FICO Psycho

While I won't promise to do TOTAL disclosure, I do want to document all stages and aspects of the condo hunt.  I'm now approaching my originally scheduled time for mortgage pre-approval, and before I started shopping around I wanted to find out my FICO score.  I know that, in general, my credit is good, but I wanted to be armed with my specific figures so I could make educated estimates about my likely treatment, and push back if I happened to run into a lender who tries to railroad me.

There are multiple types of credit scores out there, but FICO remains the gold standard - it is used by most lenders, and is the only score that is consistent across all three bureaus.  (At least in theory - more on this later.)  What sucks is that you have to pay to see them.  You're entitled to a free annual credit report from each bureau - and should take advantage of it - but there's no law which says that they have to share your actual score.

Currently, the place to go to buy scores is myfico.com.  You used to be able to buy all three here; Experian pulled out, and there currently is no way for a consumer to directly find their Experian score.  Boo!  The scores are also kind of expensive, over $15 each.  Double boo!

On the plus side, there is a coupon code you can enter for a discount.  Do a google search and one will pop up.  I saved 20%.

You enter your SSN, address, and answer some very basic credit questions.  In my case, they weren't able to verify me on the website, so I had to call their number to complete it.  This was a pretty fast process - I wasn't on hold for more than a few seconds.  There was some back-and-forth due to minor errors on my file - TransUnion apparently doesn't know the difference between Kansas City Missouri and Kansas City Kansas, and is incapable of looking up ZIP codes to determine what state an address is located in.  But the operator was reasonable and figured out that I was who I said, so she freed me up.  After that I could just log in to the web site and view everything - perfect.  The whole call from start to finish was less than 5 minutes.

The presentation on the web is good, well organized and colorful, with an easy printable version.  Once you purchase it, your report stays available online for about a month.  I believe that it's still frozen to the date you ordered, though - I don't think it's updated during that time.

Now, for the actual content....

I've been warned before that scores almost always vary between bureaus.  People explain this by saying that, while the FICO formula is constant, each bureau has access to slightly different information about you, so the inputs to that formula are different.  For example, if an account doesn't appear on one report, that will affect your corresponding score.  In general, scores are usually in the same ballpark as one another, unless there are any significant problems.

In my case, I was surprised by, first of all, how big the difference was between the two.  24 points isn't huge, but it isn't a rounding error either.  Even more perplexing, though, why the two would be different.  I've spent more time than I should looking over the two, and every time I find a discrepancy, it seems like the lower (TransUnion) score has the more favorable information.  The specific differences that I noticed are:

• TransUnion thinks that I'm using 15% of my available credit, while Equifax thinks I'm using 16%.  Equifax lists that 16% as the single biggest factor hurting my score.  My utilization is lower on TransUnion, but somehow my score is lower?
• TransUnion lists my oldest account, from a credit union, which is over 10 years old, in addition to a long-closed credit card from around the same time.  Equifax just lists the credit card.  Both reports say that having had credit longer helps my score; TransUnion has a longer history, but a lower score?

Other than that, the two reports are virtually identical, listing the exact same dollar amounts for my revolving accounts and installment accounts.  So where's that 24 points coming from?  Again, I shouldn't be obsessing about it, but I am.

Now, on to detailed results.

Full disclosure: my current TransUnion score is 764, Equifax is 788.  The maximum possible score is 850.  According to them, anything over a 760 is eligible for the best rates; further improvements won't affect lenders' decisions.

So I'm above the cut-off, which is awesome.  The TransUnion number is closer than I would usually feel comfortable with.  I'm guessing that most lenders simply pull all three reports and average the results.  I don't know what my Experian number is, but I imagine it's in that zone - I do the free credit report every year (at staggered 4-month intervals), and on the last few cycles there haven't been any major discrepancies between them.

That said, because this is a Big Deal, I probably will go ahead with my plan for Extreme Credit Awesomeness.  The basic idea is this - I already pay off my credit card in full each month, but lenders don't really know that, since they just see the balance in each monthly statement.  Since paying online is so easy, when I know that lenders will be pulling my score I plan to start paying my bill BEFORE the statement is generated - basically, stop taking advantage of the free float that the card gives me, and instead make earlier payments so that the actual statement balance is close to 0.  This will probably have a decent impact on the credit utilization area of the report.  A little over a year ago, my apartment complex started letting us pay our rent online via credit card WITHOUT adding an extra charge, which is AWESOME with my 1% cash rewards.  But that definitely inflates the amount I owe each month.  Anyways, depending on how aggressive I get with this, I can probably get revolving credit utilization down close to 0%.  Best of all, it doesn't require paying any more than I already do, just doing it a little earlier.

