The Daily Herald from Arlington Heights, Illinois on March 9, 2008 · Page 138
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The Daily Herald from Arlington Heights, Illinois · Page 138

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Sunday, March 9, 2008
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PAW 4 SKCTION 3 DAILY IIF.UAM) SUNDAY, MARCH 9, 2008 THE WALL STREET JOURNAL ill A Good Time to Buy a House—If You Can BY SHELLY BANJO F inally, it's a buyer's market out there. For years rapidly rising prices kept many first-time home buyers out of the housing market. But as home values slide further downward and interest rates hover at relatively low levels, it may be time to start looking to buy that first house. That is, if you have a secure job, can afford higher down payments than were required a few years ago and can meet lenders' much stricter income and credit requirements. "Lenders aren't cutting everyone off. They're reverting to sanity after years of making bad loans," says Dick Lepre, senior loan officer at Residential Pacific Mortgage, in San Francisco. The U.S. median home price was $201,000 in January, down 4.6% from January 2007. The S&P/Case-Shiller national home- price index for the fourth quarter was down 8.9% from a year earlier, the biggest drop in its 20 years. Prices have plunged 10% to 12% in troubled markets like Florida and California, and many economists predict an overall slide of 20% or more before the housing market bottoms. There was a 10-month supply of existing homes for sale in January, up from just under five months during boom times. If you are about to get into the housing market, this is all good news. But before you begin visiting open houses, recognize that the old home-buying rules no longer apply. You want to approach buying your first house with a financially realistic point of view. Remember: You're investing in a place to live, not speculating in the stock market or even putting money into a savings account. So keep it simple. Buy smarter. Buy cheaper. Determine what you can afford. "The days of easy money are over," says Jeff Bogue, a fi- nancial planner in Wells, Maine. Mortgage lenders have tightened their standards and are requiring larger down payments. Typically, they want buyers to spend no more than 28% of their gross monthly income on mortgage payments, real-estate taxes and home insurance. To figure out how much you can afford, use online calculators at realestatejournal.com, dinkytown.com or bankrate. com and "get preapproved or preauthorized for a loan," Mr. Bogue says. Be sure you also have cash for closing costs like legal fees and title charges. The total typically reaches 2% to 3% of the house price, but differs by state and mortgage product, says II- ona Bray, co-author of "Nolo's Essential Guide to Buying Your First Home." Also be prepared to pay for moving expenses and ongoing maintenance. Know your market. Gone are the days of "sure thing" home purchases when buyers would bid up prices and then watch the values of their houses soar like tech stocks in 1999. Today, if buyers are bidding at all, they're far more likely to insist on lower prices and to walk away if they don't get what they want. Now more than ever, location is crucial, down to the neighborhood and street level. Focus on good school districts, crime statistics and any impending construction or public works that could increase or decrease the value of a home. Conduct preliminary research online at Web sites like Zillow. com, Trulia.com and greatschools.net. "Eighty percent to 90% of housing prices can be explained by what's happening in local economies. Take a hard look at job growth and neighborhood conditions," says Patrick Newport, an economist at Global Insight in Waltham, Mass. Make your dollars count. Although conditions vary by market, look for a home that is significantly lower than its 2004 price. (You can ask real-estate agents for information and check estimated historical values at Zillow.) "From the peak to trough, home prices in some markets will drop 35% to 40%," says Christopher Thornberg, a principal at Beacon Economics, a consulting and research firm in Los Angeles. Haggle. Don't assume the seller is even in the right ballpark with his asking price. Most real-estate agents and sellers only look at comparable sales prices, or "comps," of similar homes in similar neighborhoods. Take a lesson from property investors and appraisers in- HEALTH COSTS | By Jilian Mincer Dealing With Out-of-Network Costs G oing out of network for medical care is sometimes unavoidable. But it can be a lot more expensive than dealing with doctors and hospitals in your health plan's network of providers. Ideally, you should clarify potential costs before starting