() Comments
Common factors drive price of real estate
By Michael Haubrich
Lotteries for lots in new developments, prices rising by five percent per month, buyers purchasing homes they never plan on living in - these are just a few signs of the real estate bubble we've seen in recent years in the U.S. real estate market.
These signs are mostly found in hot markets such as Florida, California, Arizona and the East Coast. Fortunately, what happens in those hot markets does not have a direct impact on real estate values in Racine. Real estate is not a national market, but a local, even a neighborhood market with prices determined by factors such as amenities, public services, transportation and proximity to other markets.
There are two factors that affect real estate prices regardless of the market: building costs (materials and labor); and cost of financing. The cost of home building has and always will increase over time. Events such as a devastating hurricane or other natural disaster can drive up building costs quickly, but over time, price increases tend to follow inflation.
What is also common in all real estate markets is the cost of financing or mortgage rates. Over the past three years, record low rates have reduced the monthly costs of borrowing. It is the affordability of monthly mortgage payments more than anything else that determines how much a buyer is willing to spend on a home.
Let's assume a buyer can afford $1,000 per month in mortgage payments. With a 30-year term and an 8 percent rate, a buyer gets a $136,000 mortgage. A 2 percent decline in the interest rates and that same $1,000 payment buys a $167,000 mortgage representing nearly 20 percent more house they can buy.
Our local market has also experienced appreciation, although not as rapidly as hot markets like Las Vegas or Naples, Fla., which experienced gains of more than 50 percent over the past couple of years.
Rules to follow,
dangers to avoid Do not buy a home unless you plan on keeping it for at least five years. If you end up paying what turns out to be the top-of-the-market price, odds are that the market will eventually recover as building costs continue to rise. If you use a 30-year amortized mortgage (which we recommend), in five years you will have paid down the principal on the mortgage by about 7 percent. This should cover the transaction costs to sell the property.
Buy what you can afford. Do not overextend yourself so you are a slave to your home. A rule of thumb is to not spend more than 2½ times your annual income for the purchase price of your home. This means if your household income is $100,000, you should not spend more than $250,000 for your primary residence.
Avoid any mortgage where the interest rate is not fixed over the time you plan on living in that home, such as interest-only mortgages or reverse amortization mortgages. For more information on how these mortgages work and the dangers associated with them, check out
http://www.toyourwealth.com for a consumer's guide on
mortgages.
Do not buy in markets you do not know. The best source of information on local markets is from the Multiple Listing Service available through real estate agents who are members. I always recommend that buyers be represented by a buyer's agent throughout the purchasing process.
Mike Haubrich is president of Financial Service Group, a registered investment advisory firm in Racine. On the Net:
http://www.toyourwealth.com
Special Offer: Get 5 Weeks of the Journal Times for $7!
|
 |
|
| Now how much would you pay for Ronco? $55 milllion | Come fall, states to expand campaign for sales taxes on Internet purchases |