On a side note - one thing I am a little concerned about is what will happen if a lender closes one of my other cards.  Right now I exclusively use a particular card, but the other cards still count towards my total available credit limit.  Any of those cards could close at any time, instantly bumping up my utilization.  Some advisors recommend that people place a small charge on each card every month to keep them active.  I suppose I could do that, but... I dunno.  I'd rather drive down balances than spread them around.

The second major thing I could do to improve my score is to accelerate payment of my student loans.  I long ago paid off my standard education loans, so the ones that are left are the federally subsidized ones.  I made the decision a while ago to keep them and pay the minimum over 10 years.  At the time, I was earning several percentage points more in my online savings account than I was on the loans.  Now that rates have crashed, that's no longer true, so it may make sense to pay them off more quickly.  I'm a bit reluctant to do so - this would help my score, but would be directly debiting the amount I'm saving for a down payment on my condo.  If I thought that taking this step would put me into a better mortgage rate bracket, I might go ahead and do so, but as it is I think I'll stick with the current plan and just keep an eye on it.

Speaking of rates... there is a lot of cool info that comes with your report, and one of the most helpful is a chart showing the average interest rates for various types of loans broken down by FICO score range.  For a 30 year mortgage, on this day I could theoretically have gotten the best rate of 5.274%.  (In reality, rates in California are always a bit more expensive, and as I've griped about before, rates on condos are more expensive still.)  The next best set of rates (700-759) is 5.496%.  The lowest (620-639) are 6.863%.  They point out that, on a $250k mortgage, the difference between the highest and lowest score results in about $256 every month.  Not a small amount of money!  You could buy seven credit reports for that!  A nifty online tool lets you put in your state and mortgage amount to get personalized payment estimates.  (These exclude taxes and insurance, so they're beguilingly low.)

So, now that I have this wonderful raw data, how will it affect me?  Not a whit!  But it does give me more confidence as I go into the next stage.  I feel like I have a game plan for how I can juice my stats a bit, and even better, a little serenity that I don't need to panic too much.  Pre-approval, here I come!

So, rates jumped up last week. What does that mean?

It's potentially devastating to people who are in the middle of buying or selling a particular property. The impact of higher rates is that a monthly mortgage payment automatically gets higher, so people cannot afford as much as they used to. For buyers, that means that the house at the extreme of what they could afford is now beyond their means. For sellers, it means that a contract might fall through because the seller cannot find a mortgage they can afford; if they haven't signed a contract yet, fewer buyers will be available to buy at their desired price.

Over the long term, it tends to even out. Eventually, sellers need to drop their prices to attract buyers. Buyers end up with the same properties, paying the same monthly amounts, just with more going to interest and less to principal.

In my personal situation, one thing I've noted and complained about is that condo interest rates are always higher than traditional single family home rates. This past week seems to confirm that the rates move at the same time and in in about the same amount for both types of mortgage (both 30 year fixed, 20% down). Provident Credit Union, a local outfit in the Bay Area, features a really nifty online mortgage tool; one of the things they offer, that I've signed up for, is email notifications of the current rate for a type of mortgage you're interested in. For more than a month now my desired one has been a steady 5.25%; last Friday, it was 5.75%. (Update: As of June 9th, it's jumped to 6.125%! Ouch!)

Off mortgage, on to property:

I'm increasingly interested in the Millbrae area. If prices continue to fall, I think that's probably where I'll wind up. I've visited a few times on weeknights and weekends, and it feels right to me... there's a good scale to their downtown, large enough for variety and an interesting walk, but not too dense or overwhelming. Being close to the Millbrae BART/Caltrain station would help with the commute. The weather seems to be quite nice - I have the advantage of nearly a year's worth of observation on my daily Caltrain ride, and I can see that it tends to be quite sunny, especially compared to the section of the peninsula immediately north.

Current downsides that I see: Again, expense is huge; there have been some significant reductions in condo prices lately, but I think there's probably more movement to go. Demographically, it's a bit older than I would prefer. And, possibly on a related note, I don't see a lot of people walking around the residential part of town - there's lots of good foot traffic on Broadway, and the parks look fairly busy, but almost nothing once you get up into the hills. (Which, to be fair, may itself be the reason why - it may feel less like a neighborhood stroll than scaling a mountain. I love slopes, but many people don't.) Oh, and every time I've been there it's been quite windy, which doesn't exactly bother me but is interesting.

