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Open House

Buying a First Home; Cutting Your Budget

Aired November 03, 2007 - 09:30   ET

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

JOSH LEVS, CNN CORRESPONDENT: Finally, I want to mention this one, guys. The IRS is warning people about a fake e-mail claming to the help wildfire victims. People are getting this e-mail. It looks like it comes from the IRS. It says: just click this link, give us your bank account information and you can help wildfire victims. In fact, that's not what happens at all. And the IRS says, you know what, we don't send out e-mails as a rule with our emblem or our logo at the top. So, beware if you get one of those. You might want to report it to authorities. Do not click on it. Do not give your bank account information to anybody, and that's hot at the dotcom desk, guys.
NGUYEN: All right Josh, thank you for that.

HOLMES: We got a quick reminder here, today daylight saving time ends at 2:00 a.m. Remember to set your clock back, but we'll keep reminding you of that throughout the morning.

But also want to tell you again about what's happening in Pakistan. A state of emergency has been declared by the government there by President Musharraf, and also details we're just getting now, is that the Pakistani army has entered the Supreme Court building. We don't have many details about what that means, why they're going in, what they're exactly hoping to do. But the Pakistani army has entered the Supreme Court building. The Supreme Court was set to make a ruling about the legitimacy about President Musharraf's presidency. So, we will continue to follow that story, have more on you -- on that throughout the morning, but OPEN HOUSE with Gerri Willis we want to get that to you right now.

GERRI WILLIS, HOST: Welcome to OPEN HOUSE the show that saves you money. I'm Gerri Willis. Coming up, critical information for first-time home buyers that you won't want to miss.

And are you wasting money around the house? How to cut your budget without compromising your lifestyle. But first, folks across the country continue to lose their homes at an alarming rate. Foreclosures across the country rose 30 percent last quarter. That's one in nearly 200 households. According to Reality Track, one city particularly hard hit is Detroit, Michigan, where a lagging economy has damaged the housing market.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: Next property $157,000.

WILLIS (voice-over): A foreclosure notice on a wall in Detroit. The problem is there's not just one, there are hundreds of them at this sheriff's sale, and with each piece of paper, there's a story.

GIGI, RENTS FORECLOSED HOUSE: A man from the Fifth Judicial Court came out and served me the papers about a foreclosure of the house I'm living in, which is not my house, but I'm renting, and I was stunned. I have foreclosure? What's that?

WILLIS: Detroit and the rest of Michigan is deep in a housing slump. The state has the fourth highest foreclosure rate in the nation in September with one in every 314 homes.

MARK ZANDI, MOODYSECONOMY.COM: I think the problem for Detroit is the ongoing job losses in the very important auto industry. That's not going to stop. And until the hemorrhaging in autos ends, this economy is going to struggle.

WILLIS: Struggling so badly that in Motor City a house can be had for less than the price of a new car.

RALPH ROBERTS, DETROIT REALTOR: The cheapest house for sale or the most affordable house is the one that's standing behind me right now.

WILLIS: This three-bedroom home is on the market for $9,900, and it's been on the market for eight months, despite the low price tag.

UNIDENTIFIED MALE: Seventy-nine dollars, ninety-seven cents.

WILLIS: Prices are even lower at the sheriff's sale.

UNIDENTIFIED MALE: Next.

WILLIS: But homes aren't moving very fast here either. There just aren't that many buyers willing to invest in Detroit.

ZANDI: Eventually I think the lower housing values and the improved affordability will help stimulate increased economic activity, but that's not until later in the decade, perhaps not until the decade after that.

WILLIS: Gigi's problems are much more immediate.

GIGI: Really, what I came out to see is who's going to bid on the house and see where I have to go from there to get a roof over my head and I've got five grandchildren that lives with me.

(END VIDEOTAPE)

WILLIS: Well, in addition to having one of the highest foreclosure rates in the nation, Michigan also has one of the highest rates of mortgage fraud. As foreclosures continue to rise, community leaders are starting to speak up and demand to be heard. The reference Jesse Jackson is in Washington, D.C.

