SMART MOVES

During the depths of the economic downturn, there were pessimists who insisted that home ownership was no longer smart or desirable. The American Dream, they said, had to be revamped and rethought in the face of new realities. Rent, don’t buy, was the message.

But, like virtually every other pronouncement made about the housing market over the past five years or so, this one was proved wrong. As it always does, the law of supply and demand worked as it should and equilibrium returned.

After years of home-price declines and tightening rental markets, homeownership is now more affordable than renting in all but two of the 100 nation’s largest metro areas — even in expensive real estate markets such as New York, Los Angeles and Boston. Best of all, Jacksonville is one of the markets in which buying is virtually a no-brainer.

That’s according to Trulia’s Rent vs. Buy Index, which compares the total cost of homeownership to the cost of renting. Trulia, a residential real estate website for buyers, sellers and real estate professionals, lists properties for sale and rent and compiles local, regional and national statistical data related to housing.

“Since the start of the ‘Great Recession,’ many former homeowners flooded the rental market,” says Pete Flint, CEO of Trulia. “As a consequence, renting has become relatively more expensive than buying in most markets.” 

The Trulia index compares the median price of buying a home and the median price of renting two-bedroom apartments, condominiums and townhomes. It also takes into account other costs related to owning, including interest, insurance and property taxes as well as offsets for tax deductions. The price of renting combines the monthly rental payment and the cost of renter’s insurance.

Then, using the data gathered, Trulia determines an average monthly cost for owning, assuming you’ve put  20 percent down and have qualified for a mortgage of 3.5 percent. The cost of owning is then compared to the cost of renting over a seven-year period.

In Jacksonville, as of the summer of 2012, the average monthly cost to own a home was  $642. The average monthly cost to rent a comparable home was $1,355, for a monthly difference of $713, or 53 percent. So, assuming you plan to stay in your home for at least seven years, and assuming it is at or near the market’s median price, it will cost 53 percent less to buy it than to rent it.

The favorable buy-rent equation in Jacksonville, as well as other Florida markets, is heavily influenced by mortgage defaults, according to Trulia spokesperson Tara-Nicholle Nelson. Jacksonville has consistently been among the 30 hardest hit cities for foreclosures over the past two years, as compiled by RealtyTrac. 

The flood of repossessed homes hitting the market has caused prices to fall by about 34 percent over the past four years, according to data from the National Association of Home Builders. But the pace of foreclosures has slowed and prices are beginning to tick up, meaning buyers today have a relatively short window of opportunity to take advantage of extraordinary bargains.

Okay, you’ve heard the “buy now” message before, and watched as prices and mortgage rates fell even further. Why should this time be any different? First, the numbers don’t lie — predictions of an improving market and rising prices are now being confirmed by hard data. 

But there are plenty of other reasons to have renewed faith in the American Dream. Let’s look at some commonly asked questions about homebuying in light of current market conditions.

Q. Why should I buy, instead of rent? 

A. A home is an investment. When you rent, you write your monthly check and that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from your federal income taxes. This will save you plenty, because for a number of years most of your monthly mortgage payment consists of interest. 

You can also deduct the property taxes you pay as a home-owner. In addition, despite the uncharacteristic behavior of the market over the past few years, the value of your home will almost certainly increase if you plan to stay put for a while, thereby building equity. Of course, the days of buying, flipping and doubling your money are likely gone forever. But over time, a new home is still a solid investment.

Finally, you’ll enjoy having something that’s all yours — a home where your own personal style will tell the world who you are. 

Q. Can I become a homebuyer even if I have I’ve had bad credit, and don’t have much for a down payment? 

A. Yes, you can. Lenders can often find a way to get you financed, although it may not be at the most favorable interest rate. 

For example, unlike conventional loans that adhere to strict underwriting guidelines, FHA-insured loans require very little cash down. In addition, there’s more flexibility in calculating household income and payment ratios. 

In Jacksonville, there’s a HUD office in the Charles Bennett Federal Building, 400 W. Bay Street, Suite 1015. Call (904) 232-2627 or check the HUD website at hud.gov. 

