MONEY home prices

What to Expect From the Housing Market in 2015

aerial view of subdivision
David Sucsy

Consumers think 2015 will be a better year than 2014, especially for selling a home. But the recovery faces an uphill climb.

What does 2015 have in store for the housing market? Nine years after the housing bubble peaked and three years after home prices bottomed, the boom and bust still cast a long shadow. None of the five measures we track in our Housing Barometer is back to normal yet, though three are getting close. The rebound effect drove the recovery after the bust but is now fading. Prices are no longer significantly undervalued and investor demand is falling. Ideally, strong economic and demographic fundamentals like job growth and household formation would take up the slack. But the virtuous cycle of gains in jobs and housing is relatively weak, and that will slow the recovery in 2015. All the same, consumers are optimistic, according to our survey of 2,008 American adults conducted November 6-10, 2014.

Consumers Expect 2015 to Be Better, Especially for Selling a Home

Consumers are as optimistic about the housing market as at any point since the recovery started. Nearly three-quarters — 74% — of respondents agreed that home ownership was part of achieving their personal American Dream, the same level as in our 2013 Q4 survey and slightly above the levels of the three previous years. For young adults, the dream has revived: 78% of 18-34 year-olds answered yes to our American Dream question, up from 73% in 2013 Q4 and a low of 65% in 2011 Q3.

AmericanDream

 

Furthermore, 93% of young renters plan to buy a home someday. That’s unchanged from 2012 Q4 despite rising home prices and worsening affordability.

Which real estate activities do consumers think will improve in 2015? All of them – but especially selling. Fully 36% said 2015 will be much or a little better than 2014 for selling a home. Just 16% said 2015 will be much or a little worse, a difference of 20 percentage points. The rest of the respondents said 2015 would be neither better nor worse, or weren’t sure. More consumers said 2015 will be better than 2014 for buying too. But the margin over those who said 2015 will be worse was not as wide.

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Despite this optimism, barriers remain to homeownership. Saving for a down payment is still the highest hurdle, as it was last year, followed by poor credit and qualifying for a mortgage. Not having a stable job has become considerably less of an obstacle, dropping to 24% this year compared with 36% last year thanks to the recovering job market. But affordability has become a bigger obstacle. Some 32% of respondents cited rising home prices, compared with 22% last year.

BiggestObstacle

 

Housing Recovery in 2015: Rebound Effect to Fade Before Fundamentals Can Take Over

Different engines power each stage of the housing recovery. During the early years—roughly 2012 to 2014 – the rebound effect drove the recovery. Investors and other buyers scooped up undervalued homes and took advantage of foreclosures and short sales, boosting overall sales volumes. Local markets hit hardest in the housing bust posted the largest price rebounds. Now, though, the rebound effect is fading. Price levels and price changes are both approaching normal, foreclosure inventories are dwindling, and investors are pulling back. This is inevitable as the market improves and therefore shifts to slower, more sustainable price increases and a healthier mix of home sales.

So what replaces the rebound effect in the next stage of the housing recovery? The market increasingly depends on fundamentals such as job growth, rising incomes, and more household formation. But here’s the hitch: These fundamental drivers of supply and demand haven’t returned to full strength. They aren’t able to fully take the reins from the rebound effect. Importantly, the share of young adults with jobs is still less than halfway back to normal, many young adults are still living with their parents, and income growth is sluggish. This points to a tricky handoff, and means housing activity in 2015 might disappoint by some measures, though the rental market will remain vigorous.

