, you’d have to spend at least $5,000 to get the maximum credit.)

The new rules also limit how much of the federal tax credit can be awarded for various types of equipment. Windows get the most stringent rules. If you spend up to $2,000 this year to install new windows you can get a maximum $200 credit—but after getting that credit, you can’t claim any tax credits for windows in future years, not even if you get even more efficient windows later or move to a new home and install such windows there.

The caps on other types of equipments reset annually. So you can get a $150 credit for a furnace or hot water boiler in 2011, and again in 2012 if you upgrade. The credit is capped at $50 a year for smaller equipment like an advanced main circulating fan (they make furnaces more efficient), but can be as high as $300 for most other types of qualified property.

The new limits will affect people who make energy improvements to their homes this year and claim the energy credit on their 2011 tax forms. So if you made improvements in 2010, you still qualify for the larger $1,500 credit, the maximum allowed total for improvements made in 2009 and 2010.

Given the newly-reduced $500 lifetime limit, you won’t be able to claim a credit this year or in future years if you’ve already claimed an energy credit of $500 or more in previous years. Many taxpayers got a second chance to get the credit and make additional energy efficient improvements to their homes in 2009 and 2010 when the credit was temporarily increased.

The credit applies to people who make qualifying upgrades to their insulation, windows, doors, roofs, heating, ventilation and air-conditioning systems, among other equipment. A separate 30% federal credit exists for alternative-energy equipment installations, such as fuel cells and solar-water heaters, which applies to improvements made through 2016. The only maximum here is for fuel cells, capped at a $500 credit.

Don’t forget that the improvements must be made on your principal residence, and that equipment must meet certain energy requirements to qualify. “If my brother-in-law had some old windows in his basement and he gives them to me and I install them, I don’t get any credit,” says Jackie Perlman, an analyst with the Tax Institute at H&R Block. And you’ll have to fill out detailed paperwork to prove that you used approved equipment. The IRS website offers more details on how to qualify.

One bright side: Even if you max out on federal credits, you may still be able to take advantage of other incentives offered by your state or local governments, and in some places, even your utility company.

- compliment of j. marte smart money blog

do you have enough homeowner’s insurance?

First, let us look at the question about homeowner’s insurance. The amount of insurance that you buy for your home should not be confused with the real estate value of your home. Depending on when you bought your home, median prices have been significantly up and down since 2000, peaking in the year 2006.

Instead of selecting coverage based on the resale value of your house, the right amount of insurance is a limit set that accurately reflects what it would cost to rebuild your home in the event that it is destroyed.

Many homeowners rely on their agent to calculate the replacement cost of their home using a computer program designed for that purpose, but they shouldn’t rely on that estimate alone. Courts have backed up insurance companies in saying that it is the homeowners’ responsibility to make sure the contract they sign has adequate replacement limits. So, look to construction costs in your community for guidance.

A builder who knows your neighborhood and the features of your home can give you a rebuilding estimate on a cost-per-square-foot basis. If, for example, the features in your home would average to $250 a square foot to replace, and your home is 2,000 square feet, you would need to have a dwelling limit (“Coverage A”) of at least $500,000 in order to rebuild your home. It is wise to take this extra step to make sure that you are not underinsured, should a disaster happen.

United Policyholders, a group dedicated to educating the public on insurance issues, conducted a survey of hundreds of individuals whose homes had been partially or totally destroyed from the 2007 wildfires in and around San Diego County. The results revealed that two years after the fires, 66 percent of respondents reported being underinsured, at a staggering average amount of $319,500.

So, if you have not dusted off your homeowners’ insurance policy for a while, get reacquainted with it in the new year and be sure that you understand what you are paying for with your premium dollars.

While you are reviewing your policy limits, evaluate the deductible that you chose. Most insurers allow you to increase the deductible in exchange for a lower premium. Increasing your deductible from $250 to $1,000 can reduce your premiums by as much as 25 percent and will prevent you from filing small claims that could cause an insurance company to drop you.

Your second question is about earthquake insurance, and the decision to buy such coverage very much depends on your personal financial situation and not what your neighbor thinks. Only approximately 12 percent of California homeowners have earthquake insurance. Many people still mistakenly believe that their homeowners’ insurance will help pay for their home to be rebuilt in the event of an earthquake.

Homeowners’ insurance specifically excludes earthquake insurance, and you have to make a choice to buy it. Premiums are linked to many factors including how close a home is to a fault line, the age of the home, the type of construction and the underlying insured value of the dwelling. The easiest way to find out what premiums would be for your home is to go the website earthquakeauthority.com. It provides a premium calculator by which you can determine how much the premium would be if you were to buy a California Earthquake Authority (CEA) policy from your homeowners insurance company.

Non-CEA policies are also available — they usually will be more expensive but will offer higher limits and additional coverage. Some complaints about earthquake policies include “the deductible is too high.” While policies typically have a 10 percent or 15 percent deductible, if you have no coverage, that means that you have a 100 percent deductible … you’ll bear the entire risk yourself.

If your home represents a large portion of your net worth, buying the extra insurance coverage is going to do what insurance is supposed to do by making sure that you do not risk more than you can afford to lose.

- compliments of sign on san diego business section