Real estate market report 2005

by Dan Krell © 2005

Many experts are not only talking about the real estate bubble, but how it’s about to burst. I was interested in finding out how many articles and proclamations exist about the bursting bubble, so I googled “housing bubble Washington, DC.” There were over 800,000 links to people and articles (some going back to 2002), talking about how the bubble is about to burst. Many talk about concerns of financial impact and others talk about a doomsday scenario when the bubble bursts. It sounds a bit negative if you ask me.

If you look at the mid year statistics, it seems that the Washington D.C. real estate market is still in full swing. You can decide for yourself based on the statistics for single family homes in Montgomery County. So, here is the mid-year report card, based on the statistics compiled by the Greater Capital Area Association of Realtors (GCAAR). Homes listed for sale for June 2005 totaled 2,004, up from the 1,971 homes listed in June 2004, an increase of 1.7%. The fact that more homes are coming on the market sounds encouraging, however, the total active listings in June 2005 (homes listed for sale but not under contract) are down 4.5% from the same time last year. So, although the supply of homes being listed for sale rose, the actual amount of homes available on the market has reduced because there are homebuyers ready to gobble these homes up as they come onto market.

It seems as if the homebuyers’ appetites for homes are insatiable. The number of contracts and settlements are up for the period of January to June 2005 as compared to the same time period in 2004. The number of houses where status changed from active to contract during the first six months of 2005 increased 1.3% compared the first six months of 2004. Additionally, the number of homes that were settled during the first six months of 2005 increased 2.5% compared to the same six month period in 2004.

Interestingly, I would like to note the sales of homes that sold for $1,000,000 or more increased from last year. There were 389 of these million dollar plus homes that sold in the first six moths of 2005, compared to the 265 sold in the same time period in 2004, that is a 46% increase! So far, for 2005, the average sale price in Montgomery is $544,719. Compared to $477,937 for the same time period in 2004, it is an increase of $66,782! (These statistics can be found at the GCAAR website www.gcaar.com).

Looking at the statistics above, you may ask yourself, “can prices continue to climb and record numbers of sales continue year after year?” Looking at the big picture, the real estate market is like all other commodity markets, such that it is subject to economic influences. Rather than having a bubble burst and having residue all over the floor, the real estate market may correct itself as economic factors change. Don’t get me wrong, a correction in the market is not pretty, but it does not mean the end of the real estate market either (does anyone remember the correction in the real estate market in the early 1990’s).

This column is not intended to provide nor should it be relied upon for legal and financial advice.
This column was originally published 7/18/2005.
Copyright Dan Krell 2005.

Finding a real estate bargain

by Dan Krell © 2005
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Many first-time homebuyers and investors I encounter always ask about foreclosures and handyman-specials. Essentially what they are trying to communicate is that they want a bargain. What are foreclosures and handyman-specials? In the past, it was assumed that if you buy a foreclosure or handyman special, you really got a bargain. Is this still true?

A foreclosure is a home that has been repossessed by the holder of the mortgage note, usually a bank. The process of foreclosure varies depending in which state the foreclosed home exists and what type of mortgage document exists on the home. To make a long story short, the home is either auctioned to the highest bidder, or the home is taken over by the bank to be sold on the market. The foreclosed homes that are put on the market are also called REO, which stands for real estate owned by bank.

Auctions for foreclosed homes are usually conducted at the courthouse by a local auctioneer. These types of auctions are also known as a trustee’s sale or substitute trustee’s sale. If you are interested in attending an auction, you can find the advertisements for the auctions in the local papers’ classified section. To bid on the home, you must have the minimum deposit in the form of certified funds. The minimum deposit is usually posted in the advertisement. If you are buying a foreclosed home at auction, you are essentially buying it “as-is” without the ability to view the interior.

When the bank has taken title to a foreclosed home, a Realtor is usually hired to list the home on the Multiple List Service (MLS). In this scenario, you have an opportunity to view the home before you decide to submit your offer. The home is generally sold “as-is.” Hopefully, you will have a Realtor of your own to advise you of the value and general condition of the home.

Generally, a foreclosed property has issues due to the time involved in the foreclosure process. Sometimes the previous owner will trash the home, or take the copper or other fixtures out of the home. Additionally, the home will be closed up with no utilities connected for months. This may lead to mold growth, water penetration, and/or other structural and environmental concerns.

A handyman special is typically a home that is owned by a person who either lives in the home or uses it as a rental property. The home is usually aged a bit, and has not been looked after or updated. Many times, a handyman special will require mostly a great deal of cosmetic work, such as painting, carpet, etc. Sometimes, there are some structural concerns, such as (but not limited to) replacing a roof, or fixing walls.

