Homeownership crisis?

homeownership crisis
Homeownership Crisis? (infographic from keepingcurrentmatters.com)

The housing market made significant strides last year with regard to home sales and home prices.  However, even with housing’s good news, the homeownership rate continues to be at generational lows.  Economists and real estate professionals are stumped. Is there a homeownership crisis?

The homeownership rate for the first quarter of 2017, reported by the U.S. Census Bureau (census.gov), was 63.6 percent.  This is a slight improvement from homeownership rate recorded in 2016.  However, in their analysis, the Census Bureau stated that when the rate is adjusted for “seasonal variation,” there was no statistical difference from the 63.5 percent rate recorded in the last quarter of 2016.

homeownership
Homeownership Rate (historical data from census.gov)

The homeownership rate peaked at 69.2 percent in 2005, but has steadily declined since the Great Recession. Industry experts have been flummoxed as to why there have not been more home buyers taking advantage of historically low interest rates in an upward economy. (Freddie Mac reported last week that the national average interest rate for a 30 year fixed rate mortgage was 3.94 percent; freddiemac.com). Even mortgage lending has become looser, as some mortgage companies have rolled out low and no-down payment programs in recent months.

A homeownership crisis in the making, why is there lack of interest in homeownership?  A recent study co-sponsored by the Fisher Center for Real Estate and Urban Economics, UC Berkley and the Rosen consulting Group (Hurdles to Homeownership: Understanding the Barriers; June 2017) asserted to have the answer to this question.  According to a NAR press release (realtor.org), the study was announced this month in honor of National Homeownership Month, and presented at the National Association of Realtors Sustainable Homeownership Conference.

The authors discussed regulatory issues that has hindered housing and mortgage lending.  They also identified issues affecting would-be home buyers, which include: student debt; availability of mortgages; housing affordability; low home sale inventory; and “post-foreclosure stress disorder.”

You may already have heard much about regulatory issues, consumer debt, mortgages, affordability, and low housing inventory.  But, what is “post-foreclosure stress disorder?”  The Rosen Consulting Group coined the phrase to give a name to the concept of perceived home buying risks derived from a financial crisis.

Even though a number of consumer surveys continue to indicate a strong positive sentiment towards homeownership, the authors point to post-foreclosure stress disorder as a major influence on home buying decisions.  They believe that many individuals have been directly and indirectly affected by the Great Recession, and therefore have changed their behaviors based on perceived financial risks.  And the greater the financial risk, the greater the caution exercised.  They claim this is confirmed by a Federal Reserve survey where 80 percent of respondents indicated they would like to own a home someday, but only one in six who were financially able to purchase a home felt that renting was the best choice for now.  The authors stated that although the trauma of the Great Recession will fade over time, they assert the need to rebuild confidence in homeownership benefits.

Post-foreclosure stress disorder may account for a decline in the homeownership rate, but this is not a homeownership crisis.  It is shift in values and a major shift in lifestyles. Surveys have indicated that millennials are expected to be the largest group of homebuyers, but many millennials don’t want to be anchored by owning a home. They want to be able to take advantage of global opportunities without the burden of having to sell a home.  There is a shift away from the old standard of being house-centric to mobility.

Copyright© Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Home inspectors make mistakes too

home inspectors
Home inspection checklist (infographic from nar.realtor)

The home inspection has become a standard part of the home buying process.  Even in very competitive buyer situations, you can still work in an inspection without hurting the chances at getting the home of your dreams.  And although you should never forgo the inspection, you should know that the home inspection offers an opinion. However, home inspectors are not always accurate or relevant, they make mistakes too.

Nick Gromicko and Kenton Shepard, of the International Association of Certified Home Inspectors, shared their thoughts on the limitations of the home inspection (The Limitations of a Home Inspection; nachi.org).  First, home inspectors are “generalists.”  They may not necessarily be an expert in all aspects of home building and/or systems.  However, they are trained to spot potential problems and may recommend you consult with an expert.