Here’s what we expect:

  • Price gains slow, but affordability worsens. Price gains slowed in 2014 and we’ll see more of the same in 2015. In October 2014, prices increased4% year-over-year, down from 10.6% in October 2013. The slowdown has been especially sharp in metros that had a severe housing bust followed by a big rebound. Now, prices nationwide are just 3% undervalued relative to fundamentals. That leaves fewer bargains and scant room for prices to rise without becoming overvalued. What’s more, with consumers expecting 2015 to be a better year to sell than 2014, more homes should come onto the market, cooling prices further. Nevertheless, despite slowing price gains,home-buying affordability will worsen in 2015 for two reasons. First, even these smaller price increases will almost surely outpace income growth. In 2013, incomes rose just 1.8% year-over-year in nominal terms, and a negligible 0.3% after adjusting for inflation. Second, the strengthening economy and the Fed’s response should push up mortgage rates.
  • The rental market will keep burning bright. Next year will see strong rental demand and lots of new supply. The demand will come from young people leaving homes belonging to parents or roommates and renting their own places. Until now, they’ve been slow to leave the nest. But the 2014 job gains for 25-34 year-olds should lead to the rise in household formation we’ve been waiting years for. At the same time, the 2014 apartment construction boom will mean more supply in 2015 since multi-unit buildings take about a year to build. Will rent gains slow? Probably – provided that this new supply keeps up with formation of renter households. This surge of renters will probably cause the homeownership rate to fall. To be sure, the ranks of homeowners will probably rise. But an even larger number of young adults will enter the housing market as renters.
  • Single-family starts and new home sales could disappoint. While apartment construction is breaking records, single-family housing starts and new home sales are still not much better than half of normal levels. They’ll improve in 2015, but not as much as we’d like. Our consumer survey suggests more people will try to sell existing homes. That would add to the supply on the market and possibly reduce demand for new homes. Also, the strongest source of housing demand will be young people getting jobs and forming households. But they’ll be moving into rentals and saving for a down payment rather than buying homes right away. Finally, the vacancy rate for single-family homes is still near its recession high, which discourages new construction. The apartment construction boom shows that where there’s demand, builders will build. But buyer demand for single-family homes simply hasn’t recovered enough to support near-normal levels of single-family starts or new home sales.

If these predictions for 2015 sound similar to our predictions for 2014, you’re right. As the rebound effect fades and fundamentals take over, the recovery gets slower and the market starts to look more similar from one year to the next. But there’s good news here. Even though the recovery remains unfinished, the housing market is becoming more stable and more certain for buyers, sellers, and renters.

Markets to Watch in 2015

As the rebound effect fades, our 10 markets to watch have strong fundamentals for housing activity. These include solid job growth, which fuels housing demand, and a low vacancy rate, which spurs construction. We gave a few extra points to markets with a higher share of millennials. These young adults are getting back to work and that will drive household formation and rental demand. We didn’t include markets where prices looked at least 5% overvalued in our latest Bubble Watch report. Here are our markets to watch, in alphabetical order:

  1. Boston, MA
  2. Dallas, TX
  3. Fresno, CA
  4. Middlesex County, MA
  5. Nashville, TN
  6. New York, NY-NJ
  7. Raleigh, NC
  8. Salt Lake City, UT
  9. San Diego, CA
  10. Seattle, WA

MarketstoWatch1

 

These markets are spread across the country: Boston, Middlesex County (just west of Boston), and New York in the Northeast; Dallas, Nashville, and Raleigh in the South (the Census considers Texas part of the South); and Fresno, Salt Lake City, San Diego, and Seattle in the West. No Midwestern metros make the list because they generally have slower job growth and higher vacancy rates than other markets, even though many are quite affordable and prices are rebounding.

In 2015, more markets will settle back into their long-term housing patterns. Fast-growing markets that boomed last decade, collapsed in the bust, and then rebounded are now leveling off. Even the markets that have been slowest to recover and have struggled longest are seeing foreclosure inventories decline and the sales mix moving back toward normal.

At the same time, first-time homeownership, single-family starts, and new home sales won’t come close to fully recovering in 2015. But if 2015 brings strong job growth, big income gains, and the long-awaited jump in household formation, then 2016 could be the year when we see a major turnaround in homeownership and single-family construction.

MONEY best of 2014

5 Trends That Changed the Face of Real Estate in 2014

Lightbulb in doorway
MONEY (photo illustration)

Cheaper solar power (finally), what millennials really want in a home, and a better shot at a mortgage (for some).

