To Payoff or Not To Payoff, That is the Question.

My wife and I spent a few days visiting a great friend, a single gal who is only a few years from retiring from a teacher’s position in a school district in Maryland.  She asked me—after a few glasses of wine—the one question that I hear all the time, “should I pay off my mortgage before I retire?”

This used to be the American Dream—to retire almost debt free—but with all the options that we have now, maybe it’s not so much today.  And so, the right answer is, it depends.

There are a ton of variables related to coming up with the right answer, and of course I won’t print her financial information here, but the things we discussed and that will make a big difference are, what kind of income will you expect to have after retirement, and what expenses can you anticipate—from where you sit today?

If you have recently refinanced your mortgage, so that it is in the 4-5% range; if you will retire with a good monthly income; if you will qualify for social security and medicare concurrently with your retirement; if you have some savings that can carry you through any lean times; if you are healthy and have a family history of longevity; then you might want to evaluate paying off your mortgage.

The real question is, is it smart to pay off the mortgage, and thereby eliminate the monthly housing expense, by spending real cash to do it?  And of course this presupposes that you will want to live there for some time and that the house is neither too big or too small, that it is in the part of the country where you want to stay, and that you can’t imagine there will be any expenses relative to the house that will come as a huge surprise over the next few years—like a new roof or the like, which might make you wish you still had your cash.

Here’s what I see as the most important elements of her situation.  What is the rate of interest she’s earning on her savings account compared to the rate of interest she’s paying on her mortgage? All other things being equal, if you are paying 5.5% for your mortgage and earning less than 1% on your savings, then your money would be better used by eliminating the mortgage.

But would using your cash to pay off your mortgage leave you with enough of a cushion to live on for the rest of your life (or until you decide to sell your home at some point and use the equity/proceeds to cover living expenses – if you should decide to do that).

Let’s look at these elements individually.

As for the interest rate comparison, it would seem pretty clear that using some of your savings to pay off your mortgage makes good financial sense. I’m basing this conclusion on the assumption that using some of that money to pay off the much higher interest rate mortgage (even after factoring in the income tax benefits of it) seems logical to me.

Probably the harder part of this decision is whether or not the cash left over (if you do pay off the mortgage) would be enough.  If your annual expenses are under control, the question to be answered is whether or not those expenses can be covered by the fixed income sources (retirement, social security, savings, and other income if any). If they can, then keeping a 6 month cash cushion may be sufficient (knowing of course that if push came to shove, you could sell your home at some point and get the equity back out of it to live on). On the other hand, if you would need to tap into your remaining funds to supplement your income sources, then the decision may not be so straightforward.

And then there are the conspiracy theorists who think the Administration and Congress may throw all of us a curve, and the value of the dollar will melt away.  But even if we suffer high interest rates and rampant inflation, the only real effect that would have on paying off a mortgage is that your savings will earn a higher interest rate, and the cash value of your house will go up.  There will be lots of other problems, but not in this example.

Any devaluation of the American dollar notwithstanding, after weighing the payoff decision, if you still aren’t comfortable with what to do, my opinion is  you should get with a Financial Planner and crunch some of the numbers specific to your situation. It will likely cost you a little bit to do that but the expense will be “short money” and may well be worth it in the end.

Dane Hahn is a real estate professional with Tarpon Coast Realty in Boca Grande, Englewood and Sarasota.  He can be reached at dane.hahn@gmail.com or 941-681-0312.

See him on the web at http://www.danesellsflorida.com/ or http://www.danesellsnh.com/

Want A Good Deal? Come On Down !

Behind every cloud there is a sil­ver lin­ing — so they say. That "silver lining thing" may not com­fort folks who have lost their homes or who are still nego­ti­at­ing with their lenders to stay in houses that have been their homes for years, but for folks who have been hop­ing to buy a home and hop­ing to get a deal — come on down!

Accord­ing to the National Asso­ci­a­tion of Home Builders which keeps track of these things on a global — or at least country-wide aspect — home afford­abil­ity recently rose to its high­est level in at least 20 years.

Sta­tis­ti­cally, “afford­able” means that the median cost of “hous­ing” in a par­tic­u­lar area is offered for about three times the annual earn­ings of the peo­ple who live in that area. So if the median (fam­ily) income of an area was $70,000; an afford­able house there would cost $210,000. Mean­ing that “afford­able” house would have an ask­ing price of $225,000 or even more.

