Making your house pay off (Nov. 2002).

Consumer Reports November 2002 issue helps buyers, homeowners,
and sellers decide if it's worth betting on the house.

YONKERS, NY -- "You can't lose betting on the house." That's the mantra prompting millions of Americans to spend whatever it takes to get into their first house, to move up to a better one, to buy a vacation home or rental property, or to pack the home they already own with lavish improvements. But you can lose-and lose big. Many economists and real-estate analysts say that right now bubbles may exist in dozens of housing markets across the country. Whether you're a buyer, a current owner, or a prospective seller, Consumer Reports' personal finance experts bring you information to help you make smart decisions in the November 2002 cover report "Making Your House Pay Off."

Owning a home has been a strong component of the American dream for generations. Besides providing shelter, privacy, and the psychic rewards of ownership, housing is the most tax-favored and politically protected investment around. "Since 1968, the single-family house has risen in value by 6.3 percent a year. But, in today's superheated housing market, people forget that houses can also fall in value," says Associate Editor Mari McQueen. And a house isn't necessarily a high-yielding investment, even in the best of times. The Joint Center for Housing Studies, a Harvard University think-tank, in a study of thousands of home sales in four cities over an 18-year period starting in 1982, found that owners lost money on 41 percent to 56 percent of home sales, depending on the locality.

Gambling on pricey housing is chancey. Consumers who wind up spending an inordinate amount of their incomes on shelter run the risk sinking beneath their debts. With lenders offering ever easier terms, it's up to homeowners to decide how much house they can afford, how much to spend on improvements, and how to cash out prudently.

TIPS FOR BUYERS

Owning your own home usually beats renting. Still, you have to make a careful appraisal of your own resources, the market, and what it will cost to carry a house.

• Assess your circumstances. How long do you expect to keep your house? The longer you stay put, the more likely you will be able to ride out any short-term dips in the real-estate market.
• How to calculate old-fashioned debt-to-income ratios which allow only 28 percent to 31 percent of gross income for principal, interest, taxes, and insurance, or PITI, as the four are called. To find out how much you can afford try the calculators at www.fanniemae.com.
• Match your money to your market. Compare what you can spend with prices of homes where you plan to buy. Consider a lower-cost neighborhood if your desired area is not within reach.
• Keep your spending in check. Credit counselors say that new homeowners often get into financial trouble by spending too much after they move in. The typical buyer of a new house lays out $9,000 for furnishings and improvements in the first year.

TIPS FOR CURRENT HOMEOWNERS

Before falling to the temptation of using the equity in your home to undertake major maintenance and remodeling projects, you should know which improvements make sense and what your financing options are.

• Improving. Remodeling and upgrading are generally poor investments in the true sense of the word (that is producing income of profit.) Projects that should take priority are those that will protect your home from deterioration and damage. Renovations that add square footage to your house are those most likely to add value as long as they bring your house up to (not above) the standard of your area. The report includes a detailed chart on how much a homeowner can expect to recover if the house is sold a year after the project is completed. The projects that render the highest returns? Major kitchen remodeling. The lowest returns? Exterior repainting, because buyers expect a decent exterior.

• Paying for improvements. Lenders allow homeowners to borrow against the cash they have in their house. All forms of home-equity borrowing leach value from your house. Transaction costs can total up to 10 percent of the loan. Three different financial instruments are available:

1. The second mortgage- offers a fixed interest rate for a set amount over 5 to 15 years.

2. The home-equity line of credit- offers variable interest rates, and flexible borrowing.

3. Cash-out refinancing- allows you to replace your first mortgage with a larger loan, and cashing out the difference.

During the next month look for a free interactive worksheet at www.ConsumerReports.org.

TIPS FOR SELLERS

If you're an empty-nester or plan to retire soon, there may never be a better time to unload that rambling three-story colonial and trade down to a smaller home.

• Baby boomers whose children have left home may be able to beat the rush that experts believe will occur when boomers start moving to less labor-intensive dwellings.

• Thanks to a 1997 federal tax law, up to $500,000 of any gain on a house sale is tax-free for married couples, $250,000 for single filers.

• Setting the right price is key to selling your house quickly and profitably.

WHERE ARE THE HOUSING BUBBLES?

The story includes a list of housing markets where prices seem unsustainably high based on the historical relationship between housing prices and incomes in each area. Among the markets that are overpriced between 31% and 48%: Fort Myers-Cape Coral, FL and Nassau-Suffolk, NY. In the 21% to 30% bracket: Ventura, CA and Mobile, AL. Housing in Portland, ME and Grand Rapids-Muskegon, MI is overpriced by 15% to 20%. To find out if your area is overpriced check out the map that accompanies this report in the November 2002 issue of Consumer Reports.

The November issue will be available in newsstands starting October 8th. Find the latest recommendations from Consumer Reports' finance experts at: http://finance.consumerreports.org. To subscribe to Consumer Reports, call 1-800-234-1645 or visit www.ConsumerReports.org.