Tuesday, December 28, 2010
Canada's housing market among world's best
Bankers sound alarm on loans
Tuesday, December 14, 2010
Planning ahead key to getting top value when selling
KATE ROBERTSON
Special to Globe and Mail Update
Published
As with every exit strategy, experts advise owners to plan early if they think they will eventually sell their business.
According to the business monitor survey published for the first quarter of this year by the Canadian Institute of Chartered Accountants and Royal Bank of Canada, the top two challenges business owners believe they will face in selling are getting the right value for their company and finding the right successor.
Wednesday, December 8, 2010
Brokers agree BoC rate hikes unlikely until late 2011
Taken from Canadian Mortgage Broker News
Friday, 3 December 2010
A poll released by Reuters reveals that primary dealers and global forecasters unanimously agree the Bank of Canada will hold interest rates at its next policy announcement, but the timing of the next hike in 2011 is up for some debate.
The Reuters poll, released on Dec. 2 showed 93% median probability that the Bank of Canada will keep its key rate at 1% at its policy announcement on Dec. 7, with all 44 forecasters polled predicting no move.
Among the 42 that forecast the central bank’s next hike, the majority saw it happening in the first half. The median forecast for the May 31 policy date has the rate rising to 1.25%.
But among the 12 Canadian primary dealers — the institutions that deal directly with the central bank to help it carry out monetary policy — the majority forecast rate hikes in the second half with a median prediction of a first hike in July.
When compared with a similar poll taken in October, the more recent survey showed rate hike forecasts had been moved deeper into 2011.
Thirty of the 44 forecasters surveyed say the central bank will still be at 1 percent after March 1, a more pessimistic view than the last poll.
Martin Marshall, Ontario Sales Manager with Homeguard Funding Ltd. (Verico) is firmly on side with the Canadian forecasters and thinks continued low rates could be a boon for brokers.
“The economy has still not fully recovered from the recession, both here in North America and in Europe,” he says. “To raise rates at this time would be premature and therefore I do not see rates rising until the second half of 2011,” he said.
“This is great news for prospective home buyers and even existing home owners. Rates are at historic lows and we may never see them this low again.”
Morgan Vaughan, a mortgage broker with The Mortgage Group Ontario sees a steady stream of business for brokers in 2011.
“With recent numbers coming out, I don’t see any reason to raise interest rates and I believe it means brokers will continue to be busy next year, especially with refinancing.
“The spring real estate market will be strong and even if there’s a one per cent increase in interest rates I don’t see it affecting too many people because of the recent changes that require buyers qualify for the five-year posted rate.”
“Given that the Bank of Canada had indicated that they didn’t want to see that great a divergence with U.S. rates and the Fed was actually doing quantitative easing, it made sense to push out the Canadian rate hike as well as opposed to adamantly defending a Q1 move,” David Watt, senior fixed income and currency strategist at RBC Capital Markets told Reuters.
“We’ve had a lot of recovery and we’re seeing some fade at the present time, so you get that caution that maybe the domestic side of the economy is not strong enough to offset the still sizable trade hit and currency strength.”
A report earlier this week from Statistics Canada showed the economy disappointed in the third quarter with the weakest growth rate in a year, while the economy shrank outright in September, adding pressure on policy makers to safeguard the patchy recovery.
Bank of Canada Governor Mark Carney in October gave a blunt assessment of the global and Canadian economic recoveries, saying the central bank would plot its next move with extreme caution.
According to CIBC World Markets senior economist Benjamin Tal at the recent CAAMP Forum, massive new monetary stimulus by the U.S. Federal Reserve to support a sagging U.S. economy also prolongs low rates south of the border, and Canada is seen not wanting to race too far ahead of its largest trading partner.
– John Tenpenny, Editor, CMP
Friday, 3 December 2010
A poll released by Reuters reveals that primary dealers and global forecasters unanimously agree the Bank of Canada will hold interest rates at its next policy announcement, but the timing of the next hike in 2011 is up for some debate.
The Reuters poll, released on Dec. 2 showed 93% median probability that the Bank of Canada will keep its key rate at 1% at its policy announcement on Dec. 7, with all 44 forecasters polled predicting no move.
Among the 42 that forecast the central bank’s next hike, the majority saw it happening in the first half. The median forecast for the May 31 policy date has the rate rising to 1.25%.
But among the 12 Canadian primary dealers — the institutions that deal directly with the central bank to help it carry out monetary policy — the majority forecast rate hikes in the second half with a median prediction of a first hike in July.
When compared with a similar poll taken in October, the more recent survey showed rate hike forecasts had been moved deeper into 2011.
Thirty of the 44 forecasters surveyed say the central bank will still be at 1 percent after March 1, a more pessimistic view than the last poll.
Martin Marshall, Ontario Sales Manager with Homeguard Funding Ltd. (Verico) is firmly on side with the Canadian forecasters and thinks continued low rates could be a boon for brokers.
“The economy has still not fully recovered from the recession, both here in North America and in Europe,” he says. “To raise rates at this time would be premature and therefore I do not see rates rising until the second half of 2011,” he said.
“This is great news for prospective home buyers and even existing home owners. Rates are at historic lows and we may never see them this low again.”
Morgan Vaughan, a mortgage broker with The Mortgage Group Ontario sees a steady stream of business for brokers in 2011.
“With recent numbers coming out, I don’t see any reason to raise interest rates and I believe it means brokers will continue to be busy next year, especially with refinancing.
“The spring real estate market will be strong and even if there’s a one per cent increase in interest rates I don’t see it affecting too many people because of the recent changes that require buyers qualify for the five-year posted rate.”
“Given that the Bank of Canada had indicated that they didn’t want to see that great a divergence with U.S. rates and the Fed was actually doing quantitative easing, it made sense to push out the Canadian rate hike as well as opposed to adamantly defending a Q1 move,” David Watt, senior fixed income and currency strategist at RBC Capital Markets told Reuters.
“We’ve had a lot of recovery and we’re seeing some fade at the present time, so you get that caution that maybe the domestic side of the economy is not strong enough to offset the still sizable trade hit and currency strength.”
A report earlier this week from Statistics Canada showed the economy disappointed in the third quarter with the weakest growth rate in a year, while the economy shrank outright in September, adding pressure on policy makers to safeguard the patchy recovery.
Bank of Canada Governor Mark Carney in October gave a blunt assessment of the global and Canadian economic recoveries, saying the central bank would plot its next move with extreme caution.
According to CIBC World Markets senior economist Benjamin Tal at the recent CAAMP Forum, massive new monetary stimulus by the U.S. Federal Reserve to support a sagging U.S. economy also prolongs low rates south of the border, and Canada is seen not wanting to race too far ahead of its largest trading partner.
– John Tenpenny, Editor, CMP
Monday, November 29, 2010
Making a return on your mortgage
ROB CARRICK
Taken from the Globe and Mail
Published Friday, Nov. 26, 2010 3:47PM EST
The 5-per-cent return on safe investments is back.
It happened last week when major banks increased their posted mortgage rates. If you were lending money out for mortgages like a bank, you could get the same return.
Here’s how: Just use the money in your registered retirement savings plan to finance your mortgage.
Mortgage negotiations Investing your RRSP dollars in your mortgage is a fringe strategy – let’s get that straight. Several financial institutions offer it, but not with much enthusiasm. It’s costly and time consuming to set up, and it locks you into returns that could be lower than what a diversified investment portfolio could earn over the long term. If your entire RRSP is invested in your mortgage, then there’s also a lack of diversification to worry about.
And yet, there’s a steady level of interest in this strategy. Mike Wise, a Calgary investment adviser, said most of the inquiries he gets are from people who want to use RRSP money as a source of funds to buy investment real estate. These people are often stretched financially and may not qualify for traditional mortgages.
The other group interested in the mortgage-RRSP strategy is made up of conservative investors who see their mortgage as a potential replacement for the low-yielding bonds and term deposits they own.
“That kind of person would be a jewel for this strategy,” said Mr. Wise, who 11 years ago put his own mortgage in his RRSP and wrote about it for Canadian MoneySaver magazine (read it here).
Charley Tsai, vice-president of wealth planning support at TD Waterhouse, offers this guideline on deciding whether it makes sense to hold your mortgage in your RRSP: “It’s worthwhile if the mortgage interest rate, net of expenses, would be greater than the investment return you would generate from your RRSP.”
Let’s deal with the “net of expenses” side of things first. Prepare yourself for a fee-for-all if you set up what banks call a non-arm’s length mortgage.
Start with the mortgage set-up fee and annual mortgage administration fee, which at TD are $250 and $225, respectively. Next, there are legal fees that can cost, in one mortgage broker’s estimation, anywhere from $500 to $1,000, depending on the specifics.
Now add mortgage insurance fees that will apply regardless of how much equity you have in your home. Genworth Financial, a private provider of mortgage insurance in Canada, says the insurance premium on mortgage amounts ranging as high as 65 per cent of the value of a home will be 0.5 per cent of the amount borrowed. Premiums rise as high as 2.75 per cent for mortgages that are up to 95 per cent of a home’s value.
You could face still another fee if you break an existing mortgage so you can move it into your RRSP. For that reason, the best time to adopt this strategy is when your mortgage comes up for renewal.
Negotiating the mortgage
When negotiating a typical mortgage, your goal should be to hammer the rate down as far as it will go. Just the opposite applies with an RRSP mortgage, because you are essentially paying interest to yourself, not the bank.
“If you’re doing this, you want to try and have as high an interest rate as possible,” Mr. Tsai said.
TD rules say you have to go with the posted mortgage rate for a non-arm’s length mortgage, but there’s still some manoeuvring room to bump up your rate high enough to make it an attractive investment for your RRSP.
Mr. Tsai said TD will allow you to select mortgage terms of one through 10 years. A five-year fixed rate would have put you at 5.44 per cent as of late this week; extending to six years put you at 5.7 per cent, seven years was at 6.09 per cent and 10 years was pegged at 6.4 per cent.
TD also allows a six-month convertible mortgage, which presents an interesting possibility if you see rates moving higher. You’d get a 4.45-per-cent rate for half a year, with an opportunity to benefit from any rate increases that happen between now and then.
But is it a wise investment?
Now to the question of whether it makes sense to put your mortgage in your RRSP from an investment point of view. If we take all the startup fees mentioned above, we end up with a cost of roughly $1,000 to $2,000 in the first year, assuming a $100,000 mortgage. Essentially, you could have a first-year fee of up to 2 per cent if you decide to pay your mortgage insurance upfront.
The cost looks more attractive in subsequent years, when the $225 annual admin fee works out to a fee of just 0.23 per cent.
These fees tell us that conservative investors earning 2 to 3 per cent in their retirement savings should not find it hard to get a better return from the mortgage-RRSP strategy.
“If you have fixed income in your RRSP and if it’s generating a very low yield, then this may be something worth looking at,” Mr. Tsai said. “The greater the difference, the more economic sense it might make to do this.”
Mr. Wise, the Calgary investment adviser, said the mortgage-RRSP strategy works best if you use the mortgage to replace the bonds and GICs in your portfolio while leaving your holdings in the stock market.
If putting your mortgage in your RRSP leaves you light on equities, take the mortgage payments flowing into your retirement plan and invest them in stocks, funds and so forth. In fact, investing each successive mortgage payment gives you a nice little dollar-cost averaging program.
Making mortgage payments into your retirement plan does not affect your RRSP contribution room. So you can further diversify your retirement savings using the money you annually add to your RRSP, separate from your mortgage.
One of the challenges in putting your mortgage in your RRSP is to find a trustee for the plan. In addition to TD Waterhouse, the online brokerages CIBC Investor’s Edge, RBC Direct Investing, Scotia iTrade and ScotiaMcLeod Direct Investing all allow this. Bank of Montreal says it no longer offers this program. If you have an investment adviser, he or she should be able to find a trust company to hold your mortgage RRSP.
Don’t forget the usual strategizing if you’re putting your mortgage into your RRSP – amortization period, biweekly versus monthly payments and so on. An interesting question arises here: Do you put the priority here on getting your mortgage paid off as quickly as possible, or on building your RRSP?
“If I can get a fixed income investment in my RRSP that will give me 5 per cent, I think I’d want to keep that as long as possible,” Mr. Wise said.
---------
HOW TO DO IT
Investing your registered retirement savings plan in the mortgage on your home is not for everyone, but it can generate steady returns that beat what bonds and term deposits offer.
Step One
Find a bank, investment dealer, trust company that offers this service; some investment advisers may also be able to help you set this up.
Step Two
Tally up fees – expect to pay a set-up fee, an annual mortgage administration fee, legal fees to set up the RRSP mortgage, mortgage insurance fees and possibly discharge fees if you're breaking your current mortgage.
Step Three
Pick mortgage terms. Expect rules guiding the rate you can use, the mortgage terms available and so forth.
Step Four
Use the money you're paying into your RRSP to diversify your RRSP investments, possibly by making regular purchases of stocks or equity funds and ETFs
WHAT YOU SHOULD KNOW
Four things to keep in mind about investing your retirement savings in your mortgage:
1. You can invest RRIF money in your mortgage, but you must have enough cash on hand to fund the required minimum annual RRIF withdrawal.
2. Some banks will allow you to use RRSP money to buy a residential investment property, while others allow this only for an owner-occupied residence.
3. It may be possible to invest in a mortgage on someone else's property.
4. You'll need mortgage default insurance even though you're lending to yourself and even if you have a lot of equity in your home.
Taken from the Globe and Mail
Published Friday, Nov. 26, 2010 3:47PM EST
The 5-per-cent return on safe investments is back.
It happened last week when major banks increased their posted mortgage rates. If you were lending money out for mortgages like a bank, you could get the same return.
Here’s how: Just use the money in your registered retirement savings plan to finance your mortgage.
Mortgage negotiations Investing your RRSP dollars in your mortgage is a fringe strategy – let’s get that straight. Several financial institutions offer it, but not with much enthusiasm. It’s costly and time consuming to set up, and it locks you into returns that could be lower than what a diversified investment portfolio could earn over the long term. If your entire RRSP is invested in your mortgage, then there’s also a lack of diversification to worry about.
