FHA Announces Policy Changes to Address Risk and Strengthen Finances
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HUD is the nation's housing agency committed to sustaining homeownership; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development and enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet at www.hud.gov and espanol.hud.gov.
By Amy Hoak
RISMEDIA, November 24, 2009—(MCT)—House shopping usually slows down in the winter, as people put their home searches on hold to trim the tree, buy presents to put under it and avoid the chilly weather. This winter, however, might be different, thanks to the extended—and expanded—first-time home-buyer tax credit.
“We’re going to see far more interest in the fourth quarter than we generally do because of the tax credit,” said Heather Fernandez, vice president of Trulia.com, a real estate search engine. Traffic surged on the site on Nov. 5, the day Congress approved the credit extension, she said.
The new law extends the tax credit for first-time home buyers and opens it up to some existing homeowners as well: The credit is now 10% of the home price, up to $8,000 for first-time buyers and up to $6,500 for repeat buyers. All buyers must have a binding contract on a house in place on or before April 30, 2010. The sale must close on or before June 30. 2010.
To be considered a first-time home buyer, an individual must not have owned a home in the past three years. And to be eligible, existing homeowners need to have lived in the same principal residence for five consecutive years during the eight-year period that ends when the new home is purchased. The credit is only for principal residences.
Income limits have risen as well. According to the IRS, the home buyer tax credit now phases out for individuals with modified adjusted gross incomes between $125,000 and $145,000, and between $225,000 and $245,000 for people filing joint returns.
The inclusion of move-up buyers might inspire homeowners to take action and list their house if they’ve been putting it off, said Carolyn Warren, a Seattle, Wash.-based mortgage broker and banker and author of the book Homebuyers Beware. “If somebody loves their home, it’s not going to entice them to sell. If they’ve had it on the back of their minds and really would like to move up, it might push them into doing it sooner than later,” Warren said.
The credit isn’t expected to have as large of an effect on move-up buyers as it has on first-time buyers, according to the Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions. The maximum tax credit is about 4% of the average purchase price for first-time buyers, but about 2% of the average purchase price for move-up buyers.
“We estimate that the first-time home buyer tax credit will result in a 10% increase in home sales from March through November of 2009,” said Thomas Popik, research director for Campbell Surveys, in a news release. “We’d expect the effect of the proposed tax credit for current homeowners to be about half as large—from December until the tax credit expiration in the spring of next year, it might be 5% of 3 million transactions, or about 150,000 incremental home sales. Incremental sales to first-time home buyers could be an additional 300,000, for a total of 450,000 incremental sales due to the tax credit extension.”
Tips for buyersInterested in buying a home and claiming the home-buyer tax credit? Below are five tips:
1. Don’t procrastinate. Start searching for a home now. Getting an early start will give you a better chance of finding the right house before the credit deadline. Before you start house hunting, get preapproved for a mortgage, said Eddie Fadel, a Miami-based mortgage banker, and do a realistic assessment of what you can afford. Buyers who have to sell an existing home should price it aggressively from the beginning to drum up interest and get a buyer as soon as possible.
2. Don’t count on another extension. The credit won’t be available forever, Fadel said. If you want to take advantage, be sure to make that spring deadline.
“This is a medication for the housing crisis. Once the patient—which is the housing market—cures, there will be no medication needed,” he said.
3. Mind the interest rates. Mortgage interest rates are low right now, but will likely rise next year. Higher rates will affect your monthly mortgage payments, thus the affordability of the house you are buying. Average rates on the 30-year fixed-rate mortgage have been hovering around 5%, but when the government stops buying large amounts of mortgage-backed securities, rates could rise.
4. Communicate with your lender. Throughout the process, make sure you’re communicating with your lender regularly; if there’s a piece of documentation you’re asked for, get it turned in as soon as possible, said Doug Heddings, a New York-based real estate agent with Charles Rutenberg Realty. Good communication is important in making sure the loan closes on time. And think twice before pursuing a short sale if you want to make the credit deadline. That’s where someone sells a home for less than what he or she owes on a mortgage, with permission of the lender. The process can be lengthy and unpredictable because the homeowner’s lender has to approve any deal, and can be complicated when there is a second mortgage associated with the property.
