Home buyer fatigue

Home Buyer Fatigue or Housing Derangement Syndrome?

home buyer fatigue
June Housing Stats (infographic from nar.realtor)

Although home prices remain strong, the volume of home sales has dropped off during June.  This is causing some in the media to exhibit “housing derangement syndrome” by reporting a pending housing collapse.   However, there is a more sensible answer and that may be “home buyer fatigue.”  Buyer fatigue is not solely used in real estate, rather it’s a term to describe consumers who do not engage in a market sector for a short duration for various reasons.  Home buyer fatigue has occurred multiple times since 2013 after a period of sustained home price increases.

Let’s look at the facts.

The National Association Realtors (nar.realtor) reported in a July 23rd press release that the total existing home sales for June decreased 0.6 percent, and is down 2.2 percent from the same time last year.  Home sales in Montgomery County have also been retreating.  The Greater Capital Area Association of Realtors (gcaar.com) reported sales declines for single-family and condos during June (-3.4 percent and -13.9 percent respectively).  Year-to-date sales are also below last year’s transactions for the same time period.

NAR chief economist Lawrence Yun observed:

There continues to be a mismatch since the spring between the growing level of homebuyer demand in most of the country in relation to the actual pace of home sales, which are declining.

However, his explanation for the home sales retreat sounds like home buyer fatigue:

“The root cause is without a doubt the severe housing shortage that is not releasing its grip on the nation’s housing market. What is for sale in most areas is going under contract very fast and in many cases, has multiple offers. This dynamic is keeping home price growth elevated, pricing out would-be buyers and ultimately slowing sales.”

Although national home prices are increasing, the gains remain steady.  The latest S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index reported on July 31st (spice-indices.com) indicated a 6.4 percent annual gain during May, which is the same as the previous month.  However, the 20 City Index showed a slight decline to 6.5 percent (from 6.7 percent).  Seattle, Las Vegas and San Francisco continue to lead the nation with double digit gains (13.6, 12.6 and 10.9 percent respectively). The Washington DC region, however, showed a modest annual home price growth of 3.06 percent.

As home sales decline, many contribute home buyer fatigue to increasing home prices and mortgage interest rates.  A few have already begun to ring the warning bells of bubble popping home price deflation citing Seattle and San Francisco’s housing woes.

However, those exhibiting housing derangement syndrome need to take a deep breath and look at the facts.  Most of the country’s home values are increasing at a sustainable rate.  Additionally, contrary to reports of inventory surpluses, home sale inventory continues to be low in most of the country (Montgomery County single-family and condo listings are below last year’s level by -9.3 and -12.8 percent respectively).

It’s also important to look deeper into what may be driving those overheated housing markets to experience the sharp price spikes and recent sale declines.  For example, Seattle’s housing juggernaut may be tied to Amazon’s nine years of a seemingly hiring frenzy.  According to reporting by Matt Day for The Seattle Times (Amazon’s employee count declines for first time since 2009; seattletimes.com; April 26, 2018), Amazon begun corporate layoffs, as well as a possible hiring freeze, earlier this year.

Copyright© Dan Krell
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Affordable housing

affordable housing
Affordable housing (graphic from montgomerycountymd.gov)

It’s no secret that housing is expensive.  Home prices are relentlessly marching forward, making it more difficult for first-time home buyers to purchase a home.  One of the contributing factors is the low inventory of homes for sale.  The deficiency of homes on the market is limiting options and stoking competition among determined home buyers, many of whom are willing to offer slightly more than then their cohorts.  All this puts upward pressure on home prices and impacting affordable housing.

Having enough for a down payment and closing costs is a hurdle for many first-time home buyers.  Home buying programs exist to help home ownership more affordable for home buyers.  The Maryland Mortgage Program (mmp.maryland.gov) offers down payment assistance in the form of loans, an employer match program, or financial grants.  In Montgomery County, the Housing Opportunities Commission of Montgomery County (hocmc.org) offers several down payment assistance options, including the House Keys 4 Employees program for many Montgomery County Employees.  Of course, you must meet eligibility, so check with your lender and/or mortgage program.

