Like any vocation, the real estate business is clad in its own unique language. And I have stumped some 30-year real estate veterans with questions concerning some of the words...even they still haven't absorbed the seemingly endless and expanding inventory of terms related to this industry. Some of the terms come from legal and coloquial expressions that are 100's of years old.
You might have thought "effective age" was when you used to be able to play racquetball for 3 hours. Perhaps you thought a "sash" was something you wore around your kimono. Still convinced a "setback" is moss reappearing in your lawn, a "percolation test" is experienced at Starbucks, a "joint liability" is something that can be treated with BenGay, or a "Granny flat" is the last bad experience your grandmother had in a car? You need to go to our glossary and enjoy the ever-growing list of real estate terms our website provides.
Saturday, March 27, 2010
Thursday, March 25, 2010
FHA Signals Efforts to Manage Risk
I will continue the investment article soon, but first, this just in:
In an effort to secure its financial health, the Federal Housing Administration plans to require borrowers to have more “skin in the game” soon. Over the past three years, FHA’s market share has boomed from about 2 percent of all new loans to about 30 percent of all new loans this year and 20 percent of refinances. The escalading volume that the administration is currently handling calls for stricter requirements as evidenced by FHA’s capital ratios falling to nearly 0.5 percent well below the minimum of 2 percent.
The agency is still analyzing the levels and time frames it wishes to tighten its standards but they expect to:
Increase minimum down payments
Increase minimum credit scores
Increase insurance premiums
Lower the amount of seller concessions
As one of the major players in the mortgage market, the health of FHA is imperative to the housing market and flow of credit to home buyers, as well as to the health of the overall economy. Taking measures to safeguard the agency from needing a government tax payer-funded bailout is a notable risk management measure.
According to a Keller Williams research study, the typical first-time buyer put down 3.5 percent this year. Those who want to take advantage of the tax credit before the April 30 contract, June 30 closing deadline may want to beef up their savings and check their credit report now in anticipation of any changes.
In an effort to secure its financial health, the Federal Housing Administration plans to require borrowers to have more “skin in the game” soon. Over the past three years, FHA’s market share has boomed from about 2 percent of all new loans to about 30 percent of all new loans this year and 20 percent of refinances. The escalading volume that the administration is currently handling calls for stricter requirements as evidenced by FHA’s capital ratios falling to nearly 0.5 percent well below the minimum of 2 percent.
The agency is still analyzing the levels and time frames it wishes to tighten its standards but they expect to:
Increase minimum credit scores
Increase insurance premiums
Lower the amount of seller concessions
As one of the major players in the mortgage market, the health of FHA is imperative to the housing market and flow of credit to home buyers, as well as to the health of the overall economy. Taking measures to safeguard the agency from needing a government tax payer-funded bailout is a notable risk management measure.
According to a Keller Williams research study, the typical first-time buyer put down 3.5 percent this year. Those who want to take advantage of the tax credit before the April 30 contract, June 30 closing deadline may want to beef up their savings and check their credit report now in anticipation of any changes.
Wednesday, March 24, 2010
Startling Real Estate Advice! (Part 2)
So have we got your attention? Here's more surprising perspective from banker Brent:
The drawback to home ownership as an investment is that (1) buying a house is expensive, maintaining a house is expensive and selling a house is expensive and (2) even if you sell it at a “profit,” (sic) you still have to find a place to live. And, guess what? While your house was going up in value, so were all the others, including the next one you are going to buy!
Beyond the cost of the home and the requisite downpayment, buying a home with a mortgage carries what the industry refers to as “Closing Costs.” These can range from a few hundred dollars up to as much as 5% of the purchase price (remember, the down payment is not included here). Then you have to maintain the home, an expense that has a bit of sticker shock for most first time buyers. There is insurance, utilities, real estate taxes, upgrades, maintenance—no, you can’t call the landlord anymore to fix the leaky pipes—and, eventually, the replacement of most of the major components of the home.