This, of course merges both new and “used” homes into the same sta­tis­ti­cal pot. Usu­ally we see new homes cost­ing more dol­lars per square foot than used homes. But not always, and not so much today. Last Fall John Can­non Homes offered a mar­ket­ing strat­egy — to get some sales — in which they offered some of their homes at $99 per square foot. This price which could grow higher with upgrades, but includes the cost of the struc­ture and the value of the under­ly­ing land.

Our old rule of thumb — when the mar­ket was strong — was that a struc­ture would cost three times the cost of the lot, and so the struc­ture was 75 per­cent of the final cost. This gave us a sense that if a lot was for sale at $50,000, we could build a house that would cost the builder $150,000 and sell the home to a con­sumer for $200,000. Those were the old days.

Today there are land bar­gains for the builders, and there­fore there are bar­gains for the buy­ers when they buy a new home. Gibral­tar Homes has recently been offer­ing new homes at $98 per square foot. I recently saw that a num­ber of lots were sold in Engle­wood with a final price to the builder of $14,000. Don’t use my old rule of thumb today — if you did you would look for $56,000 fin­ished homes on those lots — and that just is not going to happen.

Try to find a new home today in the Florida mar­ket for $200,000. This is a huge value for a new home, even if there have been some cor­ners “cut”. I would expect all new homes to be beau­ti­ful and have a as many gee-whiz fac­tors as pos­si­ble. Think hand­some but mid-range cab­i­nets, maybe a mid-range HVAC, and impres­sive porce­lain tiles and in the kitchen not mar­ble or granite.

And keep an eye out for the unseen costs that are attached to new homes that may seem too good to be true. I refer to costs to fin­ish the home in your own taste — cur­tains and other win­dow treat­ments, land­scap­ing, secu­rity, light­ing insur­ance and taxes plus the ever pop­u­lar Home Owner Asso­ci­a­tion fees, which are not nego­tiable and which may or may not include cable, assess­ment for com­mon areas and the like. In other words, $99 per square foot prob­a­bly is a ter­rific deal, but the fin­ished house may wind up cost­ing a good deal more when you fac­tor in the monthly costs of liv­ing there.

Oh and watch out for CDD costs, more on that in a future column.

Used homes, on the other hand, cost what­ever you can nego­ti­ate, and the costs of main­tain­ing the home should be pretty well known to the poten­tial buyer — and dis­closed — by the seller. There are dozens of homes in the Sarasota/Charlotte County area that are sell­ing for far less than $98 per square foot. Some of them come with less than 10,000 square feet or land — some come with an acre or two. Larger parcels of land are not some­thing the new home builders are “throw­ing in”to attract buy­ers. As a mat­ter of sim­ple eco­nom­ics, builders include the min­i­mum they can which will still make an accept­able and attrac­tive home.

Is today the best time to buy a home, new or used? It is if you are in the mar­ket to buy one. If you need or want to buy right now, you will find a smor­gas­bord of afford­able homes avail­able, from $70,000 duplexes which might allow you to live in one side and rent out the other for some pas­sive income to cover the taxes and main­te­nance; to mil­lion dol­lar beach front homes that used to be mul­ti­mil­lion dol­lar beach homes.

So afford­abil­ity today is its high­est level since we started com­put­ing the HOI,” said Bob Nielsen, NAHB’s chair­man, in a state­ment. “How­ever, while this is good news for con­sumers, both home buy­ers and builders con­tinue to con­front extremely tight credit con­di­tions, and this remains a sig­nif­i­cant obsta­cle to many poten­tial home sales.”

Dane Hahn is a real estate pro­fes­sional in Florida with Tar­pon Coast Realty in Engle­wood, Sara­sota and Boca Grande. And in New Hampshire, he is with Gove Group Realty. He will answer your ques­tions and you can reach him at dane.hahn@gmail.com or by phone at 941−681−0312. See his Florida web site at http://www.danesellsflorida.com/. And his NH web site is at http://www.danesellsnh.com/

No Equity? No Divorce!

Back in the day, when people would come into our real estate office, with the intention of selling a house, there would usually be only a couple of reasons why they were selling.  You might think they needed a larger (or smaller) home.  Sometimes their reason was a job change, and a transfer to another area.  I haven’t had a relocation seller in years.

And just as often they were changing homes due to a life change, maybe their last child graduated form High School, or perhaps there was an addition to the family, an in-law or a new baby.  Sometimes they just wanted the “trophy house”—the one they could just afford and came with all the bells and whistles.  But the biggest reason for selling the old house was a divorce about to happen.  And so it is no real surprise that home price declines are positively affecting marital stability.

