Tag Archives: income

Co-signing: Smart or Stupid?

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Realtor.com quoted me in Co-signing a Mortgage: Smart or Stupid? It opens,

There’s no doubt about it: Buying a home these days is hard. Even if you’re lucky enough to be a homeowner yourself, that doesn’t mean your kids or assorted loved ones can easily follow in your footsteps—at least, not without help.

One way that “help” can occur for home buyers who don’t qualify for a mortgage? Getting someone else—like you, dear reader—to co-sign. In a nutshell, that means that if they can’t pay their monthly dues, the lender will expect you to cough up the cash instead.

 It’s a noble idea, helping someone buy a home. But also, of course, a scary one. It’s no surprise that many co-signers are parents doing what parents do: putting their own financial well-being aside to help their children move into a home.

But let’s be clear here: The risks are huge. Some of them are obvious, but there are plenty more that you may not have even considered. So if you’re considering co-signing, it’s best you know exactly what you’re getting into, and how to protect your finances in case things don’t go well. Here are the main caveats and considerations to keep in mind.

Identify if your borrowers (and you) are good candidates

We’re not saying co-signing is a terrible idea across the board. There are plenty of legit reasons why those near and dear to you may have trouble getting the loan on their own—say, because they’re self-employed, which makes banks leery. But if your kid can’t get a loan because he just can’t seem to pay his AmEx card on time, well, that’s a different story. Judge your own risk accordingly.

Co-signers should also consider whether they’re good candidates to be taking on more financial commitments. Generally, you should consider co-signing only if you meet a few requirements. For example, “You own your home free and clear and don’t require much credit or have a need for it,” says Mary Anne Daly, senior mortgage adviser with San Francisco–based Sindeo.

Consider the pitfalls

If your borrower has a less-than-stellar history of paying back creditors or holding down a job, proceed with caution. Extreme caution.

“Unfortunately, I’ve seen parents dig further into their savings to pay the mortgage when their child can’t make the payment,” says Ryan Halset, a Realtor® with Seattle-based Boardwalk Real Estate. And if you can’t pay, it will tarnish your credit history and future odds of borrowing money.

“Your chance of getting a loan yourself in the future could be in jeopardy,” says Janine Acquafredda, an associate broker with Brooklyn-based House N Key Realty. “Not to mention the risk of ruining relationships if things go sour.” But maybe that last part’s a given.

Think like a lender

Hard as it might be, try to keep your personal relationship with the home buyer from coloring your decision. Even if it’s your child or a longtime pal, it shouldn’t (entirely) trump the warning signs.

“Before you commit, think like a lender and look at the borrower’s income, work history, and existing debt to determine if the borrower is worthy and not a potential liability to your good credit,” says Frank Tarala, owner of Sterling Heights, MI–based Principal Brokers Network.

Saying no may be tough, but it could save you tons of heartache down the road. David Reiss, professor of law and academic program director for the Center for Urban Business Entrepreneurship, recounts a situation where parents stepped in as co-signers just before the financial crisis hit. The home’s value plunged by more than half. The borrower then left the area—and his home—in search of a new gig and couldn’t make both the mortgage payments and the rent on his new apartment.

“The parents, retirees living on a modest pension in their own home, found themselves dealing with the default of their son’s mortgage with no financial resources available as a buffer,” Reiss says. “This situation has devolved into a nightmare of defaults and attempted short sales with no end in sight.”

The State of Moderate-Income Housing

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photo by Jaksmata

The Center for Housing Policy’s most recent issue of Housing Landscape gives its 2016 Annual Look at The Housing Affordability Challenges of America’s Working Households (my discussion of the Center’s 2015 report is here). it opens,

Millions of working households face big challenges in finding affordable housing, particularly in areas with strong economic growth. In 2014, more than 9.6 million low- and moderate-income working households were severely housing cost burdened. Severely cost burdened households are those that spend more than half of their income on housing costs. Overall, 15 percent of all U.S. households (17.6 million households) had a severe housing cost burden in 2014, with renters facing the biggest affordability challenges. In 2014, 24.2 percent of all renter households were severely burdened compared to 9.7 percent of all owner households. These percentages were even higher for working households, of whom 25.1 percent of renters and 16.2 percent of owners had a severe housing cost burden.

Housing costs continue to rise, particularly for working renters, who saw their median housing costs grow by more than six percent from 2011 to 2014. And for the first time since 2011, housing costs increased for working owner households as well, marking the end of a three-year downward trajectory. Additionally, more working households were renting their homes as opposed to buying—52.6 percent of working households were renters in 2014, up nearly two percentage points from 2011, when the share was 50.8 percent.