There’s also interest on your loan. Now, yes, we know it’s deductible. But what does that really mean? For sure, it does not mean you reduce your tax bill by the amount of the interest you pay. It only reduces your taxable income dollar for dollar. But, for a lot of first time homeowners, particularly with families, the rate at which their income is being taxed may be less than 20% (your “marginal” tax rate). At the 15% tax rate (think family of four with income of $70,000), every $1,000 you spend on interest only saves you $150. Same goes for real estate taxes. And you thought you were “wasting” that $1,150 a month you were paying for that 2 bedroom apartment.
But the fun really starts when you go to sell. Unless you are clueless enough to believe you can sell your home yourself without taking a big discount in price, you will engage a realtor, and he/she will charge you 6.0% of your selling price. Not to be outdone, the State will get another 2.0% out of you in transfer taxes, recordings, title insurance, etc. Oh, and did we mention the realtor insisted you REPLACE that old roof of yours ($26,769) or they couldn’t sell your house without a big-time disclosure to the buyer. And, about those old carpets in the living room. . . .
So, forgetting about the cost of maintaining the home (hey, you did a lot of the work yourself!) and even ignoring the cost of the new roof, you paid about 2% getting into the home in closing costs and about 8% selling it. So, you needed to have the actual sales price of your home be 10% higher than what you originally paid for it just to BREAK EVEN. (Here’s a good time to go read Rule # 3 again)
By analogy, compare “investing” in a home and “investing” in a company like, say, Boeing. If I spend $10,000 on Boeing common stock, that’s all I ever have to spend. No maintenance, no insurance, no roof! In fact, in good times, they might even send me a dividend. If Boeing stock goes up 10%, I pay a small commission and keep the rest. If it goes down 10%, I can sell and keep 90% of what I started with. But most importantly, I don’t have to own Boeing stock. When I sell, I can put the money in my pocket. If I had to buy the stock back—like I have to buy a house to live in when I sell the one I was living in—I have gained nothing from an investment standpoint.
Compare that to your house purchase. If you put 10% down to buy a home, and it doesn’t go up in value so that you sell it for what you paid, after your 10% selling costs, you lose your entire investment. And we already described what happens when it goes up 10% in value.
So why aren’t houses GREAT investments? While the great social commentator, Will Rogers, was correct in advising his audience to “buy real estate: they aren’t making any more of it!”, the reality is that a home—except in cases of substantial (read: Expensive) additions and improvements—is a static asset. A three bedroom, 2 bath, 2 car attached garage home will always be a three bedroom, 2 bath, 2 car attached garage home. It will just be older! In fact, without all that maintenance stuff we discussed, it eventually will be a three bedroom, 2 bath, abandoned home, with a 2 car attached garage. By comparison, a company, like Boeing, if successful, is a dynamic asset that grows and changes. It can increase its market share, improve its profit margin, add product lines and generally increase its total value. A home, conversely, incurs a change in value primarily through population growth (more people, no more Earth) and the nominal inflation of the value of the currency.
“But,” cries conventional wisdom, “THERE IS ALWAYS INFLATION!”
Actually, that’s not true nor even close to true. If you study a chart of inflation rates in the US going back to the first condo at Jamestown, you will find that, though periodically broken by short term inflationary periods, and, for that matter, short term deflationary—read DEPRESSION--periods, usually resulting from banking panics in the pre-Federal Reserve days, inflation has been the exception, not the rule. Unfortunately for most of today’s observers, one of the most egregious exceptions to the Rule occurred in the 1970’s during the OPEC crisis. Inflation rose to double digits for half a decade, adjustable rate mortgages reached rates in the 20’s, and wage and price controls were effected by none other than your United States, we of the free market system, of America. This was an event that tainted the perspective of many considered to be financial “experts” today.
The crisis also led to the deregulation of oil prices, airlines and the banking system (interest rates on savings accounts used to be regulated by the government). The effect of these deregulations was to begin the wringing out of the inflationary structure that had been created in the US by years of war, social engineering and cold war fears. Since that time, sustained periods of inflation have not existed, culminating in an environment today where “inflation-indexed” benefits from the government are actually scheduled to decline due to deflation (but, don’t bet on it. Congress isn’t very good at letting its constituents whine!)
“Hey, but housing prices did rise during the early 2000’s, in some cases doubling and tripling in value! What about that, smart guy?”
We will give you time to ponder that abrasive question...until next post...