So, we'll see how that goes. Right now I have alerts set up at Zillow to email me when new condos are put on the market or sold. I'm currently looking at the area west of El Camino and within about a mile or so of the station; this includes both Millbrae and the northern part of Burlingame, though Burlingame can make Millbrae almost look cheap. I also have RSS feeds into Craigslist's real estate section, which also provides some insight into what's in the market.

So far, the thing that I've noticed the most is how few properties are moving. There are several units at 555 Palm that have been on sale for months, one of them for at least six months, and have been through a $100k price drop but still haven't sold. The cheapest option seems to be 300 Murchison (Windwater Mills, formerly an apartment complex known as Avalon), but I'm not crazy about the location - it's close to the high school, and even when I visit on weekends the traffic feels really heavy there; plus there's some pretty disturbing reviews online about living there. There are two new condo developments, 88 South Broadway and Park Broadway; as far as I can tell, they've hardly sold anything for months. Park Broadway has slashed prices; 88 South may have cut them, but it's hard to tell, since their web site is extremely out of date.

There's another property, originally called Belamor and now Millbrae Paradise (a name I like far less), which is scheduled to go on the market in August. We'll see how that affects things - I imagine that, unless the housing market has decisively turned around, it will probably drive down the other prices.

So, that's that. Fun times!

Location Cubed

Now: Before I so rudely interrupted myself, I believe I was going to write about the areas I'm considering?

First, some general background, which I alluded to in my inaugural post.

I suppose I can roughly divide my location desires into two categories, business and pleasure.  Business-wise, I mainly hope to live somewhere that minimizes my commute time, both now and in the future.  Since I already spend about 3.5 hours every day commuting, it would be hard to pick a location that would be much worse in that regard.  I do want to find a place close enough to work proper or to public transit so that I don't need to rely on an automobile.

Planning for future commutes requires a bit more crystal ball gazing.  I currently work in San Francisco's SOMA neighborhood.  My previous job was in Los Gatos, at the very southern tip of Silicon Valley.  Odds are very likely that any future job would be located somewhere between those two extremes.  My particular focus - mobile software engineering - seems to be most active in San Francisco, the Peninsula, and Silicon Valley.  Less likely but still possible would be a location in the East Bay - Oakland/Emeryville being the biggest contenders, followed by Walnut Creek, followed by the Fremont area.

Again, it's impossible to know what the future holds, but fortunately I can rely on transit to get me at least to the general area of most places.  It's more a question of time and minimizing transfers to determine what would be a pleasant commute and what would be merely possible.

Finally, on the personal front.  Part of this comes down to location: again, I want to minimize the time required to reach places I want to visit.  Here, I put a premium on being able to walk places.  The big things for me here are grocery stores, farmers' markets, libraries, and trails.  I would also dig being able to visit a commercial area, maybe with things like bookstores, restaurants, and a gaming store.  And since I go hiking almost every weekend, the shorter of a drive to the mountains, the happier I'll be.

In terms of just living in the place itself, I'm hoping for something relatively quiet - I don't expect silence, but neither do I want to front on Highway 101.  Sunshine is great.  This is a region of microclimates, and a few blocks can easily separate regular fog from frequent sun.

Okay.  With all that background in place, here's the big-picture breakdown of places I'm considering.

General region: San Francisco
Particular areas/neighborhoods: SOMA, the Mission, the Richmond, Hayes Valley, Noe Valley, Potrero Hill
Summary: Living in an urban center, of what may be my favorite city in the world.
Advantages: Perks of urban living.  I could easily live without owning a car.  My commute to my current work would be incredibly easy.  There are some surprisingly good deals on new condos.  Weather in the eastern neighborhoods is usually pretty good.  All major Bay Area transit systems run here, often including the fastest options.
Disadvantages: The affordable neighborhoods also feel pretty marginal, with very visible indigency.  This is the extreme northwest of my employment region, so future jobs would likely require an extended commute.  While I love the city, I wouldn't take as much advantage of it as others - I'm more likely to hang out in my living room than hop between coffee shops.
Conclusion: Still the dream, but may not be worth the premium in price.  I'm increasingly drawn to the idea of living somewhere where I can easily access The City without actually living there.

