Author Archives: ARDELL

About ARDELL

ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: ardelld@gmail.com cell: 206-910-1000

Seattle Area Home Prices Hit New Low

Posted on by
30

King County Home Prices hit a new low in January of 2011. There’s definitely something a little odd going on, as median home prices do not usually fall by $32,000 in one month. But then November and December of 2010 should not likely have gone up as much as they did, unless the market is positioned to start ramping upward, which no one really expects to happen.

The only conclusion is the market is teetering on WTH to we do NOW! …or lot’s of people read my Oh NO! People are starting to overpay for houses again post.

No more tax credits, market should have gone down. But 2010 ended higher than it began. Totally unexpected and irrational.

Take a look for yourself. The blue $ is the King County Median Home Price in Thousands. The red blocks mark the bottom of the decline from PEAK Pricing in July of 2007 to March of 2009 and the second red block is where we are now at the end of January 2011. The first number in each 3 number sequence is number of homes closed. The middle number is the halfway point (median) as to units sold. Some are not exactly half as more than the perfect number sold at the same price to stop at exactly half sold for more and half sold for less.

Example: Jan 2011 824-413-$350 means 824 homes sold and 413 of them sold for $350,000+.

A NEW low!

bottom chart

The quarterly median graphs on the right above show you that in a flat market a year ends about where it started as to 1st and 4th quarter and the 2nd and 3rd quarters are usually higher. That is what they call “Spring Bump” and what a “normal” relatively flat year looks like.

Now let’s look at where King County Home Prices are BACK TO with this NEW LOW.

2004-2005 prices

NOT at 2004 pricing YET…but very close. A small $5,000 drop from here will put us at December 2004 level.

At the moment, as you can see in the above graph, we are at February 2005 pricing.

We had been running at or above April 2005 pricing for quite some time. For years…many years,and consistently for the last two years. So this new low is quite a “newsworthy” event.

I think we will “Spring” back up to $375,000ish pretty quickly…but for now, we have a new low. What will cause the rise up? Some people with really nice houses who are not upside down getting on market and listing their homes. There are more buyers today than there are nice homes, priced well, to buy. But I expect that to change, and for prices to get back up to the $375,000 level fairly quickly. If not in February, than by April at the latest.

********

(Required Disclosure: Stats in this post and in the charts in this post are not compiled or published by The Northwest Multiple Listing Service.)

How to find your “Dream Home”

Posted on by
13

Finding your Dream Home starts with determining if you can afford your Dream Home. Let’s say you have decided that you want a two story house, one with at least 3 bedrooms on the 2nd floor. Now add that you work at the main Microsoft Campus and want a home within a reasonable distance to work.

Start by taking out a map and drawing the area within which you would like to live. For the purpose of this example, I drew the map based on where most of my clients who want to live near Microsoft draw these lines. For example, most wouldn’t live on Finn Hill, so Finn Hill is not in this sampling. Most would not live in Bothell. So Bothell is not in this sampling. I can’t use a “radius” of the campus, as most don’t consider the other side of Lake Sammamish to be better than a little “further” in pure distance into Kirkland vs “around” the Lake. So I’m using a polygon, many sided, map area.

Your “mapped area” may vary, but use this as a guide, and apply to your own mapped area.

I’m using a “12 month rolling basis” here to include the most recent data and exclude the oldest data, and yet still have enough sales in the sampling to produce enough relevant data. For the most part it is 2010, but includes the most recent data available in Jan. 2011 to date, and excludes the oldest info from Jan of 2010.

Before you go out looking at houses, you want to begin with some reasonable expectations.

graph (26)

The Data above tells us that the majority of two story homes in the mapped area sold over the last 12 months existed in zip codes 98052, 98033 and 98004. Now let’s look at price.
graph (28)

I only used some of the data to produce this post. You can see the rest of the raw data HERE.

By using these simple techniques, you can easily see that you likely need to spend about $650,000 give or take and look in 98052 and 98033 primarily. But what if you want to spend $500,000 and want a home that is not older than 5 years.

Simple…just test that parameter.

98052 2-story built in 2006 or later sold in the last 365 days for $500,000 or less = one house.

98033 there was also only one house sold fitting those parameters, but it was far from being finished new construction. There is also one in pending. Both required cash buyers as the property was not in a condition that could be financed.

