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January, 2009 Newsletter

+++++++++++ January 1, 2009 +++++++++++++++++++

Introduction: Sales, Prices Continue to Slide
Mortgage Rate Update: Rates Plunge
This Month's Tip: "Put a Lid on It"


Introduction: Sales, Prices Continue to Slide

First and foremost, a very Happy New Year to all of our subscribers.
2008 was a challenging year in many aspects, so please accept our
wishes for a better 2009.

Existing-home sales weakened against a backdrop of an eroding economy,
according to the National Association of Realtors®. Existing-home sales –
including single-family, townhomes, condominiums and co-ops – fell 8.6
percent to a seasonally adjusted annual rate of 4.49 million units in
November from a downwardly revised level of 4.91 million in October,
and are 10.6 percent below the 5.02 million-unit pace in November 2007.

Lawrence Yun, NAR chief economist, expected a decline. “The quickly
deteriorating conditions in the job market, stock market, and consumer
confidence in October and November have knocked down home sales to another
level. We hope the home sales impact from the stock market crash turns out
to be short-lived, as was the case in 1987 and 2001,” he said.

On the new home side, sales of new one-family houses in November 2008 were
at a seasonally adjusted annual rate of 407,000, according to estimates
released jointly on December 23 by the U.S. Census Bureau and the Department
of Housing and Urban Development. This is 2.9 percent (±13.9%) below the
revised October of 419,000 and is 35.3 percent (±11.4%) below the November
2007 estimate of 629,000.

The median sales price of new houses sold in November 2008 was $220,400;
the average sales price was $287,500. The seasonally adjusted estimate of
new houses for sale at the end of November was 374,000. This represents a
supply of 11.5 months at the current sales rate.

As has been the case for most of the last year, until these historically
high levels of availability begin to ebb, there will likely be continued
pressure on pricing. In addition, a very high percentage of sales that
are occuring are of foreclosure, pre-foreclosure and short sales, all of
which impact pricing.


Mortgage Rate Update: Rates Plunge

The month of December saw one of the largest declines in mortgage rates
in history. According to mortgage company Freddie Mac, 30-year fixed-rate
mortgages averaged 5.10% at the end of December, a huge decrease from the
average of 5.97% in the month of November. 15-year fixed-rate mortgages
took a similar trend, falling from an average of 5.74% at the end of November
to 4.83% at the end of December.

Although there has been a big spike in refinancing activity due to the lower
rates, as homeowners try to reduce their payments and extricate themselves
from adjustable rate mortgages, there has not been an equal jump in purchase
mortgage activity. There are a number of reasons for the lack of purchase
applications, not the least of which is the attitude that "if rates fell that
much in only the last 30 days, how much more will they fall in the next 30
days?" With so many factors influencing mortgage rates, including bonds rates,
unemployment statistics and other economic indicators, it will take a real
seer to give an analysis of future mortgage trends.

Mortgage Rate Update:
For current average mortgage rates, see the
rates page.

For more information on mortgages, visit the
Mortgage Section

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This Month's Tip: "Put a Lid on It"

The subtitle of this month's tip should be "Don't buy more than is
affordable." It sounds so basic, but the last five years it was advice
that, unfortunately, millions of people did not hear. Many of the problems
that we are seeing in the housing and mortgage markets stem from a single
fact: Too many people bought more house than they could afford. Blame
has been assessed and discussed all across the board--the purchasers, the banks,
the mortgage brokers, the builders, the appraisers--so there is no need to
discuss blame here. Rather, we think that it is more important to concentrate
on what can be done to prevent a similar situation arising from a buyer
looking to purchase a home today.

Wants vs. Needs

One of the first culprits in the misstep of buying more house than is affordable
is the misunderstanding of the differences between what you NEED in a home and
what you WANT. Although the difference has been badly blurred in the last few
years, needs and wants are definitely not the same thing. A need is a feature
in a home that, without which, the house would not be feasible. For example,
a minimum number of bedrooms needed for a large family. Another example of
a need might be a garage large enough to store equipment necessary for a job.
A want, on the other hand, is something that while it would be nice to have
included has no real bearing on the liveability of a property. An example
here would be a stainless steel kitchen. Nice to have, but the food prepared
there would not taste any different and therefore would not be a necessity.
The easiest and quickest way to push yourself out of affordability is by
insisting on items that you would like (but truly do not need), all the
while rationalizing it with statements like "I absolutely MUST HAVE the
stainless kitchen with the granite countertops!" You don't, and if it
bumps the house out of affordability, you can't.

