Todd Densmore

Living within your means and what it means to a home buyer

As I thought about the turmoil in the financial markets this morning it occurred to me that there might be a few people out there that could use a heads up as they consider making their first home purchase. As you have undoubtedly heard in the news repeatedly, deep down below the current financial crisis is a problem with debt. This problem is not associated only with mortgages, but also with complex financial instruments that grew out of the repackaging of loans - both personal and commercial. Today I want to focus solely on personal mortgages.

Buying a home is a big decision, one that many of us face only a few times in our lives. I am not talking about a vacation home, investment home or fixer-upper, I am talking about your primary residence. What has happened to many people in the country is that they got in over their heads. How did they get there, or why?

For some it was just poor market timing. They bought their homes at the apex of the dramatic price increases. For others it was a poor choice of mortgage, whether they were led into it by their bank or mortgage broker, they ended up with a mortgage with "catches" in it. What catches? Well it could be an interest rate that adjusts at some point in the term, a mortgage that only required paying the interest on it, or one that required no down payment. Any of these can provide a rude shock to the owner, particularly when price appreciation stops. Millions of people have suddenly found themselves "upside down", or owing more than the house is now worth.

What happens when you are upside down? Your payments don't go down, that's for sure. You feel locked into that house, and for many this creates a dilemma if faced with having to relocate. Your choices aren't good; you sell your house at a loss and still owe the bank money. (that's called a short sale)

Since this blog is meant for first time buyers, all of the above was to get your attention! My message to you is simply this - as you plan your first purchase make sure you have a plan. Your plan should include several critical parts.

First thing is a monthly budget with all the new expenses you will incur as a homeowner along with everything else you pay for on a monthly basis. Things you may never have had to think about before like buying a mower, taking care of the lawn, planting flowers and landscaping, replacing a water heater when it suddenly bursts, paying taxes..... you get the picture. You have to have a contingency house fund planned into your budget.

Next thing to think about, before you ever start shopping is what can I really afford now that I have my budget? The mortgage company said I was pre-approved for $2,000 a month! Just because your debt to income ratios say you can spend X amount doesn't mean you HAVE to. There are a whole lot of people in this world that went out and bought the most they could afford and are now stretched to the limit. We call it house rich and cash poor. You can see it all over, just walk down the street some night and look in the windows that have no curtains or blinds and no furniture in the formal rooms - they bought the house and the BMW and now they can't afford curtains.

The whole point is to identify what you can be comfortable with and still have money left over to put in your savings account EVERY month. The pioneers of our country knew this, they didn't eat all their corn in the winter months even if they were hungry. If they did, they would have nothing to plant in the spring and they sure couldn't run to the local box store for more! Hence the saying, don't eat your seed corn. Save some for the new set of tires, for the baby's furniture, to repair the roof. If you have to, eat saltine crackers with your chili instead of $6 designer crackers, just pay yourself first.

One last thought for you. As a new owner, like a recent grad, you will get lots of offers for credit cards. Having a credit card or two is a great sense of safety and can give you a TEMPORARY cushion against unexpected bills. But treat them as that, a temporary cushion. If you use them, pay them off with the next statement; never carry a balance if you can avoid it, even if you have to give up your Starbucks coffee for a month.

Live within your means and plan for your future, it really keeps the stress level down!

Don't lump Lexington, Kentucky into the national housing market

Lexington, Kentucky and Fayette County are being painted by many with the same broad brush the media is using when discussing the overall condition of the housing market. While the Case - Shiller index may be a fair representation of larger markets, it bears very little correspondence to what is happening in our own back yards.

The Case - Shiller index is derived from the study of real estate transactions in two different groups of 10 Metropolitan Statistical Areas, orMSAs. The first tier consists of the greater areas around: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York City, San Diego, San Francisco and Washington DC. Do any of those sound like Fayette County to you? The second tier doesn't get any closer comparatively: Atlanta, Charlotte, Cleveland, Dallas-Fort Worth, Detroit, Minneapolis-St. Paul, Phoenix, Portland, Seattle and Tampa. The closest we get is Cleveland, and I don't think we are anything like them.

Fayette County, and the surrounding counties belonging to the Lexington Bluegrass Association of Realtors, did not see the spike in appreciation many of the MSAs in the Case-Shiller index did. One statistic published earlier this year in the Lane Report indicated that we have seen a modest, but steady appreciation in real estate of approximately 3% per year through 2007. Compare that to the third quarter of 2006 data for Phoenix (16.81), Las Vegas (9.76), Miami (21.19), Tampa (16.05), Seattle (17.3) and others listed in "Economic Real Estate Trends". (Found at http://www.pmi-us.com/media/pdf/products_services/eret/pmi_eret08v1s.pdf)

What does it mean for us? We never had the run up in prices experienced by many of the MSAs in the Case - Shiller index, so we shouldn't see the crash in real estate prices they are. The good news is we aren't! Unfortunately it seems that many people are just listening to the national news and not paying attention to what is actually happening closer to home. Through August of this year our average sales price of existing homes has not changed from a year ago.

While sales are down 15% compared to last year (2007 was a record year), average sales prices are level - not declining, according to year to date statistics from the Lexington Bluegrass Association of Realtors. Average number of days on the market has increased to 80 from 75, but the number of homes on the market has decreased.

All in all, Fayette County has a robust and healthy real estate market. With the announcement this week of the changes in the secondary mortgage market, the one time tax credit available to new buyers and dropping interest rates I expect we will see a further improvement.