So now you have to ask yourself, is “The Dream” a “house” or a “home”? Do you change the “what” and look for an older home of a different style in a great neighborhood with a great school? Or do you up the price in order to get everything you want, if you can afford it, but didn’t “want” to spend more than $500,000?

Point is, you don’t have to go out to “look” for your Dream House before testing your Dream against Reality. Setting a realistic objective saves you time and maybe money as well. By staying home and making this decision, you may opt to keep the price low and change your expectations as to house. If you get too vested in the outcome of “newer 2 story house of not more than 5 years old”, you may start pushing on price to get “it”.

Consider all of the factors of “dream home” including neighborhood and schools, before getting your heart set on one particular style or age of home.

Short Sales & the “new” Mortgage Fraud

Posted on by
31

see-no-evilShort Sales continue to be problematic for all concerned. So much so that “right” seems to be the minority “opinion”. At least I think I’m “right”…but apparently so does everyone else with a completely opposite opinion.

So you tell me…Am I RIGHT or am I RIGHT?

The pretty simple short of it is: IF you sell your house short…you have to MOVE OUT! While many do not dispute this, I recently commented on this question of a Broker in Florida on this issue. I appear to be the ONLY person in almost 200 comments, most all from agents, who thinks the agent is supposed to check that the seller has moved out on the day of closing, or the day all parties agree that the seller was supposed to move out.

Crazy. Just Crazy!

As my friend in Philly once said to me,

“Ardell, everyone does “the right thing”. We just don’t all agree on what “the right thing” is.

In the post the question is “What is the Penalty for Breaking an Arm’s Length Transaction Notice?”BUT he seems to think his problem is that he drove by months later and the “former owners” waved at him from the front lawn. He thinks he just “found out” the sellers didn’t move out, when in fact he should have been “in charge” of knowing whether or not they DID move out in the first place! I mean…seriously…do agents not accept responsibility for ANYTHING anymore??? …and…wait for it…this guy TEACHES a class on Short Sales. Jillayne’s gonna LOVE that one.

The Buyer, Seller and BOTH AGENTS signed this:

arm's length

No ambiguity there. Seller is NOT to remain in the property…PERIOD! But apparently “see no evil” is the excuse! Didn’t bother to notice that the seller hadn’t moved out on the day of closing? It’s pretty obvious the agent DID know the seller wasn’t going to move out that day…but “thought” that was a short term thing. BUT didn’t write a short term occupancy agreement to cover that and send it to all parties to sign, and the lienholder, PRIOR to closing!

But…no one except me thinks the agent was supposed to check that the seller in fact…MOVED OUT! Crazy. Just Crazy.

Examples of other responses:

“Well you certainly did not do anything wrong and you have little to worry about. the buyer and seller have to worry unless they can prove that the idea of the sellers regain occupancy came AFTER close of escrow..and the longer after the close, the better.”

A general consensus is all is well as long as they did not “intend” to stay as tenants at the time they signed the Arms Length Agreement and LATER decided not to move out. Even the attorney who responded says it is about “intent” when they signed the Arms Length Agreement, and not whether or not the seller actually moved out!

My response was long and very clear that the agent needs to LOOK IN THE HOUSE on the day of closing and make sure the seller is GONE! If not…I list the steps that need to be followed BEFORE the property closes. YES…STOP the closing!

“You are likely at fault for not providing the necessary paperwork for all to sign at closing to address the property not being vacant on the day of closing. The standard is not what you did know. It is what you should have known. If the contract had no post occupancy terms for the lienholder to review and know about before closing, it is because you did not cause them to be there.

So it depends on whether or not they broke an agreement AFTER closing, that you wrote before or at closing. If the contract stated possession day as closing day, then you were aware, or should have been aware, that the possession was not transferring on day of closing in accordance with the contract terms. You should have seen/witnessed a vacant property before closing OR written up a post possession agreement if it were not vacant.