And yet, there’s a steady level of interest in this strategy. Mike Wise, a Calgary investment adviser, said most of the inquiries he gets are from people who want to use RRSP money as a source of funds to buy investment real estate. These people are often stretched financially and may not qualify for traditional mortgages.
The other group interested in the mortgage-RRSP strategy is made up of conservative investors who see their mortgage as a potential replacement for the low-yielding bonds and term deposits they own.
“That kind of person would be a jewel for this strategy,” said Mr. Wise, who 11 years ago put his own mortgage in his RRSP and wrote about it for Canadian MoneySaver magazine (read it here).
Charley Tsai, vice-president of wealth planning support at TD Waterhouse, offers this guideline on deciding whether it makes sense to hold your mortgage in your RRSP: “It’s worthwhile if the mortgage interest rate, net of expenses, would be greater than the investment return you would generate from your RRSP.”
Let’s deal with the “net of expenses” side of things first. Prepare yourself for a fee-for-all if you set up what banks call a non-arm’s length mortgage.
Start with the mortgage set-up fee and annual mortgage administration fee, which at TD are $250 and $225, respectively. Next, there are legal fees that can cost, in one mortgage broker’s estimation, anywhere from $500 to $1,000, depending on the specifics.
Now add mortgage insurance fees that will apply regardless of how much equity you have in your home. Genworth Financial, a private provider of mortgage insurance in Canada, says the insurance premium on mortgage amounts ranging as high as 65 per cent of the value of a home will be 0.5 per cent of the amount borrowed. Premiums rise as high as 2.75 per cent for mortgages that are up to 95 per cent of a home’s value.
You could face still another fee if you break an existing mortgage so you can move it into your RRSP. For that reason, the best time to adopt this strategy is when your mortgage comes up for renewal.
Negotiating the mortgage
When negotiating a typical mortgage, your goal should be to hammer the rate down as far as it will go. Just the opposite applies with an RRSP mortgage, because you are essentially paying interest to yourself, not the bank.
“If you’re doing this, you want to try and have as high an interest rate as possible,” Mr. Tsai said.
TD rules say you have to go with the posted mortgage rate for a non-arm’s length mortgage, but there’s still some manoeuvring room to bump up your rate high enough to make it an attractive investment for your RRSP.
Mr. Tsai said TD will allow you to select mortgage terms of one through 10 years. A five-year fixed rate would have put you at 5.44 per cent as of late this week; extending to six years put you at 5.7 per cent, seven years was at 6.09 per cent and 10 years was pegged at 6.4 per cent.
TD also allows a six-month convertible mortgage, which presents an interesting possibility if you see rates moving higher. You’d get a 4.45-per-cent rate for half a year, with an opportunity to benefit from any rate increases that happen between now and then.
But is it a wise investment?
Now to the question of whether it makes sense to put your mortgage in your RRSP from an investment point of view. If we take all the startup fees mentioned above, we end up with a cost of roughly $1,000 to $2,000 in the first year, assuming a $100,000 mortgage. Essentially, you could have a first-year fee of up to 2 per cent if you decide to pay your mortgage insurance upfront.
The cost looks more attractive in subsequent years, when the $225 annual admin fee works out to a fee of just 0.23 per cent.
These fees tell us that conservative investors earning 2 to 3 per cent in their retirement savings should not find it hard to get a better return from the mortgage-RRSP strategy.
“If you have fixed income in your RRSP and if it’s generating a very low yield, then this may be something worth looking at,” Mr. Tsai said. “The greater the difference, the more economic sense it might make to do this.”
Mr. Wise, the Calgary investment adviser, said the mortgage-RRSP strategy works best if you use the mortgage to replace the bonds and GICs in your portfolio while leaving your holdings in the stock market.
If putting your mortgage in your RRSP leaves you light on equities, take the mortgage payments flowing into your retirement plan and invest them in stocks, funds and so forth. In fact, investing each successive mortgage payment gives you a nice little dollar-cost averaging program.
Making mortgage payments into your retirement plan does not affect your RRSP contribution room. So you can further diversify your retirement savings using the money you annually add to your RRSP, separate from your mortgage.
One of the challenges in putting your mortgage in your RRSP is to find a trustee for the plan. In addition to TD Waterhouse, the online brokerages CIBC Investor’s Edge, RBC Direct Investing, Scotia iTrade and ScotiaMcLeod Direct Investing all allow this. Bank of Montreal says it no longer offers this program. If you have an investment adviser, he or she should be able to find a trust company to hold your mortgage RRSP.
Don’t forget the usual strategizing if you’re putting your mortgage into your RRSP – amortization period, biweekly versus monthly payments and so on. An interesting question arises here: Do you put the priority here on getting your mortgage paid off as quickly as possible, or on building your RRSP?
“If I can get a fixed income investment in my RRSP that will give me 5 per cent, I think I’d want to keep that as long as possible,” Mr. Wise said.
---------
HOW TO DO IT
Investing your registered retirement savings plan in the mortgage on your home is not for everyone, but it can generate steady returns that beat what bonds and term deposits offer.
Step One
Find a bank, investment dealer, trust company that offers this service; some investment advisers may also be able to help you set this up.
Step Two
Tally up fees – expect to pay a set-up fee, an annual mortgage administration fee, legal fees to set up the RRSP mortgage, mortgage insurance fees and possibly discharge fees if you're breaking your current mortgage.
Step Three
Pick mortgage terms. Expect rules guiding the rate you can use, the mortgage terms available and so forth.
Step Four
Use the money you're paying into your RRSP to diversify your RRSP investments, possibly by making regular purchases of stocks or equity funds and ETFs
WHAT YOU SHOULD KNOW
Four things to keep in mind about investing your retirement savings in your mortgage:
1. You can invest RRIF money in your mortgage, but you must have enough cash on hand to fund the required minimum annual RRIF withdrawal.
2. Some banks will allow you to use RRSP money to buy a residential investment property, while others allow this only for an owner-occupied residence.
3. It may be possible to invest in a mortgage on someone else's property.
4. You'll need mortgage default insurance even though you're lending to yourself and even if you have a lot of equity in your home.
Tuesday, November 23, 2010
New buyers are admirably wise, survey suggests
Many first-time home buyers understand the power of the big down payment
By Peter Simpson, Vancouver Sun November 20, 2010 Although Generations X and Y are vastly different (I have daughters from both demographic cohorts so, believe me, I know all too well), when it comes to listing the impediments preventing them from buying their first homes, the members of these two generations are as similar as the Sedin twins.
A survey conducted at the 16th annual seminar for first-time homebuyers -organized by the Greater Vancouver Home Builders' Association and presented by the Homeowner Protection Office, branch of B.C. Housing -revealed that high prices and insufficient down payments were the culprits, no different than the responses gleaned from the survey conducted at, say, the fourth annual seminar in 1997.
Alas, the high cost of developable land, exacerbated by an ever-increasing array of taxes, fees, levies and development charges imposed on new homes by all four levels of government, seems to be a constant challenge throughout what is arguably the most popular geographic region in the country.
That aside, what are the needs and expectations of today's typical first-time homebuyer? I will run through the survey responses and compare them with responses from last year, when the new-homes market was mired in a 10-year low, and from 2007, when the market was riding a 14-year high.
The survey results, tabulated by Canada Mortgage and Housing Corp., reveal that most potential first-time buyers are between the age of 25 and 34 and rent accommodation away from parents. They plan to purchase a home within a year and will be buying with a spouse/ partner. They prefer a two-bedroom apartment or townhouse between 800 and 1,199 square feet. Their target price range is $300,000 to $399,000 and most have down payments of at least 10 per cent of the purchase price. They value highly the benefits of warranty protection. Half the respondents indicated they will apply RRSPs towards their down payments, and more than half believe the HST will make it difficult for them to buy a new home, although if they buy a new home priced below $525,000, the HST has little impact. And, of course, there is no HST on the purchase of a resale home.
Following are the survey findings, rounded to the nearest percentage. In parentheses are the percentages from last year, then from 2007. There were 230 first-time buyers participating.
- 63 per cent (63; 77) of respondents cited high housing costs as the major obstacle preventing them from buying their first home; 30 per cent (32; 36) said an insufficient down payment was a stumbling block, while 22 per cent (22; 20) indicated they can't seem to find the home they want.
- 55 per cent (65; 62) of respondents currently rent accommodation, while 23 per cent (23; 25) live with parents. The remainder indicated various living arrangements -relatives, friends, co-op housing.
- 58 per cent (68; 59) will be purchasing their first home with a spouse/partner; 27 per cent (23; 33) said they will be buying their first home alone; 9 per cent (5; 6) said they will be buying a home with another family member, such as a brother or sister. Friends pooling resources is another scenario.
- 29 per cent (32; 28) said they plan to buy within six months, while 36 per cent (44; 40) indicated they would buy within one year; 17 per cent (14; 21) said their timeline is the next two to three years.
- 26 per cent (29; 30) said they plan to purchase a town house, 25 per cent (30; 27) a single-detached home, 24 per cent (24; 20) a low-rise condominium apartment and 19 per cent (19; 18) a highrise condominium apartment. Yes, there are many affordably priced single-detached homes available today, satisfying the need of many buyers for a patch of land they can call their own. Others appreciate the lock-it-and-leave-it lifestyle offered by maintenance-free townhouses and apartments.
- As similarly documented in previous years, there was no clear preference for location, although municipalities mentioned most were Burnaby, New Westminster, Surrey, Langley and Vancouver.
- 7 per cent of the respondents indicated their maximum price is under $250,000 (12 per cent last year; no comparables for 2007); 11 per cent (18) said $250,000-$299,000; 20 per cent (22) said $300,000-$349,000; 17 per cent (14) said $350,000-$399,000; 9 per cent (9) said $400,000 to $449,000; 8 per cent (10) said $450,000 to $499,000; and 22 per cent (13) said they will pay more than $500,000.
- 2 per cent (4; 11) said they have less than 5 per cent of the purchase price to use as a down payment; 20 per cent (20; 17) said they have 5 per cent down; 21 per cent (23; 31) said they have 10 per cent down; 12 per cent (15; 7) said they have 15 per cent down; 24 per cent (19; 12) have 20 per cent down; and 17 per cent (19; 21) have 25 per cent or more of the purchase price for a down payment. Buyers are advised to ask their lender, mortgage broker or realtor for advice on mortgage-qualifying rules.
- 10 per cent (7; 11) said they intend to buy a home smaller than 800 sq. ft; 19 per cent (19; 20) said 800-999 sq. ft; 18 per cent (20; 20) said 1,000-1,199 sq. ft; 12 per cent (18; 16) said 1,200 to 1,499 sq. ft; 10 per cent (9; 13) said 1,500 to 1,799 sq. ft; 10 per cent (12; 7) said 1,800 to 2,000 sq. ft; and 13 per cent (11; 9) said more than 2,000 sq. ft
- 15 per cent (9; 15) said they need only one bedroom in their first home; 44 per cent (48; 53) said two bedrooms; 28 per cent (33; 23) said three bedrooms; 7 per cent (7; 4) said four bedrooms; and 3 per cent (1; 3) said more than four bedrooms.
- 93 per cent (94; 93) said it was important their new home is protected by warranty insurance. Less than 2 per cent said it wasn't important. How can a solid home warranty not be important?
- 9 per cent (11; 11) of seminar respondents were under the age of 25; 49 per cent (49; 49) were between the ages of 25-34; 10 per cent (23; 22) were 35-44; 19 per cent (19; 8) were 45-54; 7 per cent (5; 6) were over 55. Some of the older respondents were starting over after marital breakups.
When it comes to choosing a realtor, first-timers will rely heavily on referrals from family or friends. Other information sources aren't even close. Asked how they will find a realtor, 63 per cent (71; 66) of the respondents indicated a referral from family or friends; 11 per cent (10; 8) said they will choose a realtor with whom they are somewhat familiar; 7 per cent (2; 5) said they will work with a well-known real estate firm; 4 per cent (6; 5) said Internet research and 4 per cent (3; 3) indicated a realtor's advertising presence would influence their choice of a realtor to help them search for a first home.
Seminar attendees were asked to indicate their most desirable features. The list was provided for them but respondents were free to add items to the list. Features deemed most desirable, in order, were energy efficiency, healthy indoor-air quality, finished basement, home office, in-house secondary suite, flex/adaptable features, earthquake-resistant design, green building and laneway housing unit.
During the next month, I intend to contact a few of the folks who attended the seminar this year, last year and in 2007 to find out if they bought homes and, if so, how their lives have evolved since they lost their property virginity. In a future column, I will share what I learned from the first-timers.
Peter Simpson is president and chief executive officer of the Greater Vancouver Home Builders' Association. E-mail peter@gvhba.org.
By Peter Simpson, Vancouver Sun November 20, 2010 Although Generations X and Y are vastly different (I have daughters from both demographic cohorts so, believe me, I know all too well), when it comes to listing the impediments preventing them from buying their first homes, the members of these two generations are as similar as the Sedin twins.
A survey conducted at the 16th annual seminar for first-time homebuyers -organized by the Greater Vancouver Home Builders' Association and presented by the Homeowner Protection Office, branch of B.C. Housing -revealed that high prices and insufficient down payments were the culprits, no different than the responses gleaned from the survey conducted at, say, the fourth annual seminar in 1997.
Alas, the high cost of developable land, exacerbated by an ever-increasing array of taxes, fees, levies and development charges imposed on new homes by all four levels of government, seems to be a constant challenge throughout what is arguably the most popular geographic region in the country.
That aside, what are the needs and expectations of today's typical first-time homebuyer? I will run through the survey responses and compare them with responses from last year, when the new-homes market was mired in a 10-year low, and from 2007, when the market was riding a 14-year high.
