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Color of Money Book Club

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Michelle Singletary
Washington Post Columnist
Monday, May 1, 2006; 12:00 PM

Michelle Singletary hosted author June Fletcher for a discussion about this month's Color of Money Book Club selection -- "House Poor: Pumped-Up Prices, Rising Rates, and Mortgages on Steroids."

Michelle writes that she'd been looking for a real estate book to recommend for a while now. But she says too many are written by folks who are so tied to the industry they can't be objective or they overly promote (recklessly in some cases) the prospect of anyone and everyone getting Bill Gates-rich buying and selling real estate. Michelle says "House Poor" is different.

A transcript follows.

Fletcher also discussed the book in an online chat last November.

Read Michelle's past Color of Money columns .

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Michelle Singletary: Welcome all. Well this couldn't be a better topic given the current housing market, which is about to burst its bubble or is going still strong -- according to who you talk to.

So let's get started.

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Washington, D.C.: We are first-time homebuyers and after looking for months, we found a house in a great neighborhood. We close on Friday. The house is small and a definite fixer-upper, but we really love the neighborhood and in general are very excited. However, I'm really nervous that we're making a mistake here and getting in over our heads with repairs (mostly cosmetic, but every single room needs some work). Is buyers remorse normal? Logically, I know we saw a lot of houses and this was by far the best in our price range (and the only neighborhood we liked). Also, we'll probably stay for 7-10 years, so I'm trying not to get worked up about a potential bubble, but I'm still concerned that if we put money into renovations, we won't get it back when it's time to sell. I'm panicking here and haven't slept in almost a week, please help!

June Fletcher: If you're going to stay for at least seven years, then don't worry. You'll have lots of time to make needed repairs--and that's the best way to boost your home's value over time, too. According to Remodeling magazine's annual Cost vs. Value survey, exterior repairs and replacements give the best payback, followed by fixups to kitchens and baths.

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Washington, D.C.: I'm looking into getting my credit together to purchase a home and I have four negative collection accounts on my credit which adds up to $1000. Not sure if I should pay that or save the money for a down payment.

June Fletcher: You'll definitely want to spruce up your credit first, since lenders are going to base your interest rate on your FICO score.

Michelle Singletary: Also, may I suggest something that is probably different and that I'm sure some people would disagree with. Pay off those debts. You owe the money so pay off that debt before you save up for a down payment. That is the right and moral thing to do. Now, having said that you should do that if those debts are really old and about to come off your credit report (negative information comes off after 7 years) paying the debts might cause the creditor to "reage" the debt and it might appear as new information on your credit report. So here's what you should do to prevent that. Write or call all three creditors and let them know you want to settle up. If you can, get them to put in writing that they will not update your credit report in a way that will make the information reported seem like new information which could hurt your credit score. So in other words agree to pay but ask that they now report that the "debt was paid in full or "as agreed."

Once you pay off the debt then save for your downpayment.

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Columbia, Md.: Yes to Consumer Reports! Most recently we've used to it remodel a kitchen (cabinets, counters, appliances), buy two cars, washer, dryer and a lawn mower.

The online subscription would be a good option for people, also.

Michelle Singletary: I agree online subscription is good and saves paper.

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Vienna, VA: We're thinking of moving to DC to shorten our commute. However, if anything, we could only afford a condo when the prices have come back down to earth. Would you advise against buying a condo, considering that condo fee can be high and the condo market could be affected more than single family homes if the real estate market slows down severely?

June Fletcher: Condo prices tend to be volatile, and as you correctly point out, they can be more severely affected in a downturn. And they are probably being overbuilt in the DC area right now--mostly because land prices are so high, builders need a lot of density to make a profit.

But my feeling is, you should let other factors determine where you live than just potential appreciation. Does a condo suit your lifestyle, or would a single-family home be better?

Michelle Singletary: I couldn't agree with June more. I bought a condo in Baltimore way, way, way back in the mid-80s. When I finally wanted to sell the condo several years ago, I couldn't give away the place. But I kept trying and changing real estate agents and I finally sold it. Didn't make a dime in profit even tho the condo was in a lovely area (two bedroom, one bath, great space).

So no profit but I got to live it in for more than a decade, my disabled brother lived it in for awhile, got a tax break on it while I lived there...it suited my needs as a single woman. I say all that to say I didn't see any appreciation but I certainly appreciated having a home that was mine. Buying a condo is tricky but if you answer other questions other than will I make money on this place it still might be the right home for you.