If on the day of closing you knew it was not empty (and you should have even if you didn’t) and the loose agreement between buyer and seller was an extra day or more of occupancy, then you should have written up that agreement with an end date. You should then have sent that agreement to all parties, including the lienholder and the buyer’s lender. If the buyer bought it as owner occupied vs an investor loan, there is potentially lender fraud on two counts, but you can probably get concurrent terms of sentence on that. 🙂

Was the insurance policy at closing for an owner, or a landlord policy? Did it have a vacant property rider? Or was the policy done as an occupied property with a tenant in place? Pretty easy for investigators to note if the buyer’s insurance policy did not note a landlord policy with a vacant property rider, meaning the buyer, buyer’s lender and buyer’s insurance company thought it would be vacant at closing vs occupied.

If the agreement had no post occupancy provision (and since you don’t mention one I’ll assume it did not), then it was your obligation to view the property as vacant prior to closing and prior to giving the buyer the keys to the house.

There is no excuse for your not knowing the property wasn’t vacant and writing up a post possession agreement once you knew it was not vacant immediately prior to closing.

Let’s say you DID write up a 3 day post possession or a 10 day post possession or even a 30 day post possession agreement, and that document was signed by buyer and seller as part of the contract and sent to all parties and lenders/lienholders. If the parties subsequently extended or ignored that agreement, then you “may” not be liable, depending on how that post posession was worded.

But if the property was not vacant prior to closing and you did not write that up in a post possession agreement, then you are liable for not having done so.

To which several replied:

“See no evil…hear no evil…speak no evil. i would leave well enough alone.”

Forget “crazy”…this answer is INSANE!:

“There is a legal way to get around these laws because this is the United States and people are free to do as they please.”

Lots of nails in this coffin…where are the agent’s brokers? Don’t they read this stuff?

“Shrewd buyer. Approach the sellers “AFTER” the short sale. Sellers are innocent, and you have an “Avoid Jail Free” card.”

“It appears that no one has done anything wrong…”

“Sounds like an issue for the two lenders involved, not the RE agents.”

“I’m sure the bank is too busy with all the other foreclosures and short sales to really be trying to document all the new tenants in homes that have closed. I’m sure you’ll be fine…”

And a direct response from the agent in the transaction who wrote the blog post:

“ARDELL. I completely disgree that I have an obligation to check whether or not the property is vacant at time of closing.”

Recently my friend Kevin Tomlinson said this about The “new” Mortgage Fraud:

“An example of a non-arms-length transaction would be where a seller “short sells

Nobody Gives a RA

Posted on by
18

I Give a RA About You

I Give a RA About You

Today is my 5th Anniversary of writing here at Rain City Guide. Not that I expect anyone to give a RA about such things.

It’s been a pretty wild ride for me since I first started mouthing off around here on 1/14/2006. Some things in the Real Estate Industry have changed for the better, from a consumer standpoint that is…many really.

In the next 5 years, because I really DO give a RA about the consumer, let’s work on one thing that hasn’t gotten better. That is “selling people” for 25% of the commission without their knowledge or express consent. Let’s make it a goal to END “selling leads” and giving away people’s money without asking them first if it is OK with them for you to do that.

Five years ago when I started writing here I said it this way and even more succinctly in this comment to that post:

The problem with the lead generating site is not that an agent pays for the lead, but that he pays for it with the consumer’s money (the way I see it anyway).

If you are a consumer and don’t quite understand what I am talking about here, watch this video…and refuse to be “a lead” and refuse to be “captured”. If you are a home buyer, take the extra time to think about whether or not you will be using an agent to assist you. Put a LOT of thought into what you will be paying that agent as part of the sold price of the home you buy, and take the time needed to make a wise choice. It’s your money and it’s a LOT of money.

Don’t just trip over the next body willing to open a door for you and trust them with this important step in your life because you just wanted to “see a house”. That’s both childish and irresponsible. Take the time to choose your agent wisely. You owe it to yourself…you owe it to your family, to get the best your money can buy…because you are going to pay for it either way.

If you are an agent who refers their “leads” out or a bottom-feeder site, make a pledge to FULLY DISCLOSE what it is costing the consumer to go that route. Give the user of your site the information they need to know before they hit that “find an agent” button or the “schedule an appointment to see this home” button. Let them know that by doing so they likely will be picking an agent AND paying 25% of their commission paid, to whomever owns the site or calls the other agent who meets them at the house to open that door.

There are thousands of stories about “worthless agents” and not enough stories about the people who CHOSE them. There wouldn’t be “worthless agents” if people didn’t hire them. There wouldn’t be so many “traps” to “capture” you as a “lead” and sell you…if more refused to be sold.