They pointed out that home inspections are limited to what the inspector can see.  Anything that is not accessible to the inspector cannot be seen and inspected.  This includes anything behind walls, under floor coverings, or blocked by furniture or other items.

Gromicko and Shepard stated:

“Safety can be a matter of perception. Some conditions, such as exposed electrical wiring, are obviously unsafe. Other conditions, such as the presence of mold, aren’t as clear-cut.”

They further stated:

“Every home has mold and mold colonies can grow very quickly, given the right conditions. Mold can be a safety concern, but it often isn’t. The dangers represented by mold are a controversial subject.”

They conceded that “other potential safety issues that fall into the same category.”  Hazardous materials and environmental issues require specialists, and most often require samples for lab analysis.

Daniel Goldstein wrote that some home inspectors go too far (10 things a home inspector won’t tell you; marketwatch.com; February 23, 2016).  Some inspectors dwell too much on “superficial” items such as chipped paint and surface mold.  And they often provide long lists of items that may or may not be a problem without putting them into context. He stated:

“So what constitutes going too far? A less helpful inspector might dwell on things like surface mold, chipped paint or other superficial problems, or present buyers with a long litany of issues, with no context about their relative importance and no estimate of the cost of fixing them.”

Understand your home inspection has limitations, so moderate your expectations.  A good strategy is to have a conversation with your inspector about what you could expect.  Every home is different for many reasons, but often present similar issues.  Your inspector should be able to explain what you might expect due to the home’s age and level of maintenance.  Some inspectors may also be able to point out future potential issues based on the inspection.

Additionally, when it comes to hazardous materials, environmental issues, and other controversial subjects, you must go beyond the hysteria and educate yourself.  Getting the facts about such topics, which many home owners encounter, can help you understand the risks and how to reduce or eliminate them.  If issues are identified in the inspection, get an expert’s opinion.  An expert can provide further information, advice and context.

Choose an experienced home inspector with references.  Check to ensure their license is active.  Home inspectors in Maryland are licensed by the Department of Labor, Licensing and Regulation (dllr.state.md.us/license/reahi).  The stated requirements to become a licensed home inspector include the completion of an approved 72-hour home inspector training course and pass the National Home Inspector Examination.  Although Maryland home inspectors are licensed, look for an inspector with additional credentials.  Many inspectors are also certified by professional organizations such as the International Association of Certified Home Inspectors (NACHI.org) or the American Society of Home Inspectors (homeinspector.org).

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Real estate auction home buying and selling

real estate auction
Real estate auction (infographic from warwickauctions.co.uk via visual.ly)

As the housing market continues to grow, buying and selling homes through the real estate auction is becoming more popular.  Contrary to popular belief, real estate auctions are not just for distressed properties.  Being part of a real estate auction can be exciting, but it’s not for everyone.  There are pros and cons for both the home buyer and seller.

A real estate auction is traditionally a “live” auction performed at a designated place where the bidders and auctioneer meet to conduct the auction.  You must be present, or have a proxy present, to make your bid.  You must register to bid at the auction, usually presenting proof of funds for your deposit.  The pace of the live auction can be very quick, so you have to pay close attention to the action.

Another form of real estate auction that has blossomed out of the foreclosure crisis, is the online auction.  The online real estate auction allows many homes to be auctioned simultaneously.  The atmosphere and pace of an online auction is different from a live auction.  Of course, buyers can make their bid from virtually anywhere, and the bidding can take place over days or weeks.

If you want to sell your home via real estate auction, the benefits include: decreasing your homes time on market; you know when the home will sell; the home sells “as-is;” home buyer contingencies are typically few or none.  The National Association of Realtors (nar.realtor) auction information describes homes that are good prospects (What Properties are Suited for Auction?) , which include: homes with a lot of equity; unique homes; vacant homes; and homes that are difficult to appraise.