People can’t afford to get a divorce because there’s no home equity to split up.
The American Economic Review study—out this week-- findings suggest that house prices have a significant effect on divorces.  Divorce rates have declined over the past few years. The U.S. Census Bureau reported in 1996 that 50 percent of all marriages ended in divorce. Figures from 2009 showed a 46 percent divorce rate.

I had a client who owned a home in Northport—it was a home he purchased as an investment, but there was the unspoken possibility that he and his wife—both lawyers—might move into that home at some point.  My phone rang about a year ago—the call was from him.  “We have to sell that house”, he said. “Business is terrible.”  And the reason?  He’s a divorce lawyer, and nobody’s getting divorced.

Almost 40 percent of couples who were considering a divorce or separation before the recession began said they put aside their plans to split. The AER survey shows that as home prices fall, divorce rates fall with them.  Conversely, when house prices rise, growing home equity give couples financial freedom. Basically, when jobs are easy to attain, credit readily accessible, and homes quickly selling for more than last year, couples can afford to move on.

But, when jobs are scarce and home prices stagnate, people become loss resistant.  When couples find there’s no “payday” when the house sells, then there’s no easy exit from the marital union, no pot of gold at the end of the rainbow.  This is especially true for the thousands of homeowners who are currently underwater on their mortgages.  Add to this the high cost of most divorce proceedings and one reason becomes clear as to why couples have sidelined their splitting-up plans.

The unemployment rate has edged back up in recent weeks. Home prices continue to decline in many parts of the country and a continuous stream of foreclosures is expected for the foreseeable future. Will these trends continue to keep couples together? Evidence from the AER study points to this possibility.

The real estate market continues to seesaw, some weeks it’s in decline, some weeks it looks like it’ll make a pretty good recovery.  I suppose this is the new normal, but I’m reminded of Richard Farina’s novel, “Been down so long, it looks like up to me.”

So good news/bad news.  The divorce rate is down and the market is not as dead as the reports.  Paraphrasing Mark Twain, The reports of the death of the real estate market have been greatly exaggerated.

Dane Hahn is a real estate professional at Tarpon Coast Realty in Florida and The Gove Group in New Hampshire.  You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  Or see him at www.danesellsflorida.com and http://www.danesellsnh.com/

Turning Back A Home...

Q. Who do you know who has legal knowledge on turning a home back to the bank and the legal repressions of the same when the owner lives out of state?

A. First of all, I'm not a lawyer, but regarding your real estate questions, I would gladly discuss them on the phone. In a nutshell, turning a home back to the bank comes with a couple of downsides, especially when it is NOT your principle residence. You may have heard that there may be some forgiveness for owner occupied dwellings that have become untenable for the homeowner to maintain and when these go “back to the bank”, the IRS may be more gentle, but it's likely that any accommodation the bank gives an investor would be taxable.

With investors the IRS considers any money the bank forgives as income. And so there is income tax due.

For example, if you owe $200K and today's market value is $100K and the bank "takes it back", and forgives the difference; you have come out even with the bank and the market, but the IRS will count that $100K that the bank forgave you, as income.

Secondly, while many banks are taking back real estate, the benefit to you might be questionable. Remember there is a “trail” in everything we do in our lives. This trail will affect your credit score, at least for the near term. I am surprised to read that some financial councilors are suggesting a walk-away as a strategy, and I must take offense at that advice. There is on the one hand the moral question of whether it is appropriate to turn your back on a promise you made, (to pay back the money you borrowed). While on the other hand there is the business dilemma which asks, should you continue to invest in a property that has significantly less “market” value than it did when you bought it?

The Chicken Little's of the world will tell you your credit will be ruined for life if you choose to default, but only time will tell if they are right--I suspect that in a few years credit lenders will discount one or two of these kind of blots--because essentially all their applicants will have the same issues, and if they want to make a loan, they will have to overlook an occasional foreclosure.

So “turning a house back to the bank” is what everyday Realtors and Lawyers call a "deed in lieu of foreclosure", where in the simplest terms you mail in your keys instead of your next mortgage payment. If this is what you want to do, call a lawyer in the same county as the home in question. The concept is that you are giving up ownership voluntarily so the bank does not have to go through the expense and time of a full foreclosure. The local lawyer will be your resource in this effort.

Around the USA, people at all economic levels are just stopping paying their mortgage. The banks only realize they have a “new” problem after about 90 days, and that's when they start sending letters, but really they don't do anything for about 6 months or so. My experience in Florida shows that on average, it takes them 19 months to handle a complete foreclosure, from the last payment made until they own and begin to try to resell the house. (This is expensive for the bank, and usually the condition of a vacant home is also in question. They may have expensive repairs to manage along the way, together with taxes and HOA fees—all of which add up and which is why they are willing to do short-sales.)

