Consumers are devolving real estate

Consumers choose their agents
Consumers directing real estate industry (infographic from househuntnetwork.com)

The National Association of Realtors annual Profile of Home Buyers and Sellers (nar.realtor) reveals insight into consumer real estate trends.  It provides an understanding into home buyers’ and sellers’ experiences and what they want.  One aspect of focus from the Profile is how consumers choose their real estate agent.  The survey consistently indicates that a referral from a friend, neighbor or relative plays a big part in their choice.  But how do buyers and sellers view real estate brands?

There are reams of research about the relationship between brands and consumers.  However, recent data regarding millennials suggest that brand loyalty may be changing.  Jeff Fromm’s article for Forbes (Why Label Transparency Matters When It Comes To Millennial Brand Loyalty; forbes.com; December 13, 2017) points out what consumers are looking for and what they deem important.  Fromm states

If the brand doesn’t provide the information they need, millennials will look elsewhere… when millennials make purchase decisions, they’re considering more than the traditional drivers of taste, price and convenience.  They value authenticity, and make decisions based on the way they perceive brands to impact their quality of life, society as a whole, and how that brand may be contributing positively to the world.”

Real estate brokers and agents should pay close attention to the new consumer research.

This evolution of brand loyalty and how consumers perceive brands may explain the growth of independent brokers.  A 2015 Special Report by Inman Select (inman.com) The Shift Toward Independent Brokerages indicates that the number of real estate agents affiliating with independent brokerages (not affiliated with corporate or franchise real estate companies) grew significantly over the last decade.  The percentage of agents affiliating with independent brokers jumped from about 45 percent in 2006 to about 55 percent in 2015.  About 80 percent of real estate brokerages are independent.  And the trend is expected to continue.

According to the Special Report, the major advantage cited for affiliating with a brand name brokerage is brand awareness.  However, there may be a limit to the influence of a real estate brand.  Unlike retail brands, real estate brands do not have total control over the consistency and quality of the services provided.  That is left to the individual agent.  Independents, on the other hand, cite the ability to quickly adjust to consumers’ needs and being focused on the local real estate market as an advantage.

Yes, the real estate industry appears to be devolving.  Another example of the devolution is a decreasing reliance on the MLS for home listings.  It’s not to say that home sellers are not listing their homes with agents, because an increasing number of sellers are looking to agents for their expertise.  However, brokers and agents are maintaining control over their inventories through alternative means of selling homes, such as pocket listings.  An increasing number of brokers are also restricting their listings from internet syndication to increase the quality of information provided to consumers.  Although it may sound counter-intuitive to not widely broadcast a home for sale on the MLS or internet, however, a lack of transparency remains a problem for some real estate aggregator portals.

Are real estate brokers and agents listening?  The business of real estate is changing and devolving.  Control over the industry has slowly been transferred to real estate consumers.  Real estate consumers are savvy and intelligent.  They know if a broker/agent is really focused on revenue streams, gimmicks and salesy techniques.  Real estate consumers want agents and brokers who are authentic, transparent, and provide a quality service.

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 remodeling to stay or sell

home remodeling
Home remodeling (infographic from census.gov)

The Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University predicts expanded growth of home remodeling and renovations through most of 2018.  That’s a good indication that the economy has picked up and the many homes that fell in disrepair after the Great recession are getting the much-needed attention to extend their functionality.

It wasn’t that long ago when Kermit Baker wrote about a crisis of the declining housing stock due to extensive deferred maintenance (The Return of Substandard Housing; housingperspectives.blogspot.com; February 27, 2013).  The article written for the Joint Center for Housing Studies of Harvard University highlighted the considerable reduction of home maintenance as measured by home owner “maintenance spending” during the Great Recession.  This seemed to be a low point for the country’s housing stock.  The 28 percent decrease in maintenance spending between 2007 and 2011 essentially nullified the renovation spending during the housing boom.

Home remodeling activity
Home remodeling activity Q3-2017 (graph from jchs.harvard.edu)

The Remodeling Futures Program releases a quarterly data for Leading Indicator of Remodeling Activity (LIRA). The LIRA is a “a short-term outlook of national home improvement and repair spending to owner-occupied homes.”  The most recent data indicates that home remodeling and repair spending will escalate from the fourth quarter of 2017 into the third quarter of 2018, estimating an increase from 6.3 percent to 7.7 percent.  The significant increase in home improvement spending is attributed to a strengthening economy, home equity gains, and low home re-sale inventory.  Chris Herbert, Managing Director of the Joint Center for Housing Studies is optimistic about maintenance spending.  Herbert said:

“Recent strengthening of the US economy, tight for-sale housing inventories, and healthy home equity gains are all working to boost home improvement activity…Over the coming year, owners are projected to spend in excess of $330 billion on home upgrades and replacements, as well as routine maintenance.

