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Open House

How 2006 Could Stretch Your Budget

Aired December 31, 2005 - 09:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

RANDI KAYE, CNN ANCHOR: New York City is buzzing with excitement as workers make final preparations for tonight's New Year's Eve bash. Dozens of streets are being closed, and security is tight. No backpacks or alcohol will be allowed.
CNN'S Anderson Cooper will be live from Times Square tonight with music, memories, and a whole lot more. Coverage starts at 11:00 p.m. Eastern.

Will 2006 usher in more high energy prices? And what impact will Hurricane Katrina have on future housing costs? Next on "OPEN HOUSE," how your budget may be stretched in the new year.

GERRI WILLIS, HOST: Investors, brokers, bankers, they were the big winners in 2005. But 2006 can be the year for you.

Good morning, I'm Gerri Willis. Today on OPEN HOUSE, we'll look at your chance to fight back against crazy prices, dangerous mortgages, and out-of-date insurance plans, all on the heels of a year when home grabbed the headlines.

(BEGIN VIDEOTAPE)

WILLIS (voice-over): Along the Gulf Coast of Mississippi and in New Orleans, thousands of homeowners found they didn't have the right insurance.

BOBBY NIGUES: They mainly think this is flood damage, but if you look around, and you see parts of my roof in trees, parts of my roof over here and there...

WILLIS: The debate over what to do after Hurricane Katrina rages on, but at least one lesson has been learned. The feds are updating the list of designated flood zones.

This year, we've seen a shift in the market. We met Chris Brunt of suburban Detroit, who sold his house at a loss after lowering the price three times.

CHRIS BRUNT, SUBURBAN DETROIT HOMEOWNER: We expected to have it sold, you know, four to six months ago.

WILLIS: Stories like that led even the housing industry's top cheerleader to say the market has hit its peak.

DAVID LEREAH, NATIONAL ASSOCIATION OF REALTORS: Well, it is the peak of the boom. The boom is winding down, though, to an expansion. WILLIS: And that's been welcome news to home buyers, who might be able to expect perks when they buy.

RON PHIPPS, RHODE ISLAND REALTOR: The buyer of this particular house can, if he or she chooses, enjoy the benefit of this car for two years.

WILLIS: Homeowners faced losing the mortgage interest tax deduction when a presidential tax overhaul panel recommended getting rid of it.

JEFF KUPFER, PRESIDENT BUSH'S TAX PANEL: By making housing such a tax-favored investment, it really distorts the amount of investment that goes into the housing market.

WILLIS: Though no final decision has been made, homeowners and their representatives in Congress stood firm, agreeing with the mortgage industry to keep mortgage interest deductible.

DOUG DUNCAN, MORTGAGE BANKERS ASSOCIATION: I'm a pretty strong believer in the common-sense levelheadedness of middle America. And they seem pretty firmly attached to the benefits of the mortgage interest deduction.

WILLIS: And just this month, federal authorities said they'd launched Operation Quick Slip. It's a major crackdown to protect homeowners from the fast-growing crime of mortgage fraud.

ANDRE MARTIN, IRS DIRECTOR OF OPERATIONS: You have a hot market for a number of years running now in the real estate industry. You couple that with the explosion in refinancings, you just have the, you know, the perfect climate for criminal activity.

WILLIS: Crackdowns, new rules, evolving markets, shaping 2006 into the year of the buyer.

(END VIDEOTAPE)

WILLIS: So let's answer that $64,000 question. What's 2006 going to bring?

Joining me now from San Francisco is Brad Inman, publisher of "Inman News." It's an online real estate newsmagazine. And right next to me is Mike Mandel, chief economist of "Businessweek."

Welcome to both of you.

MIKE MANDEL, CHIEF ECONOMIST, "BUSINESSWEEK" MAGAZINE: Thanks very much.

BRAD INMAN, PUBLISHER, "INMAN NEWS": Hi, Gerri.

WILLIS: Hi, there.