Every year, there are innovators who come up with fresh solutions to nagging problems. Companies roll out new products or services, or improve on old ones. Researchers propose better theories to explain the world. Or stuff that’s been flying under the radar finally captivates a wide audience. For MONEY’s annual Best New Ideas list, our writers searched the world of money for the most compelling products, strategies, and insights of 2014. To make the list, these ideas—which cover the world of investing, retirement, health care, tech, college, and more—have to be more than novel. They have to help you save money, make money, or improve the way you spend it, like these five real estate trends.

Best Trend for Energy Efficiency

Thanks to better manufacturing methods, the cost of residential solar panels has fallen about 7% per year since 2000, says the Department of Energy. And that’s not the only thing making solar look like a brighter choice.

Better financing options: Low-interest, no-­money-down solar loans are now offered by lenders such as Admiral Bank, credit unions, and through major solar-panel sellers like SolarCity. (Energysage.com/solar lists the options.) David Feldman, senior financial analyst for the National Renewable Energy Laboratory, ran the numbers to compare loans to leasing, long the most popular way of going solar. He says a typical system, which might lease for $168 a month over 20 years, would cost $136 or less per month with a loan.

Chi Birmingham

Improved resale value: A study by Lawrence Berkeley National Laboratory found that homes with owned, not leased, solar panels could sell for almost $25,000 more than comparable non-solar homes.

Best Price Cut to Root For

Home prices rise, home prices fall, but the commission you pay to sell has barely budged from 5% or so. (That’s split between listing and buyer’s agents.) A few years ago it looked like new competitors might change the status quo, but the housing crash seemed to slow progress down. Now price-cutting may be picking up again: In October the brokerage Redfin cut its already low 1.5% fee to list a home to just 1% in the D.C. area. Let’s hope this move is a sign of more competition to come.

Best New Reason You May Finally Qualify for a Mortgage

That all-important three-digit score that determines how much you’ll pay to borrow money got an overhaul in 2014, which should mean a higher score for some consumers. Fair Isaac, which computes the most commonly used credit score, the FICO score, announced it would no longer ding borrowers who had a bill sent to collections if the balance was later paid or settled. Previously, even those paid accounts had remained a blemish for up to seven years.

The new formula will also give less weight to unpaid medical bills that end up in collections, in part because that can happen by accident when a patient believes the insurer covered the cost. More than one in five Americans will be contacted by a collection agency for medical bills this year, according to NerdWallet. If you have a single medical bill in collections, and no other blemishes, you can expect to see a 25-point jump in your score.

Best Tip for Advertising Your Home Sale

“One of the things younger buyers say is important to them is that the house has great cell coverage,” says Richard Davidson, CEO of Century 21 Real Estate.

Most Shocking True Confession

“I recently tried to refinance my mortgage, and I was unsuccessful in doing so … I’m not making that up,” said Ben Bernanke, former chair of the Federal Reserve, on how banks may be making it too hard to get a mortgage.

MONEY Housing Market

Why 2015 Might Be the Year You Finally Sell Your House

141224_REA_sold_1
Martin Barraud/Getty Images

Home price gains are slowing, credit is thawing, and more first-time buyers may be hitting the real estate market in 2015.

Better balance in the housing sector is “in” next year, as far as trends go. That’s likely to put buyers and sellers on a more even footing.

Some prospective sellers sound especially bullish on housing. In a recent Trulia survey, the biggest chunk of consumers, 36%, said they expect next year to be much or a little better than 2014 for selling a home.

To be sure, like politics, all real estate is local. Some sellers have stayed on the sidelines in recent years, investing in improvements amid a dearth of buyers. For others, low inventory and rising home prices meant a bidding-war bonanza.

The landscape next year’s sellers are likely to encounter depends a lot on where they live. But here are a few broad trends to bear in mind.