Overall, whether you are looking at a foreclosure or a handyman special, you will have to determine if the home is worth the price you want to pay. In addition to the acquisition cost, you will have to consider all the costs to repair the home, as well as the costs to make updates if necessary. It is also important to look at the recent comparables in the neighborhood to see if the price or adjusted price (price plus costs for repairs) is in line.

One final word; in this seller’s market, there are very few bargains. Foreclosures that once sold for pennies on the dollar, are selling at market price. Handyman specials are often marketed “as-is” and offered not much less than market price. The most important thought to consider is “can you see yourself living here.”

This column is not intended to provide nor should it be relied upon for legal and financial advice.
This column was originally published in the Montgomery County Sentinel 6/27/2005.
Copyright Dan Krell 2005.

Searching for your home on the internet

by Dan Krell © 2005
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Most homebuyers today use the internet to look for homes. These homebuyers are either looking at various sites to find homes that are still on the market, or are receiving listings from their Realtors by e-mail. This is no different with my clients. Clients that I work with always find a discrepancy or two on the homes that still say “active” (meaning they are available to see and place an offer). Sometimes the home that is marked “active” will actually be under contract, or “off the market” for one reason or another. The question that is asked is, “if the home is no longer available to show, why is the status still active?”

That is a very fair question. The answer lies in several factors. The first factor is the technology itself. The second factor lies in procedure and etiquette for entering information in the Multiple List Service (MLS). The third factor is human error.

Many Realtors and Brokers have web sites where homebuyers can search for homes that are for sale. You can get an idea of the abundance of these sites by going to an internet search engine and type in “home search Silver Spring.” The thousands of sites that exist all are run by different forms of technology. Although these websites pull information from the local MLS, the nature of the software running the websites will update the listings at different times. Some websites are actually a day or two behind the actual MLS. So, a home showing “active,” may actually be under contract.

Some websites are updated sooner than other websites, however, some are easier to navigate. If your desire is to find the home and jump on it before anyone else, relying on internet listings is not the way to go.

So much for technology. How about the human element? Realtors inputting information into the MLS also must follow a precise procedure and etiquette. The reason for the procedures is to ensure the accuracy of the information. A Realtor must input their listings within twenty-four hours of obtaining the listing, and must input all subsequent information accordingly. When the status for a home changes, such as having a contract or settling, the Realtor must input this information as well. It gets a bit sticky when the Realtor is working on final negotiations for a contract, but the contract has not been ratified. There is no contract yet so the status can not be changed. The Realtor won’t change the status until the final signatures are on the contract, and this limbo time will create some confusion and frustration for some homebuyers and Realtors.

The final reason for discrepancies to exist is human error. There are times when the listing agent (Realtor who represents the seller) will forget to change the status of the home. This is mostly unintentional, however, it does add to the homebuyer’s frustration.

Searching for homes on the internet is helpful, fun and convenient. It is not perfect. Before running out to look at the home of your dreams, make sure it is still available by asking your Realtor to check the status. This will reduce your frustration and make home buying a more pleasant experience.

This column is not intended to provide nor should it be relied upon for legal and financial advice.
This column was originally published in the Montgomery County Sentinel 6/20/2006.
Copyright Dan Krell 2005.

Risky mortgages

by Dan Krell © 2005

Reading Friday’s Washington Post Article about Alan Greenspan’s comments on the housing market does not surprise me. Mr. Greenspan was concerned about the increase in the use of what was termed “exotic mortgages,” specifically interest only mortgages. A lot of media focus has been given to this type of loan lately because the national housing market. Locally, there has been media attention as well. Like me, the Washington Post has recently written about the potential hazards of interest only mortgages. In addition to interest only mortgages, there are many other non-traditional mortgages that are popular as well, which include 100% financing, no-doc loans, balloon notes, option arms, “sub prime” mortgages, and their many variations of each. I will only describe interest only mortgages and 100% financing. You can contact your local lender for more information regarding all non-traditional mortgage programs.

These non-traditional mortgages were designed to increase home ownership and to help those that can qualify for traditional mortgages. However, many more homebuyers are looking toward these non-traditional mortgages to help them purchase more expensive homes which they might not otherwise qualify.

