Tuesday, November 22, 2011

What Came Down WILL Eventually Go Up – Home Values Don’t Jump Up Overnight

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Remember that infamous “Mortgage Meltdown” of early 2007?  What homeowner doesn’t remember that awful time when the mortgage industry came crashing down in what was one of the worse declines in home value that we had seen in a long time? Now, as the nation continues to reel over the effects of lenders’ leniency during the real estate bubble of the years 2001 to 2006, we are struggling to bounce back.  Things are improving but it is not an easy feat when you consider that millions of Americans are dealing with foreclosures or the risk of foreclosure given our current economy.

What Happened To Cause the Mortgage Crisis of February 2007?

It seems like it was ages ago but not that long ago lenders were widely soliciting any type of buyer and home loans were easily available to most.  Limited checks were done on the documentation provided by prospective borrowers and yet they were awarded loans liberally.  People were making bad decisions, and since they could purchase with little or no money down they were buying homes that were based on the monthly payment amount rather than gauging whether they could actually afford the home overall.

In February of 2007, everything in the industry came crashing down when lenders realized homes were way overvalued.  Equity homeowners once had in their homes plummeted and people could no longer afford to make monthly payments on their property.  The result was a wave of foreclosures and short sales – that to this day are prevalent in the market.  In fact, in some markets, distressed sales have been the primary sale type until only just recently as we begin to see a slight rebound.

How Has the Mortgage Industry Changed Today?

As a result of the sheer magnitude of mortgages that have gone underwater during the mortgage meltdown and since – lenders have now done a 180 on the entire process.  There are extremely tight regulations in place.  Now no loans are done without a full-blown documentation process.  Each minute detail is checked and verified and then re-verified with expirations on some of the requirements, ending up in the need to reassess yet again.  Where once a borrower submitting his own copies of tax returns as enough, they are now most often run through the 4506-t IRS transcript process.  A detailed Verification of Employment (VOE) form is also requested of employers.

Here's a Closer Look at These Numbers 

5%/ year on 450,000= $22500 = $472500 in 2013
5%/year on 472,500 = $23625 = $496125 in 2014
5%/year on 496,125 = $24806 = $520,093 in 2015
5%/year on 520,093 = $26046 = $546,140 in 2016
5%/ year on 546,140 = $27,307 = $573,447 in 2017
5%/ year on 573,447 = $28,672 = $602,119 in 2018

How Long Before My House Values At Mid-2000’s Level Again?

Unfortunately for most homeowners during the time prior to the mortgage crisis, it is very difficult to endure not seeing the expected value of their home. As a result, they end up making the decision to wait to sell, hoping the values will come back up in a year or so.

Since housing values are directly tied to income levels and salary increases (which are typically a 3% to 5% rise each year), the probability of a home regaining its value from the mid-2000s, over the next 12 months is next to nothing.  The only way for prices to go up is for buyers to earn more money.

When you examine the standard rate of employment increase and apply it to a home valued at $450,000 where the homeowners are seeking to recover the value of $600,000 from just a few years ago – it will take no less than six years.  The steady salary increase translates to about the same growth on housing values.  Considering this increase, by the year 2013 the home will have increased in value to $472,500.  By 2015 it will likely reach $520,093 and by 2018 the home will be valued at $600,000.  Factor in the loan payment given that only partial payment actually works toward the principal and it seems clear that waiting to sell may not be the best decision.
To learn whether sitting on it or selling your home is the better option – visit your Realtor for a customized consultation that examines your circumstances, performance in your market area and all other relevant factors that will help you decide your next steps.

Remember – the only way for home prices to increase in the foreseeable future is for wages to go up and until they do, housing values will only creep back upward. To see the appreciation for the last 40 years click here. 

Thursday, November 3, 2011

Homeowners Insurance – Coverage, Costs and Changes

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One of the cornerstones of the home purchase process is the purchase of a homeowners’ insurance policy.  In fact, unless a home has a valid and active homeowners’ insurance policy already purchased prior to the close of escrow, the lender will not proceed to the final stage and allow closing on the property.

There are a few things to know and be prepared with prior to selecting a policy on your new home so it is important to research and know all the options before obtaining coverage on the home.  Here are some basic frequently asked questions to get you started in your research of the right homeowner’s insurance policy for you:

Why is having a homeowners’ insurance policy important?

Without proper coverage on your home, your investment is at risk in the event of a major catastrophe.  For this reason, lenders require the purchase of a homeowners’ policy on any home being sold. The types of events and/or calamities that cause the need for such coverage range from anything like a natural disaster such as tornadoes, hurricanes or blizzards plus fire damage or total loss.

Other than major damage, what things are included on a typical homeowners’ insurance policy?
The single most important coverage outside of replacement coverage of the property is liability insurance.  Applicable to anyone other than those who reside in the home or licensed contractors on the premises to perform professional work, liability insurance protects the homeowner in case the claimant is not covered by their own policy.  Examples of such include a dog bite, visitors slipping and falling while on your premises or other incidents of accidental injury.

How much does it cost to insure a home?

Depending on what type of policy is purchased, the cost can range anywhere from $200-$300 for typical fire policies to $500-$600 for the average homeowners’ policy. Additional riders will increase the price nominally per rider but also improves coverage significantly.

What about coverage of the contents in the home?

All items in the home are covered under the homeowner’s policy with a list of a few policy exclusions that are unique to each underwriter.  There will be a specific amount covered that will be replacement of items in the home. Some specialized items like jewelry will require an additional rider beyond a certain base limit (usually $5,000).

What other benefits are there of having homeowners’ insurance?

Theft and vandalism coverage is usually standard with most homeowners’ insurance policies.  Storm damage and tree removal are standard in some cases and optional riders with other insurance carriers.  Earthquake and flood insurance is covered by some carriers as part of the homeowners’ insurance while most others have it listed as an optional rider.  Glass protection, debris removal and sewer backup coverage are also policy additions to consider.

Is the purchase amount or the loan amount being insured under a homeowners’ policy?

Though the lender will require that the loan amount be covered at the close of escrow, the actual coverage needed is the replacement value of the property.  Insurance companies have a range within which a policyholder can opt to cover.  Coverage that provides eighty percent of the replacement value can be purchased for a lower premium, for instance, but in the case of a catastrophe the homeowner would then only be eligible for that 80%.  In cases where there has been a total loss and the homeowner opted for less than one hundred percent coverage, they can choose to rebuild in a different way than the original home was built.

What changes, if any, are there in the homeowners’ insurance industry?

Most insurance carriers do not insure vacant homes and properties that are under construction.
The homeowner should carefully review the policy before signing it to confirm whether all expected items are covered.  Also needing to be reviewed is the replacement value as well as the coverage amount on any special equipment such as additional structures (tool sheds, barn, detached portions of the home) or jewelry and high-value items like works of art or firearms.

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