5. Don’t take shortcuts. Don’t forgo any of the steps you would normally take just to make the tax credit deadline. Make sure the house is a good fit for your needs and get a home inspection. Skipping steps could cost you in the long run.
First Time Homebuyer Tax Credit Extended Into 2010! Plus...A New Tax Credit for Certain Existing Home Owners!
It's official. President Obama has signed a bill that extends the tax credit for first-time homebuyers (FTHBs) into the first half of 2010. This program had been scheduled to expire on November 30, 2009.
In addition to extending the tax credit of up to $8,000 through June 30, 2010, the extension measure also opens up opportunities for others who are not buying a home for the first time.
So Who Gets What? The program that has existed for FTHBs remains intact with the one exception that more people are now eligible based on an increase in the amount of income someone may now earn.
Additionally, the program now gives those who already own a residence some additional reasons to move to a new home. This incentive comes in the form of a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.
Deadlines In order to qualify for the credit, all contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010.
Higher Income Caps in Effect The amount of income someone can earn and qualify for the full amount of the credit has been increased.
Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, single filers who earn $145,000 and above are ineligible.
Joint filers who earn up to $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, joint filers who earn $245,000 and above are ineligible.
Maximum Purchase Price Qualifying buyers may purchase a property with a maximum sales price of $800,000. First-Time Homebuyer Tax Credit – Frequently Asked QuestionsHere are answers to some commonly asked questions about the tax credit.
What is a tax credit? A tax credit is a direct reduction in tax liability owed by an individual to the Internal Revenue Service (IRS). In the event no taxes are owed, the IRS will issue a check for the amount of the tax credit an individual is owed. Unlike the tax credit that existed in 2008, this credit does not require repayment unless the home, at any time in the first 36 months of ownership, is no longer an individual's primary residence.
What is the tax credit for first-time homebuyers (FTHBs)? An eligible homebuyer may request from the IRS a tax credit of up to $8,000 or 10% of the purchase price for a home. If the amount of the home purchased is $75,000, the maximum amount the credit can be is $7,500. If the amount of the home purchased is $100,000, the amount of the credit may not exceed $8,000.
Who is eligible for the FTHB tax credit? Anyone who has not owned a primary residence in the previous 36 months, prior to closing and the transfer of title, is eligible. This applies both to single taxpayers and married couples. In the case where there is a married couple, if either spouse has owned a primary residence in the last 36 months, neither would qualify. In the case where an individual has owned property that has not been a primary residence, such as a second home or investment property, that individual would be eligible.
As mentioned above, the tax credit has been expanded so that existing homeowners who have owned and occupied a primary residence for a period of five consecutive years during the last eight years are now eligible for a tax credit of up to $6,500.
How do I claim the credit? For those taking advantage of the tax credit in 2009, you may choose to either apply for the credit with your 2009 tax return or you may apply for the credit sooner by filing an amended 2008 tax return with Form 5405 (http://www.irs.gov/pub/irs-pdf/f5405.pdf).
Can you claim the tax credit in advance of purchasing a property? No. The IRS has recently begun prosecuting people who have claimed credits where a purchase had not taken place.
Can a taxpayer claim a credit if the property is purchased from a seller with seller financing and the seller retains title to the property? Yes. In situations where the buyer purchases the property, even though the seller retains legal title, the taxpayer may file for the credit. Examples of this would include a land contract, contract for deed, etc. According to the IRS, factors that would demonstrate the ownership of the property would include: 1. the right of possession, 2. the right to obtain legal title upon full payment of the purchase price, 3. the right to construct improvements, 4. the obligation to pay property taxes, 5. the risk of loss, 6. the responsibility to insure the property and 7. the duty to maintain the property.
Are there other restrictions to taking the credit? Yes. According to the IRS, if any of the following describe your situation, a credit would not be due.
Can you buy a home from a step-relative and be eligible for the credit? Yes. Provided the person you are buying a home from is not a direct blood relative, the purchase would be allowed.