So I want to start with you, Mike. Let's talk about 2005 first. What was the biggest surprise economically? MANDEL: Well, the biggest surprise that we had a combination of a strong economy and low interest rates. Nobody would have predicted that. So when you had a lot of jobs, you had a lot of growth, low interest rates, it is the classic formula for a housing boom.

WILLIS: And that's certainly what we got.

Brad, to you now. What was the biggest surprise for you this year, 2005?

INMAN: I think the fact that rates stayed relatively stable, Gerri. A lot of people were predicting they would jump up. And while they did slightly, not dramatically.

The other thing that really blew me away was the pace of new construction. The housing market craze just caught on. We saw conversion of churches and schools. Give you an example, my hometown, southern Illinois, Gerri, a town of 5,000 people, they converted my grade school to condos.

So this isn't just happening in New York City, San Diego, Las Vegas. This is around the country. There's a housing craze. And I just never thought it would get this crazy.

WILLIS: Brad, it's true. It's really a local market. But I think what's interesting about that is, you still have differences all over the country.

Mike, I know you've been thinking about local economies and places where the job market is growing and where it's contracting. That has a huge impact on the housing market. What's in your crystal ball?

MANDEL: You know, when you're looking ahead, there's two things you need to worry about. One is where there's lots of jobs and where there's few jobs. So, for example, in Michigan, the Midwest, which has a manufacturing problem, you may see a weak housing market, even though housing prices haven't risen that much.

The other problem, you know, Brad mentioned all those places where they've been building. You look around the country, and you see places like Los Angeles and Riverside and San Diego and Phoenix and places like, even like Baltimore, lots of construction. That's really dangerous, because when that construction slows down, the jobs disappear also.

WILLIS: And that's a really big part of the local economy, right? I mean, people...

MANDEL: That's right.

WILLIS: I mean, people can get how much housing adds to the local economy. If you take that out, if it slows down, it really means the local economy tanks.

MANDEL: And then that has a negative effect on housing prices. It becomes a negative circle on the way down. People don't realize that. They sort of look at the -- they look at the housing demand, they say, Oh, it's strong. But they don't realize how much of the housing demand is actually the result of the jobs created by housing construction.

WILLIS: By housing itself.

Brad, you want to weigh in on that? Because I know you spent a lot of time thinking about the red-hot markets. What about the markets that are already kind of poised to tumble? What do you see out there?

INMAN: Well, I'm in San Francisco, and I walked here. And we have condos going up everywhere. And there's a couple examples. It's kind of a secret, but some of the condo developers are starting to -- I wouldn't call it a fire sale, but they want to unload. They're nervous as well.

Everyone's wanting to know what will happen in Q1 of '06, because the last five years, the first quarter of the year, has just been an absolute boom in the housing market. And if this doesn't start out the same pace around the Super Bowl, people are going to get real nervous.

And I think you're going to see some deals for homebuyers in some of these urban areas with all these the condos going up, because it's not just new, it's conversions.

WILLIS: Right.

INMAN: I saw an example of a motel in Long Beach that was converted to condominiums. So the supply is just really going to come on strong in the first half of the year. And I don't think there'll be as many buyers as the last few years.

WILLIS: So, Brad, you're talking about fire sales here, and secret fire sales that aren't really getting a lot of coverage. You said it's happening in San Francisco. Is it happening elsewhere as well?

INMAN: Yes, I don't want to overplay it. I'm just -- we hear stories of new developments where they're trying to unload the units in anticipation of too much supply next year.

They don't like to advertise this, because it suggests there's something wrong with the market, or something wrong with the building. But I think you're going to see more of this, because there's just too many units going up in these markets. And I just don't think there's enough buyers.

So the good news for buyers is, the party's over for sellers, finally.

WILLIS: OK.

INMAN: They have to sober up. And buyers now have a shot at getting a pretty good deal, I think, this coming year.

WILLIS: Well, and, you know, THERE'S always opportunity when somebody has a problem, right?

You say the free champagne is over, Brad. But Mike, I want to turn to you now and play contrarian for just a minute.

