Negative equity stats likely erroneous

negative equity
What is a short sale (infographic from lender411.com)

Before the Great Recession, there was the foreclosure crisis of 2007. That was the year that the housing bubble popped and home negative equity soared. Many home owners negotiated with their lenders to keep their homes, while others lost their homes to foreclosure. The Mortgage Forgiveness Debt Relief Act of 2007 was one of the first measures to assist distressed homeowners during the financial crisis. The Act initially was to end in 2009 but has been extended annually. The Act was recently retroactively extended for 2017.

The purpose of the Act was to address tax liabilities that distressed homeowners faced when they tried to save their homes. Because debt forgiveness is typically considered taxable income, a mortgage balance reduction via mortgage modification or short sale would have resulted in a tax bill to a homeowner who was already experiencing a financial hardship.

Recent home equity gains in the housing market should help many home sellers who would have otherwise needed a short sale. Highlights from CoreLogic’s Q4 2017 Home Equity Report (corelogic.com) indicated that about 4.9 percent of mortgaged homes have negative equity (which is a huge improvement from the almost 31 percent reported in 2012 by Zillow’s Negative Equity Report). Additionally, CoreLogic reported that the national average of home equity gained by homeowners over the past year was in excess of $15,000. However, there is disparity in home equity growth by region.

Dr. Frank Nothaft, chief economist for CoreLogic stated:

“Home-price growth has been the primary driver of home-equity wealth creation. The CoreLogic Home Price Index grew 6.2 percent during 2017, the largest calendar-year increase since 2013. Likewise, the average growth in home equity was more than $15,000 during 2017, the most in four years. Because wealth gains spur additional consumer purchases, the rise in home-equity wealth during 2017 should add more than $50 billion to U.S. consumption spending over the next two to three years.”

The National Association of Realtors testified on March 14th to the U.S. House Ways and Means Subcommittee hearing on “Post Tax Reform Evaluation of Recently Expired Tax Provisions” to make the Mortgage Forgiveness Debt Relief Act permanent. In his testimony, Realtor Barry Grooms discussed the plight of many homeowners who are surprised to find that they are upside-down on their mortgage despite national home price gains.

Grooms made an argument why the Mortgage Forgiveness Debt Relief Act should be permanent.  The Act has been retroactively extended each year in recent years leaving many short sellers “sweating it out” until the end of the year.  Part of the decision-making process for a short sale is a potential tax liability. Many home sellers take the chance that the Act will be renewed retroactively. But others do not want to take the chance of incurring a large tax liability.

Negative equity statistics are likely to be erroneous. The number of homes with negative equity is probably under-represented due to deferred maintenance.

Yes, home prices have significantly increased, which has grown home equity. But the statistics for home equity assume that all homes are worth “retail value.” The retail value of a home is the full price a home can sell. In today’s market the home must be in better-than-average to excellent condition to sell for retail value.  We don’t know the real value of any home until it’s sold.

In his testimony, Grooms touched upon a number of issues why homeowners are selling for less than they owe. However, not addressed by Groom is the number one reason why homeowners are under-water and why many home sellers need to sell via short sale. Property condition. The property condition crisis was highlighted in a February 2013 article by the Harvard Joint Center of Housing Studies entitled “The Return of Substandard Housing.” The lack of updates and/or deferred maintenance in a home can significantly decrease its value.

Copyright© Dan Krell
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Protected by Copyscape Web Plagiarism DetectorDisclaimer. 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.

Stock market and home buying

stock market
Real estate and the economy (infographic from nar.realtor)

It’s easy to understand why the recent stock market volatility triggered some into proclaiming that the sky is falling.  The potential for losing money can evoke some strong emotional responses.  Interestingly, some experts have speculated how the recent stock market activity would spill over to consumer spending, including the housing market.  Reporting such as Jacob Passy’s recent article titled “Could Stock Market Volatility Cause House Prices to Fall?” (Marketwatch.com; February 8, 2018) makes for good click-bait.  However, the details of the article would suggest otherwise.  The consensus is that the recent Wall Street activity is not likely to impact the housing market.