With more working households renting their homes, demand for rental housing continues to grow, pushing rents even higher in already high-cost rental markets. And although incomes are growing for many working households, this growth is not always sufficient to offset rising rents, meaning that working renter households are increasingly having to spend a higher proportion of their incomes on housing costs each month. (1)

The report outlines a series of good policy proposals (many of which are politically unfeasible in the current environment) to address this situation. But my main takeaway is that the wages of working-class households “are not sufficient for meeting the cost of adequate housing.” (5) Their housing problem is an income problem.

Borrowing Constraints and The Homeownership Rate

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photo by Victor

Arthur Acolin, Jess Bricker, Paul Calem and Susan Wachter have posted a short paper on Borrowing Constraints and Homeownership to SSRN. The abstract reads,

This paper identifies the impact of borrowing constraints on home ownership in the U.S. in the aftermath of the 2008 financial crisis. The existence of credit rationing in the U.S. mortgage market means that some households for whom it would be optimal to choose to be homeowners may not be able to do so. Borrowers with certain wealth, income and credit characteristics are unable to obtain a loan even if they are willing to pay a higher cost of credit (Linneman and Wachter 1989). The Stiglitz and Weiss (1981) canonical model sets up the rationale for this credit rationing. Using data from the 2001, 2004-2007 and 2010-2013 Surveys of Consumer Finance (SCF), this paper measures the impact of changes in the income, wealth and credit constraints on the probability of home ownership. Credit supply eased and then became considerably more restricted in the wake of the Great Recession. The loosening of borrowing constraints was accompanied by an increase in home ownership from the late 1990s until the start of the housing crisis. In this paper we estimate the role the tightening of credit has had on the probability of individual households to become homeowners and the decline in the aggregate home ownership rate following the crisis. The home ownership rate in 2010-2013 is predicted to be 5.2 percentage points lower than it would be if the constraints were at the 2004-2007 level and 2.3 percentage points lower than if the constraints were set at the 2001 level.

This paper builds on some of the other work of the authors (see here for instance) on the homeownership rate. The paper makes a valuable contribution by estimating the impact of credit rationing on the homeownership rate. To the extent we can identify an optimal amount of credit supply, it should help us to determine a target homeownership rate to guide policymakers.

Best Time to Sign a Lease

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photo by Beth Kanter

The Allstate Blog quoted me in What’s the Best Time of Year to Sign a Lease? It opens,

There is no way around it — apartment hunting can be stressful. And the cost of rent can be quite expensive — even outpacing average U.S. salary increases. According to the National Association of Realtors, the cost of rent rose an average of 15 percent while renters’ income only rose 11 percent from 2009 to 2014. However with some planning and negotiating, you may be able to have some more money in your pocket at the end of each month.

Similar to how you can pay more for a winter jacket in October than May, rental rates often vary throughout the year. By planning your move and signing lease terms to help position your next move during the lower rental rate season, you may end up saving some money. 

Research the Demand in Your Area

Just like most things, supply and demand determines prices in the rental market. Not surprisingly, you may get a better deal on renting when demand for condos or apartments are at their lowest. However, if you live in a tight rental market, your choices could be very limited. “In most areas the slow rental season is typically late fall through winter since less people move during this time,” says Scot J. Haislip, vice president, national lease program at the National Apartment Association (NAA).

It is important to understand the rental market you’re looking to move into since rental patterns can vary based on where you live. David Reiss, director of Community Development Clinic in New York City and professor at Brooklyn Law School, specializing in real estate and community development recommends contacting several local brokers to get their perspective on the slower rental periods in your area of interest. He also cautions that some high demand areas, such as New York City or Chicago, currently do not have a slower period for rentals.

Smart Negotiation

Even during the winter months, most landlords are not going to simply hand over a discount — you have to work for it by negotiating with your prospective landlord. Before you broach the subject of price, do your homework by picking up the phone or researching online to compare similar units at the current time. Reiss suggests that you consider asking for a decrease in your monthly rent or a period of free rent.

Homeowner Nation or Renter Nation?

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Andreas Praefcke

Arthur Acolin, Laurie Goodman and Susan Wachter have posted a forthcoming Cityscape article to SSRN, A Renter or Homeowner Nation? The abstract reads,

This article performs an exercise in which we identify the potential impact of key drivers of home ownership rates on home ownership outcomes by 2050. We take no position on whether these key determinants in fact will come about. Rather we perform an exercise in which we test for their impact. We demonstrate the result of shifts in three key drivers for home ownership forecasts: demographics (projected from the census), credit conditions (reflected in the fast and slow scenarios), and rents and housing cost increases (based on California). Our base case average scenario forecasts a decrease in home ownership to 57.9 percent by 2050, but alternate simulations show that it is possible for the home ownership rate to decline from current levels of around 64 percent to around 50 percent by 2050, 20 percentage points less than at its peak in 2004. Projected declines in home ownership are about equally due to demographic shifts, continuation of recent credit conditions, and potential rent and house price increases over the long term. The current and post WW II normal of two out of three households owning may also be in our future: if credit conditions improve, if (as we move to a majority-minority nation) minorities’ economic endowments move toward replicating those of majority households, and if recent rent growth relative to income stabilizes.