Affordable housing is not only an issue for home buyers.  It’s also an issue for renters.  According to the US Census Bureau’s American Community Survey five-year estimates results (census.gov), the median rent in the US increased about $21.  That does not sound life changing, however, it is the result of an analysis of nationwide monthly rents.  Results of the Survey indicated that, “Of the 382 metropolitan areas in the United States, the median gross rent in 156 areas did not change between 2007 to 2011 and 2012 to 2016…”  However, “Of the 219 that did change, increases outnumbered decreases four to one with 175 increases and 44 decreases.

Some areas had a decrease in rent, while others faced increases.  Among some of the areas with top increases include Andrews TX and McKenzie County ND, where monthly rents increased an average of $352 and $397 respectively.

The Census Bureau recent survey on rent concludes that “gross rents are on the rise.”  Other Census data indicates that 2017 had the lowest percentage of renters move since 1988.  The combination of fewer available rentals and increased rents are making it difficult to find an affordable rental.

Although “affordable housing” has been tossed about like a football, it wasn’t until Mary Schwartz and Ellen Wilson’s (US Census Bureau) analysis of the 2006 American Community Survey that really gave it meaning (Who Can Afford To Live in a Home?: A look at data from the 2006 American Community Survey; census.gov).  The analysis revealed the percentage of income that is spent towards housing.

The report indicated that forty-six percent of renters spend 30 percent or more of their income on housing costs.  Compare that to home owners: thirty-seven percent of owners with mortgages and sixteen percent of owners without spent 30 percent or more of their income on housing.  Schwartz and Wilson came up with the “30 percent standard,” and discussed that thirty percent or more of income spent on housing is considered a “housing-cost burden.”

Addressing affordable housing for renters, Representative Joe Crowley introduced H.R.3670 – Rent Relief Act of 2017 to help renters with their housing-cost burden.  The credit would only be available for taxpayers whose gross income is less than $125,000.  The bill allows for a refundable tax credit when rent exceeds 30 percent of the individual’s gross income for the taxable year.  Depending on the renter’s gross income, the amount of the credit could range from 10 to 100 percent of the excess (above 30 percent).  One caveat is that if the tenant’s rent exceeds 150 percent of the fair market rent for that specific residence, the excess above 150 percent won’t be included for the purpose of determining the amount of the credit.  Government-subsidized renters would be able to claim a credit equal to 1/12 of the rent paid by the taxpayer.  Although the bill was last heard in the House Committee on Ways and Means, at the time of this article, it is being prepared by Senator Kamala Harris to be introduced in the Senate.

Maryland offers tax credits for some renters, check with the Maryland Consumer Rights Coalition (marylandtaxcredit.com) for qualifying information.

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Home inspections pointless?

home inspections
Home Inspection Myths (infographic fom visual.ly and apexwaterproofing.com)

I have heard an increasing voice of discontent over home inspections. Not just from home sellers and their agents, but from home buyers too! Home sellers often complain about the incorrect flagging of working components as being defective. Listing agents usually gripe that home inspectors scare buyers and interfere with their sale. But many home buyers are also growing dissatisfied with inspections and the subsequent property reports.

Inspection reports are becoming “matter of fact.”  Even when an inspector flags a component or system, less information is given about it and what to do.  Additionally, there is an increasing trend for recommendations to seek expert advice .  Home inspectors have been known to make mistakes too.  Some are starting to wonder why they should hire an inspector to tell them to hire an expert.  Consumers can just hire experts to inspect the corresponding major systems and components from the start.  Some are asking if home inspections are becoming irrelevant and pointless.

The home inspection, as we know it, began in the 1980’s. As the profession became standardized, it became a necessary part of the home buying process. The inspection used to be a straight forward examination of observable systems and components. But the home inspection has morphed from a once-over by a trained professional to the concept of getting a home perfect through remedying all of the home’s defects.  The fact that home inspections have become a tool for many agents to renegotiate price is another sign the inspection may have jumped the shark.

All things considered, home buyers expect a thorough and exhaustive inspection. They are relying on the inspector to identify concealed and latent defects. They are relying on the inspection and report to help them determine the condition of the home and its systems/components before they move forward with their purchase.