However, real estate auctions are not for all sellers.  The downside to the auction is that your home may not sell, especially if you place a reserve (seller reserves the right to accept or reject highest bid) on the auction.  There are also costs that typically include the auctioneer’s commission and advertising costs, which could be due even if the home does not sell.

If you’re a home buyer, a real estate auction offers benefits for you too.  Real estate auctions offer another avenue to purchase homes other than those listed in the MLS.  This can be attractive especially when there is limited inventory of homes for sale.  Buyers guide the sale price through their bidding.  Unless it’s a blind bid auction (where bids are not disclosed to other bidders), you can decide if you want to increase your bid based on others’ bids.

If you want to buy a home at auction, do your due diligence.  Read the terms of sale, there may be a minimum bid, minimum deposit, and even a buyer’s premium (which can be as high as 5 percent of sale price) and other fees that may be due at closing.  Check the auction schedule frequently because the date and time may change, or the auction can be cancelled.  Understand the type of auction you’re bidding in, because you may not get the home even if you’re the highest bidder (especially online auctions).  Inspecting the property may be a challenge as you may have limited access.

Hire a Realtor to help you buy a home at a real estate auction

Hire a Realtor to assist and guide you through the details of buying a home via real estate auction.  Your agent can help you get the terms of sale and any due diligence material the auctioneer provides.  Additionally, they can also provide comps for the property to help you decide on your bidding strategy.  If you have the winning bid, your agent can help you with the details of getting you to settlement by assisting with contracts, financing, and other aspects of the sale.

From the National Association of Realtors auction section:

BENEFITS TO THE SELLER:
-Buyers come prepared to buy
-Quick disposal reduces long-term carrying costs, including taxes & maintenance
-Assurance that property will be sold at true market value
-Exposes the property to a large number of pre-qualified prospects
-Accelerates the sale
-Creates competition among buyers—auction price can exceed the price of a negotiated sale
-Requires potential buyers to pre-qualify for financing
-The seller knows exactly when the property will sell
-Eliminates numerous and unscheduled showings
-Takes the seller out of the negotiation process
-Ensures an aggressive marketing program that increases interest and visibility

BENEFITS TO THE BUYER:

Smart investments are made as properties are usually purchased at fair market value through competitive bidding
-The buyer knows the seller is committed to sell
-In multi-property auctions the buyer sees many offerings in the same place at the same time
-Buyers determine the purchase price
-Auctions eliminate long negotiation periods
-Auctions reduce time to purchase property
-Purchasing and closing dates are known
-Buyers know they are competing fairly and on the same terms as all other buyers
-Buyers receive comprehensive information on property via due diligence packet

Copyright© Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Transforming real estate – whom do agents really represent?

transforming real estate
Real estate transformation over time (infographic from movoto.com)

The continuously transforming real estate industry continues to change because of two forces, consumers and real estate professionals.  It would seem intuitive that the forces should be complimentary, but a deeper analysis might suggest conflicting interests between consumers and real estate agents. Whom do agents really represent?

Efficiency, although not openly stated, is a main goal of both home sellers and real estate agents.  Home sellers want to sell their homes efficiently (as quick as possible and for the most money); while the real estate agent may be focused on collecting the most commission in the least amount of time.  A.W. Jenkins’ ground breaking research looked into why consumers continued to use brokers in a transforming real estate environment as a means of buying and selling a home.  Jenkins determined that the only reason why consumers did not use a more efficient “used house dealer” is because they don’t exist (Home, Sweet Home: Real Estate Brokerage in Canada, Vancouver, Canada: The Fraser Institute, 1989).  Jenkins discussed the incentive for consumers to sign commission based broker agreements, even when there are more efficient means of buying and selling a home; including a used house dealer, sell the house on their own, or even pay a flat listing fee.