The survey results, tabulated by Canada Mortgage and Housing Corp., reveal that most potential first-time buyers are between the age of 25 and 34 and rent accommodation away from parents. They plan to purchase a home within a year and will be buying with a spouse/ partner. They prefer a two-bedroom apartment or townhouse between 800 and 1,199 square feet. Their target price range is $300,000 to $399,000 and most have down payments of at least 10 per cent of the purchase price. They value highly the benefits of warranty protection. Half the respondents indicated they will apply RRSPs towards their down payments, and more than half believe the HST will make it difficult for them to buy a new home, although if they buy a new home priced below $525,000, the HST has little impact. And, of course, there is no HST on the purchase of a resale home.
Following are the survey findings, rounded to the nearest percentage. In parentheses are the percentages from last year, then from 2007. There were 230 first-time buyers participating.
- 63 per cent (63; 77) of respondents cited high housing costs as the major obstacle preventing them from buying their first home; 30 per cent (32; 36) said an insufficient down payment was a stumbling block, while 22 per cent (22; 20) indicated they can't seem to find the home they want.
- 55 per cent (65; 62) of respondents currently rent accommodation, while 23 per cent (23; 25) live with parents. The remainder indicated various living arrangements -relatives, friends, co-op housing.
- 58 per cent (68; 59) will be purchasing their first home with a spouse/partner; 27 per cent (23; 33) said they will be buying their first home alone; 9 per cent (5; 6) said they will be buying a home with another family member, such as a brother or sister. Friends pooling resources is another scenario.
- 29 per cent (32; 28) said they plan to buy within six months, while 36 per cent (44; 40) indicated they would buy within one year; 17 per cent (14; 21) said their timeline is the next two to three years.
- 26 per cent (29; 30) said they plan to purchase a town house, 25 per cent (30; 27) a single-detached home, 24 per cent (24; 20) a low-rise condominium apartment and 19 per cent (19; 18) a highrise condominium apartment. Yes, there are many affordably priced single-detached homes available today, satisfying the need of many buyers for a patch of land they can call their own. Others appreciate the lock-it-and-leave-it lifestyle offered by maintenance-free townhouses and apartments.
- As similarly documented in previous years, there was no clear preference for location, although municipalities mentioned most were Burnaby, New Westminster, Surrey, Langley and Vancouver.
- 7 per cent of the respondents indicated their maximum price is under $250,000 (12 per cent last year; no comparables for 2007); 11 per cent (18) said $250,000-$299,000; 20 per cent (22) said $300,000-$349,000; 17 per cent (14) said $350,000-$399,000; 9 per cent (9) said $400,000 to $449,000; 8 per cent (10) said $450,000 to $499,000; and 22 per cent (13) said they will pay more than $500,000.
- 2 per cent (4; 11) said they have less than 5 per cent of the purchase price to use as a down payment; 20 per cent (20; 17) said they have 5 per cent down; 21 per cent (23; 31) said they have 10 per cent down; 12 per cent (15; 7) said they have 15 per cent down; 24 per cent (19; 12) have 20 per cent down; and 17 per cent (19; 21) have 25 per cent or more of the purchase price for a down payment. Buyers are advised to ask their lender, mortgage broker or realtor for advice on mortgage-qualifying rules.
- 10 per cent (7; 11) said they intend to buy a home smaller than 800 sq. ft; 19 per cent (19; 20) said 800-999 sq. ft; 18 per cent (20; 20) said 1,000-1,199 sq. ft; 12 per cent (18; 16) said 1,200 to 1,499 sq. ft; 10 per cent (9; 13) said 1,500 to 1,799 sq. ft; 10 per cent (12; 7) said 1,800 to 2,000 sq. ft; and 13 per cent (11; 9) said more than 2,000 sq. ft
- 15 per cent (9; 15) said they need only one bedroom in their first home; 44 per cent (48; 53) said two bedrooms; 28 per cent (33; 23) said three bedrooms; 7 per cent (7; 4) said four bedrooms; and 3 per cent (1; 3) said more than four bedrooms.
- 93 per cent (94; 93) said it was important their new home is protected by warranty insurance. Less than 2 per cent said it wasn't important. How can a solid home warranty not be important?
- 9 per cent (11; 11) of seminar respondents were under the age of 25; 49 per cent (49; 49) were between the ages of 25-34; 10 per cent (23; 22) were 35-44; 19 per cent (19; 8) were 45-54; 7 per cent (5; 6) were over 55. Some of the older respondents were starting over after marital breakups.
When it comes to choosing a realtor, first-timers will rely heavily on referrals from family or friends. Other information sources aren't even close. Asked how they will find a realtor, 63 per cent (71; 66) of the respondents indicated a referral from family or friends; 11 per cent (10; 8) said they will choose a realtor with whom they are somewhat familiar; 7 per cent (2; 5) said they will work with a well-known real estate firm; 4 per cent (6; 5) said Internet research and 4 per cent (3; 3) indicated a realtor's advertising presence would influence their choice of a realtor to help them search for a first home.
Seminar attendees were asked to indicate their most desirable features. The list was provided for them but respondents were free to add items to the list. Features deemed most desirable, in order, were energy efficiency, healthy indoor-air quality, finished basement, home office, in-house secondary suite, flex/adaptable features, earthquake-resistant design, green building and laneway housing unit.
During the next month, I intend to contact a few of the folks who attended the seminar this year, last year and in 2007 to find out if they bought homes and, if so, how their lives have evolved since they lost their property virginity. In a future column, I will share what I learned from the first-timers.
Peter Simpson is president and chief executive officer of the Greater Vancouver Home Builders' Association. E-mail peter@gvhba.org.
Monday, November 15, 2010
Homeowners unfazed by long amortization
'People will always decide what's easiest for them'
By Garry Marr, Financial Post November 10, 2010
Canadians plan to take longer to pay off their mortgages but they don't expect it to affect their retirement plans. Something just doesn't add up.
A new study from the Canadian Association of Accredited Mortgage Professionals shows consumers are taking advantage of longer amortization lengths at previously unheard of levels. Statistics released this week show 42% of new mortgages in the last year went for an amortization period of more than 25 years.
It's a huge jump when you consider that just five years ago, you couldn't even get an insured mortgage backed by the government that was amortized for more than 25 years.
The reason for the longer amortization periods is simple -- you can qualify for more mortgage when your monthly payment is lower because it is spread out over 35 years instead of 25 years.
Within the same survey by CAAMP, consumers were asked about their retirement expectations. Those with extended amortizations plan to retire on average at 61.9 years. Those amortizing their mortgage for less than 25 years plan to retire on average at 61.5 years.
"This data on expectations does not prove that actual retirement will be unaffected by recent trends in housing and mortgage markets," says CAAMP in its study. no kidding.
"But it does suggest that consumers' evaluations of their life-cycle options have not been materially altered."
Are consumers being entirely realistic about their future?
Will Dunning, chief economist with CAAMP, says the percentage of Canadians retiring with a mortgage is small enough that it is difficult to track.
"We find a lot of people taking [longer amortizations] are making additional payments," says Mr. Dunning, adding previous studies have shown people "aggressively" try to repay their mortgages.
Victor Fiume, president of the Canadian Home Builders' Association, says Canada is just catching up to a trend that has taken place in other jurisdictions.
"In many, many countries across the world, paying off a home is a multi-generational kind of thing. It doesn't happen in this generation. A lot of the stuff that goes on in England is multi-generational because the houses are so expensive," says Mr. Fiume.
There is no arguing the increased flexibility a longer amortization mortgage gives you, but increasingly some consumers do find themselves getting into financial trouble because they have bitten off too much mortgage, says Patricia White, executive director of Credit Counselling Canada.
"People will always decide what is easiest for them," she says. "But you have to plan in advance to make accelerated payments. You need to make some conscious decisions about how to get rid of that mortgage debt faster."
Canadians always do better when they have direct withdrawals from their bank accounts and less discretionary power about paying down debt, adds Ms. White.
Vince Gaetano, a principal broker and owner at Monster Mortgage, agrees people who choose the longer amortization and the lower payment rarely take advantage of that extra cash flow to make additional payments later on. "It's a very small group of people who do that," he says.
He thinks consumers going for the longer amortization are banking on their homes rising in value faster than any gains they get paying their mortgage off earlier.
"Real estate over time will appreciate at more than 2% to 4% per year," says Mr. Gaetano.
"People are saying, 'It won't affect my retirement because I plan to retire with a home that will appreciate in value in addition to the amount I pay it down.' It's not a bad strategy if you are in a market that gives you consistent appreciation, but you are not going to get that in every market in Canada."
But there is no getting around the fact the people who take a longer amortization will take longer to repay their loan.
The CAAMP study found consumers going longer than 25 years, were done with their mortgage at age 53 on average, compared with an average of 47 years for those going less than 25 years.
If you are going for a longer amortization, you better hope your home goes up in value because you are going to have fewer mortgage-free years in which to save. It's hard to believe that won't affect retirement plans.
gmarr@nationalpost.com
By Garry Marr, Financial Post November 10, 2010
Canadians plan to take longer to pay off their mortgages but they don't expect it to affect their retirement plans. Something just doesn't add up.
A new study from the Canadian Association of Accredited Mortgage Professionals shows consumers are taking advantage of longer amortization lengths at previously unheard of levels. Statistics released this week show 42% of new mortgages in the last year went for an amortization period of more than 25 years.
It's a huge jump when you consider that just five years ago, you couldn't even get an insured mortgage backed by the government that was amortized for more than 25 years.
The reason for the longer amortization periods is simple -- you can qualify for more mortgage when your monthly payment is lower because it is spread out over 35 years instead of 25 years.
Within the same survey by CAAMP, consumers were asked about their retirement expectations. Those with extended amortizations plan to retire on average at 61.9 years. Those amortizing their mortgage for less than 25 years plan to retire on average at 61.5 years.
"This data on expectations does not prove that actual retirement will be unaffected by recent trends in housing and mortgage markets," says CAAMP in its study. no kidding.
"But it does suggest that consumers' evaluations of their life-cycle options have not been materially altered."
Are consumers being entirely realistic about their future?
Will Dunning, chief economist with CAAMP, says the percentage of Canadians retiring with a mortgage is small enough that it is difficult to track.
"We find a lot of people taking [longer amortizations] are making additional payments," says Mr. Dunning, adding previous studies have shown people "aggressively" try to repay their mortgages.
Victor Fiume, president of the Canadian Home Builders' Association, says Canada is just catching up to a trend that has taken place in other jurisdictions.
"In many, many countries across the world, paying off a home is a multi-generational kind of thing. It doesn't happen in this generation. A lot of the stuff that goes on in England is multi-generational because the houses are so expensive," says Mr. Fiume.
There is no arguing the increased flexibility a longer amortization mortgage gives you, but increasingly some consumers do find themselves getting into financial trouble because they have bitten off too much mortgage, says Patricia White, executive director of Credit Counselling Canada.
"People will always decide what is easiest for them," she says. "But you have to plan in advance to make accelerated payments. You need to make some conscious decisions about how to get rid of that mortgage debt faster."
Canadians always do better when they have direct withdrawals from their bank accounts and less discretionary power about paying down debt, adds Ms. White.
Vince Gaetano, a principal broker and owner at Monster Mortgage, agrees people who choose the longer amortization and the lower payment rarely take advantage of that extra cash flow to make additional payments later on. "It's a very small group of people who do that," he says.
He thinks consumers going for the longer amortization are banking on their homes rising in value faster than any gains they get paying their mortgage off earlier.
"Real estate over time will appreciate at more than 2% to 4% per year," says Mr. Gaetano.
"People are saying, 'It won't affect my retirement because I plan to retire with a home that will appreciate in value in addition to the amount I pay it down.' It's not a bad strategy if you are in a market that gives you consistent appreciation, but you are not going to get that in every market in Canada."
But there is no getting around the fact the people who take a longer amortization will take longer to repay their loan.
The CAAMP study found consumers going longer than 25 years, were done with their mortgage at age 53 on average, compared with an average of 47 years for those going less than 25 years.
If you are going for a longer amortization, you better hope your home goes up in value because you are going to have fewer mortgage-free years in which to save. It's hard to believe that won't affect retirement plans.
gmarr@nationalpost.com
Friday, November 12, 2010
Market for homes close to balanced
By JAY BRYAN, The Montreal Gazette November 9, 2010
Mortgage debt in Canada climbed by 7.6 per cent in the past year to exceed $1 trillion -a figure that's sure to spark new worries about a housing bubble in Canada.
But a look below the surface of this number is far more reassuring.
First, the sheer amount of mortgage debt sounds daunting, but what's really important is how fast it's growing. It turns out that this growth has slowed a good deal from a trend rate of 10.7 per cent in recent years, an encouraging sign. The forecast is for a further downshift.
As well, it's hard to find signs of bubble behaviour or of a financial squeeze on homeowners.
Few Canadian homeowners are speculating on housing and most have a fat equity cushion in their properties. Better yet, most could afford monthly payments of at least $300 above their current ones, according to a new survey.
This information is courtesy of an outfit that represents many of Canada's mortgage brokers and insurers, the Canadian Association of Accredited Mortgage Professionals, which has just published a wealth of housing-market intelligence in its annual report.
Bottom line, CAAMP president Jim Murphy says in a statement accompanying the report: "Canadians are being smart and responsible with their mortgages. They are building equity in their homes and making informed, long-term mortgage decisions."
This sounds like one of those motherhood statements that you expect from sales-oriented organizations like your local real-estate board, but the interest of mortgage lenders is quite different, giving Murphy's optimism a bit more credibility.
His members would suffer big losses if there were a big deterioration in people's ability to pay off mortgage debt - a crucial factor that drove the 30-per-cent collapse in U.S. home values over the past several years.
And it's not just CAAMP that's unconvinced about any bubble. At BMO Capital Markets, senior economist Sal Guatieri has just taken another look at Canadian home valuations and concluded that the average price across the country is too high, but not by a lot.
At the peak of the home-buying frenzy late last year, Canadian prices were overvalued by maybe 18 per cent, he estimates, but this has diminished to about 11 per cent as the market cooled and incomes edged up. (His calculation is based on the long-term relationship between prices and personal incomes.)
