There’s an interesting article by Harvard professor Edward Glaeser in the New York Times Economix blog that says your home’s value probably won’t rise. Despite the downturn in the housing market, nearly everyone who buys a home does so on the assumption that the value will go up if you wait long enough. Glaeser argues that’s not generally the case.

One of the pillars underlying the belief that housing will appreciate in value over the long term is that the ratio between housing prices and income will remain stable. So as incomes rises over time, so too will home prices. Poppycock, says Glaeser. The prices of other products like computers or cars don’t go up with people’s incomes so why should housing?

In fact, there seems to be almost no link between housing prices and incomes in most cases. In cities like Houston and Phoenix the ratio of housing value to income actually dropped by at least 40 percent between 1980 and 2000.

The two instances where you can reasonably predict increasing prices are “when rising demand collides with restricted supply of land and housing permits,” Glaeser argues. Hence, areas like New York and San Francisco – where nearly every square foot of buildable land has already been used – experienced booming housing prices from 1980 through 2000, and have even weathered the downturn better than other areas.

Unfortunately for most home buyers, those two factors are not at play in other areas of the country. America still has lots of empty land and a robust construction industry capable of cranking out huge numbers of new, affordable houses. That’s not a recipe for long term housing price increases.

The Bottom Line: think twice before assuming your home will increase in value over the long term. Housing may be an asset that doesn’t appreciate over time.

photo credit: Mr. T in DC

Freddie Mac, one of the two main government-sponsored institutions that set lending standards for home mortgages announced recently that it will be phasing out interest-only loans. This is expected to drastically shrink the number of interest-only mortgages available to consumers.

Freddie Mac has already begun the phase-out after losing money on the loans over the last three years. Nearly one in five interest only loans that Freddie Mac holds are at least three months delinquent. Fannie Mae has also incurred big losses on these types of mortgages but the company has not yet said whether it will phase them out as well.

While smaller lenders say they will continue to make interest-only mortgages available, the lending standards are getting a lot stiffer. Typically consumers select a fixed-rate or variable-rate mortgage and pay only the interest on the loan or the first 10 years, after which they pay for principal and interest for the next 20 years.

Borrowers with good credit can get adjustable-rate interest-only mortgages with a 4.5 percent interest that is fixed for five years. The rate then increases a maximum of five percentage points over the next five years. Under the new tougher lending standards a consumer would have to prove they would be able to pay the fully indexed rate of 9.5 percent.

As a result of the new standards, interest-only mortgages are considered a good fit for only wealthy individuals who need flexibility in their cash flow and who do not intend to own their home for long.

The bottom line: Interest-rate mortgages are not for everyone. If you are considering this type of loan be sure you can meet they monthly payments once the principal portion of the mortgage kicks in, most likely at a higher rate.

photo credit: seier+seier+seier

If you talk to any real estate agent you’ll hear the same mantra: it’s a great time to buy a home. Realtors said it in 2001 when home prices were climbing steadily, they said it when prices peaked in 2005, and they continue to say it today. So what’s the real answer?

There a couple of ways to figure out the timing of the housing market: one involving poring over statistics and one much easier to figure out.

If you’re statistics minded there are three metrics to examine, according to Barry Ritholtz, C.E.O. and director of equity research at FusionIQ, a quantitative research firm, quoted recently in the New York Times:

the ratio of median income to median home prices, which gives you an idea about affordability
the cost of ownership versus renting – if rents in your area are much cheaper than carrying a mortgage that’s a sure warning sign
the value of the national housing stock as a percentage of gross domestic product

Each of these factors were greatly inflated during the housing bubble and are still not back to historical levels. According to Ritholtz there are two ways for these metrics to get back to normal: home prices could drop another 15 percent, or they could remain flat over a period of seven years while the GDP and personal incomes grow. That’s certainly not a vote of confidence in the current housing market.

A simpler method of evaluating the housing market is to simply look at where interest rates are headed. Will borrowing money get cheaper or more expensive? That determines whether you cna buy more or less house.

While it may be impossible to predict whether housing prices have truly bottomed out, all signs point to interest rates climbing over the next few years making it more expensive to finance a home.

The bottom line is this: if you’re thinking about buying a home do it for the right reasons. Don’t view your home as a short-term investment and be sure to compare the cost of buying vs. renting. If you’re in it for the long-haul, then this is as good a time to buy as any. But if you’re looking to make a quick buck, the housing market is not the place to do it.

photo credit: coffeego

Becoming a parent means getting your financial house in order. While you could let your finances slide a bit when you were single, you now have people depending on you. Doing some basic financial planning today can mean the difference between making your golden years happy and productive or stressful and uncertain. Whether it’s your your mortgage, insurance, or savings, every aspect of your finances should be reviewed to make sure your family is safe and secure.