Can parent(s) who will not live in the property cosign for a mortgage for their child and the child that is a qualifying FTHB still be eligible for the credit? Yes.
Can a separated spouse who has not owned a home for four years qualify for the FTHB tax credit if the spouse has owned a property anytime in the last three years? No. However, the spouse may be eligible for the repeat buyer credit. The best path to take in any situation regarding income taxes is to speak with a professional tax preparer or CPA.
If you have any questions that fall outside the situations here, give me a call and if you do not have an accountant to speak with, I can refer you to one.
RISMEDIA, August 27, 2009-Ray Robinson thought he had a really good credit score, but then he applied for an auto loan and the panic set in. His once very good 758 score had dropped to 692. The most widely used credit scores run from 300 (very poor) to 850 (immaculate). First, Robinson rushed to assess what triggered the change- he pays his home loan on time, all the credit cards and the other auto loan are kept up to date too. He wasn’t using his credit cards more than usual, so what happened?
Well, the economy continues to take its toll in more ways than one. As banks and lenders continue their ongoing effort to stabilize their portfolio risk they are closing a record number of credit card accounts (over 50 million were announced last week alone) and reducing millions of dollars in credit lines. This pull back reflects an unprecedented amount of credit-up to $2 trillion on cards alone by 2010.
As the credit lines tighten up, even some consumers with excellent credit and spotless payment records are seeing their credit scores reduced because of the diminished credit lines. Yes, our friend Ray with the once 758 score hasn’t changed the way he manages his credit or makes purchases but the credit limits he once had to support those purchases have changed. By dropping his credit limits it would “appear” that he is using a higher percentage of what credit he has available. He might even incur a “over limit fee.” Credit card providers collect around $15 billion in penalty fees each year.
So what does a few points on your credit score really matter? It’s always mattered a lot. Almost all banks, home lenders, credit card providers and even insurance companies now use your credit score to decide how risky you are for their products. If you have anything less than a 730 - 750 credit score, you typically will pay varying degrees more in the way of higher fees and interest rates. How much more? In a recent survey at bankrate.com, a consumer with the best credit could get a credit card interest rate below 8% (not including promotional/teaser rates) while those with the worst credit could see rates over 23%. It’s estimated that the typical household could pay as much as $300,000 in extra interest over a lifetime based on situations like this. This is just one of many examples that are changing the landscape of consumer credit management.
So what do you do about it? Experts will tell you to review your credit report at least once every 90 days or so and watch for any changes in your profile. But just watching and waiting is not enough. The need to proactively manage your credit profile to assure you are aware and prepared for situations like Ray’s has never been greater. Additionally, having direct access to a trusted advisor who can address all your questions about your credit report as well as provide you guidance on building a plan to more effectively manage your credit and debt profiles is of the upmost importance. Let’s face it, if you are Ray and you just realized what has happened to your credit scores, you may end up either paying a higher interest rate or not being approved for your car loan if you haven’t taken the proper steps to reduce this risk.
RISMEDIA, August 27, 2009-With the first-time home buyer’s tax credit in full effect, younger buyers are taking the opportunity to enter the real estate market and the New Jersey real estate market has seen its fair share of first-time buyers enter the playing field recently. Across the state, agents are finding that they must consider the first-time home buyers’ unique needs and adapt to this new type of client. “Those first-time home buyers who’ve entered the housing market- drawn by the perfect storm of historically low interest rates, attractive prices and the $8,000 tax credit- expect much more from their Realtors,” said Dave Liniger, Co-Founder of RE/MAX International. “They want access, they want answers, and they want ongoing communication through text messaging. They just want to know, ‘How fast can I get the information?’ and ‘How available are you?’”
Part of an ‘instant-gratification’ and Internet generation, first-time home buyers are tech savvy and educated and they don’t want to wait for answers. They are confident and eager to become home owners.
“Making a point to notice how certain generations and certain clients like to communicate is vital. You have to adapt, you have to anticipate, and you have to be ok doing business on the phone, through text message, through email, whatever your client wants,” says Anita Jacobus of RE/MAX at Barnegat Bay in Toms River.