General region: The Peninsula (San Mateo County)
Particular cities: Daly City, San Bruno, Millbrae, Burlingame, San Mateo
Summary: Smack dab between SF and SV.  This area feels conventionally suburban, but has the goodness of California and great access.
Advantages: Very quick travel to SF.  Southern section is generally sunny.  Low crime and high quality of life.  Good Caltrain throughout, and BART in the northern section.  Fairly decent range of prices, generally cheaper further north.  Santa Cruz Mountains (really hills this far north) and the Pacific Ocean.  Good commuting times to most areas I would work.
Disadvantages: Northern section is among the foggiest/cloudiest in the Bay Area.  E-X-P-E-N-S-I-V-E - especially so for housing, where it has been least affected by the downturn, but also in regular costs.  Commute times would be the worst for the East Bay.
Conclusion: If I can swing the price, I'd love to live here.  That's a really big "if", though.

General region: South Bay / Silicon Valley
Particular cities: Mountain View, San Jose, Campbell
Summary: My stomping grounds of nearly four years.  If it wasn't for my present job, I probably wouldn't hesitate to remain here.
Advantages: More affordable than SF or SM.  Excellent weather.  High density of major tech employers.  Good transit options - Caltrain now, and BART coming soon (access to East Bay) and high speed rail in a decade or so (quick access to SF and points south).  Access to great hiking in Santa Cruz and Diablo ranges.  Familiarity with the area.  Friends in the area.
Disadvantages: Long commute to SF.  Far enough away from SF that it's impractical to visit for fun - other than work, I only make it there on special occasions, and it takes a lot of commitment in time to do so.  The most suburban-feeling area.
Conclusion: A tempting option, and will get more tempting once BART is running.  Because of my immediate employment situation, this is probably a non-starter, with the possible exception of a place within walking distance of the Diridon station.

General region: East Bay
Particular cities: Oakland (Piedmont Avenue, Montclair, Rockridge, Temescal), Berkeley, Fremont
Summary: Relaxed and easy living on the other side of the bridge.
Advantages: By far the cheapest of the four regions; steals available in marginal regions, and the best areas are still reasonable.  Friends in the area.  Great hiking in the Diablo range.  Generally good weather.  Good transit to SF and other areas in the East Bay.  Great cultural activities around UC Berkeley.  Culture seems pretty friendly and upbeat.
Disadvantages: Inconvenient access to the Peninsula and Silicon Valley - commute would be easy at first, but painful if I shifted later.  Oakland has a lot of problems, and the political situation there is pretty depressing right now.
Conclusion: When I first started looking at getting a condo a few years ago, this was the only region that looked at all affordable.  It's good to have more options.  If I was confident in remaining in SF or the East Bay for work, I'd take advantage of the great deals out there.  As it is, I'll probably focus my search westward, as long as it's reasonable to do so.

I've been doing occasional "walking tours" through various neighborhoods for the past half-year or so, specifically thinking about how it would feel to live in each area, and also been mulling in general about the various tradeoffs.  My current inclination is to focus on the Peninsula.  It feels like it has the best chances of offering a great work/play combination.  I really love the idea of being able to scoot up to the city on nights and weekends to attend concerts, plays, book readings, etc.; and doing this would physically position me well for likely future employment.  Depending on where I end up, my current commute could be as short as 20 minutes each way - not bad at all!  Price will be the limiting factor here, but if current personal and broader trends continue, I may be able to squeeze into something.  Stay tuned for more!

Tips & Traps when Negotiating Real Estate

Oh, look at what we have here: Another book summary!  Please don't expect this pace to continue - there really are just a handful of real estate books that I plan on reading, I just happened to grab a bunch of them on a recent trip to the library. 

I'm paying particular attention to the topic of negotiation as I lay the groundwork for an eventual purchase, mainly because it's as aspect that starkly divides home shopping from almost any other American act of commerce.  I consider myself to be a savvy shopper, and pride myself on getting the best price for almost everything.  However, you can't negotiate with Amazon.com, or with Best Buy, or with Whole Foods.  For most commerce, getting the best price means searching among a large number of sellers until you find that price, and then acting quickly enough to take advantage of it.  In real estate, the search is still a big part of it, but even after you have found what you want, the negotiation phase can modify the price by tens of thousands of dollars.  This is the sort of thing I'll only experience a few times in my life, and I want to make sure I do it right.

I was pleased to see that there is a book out there that specifically covers the subject of negotiation within the context of home shopping, and it was pretty well reviewed at Amazon.  "Tips & Traps when Negotiating Real Estate" is written by Robert Irwin; this is the first thing by him that I've read, but apparently he writes a lot of real estate-related material, and also runs a web site with an annoying and intrusive registration requirement.