Additionally, some new-home builders have in-house mortgage financing arms. You don’t have to use them, but there is a convenience factor and the chance that a company with a vested interest in selling you a home will work harder to get you approved.

Q. How do I figure out how much I can afford?

A. One lesson from the subprime mortgage mess is, what the lender says you can afford and what you know you can afford are not necessarily the same. 

If you don’t already have a budget, make a list of all your monthly expenses, excluding rent. That includes food, transportation, insurance, student loan payments and credit card payments.

Subtract this total from your take-home pay and you’ll know roughly how much you can spend on your new home each month. If you focus on homes that are outside your price range, you may end up either stretching beyond your comfort zone or feeling unsatisfied with a home you actually can afford.      

That’s why you should get preapproved before making an offer on a home. You’ll be wasting the seller’s time, the agent’s time and your time if you sign a contract and discover later that you can’t borrow what you need. 

But even if you’ve been preapproved, your loan can fall through if you take any action that alters your credit score, such as financing a car purchase. If that happens, you may have to forfeit the money you put down when you entered into the contract.

Front-end and back-end debt ratios are used by lenders to determine how much of your monthly gross income can be used for mortgage debt (front end) and how much can be used for regular obligations (back end). In the mortgage-lending world, 28 and 36 percent ratios are fairly standard, but there are other combinations available.

Q. How much money will I have to come up with to buy a home? 

A. That depends on a number of factors, including the cost of the home and the type of mortgage you get. The more money you can put toward your down payment, the lower your mortgage payment will be. Some types of loans require 10-20 percent of the purchase price while FHA loans require only 3 percent, and sometimes less.

Shopping for a loan is like shopping for any other large purchase: you can save money if you look around. Different lenders may offer different interest rates and loan fees, so talk with several lenders before you decide. 

Q. What do I need to take with me when I apply for a mortgage? 

A. You should have Social Security numbers for both you and your spouse, if both of you are applying for the loan; copies of your bank account statements for the past six months; evidence of any other assets, such as stocks and bonds; a recent paycheck stub; a list of all credit card accounts and the approximate monthly amounts owed on each; a list of balances due on outstanding loans, such as car loans; copies of your most recent two income tax statements; and the name and address of someone who can verify your employment.

Q. How do I know which type of mortgage is best for me? 

A. Most people chose fixed-rate mortgages. With a fixed- rate mortgage, your interest rate stays the same for the term of the mortgage, which normally is 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your mortgage payment will be, and you can plan accordingly. 

Another type of mortgage is an Adjustable Rate Mortgage (ARM), in which your interest rate and monthly payments usually start lower than with a fixed-rate mortgage, but can change as often as once or twice a year. The adjustment is tied to a financial index, such as the U.S. Treasury Securities index. The advantage of an ARM is that you may be able to afford a more expensive home because your initial interest rate will be lower. 

There are several government mortgage programs, including those administered by the Veteran’s Administration and the Department of Agriculture. As we’ve discussed, although FHA doesn’t actually make loans, it insures them for approved lenders, which encourages those lenders to grant mortgages to people who might not otherwise qualify. 

LESSONS LEARNED FROM MR. BLANDINGS

ALTHOUGH CARY GRANT AND MYRNA LOY HAD PROBLEMS, BUILDING A CUSTOM HOME CAN BE EXCITING AND REWARDING.

Manhattan adman Jim Blandings (Cary Grant) has had enough of city life. Instead of a crowded apartment, he envisions a spacious, single-family home in rural Connecticut where he and his wife, Muriel (Myrna Loy), can put down roots and raise their two daughters in a bucolic, stress-free setting.

The 1948 film, Mr. Blandings Builds His Dream House, follows the travails of the hapless Blandings family as they buy a home, tear it down when they find it’s on the verge of collapse, and then build anew with the help of a flinty assortment of tradespeople who explain that most aspects of the project are either impossible or twice as costly as anticipated.

It’s a screwball comedy, but also a horror story. And more than 60 years later, Mr. Blandings’ experience remains a cautionary tale for those who wish to build a custom home but begin the process uninformed and unprepared.

