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The Skinny on the Housing Crisis - Frequently Asked Questions

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<< Return to The Skinny on the Housing Crisis book page.



1. Can I trust my real estate agent?

Your agent is compensated only if you buy. There are many honest agents. There are some dishonest agents. As a starting point, get referrals before you select an agent. Ask an agent for names of others with whom he or she has worked. If he or she is new to the business, ask for personal references – people who knew the agent in some capacity. Oftentimes you can tell a lot about a person just by the turnaround time before you get references.

More importantly, use the Internet to do your own homework on what is for sale and/or what has sold. Zillow.com is a good starting point on past transactions (“comparables”). Go to Realtor.com to see what is for sale. Go look at the houses. Consider hiring a real estate agent on a flat fee basis to help you assess the market value of a house for sale.


2. Can I negotiate with a mortgage broker?


Absolutely. Ask about the fee that he or she is making. If it is higher than 1% of the loan amount, suggest that you might want to speak with another mortgage broker or directly with a lender. Note that the fee is directly tied to the rate you pay. So, if you can negotiate the fee downward, you pay less interest rate.


3. Do all banks work with mortgage brokers?

Until recently the answer was “yes,” but as the result of some “discrepancies” in mortgage applications produced by mortgage brokers, some large lenders have recently indicated that they will no longer work with mortgage brokers.


4. Should I work with a home inspector recommended by my real estate agent?

Ask the agent for more than one name. Speak with the inspectors you are considering hiring. Get a feel for their diligence. Go to the inspection when they do it and ask a lot of questions.


5. What is the current thinking on ARM (adjustable rate mortgages) versus fixed rates?

There is no one right answer. But, if we have learned anything from the housing crisis we have learned that discretion is the better part of valor. A one-year ARM is risky. If you intend to stay in the house for less than five years, a five-year ARM does make sense.


6. What will be the impact of the government taking over Fannie Mae and Freddie Mac?

This act should stabilize and hopefully lower interest rates as Fannie and Freddie’s costs of borrowing decrease. In addition, the new executives have indicated that they will be analyzing some of the fees that Fannie/Freddie were charging lenders for securitizing mortgages and this could also lower interest rates to borrowers.


7. What is the prognosis for housing prices?  Is it a good time to buy?

Well, like any market, it is very hard (impossible?) to time the market exactly. If you are a long-term buyer, most commentators would say that now (fall, 2008) is a good time to come off the sidelines and start looking.  While there is still softness in the housing world, the foreclosures are starting to work their way through the system and they are what is pushing prices down.


8. But what about the size of the inventory?

It is true that the inventory of 11 months is about twice what is considered healthy but remember that is at the current demand level (way down). As demand picks up, the inventory could drop and that news alone will stabilize prices further.


9. Is there any mathematical formula for knowing when to buy?

Well there is something called a “rent ratio” which is when the rental value of a house is such that the house – on a pure investment basis – makes sense. The problem is that in many communities, housing prices are not connected to rent ratios and if you wait for the time when each house you are considering makes sense on an income basis, you may miss the turn of the market.


10. Do I need title insurance?

Big, good question. You will definitely be required to get title insurance for the amount of your mortgage debt but you are not required to cover your equity. Discuss with your title agent the incremental cost of covering your equity with title insurance. Ask to speak with the title agent and/or attorney to discuss the plusses and minuses of title insurance. But understand that in certain states, the attorney gets a cut of the premium.


<< Return to The Skinny on the Housing Crisis book page.

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