The book itself is extremely well written, though.  Unlike "Your New House," this book is written by an expert in the field, and it shows - he regularly recounts anecdotes from his decades in the business, and speaks with a strong air of authority.  The structure is very sound as well.  On the broad scale, it is soup-to-nuts, covering every aspect of negotiating that you may run across.  On the small scale, each chapter is focused on a particular topic, and usually includes a specific example or two to illustrate the importance of a particular type of negotiation.  As he talks through the importance of a given topic, the main text is punched up with occasional "Tips" - things you can look out for to gain advantage - and "Traps" - potential mistakes that could cost you a deal or money.

If there is one overriding theme to the book, it would be, "In real estate, EVERYTHING is negotiable."  Nothing is off-limits, even though it is in other people's interests to make it seem so.  Brokers' commissions, sales prices, the swing set in the back yard... everything can become a part of the deal.

At the same time, the most crucial tools you can have as a negotiator are knowledge and leverage.  Knowledge is crucial so you can recognize when something is a good deal, identify a reasonable price, know how hot or cold the market is so you know how much you can push the other side, and know the right questions to ask.  Leverage is crucial to get the best terms possible.  Whichever party has the most leverage can drive the other party.  In a hot market, sellers automatically have leverage, since if they don't like an offer or buyer they have plenty of others to choose from.  However, Irwin also describes ways that you can increase leverage in any market.  These all make sense, although I wouldn't necessarily have thought of them on my own.  For example, simply investing time can increase your leverage.  If you and the other party put four hours into making a deal, and then you mention that something is likely to be a deal-breaker, the other person will be much more likely to want to accommodate you and close the deal than they would be if you had brought up the deal-breaker when you first met.  Personally, I'm very Type A and I like to act quickly on everything, so I ordinarily wouldn't even consider engaging in a long conversation with an uncertain outcome like that, but Irwin's reasoning seems very sound.

The book is also valuable in the way it continues to re-emphasize things that I've read or heard from other sources: Buyers should always get a private inspection.  Make sure that your agent represents you and not the seller.  Give yourself enough time so you don't rush into a bad situation.

While everything is negotiable, you need to recognize that not everyone has the power to negotiate.  It's a bit of a waste to spend an hour chatting up the husband if the wife is responsible for all decisions.  New homes can be negotiated, but the front agent at the desk may not have the authority to change terms; you might need to get directly in touch with the builder.  Similarly, loan products are usually sold as prepackaged products by salesmen, but if you already have a loan or get in touch with a loan officer, you might (in the right market) be able to change terms.

I have to say, Irwin does seem like a formidable opponent, and I'm not sure if I would necessarily follow every one of his recommendations.  While he never recommends doing anything unethical or dishonest, he is a big advocate of taking a very hard line to get the best possible deal.  A late chapter describes why in some cases you might want to negotiate without using a real estate agent.  As he points out, even if the agent is representing you, the agent is also concerned about their reputation in the industry.  They don't want to be known as the mean person, or the person who brings in the lowest price (and hence lowest commission) for sellers.  You, on the other hand, will never see any of these agents again, and have no reason to hold back on arguing for the best deal you can get.  When he puts it that way, I can certainly see the advantage, though it's a role I wouldn't want to play often.

A lot of the negotiation-specific things he describes are worth keeping in mind.  For example, "Never negotiate at offer that cannot be closed."  He cites a hypothetical: A buyer comes to you and asks, "Would you accept $390,000 for this house?"  You reply, "We're asking $450,000, but I could go as low as $425,000".  You've just given away $25,000 - and, worst of all, you haven't gotten anything for it.  The person hasn't made you an offer - negotiations haven't truly begun - but you're already arguing from a weaker position.  The correct response is, "Are you offering $390,000?"  Ask them to put the offer in writing - in a form that can be closed - and only then begin negotiation.

I do feel pretty good about my overall chances in this field, thanks in large part to the knowledge and leverage pillars.  By investing as much time as I plan into researching the market and educating myself, I hope to get a great feel for what's a good deal.  Leverage may go up or down based on how the market is doing later this year, but even if the market warms up, I think I'll be in pretty good shape.  I plan to focus my search in the fall-winter period when sales are generally slow, and because I have such a wide time frame to work with, I'll be able to take my time to look for a good deal without feeling pressure to choose any one property.  As Irwin points out, at the end of the day you need to recognize when a deal just isn't possible and walk away.  (And be prepared if it turns out that the other party is willing to negotiate further after all - presto, instant leverage!)

