Month: August 2012

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Grading the housing market on a curve – how housing stats can be misleading

Dan Krell, Realtor®
DanKrell.com
© 2012

Home Sale StatisticsDid your teacher ever grade on a curve, where test scores are “weighted” based on the lowest and/or highest score in the class? The typical explanation for such statistical manipulation of raw test scores is to create a distribution where classmates are compared to each other, rather than how well they actually score on the usual grading scale.

The National Association of Realtors® (NAR) August 22nd news release titled “Existing-Home Sales Improve in July, Prices Continue to Rise” at first glance might seem good news, but after a deeper look the news may not be as promising. The release states that the July’s total existing home sales increased 2.3% in July from June, based on July’s seasonally adjusted annual rate of 4.47 million compared to June’s 4.37 million (realtor.org).

Although the adjusted data may have indicated a significant increase in existing home sales, the raw data may suggest something different. If you follow the links on the NAR’s press release through the website, you’ll find yourself at the page titled, “Existing Home Sales” (realtor.org/topics/existing-home-sales/data): where you’ll find a links to home sale data – which includes the “seasonally adjusted annual rate” and “not seasonally adjusted” stats.

Although July’s “seasonally adjusted annual rate” of existing home sales indicated a 2.3% increase over June’s “seasonally adjusted annual rate;” the “not seasonally adjusted” rate (e.g., the raw sales data) indicated that there was a 7.3% DECREASE in existing home sales in July compared to June, and a year to date increase of existing home sales of only 2.647%.

So, what’s the difference between “seasonally adjusted” and “not seasonally adjusted” data? Well, for that explanation, we need to follow the links to the methodology (realtor.org/topics/existing-home-sales/methodology). “Not seasonally adjusted” data is described as raw data that has been basically scrubbed for errors. However, the site states that “It is necessary to “annualize” and seasonally-adjust the existing home sales data so that month-to-month and quarter-to-quarter comparisons can be observed without seasonal variances distorting the overall picture;” thus the “seasonally adjusted annual rate” may be forward looking figure estimating a rate by which homes are selling.

And of course, many media outlets took the headline and ran with it without explaining the meaning of the “seasonally adjusted annual rate.” July’s figure gives the impression that the housing market has made significant improvement during a month where the actual number of existing homes sales decreased from the previous month. But don’t blame the NAR either: the press release contains links to pages of explanation and data for anyone to take the time to sort through and figure out.

Home Sale StatisticsStatistical analysis can be a good thing, if the statistic is meaningful and is understood. It seems as if everyone already forgot about the criticism that the NAR received last year because they announced a downward revision of existing home sales going back to 2007. If you remember, the main reason given for the revision was for “data drift” that occurred during the housing downturn; and much like other estimate revisions (such as GDP and employment figures) “re-benchmarking” is a common aspect of estimating economic data.

Regardless of what the rate of annual home sales is estimated to be, we’ll know the actual number of existing home sales at the end of the year. And at that time, we can determine what kind of year 2012 has been for housing.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 27 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

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Congress moves to clarify RESPA

Dan Krell, Realtor®
DanKrell.com
© 2012

hand shakeThe Real Estate Settlement Procedures Act of 1974 (RESPA) was enacted to protect consumers against certain abusive practices such as kickbacks; it was also supposed to help them become better shoppers for settlement services. RESPA violations were enforced by HUD; however, enforcement became the responsibility of the newly formed Consumer Financial Protection Bureau (CFPB) as of July 21st 2011.

Over the years, RESPA may have been the basis of a number of class action law suits relating to kickbacks, fees, and other lender/title issues. Two recent cases that were heard by the Supreme Court of the United States (SCOTUS) may have demonstrated how the law protects consumers as well as possibly revealing its limitations. Some have even argued that some sections of RESPA may be vague; which has prompted Congress to recently act to clarify RESPA, and may prompt future clarification as well.

On June 28th, (SCOTUS) decided on First American Financial V. Edwards, dismissing the appeal; which made the 9th circuit court ruling stand that allows Edwards to pursue the case regardless of financial harm.