This article performs a very helpful exercise to help understand the importance of the homeownership rate.  This article continues some of the earlier work of the authors (here, for instance). I had thought that that earlier paper should have given give more consideration to how we should think about the socially optimal homeownership rate. Clearly, a higher rate, like the all-time high of 69% that we had right before the financial crisis, is not always better. But just as clearly, the projected low of 50% seems way too low, given long term trends. But that leaves a lot of room in between.

This article presents a model which can help us think about the socially optimal rate instead of just bemoaning a drop from the all-time high. It states that

Equilibrium in the housing market is reached when the marginal household is indifferent between owning and renting, requiring the cost of obtaining housing services through either tenure to be equal. In addition, for households, the decision to own or rent is affected by household characteristics and, importantly, expected mobility, because moving and transaction costs are higher for owners than for renters.  Borrowing constraints also affect tenure outcomes if they delay or prevent access to homeownership. (4-5)

This short article does not answer all of the questions we have about the homeownership rate, but it does answer some of them. For those of us trying to understand how federal homeownership policy should be designed, it undertakes a very useful exercise indeed.

Reverse Mortgage Lowdown

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Athene quoted me in Is a Reverse Mortgage Right for You? It opens,

Experts weigh the pros and cons of this loan—to help you make a smart choice.

For homeowners age 62 and older who have a significant amount of equity (appraised value minus mortgage balance) in their homes, a reverse mortgage can seem like an attractive option. Simply put, a reverse mortgage allows you to convert a portion of the equity in your home into cash, without having to sell your home. But this type of loan isn’t right for everyone. Here’s help determining if a reverse mortgage is the smart choice for you.

Pros: A reverse mortgage is a loan against your home equity, which you can take as a lump sum payment, a monthly payment, or a line of credit. The loan is paid off when you no longer live in the home. “It allows a homeowner to access home equity in the present in order to supplement current income,” says David Reiss, a professor of law at Brooklyn Law School who teaches residential real estate courses.

Consider this loan if you would like to stay in your current home and

  • Have lived in your home for a long time and plan to use the equity to supplement Social Security and other investment income streams
  • Have other assets and are not using this as a loan of last resort
  • Might not be able to access the cash you need in emergencies

Cons: These loans aren’t cheap, says Scott Withiam, housing counseling supervisor at American Consumer Credit Counseling, Inc. Plus, the industry that sells them has been under scrutiny from the Consumer Financial Protection Bureau for deceptive practices. “The reverse mortgage industry has had more than its share of shady operators who are drawn to all that equity that seniors have amassed,” says Reiss. “Homeowners considering a reverse mortgage should make sure to review the terms of the transaction with someone whose financial judgment he or she trusts.”

Housing Affordability in NYC

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Jacob Riis, Lodgers in a Crowded Bayard Street Tenement

The Citizens Budget Commission has released Whose Burden Is It Anyway? Housing Affordability in New York City by Household Characteristics. The CBC produced some interesting and counterintuitive policy briefs last year, in which it

examined housing affordability across large U.S. cities to assess New York’s situation in a broader context. Using federal data sources, CBC found that while many New Yorkers face high rents, and the share of households who are “rent burdened” (paying more than 30 percent of income toward rent) grew between 2000 and 2012, the city ranks near the middle among 22 large cities in the share of rent-burdened households. A second analysis revealed New York has the lowest transportation costs among the 22 cities studied due to the large proportion of residents who commute via mass transit. When housing and transportation costs are combined, the city rises from 13th to 3rd place in affordability. The average New York household pays 32 percent of its income towards housing and transportation costs, well within the U.S. Department of Housing and Urban Development’s (HUD’s) affordability guideline of 45 percent. CBC also examined how some “typical” households (as defined by HUD) fared in terms of housing and transportation costs in the same group of cities. In this analysis, low income households in New York also ranked relatively well despite facing serious rent burdens. (1)

The current CBC report looks at NYC rent burdens in greater detail. Key findings include,

  • Forty-two percent of New York City’s renter households are “rent burdened;” that is, adjusting for actual rent paid by each household (“out-of-pocket contract rent” plus utility costs) and food stamp benefits, they pay more than 30 percent of income in rent. „
  • Half of rent burdened households are severely rent burdened, paying more than 50 percent of income in rent. Ninety-four percent of these severely rent-burdened households are low income. „
  • Low-income severely burdened households are disproportionately comprised of singles and seniors. They are also disproportionately households with children and located in the outer boroughs. (2)

CBC adjusts rent to take into account subsidies and familial support. Some will disagree with adjustments of this type, but I think it is a pretty reasonable approach. When combined with the adjustments it made for transportation costs, CBC has produced a textured portrait of the state of housing affordability in NYC.