Bringing Back Buyers

Mortgage credit is becoming more available as lenders scale back requirements. The average FICO score on a conventional purchase loan in October was 754, according to Ellie Mae. That’s a five-point drop from last year’s average. (You can check your credit scores for free on Credit.com to see where you stand.)

Tough credit and underwriting requirements have been a huge hurdle for many would-be buyers. So is liquidity, but there’s also good news on that front: Fannie Mae and Freddie Mac recently rolled out a mortgage option that allows for a 3% down payment. These two government-sponsored behemoths purchase about two-thirds of all new mortgages.

If conventional lenders get on board, the new low-down-payment option could pull more first-time buyers into the marketplace. During a time of tight credit and stagnant wages, this crucial group of buyers has been all but absent from the housing picture.

“If access to credit improves, we could see substantially larger numbers of young buyers in the market,” Jonathan Smoke, chief economist for Realtor.com, noted in his 2015 housing forecast. “However, given a high dependency on financial qualifications, this activity will be skewed to geographic areas with higher affordability, such as the Midwest and South.”

Affordability May Be a Concern

Lower credit and down-payment thresholds are causes for optimism. But rising home values and mortgage rates will impact affordability, especially in costlier housing markets. Realtor.com’s Smoke expects affordability to decline 5-10% next year.

Job and wage growth will play a big role in shaping homebuying activity. Gains in both may offset the price and rate increases likely on the horizon.

Sellers in more affordable housing markets, especially those with improving economies, are likely to see more buyers.

Home Prices & Inventory

Home price growth is slowing after years of big gains. Zillow’s chief economist predicts home values will rise about 3% next year, about half the current clip. More listings are hitting the market each month, too, although inventories are still tight in some places and price ranges.

Housing inventory nationwide jumped nearly 16% in October year over year, according to Zillow.

The combination of cooling prices and more inventory means the balance of power is tilting back toward buyers in some markets.

“Sellers have had their day in the sun for several years in a row now,” Zillow’s economist, Stan Humphries, told U.S. News & World Report. “It’s time to get back to a balanced market and for buyers to have their day.”

More on Mortgages & Homebuying:

MONEY home prices

Buying or Selling a Home in 2015? Here’s What You Need to Know

After a boom, a bust, and a bounce, housing finally gets back to "normal."

Housing should be a drama-free zone in 2015. “After the boom, the bust, and the recovery bounce, we are transitioning to a calmer market driven by fundamentals,” says Jed Kolko, chief economist at Trulia.

Even though the econ­omy is growing and mortgage rates will remain low—the 30-year fixed isn’t likely to pass 5%—bubbly gains in housing are unlikely. Household income has barely budged since the housing market bottomed in late 2011, while home prices are already about 20% higher on average. Plus, with cautious lenders requiring hefty down payments and low debt/income ratios, it’s not as if buyers have the capacity to push prices sharply up.

All that figured in, CoreLogic forecasts a 4.4% rise in the national median home price. “That’s healthy and sustainable,” says chief economist Mark Fleming.

Here’s what to do if you’re thinking about buying or selling in 2015.

Sellers, forget bidding wars. In most markets you still have leverage, but less than you did. In the summer of 2013 about 20% of homes were selling at a premium to original list; this fall, 11% are, the National Association of Realtors reported. The takeaway: “You have to price your house right,” says Redfin chief economist Nela Richardson. ­Review recent comps and list within 5% to allow for counteroffers.

Buyers, save interest. While the 30-year fixed is not expected to hit 5% until later in the year, a winter move will likely nab the lowest rates. Meanwhile, the 15-year mortgage, now at 3.3%, should stay under 4% for most of 2015—and can be a good call if you’re looking to pay off the house before retirement.

Owners, renovate. Especially if you have a low-rate mortgage, “it can be a lot cheaper to remodel to age in place than move,” says Kermit Baker, director of the Remodeling Futures Program at Harvard’s Joint Center for Housing Studies. Rates on home-equity loans and lines of credit are still “in shouting distance of record lows,” says Keith Gum­binger of mortgage data service HSH.com. While loans are pricier than HELOCs—possibly 6.5% vs. 5.5% by year’s end—the fixed-rate HEL can be a safer bet in a rising rate climate.