But building a home to your specifications need not be an ordeal. In fact, they say, the experience should be rewarding and fun. Here, then, are some questions commonly asked by buyers and answers from the experts.

Q. All right, I want to build a custom home. I guess I need to find an architect first, right?

A. That’s what Jim Blandings did, and you can see how that turned out. He and Muriel engaged an architect, bombarded him with ideas (sometimes conflicting ones) and ended up with a set of plans that cost far more to build than they had wished to spend.

That’s why many builders insist that they should be consulted first. That way, the thinking goes, your architect won’t overdesign, and you won’t end up with plans that can’t be built within your budget. 

But there’s controversy over this point. While many builders believe they should control the process from start to finish, many architects and building designers strongly disagree, insisting that they’re fully capable of assessing client needs and creating plans that accommodate any budget. 

Of course, with a design-build contract — in which the builder drives the process from conception through construction — the architect and the builder work together. A design-build contract has the added advantage of offering a single point of contact and, arguably, tighter cost controls.

But if you already have plans and want to seek bids from builders, be wary. It’s extremely time-consuming for a builder to prepare a bid on a custom home, and not every variable can be taken into account. 

That’s why simply awarding the job to whomever offers the lowest price isn’t always preferable. Better to spend a little more and choose a builder whose work you’ve checked out, and who has a track record of satisfied clients.

Q. I’ve got a set of plans I like, but my lot is kind of vertical and the house is kind of horizontal? Can we move a few walls around and make it fit?

A. Drawing up plans before you have a specific lot in mind is often futile. Not all homes fit on all lots for a variety of reasons.

Some neighborhoods and municipalities have size restrictions, setback requirements and even tree ordinances that can impact what kind of home you’re able to build. Also, lakefront lots often contain muck and may require thousands of dollars worth of fill dirt to make them buildable. In addition, you’ll need to know whether you can connect to a sewer system or if you’ll have to install a septic tank.

Unless your lot is in the sticks, you won’t be needing a well. But it’s worth remembering that Jim Blandings found, much to his dismay, that the water on his lot was as corrosive as, say, battery acid, requiring installation of a water-purification system.

Q. My brother-in-law is a cabinet-maker and my sister is an interior designer. Can I use them for my project?

A. Many custom builders are open to listening to suggestions from clients regarding vendors. But an experienced builder will already have a cadre of trusted tradespeople, and will want to use them.

One thing the clueless Jim Blandings did right: He let the contractor, Mr. Retch, and the architect, Mr. Simms, select and supervise the subcontractors. 

Q. I’d love to build a custom home, but don’t they cost a lot of money compared to a production home?

A. Many — but not all — custom homes cost from the high six figures to more than $1 million, in large part because they’re larger and feature upscale finishes and leading-edge technology. Also, custom builders may build only a handful of homes each year, lavishing many months of attention on every project, while production builders make their money on volume and replication.

Most custom builders say they can build a home for between $150 and $200 per square foot, but there’s no average because each home is one of a kind — and each client has his or her costly quirks. One client might spend tens of thousands of dollars on a specially designed spiral staircase. Another might insist that ceiling beams be salvaged from a barn in Vermont.

Most custom builders work on either fixed-price or cost-plus contracts. With a fixed-price contract, the cost of the home is predetermined and is unaffected by price fluctuations in labor and materials. Cost-plus contracts take the actual cost and tack on percentages for overhead and management.

Fixed-price contracts have the advantage of predictability but, in the final analysis, are usually more expensive than cost-plus contracts because the builder mitigates his risk by adding a small premium.

Q. Okay, so I don’t want to go the pure custom route. But I don’t want a cookie-cutter home, either. What can I do?

A. The answer is a semi-custom home, in which you choose a model from a set of plans but are permitted to make changes and alterations to suit your needs. These days, even most large-scale production builders offer at least some customization options.

Plus, there are many builders who’ve found a niche in the semi-custom market. They say their flexibility allows you to build what is for all practical purposes a custom home, but without the custom-home price tag.

Talk to your builder. These days, they’re all about making buyers happy. Consequently, you may be surprised at how much they’re willing to do to earn your business.