Here's another short fuse for the powder keg housing
market -- home owners are tapping the equity till and
increasing their mortgage balances with cash-out
refinances at the greatest rate since late 2000.
A cash-out loan is by nature an equity-depleting loan
and should home owners hit hard economic times at the
same time home appreciation stalls, they may have a
mortgage with no equity cushion to soften the blow.
Home equity is the difference between the value of the
home and the balance on the home mortgage and home
owners may be gambling that difference doesn't reach
zero.
They are also enjoying home value appreciation as high
as it was during the same late 2000 period and the new
loans are being closed with cheaper interest rates.
Cheaper rates can lower monthly payments or keep them
relatively the same.
Freddie Mac's "Cash-Out Refi Report" for the second
quarter of 2005 reveals 74 percent of home owners
trading in their old loan for a cash-out refinance are
doing so to acquire a loan that is at least 5 percent
larger.
The percentage hasn't been that high since the fourth
quarter 2000. Since 1998, the percentage of home
owners refinancing for loans 5 percent larger has been
higher than 74 percent only during each of the four
quarters prior to the fourth quarter 2000. The highest
level since 1998 was 81 percent in the third quarter
of 2003.
During the second quarter this year, only nine percent
of those refinancing to take cash out closed with a
smaller loan. That percentage has been smaller only
four times since 1998. It dropped to 7 percent during
the first quarter of 2001, Freddie Mac reported.
Home owners obviously were cashing in on mortgage
rates that dipped in the second quarter this year and
on the one-year, 23-percent increase in appreciation,
an increase that also hasn't been matched since the
fourth quarter of 2000. Annual appreciation has been
higher only twice since 1998, 24 percent in the second
quarter of 2000 and 26 percent during the third
quarter of that same year.
"The second quarter (2005) cash-out refinance volume
reflects, in part, borrowers responding to the fact
that they may not be able to obtain such favorable
rates in the future to fund home improvements or other
big purchases," said Amy Crews Cutts Freddie Mac's
deputy chief economist.
One half of the cash-out, refinancing home owners, in
the second quarter 2005, had an old interest rate
about 8 percent higher than the new loan, Freddie Mac
said.
However, mortgage market monitors predict mortgage
rates will rise at least to 6 percent this year.
Personal finance experts say home equity isn't
collateral for frivolous expenditures.
The best use of the money is capital improvements and
investments that provide an equal or greater return on
your money than the cost of the loan. Cost-vs-value
favorable home improvements, education for the kids
and successful new business financing are relatively
better uses of equity than, say, buying cars, boats
and trips around the world. Emergency nest eggs, for
unexpected events and debt consolidation can be other
wise and necessary uses. That's provided debt
consolidation doesn't become a habit.
Other more conservative financial planners say, given
the uncertain nature of Social Security and pension
and retirement plans, home equity should remain
untouched until the mortgage is paid off. Without a
mortgage payment, home owners can live relatively
shelter-cost free, with only maintenance and up keep
expenses, at a time when incomes traditionally shrink.
After retirement, should home owners need the equity,
it will be comforting knowing it's available.
The Federal Reserve, concerned that easy-money loans
were prompting home owners to squander their equity,
issued "Credit Risk Management Guidance For Home
Equity Lending," earlier this year also to warn
lenders their portfolios were too heavy with
higher-risk loans. Interest-only, higher loan-to-value
and low- and no-documentation equity loans, the feds
said, are more vulnerable to interest rate increases.
When the first active-adult communities were launched
in the 1960s, many were large in size, located in
traditional Sun Belt states and shared similar
community format, design and amenities. Today, the 50+
housing market is transforming the way builders design
and develop active-adult homes. According to experts
with the National Association of Home Builders Seniors
Housing Council, builders must recognize that today's
buyers are open to change and are demanding variety in
home designs.
"For many buyers, the established concept of the
active-adult community conjures up images of boring,
cookie-cutter neighborhoods with no opportunities for
owners to express themselves," said Bill Feinberg of
Feinberg & Associates, P.C., a Voorhees, N.J.-based
architect and designer. "Builders understand that the
active-adult industry is rapidly changing. A single
community formula will no longer meet the needs of
mature consumers."
Feinberg added that main-street communities, exclusive
enclaves and age-targeted villages within
master-planned communities are gaining popularity. In
terms of design, these youthful, individualistic
buyers want diversity in street patterns and
streetscapes, embrace natural features such as
wetlands and open space, and favor smaller, more
flexible communities. They also may not need a large
community clubhouse, preferring more informal spaces
that offer different experiences and a range of social
and physical activities.
"Boomers are buying lifestyle,"said Chuck Covell,
president of Greenbelt, Md.-based Bozzuto Homes.
"Today's 50+ buyers today are more affluent and crave
a sense of lifestyle when buying a new home. They are
not buying solely based on price or location."
Covell noted builders must include high-tech offices
and media centers in active-adult homes to appeal to
buyers who see themselves working well past the
traditional retirement age. Baby Boomers want
first-floor living space, including a master suite, as
well as high-end kitchens, luxurious master suites,
high-tech media rooms and luxurious bathrooms.
At Irwin-Pancake Architects, a firm specializing in
senior housing for 35 years, the philosophy is bathing
areas can be safe and beautiful. "While cost is always
a factor, it is in everybody's interest to ensure that
bathing facilities are not only safe and sound, but
provide long-term service and value," says Douglas
Pancake of Irwin-Pancake Architects.
Most architects think, "If it's going to be safe, it's
going to look institutional," says Gary Multanen, Best
Bath Systems President. "That's not the case with our
products. We work closely with designers to ensure
they understand the variety of custom looks for
bathroom design, while meeting all safety features
outlined by the American Disabilities Act
Accessibility Guidelines (ADAAG) and local codes."
According to "The Kitchen & Bath Consumer Speaks Out,"
a survey from the Home Improvement Research Institute
(HIRI) commissioned by the National Kitchen & Bath
Association (NKBA), more than 80 percent of homeowners
who remodeled their kitchen or bathroom within the
last year were somewhat or completely satisfied with
the outcome. The research also found:
* The average bathroom remodeling project includes
new wall treatments, flooring and faucets.
* Higher-end bathroom remodels, costing $6,300 on
average, most frequently include new faucets,
flooring, shower heads, wall treatment, lighting, and
a toilet.
* Whirlpools were purchased for 23 percent of
higher-end bathroom remodels. About 70 percent of
these bathroom remodels included the services of a
designer or contractor.
Renovating the bathroom is a huge project and you have
to get it right the first time. While we suggest you
do your own research we advise hiring both a designer
and renovator to ensure a successful job. That leaves
you to manage the family around the building site.
If you want a great bathroom renovation team, follow
these steps:
* Compile a list of experienced bathroom designers
and renovators. Calling them will give you an initial
impression and you can ascertain whether they would be
available to do the job.
* To find a designer you are happy with it is
essential that you like their style so make sure you
view some of their past work, ask for referrals and/or
visit their website.
* To choose a renovator ask for details of past
work and recommendations from previous clients. Then
obtain and compare quotes from at least three
different vendors.
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