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Nashville, Tennessee: I'm a 69 year old widow with a 30 year old house on a lake in Tennessee. It's appraised at $325,000. I'm still working for a small salary and also receive social security. I've done a good job of keeping up with repairs on my home, having recently replaced the heat pump and had new roof put on. With no mortgage payments, I took out a home equity loan to keep up with repairs, and replace some aging appliances and furniture. I now find myself wallowing in debt again. I'd like to sell and worried that after I pay down the five-digit equity line, I won't have enough to live on unless I continue to work. Am I foolish to try to keep my home, or is it time to sell and move into an apartment?

June Fletcher: Selling your home would free up cash; and well-invested in stocks, bonds and Treasuries, it could give you a chance to enjoy your retirement. You might also look into a reverse equity mortgage, which allows you to stay in your home and pull out your equity in monthly installments.

Michelle Singletary: If I might add, if you really want to stay in your home go for the reverse mortgage. With this loan product you get to keep your home and pull out the equity AND you don't have to make a single payment on the loan until you sell, move or pass away. Now the fees can be high but if you live long and stay in the home a long time, it's a good way to get out of your house rich/cash poor situation. Also depending on how much equity you have already pulled out you could qualify for a reverse mortgage now and pay off the home equity loan NOW and free yourself of that ongoing debt. Go to these Web sites for more information on reverse mortgages:

http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm

http://www.aarp.org/money/revmort/

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Silver Spring, Md.: In this market, it is more reasonable to stay in our current house and look into adding or doing a second story addition for more for space, or is it more economical or sensible to sell our current home and buy "up?"

June Fletcher: It all depends on whether or not you're happy with your current neighborhood. If you currently have a low fixed-rate mortgage and a lot of equity built up, I'd consider staying. But look for a home equity loan rather than a home-equity line of credit (aka HELOC) because rates are rising.

If you do decide to trade up, wait a while. Prices are softening in the metro area, and you'll get a better deal in a few months.

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The land of pheasant living: I plan on staying in my home for at least 3-5 years more. I'd like to move at that time. My home is currently appraised at $280,000, but the mortgage is only $160,000. Do I have anything to be worried about if the real estate market drops?

June Fletcher: You don't say where you live, but if you're going to be here up to five years, you shouldn't worry. All that matters is the state of the housing market when you sell, and five years from now, it will be a whole new ball game.

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Rockville, Md.: We're a pretty young couple with a child and relatively new to this area. We have no debt besides some student loans and a car we're almost done paying off. My husband and I both contribute to our 401K as well to our savings account for our "emergency fund." We're saving up money for our first home, and needless to say with homes in this area it seems like a slow process. We both have excellent credit. Given the fact that we both want to stay in a house we buy for a long time, and are not looking for something super fancy, I'm beginging to consider a 30 year fixed loan where you finance 80 percent and the 20 percent downpayment. What should I consider in these types of loans?

June Fletcher: Good for you for being almost debt-free! And you are right to want to put 20% down to avoid private mortgage insurance, which is basically a boon to lenders with no benefit to you.

There are many loans these days that don't require a 20% down payment. Most require that you take on a higher-interest loan for the balance, however. Unless you have a sizeable emergency fund built up, I'd be cautious about taking one on.

Fortunately for you, the housing market is softening, so I expect there will be deals for you soon--including seller financing, which won't have PMI.

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Greenbelt, Md.: A comment: If you're looking to buy a place, you might want to let your circle of friends in on the secret. I had done that back in the late 1990s, and one day my friends called to say they were moving in together and were looking to get rid of one of their two condos for a price that equalled the balance of the mortgage? Almost seven years later, I still live in that condo with a nice low mortgage payment, those friends got married and bought themselves a detached house and everybody's happy.

June Fletcher: That's a great idea--You also avoid having to pay a broker's fee. But be sure to have a competent attorney review the deal, and be diligent about having all inspections done prior to closing the sale. I'd also make sure I purchased title insurance.

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Washington, DC: Hi Mrs. Singletary,

My friend needs help with his finances. He a 35 years old man and he lives with his parents. He's been married twice and has no children. Michael is in debt up to his eyes. He's employed with the Federal Government and makes a pretty good salary and a Drug Testing Technician.

Could you help him or suggest a financial planner who can set down and work with him in getting his financial life on track.

Thanks

Sylvia

Michelle Singletary: Well, can't help your friend in this chat, but why don't you e-mail me and I'll see if I can give him a recommendation of where to go to get help.

