There is no doubt that if the government plan leaked Wednesday night becomes reality it would spur some home buying and reduce some of the inventory that is hanging out there. However, the question is, would it also cause some unintentional consequences in the long term or the short term for that matter.
I always get a little nervous when the government tries to save us. I often compare government intervention to those wonder drugs that they advertise on TV. They have super happy people doing happy things under a great tag line while they monotonously insignificantly read off the side effects that are often more harmful then the original problem.
I understand that we are now in un-chartered territory and the consequences for doing nothing could be egregious as evidenced in the slow as molasses recovery of the Japanese economy when the government acted slowly but (need a breath in the middle of this sentence gone wild) I still think it would be a worthwhile pursuit to try and understand as many of the unintended results as possible.
One immediate effect is that, knowing that a 4.5% interest rate is on the horizon, some buyers may choose to wait and see whether or not it happens. I was speaking with a lender today who said that he was inundated with calls looking for a refinance at a 4.5% rate. As I understand it the plan would likely not include refinances which would create a market of mortgages with two rates and an industry that would be trying to find a work around. Even more troubling was that he said he received calls from buyers who were currently in contract to buy a house who wondered if they should breach the deal in order to wait for the 4.5% rate.
Longer term we may find people locked into their house because it has a lower rate, causing a firmly fixed inflexible real estate market. Or, we may find that we have again artificially inflated prices causing us to move a little farther down the road, the inevitable paying of the piper.
I am not pretentious enough to believe that I am able to see the end result of these actions and I am sure there are people smarter than me attempting to understand the ramifications, but I would definitely urge them to attempt to be exhaustive in their consideration of the effects.
That all being said if you are out there planning on buying your first home I don't think you can ask for much more. You get a Tax Credit, Tax deduction, possibly bond money, a chance to buy a home at depressed prices, a buyers market, and now possibly a 4.5% interest rate. Short of a fairy slipping the key to a home under your pillow while you sleep, I do not think you are going to get a better deal.
Hooray for 4.5%
You should only do this if 1) You really want to help out the Buyers' of your home because you are going to be giving them a great deal as I will explain later or 2) You have way too much money assuming the phrase too much money describes a real situation. Now you should not feel bad if you thought this was a good idea. I hear it all the time and the idea is perpetuated by real estate professionals. The multiple listing service is full of listings that say $x,xxx.00 carpet allowance. The logic seems sound. This way they will get to pick the kind of carpet that they want. Or, they are probably going to replace the carpet anyway. Sounds good but only if you don't understand the way a Buyer chooses their home purchase. They choose it emotionally. They choose it often by the way it feels and they usually choose quickly. I usually can tell if a Buyer is going to purchase a home or not within 30 seconds of being in the house.
What you will be doing by offering a carpet allowance is giving up something for nothing. A terrible negotiation. You are giving up the cost of the carpet but it will not be reflected in your selling price. Why? Because the Buyers are going to make an offer based on how your house makes them feel and crappy carpet is not going to elicit those amorous feelings about home ownership that you need if you are to obtain a top dollar price for your home. Even worst you may get no offer at all.
The problem of bad carpet is exacerbated if you are selling a house with no furniture. I have observed over the years that when a Buyer enters a house with no furniture their eyes immediately go to the floor because there is nothing else in the room to draw their attention. This not only applies to carpet but any type of flooring. I am only using the word carpet because that is what ties into the title of this post.
So, why is this idea so prevalent?
1. Because often the Seller does not want to spend the money until they know they can sell the house. Unfortunately this is self sabotage and results in the realization of their fear, namely, the house not selling.
2. The Real Estate Professional is standing right in front of you often asking you to hire them to sell your house. So, instead of telling you that you are wrong and risk losing the listing or getting a house with nothing to offer but crappy carpet they will take the carpet allowance. The same professional might be less likely to follow this route if they were footing the cost of offering the carpet allowance. It is worth noting that people who professionally sell houses, e.g., builders, investors, Realtors will always continue working until they have a finished product. They don't stop short of installing the flooring and say they will want to pick their colors. They want the house to wow the buyer and you should too.
3. Houses do sell all the time with a carpet allowance so it seems to confirm that it was the right choice. However what is not realized is that the carpet allowance actually cost them money without benefit.
OK, OK I get it no carpet allowance. So what is a Seller to do. Install a carpet that is neutral and will have a wide appeal. Install it before you offer your house on the market so that a Buyer will fall in love with your house and pay you a premium price.
How do you pick a carpet with a wide appeal? One of the easiest ways is to ask a local flooring company what their most popular choice is or what do they often sell to builders. You will often find that it is a medium priced carpet that is less costly than what you might expect. I have found that most Sellers overestimate the cost of carpet because they remember installing carpet in their house at a higher cost. Often, this because the carpet salesman upgraded them to a carpet that is much costlier than what would be expected in even a new home.
Well hopefully that myth is put down for good and you are now armed with more knowledge you can use to go out and sell that home for a record price.
Only you can truly answer that question. As you look at the prospect of a home payment it may seem quite daunting but here are a few things to consider.
Home prices historically have risen about 6% a year. Meaning the home you are purchasing may be one of the best investments you make and as your investment grows you are able to enjoy the comforts of your home as well.
The primary vehicle to retirement security for many has been their home. The US savings rate has steadily declined from almost 10% in the 1960s to zero in this decade. The counter force to this for many has been the appreciation of their home. Home equity has been the saving grace for many a retiree.
One of the final things to consider is this. Your house payment will be fixed. Your rent is not. Each year your payment will seem smaller and smaller. As time goes by your salary will go up. Prices of most things you buy will go up but if you have a fixed rate loan your payment will be the same. So in a way you are locking in the price you pay for a place to live for 30 years. After that of course you will be paying nothing. Imagine now two peope who had a choice to buy a house or rent 30 years ago. The price to rent or the payment to buy would be about the same. It would have been about $200.00 for the average house. Flash forward 30 years to 2008. The guy who chose to rent would now be paying about $800.00 with an infinite number of ever increasing rent payments to go. The guy who bought a house would now be making his last payment of $200.00. Which guy do you want to be?
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Realtor in Oklahoma City area.
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