Reverend, good to see you again.

REV JESSE JACKSON, CIVIL RIGHTS ACTIVIST: Good morning. WILLIS: Now, I understand that you spoke with Federal Reserve chairman, Ben Bernanke, about this problem very recently. Did he say anything that would give us some cause for optimism, here?

JACKSON: Well, first of all, he is concerned. I think he cares very much. He has a future plan to deal with repayment capacity to deal with ability to pay and the like, but there is no present plan to deal with the enormity of the home foreclosure cris. The crisis in Detroit, 25,000 foreclosures in Chicago last month, 9,000 in Atlanta, 11,000 Riverside, California. And so there must be some commitment now to have massive restructuring of debt rather than massive foreclosing.

WILLIS: Well, Reverend Jackson, you stayed it. There should be some kind of answer, but is there, and what should happen?

JACKSON: Well, it seems to me that those who are running for the presidency ought make this a primary agenda item. They are attacking each other and chasing UFOs, but there's no bigger economic crisis than this issue that's facing us today because Michigan, for example, 20 percent of the foreclosures are Caucasian, 40 percent la at this know, 55 percent back, which means there's been some targeting, red lining, and steering aimed at minorities. But while that's a crack in the hull of the ship, those on deck are feeling the impact as well. I mean Stan O'Niel (ph) and Merrill Lynches had to round off $8 billion and he bit the dust just this past week. So, we need some convening of the major banks and Wall Street and the Congress to look at some much more massive plans. Unless we do, we're facing a giant economic recession.

WILLIS: Well, I'm glad you brought up the race issue, here. A study recently showed that racial minorities were more likely to receive subprime loans, those loans that have higher fees, higher costs. In fact, 4 in 10 racial minorities got prime loans, double the rates of white. Is this racism?

JACKSON: Indeed, it is. It's institutional racism, and it shows like of equal protection under the law. It even shows, in some instances, where white and the black of the same economic status, they steered the black to the subprime, but that level of exploitation is particular focus in a place like Detroit. But up around Livington (sic), Michigan, which is virtually all white, people there are going directly from a nice home to a shelter. So, in a real sense, American hard-working people trusted the financial system that has betrayed them.

WILLIS: You put the fault at the feet of the lenders here it sounds like. How do we find a solution, and do lenders have to pay some price, here?

JACKSON: Well, they must, but the way the bank sold off the pieces in some sense it's hard to find them. But, it's like if you're house is in foreclosure, my house loses value. So we're in extricable linked. So this is a national economic crisis. Usually these crises come when there is divorce, a health crisis, or loss of jobs. You see some of that in Michigan, but in a broader sense 2.2 million means that the product, the faulty ballooning product, drove the agenda. And so far we appear to be in national economic denial over just how vast the ramifications of the crisis is. I would think that those who are there running for the presidency now, Democrat and Republican, ought to put this issue in the center of their agenda as a measure of their capacity to lead on matters of substance.

WILLIS: Well, Reverend Jesse Jackson thanks for being with us. I hope the candidates hear your plea. Thank you so much.

JACKSON: Thank you.

WILLIS: Coming up, what not to do when buying your first home. Then, how does a fed rate cut impact you in your home from your mortgage to your 401k, what you need to know before making a move.

And are you wasting money at home? We'll show you how to save without compromising, but first your "Tip of the Day."

(BEGIN VIDEOTAPE)

WILLIS (voice-over): Finding a good tutor for your child can be challenging and pricey. Tutors can cost anywhere from 20 to $200 an hour. If private sessions seem expensive, consider small groups or online tutoring. These options are offered at most tutoring centers for less than private sessions. And some online homework help sites are offered for free. Check out Chatterbee's Homework Help Center or Mathnerds.com for free online homework hints.

But, remember your best resource is your child's teacher. He or she will be able to pinpoint the area in which your child is struggling and may have some advice on how to find an experienced, affordable tutor. That's your "Tip of the Day."