With prices still richer than incomes would normally support, there's some pressure for further cooling in prices, Guatieri believes, but he doesn't see a drop of more than five per cent.
That's partly because incomes continue to rise, helping to narrow the gap. It's important to remember that Canada's very low mortgage interest rates can support prices above the average level for quite a while, providing time for the slow advance of incomes to do most of the rebalancing.
Will Dunning, the chief economist at CAAMP, has a similar outlook. As demand for housing cools, he expects to see a sharp drop in new housing construction (a forecast that looked exactly right when we saw yesterday's news of a nine-per-cent drop in housing starts last month), but little pressure on resale prices.
Dunning predicts that the average Canadian home price for 2011 will be a modest 3.9 per cent lower than in 2010, simply because of price declines that have already affected some markets.
But this annual average represents past price movements. He thinks the trend in 2011 and 2012 will be one of small price gains, just enough to offset inflation.
That's because the balance between homeowners listing properties for sale and people looking for homes to buy has shifted back toward buyers, but not nearly far enough to kneecap prices. In Dunning's view, the market these days is just about balanced.
Mortgage debt in Canada climbed by 7.6 per cent in the past year to exceed $1 trillion -a figure that's sure to spark new worries about a housing bubble in Canada.
But a look below the surface of this number is far more reassuring.
First, the sheer amount of mortgage debt sounds daunting, but what's really important is how fast it's growing. It turns out that this growth has slowed a good deal from a trend rate of 10.7 per cent in recent years, an encouraging sign. The forecast is for a further downshift.
As well, it's hard to find signs of bubble behaviour or of a financial squeeze on homeowners.
Few Canadian homeowners are speculating on housing and most have a fat equity cushion in their properties. Better yet, most could afford monthly payments of at least $300 above their current ones, according to a new survey.
This information is courtesy of an outfit that represents many of Canada's mortgage brokers and insurers, the Canadian Association of Accredited Mortgage Professionals, which has just published a wealth of housing-market intelligence in its annual report.
Bottom line, CAAMP president Jim Murphy says in a statement accompanying the report: "Canadians are being smart and responsible with their mortgages. They are building equity in their homes and making informed, long-term mortgage decisions."
This sounds like one of those motherhood statements that you expect from sales-oriented organizations like your local real-estate board, but the interest of mortgage lenders is quite different, giving Murphy's optimism a bit more credibility.
His members would suffer big losses if there were a big deterioration in people's ability to pay off mortgage debt - a crucial factor that drove the 30-per-cent collapse in U.S. home values over the past several years.
And it's not just CAAMP that's unconvinced about any bubble. At BMO Capital Markets, senior economist Sal Guatieri has just taken another look at Canadian home valuations and concluded that the average price across the country is too high, but not by a lot.
At the peak of the home-buying frenzy late last year, Canadian prices were overvalued by maybe 18 per cent, he estimates, but this has diminished to about 11 per cent as the market cooled and incomes edged up. (His calculation is based on the long-term relationship between prices and personal incomes.)
With prices still richer than incomes would normally support, there's some pressure for further cooling in prices, Guatieri believes, but he doesn't see a drop of more than five per cent.
That's partly because incomes continue to rise, helping to narrow the gap. It's important to remember that Canada's very low mortgage interest rates can support prices above the average level for quite a while, providing time for the slow advance of incomes to do most of the rebalancing.
Will Dunning, the chief economist at CAAMP, has a similar outlook. As demand for housing cools, he expects to see a sharp drop in new housing construction (a forecast that looked exactly right when we saw yesterday's news of a nine-per-cent drop in housing starts last month), but little pressure on resale prices.
Dunning predicts that the average Canadian home price for 2011 will be a modest 3.9 per cent lower than in 2010, simply because of price declines that have already affected some markets.
But this annual average represents past price movements. He thinks the trend in 2011 and 2012 will be one of small price gains, just enough to offset inflation.
That's because the balance between homeowners listing properties for sale and people looking for homes to buy has shifted back toward buyers, but not nearly far enough to kneecap prices. In Dunning's view, the market these days is just about balanced.
Monday, November 1, 2010
Should buyers beware?
Deciding whether to rent or buy should be based on a lot more than just the asking price - Taken from Maclean's Magazine Online
by Jason Kirby on Monday, October 25, 2010 5:20pm - 27 Comments
Mary Altaffer/AP/ DARRYL DYCK/CP
In mid-November, Vancouver’s condo king, Bob Rennie, will take a very public mulligan. That’s when he plans to relaunch sales at the troubled Millennium Water development, the site where Olympic athletes bunked during the Winter Games. For all the praise designers and visitors from around the globe have heaped on the project’s cutting-edge, ultra-green features, the $1-billion Millennium Water sorely lacks one crucial component—buyers. Two-thirds of the 740 units in the complex sit empty. Hence Rennie’s plan to jump-start sales by way of discounts, an HST tax holiday, and a break on property taxes and maintenance fees—initiatives that could knock 14 per cent off the initial price tag of some units.
Vancouver taxpayers, who are ultimately on the hook for any losses, aren’t the only ones eager to know if the gambit pays off. In the eyes of prospective buyers in the city, and across the country for that matter, the high-profile project has become a touchstone for whether the real estate market is about to tank. And for first-time buyers sitting on the fence, the prospect of a sharp correction on the horizon is just one of the factors they must consider before taking the plunge.
The debate over whether to rent or buy has become a permanent fixture of the real estate world. And with roughly 70 per cent of households now owning their own home—a rate even higher than in the U.S., where the cult of home ownership first took root—it’s clear the buy crowd is in the lead. But the economic upheaval of the past three years has brought the issue into focus. On the one hand, those who valued stocks and bonds as a better way to build wealth while renting have likely seen their portfolios decimated. Major indexes plunged to levels not seen in a decade, though they have staged a rebound since. At the same time, the carnage in the U.S. has exposed the risks inherent in bubbly housing markets. “Real estate has been seen as a very good place to put your money during the past decade, but I think sentiment is starting to change,” says Benjamin Tal, an economist at CIBC World Markets. “After the subprime crash, people have realized prices can go down quite substantially, even in Canada.” Not surprisingly, predictions of a crash abound. David Rosenberg, the chief economist at Gluskin Sheff + Associates and a noted bear, believes house prices in Canada are overvalued by 20 per cent.
Such dire warnings have been made before about Canada’s frothiest markets, particularly Vancouver and Toronto. And so far they’ve been off the mark. Just last week it was revealed Canadian home sales in September crept up another three per cent from August, albeit down sharply from the year before.
Which means, for now, a big part of the rent or buy decision comes down to affordability. In the short term, says Vancouver financial planner Doug Macdonald, renting wins on that front. “There is no doubt about it that renting right now is a bargain,” he says.
Patrick Doyle, a Toronto software developer who writes the personal finance blog A Loonie Saved, has crunched the numbers for himself and believes it just doesn’t make sense to buy at today’s prices. Especially after factoring in all the extra costs that come with owning a home, like property taxes, insurance, utilities and general upkeep, which can quickly add up. “I choose to rent because I already have a day job, I don’t want to be a property manager, I don’t want to be a real estate speculator, I don’t want to be a highly leveraged investor and I don’t want to be responsible for repairs and maintenance. I just want a place to live,” says Doyle. “If I were to consider giving up these advantages to buy a house, it would have to save me substantial money. Instead, it costs more. For me, that makes the decision a no-brainer.”
Aside from the question of affordability, there are plenty of other reasons people choose to rent rather than buy, say experts. The most obvious is the flexibility that comes with being free to uproot and move easily. Renters also have more choice when it comes to location, since coveted neighbourhoods are typically out of reach for first-time buyers.
More strategically, it might not make sense for some people to buy a home if it means there’s no money left for saving elsewhere. That’s the concern held by Moshe Milevsky, an associate professor of finance at York University’s Schulich School of Business. “Real estate can be a good investment, but it’s very undiversified,” he says. “If I could buy property so that my kitchen is in Toronto, my bedroom in Vancouver and my bathroom in California, I’d be fine, but instead I have to buy it in one place. It’s like putting your entire portfolio into one stock.”
In fact, some renters simply believe that, over the long run, they can do more to grow their net worth if they avoid home ownership and put their money into stocks. But wait, aren’t stock markets dead? Not really. Over the last two decades the S&P/TSX Composite Index and its predecessor generated an average annual return of around six per cent, after adjusting for inflation. And yes, that includes the heart-stopping plunge of 2008. Over the same period, Canadian residential real estate as a whole has lagged behind. National house prices appreciated at an annual average rate of 1.9 per cent, though it’s long-term historical average is slightly higher at 2.5 per cent. But many rightly point out the benefits of owning a place of your own add up to far more than just price appreciation. “I don’t like looking at housing as a rate of return, because clearly you’re getting a service out of the house as a place to live,” says Adrienne Warren, economist at Scotia Economics.
For one thing, even with interest payments to the bank, owners are ultimately paying themselves to live in their homes, rather than shovelling money into their landlord’s pocket.
Owning a home is also an effective hedge against inflation over the long term. That’s because hard assets like homes generally keep pace with inflation. And when owners sell their principal property, they don’t incur any capital gains tax—though homeowners face their own set of taxes and penalties in the form of land transfer taxes and realtor fees, which can add up into the tens of thousands.
A compelling argument for buying right now, regardless of high prices in most major cities, is record-low interest rates. While the variable rate has been climbing steadily as the Bank of Canada tightens interest rates, mortgage lenders have been slashing fixed rates. A five-year fixed rate can be had for as little as 3.9 per cent, while 10-year rates can be found for less than six per cent. Given that the prime interest rate over the last three decades averages out at 8.1 per cent, according to CanEquity.com, it’s no wonder so many house hunters find today’s rates irresistible.
There are dangers that come when debt is so cheap, of course. Bank of Canada governor Mark Carney has repeatedly warned Canadians not to expect low rates to persist forever. But given the mortgage rate environment and the slowdown in the housing market, it’s a far better time to buy than it was just a year ago, say realtors. Back then, Canada’s housing market was in the midst of a surprise rebound and bidding wars were the norm. “We’ve gone through a market where there’s been a lot of multiple offers and it’s been difficult for buyers because there’s so much emotion involved,” says Monte Hannah, a Vancouver realtor. “Right now it’s very balanced.”
Above all, most proponents of home ownership argue that buying a place of your own is an ideal form of forced savings. Canadians clearly aren’t up to the task on their own. In a typical year, fewer than one-third of Canadians make use of their registered retirement savings plans, and even fewer make use of tax free savings accounts, first made available to much fanfare in 2009—though the reason for that could be because so much of their income goes toward mortgages and renovations. Those onerous monthly payments not only help build up equity over time, it keeps one from wasting money.
Still, some advisers worry too much emphasis gets placed on this argument. That’s because a home is not a liquid asset, and if all your savings have to go to paying for it, you’ll be left with empty pockets down the road. “Your house can’t put food and bread on the table,” says Bruce McDougall, a financial planner in Burlington, Ont. “You need cash for a retirement that lasts a lot longer than it did a couple of decades ago, and your house isn’t necessarily going to provide it.” Ideally, shrewd homebuyers should settle for properties they can afford that allow them to also invest in a more diversified portfolio of stocks and bonds. Easier said than done.
Everything depends on where you are in life, of course. But the staggering rise of house prices in the last few years means it’s probably good to keep renting for a while. And if you’re leaning toward buying a house because you think the stock market is a dead end, well, think again. At the same time, if you’re leaning toward buying because otherwise you won’t save anything—and you aren’t buying merely to flip the property in another two years—then go ahead. Either way, observers like Milevsky at Schulich believe the debate between renting and buying has gotten sidetracked in recent years by talk of investments, returns and portfolio allocation. “This debate has become so financial,” he says. “It’s lost the qualitative lifestyle aspect that should drive the decision. When a 22-year-old kid comes out of college and immediately asks, ‘Should I buy or should I rent?’ the question should be, ‘What do you want to do with your life—do you want to start a family, explore the world, build your career?’ That’s more important than the few hundred you may or may not save each month by doing one versus the other.”
by Jason Kirby on Monday, October 25, 2010 5:20pm - 27 Comments
Mary Altaffer/AP/ DARRYL DYCK/CP
In mid-November, Vancouver’s condo king, Bob Rennie, will take a very public mulligan. That’s when he plans to relaunch sales at the troubled Millennium Water development, the site where Olympic athletes bunked during the Winter Games. For all the praise designers and visitors from around the globe have heaped on the project’s cutting-edge, ultra-green features, the $1-billion Millennium Water sorely lacks one crucial component—buyers. Two-thirds of the 740 units in the complex sit empty. Hence Rennie’s plan to jump-start sales by way of discounts, an HST tax holiday, and a break on property taxes and maintenance fees—initiatives that could knock 14 per cent off the initial price tag of some units.
Vancouver taxpayers, who are ultimately on the hook for any losses, aren’t the only ones eager to know if the gambit pays off. In the eyes of prospective buyers in the city, and across the country for that matter, the high-profile project has become a touchstone for whether the real estate market is about to tank. And for first-time buyers sitting on the fence, the prospect of a sharp correction on the horizon is just one of the factors they must consider before taking the plunge.
The debate over whether to rent or buy has become a permanent fixture of the real estate world. And with roughly 70 per cent of households now owning their own home—a rate even higher than in the U.S., where the cult of home ownership first took root—it’s clear the buy crowd is in the lead. But the economic upheaval of the past three years has brought the issue into focus. On the one hand, those who valued stocks and bonds as a better way to build wealth while renting have likely seen their portfolios decimated. Major indexes plunged to levels not seen in a decade, though they have staged a rebound since. At the same time, the carnage in the U.S. has exposed the risks inherent in bubbly housing markets. “Real estate has been seen as a very good place to put your money during the past decade, but I think sentiment is starting to change,” says Benjamin Tal, an economist at CIBC World Markets. “After the subprime crash, people have realized prices can go down quite substantially, even in Canada.” Not surprisingly, predictions of a crash abound. David Rosenberg, the chief economist at Gluskin Sheff + Associates and a noted bear, believes house prices in Canada are overvalued by 20 per cent.