Read More on Home Buying and Selling in Money 101:

How Much House Can I Afford?
What Renovations Will Pay Off When I Sell?
How Do I Get the Best Rate on a Mortgage?

Read next: The World’s 10 Most Expensive Houses—and Who Owns Them

MONEY Ask the Expert

Home Insurance Policies to Skip

For Sale sign illustration
Robert A. Di Ieso, Jr.

Q: I just bought an $89-per-year insurance policy for our sewer pipe. My wife says these kinds of policies (of which I have quite a few) are a waste of money. What do you say?

A: Well, if your sewer pipe cracks over the next 12 months, that’s money well spent. With tens of thousands in excavation, repair, and cleanup bills, you’ll be glad you get paid back for whatever portion of the expense the policy covers (perhaps $5,000).

Of course, it’s unlikely that the pipe under your front lawn will crack this year, in which case you won’t collect anything on your policy except perhaps some peace of mind. Now, $89 certainly isn’t a big outlay if it helps you sleep at night, but consider all of the similar insurance plans and extended warranties you can buy for just about every appliance, electronic gadget, and piece of home equipment you ever purchase.

Those can add up to many hundreds of dollars spent annually on policies that, frankly, have dubious value because of likely coverage restrictions in the fine print, because you may not remember exactly what policies you’ve bought or where the paperwork is if something does happen to a covered product, and because if the company providing the policy goes belly-up, your insurance goes with it.

“As a general rule, I’d advise against buying any sort of extended warranty or product insurance policy,” says Linda Sherry, a director at Consumer Action, a national nonprofit advocacy group based in San Francisco. Those plans are huge profit centers for the retailers, which often pay large commissions to the salesmen who pressure you so hard to buy them.

Most products come with a one-year warranty anyway—and that’s often doubled by the credit card you buy it with (check your card policy). So the extended warranty you buy from an appliance retailer, for example, could be duplicative.

Besides, the point of insurance should be to protect you from financially catastrophic expenses like a house fire, car accident, or health emergency. Smaller emergency costs, such as replacing a section of sewer pipe, a water heater, or a big screen TV, are hopefully the sorts of expenses that you could cover by other means, such as shifting funds from your contingency savings.

If you’re still tempted to pay for certain extended warranty coverage, perhaps because it includes an annual maintenance visit (as with oil-furnace coverage) or free tech help (as with some computer plans), just make sure the price of the annual policy is no more than 10% of the purchase price of the covered product, says Sherry. “Anything higher is overpriced.”

MONEY

6 Simple Projects To Make Your Home More Retirement-Friendly

open kitchen with multi-level island
James Brey—Getty Images

Hoping to stay in your house for the long haul? These manageable changes will make your place more comfortable now—and for years to come.

Houses—especially prewar houses—can be tough places to navigate as you get older. Steep stairs, deep tubs, and narrow doorways, once just petty annoyances, can become serious obstacles.

Remodeling your home to remove those impediments is a major undertaking, likely to cost tens of thousands of dollars, says Louis Tenenbaum, an independent living strategist based in Potomac, Md. Plus, by the time these changes become a necessity, you probably won’t want to get involved in an expensive and inconvenient construction project.

A smarter strategy? Tackle these jobs early on, when you’re already planning a renovation. Whether you’re updating a fixer-upper, expanding a starter home for a growing family, or remodeling for your empty-nest years, making a few simple design choices now will help you live comfortably in your home for decades to come. Even better: Most will add little or nothing to the cost of your current project.

Making your home more retirement-friendly doesn’t have to mean sacrificing good looks. “We’re not talking about grab bars in the shower or a ramp by the front door,” says Columbus, Ohio, contractor Bill Owens, a National Association of Home Builders’ expert in so-called universal design. “The idea of universal design is that good design is people-centered and works for all ages and body types,” he says. Sought-after features like spacious bathrooms, farmhouse-table style kitchen islands, and freezer-on-the-bottom refrigerators are all examples of universal design.