(END VIDEOTAPE)

(COMMERCIAL BREAK)

WILLIS: Well, you probably have seen the headlines. The fed cut interest rates again, this time by a quarter point, so what does it mean for your mortgage, your credit cards, your 401k. We've got help, Greg McBride senior analyst with Bankrate.com.

Greg, welcome back to the show. Good to see you.

GREG MCBRIDE, SR ANALYST, BANKRATE.COM: Thank you for having me, Gerri.

WILLIS: Who gets helped by this? A quarter point, not much, but it's on top of a 50 basis point cut not too long ago.

MCBRIDE: And that's really the way to look at it. It's a cumulative effect of what's two interest rate cuts. For example, if you have a $30,000 home equity line your savings is about $20 on a month on the back of both rate cuts, not just the one we had this week. WILLIS: OK, that's not nothing. That's good. You have something interesting to say, though, to people who have home equity lines of credit.

MCBRIDE: Well, you know, if you have a home equity line of credit, you're going to see that lower rate the next account statement. If you have a credit card, you'll see the lower rate, it's just going to take a little bit longer, it could be January of '08 before that lower rate filters though.

WILLIS: And you know, people don't realize if you have a variable rate credit card, you know, they can brick it right back up, they're not bound by what the Federal Reserve is doing, that's for sure.

MCBRIDE: Those default rate can be 30 percent, sometimes more. So, you really have to tow the line, make sure you're making your payments on time and don't exceed your credit limit.

WILLIS: You know, the thing we don't talk about when there's a fed rate cut, this is a downside for savers. This does not help you if you have money in money markets, CDs. It's not a good deal.

MCBRIDE: Savers typically cringe at the notion of the fed cutting rates because it means lower interest earning on those things you mentioned, the CDs and money markets. However, we're not seeing the same impact this time around. Ever since the September rate cut, the CD yields, the money marked rates are down only slightly and that's compared to what was a pretty aggressive move by the fed and an even sharper decline in benchmark treasury yields. So, banks are still very dependent on deposits. As an investor, we need to be shopping around to make sure we get those best deals.

WILLIS: Always shop around. I love that advice. OK. Is this going to be a magic bullet for the economy, for homeowners out there? I mean, you know, you know how much Wall Street loves a rate cut. It's like a big party down at the trading floor when there's a rate cut, but at the end of the day, does it mean that much to the economy or to homeowners?

MCBRIDE: To the economy, yes, to homeowners, no, not really. The fact is the housing market is going to continue to be a drag on the economy for some time. The fed realizes that. One of the rationales for the rate cut was to give the economy a bit of a boost so that we can weather the headwinds from the housing market.

WILLIS: Yeah, it's pretty tough. Let's talk about the best advice for folks out there given the fears for the economy. We continue to be worried about inflation, according to Ben Bernanke, the fed chief, he is worried about inflation. He's also worried about the economy slowing down. Given that, what do I do to my 401k and my savings, my IRA. What do I do with my house?

MCBRIDE: Well, in terms of savings, you need that emergency savings cushion, three to six months worth of expenses is ideal. Put money away every paycheck, so you can get to that destination. In terms of your 401k and your IRA, really the less you do, the better. One of the bad habits investors have is they jockey around with that money too much. That's detrimental to their long-term investment performance. You're much better off worried about Britney Spears for Lindsay Lohan instead of messing with your 401k.

WILLIS: Well, you know, that's why women are better investors because they don't move their money around so much. Thanks so much for being with us, today. Really appreciate it.

MCBRIDE: Thank you, Gerri.

WILLIS: All right, still ahead on OPEN HOUSE, what you need to know before buying your very first home.

Then, we're saving you money at home from childcare to pet care to odd jobs around the house, but first your mortgage numbers.

(COMMERCIAL BREAK)

WILLIS: OK. Buying a home for the very first time can be scary, but we have some really important info for you to help you through the process. Grab your pen and paper. Sandra Rinomato is a realtor and she is the host of HGTV's "Property Virgins" in Toronto.

Welcome, Sandra. Good to see you.

SANDRA RINOMATO, HOST, HGTV'S PROPERTY VIRGINS: Thanks, Gerri, great to be here.