Following the Trend

Unlike some other investments, the trend may not be your friend. This is
another sure way to negatively impact what is affordable: Being a trend
follower. FOllowing the herd will almost always cost you extra, whether
it is the trendy home style, or neighborhood, or builder or specific
amenities. If "everyone" wants to go with the trend, it becomes, in many
cases, an issue of high demand and low supply, where even the most simple
economics demands that prices will be higher. It is also important to
consider that trends change, meaning the house you bought that had all
the trendy features may be a dinosaur 10 years later when it comes time
to sell.

Affordable Down the Line

THe housing landscape is strewn with unfortunate purchasers who bought
homes that were affordable when they moved in but which became unaffordable
at some point in the future. This often is due to one (or more) of these

+ Artificially low mortgage rates at inception that resent to higher (and
out of reach) rates. We are seeing uncountable instances of this problem
as we speak.

+ Banking on holding out until income increases enough to make the payment
affordable but the increase in earning never comes.

+ Having to deal with a big adjustment--such as a job loss or the loss of
one of the borrowers.

The more conservatively you approach your home purchase and mortgage, the
better the chance you will be able to weather potential issues down the road.

So, What IS Affordable?

Obviously, this varies a good bit from individual to individual. What makes
perfect sense for one buyer may be inadvisable for another. We have found,
though, that there are some time-tested parameters that will help to both
determine and maintain affordability.


A downpayment gives you a hedge against price fluctuations but also works to
reduce your monthly payment. The more you devote to your downpayment the bigger
the rewards in safety as well as a more comfortable monthly payment. If you
cannot afford a reasonable downpayment (a minimum of 5-10% but more if at all
possible) perhaps it is a better strategy to wait a while before making a
home purchase.

Realistic Qualifying Ratios

Probably the most important determining factor in whether or not a mortgage will
be affordable to you are the qualifying ratios that the lender will develop shortly
after applying for a mortgage. These take into account your debt ratios, both with
and without your housing expense, in relation to your monthly income. Although
this can vary a bit, traditionally your monthly obligations without your mortgage
payment should be no more than 28% of your gross monthly income and your monthly
obligations with your mortgage payment should be no more than 36% of your monthly
income. Unfortunately, these ratios got pushed to the wayside in recent years and
has had much to do with people finding themselves shackled to monthly payments that
they simply cannot afford.

Avoid Non-standard Mortgages

Another big contributing factor to the housing decline were the big increases in
what can be described as "non-standard" mortgages. Included here woud be no
documentation loans (where you had to show no proof of income or expenses),
negative amortization loans (where your mortgage balance went UP every month,
even though you were making payments), "teaser rate" mortgages where you qualified
for a mortgage with an artificially low payment which then re-adjusted to a much
higher rate (and monthly payment) and loans which required absolutely no cash
down, including settlement costs. A very high percentage of the foreclosures
that are so impacting the housing industry (and dropping prices) are the result
of just these type of loans. Although these mortgages are considerably harder
to find today, they are still available and a purchaser should likely avoid them
at all costs.

Summing Up

The housing mess that we find ourselves in did not happen in a vacuum. It was
a series of mistakes and missteps by virtually everyone involved that led us
to where we are today. Had we stuck with the time-tested parameters that served
us well for decades and not thought that somehow "this time it is different,"
we very likely would not be facing the corrections we are now seeing. For an
individual home purchaser the lesson is simple: Do not make the same mistakes
that have cost others dearly.

Next Month's Tip: Inspectors and Inspections


The Home Buying Checklist

Many of our visitors have said that one of the most valuable
aspects of the Home Buyer's Information Center is the
Buying Checklist, where they can make sure that all
the bases have been touched.
You can find the checklist

As always, if you have suggestions for improving the
site, or topics you would like to see addressed in
this newsletter (or, if you have used the Home Buyer's
Information Center to successfully purchase a home),
drop us a quick line

A special thanks to all those who have written to let us know
that they have found the Home Buyer's Information Center a
helpful resource in their buying process.

Have a great month and good luck in all your endeavors!

The Team at the Home Buyer's Information Center

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