Make it clear to your project designer and contractor that universal design is a priority whenever you renovate. Doing so will not only help you age-in-place gracefully, but will also increase the value of your home by making it more attractive and comfortable, says home designer and builder Mark Mackmiller, of Eden Prairie, Minn.

Ready to get started? Here are six changes to consider, as well as an estimate of what they’ll add to the total cost of your renovation project.

Open Floorplans

Removing walls between the living and dining rooms, kitchen, family room, and/or entry halls makes a house feel bigger, more modern, and more comfortable—and makes the space easier to negotiate in old age.

Cost: $3,000 to $5,000 per removed wall

Curb-Free Showers

Visit any high-end resort or flip through a glossy design magazine and you’ll notice that every shower has glass doors that go all the way to the floor, with no lip to step over. Aside from being a sleek and sophisticated look, this eliminates a major tripping hazard.

Cost: $500 to $1,000 for lowered plumbing and shower floor

Multiple Height Counters

When you redo the kitchen, include some counters at standard height (36 inches), some at breakfast bar height (42 inches), and some at table height (30 inches) with knee space for sitting. Having a range of counters will give you more options for prepping or cooking while standing or seated, all without requiring that you to bend over.

Cost: Nothing more than what you’re already spending on the renovation

Wide Doorways

Anytime you’re reconfiguring doorways, make sure the new openings are at least 32 inches wide. This makes your home feel more spacious, and will allow for wheelchair access should you ever need it later.

Cost: $50 to $400 per door

Lever-Style Doorknobs

Just as lever-style faucets have become the norm for kitchens and showers because they’re attractive and easy to operate, lever doorknobs are more ergonomic than standard round versions. They’re easier to grab and manipulate if you’re carrying a load of groceries or laundry—or if you’re aging in place.

Cost: No additional cost.

High Outlets

Left to their own devices, most electricians will install new outlets at 12 to 18 inches off the floor. But that requires bending over every time you need to plug in the vacuum. Ask for outlets 24 inches high instead, and you’ll make your house easier to use now, when you get older, and if you’re ever fighting a bad back.

Cost: No added cost.

 

MONEY Investing

6 Ways Newbie Landlords Can Protect Against Bad Tenants

Hoarder apartment
Alamy

Skip the hassle of dealing with deadbeat renters by adding these steps to your screening process.

One of the main components of being a successful real estate investor is finding good, qualified renters for your properties. There are few things more frustrating and cash flow draining than a renter who is always late on paying their bills or worse, a renter who never makes their payments.

Here are six easy tips for you to follow to protect yourself against deadbeat renters.

1. Before you rent your property, come up with a “perfect renter” profile.

To do this, first list the main selling points of your house from a renter’s point of view. What does the perfect renter do for a living? Do they have children? What would be the renter’s interests? Once you have your avatar built, then you can actively start marketing your property to the perfect client.

For example, if the main selling point of your house its school district, then you might want to let the local PTA group of the grade school, middle school, and high school know that your house is on the rental market. You might also want to put up flyers of your house on the school’s community board.

2. Perform background checks.

This might seem like a very logical thing to do, but you would be surprised at how many landlords never ask the prospective tenant for a background check. The one I use is Tenant Background Search. This service provides me with an eviction report, FICA score, and nationwide criminal background report — and the best part is that it costs around $25 per report.

3. Have a real estate attorney provide you with all legal documents.

Don’t be cheap and buy your rental agreements off the internet at one of these do it yourself websites. Many of these agreements have loopholes that allow the renter too much wiggle room. As my father always told me, “Prepare for the worst, and hope for the best.”

Related: 6 Reasons Landlords Should Thank Their Tenants This Holiday Season

To prepare for the worse, you should go into the agreement with the understanding that you might have to take legal action against the renter — so wouldn’t you feel more at ease knowing that your attorney provided the legal agreement?