Also, for local residents (DC, MD, VA.) I'm about to start taping for the second season of my television show for TV One called "Singletary Says" (airs on local cable and on channel 241 on Direct TV every Wed. at 8:30 p.m.) In the show I visit folks in their homes and help them come up with a way to address whatever financial issue they are dealing with. Sounds like your friend might be perfect for the show. In fact, I'm currently looking for families (grown folks living with parents and parents who want them OUT, engaged couples planning a wedding, families that relocated because of Katrina, parents who want to stop overindulging their kids etc.) So if you are interested in the possibility of being on the show e-mail me at singletarym@washpost.com. In the subject line put "Singletary Says."

Now back to the regularly scheduled chat!

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Columbia, Md.: Michelle and June,

I'm about to relocate for a promotion to the suburban Philadelphia area from suburban Baltimore. It looks like we'll get a little more bang for our buck in that market, but are anxious because my wife and I have never relocated in a hurry like this before. We should have about $120K in equity to work with. Do you have any suggestions as to things to watch out for as we make this leap?

June Fletcher: You need to check on the quality of school districts (important even if you don't have kids, because it matters on resale), as well as how well other homes in the neighborhood have appreciated over time. Zillow.com is a good tool for checking this out, and real estate agents can help, too.

But what's the rush? Why not rent for a while until you get a better feel for where you want to live permanently? Rents are a great bargain in most places these days.

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Bowie, Md.: How much of the house price spike (can't call it a bubble until it bursts) is driven by zoning?

When someone buys a home in community X, they also become a voter. And one of the things they do as a voter is to limit building of housing (particular housing costing less than theirs) to protect their quality of life, their investment and the ratio of their community's property taxes to services required.

I see plenty of land available to build housing on. And plenty of opposition from locals to putting it their.

June Fletcher: That's an interesting question; certainly NIMBYism does limit the supply of housing.

But this last boom was driven mostly by investors, economists say. (It's impossible to know how many investors are/were in the market, since they aren't always truthful about their living intentions on mortgage application forms, to avoid being slapped with a higher interest rate.) Now that investors are cashing out in droves, prices in many formerly hot markets (including DC) are softening, and inventory levels are way up.

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Arlington, Va.: What's seller financing?

June Fletcher: That's where the seller provides the loan, instead of a bank. The terms are whatever you and the seller work out. It can be a great win-win situation, especially if the seller doesn't need a lot of cash all at once--for instance, a retired couple who are planning to rent and want a steady stream of income.

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Arlington, Va.: Michelle, June -- thank you for taking my question.

My husband and I live in Arlington. We bought about five years ago, right before the prices really started rising. We could probably make a profit of at least $300K on the home, but still wouldn't be able to afford to buy another home in the area -- since they've all gone up.

So we'd like to expand the house. We have about $300K in equity in the home and our combined income is about $85K a year. Can we afford to renovate? What are our options?

June Fletcher: Certainly you can afford to renovate. Your choices are to get a fixed-rate home equity loan (which might be the best choice); a home equity line of credit (beware, because rates are variable and they're rising); or any sort of loan that you might arrange through your bank or credit union.

Be careful not to renovate above the current standards of the neighborhood, however. In other words, don't put in granite countertops if everyone else on your block has laminate.

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Think before you buy: I bought a home three years ago. I had a decent amount of cash and great credit. I bought for a really stupid reason. I wanted people (friends, family) to THINK I had my financial act together. I did have it together but so many people were leaving apartments and buying homes -- I thought I needed to do that also. I married last year and we sold the house. I made a little bit but the home needed so much refreshing to be attractive and pleasant that all we did was work on it while I lived there. I deeply regret buying. I loved apartment life and loved just paying rent. I had a great apartment in a great part of town. My husband and I ran the numbers and if I had just rented I would have saved an additional $18,000. Too late now. Buy because YOU want too fix up a place, get a tax break, and take care of problems WHEN problems occur.

Michelle Singletary: Really, really good advice! I think in this overheated housing market people are forgetting that your house is your home.

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Silver Spring, Md.: We are looking to buy our first home. We have $12K in savings and another $40K in our TSP that we could borrow (if necessary). We are looking at single family houses in the $300K range in up and coming neighborhoods along Route 1, inside the beltway (Hyattsville, Mt. Rainier). Do you think that the market will slow down significantly in this price range in these areas that are perceived as up and coming? Should we wait?

June Fletcher: Though retirement may be many years away for you, I'm not a big fan of borrowing from retirement to buy a home. I also think time is on your side. Builders are already offering incentives ranging from interest-rate buydowns to comped closing costs. Existing home owners will soon be offering goodies, too--and lowering prices. Time is on your side.

Michelle Singletary: And even if retiremetn isn't far off, says to me if you need to borrow from your retirement perhaps you can't afford to buy right now. I know people think well if I borrow from my retirement account at least I'm paying back myself back. But you are also removing money that won't earn any money and that is a loss you should factor into your decision.