Passy is trying to make an argument that the housing market will suffer from the recent stock correction, and subsequent interest rate increases.  But Daren Blomquist, senior vice president of communications at Attom Data Solutions [formerly RealtyTrac], was quoted in Passy’s article saying “The strength of the housing market and economy in general is what’s spooking the stock market.”  However, the volatility may make some home buyers wary of making an investment in housing.

The stock correction and increased Wall Street volatility is not a new phenomenon.  The last market correction with lasting volatility occurred in June and August of 2015,through the fall.  The current stock market volatility is part of the cycle of a healthy economy.  Unlike the crash of 2008, current economic fundamentals are positive.

This stock market correction is not unusual, however it is extraordinary.

Seeking Alpha noted that the percentage drop for the two largest Dow losses this year are not even in the top 100 (10 Figures On Historic Dow Correction; seekingalpha.com; February 6, 2018).  And this correction is distinct, according to ZeroHedge, because most individual stocks were left intact (If This Correction Is Over, It Will Be Unique in Leaving Most Individual Stocks Unscathed; zerohedge.com; February 13, 2018).  Many individual stocks actually made gains while the Dow and the S&P stocks “took it on the chin.”  This phenomenon is unique and is said to demonstrate that the economic fundamentals are working.

As for rising interest rates, they are needed to moderate home prices.  If home prices aren’t controlled by market forces, such as interest rates, then homes will become unaffordable for many home buyers.  Mortgage interest are still historically low, even with recent increases.

Homeownership is out of reach for many home buyers because of increasing home prices.  David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, declared in the January 30th S&P CoreLogic Case-Shiller  Home Price Index release:

Home prices continue to rise three times faster than the rate of inflation.  The S&P CoreLogic Case-Shiller National Index year-over-year increases have been 5% or more for 16 months; the 20-City index has climbed at this pace for 28 months.”

Blitzer pointed out that these increases are not based on home buyer demand, stating, “Given slow population and income growth since the financial crisis, demand is not the primary factor in rising home prices.”  Instead, sharp home price increases are due to the lack of homes for sale and new construction.  And until housing inventory increases, “home prices may continue to substantially outpace inflation.

Lawrence Yun, chief economist for the National Association of Realtors, remarked that the recent stock market volatility should not impact the housing market.  He stated, “Underlying economic fundamentals remain strong.”  However, he cautioned that if the stock market retreats further, it could affect home buyers who plan to use funds from their 401k’s and other investment vehicles as down payment sources.

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Prime housing move by Amazon

prime housing
Insight into Amazon (infographic from geekyedge.com)

Amazon is about to make a decision on their “HQ2.”  The highly anticipate decision can be a prime housing move not just for the chosen city, but the region.  As you now know, Montgomery County is on the short list.  Some even have it pegged to be in the top five.  Although many local residents are excited at the prospect of increasing home values, many others are anxious how a Montgomery County Amazon HQ2 will affect their quality of life.

If Amazon chooses Montgomery County, the county will likely see a similar impact that Seattle experienced.  However, rather than be purely speculative, let’s look how Amazon has shaped Seattle.  Stephen Cohen offers interesting statistics looking at how Seattle has changed after Amazon (How Seattle Changed After Amazon Came to Town; seattlepi.com; September 22, 2017).  Cohen points out that Amazon has been based in Seattle since the mid 1990’s, and that the major impact on the town happened when the company moved to the South Lake Union campus (SLU) in 2010.  Since the move, Amazon’s stock price skyrocketed and its market cap exceeded (and has since doubled) that of Walmart.

Cohen’s data goes beyond the pros and cons of having the business giant in the community and compares statistics that span from 2010 to 2017.  During that time, Seattle’s population grew 17.3 percent.  However, it remained as the 18th most populous US city.  Although Seattle followed the national trend of becoming more diverse, its African American population slightly decreased (which was counter the national trend).  Cohen describes Seattle’s population as “skews male,” probably because Amazon’s “workforce is 63 percent male.”

housing
Seattle Case-Shiller home price index (graph from businessinsider.com)

But the home values…Seattle has had one of the hottest and prime housing markets in the country. Seattle’s average home price increases are almost double the national average.  Finding housing in Seattle is very difficult, as the town’s vacancy rate significantly decreased to about half that of the national average.  The city’s median gross rent is 47.6 percent higher than the national average.