The drawback to home ownership as an investment is that (1) buying a house is expensive, maintaining a house is expensive and selling a house is expensive and (2) even if you sell it at a “profit,” (sic) you still have to find a place to live. And, guess what? While your house was going up in value, so were all the others, including the next one you are going to buy!
Beyond the cost of the home and the requisite downpayment, buying a home with a mortgage carries what the industry refers to as “Closing Costs.” These can range from a few hundred dollars up to as much as 5% of the purchase price (remember, the down payment is not included here). Then you have to maintain the home, an expense that has a bit of sticker shock for most first time buyers. There is insurance, utilities, real estate taxes, upgrades, maintenance—no, you can’t call the landlord anymore to fix the leaky pipes—and, eventually, the replacement of most of the major components of the home.
There’s also interest on your loan. Now, yes, we know it’s deductible. But what does that really mean? For sure, it does not mean you reduce your tax bill by the amount of the interest you pay. It only reduces your taxable income dollar for dollar. But, for a lot of first time homeowners, particularly with families, the rate at which their income is being taxed may be less than 20% (your “marginal” tax rate). At the 15% tax rate (think family of four with income of $70,000), every $1,000 you spend on interest only saves you $150. Same goes for real estate taxes. And you thought you were “wasting” that $1,150 a month you were paying for that 2 bedroom apartment.
But the fun really starts when you go to sell. Unless you are clueless enough to believe you can sell your home yourself without taking a big discount in price, you will engage a realtor, and he/she will charge you 6.0% of your selling price. Not to be outdone, the State will get another 2.0% out of you in transfer taxes, recordings, title insurance, etc. Oh, and did we mention the realtor insisted you REPLACE that old roof of yours ($26,769) or they couldn’t sell your house without a big-time disclosure to the buyer. And, about those old carpets in the living room. . . .
So, forgetting about the cost of maintaining the home (hey, you did a lot of the work yourself!) and even ignoring the cost of the new roof, you paid about 2% getting into the home in closing costs and about 8% selling it. So, you needed to have the actual sales price of your home be 10% higher than what you originally paid for it just to BREAK EVEN. (Here’s a good time to go read Rule # 3 again)
By analogy, compare “investing” in a home and “investing” in a company like, say, Boeing. If I spend $10,000 on Boeing common stock, that’s all I ever have to spend. No maintenance, no insurance, no roof! In fact, in good times, they might even send me a dividend. If Boeing stock goes up 10%, I pay a small commission and keep the rest. If it goes down 10%, I can sell and keep 90% of what I started with. But most importantly, I don’t have to own Boeing stock. When I sell, I can put the money in my pocket. If I had to buy the stock back—like I have to buy a house to live in when I sell the one I was living in—I have gained nothing from an investment standpoint.
Compare that to your house purchase. If you put 10% down to buy a home, and it doesn’t go up in value so that you sell it for what you paid, after your 10% selling costs, you lose your entire investment. And we already described what happens when it goes up 10% in value.
So why aren’t houses GREAT investments? While the great social commentator, Will Rogers, was correct in advising his audience to “buy real estate: they aren’t making any more of it!”, the reality is that a home—except in cases of substantial (read: Expensive) additions and improvements—is a static asset. A three bedroom, 2 bath, 2 car attached garage home will always be a three bedroom, 2 bath, 2 car attached garage home. It will just be older! In fact, without all that maintenance stuff we discussed, it eventually will be a three bedroom, 2 bath, abandoned home, with a 2 car attached garage. By comparison, a company, like Boeing, if successful, is a dynamic asset that grows and changes. It can increase its market share, improve its profit margin, add product lines and generally increase its total value. A home, conversely, incurs a change in value primarily through population growth (more people, no more Earth) and the nominal inflation of the value of the currency.
“But,” cries conventional wisdom, “THERE IS ALWAYS INFLATION!”
Actually, that’s not true nor even close to true. If you study a chart of inflation rates in the US going back to the first condo at Jamestown, you will find that, though periodically broken by short term inflationary periods, and, for that matter, short term deflationary—read DEPRESSION--periods, usually resulting from banking panics in the pre-Federal Reserve days, inflation has been the exception, not the rule. Unfortunately for most of today’s observers, one of the most egregious exceptions to the Rule occurred in the 1970’s during the OPEC crisis. Inflation rose to double digits for half a decade, adjustable rate mortgages reached rates in the 20’s, and wage and price controls were effected by none other than your United States, we of the free market system, of America. This was an event that tainted the perspective of many considered to be financial “experts” today.