treatment. You may also be able to trim your out-of-pocket costs by setting aside money in a tax-advantaged flexible spending account or health savings account. Last year, three out of four workers were covered by health plans that provide both network and out-of-network options, according to a Kaiser Family Foundation survey. When consumers go to doctors and hospitals within a network, they get "access to discounts that have been negotiated on their behalf," says Fred Laberge, a spokesman for Aetna. Depending on the plan, an individual might then be responsible for, say, 20% of the cost, before deductibles and out-of-pocket maximums are figured in. By contrast, when people go out of network, the plan typically pays a percentage of the "reasonable and customary" rate charged for that service by doctors in the area. If a particular doctor charges a higher fee, the patient must pay that additional cost. "The consumer would be responsible for 100% of the difference between usual and customary charges and the provider's actual charge," says Catherine J. Weatherford, executive vice president and chief executive officer of the National Association of Insurance Commissioners. Are Rates Too Low? The issue of what is "reasonable and customary" has come under considerable scrutiny recently. While it is supposed to be the average cost for your area, sometimes it's far less, consultants and others say. New York State Attorney General Andrew M. Cuomo is investigating whether some of the nation's largest health insurance companies are defrauding consumers by manipulating reimbursement rates for out-of- network care. He issued a new round of subpoenas last week. Mr. Cuomo said last month that he plans to sue UnitedHealth Group, which has a unit that supplies pricing data to other insurers. UnitedHealth spokesman Tyler Mason says, "We are in the midst of talks with the attorney general's office, and we will continue to fully cooperate." If you are contemplating going out of network, you can determine ahead of time from your insurer the "reasonable and customary" fee. Ask your provider for the "current procedural terminology" code for the expected services. The insurance company uses that CPT code, along with the doctor's or hospital's zip code, to deter- mine a figure. Mr. Laberge of Aetna suggests you also ask the doctor's office its charge for the procedure. You can compare that with the benchmark to estimate your out-of-pocket costs. Some insurance companies have online tools that consumers can use to compare "estimated costs" for network and out-of-network providers in their area. Ways to Save Paul Fronstin, director of health research and education programs at the Employee Benefit Research Institute in Washington, recommends setting aside cash for out-of-pocket expenses in a flexible spending account or a health savings account, if your employer offers one. Those enable you to pay qualified medical expenses with before-tax dollars. When medical bills arrive, examine them closely for errors. For instance, an incorrect zip code could result in a lower reimbursement rate. Additionally, keep all receipts for medical services, whether in- or out-of-network. That's because you may qualify for a tax deduction for your out-of-pocket medical spending. Email: forum.sunday@wsj.com Pick a Winner in a Tough Market I n a slowing economy, can you pick a stock that will be a winner over the next six months? It's time to try in our new Investment Dartboard game and let others see just how good your investment instincts are. In Contest No. 31, as in the past, six readers' picks will vie with a portfolio picked by Sunday Journal staffers tossing darts at the stock listings from the newspaper. The last day to enter will be Sunday, March 23. The winner among the six readers for the six months April through September 2008 earns lifetime bragging rights arid a Sunday Journal tote bag. Reader and dart choices will be announced Sunday, April 13. The rules: —Choose just one stock from the NYSE or Nasdaq markets and send your choice to the sundaydartboard@wsj. com email address. —No entries by regular mail. —You must include your name, address, daytime phone number, email address and the name of the local newspaper where you read Sunday Journal. —Brokers and other investment professionals can't compete. Neither can people previously chosen as contestants. —You must be willing to be interviewed. stead and check out prices from other angles as well. Consider what it would cost to buy land and build a comparable structure. Insurance companies can provide general cost estimates, but for a thorough assessment consider hiring an appraiser (search online by zip code at Appraisallnstitute. org). Also compare your estimated monthly costs for