October, 2005 Newsletter
+++++++++++ October 1, 2005 +++++++++++++++++++
Introduction: Sales Continue Strong
Mortgage Rate Update: Rates Edge Upward
This Month's Tip: Buying Investment Property
Introduction:Welcome to the October edition of the Home Buyer's
Newsletter, brought to you by the Home Buyer's
Existing-home sales rose in August to the second-highest pace on record,
with strong price gains in a market of tight supply, according to the National
Association of Realtors®.
Total existing-home sales – including single-family, townhomes, condominiums
and co-ops – increased 2.0 percent in August to a seasonally adjusted annual
rate1 of 7.29 million from a pace of 7.15 million in July. Sales were 7.8 percent
higher than the 6.76 million-unit pace in August 2004; the record was 7.35 million
in June of this year.
David Lereah, NAR’s chief economist, said the fundamental factors for housing
remain positive. “With a general background of growing population and favorable
affordability conditions, home sales are staying at very healthy levels,” he said.
“Housing inventory improved in August but remains tight, and we have some way
to go before we get into a range of balance between home buyers and sellers.
As a result, we’ll continue to see above-normal home price appreciation for the
Total housing inventory levels rose 3.5 percent at the end of August to 2.86
million existing homes available for sale, which represents a 4.7-month supply
at the current sales pace. Historically, a supply of around six months is reflective
of a market in balance between home buyers and sellers.
The national median existing-home price for all housing types was $220,000 in
August, up 15.8 percent from August 2004 when the median price was $190,000.
The median is a typical market price where half of the homes sold for more and
half sold for less. This is the strongest rate of appreciation since July 1979 when
annual price growth was 17.2 percent.
On the new sales side, sales of new one-family houses in August 2005 were at
a seasonally adjusted annual rate of 1,237,000, according
to estimates released jointly September 27th by the U.S. Census Bureau and the
Department of Housing and Urban Development. This is 9.9 percent (±9.8%) below
the revised July rate of 1,373,000, but is 6.2 percent (±12.3%) above the August 2004
estimate of 1,165,000.
The median sales price of new houses sold in August 2005 was $220,300;
the average sales price was $283,400.The seasonally adjusted estimate of new
houses for sale at the end of August was 479,000. This represents a
supply of 4.7 months at the current sales rate.
Can this price appreciation continue? Will sales continue to be strong through the
balance of this year and into 2006? The U.S. housing market has defied predictions
for the last year or more, so anything is possible. Those just entering the market,
though, should use prudent judgement when selecting a property and even more
importantly, be aware that it IS possible to pay too much for a property. Do your
research, keep your options open and do not let your emotions control your actions
and you should be well prepared for your home purchase.
Mortgage Rate Update: Rates Edge Upward
Mortgage rates edged upward during the month of September. According to
mortgage company Freddie Mac, average rates for 30-year fixed-rate mortgages
stood at 5.91% for the period ending September 29th, after beginning the
month at an average of 5.71%. The trend in 15-year fixed-rate mortgages was
similar, although the increase was not as high, beginning the month at an
average of 5.30% and ending at 5.44%
Economic trends are the biggest factor influencing mortgage rates, and the
U.S. economy continues to send some mixed signals as to the level of its
health. Obviously, the "hurricane factor" is at work here so it may take a
few more months to see just what the overall trend will be.
For current average mortgage rates, see the rates page.
For more information on mortgages, visit the Mortgage
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This Month's Tip: Buying Investment Property
Although the majority of the information provided on the Homebuyer's
Information Center website is geared to our primary readership--
buyers purchasing a home for their personal use--we are getting more
and more interest in (and questions about) purchasing real estate
for investment purposes. This is not surprising, since the National
Association of REALTORS reports that last year an amazing 23% of
all home purchases were for investment. In addition, another 13% of
purchases were vacation homes, which are frequently also for
investment purposes. This means that over one-third of all purchases
in 2004 were for properties not destined to be personal residences,
and appears to be the highest percentage of this activity ever. So,
it becomes an important topic for discussion.
A little about the authors of this month's tip. We have been investing in
numerous properties for the last 14 years, including over a dozen for
rental, vacation ownership and income production. We may not be
experst on the subject, but we feel that we know it pretty well.
Classes of Investment
Investment properties can be divided into a few basic classes:
* Purchases for rental income
* Vacation homes, whether for rental or not
* Purchases to repair and resell
Another class, which is relatively new, pure speculation and the most
potentially financially dangerous, is the "flipping" craze that has erupted
in the new condominium market in the last couple of years.
Purchases for Rental Income
Traditionally, this was the most common avenue for a real estate investor,
especially for a novice one. Purchase a home (single family, townhouse
or condominium) and rent it out. The rental income covers your expenses
(mortgage, taxes, insurance, repairs and maintenance) and allows for a
bit of profit. The return on your investment, though usually fairly low,
was enhanced by gradual property appreciation (2-4% per year on
average) as well as some potential tax breaks.
In many areas of North America, though, the rapid pace of property appreciation
in the last few years has been a real jolt to this type of investment. Sales
prices have far outpaced any rental price increases (in some areas, sales
prices have gone through the roof while rents have actually declined). We
watch many fledgling investors purchase homes at sky-high prices, then
turn around and rent these homes for considerably less than their expenses.
They justify this negative cash flow with the argument that says "the property
is going to go way up in value." In many areas of North America that have
seen double-digit price appreciation annually for the last few years, to think
that this is going to continue is pretty foolish. Unless there is a huge jump
in average income, the affordability factor alone will prevent prices from
continuing to make huge increases. Already, we have seen softening of prices
in several areas of the United States.
Unless you pay cash (and sometimes even then) vacation homes for investment
purposes are almost always a losing proposition on a month-to-month basis.
The reasons for this are myriad, but include the fact that the prices paid for
vacation properties are almost always at a premium, taxes and insurance are
often considerably higher than on owner-occupied, non-vacation properties,
and the rental income is often limited to a few months of the year. Here,
too, rapid price appreciation has pretty much eliminated any chance for
positive cash flow with normal mortgage terms. The bonus here, though,
is that this is a house that you can use for your vacations. Be aware that
to get maximum tax benefit on a vacation home, you are limited to roughly
two weeks per year of use. Check with your tax specialist to assess your
Another potential benefit of vacation home ownership is for a personal
home after retirement. You are paying down the mortgage during your
working years so that you will have the opportunity to retire to this home
after you stop working. Obviously, the longer the time you have until
retirement increases the benefits of this type of plan.
Purchases to Repair and Resell
This is the classic "fixer-upper" plan where a property in need of work
is purchased, repaired or remodeled and then sold immediately for a
profit. Although many have made money in this type of transaction,
there is much exposure which can result in diminished profits--or even
a loss. Some hints on fixer-uppers:
* You must pay considerably below full market value for the home, even
after factoring in repairs in order to make a profit.
* There will usually be a good number of hidden repairs that you will
not discover initially--the classic "can of worms."
* Repairs often will cost twice as much and take twice as long as
* If the market changes while you are in mid-repair, you can be left
holding the bag.
Real estate investment can be very rewarding and profitable, but it
also can be very trying and, frequently, expensive. You simply cannot
pay far too much for a property and win as an investor. Remember the
old adage, "buy low, sell high?" It is as basic as that. In addition, you
cannot overspend on repairs and maintenance because you bought the
wrong property and be profitable. And, most importantly, you cannot
drain your bank account month in and month out through negative cash
flow and be successful. Yes, to win at real estate investment requires
vision, but investing is a business and common sense, as in most
businesses, brings you the largest rewards.
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
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 here.
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