First-time home buyers are being drawn to the housing market because of low interest rates, attractive prices, a huge volume of inventory, and the tax credit. Not only do they have options and room to negotiate, but they have $8,000 that they can use to cover closing costs or to just get back come tax time.
“First-time home buyers are a large percentage of our clients right now and we’re having the best spring in three years. They are creating a domino effect in the real estate market, purchasing homes, allowing the sellers of those homes to move up or to downsize if they choose, and are stimulating the furniture and home improvement industry as well,” said Richard Wieland of RE/MAX First Realty in East Brunswick.
To qualify for the $8,000 tax credit, buyers must meet the first-time home buyer criteria and they must be a first-time home buyer. They qualify if they have not owned a principle residence in the last three years and must close on their home purchase before November 30, 2009. As long as they live in the home for three years, they never have to repay the tax credit.
Once that report comes out, markets will be looking to the FOMC meeting in the afternoon, which comes out just after the Treasury’s Budget Statement for July.
The FOMC will almost certainly maintain short-term interest rates in the zero to 0.25% range, but markets are looking for comments on its exit strategy from its massive involvement, including whether the central bank plans to extend its plans to purchases government debt.
“Unlike the Bank of England, the Fed isn’t likely to expand its bond purchase program, of which it has completed about one-half,” said analysts from BMO Capital Markets in a morning note. “Of interest is whether it actually declares that it will allow the Treasury purchase program to expire as scheduled in September, or whether it delays that decision until the September 22-23 policy meeting.”
8:30 ? The US Trade Balance shrunk to $26.0 billion in May, a level not seen in nearly ten years, but in June a surge in oil prices is expected to cause the value of imports to expand in June, causing the deficit to widen. The consensus is -$28.5 billion. With petroleum excluded, however, underlying trend should be more encouraging, as a weaker greenback should help boost exports and hurt imports.
“As both domestic and global demand remain weak due to the ongoing recession, both imports and exports are forecasted to drop further in June,” predict the economics team at BBVA. “The decline in imports, however, is expected to be slower than that of exports because the 17.7% jump in oil prices in June could help to offset the downward pressures from demand. As a result, the trade deficit could expand after contracting in May.”
1:00 ? The Treasury Department will auction $23 billion 10 yr Treasury notes. This auction has potential to influence mortgage rates
2:00 ? Hopefully markets don’t give much attention to Treasury’s Budget Statement, as it’s hard to be encouraged knowing that from October to June, the government created a fiscal debt of $1.1 trillion. Bloomberg News notes that over the past ten years the July deficit has averaged $31.7 billion, while the average for the past five years has been $49.2 billion. What’s in store for 2009? Analysts expect July’s deficit to be $190 billion. To some extent, this is old news, but reminders don’t exactly cause rallies.
2:15 ? Federal Reserve chairman Ben Bernanke, who prizes transparency, was clear in his bi-annual testimony last month that the central bank would continue to hold interest rates “exceptionally low…for an extended period.”
So analysts have low expectations for the announcement from the FOMC Meeting. The short term interest rate for lending to banks should remain between zero and 0.25%. Attention will instead shift to Fed commentary on the economic outlook, as well as new remarks on the impending exit strategy.
Analysts at IHS Global Insight said the central bank’s exit strategy is already in motion, but an unwinding in the balance sheet won’t be seen just yet. “Although the Fed's programs to purchase treasury bonds and mortgage debt are not expected to be changed, the Fed's total balance sheet is expected to continue to shrink on net over the next several months,” they said.
RISMEDIA, August 5, 2009-Pending home sales are up for the fifth consecutive month, the first time in six years for such a streak, according to the National Association of Realtors®.
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in June, rose 3.6% to 94.6 from an upwardly revised reading of 91.3 in May, and is 6.7% above June 2008 when it was 88.7. The last time there were five consecutive monthly gains was in July 2003.
Lawrence Yun, NAR chief economist, said a combination of positive market factors is fueling the gains. “Historically low mortgage interest rates, affordable home prices and large selection are encouraging buyers who’ve been on the sidelines. Activity has been consistently much stronger for lower priced homes,” he said. ”Because it may take as long as two months to close on a home after signing a contract, first-time buyers must act fairly soon to take advantage of the $8,000 tax credit because they must close on the sale by November 30.”
