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November, 2005 Newsletter

+++++++++++ November 1, 2005 +++++++++++++++++++

Introduction: Sales Continue Strong, But New Home Prices Fall
Mortgage Rate Update: Rates Continue to Trend Upward
This Month's Tip: Is the Bubble Ready to Burst?

Introduction: Sales Continue Strong, New Home Prices Fall

Welcome to the November edition of the Home Buyer's
Newsletter, brought to you by the Home Buyer's Information Center.
<A HREF="http://www.ourfamilyplace.com/homebuyer/">The Home Buyer's Information Center</A>
Sales of existing homes held at the second highest
pace on record in September, with sales surging
in some areas following Hurricane Katrina, according
to the National Association of Realtors®.

Total existing-home sales – including single-family,
townhomes, condominiums and co-ops – were at a
seasonally adjusted annual rate1 of 7.28 million
units in September, unchanged from August. Sales
were 7.2 percent above the 6.79 million-unit
level in September 2004, and were second only
to a rate of 7.35 million in June of this year.

David Lereah, NAR’s chief economist, said near-record
activity was supported by spiking home sales in
areas surrounding the Hurricane Katrina disaster
zone. “We are now getting some hard data from this
region, with spot checks showing sharply higher
home sales to residents who were displaced by the
hurricane. The sales surge is more than offsetting
declines in the disaster zone,” he said.

Ad hoc checks in markets such as Baton Rouge show
existing-home sales rose dramatically from September
2004. Parts of New Orleans recorded a fraction of the
year-ago volume, although some suburban areas are
doing well.

The national median existing-home price for all
housing types was $212,000 in September, rising 13.4
percent from September 2004 when the median price was
$187,000. The median is a typical market price where
half of the homes sold for more and half sold for less.

On the new home side, sales of new one-family houses
in September 2005 were at a seasonally adjusted annual
rate of 1,222,000, according to estimates released
jointly on October 27th by the U.S. Census Bureau
and the Department of Housing and Urban Development.
This is 2.1 percent (±11.8%) above the revised
August rate of 1,197,000, but is 0.1 percent
(±15.3%) below the September 2004 estimate of 1,223,000.
The median sales price of new houses sold in September 2005
was $215,700; the average sales price was $285,700.
The seasonally adjusted estimate of new houses for
sale at the end of September was 493,000. This
represents a supply of 4.9 months at the current sales rate.


Mortgage Rate Update: Rates Continue to Trend Upward

Mortgage rates continued their slow but steady move
upward in the month of October. The month saw four straight
weeks of increases in average rates nationwide. According
to mortgage company Freddie Mac, 30-year fixed-rate
mortgages, not including points, began the month at an
average of 5.91% and finished with the period that ended
October 27th at an average of 6.15%. 15-year fixed-rate
mortgages also trended upward, beginning the month with
an average of 5.48% and ending with an average of 5.69%.
For 30-year mortgages, this average represents the highest
levels in over one year.

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: Is the Bubble Ready to Burst?

Although we've never specifically weighed in on the
question of the existence of a "housing bubble" and its
potential burst, we've had numerous articles and
newsletters devoted to topics that might help a
prospective home buyer combat a potential bubble
burst. Some of the topics we have addressed include
"Don't Pay Too Much," "Don't Mortgage Your Life Away"
and "Don't Buy More House Than You Need." By being
prudent, we believe that a purchaser can withstand
all but the most severe of downturns.

First off, do we believe that a Real Estate bubble
even exists in North America? The answer is both yes
and no. In some, limited areas of the continent,
price increases have not risen to what would be
considered bubble status. In a good part of the U.S.
and Canada, the jury is still out
as to whether or not housing prices are sustainable
at current levels. In a number of other areas,
though, the bubble is nearly unmistakable.

There are a number of ways that Real Estate analysts
determine the existence of a bubble: Real Estate
prices rising much faster than inflation, speculators
taking up a large percentage of the market and thus
raising prices unnaturally, bidding wars escalating
prices into the stratosphere. All of these conditions
can contribute to a bubble, and when you have more
than one force at work, the bubble's effect can be

Our definition of a bubble is a fairly simple

When average prices far exceed the average buyer's
ability to pay, a bubble most likely exists. There
are, in our opinion, only 3 solutions to the problem
of a bubble:

1) There must be large increases in income
2) Interest rates tumble, increasing affordability, or
3) The bubble bursts

How unaffordable is some Real Estate in this current
market? The situation in California may be the worst,
but there are problems in a number of areas. In
California, the California Association of REALTORS
reported on October 16th that only 14% of Californians
can afford a median-priced home in that state, the
lowest percentage since these records began to be kept
in 1989. Worse, though, is that this calculation
assumes a 20% downpayment--virtually unheard of in
this market, meaning the affordablility factor is
likely even worse than these numbers indicate. In
any case, nearly 9 out of every 10 people in the
state of California cannot afford to purchase even
a median-priced home. Although the situation may
not be as acute in other areas, there are still
many areas that have a high incidence of

So, let's take a look at the solutions to this
situation, described above.

1) Large increases in income. At best, incomes
have shown only moderate increases in the last few
years. In some professions, incomes have stagnated
recently. The likelihood that incomes take a massive
jump in the next year or so? Probably fairly slim.

2) Interest rates tumble. The last couple of years
have seen interest rates lower than in almost any
period in the last 40 years. May interest rates
moderate a bit in the near future? Perhaps (although
the trend in the last 30-60 days has been up, not
down). Can there be a large decrease in rates? No,
since there is virtually no room for such a large

3) The bubble bursts. When his happens, home prices
fall to a level that is consistent with affordability
of at least a reasonable percentage of home buyers.

Protection from "Bubble Bursts"

The most effective protections against the bursting
of the bubble, should it occur, are:

1) Buy less home than you can afford. Even in the
California example, where prices have run amok, the
affordability factor is based on the MEDIAN-priced
home--meaning that there are numerous homes available
for less than that median price. Buy one of those,
as long as it fits your needs. Buy needs, not wants
and your mortgage payment, taxes, insurance and upkeep
will most likely be lower, leaving you breathing
room should a downturn occur.

2) Maximize your downpayment. We may sound like a
broken record here, but this is crucial. By putting
more money down, you improve your position two ways.
First, obviously, your monthly payment is lower since
you are mortgaging less (and, if you can put 20% or
more down you may be able to avoid Private Mortgage
Insurance (PMI) and your payment may be significantly
lower. Second, you have a much better equity position
when compared to someone who puts 10%, 5% or less
down. Many of these people will not be able to
survive a downturn without reaching deep into their
pockets should a downturn occur.

3) Most importantly, use your common sense. If
people had used common sense 5 years ago, they never
would have paid hundreds of dollars per share for
stocks that are now worth pennies--or nothing. In
the most simplest of terms, the numbers just have
to fit. If they don't, whether you are talking
about the price of stocks, houses or tulips, the
situation almost always ends badly. Common sense--
and a cool mind--can prevent you from making mistakes
that can be extremely expensive in the long run.

Next Month's Tip: Owning a Home Free and Clear

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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