Anglin & Arnott furthered Jenkins’ line of questioning and came to the conclusion that although a used house dealership (like the used car dealership) may be the most efficient means of buying and selling a home for the consumer, it is not an efficient business model for residential real estate professionals (Residential real estate brokerage as a principal-agent problem; The Journal of Real Estate Finance and Economics; 1991, vol 4, no 2, pp 99–125).  The cost of maintaining a used house inventory for the dealer is prohibitive because home resale usually takes longer than reselling an automobile.  Another reason for non-existent used house dealers is government regulation: The sale of residential real estate by individuals other than the owner is highly regulated and sets standards for real estate brokerage.

Furthermore, they hypothesize that there may be broker “collusion” in maintaining existing business models:

…Collusion, we argued, is particularly easy to sustain and enforce in the residential real estate market because transactions require cooperation between the buying and selling broker…

As the transforming real estate industry continues its journey, the notion of efficiency has taken a substantial turn in favor of the real estate agent.  The advent of buyer agency and dual agency has allowed agents to leverage their name and reputation to other agents through a “team.”  Much like the medical office business model of luring patients through someone’s name and reputation, only to see the lower techs; the real estate team has become a popular business mode because an agent can leverage their time by having other agents do their work.  To further the confusion, in some cases there are teams within teams. But to understand the structure of the real estate team concept, think of a Russian nesting doll.  The team is a smaller nesting doll which is embedded in the larger nesting doll (the broker); and the team members are even smaller nesting dolls embedded within the team nesting doll.  To be fair, there are various team models in use today; some are better than others with respect to transparency.  The transforming real estate industry has moved towards real estate teams, which essentially operate as a brokerage within a brokerage.

Real estate team advertising and disclosure have become the focus of regulation in recent years, but has not entirely thwarted unscrupulous advertising that intends to mislead the consumer.  Furthermore, agents who are independent contractors and sub-contractors of brokers and other agents, can not only muddy the waters of agency, but can further distance the agent’s incentive and duty to their client.

In his article about the dual agency controversy (From subagency to non-agency: a history; inman.com; Feb 27, 2012), Matt Carter reminded us about a 1993 treatise by the former National Association of Realtors general counsel William North titled “Agency, Facilitation and the Realtor.”  The essay was written at a time when transforming real estate was about acknowledging buyer agency.  Agency relationships between Realtors and their clients were under scrutiny.  North was questioning whom agents really represent and if agents actually knew their role.  To make it easier for agents to know to whom they have a duty, North made an argument for eliminating the independent contractor status that prevails throughout the industry.  He stated:

An approach more difficult of acceptance by NAR membership would be the abandonment of the independent contractor status…The prevailing independent contractor relationship between broker and salesperson encourages “quantity” over “quality…It is clear from the letters which have been received by Realtor News on the Agency issue that far too many Realtors and Realtor Associations simply have no concept of what an agent is, does or cannot do or that their status as an “independent contractor” vis-à-vis their broker has nothing to do with their obligations, as an agent, to the seller or the buyer.  It only compounds the public confusion as to the status of a Realtor when Realtors themselves do not understand who and what they are.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

NAR should promote Realtor Authenticity

Realtor Authenticity
Rules of Authenticity (infographic from MarketingWeek.com “How to be an Authentic Brand”

Several years ago I told you about the National Association of Realtors’ attempt in shifting consumer attitude towards Realtors.  They are pivoting away from selling Realtor integrity, to selling Realtor value.  In 2014, the NAR voted on creating a Code of Excellence to demonstrate competency.  It wasn’t until this past November that the NAR approved a framework of competencies for agents to achieve.  The eagerly anticipated implementation will allow Realtors to assess and grow their skills and knowledge in many aspects of the business of real estate.  But this Commitment to Excellence, as it is named, may help Realtors increase their competency; but in the end, just like being proficient in the Code of Ethics, it will likely fall short in building consumer trust.  The NAR should promote on Realtor authenticity.

