WHAT YOU NEED NOW - CONTENT UPDATED THROUGH THE DAY
Oct. 29 2005
BOOK REVIEW: ‘House Poor’ Issues Cautions about Viewing Your Residence as an Infinite ATM; Offers Useful Advice About Buying, Selling, Remodeling, Financing
Reviewed By David M. Kinchen
Huntington News Network Book Critic
Hinton, WV (HNN) – June Fletcher is an experienced real estate writer
currently working for the Wall Street Journal. I first met her when she was
a writer for Builder magazine, published for the National Association of
Home Builders. I was president of the National Association of Real Estate
Editors in 1984; June was NAREE president in 1990. Her Home Front column in
the Wall Street Journal is always worth reading. “House Poor: Pumped Up
Prices, Rising Rates, and Mortgages on Steroids” (Collins, $21.95, 224
pages) is her attempt to get a handle on the superheated real estate market
– it’s OK to call it a “bubble” – prevailing in many parts of the country.
Fortunately, the bubble effect doesn’t seem to have taken hold in West
Virginia – with the possible exception of Eastern Panhandle areas closest to Washington, DC. It has gripped Fairfax County, VA., across the Potomac from Washington, where Fletcher and her family live. It’s a fact of life in much of California, Las Vegas and many metro areas outside the Midwest heartland.
Chicago may be in for a major downward revision; it has an estimated 67,000
condominiums in the downtown area alone, according to Fletcher’s Wall Street
Journal (Oct. 19, 2005). I observed this situation first hand on a recent
visit to Chicago, where the construction crane is an ever-present part of
the skyline. The very same issue of The Journal had a story that San Diego,
Orange County and Oakland – all in California – and Boston and Long Island,
NY may be poised for a decline in prices or at least an end to appreciation.
These are all superheated markets, as compared with Cincinnati, Memphis,
Indianapolis and Pittsburgh, which the study by PMI Mortgage Insurance
quoted in the story cites as low-risk areas.
If, like me, you get multiple solicitations for credit cards just about
every mail delivery day, you’re probably being bombarded by the home equity
offers that Fletcher mentions in “House Poor.” I wish I had a dime for
every Di-Tech and Lending Tree commercial I see on TV. Her advice – and mine
– is to be very, very careful about assuming more debt. She says the
average household has just over $8,000 in outstanding credit card debt and
may be tempted to get a line of credit to wipe this out. Don’t do it, is my
advice – and I think hers. When the housing bubble bursts, it will affect
all markets, even those not directly involved. If you’ve fallen for
interest-only loans, 40-year mortgages and other “creative” financing
techniques, you could find yourself “upside-down” in your house—owing more
than it’s worth.
Mortgage interest rates are rising and consumer debt stands at a record 110
percent of disposable income, Fletcher points out. Income is flat for most
people. In some cities, the vultures are circling the cranes – the
construction kind – as real estate investors are creating “vulture capital”
funds to purchase condos when the bubble bursts.
Wonder of wonders, for a book on housing, Fletcher actually advises
potential buyers in extremely high-cost markets like San Francisco and Los
Angeles to rent, rather than buy. She even quotes Arlington, VA.-based
housing economist John Tuccillo as saying “Many people are better off as
lifetime renters.” This is heresy for someone connected with the housing
market, especially a person – Tuccillo – who was chief economist for the
National Association of Realtors from 1987 to 1997 -- but it makes sense.
You can rent a very nice one-bedroom apartment on the lakefront in Chicago
for about $1,800 a month. It’s in a new building facing a beautiful park and
it’s a short walk from the new Millennium Park. A similar condo might sell
for $350,000. If you finance $300,000 of that price with a 7 percent
interest rate loan for 20 years, your monthly mortgage payment would be
about $2,326. Add in association dues and property taxes and you’re in the
$3,000 a month range. It might be better to rent and find a good investment
for that $1,200 a month you’re NOT spending on housing! Then again, it might
be better to buy that nice condo now – maybe even putting more money down or
even paying cash from the proceeds of the sale of your suburban ranch house,
as many Chicagoans area are doing.
Fletcher also quotes the current NAR chief economist, David Lereah, who says
that demand for housing for new households in the next decade will outstrip
supply, reducing the likelihood of a decline in prices in most market.
Lereah argues in his new book “Are You Missing the Real Estate Boom?” –
which I reviewed last February on this site (check the archived book
reviews) – that the real estate “bubble” is a creation of the business and
real estate media, which doesn’t want to be caught sleeping at the computer
terminal if there is a sharp decline in prices in places like Chicago, San
Diego or Boston. I recommend Lereah’s book for pointing out the soundness of
housing as a long-term lifestyle choice. Both Fletcher and Lereah caution
prospective buyers of second homes in vacation areas as “investments.” Being
a landlord – and I speak from bitter personal experience – is one pain in
the tukhes after another.
Fletcher deals with foreign buyers, a major factor in many California
markets, as well as Florida and Seattle and New York City. They find housing
relatively cheap in the U.S., compared with their home countries. Canadian
flags fly outside condo developments as far apart as Florida and Hawaii. If
you’re thinking about buying real estate in a foreign country, she has
advice on this subject. My personal advice is don’t buy in areas where you
can’t get a deed to the land. This rules out coastal Mexico and places like
Thailand and the Philippines, where foreigners can’t own land. You’re better
off in Costa Rica and inland Mexico.
She also cautions about over-improving your house if you’re considering
selling it. Simple paint and cosmetic improvements – simple things like new
cabinet pulls and light switch plates and a new doorbell -- are all you
need to do in hot markets; don’t go overboard with granite countertops and
brand-new bathrooms. Even if you’re not considering selling, don’t have the
most remodeled house in your neighborhood, she warns. Fletcher also cites
several examples of people selling their houses without agents. This will
work in many markets if you do your homework, armed with a professional
appraisal for about $200-$300 and advice from an Internet home selling site.
The Internet has radically changed the real estate market, Fletcher points
out, with web sites available to help the knowledge-impaired house seller.
Fletcher touches briefly on skyrocketing property taxes, citing Florida
where a buyer was shocked to find that “low tax Florida” isn’t so low when
it comes to property taxes. The person cited found the property taxes on his
house amounted to 2 percent of the purchase price. If the house sold for
$400,000 – not uncommon in the Hurricane State – that’s $8,000 a year. We’re
in New Jersey territory here! I’m glad June Fletcher mentioned property
taxes, if only briefly; many housing writers dismiss this issue, saying
they’re deductible. Yes, but you have to pay them first! She also cites the
horrendous increase in homeowner insurance premiums, partly because of
Florida’s exposure to hurricanes, like the devastating Wilma that caused
billions of dollars of property damage this past week. Insurance companies
deny this, but they’ll try to raise rates in non-hurricane areas to cover
their losses.
I recommend June Fletcher’s “House Poor” without reservation, based on my
own 35 years of writing about real estate for two metropolitan newspapers in
Milwaukee and Los Angeles and for this Internet news site. The book is
properly indexed and has an excellent “sources and resources” appendix with
web sites, publications and books, including Lereah’s and “Freakonomics,”
which I just reviewed on this site.
Publisher’s web site: www.harpercollins.com