Kevin Russell, partner at Goldstein & Russell, P.C. and contributor to SCOTUSblog.com, couldn’t have better summed up the case: “The specific question before the Court in Edwards was whether a plaintiff alleging that her title insurance company violated the Real Estate Settlement Procedures Act (RESPA) must show that she suffered an injury from the insurance company’s unlawful conduct beyond the violation of her legal rights under the statute. RESPA prohibits title insurers and other real-estate-related companies from participating in kickback schemes related to real estate closings. Congress provided that a consumer who discovers an illegal kickback related to her closing can sue to recover statutory damages (and attorney’s fees) without having to prove that the violation caused her any financial injury or any diminution in the quality of the services she received. All she has to show is that the defendant violated her statutory right to have her closing free of the conflicts of interests that arise when the participating companies are paying each other kickbacks.” (http://www.scotusblog.com/?p=147974)

Back in May, SCOTUS offered an opinion on Freeman v. Quicken Loans; where the plaintiff argued that there was a violation of RESPA because they were charged for services they did not receive. SCOTUS’s decision ruled in favor of Quicken Loans. The ruling indicated that the section of RESPA in question, Section 2607(b), only applies to fee splitting – not the actual fees that a provider charges; the opinion stated that this section of RESPA “…manifestly cannot be understood to prohibit unreasonably high fees…” (scotusblog.com)

hand shakeThe issue highlighted by the opinion in Freeman v. Quicken Loans may be evidence that there are vague areas and limitations to RESPA. Clarification of RESPA may be achieved through changes in the law made by Congress; as in this recent bill (passed by the House on August 1st) titled, H.R. 2446: RESPA Home Warranty Clarification Act of 2011. Partnerships between home warranty companies and real estate brokers have attracted attention from HUD as well as inspiring a few class action suits; this bill clarifies that home warranties and other residential appliance and component service contracts are excluded from RESPA.

Information about RESPA can be obtained from the Consumer Financial Protection Bureau (consumerfinance.gov).

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 20 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

 

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A new wrinkle for eminent domain

Dan Krell, Realtor®
DanKrell.com
© 2012

eminent domainWhen the housing market began its decent in 2007, foreclosures seemed to occur with the frequency not seen since the S&L crisis of the late 1980’s. Since then, negotiating a lower mortgage payment by modifying the mortgage interest rate and/or reducing the principal continues to be difficult for many home owners.

One of the reasons why modifying a mortgage can be difficult is because of the complicated structure of the Real Estate Mortgage Investment Conduits (REMIC). A REMIC, is a financial instrument that may have stimulated the wide use of “100% financing” and other high risk mortgages through securitization of mortgages on the secondary market. Although a highly complex structure, a very basic explanation is that the REMIC purchases large pools of mortgages and acts as the trustee for those who own the bonds to which the loans are securitized (mortgage backed securities). Bond holders could be individuals or corporations that may also sell ownership to the bonds as well (e.g., funds, annuities, pension plans). Mortgage modifications in the REMIC environment can be legally complex. Additionally, the inherent complex structure of the REMIC as well as its fiduciary responsibility to its bond holders, makes decisions move at a snail’s pace.

In an effort to assist home owners in their local communities, a few municipalities (most notably San Bernardino County) have considered restructuring mortgages via eminent domain. Eminent domain is the power that government exercises to take private property for public use and pay the owner a “just compensation.” And although eminent domain cases typically involve real property (e.g., land), it may also involve other types of personal property.