MANDEL: That's right.

WILLIS: Turn back the clock. Last year this time, the year before that, everybody said, interest rates are going go sky-high, the market's going to tank, real estate is over. Are they going to be right this year? And why this year as opposed to any of the previous two?

MANDEL: The big worry here, as Brad says, is all the excess construction. That's the real overhang on the market. You had -- and some of those years that you mentioned, there wasn't a lot of construction. Then it kind of ramped up. And now you have a situation where the stuff is coming online like a fire hose.

So all that you need is a little bit of a slowdown in demand, and then the prices start to drop. And you know the way that people are buying now, because they expect prices to go up more in the future: What's going to happen is, the buyers will step back.

They'll wait. They'll say, I'll wait till it drops further. And then all of a sudden, you'll see, in some parts of the country, their prices will start to plummet more than anybody expected.

WILLIS: Wow. Mike, OK, so weigh in here. I want you to give me a real-world expectation. Next year this time, you're standing on the set, will have seen median home prices go from, what, $218,000 to what?

MANDEL: Well, you'll see a little bit of a drop in median home prices. I mean, you know, I can't say what it is. But it'll be the first drop that anybody's really seen.

WILLIS: That's pretty dramatic.

MANDEL: And that will be dramatic. And in some parts of the country, deep.

WILLIS: All right. And quickly, Brad, your forecast for 2006. What happens to home prices? What happens to home sales?

INMAN: I think the medium or average is going to be flat, Gerri. I think condominiums are going to see -- get hit very hard. And I think the high end of the market, the very luxury homes, could get hit hard as well.

But, you know, buying a home is still the best investment. Government subsidizes it. Rates are relatively low. So for people that are making a long-term investment, real estate is still, particularly residential, a smart investment. WILLIS: All right.

INMAN: But I think the go-go days are over.

WILLIS: The go-go days are over. Well, we'll leave it at that. Brad Inman, Mike Mandel, thanks to both of you for joining us today.

INMAN: Thank you, Gerri.

WILLIS: Coming up on OPEN HOUSE, what's up with mortgage rates? We'll find out where they're headed in 2006.

And later, money-saving strategies. Trust me, your wallet's going to love this.

OPEN HOUSE will be right back.

(COMMERCIAL BREAK)

WILLIS: OK, even in the year of the buyer, you still have to make smart moves. Mortgage rates are still historically low, but they are on the rise, and the Mortgage Bankers Association predicts they're going to keep on going up.

To help sort out your best strategy, let's take a look at the map.

The MBA says the one-year adjustable rate will rise to 5.4 percent by the middle of next year. That means if you've got a $250,000 one-year adjustable rate mortgage just last year at 3.9 percent, you were paying $1,179 a month.

Now, next year, at 5.4 percent, you'll be paying more than $1,400 a month. That's a difference of $2,700 a year.

Fixed-rate mortgages are expected to do no better. The 30-year fixed has stayed above the 6 percent mark since October. That's its highest rate since June of last year. It means right now, a $250,000 30-year mortgage is costing you at least $2,000 a year more than it would have cost in 2004.

So what's your best move in 2006? Joining me now from West Palm Beach, Florida, for a look is Greg McBride, senior financial analyst at Bankrate.com.

Greg, welcome.

GREG MCBRIDE, SENIOR FINANCIAL ANALYST, BANKRATE.COM: Thank you, Gerri.

WILLIS: You know, I think every year this time, you and I get together, and we talk about how mortgage rights are going to go through the roof next year. And it, you know, it really didn't happen this year, let's face it. Why not?

MCBRIDE: Well, they didn't. They did go up a little bit, but they didn't go through the roof, and which, you know, at the end of day, that's a really good thing for buyers and sellers alike.

But the main reason is the Fed has been very active in raising short-term interest rates to keep inflation under wraps, and the other thing is that there's a lot of money flowing in from overseas. Investors in Germany and Japan see higher interest rates here in the U.S. They're pouring a lot of money into the U.S., AND that's keeping those long-term interest rates that dictate where fixed mortgage rates go, keeping those at very low levels.