Here are the 8 most important financial steps you can take for your family:

1. Buy life insurance. When you were a swinging single you didn’t have to even think about life insurance. Now that you have a family that’s depending on you, it’s imperative that you and your spouse get a life insurance policy. Term life insurance is usually sufficient and you want to make sure you get enough that your family can continue to live comfortably if you pass away, so think about at least $500,000 in coverage. If you’re healthy, term life insurance is not a huge monthly cost and it can really put your mind at ease. Use one of the many life insurance comparison websites to instantly get a rate quote.
2. Build up a rainy day fund. Life is unpredictable and having a family multiplies that unpredictability. Unforeseen medical expenses, automotive costs, or even natural disasters can quickly put a dent in your monthly budget. Take the time now to sock away at least three to five months worth of living expenses and put that money in a savings account that is accessible. But remember – this is emergency money only, so don’t go blowing it on a big vacation.
3. Review your health insurance. Medical expenses are eating up an increasingly huge chunk of the average American family’s income. It’s time to review your health insurance to make sure you have enough coverage and that your deductible isn’t too high. If you have children, chances are you’re going to the doctor on a regular basis. While having a high deductible is a good way to save money on health insurance while you’re single, frequent doctors visits will mean a lot of money out of your pocket. Review last year’s medical costs, see how much you had to pay, and adjust your deductible accordingly.
4. Buy a house. Although the housing market has been in a tailspin for the last several years, buying a house has traditionally been one of the best investment vehicles for families over the long term. Take advantage of today’s historically low interest rates to lock in a lower cost 30 year fixed mortgage. While it might feel like a stretch to pay for it now, chances are in 30 years you will be very happy about making the decision to buy.
5. Start a college fund. Sure, when your kids are toddlers college can seem like a lifetime away. But the years pass by faster than you can imagine, so start saving up for college now. Putting away even a small amount every month or quarter can allow the power of compounding to take hold and build up your savings over the long term.
6. Get a will. No one likes to think about death, but if it happens your family needs to be ready. Having a will prepared does not have to cost an arm and a leg – ask around to see which lawyers specialize in this type of work.
7. Plan for retirement. Saving for retirement on top of all your other family expenses can seem like an overwhelming burden, especially in the current rough economy. But like starting a college fund, time is your friend. The sooner you start saving, the longer your money will have to grow. Make sure you take full advantage of any 401k plans offered through your work.
8. Create a budget and track it. You can’t control your expenses unless you know exactly where your money goes each month. Use a program like Quicken or Mint.com to track your expenses and see what the trend is. Are you spending too much on entertainment or groceries? Find where the big expenses lie and figure out ways to cut back. You can also use these programs to monitor your budget month to month. The nice thing about a program like Mint (which is free, by the way), is that your accounts are linked together so there’s little to no manual entering of data. Login at anytime to check how close to your budget you are.

While these eight steps may seem like a huge amount of extra work, you don’t have to do them all at once. Take one item from the list to complete per week and eventually you will get through them all. By the end, you’ll know much more about your present financial condition and will be able to successfully plan for the future.

photo credit: Sukanto Debnath

While the most expensive areas may not be much of a surprise – especially for those of us who live in California – the real news was how many markets on the Coldwell Banker list are now affordable.

In total, there are 84 U.S. markets in which the sample home price averages under $200,000. The monthly mortgage cost for homes in this price range could average less than $600, and down payments could amount to less than $4,000.

The survey found a price gap of more than $2 million between the most expensive and most affordable U.S. housing markets. In the annual comparison of similar 2,200-square foot homes in 310 U.S. housing markets, La Jolla, Calif. led the list as the most expensive real estate market in the country with an average home price of $2,125,000. Grayling, Mich., also known as the “canoe capital of the world,” ranked as the most affordable market in America, where a similarly sized home costs $112,675.

As in past years, California dominated the most expensive housing market list. Joining La Jolla in the top 10 were the California markets of Beverly Hills, Palo Alto, Santa Monica, San Francisco, Newport Beach, Palos Verdes, and San Mateo. Boston and Greenwich, CT were the only two non-California locations in the top 10.

In contrast, the midwest dominated the list of most affordable markets. Akron, OH, Canton, OH, Detroit, and Eau Claire, Wis. all placed in the top 10 cheapest housing markets.

The most expensive market outside the United States is Singapore, where an HPCI subject home averages $1.9 million U.S. dollars, ten percent lower than La Jolla. Coldwell Banker Real Estate compared a total of 57 markets in 29 countries outside of the United States, with those international home prices averaging $487,844 in U.S. dollars.

These low home loan rates, combined with the federal tax credit for first time homebuyers drove up the number of signed home sales contracts for the seventh straight month, the National Association of Realtors reported. The association said that its index of sales agreements rose 6.4 percent from July to 103.8, beating forecasts. The index was 12 percent higher than a year ago, matching similar reporting on home sales from the Case-Shiller home sales index.

The decline in mortgage rates is significant in that the economy appears to be picking up steam, leading many analysts to predict interest rates would start to rise. This clearly hasn’t happened yet, as last week’s rates were the lowest since May when it was 4.91 percent. Mortgage rates hit their record lowest point of 4.78 percent in the spring.