The current LIRA data doesn’t include the effects of recent hurricanes.  It is expected that those recent disasters will significantly increase the anticipated projected maintenance spending.

Home owners really have no choice but to spend on renovations, remodeling and repairs, especially if they are planning on selling their home.  Most home buyers want a turnkey home, where the home is fresh and new and offers minimal maintenance during the first year of ownership.  The desire for a turnkey home is probably why new home sales are at a ten-year high.  This week, the US Census Bureau (census.gov) released new home sale data that indicates a month-over-month increase of 6.2 percent, and a year-over-year increase of 18.7 percent!  To compete with other re-sales and new homes, home sellers must factor in the cost of home renovations.

There are many home owners who still can’t afford to move.  The fact that many are still priced out of the move-up market has been a major issue holding back the housing market.  This phenomenon is also responsible for continued low home re-sale inventories.  As a result, many home owners are staying in their homes much longer than anticipated.  The National Association of Realtors indicated in the Home Buyer and Seller Generational Trends Report 2017 (nar.realtor) that home buyers anticipate staying in a home about twelve years.  This is an increase of about five years compared to a decade ago.

Although many home owners still can’t move, they are deciding to do home “make overs.”  The make overs will give their homes a fresh look, that typically include new floors and paint schemes.  Additionally, kitchen and bathroom renovations modernize the home.  However, home owners needing more room, are opting to expand their homes to give them larger spaces.  Some home owners are going beyond the basics and creating different spaces by moving walls.

Regardless of your reasons for home renovations and repairs, home improvement experts recommend to create a budget and stick to it, and always hire licensed contractors.

Copyright© Dan Krell
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Real estate contract know-how

real estate contract
Do you know real estate? (infographic from househunt.com)

When I started selling homes almost sixteen years ago, a typical real estate contract (with addenda) may have been about twenty pages.  My mentor used to pine about the two-page contracts he used when he started in real estate.  I used to think he was exaggerating, but I found that he was actually telling the truth.  It is true that real estate contracts have evolved and become quite lengthy through the years. Today, our local Realtor contract with addenda can exceed sixty pages!  As much as it may sound like a chore, you should take the time to read and understand the real estate contract you are asked to sign.

In today’s world of convenience and digital everything, electronically signing your real estate contract may seem like a time saver.  Real estate apps make it all too easy for your agent to email you a boiler plate contract and ask you to click the mouse to sign it.  But do you really know what you’re signing?  More importantly, does your real estate agent know what they are asking you to sign?

A typical Realtor contract is a legally binding contract once it is ratified and delivered to all parties.  That means there are potential consequences for not doing what you agreed to do.  Don’t solely rely on your agent for an explanation of the contract, they may not fully understand it or its nuances.  As pedestrian as it sounds, read through the contract before you sign it.  Reading the contract will inform you of the terms and conditions to which you’re agreeing, which include your obligations and contingency timelines.  Reading the contract will also alert you to any errors and you need clarified.

The terms and conditions of your real estate contract are more than just the sale price and closing date.  Both the home buyer and seller have obligations in our local Realtor contract.  A few of the many obligations included in the terms are: settlement, obtaining financing, delivering a “clean” title, and providing access to the property.

Are there contingencies?  Typical real estate contract contingencies include financing, appraisal, and various inspections.  However, other contingencies may be included too, such as the buyer’s home sale, the seller finding a home, third party approval, or even reviewing the county or city master plan.  The contingencies you choose may vary depending on your situation.  Contingencies are time limited.  The contract describes how each contingency is met as well as timelines for completion and description of giving notice and responses.

Although the Realtor contract has become increasingly lengthy, it has become more standardized (at least in my area).  In the past, local agents needed to know or find out the contract and addenda requirements for multiple counties and cities, much of the time falling short.  Today, the Realtor contracts and addenda we use in Maryland are mostly consistent with each other, making it easier to put together and understand.

Make sure you are comfortable with the real estate contract you are signing.  You should ask your agent to take the time to sit with you and review the contract before you sign it.  If you’re a first-time home buyer or seller, getting the one-on-one review will allow you to ask questions about your obligations and the process.  Even if you have bought or sold a home in the past, reviewing the contract with your agent will make you realize how times have changed.  Since the contract is a devise, always consult with an attorney for legal advice.