WILLIS: Greg, were you surprised by this sort of, guess you'd say, lack of a move?

MCBRIDE: You know, I was surprised that they didn't go a little bit higher than they have. But keep in mind that the first nine months of this year, there were just four weeks where the average 30- year fixed rate was above the 6 percent mark. Now, since the end of September, they've been above 6 percent every week.

So it was a little late in coming. Mortgage rates did make that move. And, I mean, I think we're above the 6 percent mark to stay. And as 2006 unfolds, I think we'll see rates trend higher.

WILLIS: Higher, how much higher?

MCBRIDE: Not considerably higher. I mean, when you look at them, say now versus the beginning of 2005, mortgage rates went up about a half a percentage point. I think something on that order is in -- is on tap for next year as well. Maybe a move from what is now about 6.3 percent to the high 6 percent range, maybe 6.8, 6.9 by the close of 2006.

WILLIS: Well, let's put this in context, Greg, because all of my friends say, Oh, my goodness, interest rates are so high now, I can't believe it. And I tell people, compared to the long-term average, they're really not that high. Can you help people understand what this number means?

MCBRIDE: It's really all relative, isn't it? The long-term average for a 30-year fixed rate, believe it or not, is something close 8 percent. Now, we haven't been in that neighborhood in a long, long time, and we probably won't be in that neighborhood for quite a while.

But that doesn't mean that rates still won't seem high, especially when we've spent so much time below the 6 percent mark over the past several years.

WILLIS: Right. It's easy to get addicted to those rates. They're so attractive. It's good for you not just a homeowner, or somebody getting a mortgage. But if you have a credit card, an auto loan, it's meaningful on so many levels.

Tell me what people should be doing now, because rates are going to be rising? Is there any move, not just with your mortgage, but in your consumer life? Things you should be doing because rates will be higher. MCBRIDE: I think in general, here's where you don't want to be. You don't want to be tied to variable interest rates, whether that's an adjustable rate mortgage, a home equity line of credit...

WILLIS: Uh-oh.

MCBRIDE: ... or even credit card debt.

WILLIS: Well, and that means that some people are going to be in trouble, right?

MCBRIDE: Yes. Unfortunately, they will. I mean, and, you know, I think the move to make now is, run, don't walk, to your lender, and refinance adjustable rate debt into fixed rate debt. And do it now, before those fixed rates move even higher.

If you hold on to that adjustable rate too long, you may end up with a mortgage payment that's higher on an adjustable basis than it would be if you just locked in a fixed rate now.

WILLIS: It's very dangerous for people who hold those loans. And obviously, I think fewer of those are going to be sold next year. What about other parts of your life besides your mortgage?

MCBRIDE: Well, you know, I think (INAUDIBLE) there's been a lot of people dining at the home equity buffet over the last several years, because of low interest rates. And the lion's share of that has come on variable rate home equity lines of credit. Those have been stepping higher over the course of the last year and a half as the Fed has raised rates.

I think the first half of 2006 we'll see more of that. So again, if this is not something that you plan on retiring in the first quarter of '06 with a big bonus or some windfall, then it's time to think about refinancing that into a fixed rate, so that you have a manageable payment...

WILLIS: All right.

MCBRIDE: ... not only now, but for years to come.

WILLIS: Greg McBride, thank you so much for joining us. And happy New Year.

MCBRIDE: Happy New Year to you, Gerri. Thank you.

WILLIS: Two thousand and five was very, very good to homeowners, let's face it. You could have done nothing but sat on your couch all year, and still have reaped a 12 percent gain on your home without doing squat.

But history isn't likely to repeat itself. That means that you'll have to make some very smart moves in 2006 to get the most out of your finances.

Start by taking a solemn vow that you'll get your debt under control this year. The average family has some $9,300 in credit card debt. That's a lot. And they pay $1,000 in interest every year. Now, for that amount of money, you could go on a much-needed vacation, or actually reinvest in your property.