The Pending Home Sales Index in the Northeast rose 0.4% to 81.2 in June and is 5.8% above a year ago. In the Midwest the index increased 0.8% to 89.9 and is 11.6% above June 2008. The index in the South jumped 7.1% to 100.7 in June and is 8.9% higher than a year ago. In the West the index rose 2.9% to 100.4 but is 0.2% below June 2008.
NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, is hopeful that a recently elevated level of contract cancellations will ease. “Last month, Freddie Mac and Fannie Mae clarified that appraisals should be done by professionals with clear local expertise,” he said. “This should mitigate the situation of many valuations done by out-of-area appraisers coming in below the price negotiated between buyers and sellers. Hopefully, in the months ahead, we’ll see an even closer relationship between contract activity and closed transactions.” McMillan said NAR is continuing to press the appraisal issue. “We have asked Congress and the Federal Housing Finance Agency to immediately implement an 18-month moratorium on the new appraisal rules to further address unintended consequences of the new guidelines,” he said.
NAR’s Housing Affordability Index (HAI) remains very favorable. The affordability index stood at 159.2 in July, down from record peaks in recent months but it remains 36.6 percentage points above a year ago. Under these conditions the typical family would devote 15.7% of gross income to mortgage principal and interest, well below the standard allowance of 25%. The HAI is a broad measure of housing affordability using consistent values and assumptions over time, which examines the relationship between home prices, mortgage interest rates and family income.
“A monthly rise in home prices and somewhat higher mortgage interest rates led to a modest decline in affordability in June, but it was still the sixth highest index on record dating back to 1970,” Yun said. “Because housing is so affordable in today’s market, job security and the first-time buyer tax credit are bigger factors in influencing home sales.”
A median-income family, earning $60,700, could afford a home costing $289,100 in June with a 20% downpayment, assuming 25% of gross income is devoted to mortgage principal and interest. Affordability conditions for first-time buyers with the same income and small downpayments are roughly 80% of what a median-income family can afford. The affordable price was much higher than the median existing single-family home price in June, which was $181,600.
Yun expects existing-home sales to gradually rise over the balance of the year, with conditions varying around the country. “It appears home sales are on a sounder footing and inventory is gradually being absorbed.”
For more information, visit www.realtor.org.
RISMEDIA, July 24, 2009-As unemployment and home foreclosures continue to rise and threaten the economic recovery, the mortgage insurance industry is stepping up its ongoing efforts to keep families in their homes. The industry has been at the forefront in developing systems and procedures to support the U.S. Treasury’s Home Affordable Refinance Program (HARP) and Home Affordable Modification Program (HAMP). Since the release of the details of the HARP and HAMP programs earlier this year, mortgage insurers, lenders and servicers have been working together to implement this important initiative. While these programs are in their early stages, initial results have been encouraging.
In partnership with Fannie Mae and Freddie Mac (GSEs), the mortgage insurance industry is working alongside servicers to modify or refinance troubled loans under the HARP and HAMP programs. In addition, mortgage insurers have developed back-up underwriting capabilities and standardized reporting systems to provide distressed homeowners a “second look” if they have been turned down for a loan modification on a non-GSE loan.
“It is more vital than ever for the housing finance industry to do its part to create stability in the marketplace,” said Kevin D. Schneider, president of Mortgage Insurance Companies of America (MICA). “MICA’s members are working closely with borrowers, lenders, investors, credit counselors and government agencies to modify or refinance existing loans to make them more affordable,” he noted. “In 2008 alone, mortgage insurers, working with servicers, were able to save almost 100,000 people from losing their homes. The total sum of those mortgage workouts was nearly $18 billion.”
“Mortgage insurers are pulling out all the stops to help stem the tide of foreclosures,” said Suzanne C. Hutchinson, executive vice president of MICA. “Our member companies are working closely with servicers and both GSEs to implement the Obama administration’s HARP and HAMP programs and keep people in their homes. We are prepared to complete an increasing number of loan workouts in the coming months in support of these programs.”