All in all, this was a great book, Irwin's praise of Nixon notwithstanding.  I'll probably revisit it once more before I head out into the field for real.  After all, this will be one of the most expensive purchases I make in my entire life, and I want to get every advantage that I can.

Your New House

As part of my preparation, I've been reading a fair amount of real estate information.  A good chunk of this takes the form of news articles and online sources, but I also have several books that I've read or that I plan to read.  I'll try and summarize such books here, to describe both the good and the bad of each.

"Your New House" was written by the husband-and-wife team of Alan and Denise Fields.  It covers a relatively narrow category of real estate: purchasing a new house, with extra emphasis on overseeing construction.  In other words, rather than looking at a set of existing houses to find one that you like, working with professionals to build a house to your specifications.

The book has a lot of personality and is pretty enjoyable to read.  They stuff the book with anecdotes, a couple from their own experience and many more from readers who contacted them after reading earlier editions of the book.  This isn't a dry, detached, clinical look.  It self-advertises as being part caution, part information, and part rant. 

They don't put any effort into being "objective," and just call 'em like they see 'em.  They are relentlessly harsh towards builders and subcontractors.  If you take one thing away from this book, it will be the importance of choosing a good builder and watching them like a hawk.  They also sneer at real estate agents, only begrudgingly allowing that, in certain circumstances, it may be wise to find an exclusive buyer's agent.  On the other hand, they are generally glowing about architects, and speak fairly well about lawyers. 

Which does bring up an interesting point that they regularly raise: home-building is NOT a profession.  To become an architect or a lawyer, one must go to school for many years, study, and prove themselves.  Most real estate agents have no college degree, and anyone who picks up a hammer and (depending on the state) gets a license can become a builder.  I'm sure that there are bad architects and good builders out there, but when you consider how much money we spend on homes, it does seem pretty surprising that we don't have true systems for certifying professional builders.

While the breezy writing of the book is entertaining, it also makes it feel a bit loose and even untrustworthy.  In one example, the authors off-handedly mention that in an earlier edition of the book, they recommended that people frame their houses with 2x6 beams instead of 2x4s.  The reason for this was to permit more insulation, saving on energy bills.  Since the book came out, they had learned that the cost of the extra lumber and extra insulation was far too high, and the savings on lost heat far too low, for this to make sense.  On an average house, it would take about 75 years to recoup the extra money on materials.  So, never mind: 2x4s are fine!

Now, I'm delighted that they owned up to this mistake and talked through it, but it does shine light on a problem with this book: it's heavily anecdotal.  The authors aren't experts in the field.  Throughout the book, they're reporting what other people have told them.  Some of that is good advice; some of it is not.  You can't take this book as gospel.  Instead, you should treat it the same way you would treat a funny and opinionated guest at a dinner party.

That said, I am really glad that I read the book.  On the downside, it doesn't directly speak to my situation - the word "condo" isn't mentioned once in the entire book (fair enough, since it's "Your New House" and not "Your New Home"), and I won't have the opportunity to make many of the decisions they discuss (picking an architect, selecting a building site, etc.).  Nonetheless, all of those decisions will be made, and I now know how important it is to learn about them after the fact.  As a condo buyer I don't have as much choice, but that doesn't mean that the foundation is any less important, or that I should be less concerned about the builder's quality.

Probably the most valuable part of the book for me was the section towards the end that discusses the various choices available for components of the home: different styles of roof, materials for roofing, bathroom fixture manufacturers, siding, and so on.  Again, these aren't choices I'll be able to make, but after reading this book I now have a much better understanding of what the various options mean.  I now have a better understanding of the trade-offs between stucco, wood, brick, vinyl, and so on.  This extra knowledge will help me better evaluate various condo options and decide what I want.

Part of the book did make me seriously re-consider whether I wanted to stop being a renter at all.  The sections on builder scams and especially home-warranty fraud were especially distressing.  Once again, you would think that if you're spending so much money on something, you'd get some level of assurance of quality, but it's quite clear that a lot of people get into deep trouble.

That said, it's far better to read and think about these problems now than when I'm about to sign a check.  "Your New House" isn't gospel, but it is worth reading and thinking about.

Fannie Mae and Condo Mortgage Rates

Well, my second post and I'm already off plan!

I wanted to step back briefly from my personal search and also share/vent about larger issues that will impact me.  My current annoyance is the new financing rules from Fannie Mae.