Such dire warnings have been made before about Canada’s frothiest markets, particularly Vancouver and Toronto. And so far they’ve been off the mark. Just last week it was revealed Canadian home sales in September crept up another three per cent from August, albeit down sharply from the year before.
Which means, for now, a big part of the rent or buy decision comes down to affordability. In the short term, says Vancouver financial planner Doug Macdonald, renting wins on that front. “There is no doubt about it that renting right now is a bargain,” he says.
Patrick Doyle, a Toronto software developer who writes the personal finance blog A Loonie Saved, has crunched the numbers for himself and believes it just doesn’t make sense to buy at today’s prices. Especially after factoring in all the extra costs that come with owning a home, like property taxes, insurance, utilities and general upkeep, which can quickly add up. “I choose to rent because I already have a day job, I don’t want to be a property manager, I don’t want to be a real estate speculator, I don’t want to be a highly leveraged investor and I don’t want to be responsible for repairs and maintenance. I just want a place to live,” says Doyle. “If I were to consider giving up these advantages to buy a house, it would have to save me substantial money. Instead, it costs more. For me, that makes the decision a no-brainer.”
Aside from the question of affordability, there are plenty of other reasons people choose to rent rather than buy, say experts. The most obvious is the flexibility that comes with being free to uproot and move easily. Renters also have more choice when it comes to location, since coveted neighbourhoods are typically out of reach for first-time buyers.
More strategically, it might not make sense for some people to buy a home if it means there’s no money left for saving elsewhere. That’s the concern held by Moshe Milevsky, an associate professor of finance at York University’s Schulich School of Business. “Real estate can be a good investment, but it’s very undiversified,” he says. “If I could buy property so that my kitchen is in Toronto, my bedroom in Vancouver and my bathroom in California, I’d be fine, but instead I have to buy it in one place. It’s like putting your entire portfolio into one stock.”
In fact, some renters simply believe that, over the long run, they can do more to grow their net worth if they avoid home ownership and put their money into stocks. But wait, aren’t stock markets dead? Not really. Over the last two decades the S&P/TSX Composite Index and its predecessor generated an average annual return of around six per cent, after adjusting for inflation. And yes, that includes the heart-stopping plunge of 2008. Over the same period, Canadian residential real estate as a whole has lagged behind. National house prices appreciated at an annual average rate of 1.9 per cent, though it’s long-term historical average is slightly higher at 2.5 per cent. But many rightly point out the benefits of owning a place of your own add up to far more than just price appreciation. “I don’t like looking at housing as a rate of return, because clearly you’re getting a service out of the house as a place to live,” says Adrienne Warren, economist at Scotia Economics.
For one thing, even with interest payments to the bank, owners are ultimately paying themselves to live in their homes, rather than shovelling money into their landlord’s pocket.
Owning a home is also an effective hedge against inflation over the long term. That’s because hard assets like homes generally keep pace with inflation. And when owners sell their principal property, they don’t incur any capital gains tax—though homeowners face their own set of taxes and penalties in the form of land transfer taxes and realtor fees, which can add up into the tens of thousands.
A compelling argument for buying right now, regardless of high prices in most major cities, is record-low interest rates. While the variable rate has been climbing steadily as the Bank of Canada tightens interest rates, mortgage lenders have been slashing fixed rates. A five-year fixed rate can be had for as little as 3.9 per cent, while 10-year rates can be found for less than six per cent. Given that the prime interest rate over the last three decades averages out at 8.1 per cent, according to CanEquity.com, it’s no wonder so many house hunters find today’s rates irresistible.
There are dangers that come when debt is so cheap, of course. Bank of Canada governor Mark Carney has repeatedly warned Canadians not to expect low rates to persist forever. But given the mortgage rate environment and the slowdown in the housing market, it’s a far better time to buy than it was just a year ago, say realtors. Back then, Canada’s housing market was in the midst of a surprise rebound and bidding wars were the norm. “We’ve gone through a market where there’s been a lot of multiple offers and it’s been difficult for buyers because there’s so much emotion involved,” says Monte Hannah, a Vancouver realtor. “Right now it’s very balanced.”
Above all, most proponents of home ownership argue that buying a place of your own is an ideal form of forced savings. Canadians clearly aren’t up to the task on their own. In a typical year, fewer than one-third of Canadians make use of their registered retirement savings plans, and even fewer make use of tax free savings accounts, first made available to much fanfare in 2009—though the reason for that could be because so much of their income goes toward mortgages and renovations. Those onerous monthly payments not only help build up equity over time, it keeps one from wasting money.
Still, some advisers worry too much emphasis gets placed on this argument. That’s because a home is not a liquid asset, and if all your savings have to go to paying for it, you’ll be left with empty pockets down the road. “Your house can’t put food and bread on the table,” says Bruce McDougall, a financial planner in Burlington, Ont. “You need cash for a retirement that lasts a lot longer than it did a couple of decades ago, and your house isn’t necessarily going to provide it.” Ideally, shrewd homebuyers should settle for properties they can afford that allow them to also invest in a more diversified portfolio of stocks and bonds. Easier said than done.
Everything depends on where you are in life, of course. But the staggering rise of house prices in the last few years means it’s probably good to keep renting for a while. And if you’re leaning toward buying a house because you think the stock market is a dead end, well, think again. At the same time, if you’re leaning toward buying because otherwise you won’t save anything—and you aren’t buying merely to flip the property in another two years—then go ahead. Either way, observers like Milevsky at Schulich believe the debate between renting and buying has gotten sidetracked in recent years by talk of investments, returns and portfolio allocation. “This debate has become so financial,” he says. “It’s lost the qualitative lifestyle aspect that should drive the decision. When a 22-year-old kid comes out of college and immediately asks, ‘Should I buy or should I rent?’ the question should be, ‘What do you want to do with your life—do you want to start a family, explore the world, build your career?’ That’s more important than the few hundred you may or may not save each month by doing one versus the other.”
Monday, October 25, 2010
Six suggestions for avoiding mortgage fraud
DIANNE NICE
Taken from the CTV news website
Whenever the housing market starts to heat up, so does mortgage and real estate fraud. Buyers rush through deals to avoid losing out, but can end up being scammed if they’re not careful.
While there are no statistics on these types of fraud in Canada, in the United States, it is estimated to cost victims between $4-billion and $6-billion (U.S.) a year.
“Mortgage scams are carried out in all different forms and involve a multitude of people, some who don't even know they're being taken advantage of,” says Diane Scott, president of the Calgary Real Estate Board.
Ms. Scott says at least two types of mortgage fraud have occurred in Calgary this year. One is property flipping, in which a dishonest seller artificially inflates the value of a property using a phony appraisal and then sells it for a large profit. The phony appraisal often remains with the property through multiple transactions, making it difficult to determine the property's true worth, and the end buyer is left paying for a mortgage that is much higher than the home's value.
The other involves “straw buyers,” who are offered money to lend their identity and good credit record for use on fraudulent mortgage applications. The fraudster uses the information to apply for a loan, then disappears with the money, leaving the straw buyer on the hook for the mortgage payments.
Other types of real estate scams include title fraud, where your identity is stolen and used to assume the title of your property, which can then be used to sell your home or get a new mortgage. The criminal takes the mortgage money and runs. You may not even find out about the fraud until the lender contacts you or someone pulls up in a moving van, claiming to be the new owner of the house.
And there’s also foreclosure fraud, in which a homeowner having trouble paying a mortgage is offered a loan in exchange for up-front fees and an agreement to transfer the property title to the scammer, who is then able to take the victim’s loan payments, sell the house or remortgage it and leave with the money.
While a lawyer, realtor or licensed mortgage broker can help ensure all legal precautions are taken, it’s still important to do your homework before you buy, Ms. Scott says. Here’s her advice on how to avoid becoming a victim of fraud:
1. Beware of unusual offers. Never lend your identity to anyone or sign documents you do not fully understand. “If it sounds too good to be true, then it probably is,” Ms. Scott says.
2. Do the math. Look at the listing history on the property and do a comparative market analysis. Check the number of sales and price ranges for the community. If the home’s listing price is much higher than the average value of neighbouring homes, it could mean someone is flipping the property or has had it fraudulently appraised.
3. Don’t assume the seller is honest. Get your own realtor or independent representation for your purchase. If the seller objects, something is wrong.
4. Do a land title search. This will show the name of the property owner, any mortgages or liens registered on the title, as well as previous sales and transfers. You can also buy title insurance to protect against title fraud.
5. Get your own appraisal. You may want to include, as part of your offer to purchase, the option to have the property appraised by a member of the Appraisal Institute of Canada.
6. Secure your deposit. Make sure your money is being held in a real estate trust account by a realtor or lawyer. This will ensure your money is safe until the deal closes.
Taken from the CTV news website
Whenever the housing market starts to heat up, so does mortgage and real estate fraud. Buyers rush through deals to avoid losing out, but can end up being scammed if they’re not careful.
While there are no statistics on these types of fraud in Canada, in the United States, it is estimated to cost victims between $4-billion and $6-billion (U.S.) a year.
“Mortgage scams are carried out in all different forms and involve a multitude of people, some who don't even know they're being taken advantage of,” says Diane Scott, president of the Calgary Real Estate Board.
Ms. Scott says at least two types of mortgage fraud have occurred in Calgary this year. One is property flipping, in which a dishonest seller artificially inflates the value of a property using a phony appraisal and then sells it for a large profit. The phony appraisal often remains with the property through multiple transactions, making it difficult to determine the property's true worth, and the end buyer is left paying for a mortgage that is much higher than the home's value.
The other involves “straw buyers,” who are offered money to lend their identity and good credit record for use on fraudulent mortgage applications. The fraudster uses the information to apply for a loan, then disappears with the money, leaving the straw buyer on the hook for the mortgage payments.
Other types of real estate scams include title fraud, where your identity is stolen and used to assume the title of your property, which can then be used to sell your home or get a new mortgage. The criminal takes the mortgage money and runs. You may not even find out about the fraud until the lender contacts you or someone pulls up in a moving van, claiming to be the new owner of the house.
And there’s also foreclosure fraud, in which a homeowner having trouble paying a mortgage is offered a loan in exchange for up-front fees and an agreement to transfer the property title to the scammer, who is then able to take the victim’s loan payments, sell the house or remortgage it and leave with the money.
While a lawyer, realtor or licensed mortgage broker can help ensure all legal precautions are taken, it’s still important to do your homework before you buy, Ms. Scott says. Here’s her advice on how to avoid becoming a victim of fraud:
1. Beware of unusual offers. Never lend your identity to anyone or sign documents you do not fully understand. “If it sounds too good to be true, then it probably is,” Ms. Scott says.
2. Do the math. Look at the listing history on the property and do a comparative market analysis. Check the number of sales and price ranges for the community. If the home’s listing price is much higher than the average value of neighbouring homes, it could mean someone is flipping the property or has had it fraudulently appraised.
3. Don’t assume the seller is honest. Get your own realtor or independent representation for your purchase. If the seller objects, something is wrong.
4. Do a land title search. This will show the name of the property owner, any mortgages or liens registered on the title, as well as previous sales and transfers. You can also buy title insurance to protect against title fraud.
5. Get your own appraisal. You may want to include, as part of your offer to purchase, the option to have the property appraised by a member of the Appraisal Institute of Canada.
6. Secure your deposit. Make sure your money is being held in a real estate trust account by a realtor or lawyer. This will ensure your money is safe until the deal closes.
Monday, October 18, 2010
Top 6 Mortgage Mistakes
Mark Riddix, provided by
Tuesday, October 12, 2010
During the 2007-2009 financial crisis, the United States economy crumbled because of a problem with mortgage foreclosures. Borrowers all over the nation had trouble paying their mortgages. At the time, eight out of 10 borrowers were trying to refinance their mortgages. Even high end homeowners were having trouble with foreclosures. Why were so many citizens having trouble with their mortgages?
Let's take a look at the biggest mortgage mistakes that homeowners make.
1. Adjustable Rate Mortgages
Adjustable rate mortgages seem like a homeowners dream. An adjustable rate mortgage starts you off with a low interest rate for the first two to five years. They allow you to buy a larger house than you can normally qualify for and have lower payments that you can afford. After two to five years the interest rate resets to a higher market rate. That's no problem because borrowers can just take the equity out of their homes and refinance to a lower rate once it resets.
Well, it doesn't always work out that way. When housing prices drop, borrowers tend to find that they are unable to refinance their existing loans. This leaves many borrowers facing high mortgage payments that are two to three times their original payments. The dream of home ownership quickly becomes a nightmare.
2. No Down Payment
During the subprime crisis, many companies were offering borrowers no down payment loans to borrowers. The purpose of a down payment is twofold. First, it increases the amount of equity that you have in your home and reduces the amount of money that you owe on a home. Second, a down payment makes sure that you have some skin in the game. Borrowers that place down a large down payment are much more likely to try everything possible to make their mortgage payments since they do not want to lose their investment. Many borrowers who put little to nothing down on their homes find themselves upside down on their mortgage and end up just walking away. They owe more money than the home is worth. The more a borrower owes, the more likely they are to walk away.
3. Liar Loans
The phrase "liar loans" leaves a bad taste in your mouth. Liar loans were incredibly popular during the real estate boom prior to the subprime meltdown that began in 2007. Mortgage lenders were quick to hand them out and borrowers were quick to accept them. A liar loan is a loan that requires little to no documentation. Liar loans do not require verification. The loan is based on the borrower's stated income, stated assets and stated expenses.
They are called liar loans because borrowers have a tendency to lie and inflate their income so that they can buy a larger house. Some individuals that received a liar loan did not even have a job! The trouble starts once the buyer gets in the home. Since the mortgage payments have to be paid with actual income and not stated income, the borrower is unable to consistently make their mortgage payments. They fall behind on the payments and find themselves facing bankruptcy and foreclosure.