According to Maryland’s home inspector licensing law, the home inspection is intended to “provide a client with objective information regarding the condition of the systems and components of a home at the time of the home inspection;” and provides an opinion of “visible defects and conditions that adversely affect the function or integrity of the items, components, and systems inspected, including those items or components near the end of their serviceable life.” However, there are limitations (COMAR 09.36.07.03).

According to COMAR, a home inspection is “not technically exhaustive,” and it may not identify a concealed condition or a latent defect. Among the list of items that the home inspector is not required to ascertain, includes the condition of systems that are not accessible, and the remaining life of any system or component.

Furthermore, an article that appeared in RealtorMag last year suggests that home inspectors are generalists and don’t know everything about a home (4 Things Home Inspectors Don’t Often Check; realtormag.realtor.org; July 05, 2017). Inspectors often defer to experts on foundations, fireplaces, chimneys, well/septic systems, and roofs. This is done because those components are not easily inspected and also requires specialized knowledge that is usually outside the scope of the inspection and/or beyond the expertise of the inspector.

However, in today’s real estate environment, home buyers are wanting and expecting more from the professionals they hire as well as the homes they buy. Buyers anticipate their home inspection with high expectations about the inspector’s opinion and conclusions. So, it’s not a surprise that many home buyers are voicing displeasure with their inspectors. Some complain that the inspector missed items and/or did not inspect a component.  Additional complaints are about the inspection reports, that some feel are lacking in detailed information.

Have home inspections become irrelevant? Or is it just a case of the home inspectors having to educate the public what they do?

Home inspections are essential for most home buyers. But home buyers need to understand that inspectors are not the authoritative voice on all home systems and components. Instead, home inspectors bridge the knowledge gap between what the home buyer knows and what they should know about a home, especially the home they are buying.

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Housing inventory crisis?

housing inventoryThe low housing inventory crisis has plagued the housing market for about six years.  Low inventory has frustrated home buyers and all but eliminated move up home buyers.  The ongoing housing inventory crisis is an obstacle to a balanced housing market.

As a result of the ongoing housing inventory crisis, existing home sales may see a decline in the next few months, when spring sales should be strong.  Seasonal increases are a given, as National Association of Realtors (nar.realtor) data indicated a 3.0 percent month-over-month increase for February existing home sales and a 3.1 percent month-over-month increase in the Pending Home Sale Index (the Pending Home Sales Index is a forward-looking dataset indicating the number of homes that are under contract).  However, February sales only increased 1.1 percent from last year.  But the tell of slowing activity is the 4.1 percent decrease in pending home sales from last year.

Most experts blame the sluggish home sale activity on low housing inventory.  NAR’s reporting that February’s seasonal month-over-month 4.6 percent increase of total housing inventory is expected.  However, the 8.1 percent decrease in housing inventory compared to last year is worrisome.

The Greater Capital Area Association of Realtors (gcaar.com) March 2018 data for single family home sales in Montgomery County indicated a decline in activity across the board.  Listings decreased 11.1 percent month-over-month and 7.8 from last year.  Contracts decreased 6.6 percent month-over-month and 6.9 percent from last year.  While closings only decreased 3.8 percent month-over-month, there was a 7.8 percent decrease from last year.

Another sign that that the housing market is in crisis is last week’s announcement from Zillow.  If you have not yet heard, Zillow is expanding their Instant Offer program and plans to jump into the housing market (zillow.com).  They plan to fix and flip homes by making cash offers and buying houses like other investors who participate in their IO program. The homes will be listed for sale with real estate agents who subscribe to Zillow’s Premier Agent program, as well as select partner brokers.

Zillow Chief Marketing Officer Jeremy Wacksman stated,

“Even in today’s hot market, many sellers are stressed and searching for a more seamless way to sell their homes…They want help, and while most prefer to sell their home on the open market with an agent, some value convenience and time over price. This expansion of Instant Offers, and Zillow’s entrance into the marketplace, will help us better serve both types of consumers as well as provide an opportunity for Premier Agents to connect with sellers. This is expected to be a vibrant line of business for us and for our partners in the real estate industry, while providing homeowners with more choices and information.”