Here’s hoping that 5 years from now I will be able to report on my 10 Year Anniversary, that this practice has either stopped completely, or at the very least is not happening without the express consent of the consumer.

December 2010 King County SFH

Posted on by
3

There’s a big hoo-ha brewing over the December 2010 “increase” in home sales. Not to worry. It’s more of a “Lies, Damned Lies and Statistics” argument, than a true market change of any kind.
bottom chart

As you can see in the chart above, prices are still trailing along the bottom from the price in the red block of March 2009.

Volume for the 4th Quarter is higher than 2008 and lower than 2009. The December up is simply a correction for November down. That correction could simply be a matter of reportings vs actual closings OR it could simply be longer loan processing times throwing some November closings into December.

Don’t worry about the noise, but do worry that more home buyers seem to be overpaying for homes these days than they have been for a couple of years. There is no market trend that will cover up those kinds of mistakes.
********
Required Disclosure: The Stats in the above chart are compiled be ARDELL and are NOT compiled, verified or posted by The Northwest Multiple Listing Service.

Note: The primary variance in my numbers vs other reportings is that most count townhomes in Seattle but not elsewhere. I even that out by not counting townhomes at all.

I Don’t Need No Stinking “Database”

Posted on by
22

The Christmas Season is here, and I have had a chat or two with some of my colleagues around the Country regarding why we in the Real Estate Industry should strike the word LEAD from our vocablulary. Wrap the word “LEAD” up in a box with the word “DEAL” and set the box on fire before the New Decade begins.

I had a very startling conversation with an agent who not only had no friends who were past clients, but referred ALL family and friends OUT, and refused to work with family and friends. That is such an opposite experience to mine. I still get calls from past clients and family around the Country, who will not buy or sell a house without consulting with me first.

Seriously. If you are not “good enough” for your own friends and family, if you are not the “go to person” for your friends and family with real estate needs, why should anyone else hire you to help them and their friends and family? Why would you have on your business card “Call Me For ALL Of Your Real Estate Needs” and then tell friends and family to call someone else??? Maybe I just don’t “get it”.

client friends
Twenty years ago when I started in this business, someone said to me “make a friend, and then help your friend buy/sell a house”. I have always tried to apply that, and clearly never forgot it. A real estate broker should apply the top level of care when assisting a friend or relative in the purchase or sale of a house, and then apply that same level of care to all clients. It’s what keeps you “on top of your game”.

Many articles have been written on “How To Choose a Real Estate Agent”. Truth is your real estate agent will likely know (and need to know) MUCH more about you to assist you well, than your family and friends know about you.

If you can’t envision your agent as someone you might call over the years AFTER you buy a house to ask about most anything home related, you likely should not have chosen that agent in the first place.

What causes “a client” to move to the right of the Venn Diagram, vs someone bounced back to the left, to only be spoken with if and when they need to buy or sell a house again? What would cause a Past Client, or even a Vendor, to not pass through to the “friend” side of the diagram, and become merely a name and address in a DATABASE to “drip” on?

Back to Christmas. Each morning I wake up to new emails from past clients, wishing Kim and I the best in the New Year. Emails asking how we are doing, and sending warm holiday greetings. Yesterday a gift box arrived from a “past client” who bought a house in 2009, thanking me for helping them with something home related in 2010. Something I did as his friend and “real estate agent for life”, vs something that ended up in a commission for me.

So no…I Don’t Need No Stinking Database”…unless you want to call my Christmas Card List “a database”.

Merry Christmas and Happy New Decade to you and yours!

Real Estate – “Proceeding in Good Faith”

Posted on by
18

contract
Real Estate Transactions have long depended on the underlying principle of “Proceeding in Good Faith”. It’s not something that we talk about much, as it is something we pretty much take for granted.

I raise this issue today as Craig has mentioned it a few times this year in his posts and comments, and most recently the other day in his post regarding “Good Faith Home Inspection Negotiations”.

Before we can discuss how “Proceeding in Good Faith” applies to the Home Inspection specifically, we need to discuss how “Proceeding in Good Faith” applies to all real estate transactions, generally. When we are talking about this principle in real estate, we are talking about the Buyer and the Seller who are the “Parties To” the transaction. It is not about agents except to the extent that they represent someone who is acting and proceeding in good faith. Consequently the presence or absence of real estate agents in the transaction neither heightens nor diminishes the importance of the good faith process.