The interests of borrowers, mortgage insurers and investors are aligned because unnecessary foreclosures harm everyone; families lose their home, the mortgage insurer pays a claim and the investor has a financial loss. However, when every alternative is exhausted and a foreclosure cannot be avoided, mortgage insurers stand ready to pay all valid claims.
MICA’s members have also adopted the recently announced GSE guideline changes that allow up to 125% loan-to-value ratios for refinancing mortgages that are HARP eligible. That higher LTV level will help more troubled borrowers refinance into a loan with a lower monthly payment.
For more information, visit www.privatemi.com.
RISMEDIA, July 13, 2009-Most Americans still consider having enough money for downpayment and closing costs to be the biggest obstacles to buying a home. That’s according to the 2009 National Housing Pulse Survey, an annual survey released today by the National Association of Realtors®.
The survey, which measures how affordable housing issues affect consumers, also found job security concerns to be the highest in seven years of sampling. Two-thirds of Americans think job layoffs and unemployment are a big problem; eight in 10 cite these issues as a barrier to homeownership.
“Homeownership is an investment in your future; however, saving for a downpayment and closing costs is still too great of an obstacle for 82% of house hunters looking to take advantage of the current market,” said NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth. “Monetizing the $8,000 first-time buyer tax credit for downpayment or closing costs on FHA-insured mortgages is a positive first step. Our hope is that the tax credit will be extended and expanded to all home buyers and will help bring stability to the housing market and enable more Americans to achieve the dream of homeownership.”
Despite the challenges with the economy and housing market, 83% of Americans still believe buying a home is a good financial decision. Three-fourths of those surveyed also believe now is a good time to buy a home, a number that has increased steadily the past two years. In fact, one-third of renters are thinking more about buying a home than they were a year ago.
While Americans are seeing more stability in the real estate market, uncertainty persists. The number of those who feel buying and selling activity has stabilized or stayed nearly the same has grown significantly, from 18% last year to 26% this year.
However the majority (58%) report that activity in their market has slowed.Regarding home sales, nearly eight in 10 say it’s harder to sell a home in their area today than it was a year ago, despite the fact that nearly three-fourths of respondents say home prices are less expensive. Large home inventories could be to blame; 44% cite concerns about the high number of homes and condos for sale in their area.
While nearly three-fourths of Americans are concerned about the local drop in home values, respondents expect to see more stability in the near future. Nearly seven in 10 expect local home prices to remain about the same in the next three months; only 18% expect prices to further decrease. The drop in prices has improved affordability, and consequently, concerns about the lack of affordable housing are the lowest they’ve been in seven years of polling - 34% say it’s one of their biggest worries, down from 41% two years ago.
Foreclosures remain a real concern among survey respondents. Slightly more than half (51%) say foreclosures are a big to moderate problem in their area. However, the rate of foreclosures is generally seen as stabilizing; 41% say the rate of foreclosures in their area is about the same as last year.
Ninety-two percent of respondents said neither they nor members of their immediate family have experienced a foreclosure in the past year, yet it is still a personal concern for many. One in five respondents said they are very or fairly worried that they will have difficulty making their mortgage payments over the next year. Thirty-two percent say it’s a big or moderate worry that they, or a member of their family, may have their home repossessed or foreclosed because they are unable to pay rising monthly mortgage payments.
In 2008, more than half of respondents (54%) were open to the federal government taking a more active role in overseeing mortgage and lending practices - the number dropped this year to 47%. This could be because 42% of Americans believe the country is back on the right track, more than double the number last year (16%).
Regarding financing, seven in 10 Americans cite a lack of confidence in their ability to be approved for a home loan as an obstacle to homeownership. The same number also say that banks are making it too hard to qualify for a loan (71%) and that fewer mortgage options offered by banks have made it harder for them to buy a home (71%). The perception of qualifying for a loan as a huge obstacle is especially high among minorities.
“Home buyers need protection from risky lending products but also need access to mortgages at a reasonable cost. While there has been some easing of credit in the mortgage market, the availability of credit continues to be an issue for many qualified home buyers,” said McMillan.