Some background: most mortgage loans are made by banks, credit unions, or other organizations who typically keep the loan for a year or so, and then turn around and sell it to Fannie Mae or Freddie Mac.  This system has been in place for decades, and may be changing thanks to the government takeover of these companies.  Fannie and Freddie encourage loaning (and hence homeownership) by removing the risk of default from the people who make the mortgages.  If it weren't for them, then after you made a loan, you'd spend the next 30 years worrying about whether the loanee would continue making payments.  By selling the loan, you can clear your books and make a new loan.

Because of this power, Fannie and Freddie have enormous influence in how everyone else makes loans.  They won't purchase certain loans, and hence these loans will be more expensive, due to the increased risk taken by lenders.  The best example of this is the $417,000 limit in the size of a loan.  Traditionally, if you needed more money than this, you'd need to get a "Jumbo" loan.  "Jumbo" just meant "Too big for Fannie and Freddie."

Those of you who follow the news and/or listen to This American Life know that the loan-selling business is a big part of the reason why we got into the current housing mess.  Banks were making crazy loans because they wouldn't need to worry about whether people could make their payments over the next 30 years.  Fannie and Freddie's rules shielded them from the worst of this, but it was clear that they would need to be leaders on two fronts: on the one hand, continuing to purchase loans so the financial machinery that drives home-sales can continue; and, on the other hand, pushing out rules that will encourage more responsible loan origination.

In general, I'm fine with most of these changes.  For example, it makes a lot of sense to increase the required minimum credit score - more responsible borrowers are more likely to pay off their obligations, and so they should get the lowest rates.

What really ticks me off, though, is that the latest set of rules are anti-condo.  The single worst example: ANY condominium loan will AUTOMATICALLY be charged 0.75% more than a traditional single-family house.  That means that a 5% loan would instead be a 5.75% loan.  The rates climb even higher if you put down less than 30% (!!!) as a down payment.  And they may refuse to buy a loan altogether if the building includes rental units, or if there are commercial tenants.

I can imagine how they justify these rules: more condos have gone into foreclosure than traditional homes.  Once again, someone has forgotten a cardinal rule of statistics: correlation does not prove causation.  There isn't some mystical material in condominium buildings that makes them inherently more likely to cause the owners to miss payments.  No: they're more likely to be foreclosed upon because condos were the prime targets of the speculative boom.  When people were buying homes as investment properties, condos, with more affordable price tags and locations in major metro areas, were the best game in town.

The RIGHT way to fix the problem would be to focus on the root cause of the problem.  Make loans more stringent for people who are purchasing homes that will not serve as their primary residence.  And, again, make sure that borrowers are responsible (by requiring a 20% down payment and possessing a good credit score).  But don't take the lazy route of punishing all condos.

What is the effect of this change?  It's most drastic for - surprise! - people like me who live in high-cost regions with little available land.  A condo may be a lifestyle choice in a place like Chicago or Miami, but out here, it's the only game in town for people who can't slap down a cool million on a single-family detached home.  Far from being speculative tools for irresponsible investors, condos are a practical and conservative choice for first-time home-buyers.

What does this mean for me, personally?  First of all, I'm hoping that these rules change before I buy.  There seems to be growing public anger about the changes at Fannie and Freddie - not specifically due to the condo rules, but if Congress steps in to correct some other problems, I hope they will sanitize these as well.  Second, it means that I'll have to pay a higher rate, which means a less attractive home, or, in the worst case, no home at all.  An extra 1% won't kill me, but it does have a pretty dramatic impact on how much I can afford.  Third, over the long run, if it seems like these rule changes are here to stay, the net effect is that condos across the board will become less attractive.  Fewer will be built, and the ones that already exist will fall in value.  If I wait until after that finishes happening, then the net effect may be a wash for me - higher interest rate, but lower sales price, resulting in about the same total monthly mortgage check for the same unit.

I'll continue following this issue.  I was upset enough to write my representative and senators about this issue - there's no chance that my letter alone will make a change, but if enough homebuyers complain, we may see some action.  In the meantime, I'll continue my search, and hope for the best.

Origins

I intend to use this blog to chronicle my attempts to purchase a dwelling in the San Francisco Bay Area. The blog will serve several purposes. First, much like my primary blog, it is a journal of sorts, something that I use today to capture my thoughts and experiences in the expectation that I will re-read it years from now to get a fuzzy nostalgic feeling. Second, since this process will likely be long and confusing, I hope that by setting out my thoughts "in stone," as it were, I will be able to ground myself in the process. Merely by articulating what I want, I hope that I will be forced to fully understand my desires. And, months from now, I hope to be able to re-visit posts to remind myself of my priorities, and see if they have changed (unlikely) or if my judgement has grown clouded (much more likely).