If the property in question is a residence, there might be a few other options. You should certainly keep it insured, even if you are not paying taxes, HOA's and the mortgage. So long as you still have the deed, you don't want to have a hurricane or fire do additional damage.

You may want to rent your unused dwelling, even for a low figure. But to avoid a legal issue with a tenant, I would suggest offering it without a lease. At the same time, try to negotiate a deal with the bank—if they will accept a “deed in lieu” then go that way, if not at least you will have tried as an honorable gentleman. At that point, and with no luck there, you might let it go to foreclosure, but you might as well keep collecting the rent as long as you can.

A better choice might be a short sale. This is a transaction in which we Realtors offer the home for sale usually for 10% to 20% less than the tax Assessor guesses it's worth. Once a buyer is found--and that can be quick--the deal is sent to the bank for their approval. This required step usually takes a long time, and often the buyer will get cold feet and drift away during the wait. But it's the way these things go--once we hear back from the bank as to the acceptable price, we can either sell to the buyer we already have—or if he has moved along, we set the “new” asking price to what we know the bank will accept and look for a new buyer.

As a condition of the sale, be sure to include that if the bank accepts this offer, you are not responsible for any difference between the amount still owed and the sale price. Good luck with the IRS.

Dane Hahn is a real estate professional with Tarpon Coast Realty in Boca Grande, Englewood and Sarasota. He will answer your questions. You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312. See him on the web at http://www.danesellsflorida.com/

Happy 4th of July--Maybe the Market Has Turned?

I have been telling you that I think our real estate market—where it is today—is at the bottom of the present cycle. That readers who want to sell can now assume prices will firm up about where they are today, and buyers should get used to these “new” prices, 'cause they're not likely to go any lower. In fact a significant majority of economists and experts believe that the bottom for home prices arrived in the first quarter (or just to cover their butts will agree that the “bottom” will have arrived sometime before year-end.)
Despite persistent macroeconomic uncertainty and unprecedented housing market dysfunction, almost two-thirds of the panelists of the Macro Markets Economic Roundtable see the residential real estate market at an historic turning point.

So, would that mean there is a recovery on the immediate horizon? Well, maybe not. Just because we're about to signal the end is near, doesn't mean the recovery will immediately follow. The group of 69 panelists who are currently forecasting the 2011 turning point only predict about a two percent average annual growth in home prices over the next 3-4 years.

One thing all agree on is that young families and adults ages 31 to 45—are likely to lead the home-buying recovery as it gets underway. These potential home buyers are most likely to think it’s a good time to get off the fence—and have strong opinions about the design features their new homes will include.
In sharp contrast, Baby Boomers continue to wait for the market to improve, and their decisions to delay retirement also delay their decisions to purchase and/or downsize into a smaller home.

In a recent survey of 10,000 buyers and potential buyers across the country, almost 90% were optimistic about a new home purchase saying that in their opinion, now was a good time to buy a home. In addition, even though the average home size is shrinking, a majority of these prospective buyers said they would like a bigger home than the one they have. This is especially true among first-time buyers or younger families looking for more room to grow.

This group is willing to pay more money for a green home, and they expect new homes to already have many green technology features. They also favor dark wood cabinets, a separate tub and shower and a fireplace in the living room, and more preferred a great room over formal spaces.

And while community amenities are important to Gen X buyers, nearly half said they prefer a home in a large-lot, suburban development, versus about one fifth looking for a traditional or “walkable” neighborhood. And they are looking for homes with a connection between indoor and outdoor spaces, to create the perception of greater home size, even if the space is not under A/C. They also want more storage space, an open floor plan and more flexibility in the garage.

All this is good news, and my own feeling is that we're all so tired of the market being depressed, we're ready for a turn.

My opinion: I'm not saying the market has turned, because in spite of the trickery, smoke and mirrors presently at work in Washington—including the QE2 cheaper dollars which will make house prices go up, together with restated numbers as needed--there may still be a significant wait before we will see any of the growth we had only a few years back, nonetheless, some growth (even in cheaper dollars) is certainly a welcome change for all Americans.

BTW, if you read last week's column you may recall that last week I had clients who made 4 offers, well two of those 4 offers were accepted, so has the spell been broken? Stay tuned.

Dane Hahn is a real estate professional in New Hampshire at The Gove Group in Stratham and in Florida at Tarpon Coast Realty in Boca Grande, Englewood and Sarasota. He will answer your questions sent to dane.hahn@gmail.com