An interest only mortgage is just that, it is a mortgage where the borrower’s monthly payments only go to pay off the interest of the loan. The principal is never paid back until the home is sold or the mortgage is refinanced. There are several varieties of this type of loan but the underlying goal is the same, which is to allow a borrower to have lower mortgage payments. The intent for this program is to lower the mortgage’s impact on the borrower’s cash flow. In reality, however, the borrowers’ cash flow has been increased because of the added debt from the higher priced homes they purchase. Doing so only puts the borrower at a higher risk because the borrower’s cash flow has not been reduced and the mortgage principal never decreases during the life of the loan.

Another popular mortgage program is the no down payment mortgage, or 100% financing. This program helps borrowers who have little cash for down payment and closing costs. The program provides the borrower with a loan that is one hundred percent of the purchase price. Typically, the borrower relies on a long term approach for building equity. However, recently, borrowers have relied on the strong real estate market to grant them short term equity gains.

These are two wonderful mortgage programs, when employed properly help homebuyers. The risk in these two programs is paradoxical. What was devised to help homebuyers with limited funds and/or cash flow becomes a tremendous burden when the borrower has a financial set back. Because the principal on the loan is either not reduced at all or is reduced marginally within the several years of the loan, the borrower could easily become “upside down” if they fall behind on their mortgage. Added interest and penalties on unpaid amounts quickly add additional thousands of dollars to the overall mortgage. Being upside down is a term used to describe when you owe more than the home is worth.

Again, these mortgage programs are great devices that have helped to increase home ownership across the country. All mortgages are risks, some are riskier than others. Homebuyers should understand the risks involved before choosing any mortgage program.

This column is not intended to provide nor should it be relied upon for legal and financial advice.
This column was originally published in the Montgomery County Sentinel 6/2005.
Copyright Dan Krell 2005.

How your interest rate effects you

by Dan Krell © 2005
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Last week, I was in Starbucks talking about interest rates and the current real estate market. It was not unusual that I was in Starbucks nor conducting business there, as it seems that Starbucks, these days, maybe second to the golf course in the culmination of business. This day, I happened to be talking with Ken Cusick. Ken and I were discussing the vulnerability of those homeowners who purchased their home with adjustable mortgages, primarily interest only mortgages. Ken had a lot to say about this topic. Ken knows what he is talking about because he is the principal of Cusick Financial, LLC, a financial consulting firm located in Olney, MD specializing in residential and commercial financing.

Ken and I agreed that many homeowners have a great mortgage rate because of the historically low interest rates we have had recently. I expressed my concern about the many homeowners who have bought their home with an interest only or variable rate mortgage to either allow them to buy more home than they normally could afford, or to keep payments down. After all, the interest rates for these mortgages usually started between three to four percent. This cut the mortgage payment by at least a few hundred dollars a month, if not more.

Ken had a few things to say in response, as well as a few words of advice. First, Ken asserted that because the interest only and variable rate mortgages are tied to short term indices, they usually tend to be a better deal than 30-year mortgages (which are tied to long term bonds and indices). Depending on the type of index the mortgage is tied to, the interest rate can change annually or even as frequently as monthly. He stated that the unusually low interest rate environment we have had in the past five years has made housing more affordable, which paradoxically led to the significant increase in home prices we have experienced.

Second, Ken stated that those homeowners who have a fixed rate mortgage would always be able to afford their home as long as their income never decreases and they never need to sell their home. Even if there is a correction in the real estate market to lower home prices, these homeowners are in good shape.

Third, homeowners who have interest only or variable rate mortgages are subject to the volatility of the market as rates rise and fall, and are at significant risk. As interest rates rise, their monthly mortgage payments rise. Additionally, as interest rates rise, the cost of housing rises and housing demand decreases. This creates difficulty for those who were betting on interest rates to stay low because the affordability of the mortgage becomes an increasing burden on those who may not be able to afford higher payments. Add that to the possibility of their home being devalued increases the burden of loss.

Ken’s advice was simple. If the homeowner could not afford the mortgage payment with an increase of of interest by two to three percentage points, then they should refinance into a fixed rate mortgage. He admits the payment will be higher, but the comfort that the payment will not change should be peace of mind in an uncertain future.

If, however, the mortgage rate does not adjust in three to five years and the homeowner intends to sell in within that time period, Ken says to hang in there. The logic is that the only risk the homeowner takes is the possibility of the home depreciating in value. If the mortgage balance is 70% to 80% of the current home value, then the risk is much less.

To many, Ken’s advice would seem a bit too conservative. I, however, believe that this advice to be the consensus of good financial planning.

This column is not intended to provide nor should it be relied upon for legal and financial advice.
Copyright Dan Krell 2005