WILLIS: Well, you know, I like your advice on people -- first time buyers who, of course, they're out there, they want to take advantage of this market, they want to buy their first home, let's start with the money, because that's one of the most important things. You say people, they're just not realistic when it comes to how much they're going to spend on that first home.

RINOMATO: Well, ideally they have to take a look at their budget and be realistic about it. Write down everything they're spending within a month-long period. This is way before they start their search, and analyze whether or not they're willing to give up those lattes or magazine subscriptions, whatever it is that they're spending their money on. Then figure out exactly how much they can afford to spend on a house.

WILLIS: I think that's so interesting, because you're saying don't change your lifestyle, right?

RINOMATO: Not necessarily. There are some people that I have consulted with that were spending hundreds of dollars a night at a bar. You know, that...

WILLIS: That's always bad news, right?

RINOMATO: Exactly. So, maybe cut down on that a bit and save some money for a down payment. WILLIS: OK. So you say -- of course, you want to spend about a third of your budget on housing. That's typically what the experts recommend, no more than that. Keep it in line obviously. But, let's talk about that starter home. You need to be realistic in shopping that starter home, picking something that you're not going to be there forever, right?

RINOMATO: Exactly. But, you want to, in this market especially, you want to make sure that you have some longevity there; you want to be able to spend a few years there. So if you're pregnant with twins, don't buy a one-bedroom condo apartment, so you can stay there and ride out any issues in the market like we have right now. But, also a single person maybe shouldn't consider a three-bedroom home. Maybe they should be looking at two-bedroom home that will work for them now.

WILLIS: How do you find a good realtor realtor? You're a realtor.

RINOMATO: A lot of people have talked to me at open houses interviewing me when I didn't know they were or in community work when I'm doing fund-raisers, but also word of mouth is huge, that's the best way to find a realtor. Find someone who has had a great experience that trusts their realtor and that's the best way to find one.

WILLIS: Well, you know, I'm wondering in this market, if you buy a home that's for sale by the owner, you may get an incredibly good deal. Isn't it a good idea sometimes to go out on your own when you're looking for that house? I mean the savings can be phenomenal.

RINOMATO: Why do you think the savings are phenomenal?

WILLIS: Because we're not waying for a real estate agent.

RINOMATO: So, the buyer doesn't pay the real estate fees anyway...

WILLIS: It adds to the price of the house.

RINOMATO: Right, but only one person -- that may be true and that may not be true. The seller wants to save the commission. So, why should the buyer save the commission?

WILLIS: Are there are times when it makes sense for buyers to go without real estate agents?

RINOMATO: I wouldn't advise it. First of all, as a buyer, you don't pay your realtor. You have a professional standing by to offer their expertise and their knowledge to you for free, no cost to you, and most importantly, I think, is the accountability. So they have to take care of you. Otherwise as a realtor we can be in big trouble...

WILLIS: Well, you guys do have standards that you're supposed to meet. You also have some interesting advice on online offerings for homes. You say people overuse these. RINOMATO: You know, the Web sites with housing has replaced pornography as the most popular thing to do late at night or possibly at work. And I don't think there's anything wrong with that. House porn, we're calling it. But I think that the problem comes from buyers who think that they can buy real estate without the use of an expert. They think that they have all of the information when, in fact, they're just getting the tip of the iceberg when it comes to information.

WILLIS: Well, Sandra, thank you so much for your help today.

Still ahead, how to save money at home without compromising your lifestyle, but first, your "Local Lowdown."

(BEGIN VIDEOTAPE)

WILLIS (voice-over): Portland, Oregon, the city of roses, ranked among the greenest places to live. Portland is one of the first U.S. cities to encourage green building initiatives and an active plan to reduce the O2 emission. And you can explore this paradise for free. Head to the International Rose Test Garden with over 8,000 rose bushes on display, this is the perfect spot for a picnic, and admission is always free.

Make sure you check out the free tours of Portland's local breweries, some even give free samples. And be sure to stop by Multnomah Falls. The scenic waterfalls drop 620 feet and cold winter weather can freeze the dropping water into an icle. That's your "Local Lowdown."

