And they know what they want: a three-bedroom, single-family home near us in Monmouth County, N.J. Melissa wants to move closer so our families can spend more time together. Joe lived in the area as a child, and he's eager to return.
But our neck of the woods has seen some of the steepest home-price increases in the nation over the last several years. In the second quarter of 2006, the median price for a single-family home in our region was $393,600, more than double the median of $188,200 in 2000, according to the National Association of Realtors.
Those price increases have reflected fierce competition, something my sister knows all too well. Last summer Melissa and Joe found the perfect place — a roomy home near us on a fair-sized lot for a hair under $250,000. (Roomy was key — standing 6 foot 5 plus, Joe's a guy who needs space.) After making an offer, they thought the house was theirs, only to see it snatched out from under them at the last minute by a counteroffer for $10,000 more. That was too much for my sister; deeply disappointed, she and Joe stopped looking. Still, they did keep an eye on real-estate sites, hoping for signs of a letup in the insanity.
Recently she's seen reasons for hope: Far more homes were showing up in their price range, and others she'd seen a year ago were being relisted at reduced asking prices. Melissa decided it was time to look around again, and last weekend she asked me to come along on a tour of open houses in her price range. My sister had a list of homes she'd found online, but I suggested we tour as many open houses as we could to get a feel for the market.
What we saw was bleak news for sellers in our region, but good news for buyers like Melissa and Joe: block after block of open-house signs. In fact, we were hard-pressed to find a street that didn't have at least one home for sale — and many had more than one. What's more, most of the 20 or so homes we visited were vacant — a sign that homeowners have moved on and are motivated to sell, or that speculators are looking to unload properties before prices go any lower. (Asked why one home was vacant, one agent said frankly: "This was a 'flip' that flopped.")
Though some of the agents we encountered continued to promote their "charming" homes as "a steal," a surprising number were more candid. "The owner way overpriced this home," said one. "I bet if you offered $30,000 less they'd jump at it." We believed her, because she was running the open house as a favor for another agent.
Another sign of a turning market: We saw very similar houses with prices all over the map — ranging from the low $200,000s to $270,000. That's evidence that sellers aren't sure what houses are worth these days, with some reluctant to accept that market dynamics have changed.
"They look at home-price comparisons from a year ago when there was far more demand than supply," says Pat Lashinsky, senior vice president of Emeryville, Calif., real-estate firm ZipRealty. Now that there's excess supply, he says, sellers need to be more willing to negotiate.
One agent on our tour encouraged Melissa to look at homes "in the $270s or $280s" — well out of her price range — and make lowball offers. Think that wouldn't work? We encountered a husband and wife going the "for sale by owner" route, with an asking price of $315,000. While his wife pointed out the home's features to my sister, the husband gave me a wink and whispered, "Don't let that $315 scare you, we're extremely negotiable."
After our exhausting open-house blitz, Melissa asked for my thoughts. Though I'm too young to have experienced the 1980s real-estate market implosion, something told me that things are going to get a lot worse for sellers before they get better. To get an expert's take, I asked Robert J. Shiller, a Yale economics professor, for his insight on where the East Coast real-estate market may be headed.
"We don't know exactly what's going to happen because we've just experienced the biggest housing boom this country has ever seen," he says. In addition to homeowners struggling to sell existing homes, construction is at near-record levels: The last time this much inventory entered the market was 1950, when builders were building suburban homes for soldiers returning from war, he says.
Prof. Shiller suggests that the Japanese housing bust may provide a precedent. Home prices there remained depressed for a decade before the market recovered. He says: "The real question is, 'Is this the beginning of a major period of decline as we saw in Japan, or will we see a kind of sharp and sudden correction?' "
Despite evidence of a cooling real-estate market, Melissa and Joe decided they weren't quite ready to wade back in: They'll take the market's temperature again in the spring.
That settled, my sister wanted to know what I thought they could reasonably afford. When they began looking, Melissa believed homes around $250,000 to $260,000 were in their price range, based on the going mortgage rates. But as rates have marched steadily higher, the maximum they can afford to borrow has become a bit of a moving target. To pinpoint how much they could afford, I told Melissa to plug in the numbers on our home-affordability calculator; after doing so, she estimated the most they could afford was a $230,000 loan, assuming they put $20,000 down.
Affordability has long been a problem for first-time home buyers who are strapped for cash. Mortgage payments are taking a bigger bite out of household incomes: The median monthly payment as a percentage of income was 24.3 percent in July 2006, up from 20.5 percent in 2000. And now double-digit jumps in home prices in some areas of the country — like ours — are even squeezing households with higher-than average income.
In 1992, when he was 25, Gerry bought a three-bedroom house on a 50 foot by 100 foot lot for $134,000. The home was located in one of the coastal towns Melissa and Joe have been looking at. Money was tight for a few years, but he managed the monthly payments with no problems. Today, comparable homes are listed in the same neighborhood in the $400,000 range, three times as much. But Melissa and Joe's household income is less than double what ours was back then. Home-price inflation had clearly outpaced incomes.
To get into pricier homes, many homebuyers have turned to adjustable-rate mortgages, which offer low upfront interest rates that fluctuate over time. But as these loans begin to reset, rising interest rates have begun to take a toll on family finances, as this article notes.
For this reason, I've urged my sister to avoid ARMs, even though there's a possibility she and Joe might want to upgrade to a nicer home within seven years — the average length of time before homeowners either sell their homes or refinance their mortgages. A 30-year fixed-rate mortgage averaged 6.53 percent statewide in New Jersey for the week ending Sept. 8, according to HSH Financial Publishers. Compare that to 5.48 percent for a one-year ARM.
True, an ARM would allow Melissa and Joe to get more home for the money: Using this calculator, Melissa used the terms of two mortgages she's comparing and found her monthly mortgage payment would be $1,458 with the fixed-rate loan, and just $1,303 with a one-year ARM if rates remained where they are. But that's a big if: If rates hit the 12 percent cap, she'd be looking at a monthly nut of $3,252. The thought of a sudden mortgage-payment increase of even a few hundred dollars makes my sister queasy, so she agreed the fixed-rate loan is a better fit.
I also urged her to tune out mortgage brokers who tell her she can afford a much more expensive home by using exotic loans such as interest-only mortgages or option ARMs, which let you choose how much your monthly payment will be. These loans leave the homeowner at risk of being "upside down" on their loans, where the mortgage is greater than the value of the home. If forced to sell, they could be in serious trouble.
Finally, since Melissa and Joe have decided to wait to see how market conditions unfold, I suggested they begin "paying" her mortgage now so their first payment won't come as such a shock to the system. Their current rent is roughly $700 (yes, a spacious apartment can still be had near New York City for less than a grand a month).
So, back to the math: If their monthly mortgage payments are likely to be in the $1,500-a-month range, Melissa and Joe should start using the difference ($800 a month) from their disposable income to either pay down debt or save for a larger down-payment. That will help when the time comes for them to hop off the fence and become first-time homeowners.