Good Faith BEGINS with a seller who wants to sell and a buyer who wants to buy. One would think this is always the case, but it is not. NO ONE can PROCEED “in good faith” if these two things are not present from the getgo.

While it may be hard for some to believe, not everyone who has their home listed for sale has the intent of actually selling it (at the price at which it will actually sell), and not everyone who makes a written offer actually has the intent of buying (that particular house). Who is and who is not Proceeding in Good Faith…well, that gets a little complicated.

Buyer Says: “What’s wrong with this seller? Is he REALLY going to Let This Sale Fall Apart over a $150 fix to a leak under the sink?”

Seller Says: “Well it’s a good thing that buyer DIDN”T buy my house, He oviously did NOT want it, if he was willing to walk away from it over a $150 fix to a leak under a sink! Anyone who is not willing to fix a leak under a sink shouldn’t be a Home OWNER Period!”

Craig, in his post linked in this one says: ” As a general rule, I think “good faith

Why the Lender may “reduce” Your Gross Income

Posted on by
12

Gross Income is sometimes a subjective factor, modified at The Underwriter’s discretion. Most often that is the case whenever ANY part of the borrowers Gross Income is derived from overtime, bonus or commission, or the entire Gross Income is based on hourly wages vs salaried wages.

EVERY AGENT should understand these BASICS, as WE often know our clients longer and better than the lender who is giving you a pre-approval letter to attach to the buyer’s offer. At a minimum, every agent should know that if their client is not purely “on salary”, there may be some bumps along the way that may turn a preapproval into a loan denial.

Even if the lender did a full preapproval process, The Underwriter may require the employer to make a written statement regarding future bonus or commission or overtime income, that the employer will not put in writing. That can happen in any case, and sometimes a few days before closing, no matter how careful the loan originator was in gathering information prior to producing the preapproval letter.

AGENTS should know when the preapproval MAY be based on the “wrong facts”, especially when you are getting a preapproval letter with short notice, and the lender knows the client for 15 minutes prior to giving the agent what they need to get the offer submitted quickly. Fully delegating this responsibility to the lender is inappropriate. An agent should know when to give the lender a “heads up” that $100,000 may indeed be “current” gross income, BUT it is likely that The Underwriter at the end of the day WILL NOT count ALL of that $100,000!

Getting a mortgage is not an “entitlement”…it is a business decision. Below are examples of how Lenders have historically “viewed” Gross Income calculations in most cases. But know that The Underwriter has the discretion to modify “as needed” based on inconsistencies.

First let’s look at the basic chart I made for the purpose of further discussion:
gross income

Column One: Salaried Income is almost always counted at current “face” value. Even if you just got a significant raise just prior to making an offer on the house, the lender will usually count it all. They will require at least one and often two paystubs at the NEW amount as proof that the raise is in effect, and ALL of the monies have to be salary vs hourly or bonus or commission based.

Column Two: If your wages are based on an hourly amount, RARELY will the Lender count it at its current annual amount based on today’s hourly wage. I don’t necessarily agree that hourly based wage earners should be treated differently than salaried ones, but I don’t make “the rules”.

If your hourly rate increased from $16 an hour to $24 an hour over the last two years, you normally need A FULL TWO YEAR HISTORY of earnings at the new hourly amount of $24, for the Lender to use that as your Gross Income. If you earned $16 an hour in 2009 and $19 an hour in 2010 and you WILL BE making $24 an hour in 2011, the Lender will usually average your annual wages of 2009 and 2010 and count your income at only $16 + $19 divided by two at ONLY $17.50 an hour vs the $24 that you are now making. Terrible, but true. They actually average your total earnings (not including overtime) for the two years, vs the hourly number.

HUGELY important for an agent and a lender to know if your wages are based on an hourly amount before issuing a preapproval letter.

Again, I really don’t think that it is fair, as I have had clients with an over 20 year history with the same employer (Boeing) whose income was stated on an hourly vs salaried basis. Why that counts as “lesser” in the eyes of lenders, I don’t know. Just is, in MOST if not all cases.