By Kayce T. Ataiyero Print Article
RISMEDIA, July 8, 2009-It’s dinner time at the Harris house and turkey tacos are on the menu. Avery, 6, standing in a chair, is browning the meat on the stove with the help of his mom, Andee. Eden, 3, growing impatient, has started munching on her tortilla, abandoning her post at the other end of the counter where dad Jonathan is cutting up the watermelon side dish.
The family used to eat out a lot. But that was before Andee’s salary as a partner in a technology consulting firm got cut 30% last year. They decided to cook more at home and turn the kids into kitchen helpers to make the meals more fun.
“Dinner can take a lot longer to prepare than it does to eat,” said Jonathan as he tried to corral his distracted daughter. “Eden, are you going to help me cut the watermelon?”
Cooking dinner instead of going out to eat. Renting movies instead of trekking to the multiplex. Families across the country have been making this kind of little trade-off for months since the economy tanked. If a parent has been laid off, tougher financial choices loom: Do we keep paying for piano lessons? Can we afford a family vacation? And what about those college funds?
Whatever route parents take in navigating the recession, experts say children are paying attention. The financial decisions parents make today, the priorities and examples they set, will have an important influence on their children’s financial lives, experts say. Just as many children of the Great Depression learned to hoard money in their houses for fear of another banking collapse, today’s children will develop financial habits based on what they learn from parents coping with the recession.
Patricia Seaman, director of marketing and communications for the National Endowment for Financial Education, said the economy has created a teachable moment for parents. Seaman said activities such as having children help cook their own food instead of eating in restaurants can teach them to be proactive about saving money during a financial crunch.
“You can share your own (financial) values, like having a rainy day fund. If you don’t have that, you can use the economy as a great example of why it’s important to save,” Seaman said. “You can use this as an opportunity to start to prepare them for handling this when out on their own.”
Experts say the learning begins with parents leading by example. Taking kids grocery shopping with coupons and putting the savings in a piggy bank, eating leftovers and brown-bagging lunches, repairing shoes instead of replacing them - these are all ways to teach kids the value of a dollar and the importance of being frugal.
Jim Stoops, a financial consultant in Charles Schwab’s Naperville, Ill., office, said parents have the important job of being their children’s primary financial role models.
“The biggest issue is how you react to any hardships and changes in the budget,” Stoops said. “Financial hardships in this country are going to happen again. How you insulate yourself and deal with them and come out of it is very important for kids to see.”
The lessons also come from having age-appropriate conversations with kids, striking the right balance between what to share and what to shield them from.
With younger children, experts suggest speaking in simple terms, mindful of language and tone. Explain that the family is facing the same challenges many others are and that the changes in the family’s lifestyle are temporary. Offer trade-offs, such as working together to fix up an old bike instead of buying a new one.
Be honest with them about the necessary changes to your spending habits, but reassure them that their basic needs will be met.
Andee Harris explained to her children that when they go shopping for a gift for a friend’s birthday party they will no longer also receive a toy. Instead, the kids put things they want on a wish list tacked to the refrigerator door. When a special occasion arises, such as a birthday of their own, they get to pick something from the list.
“We try to explain wants versus needs. Needs are your food, shoes, the house,” Andee Harris said. “We’re honest with them but we’re not freaking them out.”
Parents of older children can be more explicit about the financial sacrifices the family has to make. The conversation can address their expectations for material goods and explore ways that they could earn their own money to pay for some of the things they want.
Whatever you do, don’t ignore the challenges your family is facing, said Nancy Molitor, a Wilmette, Ill., psychologist. Trying to protect your children from your financial troubles could do more harm than good.
“We think we’re doing our children a favor by not burdening them but we often are doing just the opposite. You pretend everything is OK, but the children pick up on it,” Molitor said. “You do need to sit down and have some acknowledgment about you cutting back.”
Molitor added that, in most cases, children will adjust to the lifestyle changes just fine.
“Children are more resilient than we give them credit for,” Molitor said. “If the parents are calm and the family is banding together, the children will bounce back.”
©2009, Chicago Tribune.
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