Considering that eminent domain is often a contentious topic, you might imagine that there might be some resistance to the condemnation of mortgages by municipalities. The Federal Housing Finance Agency (the FHFA oversees Fannie Mae and Freddie Mac) entered a note in the Federal Register on August 9th (“Use of Eminent Domain To Restructure Performing Loans”). The note listed concerns for such practice of eminent domain, among which is a concern that tax payers could ultimately bear the losses incurred from restructuring mortgages through eminent domain. As a result, the FHFA may take action to “avoid a risk to safe and sound operations and to avoid taxpayer expense.”

eminent domainThe Wall Street Journal reported on August 8th (“New Roadblock for Eminent Domain Bid: Housing Regulator”; by Al Yoon) that banking and other related groups are concerned that “stripping loans from investors would create unnecessary losses and reduce the availability of credit.” And, “… the Securities Industry and Financial Markets Association, or Sifma, has proposed prohibiting loans originated in areas using eminent domain from a key part of the $5 trillion mortgage-backed securities market that is a backbone for U.S. housing finance.”

An article by Rep Brad Miller published in the American Banker on July 11th (“No Wonder Eminent Domain Mortgage Seizures Scare Wall Street”) discussed the impact of eminent domain of mortgages on Wall Street, specifically the four largest banks. Congressman Miller pointed out that there is a cost to lenders holding second mortgages when mortgages are restructured. In particular, the four largest banks, which “hold $363 billion in second liens, very commonly on the same property as first mortgages they service.”

Regardless of the outcome, there is sure to be plenty of posturing; the result may add a new wrinkle in the eminent domain debate.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 13 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

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Post crisis real estate investing

by Dan Krell ©2012
DanKrell.com

horseWatching an interview of Chef Bobby Flay this week, talk about the possibly of buying a horse at the Fasig Tipton Yearling Auction in Saratoga Springs, NY, I heard him say, “I’m actually looking at this like buying a building, literally…it’s like buying a really expensive piece of real estate…”

Well, why not buy that expensive piece of real estate? Some experts are still saying that real estate is still one of the core investment assets. For example: Brad Case, of the National Association of Real Estate Investment Trusts®, in his June 2011 article in Financial Planning (“School is in”; 41, 3), discussed the importance of real estate as an investment class. Case stated that, real estate is a “basic” investment class. He continued by quoting some of the most influential financial experts on real estate investing: “…Burton Malkiel, the Princeton professor and former member of the Council of Economic Advisors who wrote the famous investing manual, A Random Walk Down Wall Street, said, ‘There are only four types of investment categories that you need to consider: cash, bonds, common stocks and real estate.’ Mark Anson, who led the largest pension funds in both the U.S. (CalPERS) and the U.K. (British Telecom), completely agreed: ‘Equity, fixed income, cash and real estate are the basic asset classes that must be held within a diversified portfolio’…”

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Ann Marsh, in her may 2012 article “Real estate’s rehabilitation” (Financial Planning, 42, 56), also agreed. She stated that not only are financial planners urging their clients to buy into real estate investment trusts (REITs), some planners are urging the “outright” purchase of individual buildings.

Of course, when thinking of real estate investing, most people think about residential real estate – in particular flipping homes or owning rental properties. Investors looking for rental properties tend to look at long term value (appreciation) as well as having a positive cash flow; while home flippers are interested in renovating a home and selling for a quick profit.

commercial real estateResidential real estate is not the only opportunity for investors. Some real estate investors look for deals in commercial buildings; the market downturn has added to the possibilities too. Investors in commercial properties tend to look for development opportunities as well as long term retention.

Another way to invest in real estate is through a real estate investment trust (REIT). The REIT investment structure has been around for many years, and may provide the real estate investor access to investments they might not otherwise purchase on their own. There are many types of REITS, some invest broadly in many types of real estate; while some are focused on specific types of properties (e.g., shopping centers, storage centers, apartments, etc).

Clearly, there are many risks involved in real estate investing. Of course there are financial risks, but there also a time investment required. Additionally: cash flow can become an issue when tenants stop paying rent, or unexpected maintenance issues need attention; rehab or development costs can skyrocket when unexpected obstacles are encountered; and when selling, you may not realize the sale price you initially estimated due to market fluctuations, bad appraisals, etc.

Although some real estate investors are successful; many real estate investors lose money. Before you decide to invest in real estate, you should consult investment, financial, real estate, and other professionals to assist you with the research and due diligence.

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More news and articles on “the Blog”
This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 6 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

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