The venture into flipping is a huge deviation for the internet juggernaut, whose revenue is mostly generated by selling advertising and leads to real estate agents and loan officers.  The reaction in the industry is mixed, however Zillow’s stock dropped 7 percent the day after the announcement.  Critics, including experienced real estate investors, scoffed at Zillow’s ambitious plan to flip a house within ninety days.

In a market where home owners are reluctant to sell, and frustrated home buyers are dropping out, Zillow needs to find ways to increase lead generation to grow subscribers (see why tech models looking for alternate revenue).

While being ridiculed by many, Zillow’s flipping plan may be a brilliant strategy to generate home seller leads for agents.  Zillow acknowledges in their press release that “the vast majority of sellers who requested an Instant Offer ended up selling their home with an agent, making Instant Offers an excellent source of seller leads for Premier Agents and brokerage partners.”  If Zillow’s plan works, it could also grease the wheels of the housing market by turning reluctant home owners into sellers.

As a home seller, the home sale inventory shortage limits your competition.  But be aware that it’s not entirely a seller’s market.  Your home’s condition can significantly lower the sales price, or even prevent a sale.  Serious consideration should also be given to your listing price.  Additionally, you should focus your attention to preparing your home to show to home buyers.

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Interest rate increase – Don’t panic

interest rate increase
45 years of mortgage interest rates

Last week, the Federal Open Market Committee (FOMC) decided to raise the federal funds rate. The federal funds rate is the interest rate that is charged to banks for borrowing overnight funds to maintain the required target funds. Although the Fed interest rate increase means that a banks’ business is getting more expensive, it doesn’t necessarily mean that mortgage interest rates increase in kind.

If mortgage rates are not always affected by the Fed’s interest rate increase, then what is?

Katherine Reynolds Lewis pointed out that the FOMC’s interest rate hike indirectly influences jobs, wages, prices of the things we buy, and other items (7 ways the Fed’s decisions on interest rates affect you; bankrate.com; March 20, 2018). She states, “Sometimes mortgage rates go up when the Fed increases short-term rates, as the central bank’s action sets the tone for most other interest rates. But sometimes mortgage rates fall after the Fed raises the federal funds rate.” An example of this is the seventeen rate increases during 2004-2005 when mortgage interest rates initially dropped, then slightly increased a year later. And most recently, the three Fed rate increases during 2017 when mortgage interest rates remained stable.

The reason why a FOMC interest rate increase doesn’t always affect mortgage interest rates is because mortgage interest rates are tied to the bond market. The bond market is typically a bellwether of the economy. It is highly likely that the bond market baked in last week’s Fed’s rate increase prior to the FOMC announcement. Bond yields have already been increasing due to an improving economy, which pushed mortgage rates higher in recent weeks.

In fact, the Freddie Mac Press release the day after the Fed’s announcement indicated that mortgage rates increased one basis point (freddiemac.com; March 22, 2018):

“The Fed’s decision to raise interest rates by a quarter of a percentage point puts the federal funds rate at its highest level since 2008. The decision, while widely expected, sent the yield on the benchmark 10-year Treasury soaring. Following Treasurys (sic), mortgage rates shrugged off last week’s drop and continued their upward march. The U.S. weekly average 30-year fixed mortgage rate rose 1 basis point to 4.45 percent in this week’s survey.”

Immediately following the Fed’s interest rate increase, NAR’s chief economist, Lawrence Yun, statedWe are in the middle innings of monetary policy normalization (nar.realtor, March 21, 2018).” Yun believes that the labor market is pushing the Fed to act to stave off inflation. He stated that consumers should expect more rate increases throughout 2018. However, he believes that increased new construction can belay future Fed rate increases:

“Housing costs are also rising solidly and contributing to faster inflation. The one thing that could slow the pace of rate increases would be to tame housing costs through an increased supply of new homes. Not only will more home construction lead to a slower pace of rate hikes, it will also lead to faster economic growth. Let’s put greater focus on boosting home construction.”

Yun’s call to home builders to increase housing stock is preaching to the choir. The housing market’s tight sale inventory should already be spurring home builders to crank out new homes. But there are challenges. The latest new construction statistics released by the US Census (census.gov) indicated that building permits issued during February were 5.7 percent lower than January’s permits, but 6.5 percent higher than last February.

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