4. Reverse Mortgages
If you watch television, you have probably seen a reverse mortgage advertised as the solution to all of your income problems. Are reverse mortgages the godsend that people claim that they are? A reverse mortgage is a loan available to senior citizens age 62 and up that uses the equity out of your home to provide you with an income stream. The available equity is paid out to you in a steady stream of payments or in a lump sum like an annuity.
There are many drawbacks to getting a reverse mortgage. There are high upfront costs. Origination fees, mortgage insurance, title insurance, appraisal fees, attorney fees and miscellaneous fees can quickly eat up your equity. The borrower loses full ownership of their home. Since all of the equity will be gone from your home, the bank now owns the home. The family is only entitled to any equity that is left after all of the cash from the deceased's estate has been used to pay off the mortgage, fees, and interest. The family will have to try to work out an agreement with the bank and make mortgage payments to keep the family home.
5. Longer Amortization
You may have thought that 30 years was the longest time frame that you could get on a mortgage. Are you aware that some mortgage companies are offering loans that run 40 years now? Thirty five and forty year mortgages are slowly rising in popularity. They allow individuals to buy a larger house for much lower payments. A 40-year mortgage may make sense for a young 20-year-old who plans to stay in their home for the next 20 years but it doesn't make sense for a lot of people. The interest rate on a 40-year mortgage will be slightly higher than a 30 year. This amounts to a whole lot more interest over a 40-year time period, because banks aren't going to give borrowers 10 extra years to pay off their mortgage without making it up on the back end.
Borrowers will also have less equity in their homes. The bulk of payments for the first 10 to 20 years will primarily pay down interest making it nearly impossible for the borrower to move. Besides, do you really want to be making mortgage payments in your 70's?
6. Exotic Mortgage Products
Some homeowners simply did not understand what they were getting themselves into. Lenders came up with all sorts of exotic products that made the dream of home ownership a reality. Products like interest only loans which can lower payments 20-30%. These loans let borrowers live in a home for a few years and only make interest payments. Name your payment loans let borrowers decide exactly how much they want to pay on their mortgage each month.
The catch is that a big balloon principal payment would come due after a certain time period. All of these products are known as negative amortization products. Instead of building up equity, borrowers are building negative equity. They are increasing the amount that they owe every month until their debt comes crashing down on them like a pile of bricks. Exotic mortgage products have led to many borrowers being underwater on their loans.
The Bottom Line
As you can clearly see, the road to home ownership is riddled with many traps. If you can avoid the traps that many borrowers fell into then you can keep yourself from financial ruin.
Tuesday, October 12, 2010
During the 2007-2009 financial crisis, the United States economy crumbled because of a problem with mortgage foreclosures. Borrowers all over the nation had trouble paying their mortgages. At the time, eight out of 10 borrowers were trying to refinance their mortgages. Even high end homeowners were having trouble with foreclosures. Why were so many citizens having trouble with their mortgages?
Let's take a look at the biggest mortgage mistakes that homeowners make.
1. Adjustable Rate Mortgages
Adjustable rate mortgages seem like a homeowners dream. An adjustable rate mortgage starts you off with a low interest rate for the first two to five years. They allow you to buy a larger house than you can normally qualify for and have lower payments that you can afford. After two to five years the interest rate resets to a higher market rate. That's no problem because borrowers can just take the equity out of their homes and refinance to a lower rate once it resets.
Well, it doesn't always work out that way. When housing prices drop, borrowers tend to find that they are unable to refinance their existing loans. This leaves many borrowers facing high mortgage payments that are two to three times their original payments. The dream of home ownership quickly becomes a nightmare.
2. No Down Payment
During the subprime crisis, many companies were offering borrowers no down payment loans to borrowers. The purpose of a down payment is twofold. First, it increases the amount of equity that you have in your home and reduces the amount of money that you owe on a home. Second, a down payment makes sure that you have some skin in the game. Borrowers that place down a large down payment are much more likely to try everything possible to make their mortgage payments since they do not want to lose their investment. Many borrowers who put little to nothing down on their homes find themselves upside down on their mortgage and end up just walking away. They owe more money than the home is worth. The more a borrower owes, the more likely they are to walk away.
3. Liar Loans
The phrase "liar loans" leaves a bad taste in your mouth. Liar loans were incredibly popular during the real estate boom prior to the subprime meltdown that began in 2007. Mortgage lenders were quick to hand them out and borrowers were quick to accept them. A liar loan is a loan that requires little to no documentation. Liar loans do not require verification. The loan is based on the borrower's stated income, stated assets and stated expenses.
They are called liar loans because borrowers have a tendency to lie and inflate their income so that they can buy a larger house. Some individuals that received a liar loan did not even have a job! The trouble starts once the buyer gets in the home. Since the mortgage payments have to be paid with actual income and not stated income, the borrower is unable to consistently make their mortgage payments. They fall behind on the payments and find themselves facing bankruptcy and foreclosure.
4. Reverse Mortgages
If you watch television, you have probably seen a reverse mortgage advertised as the solution to all of your income problems. Are reverse mortgages the godsend that people claim that they are? A reverse mortgage is a loan available to senior citizens age 62 and up that uses the equity out of your home to provide you with an income stream. The available equity is paid out to you in a steady stream of payments or in a lump sum like an annuity.
There are many drawbacks to getting a reverse mortgage. There are high upfront costs. Origination fees, mortgage insurance, title insurance, appraisal fees, attorney fees and miscellaneous fees can quickly eat up your equity. The borrower loses full ownership of their home. Since all of the equity will be gone from your home, the bank now owns the home. The family is only entitled to any equity that is left after all of the cash from the deceased's estate has been used to pay off the mortgage, fees, and interest. The family will have to try to work out an agreement with the bank and make mortgage payments to keep the family home.
5. Longer Amortization
You may have thought that 30 years was the longest time frame that you could get on a mortgage. Are you aware that some mortgage companies are offering loans that run 40 years now? Thirty five and forty year mortgages are slowly rising in popularity. They allow individuals to buy a larger house for much lower payments. A 40-year mortgage may make sense for a young 20-year-old who plans to stay in their home for the next 20 years but it doesn't make sense for a lot of people. The interest rate on a 40-year mortgage will be slightly higher than a 30 year. This amounts to a whole lot more interest over a 40-year time period, because banks aren't going to give borrowers 10 extra years to pay off their mortgage without making it up on the back end.
Borrowers will also have less equity in their homes. The bulk of payments for the first 10 to 20 years will primarily pay down interest making it nearly impossible for the borrower to move. Besides, do you really want to be making mortgage payments in your 70's?
6. Exotic Mortgage Products
Some homeowners simply did not understand what they were getting themselves into. Lenders came up with all sorts of exotic products that made the dream of home ownership a reality. Products like interest only loans which can lower payments 20-30%. These loans let borrowers live in a home for a few years and only make interest payments. Name your payment loans let borrowers decide exactly how much they want to pay on their mortgage each month.
The catch is that a big balloon principal payment would come due after a certain time period. All of these products are known as negative amortization products. Instead of building up equity, borrowers are building negative equity. They are increasing the amount that they owe every month until their debt comes crashing down on them like a pile of bricks. Exotic mortgage products have led to many borrowers being underwater on their loans.
The Bottom Line
As you can clearly see, the road to home ownership is riddled with many traps. If you can avoid the traps that many borrowers fell into then you can keep yourself from financial ruin.
Wednesday, October 13, 2010
The Housing Market: Is it Time to Rent or to Buy?
Taken from Time Magazine onlineBy Janet Morrissey Monday, Oct. 11, 2010
The stalled economy, expiration of homebuyer tax credits, marked-down home prices, stubbornly high unemployment and concerns about a double-dip recession all leave prospective homebuyers wondering if now is the time. Is it time for renters to convert to buyers and for existing owners to grab that dream home on the cheap? Or will housing get even cheaper?
Home prices have plunged about 30% from their mid-2006 peak on average, with some areas, like Las Vegas, seeing prices plummet in excess of 60%. At the same time, foreclosures have continued to rise in 2010 from their 2009 historic highs and have pressured prices further.
(See high-end homes that won't sell.)
Buyers who are eyeing condos and townhomes in particular might want to check out Trulia's latest rent-vs.-buy index, which tracks 50 of the country's largest markets. It offers a breakdown on cities that offer the best buying opportunities and those that are still renters' markets.
According to Trulia, a real estate search engine, the best markets for bargain condos are Arlington, Texas; Fresno, Calif.; and Miami. Others in the top 10 include Mesa, Ariz.; Phoenix; Jacksonville, Fla.; Detroit; Columbus, Ohio; El Paso, Texas; and Nashville. Some of these cities are among the markets hit hardest by the boom-and-bust phenomena, foreclosure crisis and job layoffs, says Tara-Nicholle Nelson, consumer educator at Trulia.
The firm calculates the price-to-rent ratio by comparing the average listing price of a condo or townhome with the average rental rate of two-bedroom apartments and condos on Trulia. Basically, the calculation takes the median price of the condo in a market and divides it by the annual rental payments generated on a similar property.
When it comes to renting, New York City real estate ranked first on the list as being cheaper to rent than to own although rents there have been on the rise recently. The Big Apple was followed by Seattle and Forth Worth. Rounding out the top 10 renters' markets are Omaha; Sacramento; Kansas City; Portland, Ore.; San Diego; San Francisco; and Boston.
(See pictures of Americans in their homes.)
Nelson says she was particularly surprised that condos in Omaha, Fort Worth and Kansas City were more expensive to own than to rent. She attributes this to lower unemployment rates and affluent families paying up, which kept condo prices up. Some cities avoided the housing bubble, she says, another reason prices have held.
Still, even if the broad rent-vs.-buy ratio favors renting, prospective buyers should take into account other factors, such as how much prices have fallen from their peak, potential tax advantages and the length of time the buyer plans to live in the property, Nelson cautions. For someone who isn't looking to flip the property for a quick buck — those days are over, aren't they? — and plans to stay in a home for 10 years or until they're hauled off to the grave, buying now could make financial sense even in some of the renters' markets, she says.
In recent months, there have been signs that housing may finally be bouncing along the bottom. The Standard & Poor's/Case-Shiller composite home-price index shows prices rose, albeit modestly, for the past few months, and some major lenders, such as Bank of America, GMAC Mortgage and JPMorgan Chase, have put foreclosures on hold in 23 states over record-keeping issues. All of this indicates price declines may stall — at least temporarily.
But Alex Barron, founder of Housing Research Center LLC, remains bearish on buying. He expects prices to fall another 10% to 30% before the sector bottoms out. Inventory has increased since the expiration of the homebuyer tax credit, he notes. Barron speculates that once mortgage rates start ticking up, home prices will likely tumble. "Prices will correct 10% for every one percentage point the mortgage rate goes up," he says.
Foreclosures are also pressuring prices. Barron notes that bank repossessions totaled 718,000 in the first eight months of 2010, up 23% from the record 584,000 during the same period a year ago. He speculates that once the current foreclosure suspension is lifted, a flood of foreclosures could hit the market. That added supply will likely cause another correction in home prices.
Read more: http://www.time.com/time/business/article/0,8599,2024445,00.html#ixzz12Gg1trt2
Tuesday, October 5, 2010
The Housing Death Spiral Means A Mammoth One In Five Borrowers Will Default
Michael David White, Housing Story Oct. 4, 2010, 8:08 AMA Mammoth One in Five Borrowers Will Default
A leading mortgage analyst predicts over 11 million homeowners will default and lose their home if the government fails to take more radical intervention.
Amherst Securities Group LP, one of the most respected names in mortgage research, has trumpeted an ambitious call-to-government arms in its October mortgage report.
“The death spiral of lower home prices, more borrowers underwater, higher transition rates (to default), more distressed sales and lower home prices must be arrested.”
The authors dismiss recent talk of mortgage performance improvement as statistical sleight-of-hand magically conjured by modifications.
“This ‘improvement’ (in mortgage performance) simply reflects large scale modification activity having served to artificially lower the delinquency rate” (Please see the chart above of mortgage balances delinquent and re-performing. All charts in this post are from “Amherst Mortgage Insight” dated October 1, 2010.).
The report offers an astounding forecast of the fate of severe negative-equity properties. Nineteen percent of properties with a loan-to-value (LTV) of 120% or greater are defaulting every year. A death-defying 75% of mortgages on 120% LTV properties will eventually go bad (19% + 19% + 19%, …).
The current crop of mortgages is already “impaired” at the one-of-five level. Nine of 100 are seriously delinquent. Six of 100 are “dirty current” (made current by modification). Five of 100 are seriously underwater (LTV greater than 120%) (Please see the chart above categorizing the forecast of 11 million defaults.).
The authors, who describe current conditions as leading to “an impossible number” of defaults and one that is “politically unfeasible”, unveil a major arms race of measures to counteract the default tide.
The solutions include mandatory principal reductions, looser underwriting of new mortgage loans, leveraged capital pools for investors, and penalties for defaulting homeowners. Amherst reports that a family who defaults can live rent-free for 20 months on average. They propose that missed mortgage payments, including property taxes and insurance, be counted as W2 income.
They make note of recent new signs of distress including two record-low readings of existing home sales in the last two reports. Another block is that underwriting standards have grown much stricter at Fannie and Freddie. Only 2% of Freddie purchases are now bad-credit borrowers where they represented about 20% of borrowers in 2006. FHA purchase mortgages, however, which have by definition much more lenient lending guidelines, have exploded upwards from roughly 10% of their lending in 2006 to more than 50% today.
The buyer pool is also compromised by the fact that 17% of borrowers now have a seriously compromised credit history. After mortgage default a typical wait-time to qualify again is anywhere from 3 to 7 years. One of the more desperate measures suggested by the authors seeks a new mortgage for those who are now behind or in danger of failing. “This (default) can be fixed by re-qualifying borrowers who are in a home they can’t afford into one they can afford.”
Risk is so high in today’s real estate market that private money has largely left the mortgage category. The retreat is most easily seen in the jumbo mortgage market. Total jumbo mortgage origination has fallen from a high of $650 billion in 2003 to $92 billion in 2009 (see the chart above). Government loans account for 90% of current originations.