For the most part, I imagine this blog as being an irregularly updated progress reports, perhaps with one or two posts a month, describing the home search. When things are slow, posts will be less frequent; when it picks up, I'll write more often or longer. In addition, I may write about more general thoughts that aren't tied to specific experiences but that seem relevant to my overall goals.

So, first things first: where am I right now?

I think I've more or less finished the self-education phase of my search. I have a very rough plan of action in mind that, if everything goes smoothly, should see me in a new home within a year. I have a pretty decent idea of what kind of building I want, and a slightly more vague idea of where I want to live.

Where do I go from here?

Again, I'm speaking very roughly here, but I'm thinking of applying for mortgage pre-approval in July and collecting real estate agent recommendations. I'd like to settle on an agent around August or September, and start touring homes a bit after that. Because I'm pretty flexible on my moving timeframe, I think the ideal time for me to move would be somewhere in the December to mid-February timeframe, which is traditionally when the market is slowest and prices are lowest. I'd like to be able to take action earlier if a great opportunity presents itself, though, and not feel pressured to buy by any particular time.

What am I looking for?

Several things are most important to me. One of the biggest is having good access to urban centers. I wouldn't be able to stand living in, say, the central valley and being a super-commuter. Ideally I would be able to get to my office in a very short time and minimize commuting. One complication here is that my office will probably change location before I do - either from changing jobs or because we've outgrown our space. So I'm really looking more at zones or corridors than points - identifying spots that will be most convenient to the most likely employment locations.

On a very related note, I'm focusing on public transit options. Right now I live more than 50 miles from where I work, but it's surprisingly bearable because of the transit options available. Distances that would drive me nuts to drive can be tolerated if covered by train or on bicycle. I'm not a fan of buses, but appreciate Caltrain and BART. Looking to the future, I expect that the coming decades will see a return to rising energy costs, and employers increasingly supporting transit by employees, meaning that as long as I can reach a major station nearby, I'll be able to rely on them to get me the rest of the way there.

Of course, work is only a part of what's important to me. Besides a convenient commute, I also want access to the things I enjoy doing. Fortunately for me, the entire Bay Area is rich in opportunities for things like hiking. Access to a public library and a farmers' market would be nice as well. One thing that would be much better than my current location is convenient access to San Francisco. I can easily get to the city for things, but getting home is more of an obstacle, especially late at night. It becomes a lot less convenient to take Caltrain late at night, and trains stop running entirely at midnight. It's frustrating to have to pass on fun-sounding events, speakers, concerts, plays, etc. when I know that I won't be able to make it home afterwards. I also hope to do more in the city when it becomes easier to go there. Even when it works out for me time-wise, on the weekends it takes over 90 minutes just to get into the city by train, and few activities are worth a 3-hour round trip weekend ride.

Going to San Francisco is a blast, but the truth is that I'm an introvert and ultimately a bit of a homebody... I enjoy going out to do specific things, but by default I spend much of my leisure time at home. As such, having a comfortable space is important. Something fairly quiet would be nice - finances dictate that I'll be getting a condo, so I'm not expecting complete silence, but the less noise the better; I don't want to be edged up against Highway 101 or above a Market Street hot spot. I don't need a ton of space, but it'd be nice to have at least as much as I have now, about 650 square feet... that's enough to comfortably store all the stuff I need, and feel like I have enough room to live, breathe, and move around. I do a decent amount of cooking, so a workable kitchen is important. I don't do much entertaining, so I don't really care about designer accents or anything like that.

And, since I'm paying big bucks to live in California, I want to be able to enjoy it. That means having some kind of balcony, porch, or small yard so I can take full, gleeful advantage of those warm and sunny February days.

One of my litmus tests is that I don't want to live anyplace where I need to mow the lawn. While I do like the idea of becoming a homeowner, the domestic tasks that come with being a houseowner - mowing, painting, gardening, and so on - don't do anything for me. I can't say that they never will, but right now I just feel like there are a lot of things I would rather spend my time and attention on than looking after a physical property. Because of this, and because they're (relatively) cheap, I plan to buy a condominium.

So, there you have it, my first take at what I'm looking for. Coming soon: locations currently under consideration.