Number two, the first boomers, unbelievably, are turning 60 tomorrow. With any luck at all, retirement could be around the corner. But you won't get a chance to put your feet up unless you have enough savings.

To get an idea of how close you are to having a big enough nest egg, check out T. Rowe Price's retirement calculator. It's simple to use, and if you need more dough, this is the year to set up an additional retirement savings account. Roth IRAs still tend to be the best vehicle out there for most people.

And finally, home prices could stagnate or maybe even fall in your area this year. That means building the value of your home can't be left to the whim of the market. It's up to you to decide what upgrades to make. When you do, make sure you consider how much time you plan to spend in your castle and what the market is likely to bear in coming years.

Bottom line here, don't boost the value of your house beyond the value of your neighbors' homes.

Coming up, could you save $100 a month? It may not be as tough as you think. We'll show you how, when OPEN HOUSE returns.

(COMMERCIAL BREAK)

WILLIS: OK, nothing can be better than ringing in the new year with some extra cash in your pocket. A few easy changes around the house could save you $100 a month without cutting back on your lifestyle.

Everyone could use a little extra money each month, and without realizing it, you're probably spending more than you need to for the services you use every day.

Filling up your car can a painful experience, as can searching for the cheapest gas in town. Web sites like GasBuddy.com can show you where people are finding the lowest prices in your neighborhood.

Also, keep your car in tiptop shape. Properly inflated tires and a well-tuned engine will improve your mileage. And take that junk out of your trunk. The extra weight is costing you at the pump. You could save up to $35 a month.

Back at home, your electric bills are probably climbing, but there is an easy way to save every month.

MATT DEAN, ASSOCIATION FOR ENERGY AFFORDABILITY: One thing you can do is install CFL lighting, compact...

WILLIS: Wow.

DEAN: ... fluorescent lights.

What we would recommend is that you would replace the five most- used lights in your home, per floor, with these bulbs. And...

WILLIS: How much do I save?

DEAN: You should save about 5 percent on your energy bill.

WILLIS: The bulbs cost about $4 or $5, but they can last 10 years, and you could save $5 a month.

If you already have a high-speed Internet connection at home, you could save by switching your home phone service to an Internet phone service. You use the same phone, but calls are carried over the Internet. You can get Internet phone service from your current phone company, your cable company, and others.

You could save up to $30 a month. But Internet phone service is new, and may not transmit your location to 911. So if you have children in the house, you may want to keep a basic landline.

Are you overinsured? Beyond health, life, home, and auto, many people are buying policies they don't need, and sometimes doubling up on coverage they already have. If you're buying flight insurance, car rental insurance, or credit card insurance, you're probably already covered.

Check your credit card, auto, and homeowner's policies first to make sure.

And sometimes, you don't need coverage at all.

BOB HUSBULDT, PRESIDENT, TRUSTED CHOICE: A lot of this stuff is a consumer ripoff. Credit life insurance is a perfect example. When you go to buy a car, and you need a loan, and the lending institution says, Check this box for credit life insurance, 90 percent or more of the people don't need that insurance coverage. It's a ripoff.

WILLIS: You could save up to $30 a month.

And remember, these tips are just the beginning. A hundred dollars 100 a month will add up over time, and there are plenty other places you can check to see if you're paying too much.

We'll have tips on saving for healthcare, travel, and more in 2006.

I'll be back with final thoughts for 2005 right after this.

(COMMERCIAL BREAK)

WILLIS: A final thought for 2005. Right now, the median price of a home in this country tops $215,000. Just one year ago, though, it stood at about $187,000. That's a gain of $28,000, and not a bad return for just one year. We want to hear from you. Send us your comments or your questions to openhouse@cnn.com, and you'll find more on today's guests and topics on our Web site, cnnmoney.com/openhouse.

Thanks for watching OPEN HOUSE. We'll see you here next week.

The day's top stories are next on "CNN SATURDAY."

Have a safe and a happy New Year.

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