“If government policy does not change, over 11.5 million borrowers are in danger of losing their homes (1 borrower out of every 5),”‘ the report said, which estimates the total of homes with a first mortgage at 55 million. “Politically, this cannot happen.”
Friday, October 1, 2010
Ellen Roseman: Why it's crucial to check your credit report
September 15, 2010 8:28 AMBy Ellen Roseman
Ellen Roseman is a business writer at the Toronto Star.
Here's a story that shows the importance of checking your credit report.
I recently heard from Delores, who was trying to renew her condo mortgage. But the bank wouldn't sign a deal unless her credit history was cleaned up.
She found that Rogers Communications had reported a bad debt. She didn't even have an account with Rogers - nor did she receive any collection notices.
It seems Delores had been mixed up with someone who had a similar name. She managed to get the bad debt removed just three days before her mortgage came up for renewal.
You don't want to hear bad news while in the midst of negotiating a time-sensitive loan. So, you should know what secrets might be lurking in your credit files.
Under provincial laws, you have the right to check the credit reports in your name held by Canada's two credit reporting agencies, Equifax and TransUnion. You don't have to pay a fee and you can do it as often as you like, as long as you ask for the report to be delivered in the mail.
What stands in the way of exercising your legal right to check your credit report for free? I point to the fact that Equifax and TransUnion are private businesses, which want to sell as many products as they can.
When you visit their websites, you see promotions for online access to your credit report at $15 and subscriptions to credit monitoring services at $15 a month. But you can't find the information about how to get your free credit report unless you dig very deeply.
In the United States, the law guarantees free access to your credit report at your request once every 12 months. To make things easier, the three U.S. credit reporting agencies have a central website, toll-free phone number and mailing address through which reports can be obtained.
Here's another difference. In Canada, you have to pay to get access to your credit score. This newer piece of information, not mentioned in the laws governing credit reports, is used heavily by lenders to decide whether you get credit and at what rate. The score is based partially on your credit report, but incorporates other factors.
In the United States, consumers are entitled to receive a free credit score if they're denied a loan or insurance because of their credit rating. They're lucky to get this right, which came about as part of the Wall Street Reform Bill passed last July.
Canadians are still struggling to get free credit reports and correct them. Free access to credit scores isn't on the agenda yet. I'd like to see tighter controls on credit bureaus and a greater role for government in ensuring access to this important information.
Tuesday, September 28, 2010
Credit Scores May Hamper Housing Comeback
Taken from The Wall Street Journal
By Phil Izzo
Homeownership is potentially out of reach for nearly a third of Americans, according to a new report that highlights the difficulties in the housing market in the wake of the Great Recession.
Bloomberg News
Potential home buyers may be among the hardest hit by the recession.People with a credit score below 620 who went searching for a loan were unlikely to receive even one quote, according to real-estate web site Zillow.com, even if they offered a down payment of 15%-25%. Zillow notes that 29% of Americans has a credit score this low, according to data provided by myFICO.com.
“Today’s tighter credit is a predictable response by banks after the foreclosure crisis, but also keeps a cap on housing demand, which is important for the greater housing market recovery,” said Zillow chief economist Stan Humphries.
While banks may be right to try to avoid repeating mistakes made during the housing bubble, an over-reliance on credit scores could create problems for the real-estate market. Banks shouldn’t be giving mortgages to borrowers who can’t afford to pay them back, but if people with sizeable down payments and solid sources of income are being turned down because of credit scores, that’s not healthy, either.
Many factors influence credit scores. A temporary spell of unemployment and the resultant hardship can easily push them down. According to a new report from the Pew Research Center, the majority of Americans may find themselves in this situation. Pew separates its respondents into two groups, one that “held its own” — 45%, a number similar to myFico’s estimated 47% of Americans who have the best credit scores (over 720) — during the recession and another that “lost ground” — 55%.
The Pew report’s demographic breakdown may be even more troubling for housing. Those who “held their own” tended to be older people who already owned homes. Real Time Economics recently noted a potential “shadow demand” for housing from people who postponed plans to form new households in the wake of the recession, but that pool of potential homeowners was also more likely to have lost ground during the recession. According to Pew, 69% of people age 18-49 and 60% of those 30-49 lost ground.
It’s likely that those groups, who are the most likely first-time and move-up home buyers, took a hit to their credit scores during the recession. Zillow’s data indicate that even if they’ve recovered from the worst, the may not be able to get a mortgage, and if they do, they also are more likely to face higher interest rates.
“Today’s tighter credit is a predictable response by banks after the foreclosure crisis, but also keeps a cap on housing demand, which is important for the greater housing market recovery,” said Zillow chief economist Stan Humphries.
While banks may be right to try to avoid repeating mistakes made during the housing bubble, an over-reliance on credit scores could create problems for the real-estate market. Banks shouldn’t be giving mortgages to borrowers who can’t afford to pay them back, but if people with sizeable down payments and solid sources of income are being turned down because of credit scores, that’s not healthy, either.
Many factors influence credit scores. A temporary spell of unemployment and the resultant hardship can easily push them down. According to a new report from the Pew Research Center, the majority of Americans may find themselves in this situation. Pew separates its respondents into two groups, one that “held its own” — 45%, a number similar to myFico’s estimated 47% of Americans who have the best credit scores (over 720) — during the recession and another that “lost ground” — 55%.
The Pew report’s demographic breakdown may be even more troubling for housing. Those who “held their own” tended to be older people who already owned homes. Real Time Economics recently noted a potential “shadow demand” for housing from people who postponed plans to form new households in the wake of the recession, but that pool of potential homeowners was also more likely to have lost ground during the recession. According to Pew, 69% of people age 18-49 and 60% of those 30-49 lost ground.
It’s likely that those groups, who are the most likely first-time and move-up home buyers, took a hit to their credit scores during the recession. Zillow’s data indicate that even if they’ve recovered from the worst, the may not be able to get a mortgage, and if they do, they also are more likely to face higher interest rates.
Saturday, September 18, 2010
Why (housing) bubbles aren't good for you
And there’s certainly a lot of bubble talk going on today – especially in relation to the Canadian real estate market.The bubble isn’t the bad part. That’s when prices inflate and living is good. As most economists will tell you, it’s the bursting that you should be worried about.
But what exactly is a bubble anyway?
Classic economic theory says a bubble is simply an overly rapid expansion of a good or investment followed by a severe contraction, also known as a crash. That’s the not-so-great part.
“A bubble forms when there is a hot new investment idea that capture’s everyone’s imagination,” says David Rosenberg, chief economist for Gluskin + Sheff & Associates.
According to Luis Seco, a professor of finance at the University of Toronto, the definition of an asset bubble is simple:
“It is when asset prices are for whatever reason unfairly inflated. But at the time, it is difficult to know whether it is overpriced unless you put it in relation to other goods and services, so it’s difficult to see it coming.”
Bubbles aren’t an unusual occurrence in markets. Just ask the folk who bought Nortel stock at the height of the technology bubble in 2000 at $1,245 a share. The company was worth more than a third of the entire Toronto Stock Exchange before it plummeted to penny stock status, eventually filing for bankruptcy protection.
“When people start using phrases like ‘this time it’s different, or we have a new paradigm, or I better buy now or I won’t be able to afford it,’ then you know you’re in trouble,” says economist Will Dunning.
In the case of the technology bubble, greed and speculation had set in. It was also difficult to value dot-com stocks since most companies were burning cash and traditional methods of valuing a company went out the door. The subsequent stock market crash caused more than $1 trillion in wealth to be wiped out.
While tech stocks were seen as the “hot new idea” back then, that concept can be extended to the housing market where people see property as a hot investment rather than as a place to live, says Rosenberg.
“The new idea becomes a bubble based on three criteria: excessive leverage, widespread participation and dramatic overvaluation.”
Perhaps the first recorded instance of an asset bubble was the Dutch Tulip mania of the 1600s. At the peak in 1637, a single most-sought-after bulb equalled the price of a luxury home on the finest canal in Amsterdam.
Many investors grew fabulously wealthy, with more people purchasing them with intent to flip them for a profit. But the market crashed spectacularly, wiping out parts of the Dutch economy. Substitute tulips for condos, and you pretty much have the Toronto market crash of 1989.
“When you think about it – it’s completely crazy that the Dutch would do something like that but when you are in the bubble you think it is perfectly normal,” says Toru Yoshikawa, a former professor of strategic management at the DeGroote School of Business in Hamilton, who now teaches at Singapore Management University.
Yoshikawa lived through one of the greatest stock market and housing bubbles in history. As a young executive at Canadian-based CIBC bank in Tokyo, he witnessed the implosion of the Japanese stock market in 1989 followed by the bursting of the real estate market. At one point the grounds of the Imperial Palace were said to be worth more than the entire state of California.
The fall of the Japanese economy followed two decades of stagnation. Some economists now wonder whether the American economy, which has seen a massive retraction, will suffer the same fate.
“Everyone said at the time that prices couldn’t go down, that there was only so much land available. It was like brainwashing,” says Yoshikawa. One banker friend ended up buying four condos in downtown Tokyo and almost went bankrupt as a result, he says.
“I was tempted to buy something myself, just because everyone was buying something,” says Yoshikawa. “Now I see many of the same things happening in Canada.”
Another definition of a bubble: They emerge when prices increase more rapidly than inflation, household incomes and economic growth, according to David Macdonald, an economist with the Canadian Centre for Policy Alternatives.
A number of factors can contribute to bubble conditions, including access to easy credit and low mortgage rates.
The bubble burst in the United States because there were other factors, such as sub-prime mortgages in loosely regulated financial markets which caused prices to peak in 2005 – and decline every year since, according to Macdonald. Currently, almost one quarter of U.S. households are “under water,” where the mortgage is more than the market value of the home.
Most economists have ruled out a U.S.-style housing bust in Canada, particularly because we didn’t have the same volume of sub-prime loans. Tougher mortgage restrictions introduced this year means that risky zero-down, 40-year mortgages are no longer allowed.
“Canadian housing policies…continue to mitigate the risk of a massive wave of defaults in the future,” says economist Jim MacGee, author of a C.D. Howe Institute study saying a crash is unlikely.
Still, MacGee’s more bullish report came out only a day after Macdonald’s study, which was titled: “Canada’s Housing Bubble – An Accident Waiting To Happen.”
The case of the dueling reports led to more confusion over the direction of the housing market.
But in reality, the two economists did not have completely diametric views. Macdonald gave three scenarios for a housing bubble bursting, and the U.S.-style example was the most extreme and unlikely he looked at.
Rosenberg, one of the most influential economists, and formerly chief North American economist for Merrill Lynch, says determining if we are in a bubble remains a “close call. If it wasn’t a bubble at the recent peak, then it was one giant-sized sud.”
While most economists agree that sales of homes have gone beyond historical and demographic norms and prices are likely over-inflated in comparison to income, they disagree on whether the third element to be found in most bubbles truly exists in the Canadian housing market: Mass hysteria.
“The human part of it, the psychology is missing – are people really buying these homes because they expect values to rise constantly?” asks Dunning. “Most of the buying we’re seeing is from people who are not being speculators.”
“In a bubble market you have to find that greater fool, the persons who will always buy that good from you at a higher price,” says CIBC Economist Benjamin Tal.
Economist Yoshikawa agrees that Canadians have been much more conservative than his Japanese counterparts.
“In Japan, no one was questioning anything. It was a pure psychological euphoria. That is a key ingredient of a bubble. In this case, Canadians are not that extreme.”
Tell that to frustrated buyers who were caught up in bidding wars earlier this year. Only a few months ago, buyers lined up overnight to be first in line to get condominiums in North York. It was the same scene when buyers camped out at a housing site in Mississauga for three weeks to get first crack at buying a property. Justin Beiber fans could identify.
Still, most consumers don’t care about the semantics of whether the market is in a bubble or not. They just want to know whether prices are coming down.
Here, most economists at least agree that prices will have to fall or level off over the next several years.
“I don’t think you should be surprised if we see a 10-per-cent drop in average housing prices,” says CIBC’s Tal.
Dunning says the market is not in a bubble, but simply in a corrective phase, with prices coming down by 5 or 10 per cent.
The bursting of a bubble, as in the U.S., would be far more radical, with prices dropping by 30 per cent in three years. In Toronto, starting in 1989, prices fell 28 per cent in four years. A variation of this scenario might be possible if interest rates keep going up and government does not clamp down further on mortgage regulations, argues economist Macdonald.
A correction, meanwhile, is a short-term realigning of the market, but not severe enough to be called a crash – the aftermath of the bubble bursting.
“There is a difference between a popping of a bubble and a correction,” says Tal. “What we have seen are house prices overshooting and coming back to earth, but I don’t think it is going to be a dramatic fall.”
So why talk about bubbles?
“Because they’re a lot more sexy” says Tal. “People immediately understand what you’re talking about – and boy do they pay attention.”
Smart-shelter rules of thumb
• Buy a home you want to live in, not flip. Most studies show that in the short run, renting a home is cheaper than buying one. In the first years of purchase, your monthly payments are mostly paying off interest and the only person you’re making rich is your banker.
• Don’t buy during a boom. Markets move in cycles. We’ve been in a strong up cycle over the last decade, but the laws of market gravity will not be defied. What goes up can eventually come down.
• Make the biggest cash down payment you can afford. It’s simple. The more money you put down, the less interest you will have to pay on your property. This could result in substantial savings in the long run.
• Location, location, location. All the funds you’ve invested to improve your home’s “curb value” will be for naught if the neighbourhood is a no-go zone. It’s better to buy a fixer upper in a good neighborhood than having the best house in a run down area.
• Be Realistic. Buying a home is an emotional purchase, but don’t bite off more than you can chew. Make sure you keep within your financial comfort zone. A pool and a picket fence might be ideal – but not when you’re stressed out about paying the monthly dues.
Monday, September 13, 2010
How mortgage market has tightened
Robert Selna,Carolyn Said, Chronicle Staff WritersSan Francisco Chronicle
Sunday, September 12, 2010
In 2006, Arthur Brito, a self-employed Bay Area landscape designer, and his wife were prequalified for a $625,000 home loan. After being priced out of the housing market by inflated values, they started looking again last year, but quickly learned that the mortgage crisis had changed their fortunes: They now qualified for a loan of only $280,000.