The crisis also led to the deregulation of oil prices, airlines and the banking system (interest rates on savings accounts used to be regulated by the government). The effect of these deregulations was to begin the wringing out of the inflationary structure that had been created in the US by years of war, social engineering and cold war fears. Since that time, sustained periods of inflation have not existed, culminating in an environment today where “inflation-indexed” benefits from the government are actually scheduled to decline due to deflation (but, don’t bet on it. Congress isn’t very good at letting its constituents whine!)
“Hey, but housing prices did rise during the early 2000’s, in some cases doubling and tripling in value! What about that, smart guy?”
We will give you time to ponder that abrasive question...until next post...
Friday, March 19, 2010
Startling Real Estate Advice!
We have all heard real estate buying advice -- increasing in both page-count and audio volume over the past few years. I will bet, however, you have never heard advice in the direction or tone of the article I am going to present over the next few days. This advice is both surprising and honest. Though called Selecting the Right House, the article offers perspective on investing, life priorities and our American culture. It comes from a man who graduated in 3 1/2 years in Mathematics and Economics (on the Dean's List) from Brown University. He is an attorney with over 37 years experience in the banking industry. I am proud to say he is also my eldest brother.
Enjoy part 1, and stay tuned in the coming days...
Selecting the Right House (Part 1)
Much advice is offered to the first time homebuyer on choosing the right home. Most of it’s bad! Rather than following the advice of late night infomercials and mortgage brokers operating out of the trunk of their (leased) cars, most homebuyers would have been best served to follow these three easy, common sense rules:
1. Buy a house you like living in;
2. Don’t buy more house than you can afford; and
3. When you’re not sure, go back to rule # 1!
While these rules may seem obvious, we are experiencing a housing crisis today that could not have occurred if these had been followed by most buyers. So why do people use more care picking out an I-Pod than they do purchasing what is probably their most valuable asset? In many cases, it is exactly the fact that the purchase is so significant that buyers don’t trust their own intelligence and, instead, turn to a gaggle of advisors, pundits, self-styled authorities and self-serving promoters to seek advice. The problem is, what you get is quite often a misleading cacophony of half-truths, generalizations, exaggerations and, my favorite, conventional wisdoms.
So why isn’t the conventional wisdom reliable? Well, first of all, if conventional wisdom in the investment area were effective, everybody would be RICH and no one would need advice from experts. Unfortunately, most conventional wisdom is best described as wishful thinking without using any math. Particularly in the areas of finance, economics and investment, where most people feel a bit uncomfortable in DIY mode, a horrendous amount of misinformation gets passed around widely and often enough to become, eventually, so ingrained in our way of thinking that one can hardly be convinced it is total nonsense. Here are a few pertinent examples.
A HOME IS A GREAT INVESTMENT. Hardly. A residence is a necessary investment, like kids’ braces. It can also be a “good” way to preserve capital and keep up with inflation. It can also be a source of great satisfaction and enjoyment, not to mention security and well-being. These are not insubstantial factors and should never be down-played. But purchasing a home because of its investment value is practically never a good decision, even when housing prices rise after the purchase.
Yet, I will always get a room full of dissent and counter-argument when I make this statement, despite the fact that over a quarter of today’s homeowners owe more than the value of their homes, foreclosures are approaching Great Depression volumes and short sales outnumber regular transactions in almost every major market in our country. The argument goes that this market is an “aberration” (yeah, and so was the one in the early 1990’s, the late 1970’s, the 1960’s and from the beginning of the Great Depression until the end of the Korean War, just to trace the last 100 years), or this was caused by Wall Street, or Congress or the neo-Fascist world conspiracy! The fact is it was caused by the same thing that causes all price changes: Supply and Demand. We built too many houses given the number of qualified buyers; hence, prices declined, and, with them went the equity of over-extended (often with second mortgages on top of the firsts) home owner/borrowers who really believed (now I know who watches Survivor and thinks it is real life!) that housing prices always go up.