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RE: think before you buy: AMEN! I really regretted buying in my first year or two. I am finally resigned to it, but only because I had a flood that forced me to make changes -- which ended up with my having a more livable home.

Michelle Singletary: Interesting!

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Arlington, Va.: First, let me say that I sincerely appreciate your financial advice. However, this is the second chat in a row where you have prefaced a response with "I know some people may not agree with this," and continued to discuss the "moral implications" of specific actions (last time it was cohabitation, this time repaying debt instead of saving).

In a perfect world, the best financial solution is also the moral solution. However, we come to you for FINANCIAL advice. I believe your responses should suggest the best (legal) FINANCIAL decisions... and then let us decide for ourselves (or ask Carolyn Hax) whether said suggestions agree with our personal values.

Michelle Singletary: You are nuts!

With my financial advice comes my morals, viewpoints, knowledge, experience, etc. I'm as much a columnist and advice giver as Hax. And frankly if more people really thought about their financial decisions in the context of what is the right thing to do they wouldn't be in the mess they are in. For example, if people really, really understand what debt is they wouldn't charge on credit cards with no idea of how or when they will pay it off. I think of all the businesses that in good faith sell people things with the intention of being paid. Behind those goods or services are people who need to be paid. When we don't pay our obligations our actions affect others.

So you know what I will continue to preach against shacking up, or the moral obligation of paying your debts...that's what you get when you ask ME for my opinion. And I preach against these things because I see the results of when those relationships go bad or when people move in together to save money only to end up breaking up and breaking the bank. I know the stats. I know that marriage works and there are financial benefits you can't get if you live together.

As I've said before I'm not a REPORTER. I am a columnist and the Post pays me to write my opinions which come with my values.

And you know what you are free to disagree or ignore my advice. You are grown. I won't be mad. As long as I'm respectful to my readers this is what they get.

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RE: Retirement borrowing: Great points, Michlelle. In addition, if you borrow against your retirement funds, you have a loan you must make payments on. You will be making these payments with money you could/should be putting into savings.

Michelle Singletary: Good point. Forgot that too!

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Laurel, Md. (sigh): Ms. Feltcher, 12 years ago I bought an affordable house in Prince Georges County (in you don't understand the significance of that, ask Michelle) that met my needs.

Steady employment and pay raises later, I'm considering trading up and possibly changing jurisdictions. But desite what I read about housing bubbles and spikes, the most recent assessment of my comparables indicates that I've appredicated only about 75 percent in 12 years.

Some places, that might seem like a good investment; but in the D.C. area I feel like I bought Pets.com -- I can't really afford to move because everything else has appreciated more than my house.

June Fletcher: I sympathize. But housing is an investment, and therefore a gamble. It doesn't always pay off.

Does your house suit your needs? If so, then don't worry about appreciation rates. If it doesn't, then cut your losses and move. But make your housing decisions based first on your needs, not on money.

Michelle Singletary: Amen!

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San Diego, Calif.: We're selling our condo in San Diego County before we reach the two year residence test to exclude capital gains taxes. We've worked out that it's not a terrible idea because housing prices are dropping here and we could lose more in selling price than we'd pay in taxes if we wait the five months to meet the two-year mark.

My question is how and when do we pay the tax? I've read IRS instructions which seem to suggest that all we do is report the gain (after excluding selling costs/etc.) on our 1040 schedule D next year when we file our 2006 taxes. But our realtor seems to think he's heard something about the government taking 30 percent at the time of the sale and then square up with us at tax time next year. I've never heard of this and can't find any reference to it on IRS.gov. who's right?

Michelle Singletary: First of all you really need to read up on the tax exclusion for home owners. If you sell BEFORE you reach the two out of five year residency requirement you WILL NOT get the tax break. You have it backwards. The rule is you have to live in your home two of the last five years to qualify for a $250,000 tax exclusion if you are single and $500,000 if you are married filing jointly.

If you qualify for the break, you typically just sign a document at settlement. Please consult someone than that knucklehead realtor you are dealing with. He or she should know this!

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Michelle Singletary: I honestly can't believe the hour has passed already. I'm so sorry if we didn't get to your question. I will however, ask June if she will answer more questions that I'll print in either my column or in my weekly e-letter, which if you aren't subscribing to you will. (Go to the business section at the Post and click on personal finance and then my column and you'll see how).

Thanks to all you submitted questions. Thanks to all who don't mind my preaching/teaching. Really it's all in love and given with a desire to help you do the right thing with your money. Even if you disagree come back because trust me you will learn something. And if you already know it, pass the information along to someone who doesn't.

See you back here in two weeks.

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