4. Be upfront and honest with the renters before they rent.

I have one rental property here in Orlando that has joust windows. Now, these windows give the house a lot of character, and it does give the house a lot of appeal; however, these windows are not air tight, and the electricity bill can be quite expensive, especially in the summer months. I have always been very upfront with all the renters, and I even put this warning in the contractual agreement.

What is interesting is that I have had only one person who decided not to rent the house because of this language, and not one renter in the past 8 years has tried to get out of the rental agreement early due to the high monthly upkeep. On the flip side, the house next door has the same joust windows, and that house always seems to have a “for rent” sign in the yard. As a landlord it is always the best practice to be fair and upfront when dealing with your tenants.

5. Include routine maintenance in the monthly rental amount.

I had to learn this the hard way by having to re-sod the front yard to one of my houses because the tenants never cut the grass, and the yard was overrun with weeds. There is nothing that will hurt the value of a house more than poor curb appeal.

Related: Rent Payment Plans Can Benefit Both Tenant & Landlord: Here’s Why

To protect your investment, include the upkeep of the yard, spraying of weeds, trash removal service, etc. in the monthly amount. This way, you can pay to have someone other than the renter provide these services, and you can make sure they are done properly.

6. Make sure the renters provide their own insurance.

It is always a good idea to put in the agreement that the renters must provide their own renter’s insurance. This way, if something unfortunate happens, it does not back up on you. I also think it is a good idea to have the rental property or properties set up in an LLC; this way, your personal assets are protected should something happen unexpectedly at your rental property. If your accountant tells you an LLC is not advantageous for you, then I would get a million or two million dollar umbrella policy for extra protection.

Being a landlord is really not that hard — just be careful and treat people fairly. Word of mouth is the best marketing, and people want to rent from good landlords.

Read more from The Bigger Pockets Blog:
7 Smart Tips for Getting the Most Out of a Property Inspection
Offering Rent Specials to Tenants Can Be a Costly Mistake: Here’s Why
11 Things Landlords Should Be Doing Every Year…But Probably Aren’t

MONEY Ask the Expert

How to Negotiate the Best Price From a Home-Improvement Contractor

For Sale sign illustration
Robert A. Di Ieso, Jr.

Q: Can I negotiate the cost of a home improvement project? I feel like these guys all really want my business, but I don’t want to anger anyone by suggesting they lower their bids.

A: Yes, you can negotiate with a contractor; the trick is doing it without making it feel like a negotiation. Anytime you’re haggling over someone’s work (versus a mass-produced product like a car or flat-screen television), look for a way to ask for a lower price without any suggestion of insult. The last thing you want is an angry contractor looking for ways to cut corners on your project to make it come in at what he thinks is an unjustly low price.

Here are three effective techniques you can use:

1. Announce that you’re getting multiple bids. One of the major advantages to getting three or more bids for any significant (say, more than $5,000) home project is that you can tell the prospective contractors, honestly, that you’re doing so. That gets the message across that a) you’re concerned about the price, b) he’s competing with other contractors for your job, and c) he’d better sharpen his pencil and give you the best possible number he can. This is not to say that you should hire the contractor with the lowest bid. Hire the one whose work and reputation are the best. But the process of competing for your business will almost certainly drive down everyone’s price.

2. Ask him to “value engineer” the plans. Rather than flat-out asking your contractor if he will lower his price to win your business, which could backfire, ask for his advice on how you can rein in the cost of your plans. If his bid is $30,000 and you’re trying to keep the project to $25,000, for example, tell him so, and ask him if he can recommend any changes that could bring the cost in line. Maybe he will suggest a similar-looking-yet-more-affordable tile for your new master bathroom or a different layout that keeps the fixtures where they are and therefore slashes the plumbing costs. An open conversation about where to scale back doesn’t run the risk of making him mad—in fact, it shows that you value his opinion. And it further drives home the message that your budget is tight, possibly leading him to make other money-saving suggestions elsewhere.