the mortgage, taxes and other expenses with the cost of renting a similar place nearby. If you can rent virtually the same house for a much lower cost, the seller is asking too much. Builders, sellers and banks are eager to unload unoccupied houses, giving the buyer more leverage to ask for lower prices or incentives. And don't overlook REOs ("real estate owned" properties) held by lenders, says Patrick Carey, executive vice president of default and retention operations for Wells Fargo. No Money Down? Sorry. BY AMY HOAK Buy for the long haul. "Most first-time home buyers don't buy the house they're going to end up in," says Ilyce Glink, author of "100 Questions Every First- Time Home Buyer Should Ask." But experts suggest that in a downward market, people should purchase a home only if they intend to live there for seven to 10 years. "Historically, housing bubbles have taken several years to deflate, but it's hard to tell if we'll see prices drop a lot in the next two or three years or see moderate drops over the next 10 years," says Mr. Newport, the economist. If you're not planning to stay in the house for long, he notes, "it may be wise to watch from the sidelines." P rices have dropped since last year when Greg Sax bought his St. Paul, Minn., home. But the 37-year-old first- time home buyer still feels lucky he made the move when he did. He was able to finance his purchase with no money down. And after talking with real-estate professionals in his job as communications manager for the Minneapolis Area Association of Realtors, he's not so sure he'd be able to secure that 100% financing today. "If we had to put 10% or 20% down, we'd probably still be renting," he says. Financing Challenge Falling prices in many parts of the country have improved affordability for those interested in becoming homeowners _ for the first time, but financing the purchase has become a big- chal- SPECIAL REPORT BUYING YOUR FIRST HOME ger lenge. Lenders, larger down payments and higher credit scores, criteria that can trip up first-time buyers. It's typically first-time buyers who have the toughest time scraping together a down payment. According to the National Association of Realtors, 45% of first-time home buyers opted for 100% financing between July 2006 and June 2007. The median percentage that first- time buyers financed was 98%. No-down-payment loans "are still happening, but with a lot more restrictions than before," says Barton Pitts, president of Downers Grove, Ill-based Professional Mortgage Partners. Borrowers today are going to have to verify their income and verify their financial assets to lenders, says Frank Nothaft, chief economist for Freddie Mac, the government-sponsored mortgage agency. A FICO credit score of 660 to 680 is now the minimum most lenders will consider to prove your creditworthiness, he says. "It's the standards of maybe a decade ago," he adds. The new lending realities make it especially important for first-time buyers to talk to a mortgage professional prior to the start of any home search, Mr. Pitts and others say. "Know exactly where you stand going in," he says. There are no one-size-fits-all rules to mortgage requirements; your profile as a borrower will depend on factors such as credit scores, income levels and cash reserves. But some in the industry figure that many borrowers will need about a 5% down payment on a typical loan these days. Looming 20% Down Others are predicting heftier restrictions to entry: According to Guy Cecala, publisher of the industry newsletter Inside Mortgage Finance, a first-time buyer in many markets will soon need even more money down—perhaps 10%. "And I think before too long we're going to see it up to 15% to 20%," he adds. But all hope is not lost for those who don't have the capital to make a substantial down payment. For one, some prospective home buyers might consider a mortgage backed by the Federal Housing Administration. FHA loans require only a 3% down payment, which can be a gift from friends or family. To be eligible, the home price has to be under a certain loan limit, and that varies by location. Amy Hoak writes for Market- Watch. See more stories at MarketWatch.com GETTING GOING The Joy of Building Your Own Portfolio By Jonathan Clements T here's nothing like home cooking. Folks are increasingly turning to ready-made investment mixes, such as target-date retirement funds, which offer a complete portfolio in a single mutual fund. And I think that is a smart move for many investors. Still, there's a lot to be said for building your own fund portfolio, which allows you to fine-tune the risk level and tap into more exotic sectors. Intrigued? Here's a seven- step recipe for cooking up your own investment mix. 1 Splitting Up -L Begin with a