I also included an odd example in Column Two of The Underwriter deciding that if your income reduced by 20% that maybe that will happen again in the future. Once The Underwriter is in “their discretion” territory, there really is a lot of room for The Underwriter to do pretty much whatever they deem necessary to be comfortable with approving the loan. If there is a declining income vs an increasing income…expect problems and delays and be prepared for a potentially very bumpy ride to the “approved and funded” day.

Column Three: Bonus income is calculated the same as hourly income…a two year average. So if your income is part salary and part bonus, the safest way to proceed is based on the salaried portion only, especially if the bonus income is a small amount. If you do want to include the bonus income, you need to know that not only will the lender require a consistent history of bonus income, BUT may require your employer to put in writing that they expect that level of bonus to continue for X period of time into the future.

In these economic times it is The Underwriter’s Discretion regarding how much to count OVERTIME and/or BONUS income. They may decide not to count it at all unless your employer is willing to guarantee that extra income for several years out from now.

Column Four: There is no Column Four BUT if there were a Column Four it would be for people whose ENTIRE income is commission based. Also in Column Four would be people whose entire income comes from a business venture.

Also, regardless of income source, if you are applying for a JUMBO loan…well, just about anything can happen. The number of hoops one may have to jump through to get a JUMBO loan are many and varied and change from lender to lender and from one minute to the next.

Likely the biggest snafu that can happen unexpectedly is when someone owns a rental property. Maybe one of the Lending Professionals can help with this in the comment section of the post. Suffice it to say that the Lender does not look at rental income the same way that someone who owns a rental does…not at all. They only count 75% of the rent as income, while counting all of the mortgage payment on the rental property as an expense. So if you think that $2,000 rent wipes away the $2,000 mortgage payment and is “a wash”…not so. So if you own a rental property, make sure you make that fact known BEFORE getting a preapproval letter and before making an offer on a house.

Last but not least is you cannot count the Rental Income of a property you are buying as a rental. Yes, we know you will be getting rent, but that rent is not counted AT ALL because you have no HISTORY of rental income from that property at time of purchase. Two or three years from now you can count that rental income when doing a refinance, but at time of purchase…you have to qualify to buy it without considering the income you will derive from it.

Some day when you are wondering why EVERY escrow that had a preapproval does not close…you may want to come back and read this again.

You Should Not Be Buying a House If You Don’t Get This

You should NOT be buying a house if you don’t “get” this.

Posted on by
14

Why did so many people buy houses they couldn’t afford? I’m not talking about people who bought 5 houses to “FLIP”, or the cash out refinance issues. I’m talking about the basic Buy A House to Live In IT bunch who never did a cash out refinance.

Well…on 2nd thought…let’s leave those cash out refinance people in, as this “study” may explain WHY so many NEEDED to do a cash out refinance, and use their home as an ATM machine.

Let’s start with the basic MODEL and examine where everything started to go sideways.

Qualifying for Mortgage Chart

Qualifying Ratios ONLY WORK well when THE MIDDLE COLUMN is in sync.

Now that the dust has settled and we are not looking for some ONE to BLAME, let’s look at the REALITY of what, exactly, is broken…so YOU can fix it. This is about you, as a buyer of a home, as you are the only one who can proceed on the RIGHT basis. No agent or lender can sort out that middle column for you. You must make the extra effort to QUALIFY YOURSELF!

Here’s what happened, in a nutshell. EVERYONE’S BACK END WAS OUT!!!

Used to be, looking at my Chart inserted in this post, that IF YOUR DEBT PAYMENTS caused your TOTAL of housing payment + Debt to exceed the “back end allowance”, your housing allowance was REDUCED accordingly.

EXAMPLE: Housing payment $2,800 (column one) Debt + Housing $4,000 (vs the allowable $3,600 in the Chart’s middle column) equalled a REDUCTION in allowable housing payment from $2,800 to $2,400. 28% of Gross Income was ONLY the allowable amount IF your housing payment plus monthly recurring debt payments did not exceed 36% on a combined basis.

If you do not understand this up to this point, PLEASE, PLEASE ask questions as you should NOT be buying a house if you do not understand this. If you are not capable of understanding the basic accounting framework of home buying and home ownership, then do not buy a house. It really is THAT simple.