Other interesting facts from Cohen’s data…one-person households decreased from about 15 percent to slightly more than 10 percent.  There was a 25.2 percent increase in commuters.  And, the city’s mean household income increased 41.3 percent, which is more than double the national average.

Prime housing is not for everyone.  Cohen cites the sharply increased cost of housing and high cost of living for negatively affected the poor, as well as the middle class.  And although Seattle is the 18th largest US city, it has the third largest homeless population (according to a December 7, 2017 Seattle Times expose “King County homeless population third-largest in U.S.”).

But, Lisa Stiffler reported that Amazon’s philanthropic corporate culture has noticeably changed (What gives? Tech giant Amazon finally boosts its philanthropic rep in its hometown; geekwire.com; December 14, 2016).  She notes that it is evident that employees are volunteering and getting involved with such activities as the Amazon “Non-Profit Expo.”

Seattle’s SLU is described by Stephen Cohen as an “Innovation District,” which is a Brookings Institute term for a “geographic areas where leading-edge anchor institutions and companies cluster and connect with start-ups, business incubators, and accelerators.”  SLU is similar to Montgomery County’s Technology Corridor.  An Amazon move to MoCo’s Tech Corridor would likely dovetail with a $100 million plan to improve I-270 (the infrastructure plan was reported by the Washington Post last April).  Such infrastructure improvements would open up Maryland’s western real estate market, which would ease some of the upward pressure to MoCo’s already tight prime housing market and already increasing home prices.

Copyright© Dan Krell
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Neighbors affect home values

good neighbors
Good Neighbors (infographic from appfolio.com)

The housing market has been fairly good in recent years.  In fact, the shortage of homes for sale has shown how competitive home buyers can be as they try to outbid their cohorts for hot properties.  Even homes that are in need of “tlc” or have been neglected in some way have found new owners too.  But, as I have mentioned in the past, not all homes sell.  And for some home sellers whose homes have not sold, they only need to look their neighbors.

That’s correct.  Your neighbor may have more sway over your home sale and property value than you think.  A 2013 news item from the Appraisal Institute warns home sellers and buyers about the neighbor factor (Bad Neighbors Can Reduce Property Values, Appraisal Institute Warns; appraisalinstitute.org; January 30 2013).  Not only can bad neighbors affect your sale, but can “significantly reduce nearby property values.”

Former Appraisal Institute President Richard L. Borges II, MAI, SRA stated:

I’ve seen many situations where external factors, such as living near a bad neighbor, can lower home values by more than 5 to 10 percent…Homeowners should be aware of what is going on in their neighborhood and how others’ bad behaviors could affect their home’s value.”

“Bad neighbors” are often characterized as inconsiderate, if not sometimes belligerent.  Typical neighbor complaints stem from pets, excessive noise, and poor exterior home maintenance.  In high density neighborhoods (such as townhomes and condos), parking and trash/recycling debris can also be a source of neighbor conflict.

Neighbor disputes are often resolved by talking it out.  However, if you find that your neighbor is not receptive, you may have other avenues of recourse.  If you live in a Homeowners or Condo Association, your association may offer assistance in resolving your issue.

Montgomery County addressed the issue by enacting “Good Neighbor” ordinances in 2011 “to preserve the quality of life” in the county.  The purpose was to reduce the influx of commercial influences into residential neighborhoods, and maintain their domiciliary character.  These ordnances were directed at home based businesses, parking of commercial vehicles, off street vehicle parking, and paving of front yards.

If you believe your neighbor issue arises from a code violation, you can contact the appropriate county department to investigate a complaint.  For example, Housing Code Enforcement can investigate such things as housing and building standards, overgrown weeds, and excess debris in yards.  Whereas the Department of Police – Animal Services Division can investigate common pet complaints such as an unleashed pet roaming the neighborhood, or a neighbor not cleaning up after their pet does their business on your yard or common areas.

Unfortunately, there are occasions where trying to resolve your neighbor issues civilly comes up short.  In extreme instances, however, you may have to seek legal counsel.