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.

Buyer’s market home selling

Buyer's Market
Home Selling Mistakes (infographic from floridarealtors.org)

As winter approaches, many home sellers will be contemplating their next move after their homes have not sold.  It is likely that a volatile housing market awaits home sellers during the first half of 2018.  If you’re planning to list your home, you should have a selling plan that is able to adjust to market conditions quickly.  In other words, know about home selling in a buyer’s market.

The good news for home sellers is that this year’s home sale prices continue to climb, as the September 26th 20-city composite of the S&P Corelogic Case Shiller National Home Price Index (spindices.com) revealed.  The national index during July increased 5.8 percent compared to the same period last year, while the Washington DC area realized a 3.3 percent year over year gain.  However, there is expectation home sale prices may moderate or even slightly decrease in the first quarter of 2018 because of Fed policy and other market forces.

David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices stated in the release:

“While home prices continue to rise, other housing indicators may be leveling off. Sales of both new and existing homes have slipped since last March. The Builders Sentiment Index published by the National Association of Home Builders also leveled off after March. Automobiles are the second largest consumer purchase most people make after houses. Auto sales peaked last November and have been flat to slightly lower since. The housing market will face two contradicting challenges during the rest of 2017 and into 2018. First, rebuilding following hurricanes across Texas, Florida and other parts of the south will lead to further supply pressures. Second, the Fed’s recent move to shrink its balance sheet could push mortgage rates upward.”

Of course, home sale price indices only show sale prices for homes that sell.  And while home sale prices are increasing back to record levels in many areas, the volume of homes sold during 2017 so far is disappointing.  According to a September 20th NAR news release (realtor.nar), August’s existing home sales dropped 1.7 percent.  The Pending Home Sale Index for August dropped 2.6 percent, which made the NAR revise their 2017 home sale forecast to be “slightly below the pace set in 2016.”  Home sale volume in the first quarter of 2018 may also lag due to continued lack of inventory and anticipated increasing mortgage interest rates.  Lawrence Yun, cheif NAR economist, quipped

“The supply and affordability headwinds would have likely held sales growth just a tad above last year, but coupled with the temporary effects from Hurricanes Harvey and Irma, sales in 2017 now appear will fall slightly below last year…The good news is that nearly all of the missed closings for the remainder of the year will likely show up in 2018, with existing sales forecast to rise 6.9 percent.”

Since these are August sales figures from the NAR, it is an unfortunate truth that August sales were not really affected by hurricanes. Mostly because hurricane Harvey hit Texas the very last days of August and Irma hit Florida in September. The main affects of the hurricanes disruption to existing home sales will be seen in September’s statistics. And “missed closings” is a euphemism for phantom closings, because they don’t really exist. So, with regard to sliding home sales, you should take Yun’s “headwinds” of supply and affordability very seriously.

Home selling in 2018, a buyer’s market?

Home sellers positioning themselves solely on this year’s home sale prices may be in for a rude awakening next year.  Sellers may feel as if the market is getting soft, however that may change the latter half of 2018 as home prices moderate.  Sellers will need to be reasonable.  They will need to have awareness of many factors besides home sale prices, including existing home sales volume and neighborhood sale trends.  Including home selling in a buyer’s market.

If you’re planning to sell your home, you will need to play to your audience (home buyers), and listen to their feedback.  Know how to sell in 2018.  Prepare your home before listing it in the MLS by repairing deferred maintenance and possibly making updates.  Home buyers have a track record of paying more for a home that has been totally renovated.  However, if you don’t completely repair and/or update your home, be prepared to lower your sale price.

Be flexible to quickly adjust to the market.  Feedback is highly important to get other’s perspectives about your home.  However, take Realtor feedback with a grain of salt.  Instead, have your agent collect buyer feedback at open houses. Home buyers tend to be more honest when giving feedback, and it can be especially helpful in a buyer’s market.  If the consensus is that the price is too high, the price may actually be too high.  If buyers are turned off by the condition and/or curb appeal of the home, consider making repairs or lowering price to reflect the condition.  If they are focused on your décor, consider hiring a professional stager to make the home more appealing.

Rather than a soft market, we are experiencing the struggle for a balanced market due to an inventory shortage and sharply decreasing affordability.  The last year and a half has been all about the home seller.  However, 2018 will be about the home buyer.  Home selling in a volatile or buyer’s market can be challenging. If you’re planning a sale, be realistic about your home’s condition and value. Over pricing your home from the start can make your home languish on the market, which could get you a much lower price if it sells.