key decision: Your basic split between stocks and more conservative investments. This is the biggest driver of your portfolio's risk and return. The classic balanced portfolio has 60% U.S. stocks and 40% high-quality U.S. bonds, and that's a good starting point. Aggressive investors might hold 80% stocks, conservative folks might opt for 40%—and the rest of us should probably be somewhere between those two extremes. n Heading Abroad Lt Next, consider how much to invest in foreign shares. I generally suggest stashing 25% or 30% of a stock portfolio overseas. A decade ago, readers would complain that this was too aggressive. Now, I regularly hear folks advocate investing half a stock portfolio abroad. Could this sudden enthusiasm reflect the great foreign-stock returns of recent years? You'd better believe it. I would stick with 25% or 30%. The fact is, you save and invest now so you can consume later. Come retirement, most of your spending will be on U.S.-produced goods and services, so it makes sense to keep the bulk of your nest egg in U.S. assets. O Fighting Inflation *-* Inflation-indexed Treasury bonds strike me as overvalued right now. Nonetheless, as a long-term target, I could see earmarking half a bond portfolio for inflation bonds, with the other half going into conventional high-quality U.S. bonds. The reason: Inflation-indexed Treasurys are a great diversifier. Conventional bonds fare best when interest rates are falling, but they can get ravaged at times of rising interest rates and accelerating inflation. During these rough spells, inflation bonds may deliver offsetting gains, because their principal value is stepped up along with the consumer price index. Put it all together, and your portfolio might have 45% U.S. stocks, 15% foreign shares, 20% high-quality U.S. bonds and 20% inflation-indexed Trea- surys. For your stock exposure, consider purchasing a U.S. total- market index fund and a broad- based foreign-stock index fund. A Seeking Value rt Want to get more sophisticated? Try tweaking your U.S. stock allocation. For instance, you could stuff 5% of your total stock portfolio into real-estate investment trusts. This would work out to 3% of your overall portfolio, assuming a 60-40 stock-bond split. You might also make style bets, shifting 10% of your stock portfolio into large-company growth shares and another 10% into a small-company growth fund. Alternatively, you could tilt the other way, adding large- and small-value funds. Many experts favor the value tilt, because value has outperformed historically. £ Traveling Far O You might also tweak your international stocks, parking 5% of your total stock portfolio in international small-cap companies, 5% in emerging markets and 5% in foreign real-estate shares. These funds should better diversify your portfolio, because you're getting away from the foreign multinationals that dominate most mainstream for- eign-stock funds. These multinationals typically have big U.S. business interests, so they may not perform that differently from U.S. shares. 6 Going Into Debt What about your bond portfolio? You could get cleverer there, allocating maybe 10% of your bond portfolio to sectors such as foreign high-quality bonds, emerging-markets debt and U.S. high-yield junk bonds. With a 60% stock-40% bond split, these bond-sector bets would each be equal to 4% of your overall portfolio. Suddenly, things are getting pretty complicated. Your 45% in U.S. stocks might include 30% in a U.S. total-market index fund, 6% large-company value, 6% small-company value and 3% real-estate investment trusts. Meanwhile, your 15% foreign- stock holdings might consist of 6% in a broad-based foreign- stock index fund, 3% international small-caps, 3% emerging markets and 3% foreign real estate. Finally, for your 40% in bonds, you could have a mix of 14% high-quality U.S. bonds, 14% inflation-indexed Trea- surys, 4% foreign bonds, 4% emerging-markets debt and 4% junk bonds. ij Getting Real I On top of all this, think about siphoning off a little money from both your stocks and your bonds, so you can allocate up to 5% of your total savings to a gold-stock fund or a commodity fund. These "real" assets may generate gains when financial or political turmoil rocks the rest of your portfolio. At this point, you're looking at 14 different sectors and hence 14 different mutual funds or exchange-traded index funds. Too many? There's no need to buy all, or even any, of the sectors listed in step No. 4 onward. And you could always take the easy route—and simply buy yourself one of those target- date retirement funds. A separate "Getting Going" appears each Wednesday in The Wall Street Journal. Email: jonathan.clements@wsj.com

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