3. See if you can contribute some sweat equity. If you’re handy and have the time, you might be able to knock off a portion of the project yourself. In that case you can ask the contractor to reduce his price accordingly. If you have a good hand for painting, for example, that’s a perfect project to tackle yourself. You could also do some basic demolition (assuming you have the know-how and gear to do it safely), excavation work (for small projects that don’t require power earth-moving equipment), or landscaping around the finished job. Any of these could easily slash hundreds or thousands of dollars off the project price.

 

MONEY mortgages

Here Come Cheap Mortgages for Millennials. Should We Worry?

young couple admiring their new home
Justin Horrocks—Getty Images

The federal agencies that guarantee most mortgages are launching new loan programs that require only 3% down payments for first-time buyers. Is this the start of financial crisis redux?  

According to new research from Trulia, in metro areas teeming with millennials, such as Austin, Honolulu, New York, and San Diego, more than two-thirds of the homes for sale are out of reach for the typical millennial household.

That goes a long way to explaining why first-time homebuyers have recently accounted for about one-third of homes sales, according to the National Association of Realtors, down from a historic norm of about 40%. And it should concern you even if you’re not a millennial or related to one: A shortage of first-time buyers makes it harder for households that want to trade up to find potential buyers; and spending by homeowners for homes and housing-related services accounts for about 15% of GDP.

Now the federal government appears intent on reversing the trend — or at least on easing the pain of the still-sluggish housing industry.

Trulia’s dire analysis assumes that buyers need to make a 20% down payment — a high hurdle for anyone, let along a younger adult. But Fannie Mae and Freddie Mac, the government agencies that guarantee the vast majority of mortgages, this week launched new loan options that will require down payments of as little as 3% for first-time buyers (and, in limited instances, refinancers as well). Fannie’s program will be live next week; Freddie’s, which will be available to repeat buyers as well, will launch in early spring.

Before you get all “Isn’t that the sort of lax standard that fueled the financial crisis!?”, it’s important to realize significant differences between now and then.

The only deals that will qualify for the 3%-down programs are plain-vanilla 30-year fixed-rate loans. No adjustable-rate deals, no teaser-rate come-ons, and, lordy, no interest-only payment options. And flippers are not welcome; the home must be the borrower’s principal residence.

Both Fannie Mae’s MyCommunityMortgage and Freddie Mac’s Home Possible Mortgage program are aimed at moderate-income households. For example, to qualify for Fannie Mae’s program, household income must typically be below the area median. Income limits are relaxed a bit in some high cost areas, such as the State of California (up to 140% of the local median) and pricey counties in New York (165% of the median).

That said, lenders will be allowed to extend these loans to borrowers with credit scores as low as 620. That’s even lower than the average 661 FICO credit score for Federal Housing Administration-insured loan applications that were turned down in October, according to mortgage data firm Ellie Mae. (The average FICO credit score for FHA approved loans was 683.)

Like FHA-insured loans, the new 3% mortgages offered by Fannie and Freddie will require home buyers have private mortgage insurance (PMI). That can add significantly to mortgage costs.

For example, a $300,000 home purchased with a 3.5% fixed rate loan and a 3% down payment would have monthly principal and interest charges of about $1,300 a month. The PMI adds another $240 or so to the monthly cost; that’s nearly 20% of the base monthly mortgage amount. (You can estimate the bite of PMI using Zillow’s Mortgage Calculator.)

But one significant advantage the new Fannie/Freddie loan programs have over the FHA program is that they will allow homeowners to cancel their PMI once their home equity reaches at least 20%. Beginning in 2013, the annual insurance charge on FHA-insured loans, currently 1.35% of the loan balance, can never be cancelled regardless of whether the borrower has more than 20% equity.

 

MONEY housing

Fannie, Freddie Announce Plans to Back 3% Down-Payment Mortgages

According to officials with the companies the move is designed to help those with lower income and good credit to afford homes.

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