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.

Quantitative easing housing legacy

quantitative easing
Fed Balance Sheet (infographic from raymondjames.com)

The Fed stopped purchasing mortgage backed securities and other assets through quantitative easing a few years ago.  But the  Fed still maintains the estimated $4.5 trillion of assets it has accumulated by extending asset maturity and reinvesting in the securities.  The result has been historically low interest rates, and bubble-esque home price spikes.  But that may change rapidly over the next six months.

Quantitative easing was a name for the Fed’s “large scale asset purchases” (LSAP) from mid-2008 to 2014.  The purpose of the LSAP was to keep boost the economy and housing markets by keeping interest rates low.  According to the Fed (federalreserve.gov):

In December 2008, as evidence of a dramatic slowdown in the U.S. economy mounted, the Federal Reserve reduced its target for the federal funds rate–the interest rate that depository institutions charge each other for borrowing funds overnight–to nearly zero, in order to provide stimulus to household and business spending and so support economic recovery. With short-term interest rates at nearly zero, the Federal Reserve made a series of large-scale asset purchases (LSAPs) between late 2008 and October 2014.

In conducting LSAPs, the Fed purchased longer-term securities issued by the U.S. government and longer-term securities issued or guaranteed by government-sponsored agencies such as Fannie Mae or Freddie Mac. The Fed purchased the securities in the private market through a competitive process; the Fed does not purchase government securities directly from the U.S. Treasury. The Fed’s purchases reduced the available supply of securities in the market, leading to an increase in the prices of those securities and a reduction in their yields. Lower yields on mortgage-backed securities reduced mortgage rates as well. Moreover, private investors responded to lower yields on U.S. Treasury securities and agency-guaranteed mortgage-backed securities by seeking to acquire assets with higher yields–assets such as corporate bonds and other privately issued securities. Investors’ purchases raised the prices of those securities and reduced their yields. Thus, the overall effect of the Fed’s LSAPs was to put downward pressure on yields of a wide range of longer-term securities, support mortgage markets, and promote a stronger economic recovery.

In the June Open Market Committee press release, the Fed signaled that it would begin unwinding quantitative easing later in 2017 through “balance sheet normalization.”  Of course, the proviso was that the economy would “evolve broadly.”  The normalizing the balance sheet would “gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities.”

There is little doubt that the 3.1 percent real Second Quarter 2017 GDP (bea.gov), along with a record breaking housing market during the first half of 2017 was a large part in the decision to move forward with the balance sheet normalization program.  At the very end of September’s Open Market Committee press release, the Fed stated that balance sheet normalization will begin in October.

How will unwinding quantitative easing affect the housing market?

Since the Fed’s announcement last week to unwind quantitative easing, there has been a lot of speculation as to how the housing market will respond.  Lawrence Yun, chief economist for the National Association of Realtors, issued a statement saying that he believes the Fed’s unwinding pace will be “in slow motion” and “mortgage rates would rise up only modestly over time.”  He expects that the 30-year fixed rate would only reach about 4.7 percent by the end of 2018 (nar.realtor).

But a sober 2013 article written by Edward Pinto, a former Fannie Mae executive, pointed out the immediate impact and consequences of quantitative easing (Is the Fed blowing a new housing bubble? wsj.com, April 9, 2013).  Pinto asserted that the home price surge of 2013 was due to the Fed’s LSAP rather than the often cited “broad based improvements in the economy’s fundamentals.”  Pinto stated, “The average mortgage rate during the first nine years of the 2000s was 6.3% compared with today’s [2013] rate of less than 3.5%. If mortgage rates were to increase to a moderate 6% in three years, say, some combination of three things would have to happen to keep the same level of homeownership affordability. Incomes would need to increase by a third, house prices would need to decline by a quarter, or lending standards would need to be loosened even further.”

Maybe the unwinding of quantitative easing is past due.  Home sale prices have since surged past 2006 home prices in some areas, and has considerably reduced the affordability of homeownership for many Americans.  Average wages have not increased significantly (if at all) since quantitative easing began.  Lending has loosened some, but not enough to make up for missing home buyer sectors (such as the move-up home buyer).

Home sellers may be in for a shock in 2018.  Rising interest rates will certainly moderate home prices.  However, rising mortgage rates would likely mean a return to stable housing market.  Mortgage interest rates will rise as sharply as they were reduced when the LSAP began, most likely rising above 5 percent by the end of 2018.

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.