Having agents commit to more training is a good idea in building competency among real estate practitioners.  However, research has demonstrated that showing off accolades and awards doesn’t instill value, nor does it increase sales (Valsesia, Nunes, & Ordanini: What Wins Awards Is Not Always What I Buy: How Creative Control Affects Authenticity and Thus Recognition (But Not Liking). Journal of Consumer Research. Apr2016, Vol. 42 Issue 6, p897-914).

Realtors have a trust gap.  And a badge indicating competency and a Commitment to Excellence won’t bridge that gap.  The business of residential real estate is likened to a game of smoke and mirrors.  Instead of encouraging Realtor authenticity, agents are often taught techniques of persuasion to increase sales.  Many agents devise gimmicks and expensive marketing materials to entice you to do business with them.  Even before you meet with a real estate agent, they are likely scheming how to gain your trust.  Whether or not they earn it is an entirely different matter.

Instead of creating another Realtor badge, designation or code, the NAR should consult with James Gilmour and Joseph Pine II (of the Strategic Horizons LLP).  The title of their 2007 groundbreaking book sums it up nicely: “Authenticity: What Consumers Really Want.”  Realtor authenticity is sorely lacking in the industry, and it’s not just the NAR; it stems from the brokers who train real estate agents as well.  In order for Realtors to build trust, they need to be authentic.

A brief 2004 article by Michael Angier (Authenticity Matters: Are you the real McCoy; Sales & Service Excellence Essentials. Vol. 4 Issue 9, p10) highlighted the necessity for authenticity in the sales environment.  He stated that “People like to do business with people they like. And they like people who are like themselves… Buyers today are savvy. They have more choices. And they can tell whether the company and the people in it are congruent. They seek out, resonate with and tend to be loyal to companies that are authentic. Your uniqueness and the things you’re best at doing are part of your differentiating position. It’s who you are—your identity. It’s what people can relate to. If there’s anything false, made up or covered over, your prospects will sense it. And they can’t even tell you why they didn’t buy…”  Realtor authenticity would certainly positively affect client satisfaction.

Realtor authenticity will not only build trust but can also increase sales.  And indeed, a 2006 research article by Allen Schaefer and Charles Pettijohn (The Relevance Of Authenticity In Personal Selling: Is Genuineness An Asset Or Liability? Journal of Marketing Theory & Practice. Vol. 14 Issue 1, p25-35) confirms that authenticity is related to sales performance.  Their results indicated that salespeople who felt more authentic in their roles performed at higher levels and had a higher commitment to “personal selling.”

What do you think?  Below is the framework of the Commitment to Excellence Program as adopted by the NAR is below (from nar.realtor/policy/commitment-to-excellence). It seems to me that Realtors should already be striving to be competent in these areas:

1) Being current and knowledgeable about the laws, regulations and legislation affecting the real estate disciplines the REALTOR® engages in, and about real estate in their community generally.

2) Understanding the Code of Ethics is a living document, and keeping themselves informed about its duties and obligations on an ongoing basis.

3) Providing equal professional services to all consistent with Article 10 of the Code of Ethics.

4) Advocating for property ownership rights in their community, state and nation.

5) Acknowledging and valuing that honesty and integrity are fundamental and essential to REALTORS® being known as consumers’ trusted advisors.

6) Becoming and remaining proficient in the use of technology tools to provide the highest levels of service to clients, customers and the public, and facilitating cooperation by sharing accurate, current information with consumers and with other real estate professionals.

7) Keeping up-to-date on laws and regulations governing data privacy and data security, and taking necessary and appropriate steps to safeguard the privacy and integrity of information entrusted to them.

8) Committing themselves to enhancing their knowledge and skills in the real estate areas of practice they engage in on an ongoing basis.

9) Providing superior customer service.

10) Appreciating that courtesy, timely communication and cooperation are fundamental to facilitating successful real estate transactions, and to building and maintaining an impeccable professional reputation.

11) As a broker-owner or principal of a real estate company, being committed to creating and maintaining an environment that promotes excellent customer service consistent with these standards.

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