See what I mean? More soon...
Enjoy part 1, and stay tuned in the coming days...
Selecting the Right House (Part 1)
Much advice is offered to the first time homebuyer on choosing the right home. Most of it’s bad! Rather than following the advice of late night infomercials and mortgage brokers operating out of the trunk of their (leased) cars, most homebuyers would have been best served to follow these three easy, common sense rules:
1. Buy a house you like living in;
2. Don’t buy more house than you can afford; and
3. When you’re not sure, go back to rule # 1!
While these rules may seem obvious, we are experiencing a housing crisis today that could not have occurred if these had been followed by most buyers. So why do people use more care picking out an I-Pod than they do purchasing what is probably their most valuable asset? In many cases, it is exactly the fact that the purchase is so significant that buyers don’t trust their own intelligence and, instead, turn to a gaggle of advisors, pundits, self-styled authorities and self-serving promoters to seek advice. The problem is, what you get is quite often a misleading cacophony of half-truths, generalizations, exaggerations and, my favorite, conventional wisdoms.
So why isn’t the conventional wisdom reliable? Well, first of all, if conventional wisdom in the investment area were effective, everybody would be RICH and no one would need advice from experts. Unfortunately, most conventional wisdom is best described as wishful thinking without using any math. Particularly in the areas of finance, economics and investment, where most people feel a bit uncomfortable in DIY mode, a horrendous amount of misinformation gets passed around widely and often enough to become, eventually, so ingrained in our way of thinking that one can hardly be convinced it is total nonsense. Here are a few pertinent examples.
A HOME IS A GREAT INVESTMENT. Hardly. A residence is a necessary investment, like kids’ braces. It can also be a “good” way to preserve capital and keep up with inflation. It can also be a source of great satisfaction and enjoyment, not to mention security and well-being. These are not insubstantial factors and should never be down-played. But purchasing a home because of its investment value is practically never a good decision, even when housing prices rise after the purchase.
Yet, I will always get a room full of dissent and counter-argument when I make this statement, despite the fact that over a quarter of today’s homeowners owe more than the value of their homes, foreclosures are approaching Great Depression volumes and short sales outnumber regular transactions in almost every major market in our country. The argument goes that this market is an “aberration” (yeah, and so was the one in the early 1990’s, the late 1970’s, the 1960’s and from the beginning of the Great Depression until the end of the Korean War, just to trace the last 100 years), or this was caused by Wall Street, or Congress or the neo-Fascist world conspiracy! The fact is it was caused by the same thing that causes all price changes: Supply and Demand. We built too many houses given the number of qualified buyers; hence, prices declined, and, with them went the equity of over-extended (often with second mortgages on top of the firsts) home owner/borrowers who really believed (now I know who watches Survivor and thinks it is real life!) that housing prices always go up.
See what I mean? More soon...
Thursday, March 4, 2010
Encouraging notes in real estate...
I've always been an optimist, but there seems to be statistical reason to see the real estate cup as half full today. Cases in point:
- Lawrence Yun, Chief Economist for the National Association of Realtors, said recently that unprecedented interest rates, low home prices and tax credits are lifiting the housing market. All these factors combined, he said, are "adding to the buying power of the typical family, with affordability conditions this year at the highest on record dating back to 1970." So far this year, the home price-to-income ratio has fallen well below the historical average of 25% -- the ratio now stands at 15%.
- Fannie Mae is developing new programs to both encourage purchasing their foreclosed properties and improve the neighborhoods where those purchases are made. They are offering 3.5%-of-purchase price, on some properties, toward Whirlpool appliances or closing costs -- or a combination of both. They have also introduced a "First Look" initiative to give home buyers a chance to get the jump on investors, thereby stabilizing neighborhoods. In this program, only buyers who plan to live in the house or public entities committed to the best interests of the community may purchase it for the first 15 days. Once they've made an offer, they have 45 days (up from 30 days) to close and the earnest money requirement may be reduced.
- Only 1.29% of the houses on the market in Washington are foreclosures -- that's tied with Arkansas! It's still tough, but better than the 6.12% in Arizona and 10.17% in Nevada...
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