Being a good neighbor is a two-way street, often requiring some compromise and offering assistance.  Housing experts suggest that you can resolve your neighbor issues by talking to them.  All too often, neighbors who seem neglectful of their homes are actually in need of assistance.  Regardless of their issues, they may be too proud to ask for help, they don’t know where to get help, or they are so overwhelmed they don’t know they need help.  Talking to your neighbors and lending a hand can not only mend fences and build a stronger community, but may also increase the value of your home.

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Marijuana’s high home values

high home values
Weed makes home values high? (infographic from gobankingrates.com)

Did you know that the licensing of medical marijuana dispensaries in Maryland has begun?  There are only a handful of licensed dispensaries at this time, including one in Montgomery County.  Besides dispensaries, Maryland’s budding medical marijuana industry includes growers and processors.  Even though the industry is just taking off, there is growing support for legalizing marijuana for recreational use.  This is evidenced by recent bills introduced in the Maryland General Assembly that focused on establishing a tax for cannabis sales.  Besides increasing tax revenue for states where marijuana is decriminalized, there also seems to be a phenomenon of high home values.

If Maryland does decriminalize marijuana, it could be a potential source of tax.  The San Francisco Chronicle (6 lessons from legal pot in Washington and Colorado; sfchronicle.com; September 30, 2016)   pointed out that the state of Washington has had a windfall since legalizing pot.  It was reported that Washington collected $135 million for the fiscal year 2015 and $186 million for the fiscal year 2016.  They were expected a fifty percent for the fiscal year 2017.  And that is just on the excise tax on pot products, and doesn’t include the collected sales tax.

About those high home values…

Colorado and Washington state have realized a significant housing boom since decriminalizing marijuana.  Washington DC’s housing market has been buzzing along quite nicely as well.  While the surrounding suburbs’ housing market has slowed, GCAAR’s October stats (gcarr.com) reveal that Washington DC’s home sales have surged about ten percent year-to-date and average home sale prices grew about four percent!  Recent empirical studies have validated the housing-marijuana relationship.

One recent paper that provides such evidence was presented at the 2017 Annual Meeting of the Allied Social Sciences Associations held by the American Economic Association.  Cheng, Mayer and Mayer (The Effect of Legalizing Retail Marijuana on Housing Values: Evidence from Colorado; working paper, 2016) measured the “benefits and costs” of legalizing marijuana expressed in home prices.  They concede that although marijuana legalization is controversial, there are some benefits.  They determined that there is a causal effect such that Colorado’s retail marijuana law implementation was instrumental in its recent housing boom.  They concluded that implementing a retail marijuana law will give home prices a bump of about six percent.  They also found that high home values and inventory are mutually exclusive, such that the increase in housing demand did not affect housing supply.

Are high home values worth the affects of decriminalizing pot?  High home values is not everything.

Regardless of high home values, decriminalizing marijuana is not all peaches and cream.  Not to be a buzzkill, marijuana can also negatively impact real estate too.  Amy Hoak’s reporting lists a number of issues where legalizing marijuana has adverse effects to housing (5 ways marijuana legalization affects real estate; MarketWatch.com; November 25, 2014).

A major issue Hoak points out concerns federal law.  Regardless of any state or local retail marijuana law, the Feds still consider marijuana verboten.  Properties (commercial or residential) that are associated with marijuana related activities and can be subjected to civil asset forfeiture.  Another issue is financing properties related to the marijuana industry.  Federally chartered banks conform to federal law and won’t lend on these properties.

Hoak also points out issues with properties where marijuana is processed, sold or used (commercial or residential).  There has been a significant increase in property explosions in states where marijuana has been decriminalized.  The explosions are likely due to processing marijuana into hash oil, a process that involves butane.  Mold is an issue where marijuana is grown, because of the large amounts of water used in the process.  Much like cigarette smoke, marijuana odors can permeate walls and be very difficult to remove.  Even if a lease forbids it, residential landlords can have problems when tenants grow, process, and smoke marijuana in the home.

Regardless of the increased home value phenomenon associated with retail marijuana laws, some homes can be difficult to sell.  High home values aside, homes that have been “tainted” with odors or mold can languish on the market, even if they are in prime locations.  Finally, Hoak pointed out that people are not keen living next to properties involved in the marijuana industry.

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.