The Middle Column went out of whack when people started using their Credit Cards for Column Three items. Before ATM cards, people did not do that. Credit was for buying a home and LARGE purchases and MONEY was for buying everything else. Front End + Back End assumed that no one would buy a carton of milk or a loaf of bread on a credit card. Front End and Back End assumed that no one would use a credit card to go to a movie theater.

That said, what YOU need to do is look at your Total Credit Card debt and separate the balance into “used for LARGE purchases” vs “used for column three expenses”.

The Lenders and the Real Estate Agents really can not do that for you. So what they DID (which proved to be disastrous) was EXPAND the back end ratio to include the usage of credit cards for column three expenses. This started when people LEASED cars vs buying them. Given you did not OWN the car at the end…this shifted the car payment from a column two expense to a column three expense.

Column Two is for large PURCHASES! Leasing a car is NOT a “purchase”. Seriously…that was the EVENT that created a huge disconnect for Qualifying Ratios, combined with people not making a distinction between when they were using a Credit Card vs an ATM card for minor purchases. Going to the movies is not a LARGE PURCHASE worthy of using a Credit Card vs a Debit Card.

There’s an old saying: “One Step Forward; Two Steps Back”. What I am suggesting here is that we have taken Two Steps Forward, and need to take One Step Back. Reconstruct your Credit Card debt to LARGE purchases only. Do not buy a house until your small purchases and living expenses of Column Three are NEVER “financed”.

If you NEED to buy your food with a credit card…you should not be buying a house. It’s THAT simple.

********

Column Three went out of whack for a number of reasons, mostly related to Column Two events as noted above. The MAIN Column Three disrupt, not associated with Column Two, is about EARMARKED savings.

Used to be people had a “Christmas Club” savings account and a “Vacation Club” savings account and an Emergency Fund Savings account that was never touched except for dire emergency (and then repaid BACK into the Emergency Fund), and a Short Term savings account for “luxury items” and a Long Term Savings Account for retirement.

Buying a boat was a “luxury item” vs a “Large Purchase”. “Large Purchase was a refrigerator, a washer and dryer, a bedroom set, etc. Things you needed long term, not things you WANTED long term. You saved for a Luxury Purchase – a large item that you WANTED and you charged a NEEDED large item to spread out the payments.

Two things largely contributed to the demise of Americans saving money and saving it in an earmarked way. One was the change from the standard 5% interest bearing passbook savings account. The other was the expansion of bank charges per account, that caused people to lump their savings into one account vs earmarking it by spreading it out among several designated purpose accounts. There was never a charge for a “christmas club” or a “vacation club”, and with 5% interest, people saved for those things vs charging those things.

A third thing that changed was the ability for a homeowner to convert their non-deductible charge card interest to deductible “mortgage” interest via a “cash out” refinance to “consolidate” debt. Seemed like a financially “smart” thing to do…until your house was “upside down” and you needed to do a short sale. Ask yourself how many short sales are done to “forgive” the car loan and the student loans that were combined into their Mortgage Amount? That is a frightening thought, and not about a HOUSING Crisis at all!

Is there any hope for a true FIX? The answer is likely HIGH INTEREST RATES are needed. When interest rates are high, people save more. When interest rates are high, people put the right amount of forethought into buying a home.

For that reason I have to say that keeping interest rates low and fixing the economy all at the same time is an oxymoron. I don’t want to see interest rates go to double digits, but until interest rates are back in the 7% to 8% range, I don’t see much hope for an overall “fix”. BUT, hopefully, if you “get” what I am saying here, you can at least fix it for YOU.

Also, an up front Tax Credit to REPLACE the Mortgage Interest Deduction would go a long way to preventing homeowners from creating an Umbrella Loan for their Car and Education and other non housing related debt, in order to qualify the interest paid as a “mortgage interest” deduction.

If you understand the chart above, and keep your “back end from falling out”, you will clearly be a Giant Step ahead of most of your Peers. It’s a NEW Decade. 2011 is the year of One Step Back to Sound Principals and reliable fundamentals. Good Luck with that. If you don’t understand any part of this, please ASK!

Happy New Year!

The 2009 Version of the “same” principals

Can you modify the ratios from those in the Chart?

Half the battle is “won” when you know WHEN you are STRETCHING, and by how much.