Brito's experience illustrates how residential lending practices have shifted dramatically, from a market where high-risk buyers got loans far exceeding their ability to pay to one in which borrowers who are employed and have good credit and a healthy down payment may be out of luck.
"Financially, we are the same people as we were in 2006, so it's pretty frustrating," said Brito, 33. "Our incomes haven't changed, but the rules have changed, so we don't really talk about buying houses anymore. We've shelved it."
Like Brito, many borrowers are suffering a housing loan hangover precipitated by historically lax lending standards.
In 2006, chicanery driven by avarice infected the mortgage industry food chain: Some mortgage brokers pushed risky loans, borrowers lied about their income, appraisers inflated home values, lenders originated shaky mortgages, Wall Street firms bundled them as securities and sold them, and ratings firms characterized them as safe investments.
At the center of this distorted world was the subprime loan, issued at a high interest rate to borrowers with tarnished credit, checkered employment history and little or no money in the bank. Wall Street firms such as Lehman Bros. traded in the lucrative high-interest loans, which yielded quick profits for brokers who sold them and lenders that originated them.
By 2005, the subprime market was $630 billion a year and growing - triple the $210 billion market in 2002.
Mortgage-backed securities create the liquidity that allow banks to originate mortgages, so they are not going away, but in many respects real estate lending has returned to its more traditional and conservative standards.
Higher standards
Borrowers generally need good credit, relatively large down payments, stable employment and a high percentage of income to debt to get a home loan. Dubious mortgages - with no money down, no documentation of income, adjustable rates that skyrocket after an introductory period - have largely gone by the wayside.
"The bottom line is that we have had a complete reboot of the mortgage lending system in this country," said Keith Gumbinger, vice president at HSH Associates, a leading publisher of mortgage and consumer loan information.
Gumbinger said there has always been risk associated with the different facets of mortgage lending, but during the housing boom, one risk was layered on top of another. Now, much of the risk in the market is undertaken by the federal government.
Since the subprime market dried up, buyers with lower down payments and subpar credit increasingly have turned to Federal Housing Administration-backed loans. The FHA requires just a 3.5 percent down payment for buyers who obtain loans from government-approved lenders and pay an insurance premium. The program is funded by the premiums.
Historically, the FHA program had been more popular in states with lower housing costs. That changed with the Economic Stimulus Act of 2008, which doubled the maximum loan the FHA insured to $729,750 in high-cost areas. As a result, FHA lending has boomed in the Bay Area during the past two years. Nationally, FHA lending has gone from 2 percent of all loans originated in 2006 to 30 percent in 2010, according to Gumbinger.
The mortgage-backed securities markets now are dominated by Fannie Mae and Freddie Mac, the nation's largest buyers and sellers of mortgage-backed securities, which became insolvent in September 2008 and were placed under government conservatorship. By law, they are allowed to buy only conforming loans, which include debt-to-income ratio limits and income documentation requirements.
"With the end of Lehman Bros. and others, the machines that create credit came to a standstill," Gumbinger said. "The securities markets are now broken for mortgages that are not supported by Fannie and Freddie."
With subprime loans gone and tighter government regulations, mortgage bankers labor to qualify buyers who don't fit the mold of the ideal borrower: traditional job, good credit, substantial down payment and low debt-to-income balance, according to East Bay mortgage banker John Schaff.
While self-employed people like Brito could have applied for a "stated income" loan three years ago with little documentation, they now have to supply business tax returns and a detailed account of their profit and costs, creating a complex formula and reducing their chances of approval, Schaff said.
Self-employed 'risk'
Because Brito is self-employed and gets more work in good weather than bad, he is considered a lending risk in today's market. As a result, his wife's modest income as a nurse at a nonprofit clinic was the primary basis for the couple's $280,000 loan limit.
"I would have had no problem getting Arthur a loan at a much higher level three or four years ago," Schaff said. "Generally, the new lending standards are a good thing, but he's an example of how the pendulum may have swung too far in that direction."
In 2006, Arthur Brito, a self-employed Bay Area landscape designer, and his wife were prequalified for a $625,000 home loan. After being priced out of the housing market by inflated values, they started looking again last year, but quickly learned that the mortgage crisis had changed their fortunes: They now qualified for a loan of only $280,000.
Brito's experience illustrates how residential lending practices have shifted dramatically, from a market where high-risk buyers got loans far exceeding their ability to pay to one in which borrowers who are employed and have good credit and a healthy down payment may be out of luck.
"Financially, we are the same people as we were in 2006, so it's pretty frustrating," said Brito, 33. "Our incomes haven't changed, but the rules have changed, so we don't really talk about buying houses anymore. We've shelved it."
Like Brito, many borrowers are suffering a housing loan hangover precipitated by historically lax lending standards.
In 2006, chicanery driven by avarice infected the mortgage industry food chain: Some mortgage brokers pushed risky loans, borrowers lied about their income, appraisers inflated home values, lenders originated shaky mortgages, Wall Street firms bundled them as securities and sold them, and ratings firms characterized them as safe investments.
At the center of this distorted world was the subprime loan, issued at a high interest rate to borrowers with tarnished credit, checkered employment history and little or no money in the bank. Wall Street firms such as Lehman Bros. traded in the lucrative high-interest loans, which yielded quick profits for brokers who sold them and lenders that originated them.
By 2005, the subprime market was $630 billion a year and growing - triple the $210 billion market in 2002.
Mortgage-backed securities create the liquidity that allow banks to originate mortgages, so they are not going away, but in many respects real estate lending has returned to its more traditional and conservative standards.
Higher standards
Borrowers generally need good credit, relatively large down payments, stable employment and a high percentage of income to debt to get a home loan. Dubious mortgages - with no money down, no documentation of income, adjustable rates that skyrocket after an introductory period - have largely gone by the wayside.
"The bottom line is that we have had a complete reboot of the mortgage lending system in this country," said Keith Gumbinger, vice president at HSH Associates, a leading publisher of mortgage and consumer loan information.
Gumbinger said there has always been risk associated with the different facets of mortgage lending, but during the housing boom, one risk was layered on top of another. Now, much of the risk in the market is undertaken by the federal government.
Since the subprime market dried up, buyers with lower down payments and subpar credit increasingly have turned to Federal Housing Administration-backed loans. The FHA requires just a 3.5 percent down payment for buyers who obtain loans from government-approved lenders and pay an insurance premium. The program is funded by the premiums.
Historically, the FHA program had been more popular in states with lower housing costs. That changed with the Economic Stimulus Act of 2008, which doubled the maximum loan the FHA insured to $729,750 in high-cost areas. As a result, FHA lending has boomed in the Bay Area during the past two years. Nationally, FHA lending has gone from 2 percent of all loans originated in 2006 to 30 percent in 2010, according to Gumbinger.
The mortgage-backed securities markets now are dominated by Fannie Mae and Freddie Mac, the nation's largest buyers and sellers of mortgage-backed securities, which became insolvent in September 2008 and were placed under government conservatorship. By law, they are allowed to buy only conforming loans, which include debt-to-income ratio limits and income documentation requirements.
"With the end of Lehman Bros. and others, the machines that create credit came to a standstill," Gumbinger said. "The securities markets are now broken for mortgages that are not supported by Fannie and Freddie."
With subprime loans gone and tighter government regulations, mortgage bankers labor to qualify buyers who don't fit the mold of the ideal borrower: traditional job, good credit, substantial down payment and low debt-to-income balance, according to East Bay mortgage banker John Schaff.
While self-employed people like Brito could have applied for a "stated income" loan three years ago with little documentation, they now have to supply business tax returns and a detailed account of their profit and costs, creating a complex formula and reducing their chances of approval, Schaff said.
Self-employed 'risk'
Because Brito is self-employed and gets more work in good weather than bad, he is considered a lending risk in today's market. As a result, his wife's modest income as a nurse at a nonprofit clinic was the primary basis for the couple's $280,000 loan limit.
"I would have had no problem getting Arthur a loan at a much higher level three or four years ago," Schaff said. "Generally, the new lending standards are a good thing, but he's an example of how the pendulum may have swung too far in that direction."
Thursday, September 9, 2010
Bank of Canada raises rates, but sees soft recovery
Hike will be noticed immediately by those who have variable mortgages, lines of credit
By Fiona Anderson, Vancouver Sun September 9, 2010
The Bank of Canada raised its benchmark lending rate Wednesday, the third increase in just over three months.
The bump of 25 basis points brings the bank's target rate for overnight loans between financial institutions to one per cent. Canada's largest banks followed suit by raising their prime lending rate to three per cent.
The increase in prime lending rates will be noticed immediately by anyone with loans -- like variable mortgage rates or lines of credit -- that calculate interest according to the prime rate.
People with big lines of credit "are the people who are going to hurt," said Andrey Pavlov, associate professor of finance at Simon Fraser University.
But that's what the Bank of Canada was thinking when it raised the overnight rate, he said. The bank wants to slow consumption and it does that by hitting those who consume the most.
"Now they're not out there to hurt anyone in particular, but they do need to slow down the economy because if we grow too fast we're going to get inflation," Pavlov said.
But whether fixed mortgage rates will be affected is a different story. While the central bank has been raising its overnight rate since June, commercial banks have been lowering mortgage rates.
"So it doesn't necessarily mean that the fixed rate will go up," said Tsur Somerville, director of the centre for urban economics and real estate in the Sauder School of Business at the University of British Columbia.
"But it certainly means the variable-rate mortgages will go up [and] so by definition it has to dampen the housing market."
With the higher variable rate there will be some downward pressure on house prices, he said. But at the same time, the strengthening economy should have a positive effect on the market.
"And the strength of the economy is going to be a more important factor for the housing market," Somerville said.
Despite the rise in variable rates, and the uncertain effect on fixed-rate mortgages, Pavlov believes that variable-rate mortgages are still the way to go, especially since he believes this rate increase will be the last for some time to come.
"I wouldn't be surprised to see another year with no further increase," Pavlov said.
So although people who took out a variable-rate mortgage six months ago or a year ago now are paying a little bit more compared to a fixed-rate mortgage they could have taken out six months ago, they are still way ahead, he said.
"If [rates] do hold for another year you'll surely be ahead regardless of what happens afterwards because you're paying down your mortgage. You should be keeping your payments high; then even if interest rates go up they are going to be on a lower balance," Pavlov said.
But whether the Bank of Canada will hold rates steady or not is an open question. In its announcement, the central banker said economic activity in Canada had been softer than expected and that the economic recovery was now expected to be slightly more gradual than projected. But it also said "consumption growth is expected to remain solid and business investment to rise strongly."
As a result, "any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook," the bank said.
Douglas Porter, deputy chief economist at BMO Capital Markets, called the central bank's statement "a bit more hawkish than we expected."
"The Bank of Canada clearly retains its tightening bias, and seems generally unfazed by the recent cooling in the Canadian economy," Porter wrote in a note. "While we had been expecting the bank to now move to the sidelines for a spell, it appears that it will take a deeper slowdown in domestic spending ... than what we have seen so far to prompt them to stop raising rates."
By Fiona Anderson, Vancouver Sun September 9, 2010
The Bank of Canada raised its benchmark lending rate Wednesday, the third increase in just over three months.
The bump of 25 basis points brings the bank's target rate for overnight loans between financial institutions to one per cent. Canada's largest banks followed suit by raising their prime lending rate to three per cent.
The increase in prime lending rates will be noticed immediately by anyone with loans -- like variable mortgage rates or lines of credit -- that calculate interest according to the prime rate.
People with big lines of credit "are the people who are going to hurt," said Andrey Pavlov, associate professor of finance at Simon Fraser University.
But that's what the Bank of Canada was thinking when it raised the overnight rate, he said. The bank wants to slow consumption and it does that by hitting those who consume the most.
"Now they're not out there to hurt anyone in particular, but they do need to slow down the economy because if we grow too fast we're going to get inflation," Pavlov said.
But whether fixed mortgage rates will be affected is a different story. While the central bank has been raising its overnight rate since June, commercial banks have been lowering mortgage rates.
"So it doesn't necessarily mean that the fixed rate will go up," said Tsur Somerville, director of the centre for urban economics and real estate in the Sauder School of Business at the University of British Columbia.
"But it certainly means the variable-rate mortgages will go up [and] so by definition it has to dampen the housing market."
With the higher variable rate there will be some downward pressure on house prices, he said. But at the same time, the strengthening economy should have a positive effect on the market.
"And the strength of the economy is going to be a more important factor for the housing market," Somerville said.
Despite the rise in variable rates, and the uncertain effect on fixed-rate mortgages, Pavlov believes that variable-rate mortgages are still the way to go, especially since he believes this rate increase will be the last for some time to come.
"I wouldn't be surprised to see another year with no further increase," Pavlov said.
So although people who took out a variable-rate mortgage six months ago or a year ago now are paying a little bit more compared to a fixed-rate mortgage they could have taken out six months ago, they are still way ahead, he said.
"If [rates] do hold for another year you'll surely be ahead regardless of what happens afterwards because you're paying down your mortgage. You should be keeping your payments high; then even if interest rates go up they are going to be on a lower balance," Pavlov said.
But whether the Bank of Canada will hold rates steady or not is an open question. In its announcement, the central banker said economic activity in Canada had been softer than expected and that the economic recovery was now expected to be slightly more gradual than projected. But it also said "consumption growth is expected to remain solid and business investment to rise strongly."
As a result, "any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook," the bank said.
Douglas Porter, deputy chief economist at BMO Capital Markets, called the central bank's statement "a bit more hawkish than we expected."
"The Bank of Canada clearly retains its tightening bias, and seems generally unfazed by the recent cooling in the Canadian economy," Porter wrote in a note. "While we had been expecting the bank to now move to the sidelines for a spell, it appears that it will take a deeper slowdown in domestic spending ... than what we have seen so far to prompt them to stop raising rates."
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