(END VIDEOTAPE)

WILLIS: Finally today, wealth, how to build it, save it, spend it wisely, and it all starts at home. Robert Frank is the author of "Richistan: A Journey through the American Wealth Boom and the Lives of the New Rich." Gosh, I wish I was one of them. I'm not.

You study their spending habits, though, which I think is really interesting. And folks out there who aren't rich are always thinking about things they need to do, want to do, can't afford. What's your advice to people out there if you're trying to get some help and maybe you don't have a lot of money?

ROBERT FRANK, THE WALL STREET JOURNAL: Well, the great thing is all of us have less time than we used to have. We're all very busy, and there are all these services today that offer people the help that only the rich used to be able to afford, but now they're affordable to everyone else, and it runs from childcare to lawn care to walking your dog.

WILLIS: All right. Well, let's start with childcare, for example. Now, I'm used to the old fashioned model, you go find the baby-sitter, pay them $8 to $10, you know, for an hour for some help. Is that the way to do it today?

FRANK: That's still the way to do it in many neighborhoods and that still works, and the rates have gone up a little bit, but that also goes up to the agencies that have started up around the country that offer some of the same services with references. So, if you can't find that kid on the block who does, it you can go to a respected agency, get a baby-sitter that has a good reference and hire them that way.

WILLIS: Do I pay more for the privilege?

FRANK: Oftentimes it's $3 to $5 more per hour, but again, if you're stuck, if that kid down the block can't do it, this is a good alternative.

WILLIS: Now, I got to tell you, I always end up being the pet care person in the neighborhood and I don't get paid for it, and I'm sure there are people out there who are looking for someone who don't have a neighbor like me. What do they do?

FRANK: Well again, there are some agencies out there that have standardized these services and offered them for $10 or $12 for a simple walk the dog or look in on a cat. But these can go all the way up to the pet spas that we're seeing now that, for instance, offer a dog manicure/pedicure, cut and wash for around $75. But again, there are all these agencies that do these things that if you're not around, for instance, other people can hire to do them for them.

WILLIS: Yeah, people are crazy about the people who take care of their pets. They want to make sure they're going to be safe, everything is going to be OK. Can we trust these agencies?

FRANK: Yes, and again it's important to get some references. Find out who their clients are now and talk to some people who've used that service and like it.

WILLIS: All right. Let's talk about yard work. Not everybody can do this. I mean, if you have anything other than a one-story house, a lot of folks cannot clean their gutters. You've got to get help. How do you do that and do it efficiently for the least amount of money possible.

FRANK: Right. Again, there are a lot of companies now that have great equipment that can come and mow your yard, take care of your flowers and your trees for somewhere between $10 and $15 an hour. That can go all the way up to this new crop of people called personal arborists, and these are people...

WILLIS: What? Wait, wait, wait, personal arborists?

FRANK: That's right, these are people who find trees from around the world that fit your personality and that you like, and...

(LAUGHTER)

WILLIS: Trees can fit my personality?

FRANK: Trees can fit your personality and your social standing. For instance, in Palm Beach people want really tall palm tree that is go for $20,000 to $30,000 each. Each. Each, for a palm tree.

WILLIS: Holy guacamole. You can put a kid through school for that.

FRANK: Exactly.

WILLIS: Thank you so much for helping us out today. It was a ton of fun.

FRANK: Thank you.

WILLIS: Appreciate it. As always, if you have an idea on how to save money, send us an e-mail to Openhouse@cnn.com and if you want to check out this project savings again, check out our Web site, cnn.com/openhouse. You can hear much more about the impact of this week's news on your money on YOUR MONEY with Christine Romans and Ali Velshi coming up in a few hours at 1:00 p.m. Eastern, right here on CNN.

Thank you for spending part of your Saturday with us. OPEN HOUSE will be back next week, right here on CNN. And you can catch us on HEADLINE NEWS, every Saturday and Sunday at 3:30 p.m. Eastern Time. Don't go anywhere, your top stories are next in the CNN NEWSROOM. Have a great weekend.

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